PDF of Secrets of Success Booklet from the Silicon Valley Business Journal May 31 Issue

On MAY 16, 2013, the Silicon Valley Business Journal sat down to talk about today’s complex world of mergers and acquisitions with respected experts in the field. Held at Rosewood Sand Hill in Menlo Park, the conversation was hosted by accounting firm Sensiba San Filippo LLP and moderated by Business Journal Senior Technology Reporter Cromwell Schubarth. Below is the full transcript from that morning.

Panelists (in order above)
John Sensiba – Managing Partner, Sensiba San Filippo LLP
Jamie Leigh – Partner, Cooley LLP
Brett Rochkind – Partner, General Atlantic
Kevin Spain – General Partner, Emergence Capital Partners
Jon Soberg – Managing Director, Blumberg Capital
Kevin Strain – M&A Practice Leader, Sensiba San Filippo LLP

Cromwell Schubarth – Senior Technology Reporter, Silicon Valley Business Journal


Cromwell Schubarth: What I’d like to start out with is to get a feel for the climate of mergers and acquisitions from each of you. You’re all involved in some way with that, and various reports talking about economic uncertainties last year and in the first quarter of this year, providing a challenging period to do deals. What are you seeing?

Kevin Spain: Well, Emergence focuses exclusively on software as a service in Cloud computing companies. And clearly, this is one of the hottest sectors in technology today, I think from both an IPO [Initial Public Offering] and M&A [Mergers and Acquisitions] perspective. We’ve seen a lot of interest in our portfolio companies from potential strategic buyers. It’s a very narrow view of the market; we’re sort of focused on one particular area of technology, but at least in that area we certainly see that the climate probably hasn’t abated at all, and if anything over the last six months we’ve seen interest in acquisitions in this sector rise quite a bit.

Cromwell Schubarth: How about you, Jon?

Jon Soberg: Blumberg Capital focuses on early-stage venture, across several sectors. We do a lot in enterprise software and SaaS, [Software as a Service], some in financial technology. Maybe 30 percent of our portfolio is consumer. And I think what we’ve seen is – it’s the same shift that we’re seeing with venture, that there’s more interest in the enterprise type of real software as a service models, that have real revenues: that interest is there and continues to be there. On the consumer business side, there’s less interest: if you don’t get ramp or traction there, there’s very little opportunity on that side.

Cromwell Schubarth: How about you, Brett? You’re also in the investing side of this. What are you seeing?

Brett Rochkind: General Atlantic, we’re a global growth equity firm, we do everything from a late-stage venture, $50 million checks, to buy-out investments: $500 million investments. Half of our business is in the U.S. and half is international. I think you’ve seen last year, probably 12 months ago, maybe similar to Kevin and John, a lot of activity among strategics in kind of the SaaS area: SAP and Oracle made multi-billion dollar acquisitions. You’ve seen a few kind of trickle out the beginning part of this year. Our perspective is, that will continue, the trend will continue for multiple years to come. I mean, the only way that these big technology companies are innovating is by buying early-stage and late-stage start-ups that have innovative technologies. We think that will continue. On the consumer side, you’ve seen some bigger deals, more investors in the travel segment: you’ve seen Priceline buy Kayak, which was a couple of billion dollar deal; businesses that have strategic models, have kind of bearish entry in their respective markets, there’s always a buyer for that. I think anyone that’s gained real traction on the mobile side – you saw Facebook, obviously with Instagram’s acquisition, they’re rumored to be looking at others. I think they’ll continue to be pretty active, as well as Google, in the mobile app space. We think it’s actually a pretty good environment, despite what’s happening in the broader economy. And then in the buyout side of our business, you’re seeing the Dell deal that’s obviously going, and BMC and a bunch of others; the leverage markets have been so wide open, and so low, with the covenant-like deals you saw back in 2007, and people thought would never return – they’re back again. And so, you’ve seen a very robust buyout market, at least in technology. The question will be, can they extend into other areas. You’re probably seeing a little bit less activity in non-technology areas, in both M&A and buyouts.

Cromwell Schubarth: If I can stay with the investment panelists for just one moment – tell me, how important is M&A to what you do?

Kevin Spain: Well, I think it’s critical for any venture investor – we are Series A investors also. The stat that a lot of people like to quote is 80 percent of venture exits are M&A. That’s probably about right, when we look at our portfolio. Only the companies that get to the greatest levels of scale ultimately end up being public companies. M&A is absolutely critical to us. And M&A can sometimes generate outcomes that are as interesting as, or sometimes better than, what you might see in public markets. I think M&A is going to continue to be a staple for us, and probably for most other folks in the venture business.

Cromwell Schubarth: John, what are you seeing as far as the climate right now, compared to last year?

John Sensiba: We have seen a lot of pent up capital and more activity in the tech space, particularly within the middle market sector, and amongst private companies. Overall, while M&A activity has increased, we have not seen the expansion as significantly as forecasted, however we anticipate a cascade effect will take place.

