Corporate Development Spotlight

Spotlight Q&A:

Jeremy – Thanks for joining us for this issue of Corporate Development Spotlight! Can you provide a quick flyover of the Progress Software corporate development team and approach to M&A?

The Progress Corporate Development team is comprised of 3 professionals. Given we are doing between 1-3 deals per year, this is the right size for us. In addition to my internal team, I have a lengthy rolodex of external M&A practitioners (Bridge Street Advisors, investment bankers, PE and VC contacts, etc.) that I can call on as we pursue opportunities. As SVP of the group, I am responsible for all aspects of a deal from initial sourcing through integration. I have a Director on my team who assists with sourcing, managing our deal funnel, leading our due diligence process, etc. I also have a Senior Director on the team who leads our Integration Management Office and is responsible for planning and executing the integration of our acquisitions.

As a software company valued on EBITDA, it is critical that transactions we complete create shareholder value by being accretive to our EBITDA and EBITDA margins. Therefore, when we are evaluating an acquisition opportunity, we must have visibility into how we can incorporate the necessary operating efficiencies to meet our goals. As such, Progress is not looking for fast growers that are bleeding cash. Our ideal acquisition targets are enjoying revenue growth in the low single digits to mid-teens, have established a highly loyal customer base (>90% net retention rates), have strong recurring revenue, and may be experiencing a plateau in growth such that being on a larger platform (greater distribution, customer base) makes sense.

It’s no secret that the M&A markets are on fire. What’s your assessment of the current M&A market, specifically the impact on corporate M&A?

It is definitely a seller’s market right now. Battery Ventures recently issued a report on M&A trends where even software companies with growth <10% have seen a greater than 100% uptick in revenue multiples. We are certainly seeing this in our dialogue with prospective targets, where their views of their own value have been skewed by some of the irrationality occurring in M&A.

PE’s are flush with cash, and the advantage strategics once had around being able to pay more no longer exists in many cases. PE’s and PE backed strategics are becoming even more aggressive on price, but what has made it more challenging for strategics is the PE’s willingness to take on more risk with less diligence, agree to more seller friendly deal terms, and to have no issue backstopping sizable financing commitments. And their willingness to close quickly, providing greater certainty to close, has given them a distinct advantage in many competitive situations with strategics.

An interesting tactic we have witnessed multiple times over the last year is PE’s coming in a few days before a bid due date and saying they are done (pencils down on diligence, light mark-up of a seller’s agreement, financing in place), asking for exclusivity, and giving a very short window for the offer to be valid. As a seller, this can present a challenging predicament. While they might get a greater purchase price from another party, they must weigh the risk of potentially losing the “certainty” of the PE’s bid.

How are you and your team adapting in the current environment (lessons learned/best practices)?

We have taken several steps to better position ourselves for success, particularly in competitive auction transactions. 1) We continuously reiterate our total growth strategy driven by M&A so that the market understands the importance of our being relevant in deal processes. 2) We recently completed a $360M convertible note offering in which we consistently stated that the primary purpose of the offering was to provide us the firepower to transact without a dependency on obtaining financing commitment papers. 3) We have refined our diligence process to better reflect our internal priorities while at the same time acknowledging that we need to move quickly and that we will likely not have every request filled to our satisfaction. 4) In our acquisition of Chef Software in October 2020, we utilized representation and warranty insurance for the first time and found the process and mechanics of doing so to be very straightforward. By doing so, we recognized the importance of modernizing the other deal terms we typically pursue.

Predictions for the next 12 months in corporate M&A:

I do believe the hot M&A market will continue. As long as interest rates remain low, and the PE’s are well armed with cash, and the capital markets continue to be receptive, acquirers will be well equipped to transact. It will certainly be interesting to see if private multiples begin to contract a bit like public multiples have, and with the Biden administration imposing new tax rules, sellers could be incented to sell in 2021 rather than take a bigger tax hit, and potentially be willing to sell at a lower multiple to still earn a bigger return than if the capital gains rate does go from 20% to 39.6%.

Most memorable M&A story (can be most successful, funny, best learning experience etc):

I have so many memorable stories from my 21 years of doing M&A. I can say we have come a long way since my early days in Corp Dev at Akamai when we literally did our diligence reviewing paper files in a law firm conference room every week with a proctor in the room, flying back and forth between the east coast and west coast every week for 6 weeks, to now having our own CRM system specifically built for managing deal pipeline (advertising plug – Deal Cloud!) – technology is what allowed us to complete our Chef Software acquisition start to finish without ever getting on a plane, sharing a dinner, or sitting in a conference room across the table for a management meeting. I am still old school and look forward to getting back to the personal interaction aspect of my job, but as someone who originally was skeptical that a deal could get done without ever meeting in person, I now feel like we are that much better deal practitioners, who can leverage technology to make the deal process even more efficient.

About Lion Equity Partners:

Lion Equity is a Denver-based private equity firm founded with the core purpose of helping companies meet strategic divestiture objectives. The Partners of Lion Equity have significant experience acquiring corporate divestitures and the overall M&A process.

Why do corporations divest non-core divisions to Lion Equity:

• Proven track record of executing complex carve-outs from sellers, including Bed Bath & Beyond, Siemens, Pitney Bowes, Sodexo, The Washington Post and others;
• Demonstrated ability to execute time-sensitive carve-outs requiring speed and certainty of closure;
• Committed to flexible structures that meet seller’s divestiture objectives;
• Dedicated to seamless transition through a unique understanding of the specific issues involved both during due diligence and post-closing working with Seller, employees, customers and suppliers.

To discuss a corporate carve-out transaction, please contact: