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Client Briefing

July 2013

I n depen dent I nvestment Ban ki n g fo r M e di a , I n formation, Marketi ng, Tech nology & H ealthcare

In This Issue

Senior PE Investors Discuss M&A Outlook

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JEGI asked a select group of PE executives in- In the past several years, ABRY has increased its vesting in the media, information, marketing investing outside the U.S. (primarily in Western and technology sectors to provide their in- Europe) in data centers and software, two arsights on their funds’ investment activities and eas in which we have deep domain expertise. their outlook on the market: Importantly, whenever we invest outside the 1. What are the macro factors that will impact U.S., the investment must meet several criteM&A in the sectors mentioned above? What ria: the company must be in a sector where are the major secular trends impacting your we have substantial, specific prior experience; there must be a minimal difference in operaportfolio strategy? 2. With regard to your fund’s M&A strategy tions between a European and a domestic U.S. over the next 12-18 months: what types of business; and there must be very little regulacompanies are you looking to acquire? In tory or political risk. Our typical equity investwhich sectors? In which geographies? What ment size for an acquisition is between $75-150 million. For a growth investment out of our size range will you consider? senior equity fund, the typical investment is 3. What is your view of the debt market and where it is headed over the next six to nine $25-75 million. months? How is it affecting transactions The debt markets are very robust and have and multiples? For your deals, what is your arguably peaked. Larger middle market compoptimal mix of equity, senior and mezzanine anies are attracting leverage of between 6-7x debt? What senior and mezzanine debt mul- EBITDA, at very attractive pricing and with tiples are you seeing in the market? minimal financial covenants. We are cautious 4. Other than concerns about the economy, in this debt environment, but also opportunistic. Over the past 12 months, we have recapiwhat keeps you awake at night? talized many of our portfolio companies and peggy koenig, managing partner & co-ceo, expect to execute several recaps in 2013. and john hunt, partner, abry,

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• Senior PE Investors Discuss M&A Outlook • Media, Marketing, Tech M&A Steady Year-Over-Year • 2013 SIIA Strategic & Financial Investment Conference • The Future of Healthcare IT M&A • Exceptional Transaction Experience

pkoenig@abry.com and jhunt@abry.com

(from left) Scott Howe, CEO, Acxiom; Paul Chachko, CEO, V12 Group; Charles Stryker, Founder & CEO, Venture Development Center; Wilma Jordan, Founder & CEO, JEGI; Matthew Egol, Partner, Booz & Co.; Tom Stewart, Chief Knowledge and Marketing Officer, Booz & Co.; and David Kieselstein, CEO, Penton Media

To subscribe to JEGI’s Client Briefing Newsletter: http://bit.ly/YzEqQK Follow JEGI on Twitter: http://twitter.com/JordanEdmiston

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The overheated credit markets are the most important factor impacting M&A in our sectors. Although it is easier to finance acquisitions, and at levels that can drive good equity returns, this has also translated into higher prices for assets. In an environment of higher prices, it is even more important to stay focused on the areas we know well and where we are confident we can add substantial value to our portfolio companies. Another factor that impacts our strategy is the continued strong global demand for bandwidth. For several years now, our focus in communications has been on sectors that we think help satisfy this demand, and therefore, we are benefitting from it. The most obvious beneficiary, and an area of substantial activity for ABRY, has been data centers and other broadband services companies. We continue to focus on information, software and business services, telecom services, education and media and entertainment companies.

Both our buyout fund and senior equity fund portfolios are performing very well. However, having lived through a number of downturns throughout our private equity careers, we are very mindful of the importance of staying close to our portfolio companies, even when things are going very well, to ensure we are prepared to withstand, and also take advantage of, a downturn. doug schreiber, partner, lee equity partners, dschreiber@thlcapital.com

We focus on trying to develop theses about where industries are going and then invest in companies that are likely to benefit from those trends. We also try to find business models that are both attractive and defensible, and where we can provide capital to support and potentially accelerate growth.