Cromwell Schubarth: How about you, Jamie? What are you seeing?

Jamie Leigh: I think the beginning of this year was slow – which we all anticipated in part, because there was so much pressure in 2012, to sort of finish deals up, given concerns over tax changes. I also think there was a ton of change in the big serial acquirers corp-dev [corporate-development] in sort of strategic outlook. And it took a lot of the big acquirers a couple of months to really kind of retool what the acquisition strategy would be. And in particular with the push in 2012, I think people had to sort of refresh the white board a little bit. The beginning of this year was slow, which we anticipated. But somebody turned the spigot on in March in the technology sector in particular, on the private company side. On the public company side, acquirers have been a little bit more timid; watching what else is going on in the market. We have more volume on the legal side, just because there is so much pent up capital, and people are really ready to spend. And the big strategic buyers in the Valley are competing, hotly, for good technology targets. I think the private equity sector is still moving, with increased speed, I think, as people see the potential debt window getting a little tighter toward the end of the year. So I think there’s a lot of pressure to move, there. And on the public company side, I think acquirers have been a little bit more timid to do the big huge deals, as they sort of watch what else is going on in the market. But there’s definitely a little bit of concern, too, on the public companies’ side, about evaluations and whether we’re yet at a point where we’re overpaying or not. So, I think there’s a ton of movement, but there’s been a lot of watching, and a lot of term sheets and a lot of looking. But not quite as many deals yet completed for 2013 as we had anticipated.

Cromwell Schubarth: How about you, Kevin – more or less optimistic than last year?

Kevin Strain: I think going forward, optimistic for sure. I think like we all talked about, the March time parameter, definitely some increase and seeing more deals come through. And you know, in 2012, there seemed to be a pretty constant flow; I primarily focus on smaller technology companies in the Valley. And being here in the Valley, there just seems to be an endless stream of acquisition going on, at least for the last two years. It’s been pretty robust. We’ve definitely seen some increases in the private equity markup; we had two acquisitions last year, buyouts, that were new and unique to us; but it seems like it’s opening up to us. It definitely seems like there’s more opportunities out there. Of my client base, at least 50 percent of them are either being pursued, looking for targets or trying to find somebody to buy them.

Cromwell Schubarth: Does anybody see an advantage, buyer versus seller, right now? Brett?

Brett Rochkind: I’ll tell you, it’s definitely a seller’s market. I think you have public market values at all-time highs. I mean, everyone talks about the Dow over 15,000; the IPO market has been very robust for growth-oriented companies. And there’s been the acquisition exit we talked about, after the IPO, for many of these software as a service companies. So I think it’s a great time to sell assets; we had almost record liquidity last year, due to a lot of inbound from strategics last year, as well as some processes that we drove, too. One of the things we find, is that the leverage markets kind of work both ways, right? It’s great that the leverage is available, and returns models and expectations, and cheap debt drives higher equity returns, presumably. But what we learned from the last time, in 2007, was: that also drove very high prices of assets that you had to buy – and a lot of that benefit that debt provided really went to the seller. I think that you’ll see that again, this time around, where profit multiples and revenue multiples are quite high for the purchases that are being made. Definitely a seller’s market, with selected circumstances. We have a company called TriNet, in the small business area; it’s more of a niche, it’s a market leader: they’re buying great businesses at reasonable prices, using relatively cheap debt. So in certain specific markets and in isolation, it’s a good buying opportunity as well, given that leverage is widely available to make strategic kinds of acquisitions.

Cromwell Schubarth: How about anybody else? Do you see the same thing, a seller’s market?

Kevin Spain: I think so. Again, as Brett mentioned, it’s often about the sector. I mean, it’s not ever the case that every single company in the market, in every single sector, is either in a great position or in a bad position. The space you’re in and how hot that space is and how you’re performing as a business. We certainly see that in our portfolio; I’m sure other investors do as well. I think in general, though, in SaaS and Cloud, there’s definitely a situation where sellers are at an advantage. And in fact, I think there’s so much relatively inexpensive capital that’s available, for these companies to continue to run and grow, that most of them would prefer to do that, rather than sell, even though the multiples that they can get in their business are relatively high today, if they were to choose to sell. I think there’s just a belief that if you’re in a recurring revenue business and you’ve got some great momentum, that next year things are going to look even better if you do decide to sell at that point. So why cash out now? Instead, raise some more capital and keep going.

Cromwell Schubarth: What about you, John? What do you think?

John Sensiba: I would agree. Not only intellectually, based on the capital available and the inexpensive debt available, but I think there’s just more optimism, all across the market, right now. And I think that because people are inclined to maybe stay in the game a little bit longer, it can drive multiples up for folks who really want to get a deal done.

Cromwell Schubarth: Are there any sectors where people are seeing a buyer’s market?

