Wednesday, 25 July 2012

Veracap Technology Index Update

At Veracap we track Canadian mid-market public technology companies in an index called the Veracap Technology Index (the “VTI”, see  The VTI includes all technology sector companies trading on the TSX and TSX-V with a market capitalization between $10 million and $500 million.
Recently we examined whether VTI companies generating strong margins were also the highest valued companies in the index and we concluded that largely they were.  In the current issue we focus on growth; are faster growing companies trading at higher LTM EBITDA multiples than average growth companies.  A number of initial observations should be noted as follows: (i) within the VTI more higher growth companies are trading on the TSX-V than the TSX, (ii) many high growth companies are not profitable and, (iii) very few companies have Analyst coverage providing earnings forecasts.  As a result the best valuation comparison metric will be a multiple of LTM revenues.  We looked at average two year historical revenue growth and the following summarizes our findings:

Average 2 year revenue growth
Median LTM revenue multiple
Bottom Quartile
Second Quartile
Third Quartile
Top Quartile
Note: due to the small sample size these findings are not statistically significant.

The average two-year revenue growth rate in the top quartile is an impressive 67.4% per annum which is quite extraordinary and, as expected, this group trades at a substantially higher LTM revenue multiple. It is interesting to see that the middle quartiles are being valued the same and that even declining revenue companies are still trading close to 1x revenues.
Some of the stars in the top quartile include Bluedrop Performance Learning Inc., iSign Media Solutions Inc., Avigilon Corporation, Poynt Corporation, Amaya Gaming Group Inc., and ePals Corporation. Fifty-three percent of the top quartile companies were also profitable and the highest profit margins were generated by C-Com Satellite Systems Inc., Norsat International Inc. and Zedi, Inc.
As expected, high-growth VTI companies are trading at stronger revenue multiples than their moderate growth peers.  While there is insufficient data to draw statistically significant conclusions, the following summarizes some of the parameters we have observed in the VTI as at July 1, 2012:
No. of companies
Avg. Market Cap
$82.3 Million
% profitable
% Growing > 10%

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.

Friday, 6 July 2012

Buyers are Currently Paying High Prices for Businesses Like Yours

My previous post was about M&A advisors saying they personally know buyers in a sector.  Another tactic that gets potential sellers’ attention is to say buyers are currently paying high prices in a particular sector.  For example, after Facebook offered $1 billion for Instagram, advisors might approach other photo sharing application companies and say, because Facebook offered $1 billion, there will be other buyers also interested in paying a high price for your company.
When presenting their credentials, M&A advisors will often include market stats such as recent publicly available acquisition terms of similar businesses and a sample of comparable publicly traded valuation multiples (comp tables) to provide a potential seller with a basis for value expectations and engage the potential seller in a value discussion.
While recent transactions and comp tables can be helpful to show broad trends, interpreting them to determine expected sale price is fraught with pitfalls.  When comparing your company to recent sale transactions you need to examine many possible differences in company risk and future prospects.  The following are just some of the questions that should be considered: is the company in question of the same size, does it have more or less customers, does it have patents, a defensible product/service differentiator, are the margins the same, historical growth rate, is there debt or redundant assets, was the debt included in the sale, etc.  In the case of publicly traded company valuation multiples, it must be recognized that these represent shares trading at a minority discount (a minority discount applies because, as a single shareholder of a public company, you have little influence over its corporate decisions), control blocks typically sell for 30% to 50% more.  There is an old statistics joke that goes as follows:  “he uses statistics like a drunken man uses a light post, for support rather than illumination.”  Recent transactions and comp tables can be used in the same way. 
Keeping in mind that recent/current market activity can only be a rough guideline and that no one can predict what the results of a well managed auction between two or more motivated strategic acquirers will be, it is nevertheless imperative that the seller and the M&A advisor agree on the expected sale price range before the divestiture process begins.  The best way to align the seller’s and advisor’s interests is to agree that the bulk of the advisor’s compensation be tied to achieving the mutually agreed sale price range (having said that, I also think it is fair that the advisor receive some level of work fees in order for him/her to get comfort that the seller is taking the process seriously - however this work fee should be credited towards the success fee).
To put it kindly, M&A advisors will put their best foot forward in their presentations to convince sellers to use their services and, as usual, it is a case of buyer beware.  Don’t believe all that you hear and see and look beyond the pitch to the firm’s history, reputation and particularly the lead banker’s character.  At the risk of sounding like a broken record, only by going to market with an experienced advisor who (i) understands the business and has presented the opportunity strategically, (ii) conducts a thorough process and, (iii) has the time and interest to put your company first, can you secure the best price for your company.

Derek van der Plaat, CFA has worked in private market M&A for more than 20 years and is a Managing Director with Veracap Corporate Finance in Toronto.