The Maturing Tech M&A Cycle Data provided by Steady rises in multiples and deal price tags, with the former In early November 2017, Broadcom culminating in a plateau between 2016 and 2017 to date, speak to the announced an acquisitional overture maturation of the overall M&A cycle of rival chipmaker for no Median US M&A transaction multiple & size ($M) less than $130 billion all told. Should 12.0x $80.0 it go through, that transaction would $71.5 be the largest pure-play technology 10.6x $70.0 acquisition in history. 10.0x 10.5x M&A in the U.S. has been getting $60.0 pricier over the past few years on the 8.0x $51.2 whole. However, between 2016 and the $50.0 first nine months of 2017, transaction multiples have leveled off, even though 6.0x $40.0 median deal sizes soared once more to a new high. In tandem with diminishing $30.0 4.0x overall M&A volume, these recent

$20.0 developments imply a decline in the supply of targets even as demand 2.0x Valua�on/EBITDA Median Deal Size ($M) $10.0 remains high. For IT in particular, the cycle has been extended. 0.0x $0.0 2010 2011 2012 2013 2014 2015 2016 2017* Source: PitchBook *As of 9/30/2017

IT stayed more resilient in volume until this year Mega-deals have boosted IT’s proportion US M&A (#) by sector US M&A ($B) by sector

14,000 Materials & Resources IT $1,600 Materials & Resources Healthcare Financial Services IT 12,000 Energy B2C $1,400 Healthcare B2B Financial Services $1,200 10,000 Energy B2C $1,000 8,000 B2B $800 6,000 $600

4,000 $400

2,000 $200

0 $0 2010 2011 2012 2013 2014 2015 2016 2017* 2010 2011 2012 2013 2014 2015 2016 2017* Source: PitchBook Source: PitchBook *As of 9/30/2017 *As of 9/30/2017

2 VRC | THE MATURING TECH M&A CYCLE | WWW.VALUATIONRESEARCH.COM Driven by the incidence of mega- shops continue to bolster overall IT M&A activity transactions such as the Dell-EMC US IT M&A (#) by acquirer type merger, aggregate IT M&A value 2,500 surged last year, but what is more telling is the resilience of volume Buyout M&A within the sector. Consolidation is still 2,000 proceeding apace—as exemplified most dramatically by the potential Broadcom-Qualcomm merger—and 1,500 underpinned even more strongly by the entrance of financial acquirers into 1,000 the tech M&A arena.

Buyout firms such as Francisco 500 Partners, Thoma Bravo or Vista Partners have long focused primarily on technology, but more and more 0 fund managers are getting in the game. 2010 2011 2012 2013 2014 2015 2016 2017* Source: PitchBook In fact, PE investors are remaining so *As of 9/30/2017 active that they have accounted for an ever-growing share of IT M&A in Much of the resilience in IT can be chalked up to add-ons the U.S., proportionately speaking. US IT PE add-ons As the software space in particular matures, widespread adoption of the Deal Value ($B) # of Deals Closed 282 SaaS business model, predicated on 270 recurring revenues, became ever-more 233 237 238 applicable to traditional PE operating 224 theses. In addition, as software 184 applications proliferated, blurring 176 177 traditional sector demarcation, many 145 businesses simply became more 140 prime targets for PE buyers. Last but not least, PE firms have a veritable 108 mountain of dry powder to invest, while supply of worthwhile targets is 7 8 3 5 9 2 8 2 1 0

hardly unlimited; their sourcing scope 4 1 1 1 1 1 2 1 2 9 3 7 $ $ $ $ $ $ $ $ $ $ $ was bound to expand to wherever $ seemed most feasible. Accordingly, PE 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* firms are engaging avidly in rolling up Source: PitchBook fragmented IT niches, as the overall IT *As of 9/30/2017 M&A cycle continues to mature.

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3 VRC | THE MATURING TECH M&A CYCLE | WWW.VALUATIONRESEARCH.COM What is your current take on M&A activity within the US right now? There’s talk of the buying cycle winding down—do you agree?