Jon Soberg: I think the buyer’s market has to do more with opportunities where the company is not necessarily executing quite as well. You see some of these… where you buy a company and you shut it, you shut down the product; where maybe it’s Yahoo or maybe it’s a Salesforce or some of these big players are finding great teams that are very innovative and are going to add a lot of value to their company but maybe don’t even care what the product is. And they take them out fairly early, and sometimes before the company has really gotten traction. And in those scenarios I think there’s often a buyer’s market. You can argue the other way, that maybe they’re potentially overpaying – but I think that, realistically, if you project out what these teams are going to add in value into these companies, it’s probably getting pretty good value.

Cromwell Schubarth: If this is a seller’s market, and you’re a buyer, what should you be looking for? What are you looking at, what kind of red flags might there be? And what kind of incentives are you looking for?

Brett Rochkind: I guess strategically, for us, we’re looking in emerging markets. It’s interesting: while the U.S. is at record highs, I was just down in Brazil and got back yesterday. There’s great technology and services-oriented businesses down there, and the market and the currency has depreciated, so it’s actually potentially a good entry point. There’s the expectation that goes back to where it was, in all-time highs, a couple of years ago. But we think overseas emerging markets are a little bit out of favor at the moment, relative at least to the United States. In select circumstances, there’s great investment opportunities in some of these geographies – whether it be Brazil, India, China, and then even new emerging markets like Southeast Asia, Malaysia and Indonesia, which are a little bit more hyped at the moment. That’s what we’re looking at. And then we’re also looking, trying to be contrarian, in the U.S., and say whatever comes from out of favor sectors. Technology is about a third of what we do, but we do have some investments and financial services in some areas. And there are some areas of, not to say distress, but underappreciation of the value of some of the companies, whether it be in areas like acid management, where we’re close to investment in, or just other businesses that just aren’t as “growthy” at this moment in time.

Cromwell Schubarth: Is there anything that you see, from the legal perspective?

Jamie Leigh: I think two or three things have shifted from lessons learned and they’re particularly on the technology side. I think the first is real focus up front on integration, so trying to figure out if the teams are good fits seems to be a very important part of very early-stage diligence. Historically, diligence was almost solely focused on financials, or any very large valuation triggers in terms of big liabilities; now I see buyers going in and really doing pretty detailed employee diligence up front. Not just who are the two execs, but how deep you go: 10-15-20-30 people down the line, to really see if the company is a fit on an integration basis. I think that buyers are also being smarter about timing, so we have many technology companies, in particular that are in the luxury and private side of being in auction mode. And they really are in auction mode, and have quite a number of willing buyers, willing to put a lot of money on the table. One of the things that buyers are being very savvy about now is timing to execution. And promising a target company that they will start and finish, somewhat noninvasively, within a specific time period – which for a company that’s trying to either auction themselves off efficiently or, God forbid, continue to run their business efficiently. Timing to execution has become pretty compelling. And the other thing I think buyers are really doing is being savvy about competitive moves. To your point, if the ultimate product is not yet viable, or not quite integral, the teams are very important – and not just from integrating the team, but from a competitive landscape, making sure top talent doesn’t go to a competitor.

Cromwell Schubarth: What are you telling people when they’re contemplating a buy, what are you advising?

Jon Soberg: It’s a case-by-case basis for us, depending on what we think the company prospects are, whether it makes sense to stay in the game. I think on the venture side there’s a couple of things. Sometimes you can get a really great multiple in that company; it makes sense to potentially find that window. In other cases, I think, there’s a lot of capital available for companies that are growing quickly on the private side as well, too. So, to the point made earlier, I think if the company has the appetite and the desire to continue to go, there’s capital available to grow and potentially then to find a much better exit on the outside. For the buyers, in some cases I think it’s very strategic about whether it’s worth paying this much for a product or a team, and sometimes to pay up for it if they think that it’s really that strategic. To me, Instagram was probably the best example of that: clearly, everybody thinks huge, huge, multiple valuation for that company. But from a Facebook standpoint, it was almost a must-have, I think. Look at that from a strategic standpoint and say, “There are times when the price makes sense.”

Cromwell Schubarth: How about you, Kevin?

Kevin Spain: Well, I think what we’ve seen that’s interesting is we’re finding founders/CEOs showing a greater appreciation for what it means to be acquired, and paying attention to cultural fit. They want to feel that they’re taking the company they helped build someplace where it’s going to be appreciated — and where their team is going to be valued. We’re investors in Yammer, which Microsoft acquired last year – and that was pretty significant for David Sacks and the rest of the team there. And in fact, if you look at what’s happened since the acquisition, Microsoft has essentially left Yammer as a stand-alone business. And I think that was a key reason why David and the rest of the team really felt comfortable going there. They felt that they could continue to control their destiny, and continue to build the kind of company they wanted to build, even inside of a big corporate like Microsoft. I think there’s a greater appreciation than ever, on the part of founder/CEOs, for what it means to be acquired – what it’s going to mean for them personally, and for the company they built. Like I said, there’s just a lot of attention that’s being paid to that as part of their process.

Cromwell Schubarth: John, what about you? What’s at the top of the checklist when you’re working with somebody who’s making acquisition?