In both consumer and B2B media sectors, audience behavior continues to shift tremendously. It is amazing to think that the iPad was announced only a few years ago and now repre (continued on page 6)

> for more information visit www.jegi.com


Media, Marketing, Tech M&A Steady Year-Over-Year The media, information, marketing, healthcare and technology sectors saw a healthy 708 transactions in the first half of 2013, roughly even in both volume and value with the first half of 2012, excluding Alibaba Group’s buyback of 20% of its shares from Yahoo for $7.1 billion in 2012. As expected, the year got off to a slow start following the rush of year-end deal closings ahead of impending tax law changes. The second quarter saw a pickup in both number and size of announced M&A deals.

active quarter for jegi M&A activity picked up for JEGI in the second quarter of 2013, with five deal closings, although only four have been officially announced, including (JEGI client listed first):

• Onex Corporation’s $950 million acquisition

of Nielsen Expositions, a leading operator of business-to-business tradeshows; • MyWebGrocer, a leading provider of shopping and shopper marketing software and services, receiving a significant investment from private equity firm HGGC; • The sale of Group SJR, a leading digital consultancy specializing in insights, content creation, curation, and audience development, to Hill+Knowlton Strategies, a subsidiary of WPP; and • The sale of Digital Broadcasting Group (DBG), a leading creator, producer, and distributor of premium video content across digital media, to Alloy Digital. m&a highlights for 1h 2013 M&A activity for the b2b online media and technology sector was slow in the first half of 2013, with a 26% decline in the num-

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ber of deals announced compared to 1H 2012 and deal value sharply down, primarily due to the $7.1 billion Alibaba Group/Yahoo transaction in 2012. Notable Q2 2013 deals included: Answers Corporation’s acquisition of Webcollage, a web-based application used to publish product information for manufacturer retail channels, for $37 million; TheStreet’s acquisition of DealFlow Media’s DealFlow Report, Life Settlements Report and PrivateRaise Database newsletters; and IntraLinks’ acquisitions of PE-Nexus, an Internet deal flow exchange and private social network for M&A, and MergerID, an online matching tool for buyers and sellers of mid-market companies around the world. B2c online media and technology was an active sector for M&A in 1H 2013, with 119 transactions at a total value of $4.0 billion. Compared to 1H 2012, the number of deals dropped slightly, by 10%, and transaction value remained flat. Notable deals in Q2 2013 included: Yahoo’s $1.1 billion acquisition of Tumblr, an online platform that enables users to share text, photos, links, videos, etc. across any channel; Alibaba Group’s acquisition of an 18% stake in Weibo, an online microblogging service, for $586 million; Baidu’s acquisition of PPStream, a provider of online video services, for $370 million; DreamWorks Animation’s acquisition of AwesomenessTV, a YouTube channel for teens, for $150 million; and Demand

Media’s acquisition of Society6, an e-commerce marketplace for artists, for $94 million. Transaction volume for the business-to-business media sector remained flat, with 15 transactions in 2013, compared to 14 in 2012. In the first quarter of the year, Catalyst Investment Managers acquired Reed Business Information Australia for $42 million and Euromoney Institutional Investor acquired financial publisher Insider Publishing for $25 million. Notable deals in Q2 included: Edmond de Rothschild Investment Partners and BNP Paribas’ acquisition of Reed Business Information France; LexisNexis’ acquisition of Sheshunoff Information Services, publisher for finance professionals; and Times Media Group’s acquisition of BDFM Publishers from Pearson. The consumer magazines sector also saw significant growth in the first half of 2013, with 24 transactions at a total value of $281 million, due to a few larger deals in Q1 2013. The most prominent deal was NC2 Media’s $75 million acquisition of Lonely Planet Publications, a publisher of travel guidebooks, digital books, city guides, and maps. Notable deals for the second quarter included the TeamRock and Harwood Private Equity $15.4 million acquisition of Classic Rock and Metal Hammer magazines from Future, and Arthur Frommer’s repurchase of Frommer’s Travel Guides, which were sold to Google in August of 2012. M&A activity for the database and information services sector saw a total value of $3.2 billion in 1H 2013, down 26% from the first half of 2012, which saw the $3.3 billion take-private of Transunion by Advent International and GS