Justin: On the PE side, we’ve seen a Justin Johnson, PJ Patel, little slowdown in overall volume, but CFA CFA, ASA activity by and large still seems strong. Co-CEO & Senior Managing Co-CEO & Senior Managing Especially in terms of add-ons, there are still plenty of those, which has kept Director Director aggregate buyout activity stronger. Mr. Johnson has more than 20 years Mr. Patel is co-CEO/senior managing PJ: Based on historical levels, we’re still of financial and valuation advisory director and is a member of VRC’s seeing strong activity, with an increase experience. This experience includes Board of Directors. Mr. Patel in larger carveout transactions relative providing fairness and solvency specializes in the valuation of opinions as well as considerable businesses, assets and liabilities for to two or three years ago. experience conducting valuations for financial reporting purposes. As is common toward the end of the M&A, investment, financial reporting, Mr. Patel is a frequent presenter on cycle, there can still be fairly high- tax and litigation purposes. Mr. valuation issues for financial reporting priced valuations, although initial Johnson also has significant experience purposes and has recently presented North American figures seem to have serving clients and on valuation issues relating to ASC 805, slid slightly from the heights of 2016. private equity portfolio companies. ASC 350/360 and ASC 820. In addition, What are you seeing in the market? He has worked with well-known firms Mr. Patel was on the Fair Value panel such as Accel-KKR, Altamont Capital at the 2008 AICPA SEC Conference. Justin: In terms of multiples, valuations Partners, Francisco Partners, Golden He has been quoted numerous times are high, there’s no question about Gate Capital, Leonard Green & Partners, in the press regarding valuation issues. that. But if you go back to the dot-com Vector Capital and Vista Equity Mr. Patel is an active member of the era, we still aren’t seeing multiples Partners. AITF. He is a member of the Appraisal or valuations as high as we observed Prior to joining VRC, Mr. Johnson held Foundation’s Working Group preparing back then. Again on the PE side, as positions with Arthur Andersen, Merrill an industry Practice Aid for valuing they perform these add-ons, the Lynch and PricewaterhouseCoopers. customer related assets. multiples are highly discounted versus Mr. Johnson holds the designation of Mr. Patel holds the designations of what we’d see for publicly traded Chartered Financial Analyst (CFA) and chartered financial analyst (CFA) and companies, even in the same industry. Accredited Senior Appraiser (ASA). He accredited senior appraiser (ASA). is also a Certified Public Accountant In addition, he holds a bachelor of PJ: Platform transactions appear to be (CPA), Accredited in Business science degree from the University selling for a premium. But for add- Valuation (ABV). Mr. Johnson is a of Toronto, and a master of business ons, single product lines, and smaller member of the CFA Institute and the administration degree from Canisius companies in general, there’s not quite CFA Society San Francisco. He is also College. as much interest and therefore prices a member of the American Society of tend to be lower. Appraisers. Mr. Johnson holds degrees from Brigham Young University in Accounting and Mandarin Chinese.

4 VRC | THE MATURING TECH M&A CYCLE | WWW.VALUATIONRESEARCH.COM From your perspective, especially in and are instrumental. On the PE side, What are the most common the current environment, what are however, there’s a very different role erroneous assumptions prospective the key elements for dealmakers to for i-bankers in general; PE partners acquirers make as they approach prioritize when they embark on the are in the market all the time, so they deals in an expensive environment? valuation process? frequently are cognizant of what’s Justin: I’d say our biggest role right Justin: It varies depending which part going on in terms of prospective deal now is playing devil’s advocate and of the M&A market you are looking flow. ensuring the deal receives the proper at, between PE and public acquirers. Especially in the current environment, scrutiny. Not overplaying potential On the public side, with the market how have valuation approaches synergies is important, especially at where it is right now, public companies needed to adapt to the growing this stage of the M&A cycle. So it’s not have to be careful about valuations incidence of private-market so much there are new issues, but that and what they’ll pay for a target, transactions? we have to play devil’s advocate. especially assessing the benefits of the Justin: Acquirers need to look at deals PJ: Just to add to that, it’s especially synergies they anticipate playing out. very carefully. Most deals don’t end up important in working with public Another issue we see when the market being good transactions for the public companies—their versus gets to this pitch is the prevalence of acquirer over time, meaning they don’t expected return on a transaction. investment bankers’ incentives—which end up being accretive for their . Secondly, is the timeline around are of course geared toward fees Acquirers need to do a disciplined expected realization of synergies based on transactions and not losing valuation analysis—err on the side of realistic or optimistic? the deal—not aligning as well with being conservative in analysis when it those of corporate development teams What are your thoughts on comes to synergies. as much as they should. the increased incidence of PJ: I’d add a continued focus on secondary buyouts and leveraged PJ: I concur with Justin’s remarks fundamentals is key. You simply have in the current overall, with one addition. Given the to be more careful in this environment. market? dearth of targets available, the time Furthermore, one must really nail Justin: We have seen an increase to close is actually shorter than what down when the transaction becomes in sponsor-to-sponsor transactions we’ve historically seen. What we see accretive, especially for public for purposes of liquidity, with some today is that due diligence processes acquirers. PE groups taking an enterprise can be abbreviated, with the gap through one phase and then selling to between seller and buyer expectations Justin: On the PE side, not much another, or a PE firm selling a majority being bridged by earnouts or shared has changed when it comes to interest but keeping a minority for risk. If you’re talking lower-middle- valuation methods. In the technology any subsequent upside. Leveraged market deals, where the target isn’t space, software in particular, dividend recapitalizations have also necessarily a PE-backed company, you valuation approaches typically increased over the last several years, definitely see much more incidence of emphasize revenue multiples and as PE groups look to obtain partial earnouts. In this seller’s market, where the recurrence of revenue in general, liquidity during the holding period. there aren’t many targets, sellers can in addition to traditional EBITDA There are many reasons for PE fund ask for anything they want. One of multiples. Particularly if the target managers to do this—in the past, if a those asks can be: “How quickly can is underperforming on its margins company didn’t have a clear exit and you close?” relative to its industry or targets, we’ll frequently see a greater emphasis on had been held for three to five years, Justin: I’ll touch again on the revenue multiples. dividend recapitalizations were more comment about how i-bankers’ of an interim solution. But now they role varies between public and are more a matter of course. Even if private markets. Public companies a company is successful or as little especially rely on i-bankers to bring as two years into its hold period, PE them deals, even given their internal investors may consider a dividend corporate development groups, and regardless of their consequently i-bankers work with ultimate exit strategy. them throughout that entire process

5 VRC | THE MATURING TECH M&A CYCLE | WWW.VALUATIONRESEARCH.COM