John Sensiba: We’re finance guys – you know, you go to a transmission shop, they talk about transmissions. [laughter] It’s a big deal for us, and tax issues are always a big deal for us. But really, what I’m seeing becoming a larger and larger issue is that post-transaction integration, and having buyers that don’t have stars in their eyes: they really have a pragmatic view towards what this is going to look like when the romance is over. And budgeting – having enough budget and resources, to make sure the deal is successful. A friend of mine always uses the analogy of having a baby… It’s great to have a baby, but they don’t raise themselves very well. [laughter] And it’s great to have a transaction, but it really needs a lot of care, post-transaction care. That’s the thing that we talk to our buyers about, depending on the level of sophistication of the buyer, to make sure they’ve got a view beyond the transaction, that they can be successful.

Cromwell Schubarth: How about the rest of you, as far as that post-transaction with the buyer? How involved do you get? I know that on the venture side often people talk about the IPO isn’t the end of the deal, the end of the investment. Is it the same with the purchase and sale of the business?

Kevin Spain: I’d say it’s very different. In the case of an IPO, it’s very rare that we would sell all of our position in an IPO and we continue to be investors. In some cases we remain on the board and we remain involved and active and interested. I think in an M&A context, we’re no longer shareholders, right, and it’s a very different kind of situation. And while we may, and often do, continue to lend moral support to our entrepreneurs, once they’re acquired, because they will still call on us for advice from time to time, our financial involvement and our day-to-day involvement is certainly going to be much less in that case.

Cromwell Schubarth: I was actually thinking more from the buy side; but how about you, Brett?

Brett Rochkind: Yeah, it’s interesting in both situations. I think when we maintain significant ownership… Take an example, we sold our business, Network Solutions, to Web.com – we became a larger shareholder in Web.com, so that’s clearly a sign that we look at it as we were able to exit and return some capital to our limited partners. But we very much look at it as an ongoing relation with Web.com, to help David Brown and his team realize their vision to their largest shareholder today, it’s a public trade company. On new acquisitions and new investments, we get very active. In fact, our model is very much always to be involved on the board. We don’t make many investments; globally we’ll make 10-12 investments out here, one or two or three. And we have a relatively sizeable team, on a global basis to help our companies, and locally. And so, we try to get very active in all sorts of things, from new business development, customer introductions; we have a pretty good connection amongst the Fortune 500 CIOs, that’s something that we spend a lot of time on. On global expansion, because of our network with both offices and relationships, helping anywhere when companies go abroad: we think that’s a real value enhancement both from a financial perspective, but in the market and strategy, it’s really taking something that works very well here in the U.S. and whether it be technology and enterprise, and also some consumer businesses, and make it successful both in Europe and Asia and Latin America. That’s been a big part of what we do. And we have a lot of expertise in kind of operating partners as well, that have experience in their businesses, that they get active with our portfolio companies in advising either in functional areas or strategic areas. So, our model is complementary, I think, to the venture model, which I think does many of those things at an earlier stage in the development of companies. Our focus is exclusively on companies that have meaningful revenue in many cases; in most cases, profit. We get very active in those companies.

Cromwell Schubarth: Let’s look at the other side of the equation now, the seller’s side. Let’s start with you, Kevin. What’s at the top of the list if you’re advising somebody who’s going to be making a pitch: what should they be talking about?

Kevin Strain: I advise my clients to focus on why you’re at the table and the value that you’re bringing. Make sure your forecast and projections make sense and that you can explain them; if it is a technology play, make sure it works and that you can explain it and sell it well. Have a well prepared pitch and know what you’re thinking through the entire transaction. It’s really just focusing on why you’re there and why people are interested, and really emphasizing that point. There’s also some areas to focus on, to making sure that you know what your negotiating points are. Going into the room knowing what areas that you’re going to be able to kind of give on, or at least knowing your exposures. Because if you get to the end of the deal and one of the items comes up and you’re not willing to negotiate on it, you’ve been two months down the road and all of the sudden this thing breaks it down, it’s kind of a rip in the wall to your identification, kind of breaks the deal down. Be prepared, and knowing what you’re thinking through the entire transaction, early on, can really help a seller.

Cromwell Schubarth: Jon, what about you?

Jon Soberg: I agree with that. I think that we talked a lot on the seller side about the types of due diligence they’re doing, about the teams and the integration – that’s at least as important if not more important for the sellers as they’re looking at this. There are two things that we see: one is the value proposition that they bring to the potential buyer; and the synergy that exists or doesn’t exist there – and realistically that helps drive the priorities, too, because in some cases it’s not totally optimizing on exactly the best financial deal that you can get. Because you may be trying to find where you think the best opportunity is over time. A lot is about cultural fit; and then also understanding the value in the way that this is going to mesh together once you complete that transaction.

Cromwell Schubarth: How about you? [to Kevin Spain]

Kevin Spain: Well, I think it’s important, in the process of negotiating a deal, to come to the table from a position of strength. It’s important to communicate along the way that you have other options; maybe those options are other buyers, or maybe that option is just a stand-alone option. And as I said earlier, many SaaS and Cloud companies these days, the option of a stand-alone path, going to become a public company, is a very viable one, because there’s plenty of capital available and these companies are growing so quickly. In addition to positioning all the assets that you bring to the table, it’s important to highlight that you do have another path you can go down if things don’t work out. That’s the only way, in my experience, to actually generate the best financial outcome.

Cromwell Schubarth: And John, as far as making sure that you’re correctly evaluating what you have as a seller, what’s the checklist – what’s the most important thing there for you?

John Sensiba: Well, Kevin [Strain] identified most of those. As I’m sitting here thinking of sellers, especially technology companies, maybe the investor’s going to drive that process. And they need to recognize that they need a deal maker. Founders/CEOs pursuing a deal, need to recognize that they’re going to triple their workload. They need to continue to focus on their business, work on the deal, and maintain open communications with their people, making sure everybody is comfortable with what’s going on and understands the path forward. There’s two things: Recognizing the workload and not taking your eye off the ball – because most deals don’t happen. And then making sure you’ve got somebody on your end who knows how to get the deal done. Because deals that get done well get done quickly. And making sure that you have those resources internally, to hold up your end of the bargain, is really important.

Cromwell Schubarth: There was a report I saw earlier this year that said something I found surprising – but maybe you could say if this was typical or not. They were saying that, in tech, the majority of the M&A that was going on involved companies being bought that had never raised venture money. Is that something that you see all the time?

John Sensiba: No. No, it’s something we expect to see more of – and I’d like to get opinions around the table. As the SEC [Securities and Exchange Commission] gives us rules about crowdfunding, I expect to see more of that. I would’ve expected to see more of that last year, based on the passing of the JOBS [Jumpstart Our Business] Act. But we really don’t have the rules yet. The platforms are there to make it happen, so I’d expect to see that.

Kevin Spain: Well, I have a little bit of a biased perspective, as a venture investor … Our views, and again, in the space that we focus on, we haven’t seen the need that companies have for capital diminish. I think it’s changed in terms of when companies need capital. Early on, when building a product, you don’t need as much capital as you needed 10 or 15 years ago. With the advent of infrastructures of service like Amazon Web Services, with open source technology, you can build a first version of a product literally in your garage – and sometimes even have customers – before you ever put a whole lot of your own capital, or anyone else’s capital, into it. But when it comes to that scaling stage, when you’re actually acquiring customers – and particularly business customers – what we’ve found is that the need for capital really hasn’t diminished dramatically. And in fact, with software as a service, when you extend the revenue stream out over a period of time, rather than getting paid up front, in many cases, the need for capital is actually increased, versus enterprise software 10 or 15 years ago. We think there’s still a substantial need for capital in the space that we invested; and I actually also believe (again, from a biased perspective) that there’s a great need for expertise at the board level when it comes to scaling businesses. That’s something that the crowdfunding model can’t necessarily address quite as effectively. A strong board member with a lot of background helping to build these businesses, we still feel is a prerequisite for success.

Jon Soberg: I was going to say, from our side, we have not seen as many deals either that are not funded by venture, or at least by angel investors, but I guess sophisticated investors typically to me have been involved in most of the transactions, even at the low end. Usually you’ll find the best teams attract also very good investors, and they also attract them fairly early; so they usually have raised some level of capital by the time they’ve gone out. I guess I also have a bias, but I’ve kind of gone on record multiple times, saying, “I’m skeptical about the crowdfunding model” in early-stage. Because I think again there’s a selection bias and the best entrepreneurs go and seek out the best investors that have that expertise, and that capacity to help them. What you end up with, then, is on the crowdfunding platforms not the best deals, and not as sophisticated of investors; and that we probably will see some transactions there, but I don’t think it’s going to be the top tier. It’s not going to be the ones that the make the headlines.

Cromwell Schubarth: Anybody else have an opinion on the effect of crowdfunding on mergers and acquisitions?

Brett Rochkind: I think it’s not as relevant as it’s discussed in the media. Definitely, for certain entrepreneurs, it’s almost the equivalent of people talking about IPOs would be online auctions, right? And there was a big thing in 1999, 2000: hey, there’s no need for an investment banker, there’s no need for underwriting. At the time I was at Morgan Stanley and some people did hybrid and Google went public with part auction, part under an offering.

Jamie Leigh: But that was Google. [laughter]

Brett Rochkind: But that was Google – exactly. But venture capital business, as Jon pointed out, is for entrepreneurs who do want that value-guided assistance and not just the capital. It’s a good point. We do like when entrepreneurs bootstrap their companies: it causes them to make decisions around capital efficiency decisions, reduces waste, kind of prioritizes things, supposed to kind of do everything. And then, ultimately, when we do invest, and VCs [Venture Capital] invest as well, you feel more comfortable with those companies that you feel are good stewards of capital – the entrepreneurs that aren’t just thinking about raising the next round, but really focused on building their businesses to be long-term, sustainable, market-leading franchises. That’s how we tend to think about it. But crowdfunding, like I said, it’s kind of like the online auction.

