Back to Blog

Insights From Software M&A Expert Nat Burgess Of Corum Group



Nat Burgess is the President of Corum Group Ltd., which specializes in software and information technology (IT) mergers and acquisitions (M&A). Burgess brings a diverse background in technology M&A and law, including experience at the Enforcement Division of the U.S. Securities and Exchange Commission, the Strategic Development Division of Morgan Stanley's M&A Group, and Morgan Stanley's Tokyo office. Burgess is frequently quoted in industry publications and mainstream media such as Time magazine, USA Today, CNBC, and The Wall Street Journal’s MarketWatch.

SecureDocs had the pleasure of interviewing Burgess, and hearing his thoughts on various aspects of M&A in the software, IT and related technology markets. Our interview is as follows:


Please tell us about Corum Group.


Corum is in its 27th year working only with privately held software, IT and related technology companies to help our clients get maximum value in M&A transactions. We’re headquartered in Seattle, but have offices around the world because buyers, and sellers, are everywhere. Over 60% of our transactions involve a non-U.S. buyer or seller. We have developed a proprietary process to achieve an optimal outcome in today’s rigorous M&A market. To keep our clients from being burdened by the M&A process we employ a team approach of five professionals with expertise in the various disciplines of research, writing, financial analysis, and valuations. The team is led by the most senior negotiators in the world – former CEOs who have sold their own companies. We are the largest educator on tech M&A in the world, running over 100 events a year that involve both buyers and sellers.


Finally, Corum has the largest proprietary buyer database in the world. It includes data from all our research, educational events and client engagements, totaling over 10 million entries. This knowledge that we’ve captured in a proprietary system gives our clients a decided advantage in getting their company successfully sold.


Do you feel that M&A will be strong or weak for the rest of this year?


2013 will go down in history as a banner year for tech M&A, rivaling or exceeding deal volumes in 2000 and 2007. The current M&A boom is driven by market dynamics, pent-up demand, technology disruption, and the new reality of a global M&A market.


Historically, M&A volumes track in lockstep with the public markets. Over the past 18 months the public market curve and the M&A curve have diverged. Markets were up in 2012, but M&A was down 30%. Currently the dynamic is changing as the public market continues to rise, and the M&A market catches up. Q1 2013 transactions are on track to exceed 2012 numbers by a large margin.


Cash reserves have also fueled M&A. There is almost half a trillion dollars in excess cash on corporate balance sheets, and over a trillion in private equity coffers. If that money isn’t put to work, investors are going to want it back – and the last thing CEOs and fund managers want to do is return even money to investors.


Buyers are active again because they stopped buying during the downturn, but the market continued to evolve. Now they need to buy new technologies, acquire innovative teams, and most importantly, gain control of products that will drive top line growth. The big technology companies remembered how to be profitable during the downturn, but they lost the ability to grow. M&A is the fastest way to push the revenue line up.


The unprecedented disruption of the technology markets has also pushed the big players back onto the M&A field. Examples are all around us. Apple has created a multi-billion dollar market out of a product that did not exist 5 years ago. Microsoft operating systems ran in 90% of connected devices a decade ago. Today Microsoft’s share has dropped below 20%. Bookstores are closing but the market for digital goods has exploded. The last mile has transitioned from carrier to highway; rather than deliver value to end users, the ISPs have become a conduit for others, such as Netflix and Amazon, to deliver high-margin goods and services. In this storm of change, complacency is death. Acquiring small, agile teams that have innovated out ahead of the market is the only way to stay afloat.


In sailing we pay attention to “fetch,” which is the distance over which the wind creates waves. When a shore is near, there is very little fetch and very small waves. When shores are distant the wind builds bigger waves. In the southern oceans the fetch is endless; waves go around the globe without hitting land, creating the most fearsome seaways known to man. And that is the best analogy I can think of for the new global economy. We have recently completed transactions in Helsinki, Germany, South Korea, Japan, India, France, Norway, Sweden, Czech Republic, and many other countries. Innovation happens everywhere, and reaches the market almost instantly. Companies can no longer hide behind their flags. They have to pursue a global M&A strategy. Adding fuel to the fire, more than half of the cash reserves of most US tech companies is offshore, creating additional incentives to pursue offshore deals.


What are the top M&A trends that you are seeing now?


When M&A slows, deal terms deteriorate and deals take longer to close. With a surge comes better terms, tighter processes and faster close times. We recently received a preemptive offer from a savvy private equity firm that had no escrow, and no indemnification beyond fundamental reps. That would have been unthinkable two years ago. And we currently have three deals under LOI on a 30-day clock, a far cry from the 60 to 90 days closes we saw in 2008 and 2009.


Not to say that it is a seller’s market. The dumb money washed out in the downturn. Buyers are smart and cautious, but when they decide to move, they really move. Keeping pace with aggressive buyers requires very thorough preparation, in order to withstand fast-moving diligence and to avoid raising red flags.


We are seeing more activity out of Asia, but mostly Japan, Korea and Southeast Asia. China will be a factor, but so far the numbers show very little outbound M&A.


How do you see M&A trends changing in the future?

  • Large incumbents will lose leverage and power.
  • There will be no barriers between companies and consumers.
  • Companies (and countries) that are careless with IP will lose market share as customers lose confidence.


What are several tips for a smooth, successful M&A process?


Be prepared. As an angel investor I push companies to establish a virtual data room at formation, a data room that gets updated quarterly and is diligence-ready. Filing cabinets, orphaned spreadsheets and brain trusts went out with the printing press. There is no reason for executives to scramble to find documents when the balloon goes up. We need to be crisp and professional, and that requires discipline.


Know what you want. Your company has value to its investors. It might have more value to a buyer. How much more is the question. We need to be realistic about our value, and we need to portray it convincingly and credibly. If you are only interested in selling at a ridiculous valuation, you need to step back from the table and reassess. You are wasting your time, and burning bridges.


Establish and maintain relationships with the key decision makers around you. If they take you seriously and want you on your team, you have won half the battle.


Seek professional help. You will face experienced dealmakers. Put experience on your side. Hire the right intermediaries to take the heat on contentious issues so that you can maintain relationships with the people you will ultimately be working for.


What are some of the worst things one could do when trying to sell one's company?


The biggest mistake sellers make is dealing with only one buyer. They get approached, they like the idea of doing a deal, they get complacent, and six months later they are still negotiating. Meanwhile the valuation is dropping, business is falling off, relationships are getting strained, and the buyer is starting to look at shiny new deals.


The only way to close a deal at maximum value is to pursue all options, maintain a position of strength, and continuously develop alternate strategies.


What advice would you give to the CEO of a tech startup looking for an exit via acquisition in the future?


Every tech startup will get acquired or dissolve. The percentage of companies that go public is statistically insignificant. Even if the stated objective is IPO, the company still needs to optimize for M&A – because that is the most likely endgame. Therefore it is critical that the company operate so as to build and protect value. That means taking great care to maintain ownership and control of IP. Encumbrances to IP kills deals. Exclusive contracts, flawed or missing work-for-hire agreements, dependency on third party code – these are issues that may not harm a small business, but will preclude a larger company from acquiring.


It is also critical to build quality revenue. The valuation metrics tell the story. SaaS businesses with strong recurring revenue are expensive to build, but are valued at 2 to 5 times the valuation of premise solutions. A quick revenue ramp doesn’t build value if it sets the stage for high churn and low retention.


Finally, it is important to make yourself part of the larger ecosystem. A room full of smart guys passing notes to each other has no value, outside of the room. A company that embraces relationships with larger partners and creates value for others in the ecosystem will also create value for itself.