Partners. The sector only had one deal above the $1 billion mark this year, IHS’s $1.4 billion acquisition of R.L. Polk & Co., a provider of automotive intelligence and marketing solutions. Other prominent deals in Q2 2013 included: the Temasek Holdings acquisition of a 10% stake in Markit Group, a financial information services company that provides credit derivative pricing services to financial institutions, for $500 million; McGraw Hill Financial’s acquisition of a 22% stake in CRISIL, a provider of ratings, research, and risk and policy advisory services, for $335 million; and Electra Partners’ acquisition of UBM’s data services business, Delta, for approximately $214 million. The education information, technology and training sector saw strong growth in the number of deals announced in 1H 2013, up 52% vs. 1H 2012. Additionally, deal value increased significantly, due to BC Partners’ $4.4 billion acquisition of a majority stake in academic publisher Springer Science & Business Media. Other notable deals in the second quarter of this year included Elsevier’s acquisition of Mendeley, a social platform for academics and organizations to collaborate on research, for $69 million, and Pearson’s acquisition of IndiaCan Education, provider of training for educating and employing the youth in India, for $22 million. The number of deals in the exhibitions and conferences sector remained flat, with 30 transactions in 1H 2013 vs. 28 transactions in 1H 2012, while deal value spiked with Onex’s $950 million acquisition of Nielsen Expositions (a JEGI transaction). Additional notable deals for the quarter included: Reed Expositions’ acquisition of Expo Nacional Ferretera, a Mexican event serving the hardware, construction and electrical markets, for $25 million, and Global Sources’ acquisition of a 70% stake in Shenzhen International Machinery Manufacturing Industry Exhibition (SIMM) for $16 million. The healthcare information and technology sector was the third most active sector in the first half of 2013, with 104 transactions at a total value of $4.2 billion. The number of deals increased by 16%, but deal value dropped by 25%, as 2012 saw more large transactions, including nine over $200 million. Notable deals for Q2 2013 included: Roper Industries’ $1.0 billion acquisition of Managed Healthcare Associates, provider of pharmacy solutions and data analytics for long-term care and other healthcare providers; Qiagen’s acquisition of Ingenuity Systems, a provider of information solutions and services for life science researchers, for $109.4 million; JLL Partners’ acquisition of BioClinica, a provider of clinical research technol-

ogy to pharmaceutical, biotechnology, medical device companies, for $105 million; and Jawbone’s acquisition of BodyMedia, maker of wearable health tracking devices, for approximately $100 million. Although the number of deals and value declined in the marketing and interactive services sector in 1H 2013 vs. 1H 2012, by 11% and 17%, respectively, the sector continues to be a major driver of M&A activity, with 224 deals accounting for $6.8 billion of value in the first half of 2013. Notable transactions included:

2013 SIIA Strategic & Financial Investment Conference

The 2013 Conference had 18 high-caliber firms from across the education technology, media and digital content, information services and software sectors. The audience consisted of nearly 200 strategic M&A-focused executives and financial sponsors from a strong mix of global companies and private equity firms. The conference, co-founded by sponsors JEGI and VSS, was held June 13 at the Princeton Club in NYC. For further details on the event, visit: www.siia.net/investment/2013.

• Salesforce.com’s acquisition of ExactTarget, cross-channel digital marketing SaaS solutions, for $2.25 billion; • Trulia’s acquisition of Market Leader, online technology and marketing for real estate professionals, for $314 million; • Accenture’s acquisition of Acquity Group, brand e-commerce and digital marketing services, for $285 million; • Significant investment in MyWebGrocer by HGGC (a JEGI transaction), for which terms were not disclosed; • Intel’s acquisition of Mashery, API management services, for approximately $180 million; • Alloy Digital’s acquisition of DBG (a JEGI transaction), for which terms were not disclosed; and • Hill+Knowlton Strategies’ acquisition of Group SJR (a JEGI transaction), for which terms were not disclosed.

Another deal of note is Adobe’s acquisition of Neolane, a provider of enterprise marketing software, for $600 million, which was announced after JEGI released its M&A report for the first half of the year. The mobile media and technology sector increased by 14% in number of deals, up to 82 transactions, and rose in overall deal value by 6%, reaching $2.7 billion, in the first half of 2013, compared to the first half of 2012. Notable deals in the second quarter included: Google’s $1.3 billion acquisition of Waze, a social mobile application that enables drivers to build and use real-time road intelligence on smartphones; LinkedIn’s acquisition of Pulse, a mobile news aggregation startup, for $90 million; and Facebook’s acquisition of Parse, a provider of software developer kits for mobile devices, for a reported $85 million. n

Presenting companies included:

Alert Solutions: SAAS Messaging Provider Blue Cava: Mobile Targeting Provider EduTone Corporation: Marketplace as a Service (MaaS) Education Platform Free Pint: Information Services Publisher Green Mountain Digital: Producer of Digital Field Guides InsideView: Provider of Sales & Marketing Intelligence iProduction: Cloud Publishing Platform IRON Solutions: Provider of Equipment & Agronomic Lifecycle Information McMurry/TMG: Content Marketing Agency MIR3: Provider of Intelligent Notification & Response Software PetroSkills: Provider of Training & Competency Assurance Services Reportlinker: Business Search Engine Return Path: Email Intelligence Solutions SkillSurvey: Social Platform for ReferenceChecking STEMscopes: Online Science Curriculum Tax Credit Co: Provider of Tax Incentive Consulting V12 Group: Provider of Data & CrossChannel Digital M arketing www.Iseeyou.MD: Healthcare Software Services Platform If you are interested in presenting at next year’s Conference, please contact Christie Adams at christiea@jegi.com. n