John Sensiba: I don’t like the term “smart money,” but really it kind of applies. I think about the story, of Joe Kennedy, who got out of the market in 1929. Somebody said, “Jeez, how did you know?” And he said, “Well, I was getting my shoes shined and the guy shining my shoes was talking to me about his positions in the market and how excited he was about it – and at that point in time, I knew there was a problem. [laughter] And it’s kind of the same with crowdfunding. I worry about not only the lack of expertise but also the loss of capital for people who really are not sophisticated investors. We had the acts of 1933 and 1934 to protect the public, and I see this eroding that a little bit. I’m a little worried about that. But I don’t think it ever really will take the place of that “smart money”.

Brett Rochkind: Something about the private market, right. If you look at the Facebook IPO, and Zynga and Groupon, you have private markets really exploding, with lots of secondary capital entering the market, and ultimately led to the loss of capital, as you suggested. It’s interesting, I think for certain companies, we all are maybe too down on crowdfunding. For certain companies – if I were going to start my own – actually, it’s a pretty interesting situation, just like for Google, the online IPO auction was a good thing. In some situations in these private markets, it did work well for shareholders, and there are great companies where, if you could have bought Workday stock or SocialStay stock prior to them going public, you would have done terrifically well. And if you bought Facebook early enough, you would have done really well, as well. So I think there are reasonable markets; just going back to the shoeshine issue, when they get as overheated as they are and hyped, it’s probably not a good thing.

Cromwell Schubarth: Jamie, do you see any legal issues around M&A involving crowdfunding?

Jamie Leigh: You know, I think it is a really hot topic that people are spending a lot of time thinking about. But the real legal issues sort of don’t quite get vetted until people start putting it into practice. We’re doing a lot of talking and my jury is out until we actually have real issues to deal with on the table. I am actually a little more optimistic about it. We have some very sophisticated and very well self-funded entrepreneurs in the Valley, who might find it entertaining to give it a whirl. There may be a few outlier examples, so as soon as we can figure out how that works, from a legal perspective, I don’t disagree with the general sentiment that for most companies we’re not going to head that direction very quickly, because the infrastructure of the private financing world is important. But I think we’ll see it. I do.

Cromwell Schubarth: Let’s stay with you [Jamie] for a moment. On the legal side of M&A, what kind of red flags do you look for when a client is coming to you with a deal?

Jamie Leigh: I’m so glad I have some investors at the table – to scold. [laughter] It makes me very happy to have a forum. Private and public is obviously very, very different. So I’ll speak on the private side, mostly. We focus on things from such a different perspective in a public company sale process. The biggest thing on the private side is to be organized – both from a diligence perspective and from a “what’s the pitch” perspective and from an investor perspective. On the diligence perspective – because, in part, transactions are happening very quickly and there is a lot of pressure from the investors for deals once you sign that LOI [Letter Of Intent] to get the signature on the definitive agreement. Investors can really help their companies, because nobody listens to the lawyer raising red flags because that’s what we do for a living, so they tune us out.

Being coordinated on the diligence side is quite important, and I’ve seen a lot of… not only investment advisors but investors, take a lead person and give the company a hand, in terms of getting data rooms set up or financial metrics pulled together. Many times private companies want to keep the potential deal under the tent with only two or three people. And they simply don’t have either the bandwidth or the expertise to know – not just how to put a good book together, but how to populate the data room, package big ticket liabilities in the right way. Really understanding what your export compliance issue may or may not be before this buyer has a SWAT team of 500 people coming to look at the fact that you’ve been selling software to Syria [laughter] is something that’s quite important from an evaluation perspective, right? These investors who’ve been sitting on the repeat-sale side can help be a steward to the executive team in making sure they’re getting ahead of those issues quickly, and before the buyer does, so that they don’t end up being a ding on ultimate valuation.

The “what’s the pitch” platform is crucial. A lot of investor-backed companies, sometimes fueled by an exec time who’s just ready to go, sometimes fueled by hot money being thrown around in an auction and people really want to just get in the door, or just get the LOI signed. Unless you have a very good pitch, to sort of push you all the way through the deal, if you want to hang on to that valuation that you got that made you sign that LOI, you have to have a sales platform that goes not just to the LOI but all the way to signing the definitive agreement. And investment advisors and your investors can also be very helpful, and sometimes executive teams are hesitant to really leverage that when they have a lot of firepower behind them.