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The Future of Healthcare IT M&A later this month, jegi will publish its f irst report focused on the healthcare it market. the following article is a summary of this report. for more information, please go to www.jegi.com. The U.S. healthcare system is undergoing unprecedented change as a result of the Patient Protection & Affordable Care Act (ACA) signed in March 2010, and these changes have created opportunities for companies across the entire healthcare landscape. Healthcare information technology (HCIT) is a critical piece to many of the government’s changes, and the Health information Technology for Economic and Clinical Health (HITECH) Act has created large incentives for the adoption of information technology solutions, spurring even greater tailwinds for the industry. the u.s. healthcare market Healthcare expenditures in the U.S. are expected to increase from $2.8 trillion to $3.3 trillion, or 18% of GDP, by 2015. The U.S. government currently accounts for 37% of total payments. On March 23, 2010, President Obama signed the ACA, one of the most sweeping changes to healthcare in the United States since the creation of Medicare. As a result of the problems facing the industry and the beginnings of healthcare reform, JEGI has identified five major “takeaways” that we expect to impact the market:

• Continued growth in healthcare expenditures that outpaces income and GDP growth;

• Lower reimbursement rates, due to the desire to lower costs and the expansion of Medicaid;

• Increasing demand for medical professionals; • Increase in consumerism and social media in healthcare; • Transformation of the healthcare insurance industry; and • Universal risk sharing and the need for patient engagement. overview of u.s. healthcare it market The global healthcare IT market, approximately $170 billion in 2012 and expected to grow 4% annually through 2016, includes software, hardware, connectivity/telecom, IT services and internal or outsourced services. The U.S. healthcare IT market, an estimated $65.6 billion in 2012, has grown steadily over the past decade. Solutions, such as EMRs, clinical physician order entry, point of care systems, and specialty care systems, have been growing at even higher annual rates. Healthcare informatics represents the intersection of information science, computer science and healthcare and provides the next high growth opportunity in HCIT. The wide variety of information and data sources (e.g., hospitals, insurance companies and retail pharmacies) and the disparity of data make the healthcare informatics opportunity even more compelling and valuable than in most other sectors. Doctors, pharmaceutical and device manufacturers and other healthcare providers can build a deeper and more accurate profile of the consumer patient through EHRs, prescriptions, claims data and other registries, spurring continued expansion of the informatics and consumer health information market. While the informatics ecosystem has created a vast re-

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source of information and intelligence, the data is still not being used to improve the delivery of care and the value delivered to the patient. The HITECH Act was signed into law on February 19, 2009 as part of the American Recovery and Reinvestment Act of 2009. It provides financial incentives for hospitals and eligible professionals totaling over $22 billion of incentive payments plus $2 billion for the funding of the Office of the National Coordinator for Health Information Technology. According to CMS (Centers for Medicare & Medicaid Services), over 85% of eligible hospitals have registered for the program, and approximately 75% of EPs have registered. Several other regulatory programs are also driving additional HCIT spending. Although these programs will not have the impact that Federal EHR incentives are having, it will continue to add growth to the overall healthcare IT market in the U.S. impact on healthcare it and the dawn of the information age JEGI expects healthcare IT and especially informatics to play a pivotal role in addressing decades-long problems plaguing the U.S. healthcare system and enabling healthcare companies to adapt the new, post-reform competitive environment. The HITECH Act and other Federal programs have created a tipping point for the use of data in healthcare, ushering in the dawn of the industry’s information age. With the large scale adoption of electronic health records (EHR), massive amounts of data are being collected, stored and utilized for better decision making, increasing the demand for technology that can put this information to use. While we believe the entire HCIT market will continue to thrive, JEGI has identified four major “Market Catalysts” that will have an even greater impact on healthcare information and technology. We also see these catalysts driving M&A activity in certain segments, as a broad range of information technology vendors seek to expand their solution set and obtain greater market share.

“The HITECH Act and other Federal programs have created a tipping point for the use of data in healthcare, ushering in the dawn of the industry’s information age.” market catalyst #1: higher patient volumes at lower reimbursement rates Patient volumes are expected to increase dramatically over the next decade, as 20 to 40 million patients join the insurance roles and the aging of the population continues. These demographics, coupled with the eventual elimination of fee-for-service and expansion of Medicaid, will force healthcare companies, especially hospital systems, to become more efficient. Innovative operational and work flow solution software tools have emerged that eliminate waste and streamline operations. For example, there are tools that provide key operating information, such as peak volumes and patient throughput; improved business intelligence and staffing software; and financial optimization – budgeting/capital planning, next-generation revenue cycle management and spend


management. Other key IT solutions, spurred by the need to manage higher patient volumes and improve operational efficiencies include telemedicine, human capital management and referral management. JEGI believes that companies providing these next-generation solutions will be in high demand by software vendors seeking to expand their presence in the market. HCIT vendors and other large enterprise software vendors will continue to acquire businesses that broaden their range of solutions for operational needs and challenges. We expect acquirors to include traditional players, such as Emdeon, Allscripts and MedAssets, as well as relatively new market entrants. market catalyst #2: informatics and data-driven decision making

Healthcare informatics is already impacting the healthcare market, as healthcare companies seek to develop clinical and business decision support tools. Collecting, aggregating, analyzing and distributing information requires a substantial commitment from healthcare participants, however. The graph to the right shows the progression from the empirical medicine stage to value-based medicine, the highest level of the informatics life cycle, that healthcare companies are seeking to accomplish.

“must-have” capability of healthcare companies, as hospitals are forced to be more accountable for outcomes and pharmaceutical and device companies seek clinical validation of their products. Social media is emerging as a powerful tool in healthcare and will be an important factor in healthcare in the future. Nevertheless, most healthcare companies are still under-invested in patient communication and engagement tools. market catalyst #4: transformation of the healthcare insurance market The healthcare insurance market is also undergoing dramatic change as a result of the ACA, as corporations struggle to meet its requirements and look for ways to alleviate the financial burden imposed by healthcare insurance premiums. Meanwhile, states are already setting up their own insurance exchanges. As a result, JEGI believes that the healthcare insurance market will begin to function like other retail-oriented insurance markets, such automobile and casualty insurance. As a result, healthcare insurance companies will need to develop several new capabilities, including insurance exchange technology and marketing services capabilities.

Information technology will play a key role in this transformation by creating public and private insurance exchanges and helping to create a B2C marketplace for healthMoving to value-based medicine recare insurance, which means that quires additional investments in a healthcare insurance providers will variety of technical components in need to utilize marketing technolorder to create an end-to-end platogy to better understand their auform that enable enhanced use of a dience and adapt to the changes in system’s data, including: the market. Some insurance providSource: Oracle Corp, “Enterprise Healthcare Analytics: Healthcare Data Warehouse ers may develop their technology • Data Collection: collecting and syn- Foundation,” Healthcare Information Management System Society, 2009 internally, but numerous others will thesizing information from across look to acquire the technology and capability set needed to accelerate the enterprise in a variety of forms continues to be a major challenge. • Data Aggregation: data warehousing is an important element and has the process. M&A activity in this area has begun, and JEGI expects many other transactions to occur in the near-term. become an area of innovation. • Decision Support: involves extracting data in multiple forms to assist in conclusion business and clinical decisions. • Communication: distributing the information to physicians, nurses, pa- Through the ACA, healthcare reform is having a profound impact on tients and administrators requires the use of a variety of communication the current healthcare market. While the healthcare industry has traditionally been slow to adopt innovative technology solutions, channels including mobile devices, patient portals and social media. companies now realize the need to quickly adapt to the new environment M&A activity will be driven by the large size of the market, the desire or face a struggle for survival. Adding to this, the federal government of large vendors to fill out their product portfolio and innovation from has put financial incentives in place to accelerate the adoption of new smaller participants. HCIT solutions, such as EHRs and healthcare information exchanges. Evidence-based medicine and value-based purchasing will require market catalyst #3: the emergence of the consumer patient companies across the industry spectrum to not only collect data, but With more individuals realizing that they cannot be passive participants use it in their decision making process. The technology required to in their own health treatment, patients have become better consumers accomplish this is substantial, and the vendors that provide the best and are applying greater scrutiny to the care they receive. In response, solutions will create enormous value for their stakeholders, due to the innovative companies are leveling the information imbalance in health- tens of billions of dollars involved and the overall growth of the market. care and enabling the consumer patient to better determine price, quality and ultimately value. Pricing and quality transparency tools, social M&A will continue to be a key strategy in the healthcare IT and informatics market, and the pace of activity will accelerate, particularly media platforms and patient engagement solutions have emerged rein selected markets. Healthcare customers are seeking innovation, cently to address this trend. At the same time, employers are taking a and this is more likely to come from emerging companies than the greater interest in the health of employees, implementing programs to incumbent vendors. These are exciting times for nimble healthcare IT encourage wellness and lower healthcare costs. companies that can meet the needs of the changing market, as the JEGI expects dramatic growth in this market, as consumers and employ- status quo has been replaced by a desire to improve the way healthcare ers attempt to rein in costs. Patient engagement has become a critical is delivered and reimbursed. n