I think also have a key point person on the deal is just crucial. Sometimes you have an exec who’s very, very good at that – and sometimes you don’t. Having consensus is just incredibly important; and you [Brett] raised this idea, about making sure the investor team and the executive team is on the same page and has really flagged, the parameters for the negotiation. Many times you will get to the third or fourth turn of the document, everybody thinks they’re going to be signing next week: the lawyers are saying, “That will never happen,” the investors are saying, “Yes it will,” and what you realize is that you have a delta of a pretty important percentage of valuation hung up – usually in indemnification discussions, usually around who’s on the hook for what, at what percentage – and the investor ranks sort of break down. And the minute you lose that momentum, I swear the buyers can smell it. You lose the traction, you lose a lot of valuation. And it’s very difficult, particularly if you have a company with many rounds of investing, you have many different points of inflection where things matter for the investor pool – but those investors have got to stay coordinated together, whether you decide to use an investor representative to do most of the negotiating, to do the back-channeling with the rest of the investor pool, whatever it is. That’s the stronger position, is to have a way to be coordinated as an investor team, so that you’re not losing things by the wayside.

Coordinating with the lawyers well in that way is very, very important. There’s nothing worse than sending out an initial document and as lead company council getting eight different sets of comments from investors that really span… like “No, no, no – I’m over here on purchase price: we need $20 million more” and / “I’m over here, please just sign this document, it’s fine, whatever: yes I’ll sign a non-compete, yes I’ll sign a non-solicit, I’ll do anything” / and “No, I’ll never sign a non-solicit.” It’s like, okay, team. [laughter] You really want to be ready, from an investor perspective, too, to sell and understand on what terms that is. And it’s really an hour of people’s time up front, to get coordinated. I mean, no one wants to talk to me an hour a day… [laughter] but probably okay to talk to me for an hour before you start.

Cromwell Schubarth: How about you, John? Are there things from the finance side that you see people not paying enough attention to?

John Sensiba: Nobody wants to spend money on the administrative stuff. If you’re not spending a dollar on the mission, you’re wasting a dollar. We spend a lot of time trying to convince people to dress for success from an infrastructure standpoint, and to get their finances in order so that it’s not a hitch when it comes time to do due diligence.

It’s much easier now to make those things happen, but I wouldn’t tell an entrepreneur that that’s a bad decision. It’s a good decision: spend your money where it has the most impact – but to the extent that you can get things in alignment in advance of due diligence. Your multiples are going to be better, the deals are going to go faster, and the deal’s going to get done. We’re constantly the stepchild, in trying to get people to focus on it and allocate appropriate resources to it.

Cromwell Schubarth: Do you folks on the investment side feel scolded at all? [laughter]

John Sensiba: They could care less. [laughter]

Cromwell Schubarth: Do you want time for a rebuttal? [laughter]

Kevin Spain: I think it’s justified scolding, most of the time. [laughter] I agree with the comment: you need somebody who’s going to drive the process. It doesn’t have to be somebody on the board, and it doesn’t have to be an executive. It can be a lawyer; it can be a trusted advisor from outside the company who has rapport with buyers and also with people inside. But somebody who’s going to take the mantle who has been through it before, that’s really the key. This is not something you want to learn on the job. It’s really complicated; there are lots of nuances to it. When things are going awry, that person does need to scold the team to get things going. And they need to be put in a position of authority where they can actually do that. Whether it’s someone inside or whether you can bring someone in from the outside, it’s a very wise thing to do.

John Sensiba: You’ve got to make sure that the other side has somebody as well. You’ve got to have somebody on the other end that’s got that sophistication to make that happen. And many times you’ll see a CEO that kind-of, sort-of gives someone that authority, but not really, and it just doesn’t work.

Jon Soberg: I would say the same thing. We’ve had deals that were much better run than others, and it’s very clear that having that coordination is really critical, and giving that person the authority to do that is absolutely essential.

Cromwell Schubarth: Jamie, is there anything on the other side? You were just talking about selling – how about buying? Differences?

Jamie Leigh: It depends if you’re in an auction context or not. Whether or not your target is hot or not, the landscape is a little bit different. Again, scolding [laughter] – and there’s nobody here. I can scold in person, but really on the acquirer side, having consensus from all specialty centers in the company, about how the acquisition will work, is important. You can have a totally excited corp-dev team and not a very excited legal team, or a corp-dev team that’s 12 deals down the runway and a legal team that’s just barely keeping up. I think coordination even on the buy side is really important. Sometimes we just get in these periods where we have to just go, and that’s the only choice – and maybe you’re not quite sure how it works out, but you need the target in the shop. Be very clear in your advisor teams about where you are in that process is key. If someone says to me, “We have no idea; we just have to get this in. This is the hottest deal you’ve ever seen: please just make it happen.” And you say, “Okay, great. Give me the leverage to do that and we’ll get it done.”

The same on the investment advisor side, companies need to be very clear what the goal is. There’s a lot of pressure around liabilities now, for buyers. When you go out and you model an acquisition, there’s a lot more focus being placed on the back end, in terms of liabilities, particularly in the SaaS space, and the software space, export control and regulation, which has become a huge hot button. The overseas tax issue is also quite big as well as the acquisition for hire model overseas for employment.