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Senior PE Investors (continued from page 1) sents the platform of choice for a substantial and growing portion of the audience. At the same time, advertisers are taking the lessons they have learned in the digital space and asking for more analytics and accountability across all media, forcing both marketers and media outlets to adjust. Finally, the B2B media world is just beginning to show signs of recovery, but the landscape is much changed; the need to be a dominant number one player appears to be more critical than ever before. Our investment criteria focus more on certain characteristics than the sector or type of company. We are looking to back proven managers in businesses that are leaders in their field. We look to become partners with management and highly value a manager/owner’s significant continued economic interest in the business alongside us. Typically, we invest $50-200 million of equity in any given investment, and the professional staff at Lee Equity also makes substantial personal investments in transactions.

“The debt markets have been very accomodating...” The debt markets have been very accommodating for the past 6-12 months, and we have continued to see leverage availability and rates at very attractive levels. This appears to be driven largely by an imbalance in supply/ demand in the market. Availability of leverage and low rates tend to drive up overall transaction prices; however, just because leverage is available, does not mean that it is prudent to use it. Leverage magnifies movements in both directions, and we all saw the painful impact of deleveraging in the downturn. I do not believe there is a stock answer to the question of how much leverage to use. Certain businesses, typically those that are less volatile, can generally support higher leverage. On the other hand, businesses that need flexibility for growth or where results are less predictable should be financed more conservatively. The goal is to match the leverage to the specific business situation. Prior to Lee Equity, I spent a significant portion of my career in venture capital, backing start-up companies. In this environment, you learn very quickly that businesses are fragile. So, I worry about everything. I believe the key to success is to back great managers and give them both the support and the space they need to anticipate changes and react before their competitors. Mr. Schreiber’s remarks represent his own views and not necessarily the views of Lee Equity Partners, LLC or any of the partners or staff of Lee Equity Partners.

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jeffrey stevenson, managing partner, veronis suhler stevenson, stevensonj@vss.com

The key driver of the recent increase in activity and valuation for middle market M&A has been the improving availability of credit in the U.S. Other background factors include the gradually improving economy and stock market, the return of risk, and the absence of global setbacks and surprises. In the case of private equity, the expiration of investment periods is playing a role in pricing. Secular trends that impact our strategy include the continuing shift toward digital and business models that depend more on recurring subscription revenue than advertising. We are primarily focused on information and business services, education, media and marketing services companies in North America and Northern Europe, with EBITDA between $5-25 million, and particularly those that are tech and/or data enabled. The debt capital markets in the U.S. are very strong with looser covenants and higher leverage ratios (5-6x) especially for credits with EBITDA over $50 million. For smaller credits (under $25 million in EBITDA), we are seeing a full turn lower in leverage (4-5x). If anything, the expected reduction of quantitative easing by the Federal Reserve (“Fed”) may help the U.S. banking sector and credit markets (although equity markets may suffer in the short term) and, as such, leverage multiples will remain high for the next six to nine months, as investors continue to chase yield. The more aggressive approach by credit providers has forced transaction multiples higher and incentivized companies to seek a sale. We aim to keep a relatively conservative capital structure with approximately 2-3x senior leverage, 2x mezzanine and 40-50% equity to enable companies to have the flexibility to pursue growth strategies, including add-on acquisitions. We also are providing structured capital for non-control transactions to facilitate acquisitions, shareholder buy backs and dividend recapitalizations.

force announcing the acquisition of ExactTarget. The large enterprise software companies need to fill holes in their product suites and will look to acquisitions of middle-market and emerging marketing services and software companies. At Sterling, we are working towards making sure our companies use these cutting edge sales and marketing tools to accelerate growth. Sterling focuses on control growth equity investments in small and mid-market businesses (enterprise values between $30-300 million) in North America. Across all investments, we look for opportunities to apply our Operations methodology and drive operational improvement across human capital, strategy, governance, sales/marketing, etc. Sterling’s sector focus in healthcare, education and business services is driven primarily by the firm’s targeted business model characteristics (e.g., high growth market or niche, proprietary product or service, sticky customers, low customer concentration, etc.), rather than a focus on particular industries. The firm has strong roots and over 25 years of experience in the education sector. The similarity of attributes in healthcare and business services to education fostered the sector expansion early in the history of the firm. The team has also pursued opportunities in other sectors that share similar attributes, such as financial services, global supply chain and logistics, energy and industrials, SaaS and big data. We continue to witness a strong senior debt market. In 2012, middle market loan volume was up about 25% from 2011. The trend in recap volume was even more pronounced, with increases in mid-market activity of more than 50% versus 2011. We remain optimistic and continue to see encouraging trends around lender process and an ability to move quickly and decisively. The market could face setbacks from international developments or from a

June 2013 JEGI Emerging Company Dinner in NYC

dan hosler, principal, sterling partners, dhosler@sterlingpartners.com Right now, we are undergoing a transition of budget allocation from the IT departments to the sales and marketing departments of large organizations, providing the CMO with a larger technology budget than the IT department. This trend will accelerate the growth of software and services companies that meet the needs of the CMO. This shifting trend will likely mean more acquisitions of these fast growing companies, such as Oracle’s acquisition of Eloqua, and Sales-

(from left) Mark Petroff, President, Marketing Associates; Wilma Jordan, Founder & CEO, JEGI; Keith Cooper, CEO, Connotate Technologies; and Scott Peters, Co-President, JEGI


delay in addressing the long-term federal debt crisis, but the underlying fundamentals indicate that 2013 will be another good year for the senior debt market. As the Fed begins to taper off quantitative easing, we expect the economy, the stock market, the debt markets, overall employment and GDP to experience volatility. But, volatility can also create opportunities, so we have to focus on long-term trends that can create great returns for our investors and partners. marc byron, chief executive off icer, trivergance, marc.byron@trivergance.com

In marketing services, the key macro factor is specialized verticalization. Marketing companies will look to acquire capabilities that broaden their solution set, while remaining very focused on their particular vertical.

“In marketing services, the key macro factor is specialized verticalization.” In data and analytics, M&A activity will continue to flourish, as acquirers seek ways to gather and interpret real-time data (“Big Data)”, especially into useable, actionable and relevant outputs. A new class of “analytics” will emerge under the banner “Recommendation Engines”, in which vast amounts of data are gathered, formatted and interpreted, and then in realtime optimal suggestions are made as to what to do. This can be in the form of communications, engagements, offers, etc. We operate differently and uniquely as a fundless sponsor. We have deployed over $3 billion in the past five years, but we don’t have the pressure of other funds to deploy capital or recoup investments. Our model depends much more on doing the right deal with our capital partner, so that if we add significant and demonstrable value, we share disproportionately to traditional market comps. Therefore, we are very picky and search for the right opportunities, identifying those that are truly proprietary.

d) benefit from our many CEO-level Fortune 500 relationships; and e) be between $25-150 million in EBITDA. The only thing that keeps me up at night is thinking that if the U.S. were a company, it probably would have to go through bankruptcy, and that until we deal with the reality of this country’s finances, we are playing financial “Russian Roulette”. scott feldman, managing director, susquehanna growth equity, scott.feldman@sgep.com

A major trend we see is the convergence of software, information and payments solutions all in one; examples include Uber for car service, SeamlessWeb for food delivery, OpenTable for restaurant reservations, and LinkedIn for CRM solutions. A secular trend we see is in the payments field specifically. All existing point-of-sale solutions are about to be disintermediated. Cash registers will be tablet computers within the next 24 months, and that will drive incredible opportunities in point-of-sale (POS) loyalty solutions and the ability to track what customers are buying on and offline by retailer. We see the payments solutions and software solutions companies extending themselves into marketing solutions, so we expect to see more deals like Salesforce acquiring ExactTarget. Another massive secular trend we see is in healthcare. We expect to see deductibles double or triple over the next five years and would not be surprised if the average patient deductible for a health insurance plan is north of $15,000 in 2018. This will drive increasing focus on cost containment and transparency and will pave the way for good information and payments solutions, such as MMIT (SGE portfolio company), Castlight, Simplee, etc. Our portfolio strategy continues to be to invest in software, information and payments, but we are becoming increasingly conscious of this triple threat and the risk taken by providing only one or two parts of the solution. That is certainly affecting which companies we are willing to fund.

We are in hyper acquisition mode and are completing the monetization of our most recent platform company – one of the most successful, fundless sponsor ROI deals we have seen to date. Our team helped deliver approximately $1 billion of value creation in about six years, investing none of our own financial capital but contributing much human and intellectual capital.

We are looking for companies with $5-50 million in revenues, with multiples of 2-3x senior debt and 1x mezzanine debt. However, we do not lever most of our deals and continue to expect the vast majority of our returns to come from growth, multiple expansion and/or operational improvements.

We are searching today for our next platform, which will: a) be consumer facing; b) leverage our direct marketing knowledge; c) have become stagnated for one or more reasons;

The fierceness of competition keeps us up at night. Capital efficiency is here to stay in technology and information solutions companies. That means you always have to innovate and

have the best product. Switching costs are lower today than they were five years ago across the board, mainly due to improvements in general infrastructure and the ability to port large amounts of data seamlessly from system to system. robert nolan, managing partner, halyard capital, rnolan@halyard.com

The macro factors we see impacting M&A include: market liquidity at attractive interest rates and a robust public equity market, continued IT spending by both corporate and government entities; continued investing of PE capital overhang (the demand factor); and a strong inventory, as PE funds continue to sell their “long in the tooth” portfolio companies, which have on average ownership length of nearly five years (the supply factor). Halyard is most interested in entrepreneurial-based organizations with the need to institutionalize their operating structure, and growth-oriented scenarios where our operating experience can improve the company’s outcome. The sectors we consider are: Marketing Services; IT Services (Healthcare and Education); Information Services; Government Services; and Human Capital Management Services. We would consider a transaction size up to $150-200 million in enterprise value for a company earning up to $20 million in EBITDA. The current debt market remains attractive with low interest rates and commercially reasonable terms. The Fed has triggered a bullish effect on market multiples and levels of leverage, both of which have grown over the past year. We believe that market interest rates will increase slightly in the next six to nine months, as the Fed still needs to prove that the unemployment situation is under control before it completely ends its easing strategy.

“The Fed has triggered a bullish effect on market multiples...” Our optimal mix for a transaction is 50-60% equity, 30-40% senior debt, and in cases where appropriate 10-15% mezzanine debt. The multiples we are seeing for senior debt range from 2.5-4x EBITDA and for mezzanine debt range from 1-2x EBITDA. Our concerns remain the capable and reasonable behavior by our portfolio company management teams; and the constant search for meaningful growth in an economic environment that has experienced tepid/low growth during the past four to five years. Said differently, “professional performance and growth opportunity” are two key indicators. n

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For the 7th Consecutive Year, JEGI Ranked #1 by Bloomberg for U.S. Media, Internet and Marketing M&A Transactions

a leading digital consultancy specializing in insights, content creation, curation, and audience development has been sold to

has acquired a leading operator of large, business-to-business tradeshows which was renamed

a leading provider of shopping and shopper marketing software and services

a leading creator, producer, and distributor of premium video content across digital media

a leading full service content marketing firm

has received a significant investment from

has been sold to

May 2013

April 2013

December 2012

a leading digital strategy and experience design firm focused on delivering e-commerce and broadband video solutions and a portfolio company of

a leading provider of news and information for the European entertainment and technology markets

has been sold to

a subsidiary of

for $950,000,000

June 2013

June 2013

has sold

a leading full service content marketing firm

the leading event for the streetwear and action sports industries

has been sold to

a marketing research firm to

has joined a portfolio company of

December 2012

has been sold to

December 2012

December 2012

has been sold to

a portfolio company of

December 2012

December 2012

jegi’s client is mentioned first in each of the above transactions.

Wilma Jordan Founder & CEO wilmaj@jegi.com

Scott Peters Co-President scottp@jegi.com

Tolman Geffs Co-President tolmang@jegi.com

Richard Mead Managing Director richardm@jegi.com

David Clark Managing Director davidc@jegi.com

Chris Calton Managing Director chrisc@jegi.com

Daniel Avrutsky Managing Director daniel@jegi.com

Tom Pecht Managing Director tomp@jegi.com

Bill Hitzig Chief Operating Officer billh@jegi.com

Adam Gross Chief Marketing Officer adamg@jegi.com

Tom Creaser Executive Vice President tomc@jegi.com

Amir Akhavan Director amira@jegi.com

150 East 52nd Street, 18th Floor

New York, NY 10022

212-754-0710

www.jegi.com


July 2013 Test