One of the things that buyers are not yet good at communicating is the expectation with respect to liability for the deal, and sort of where that pivots on the valuation sector. This the kind of deal where I’m going to bill you a billion dollars because you’re so hot, but just to be clear if there is any nick for liability on a post-close basis, it’s dollar one and it’s all yours. I see buyers really sort of having that expectation internally that’s not clear at the valuation and the modeling stage, and then you get halfway through the deal and the investors say, “Oh, no – I am not signing up for that kind of responsibility on the back end of the deal,” and you end up essentially with the valuation divide. Being very clear on that is important.

In-house legal teams and big acquirers have sort of become hair-trigger. And the fact of the matter is, you’re not going to acquire a company that’s clean – particularly if it’s two years old and they got a product out the door before they even had funding… the reality is, some of these things are just a work in progress when you buy them, and buyers need to figure out how to assimilate that type of company into their very big, very low-regulated, very well run machines. That takes some creativity and some doing, and buyers sort of get a hiccup there sometimes when they are buying companies that are still pretty new, even if they’re still pretty big.

Cromwell Schubarth: You hit on a couple of interesting phenomena there. We hear a lot about the scarcity of talent, in the Valley in particular. Acquisition for hire: are there particular things that you have to keep in mind with an acquisition for hire, going into it?

Kevin Spain: Well, from a seller’s perspective… Whenever I hear “acquisition for hire” I hear “fire sale,” basically. [laughter] From an investor’s perspective, it’s not necessarily an exciting financial return. But if you’re at a point where you’re seriously considering that, it’s usually for good reason. And look, if you can have an exit that gives the entrepreneur and the team a home, rather than what might be a much less desirable an alternative, as a stand-alone company if they’re not performing well, then that’s not necessarily a bad thing, even as an investor. But it’s not an exciting thing and I don’t think any of the best entrepreneurs aspire to start companies because they want an acqui-hire [acquisition for hire] as sort of an outcome. I think that’s not exciting. From a entrepreneur’s perspective, when you’re looking at something like this, the key thing to understand is, what am I going to be drawn into doing, and how long am I then committed to doing this? You’re always going to be tied up in an acquisition if you’re an important employee for a period of time after an acquisition, but in an acqui-hire scenario, when your product isn’t actually being capped, it’s probably going to be shut down. What is that going to end up meaning, for me and the team – and is that going to be an exciting outcome, particularly if I’m signing up to be there for a year or more? The things that you have to end up having to pay attention to, as the entrepreneur, definitely change a bit when you’re in that scenario.

Cromwell Schubarth: What about you, Brett? You deal in companies in a much larger scale; are they doing a lot of this acquisition for hire? What are you telling them?

Brett Rochkind: I was going to follow up on Jamie’s point, too. I would say buying’s a tricky thing, in general, leaving aside the acquisition for hire model. I mean, you have the sellers on the other side that are, in some cases, putting up the pig – they’re putting together great financial infrastructure, great numbers. They’re putting the most rosy projections on the table. It’s a delicate balance on the buying side – of looking at those numbers, trying to be competitive, particularly in an auction situation, putting forward what you think is reflective of the competition, the competitive landscape, the competitive element of that auction. It’s compelling, given the numbers and the rosy projection they’ve put in, and balancing that with all the different processes, once you get into diligence and really learn what’s in the middle of that. From that standpoint, Buying is a tricky thing, it’s not something to get down on, because it’s the nature of our job and business.

I would say, on the company side, I think acquisition for hire is fine, why not build versus buy? Is there a way to get to the same product, the same business, by building it organically? And there’s always that trade-off of what are you actually acquiring when you’re acquiring just people – are there comparable engineers, comparable product ideas that you could execute on within the current business that you’re operating? But we’ve done it from time to time.

Box is an example: they’ve done a couple of smaller acqui-hires, they did come with some product and ideas around either rendering or different ways of processing images. And that’s been valuable. And that did accelerate their time to development: that’s an important thing in their business, given the competitive dynamic in that market. Having access to the best talent, the best engineers, that have those types of ideas and those types of technologies, it is important. You’ve got to be balanced on the price you’re paying for that, relative to the cost and time it takes to build it. We think about that pretty prudently with our companies. Most of the acquisitions our companies do make are of real businesses that kind of move the puck forward in a more dramatic way and are more transformational. TriNet, as I mentioned, has done a bunch of those, even to go buy a PC business, which took it to be a global business. Those are the kinds of things we spend more of our time on; and we’ve let the companies, in many ways, decide what they want to do on the acqui-hire side, because they’re closer to the engineering teams understanding what they can do internally versus externally.

Cromwell Schubarth: How about you? [to Jon]

Jon Soberg: Yeah, I think acqui-hire is typical of a fire sale in most cases – or maybe not fully a fire sale, maybe it’s more walking dead. You’ll have a company that might be fine, but not scaling, and I think then that you’re not going to do that forever, necessarily. And some of the entrepreneurs don’t have the appetite to just keep building their business and not have the capital or not really have figured out how to scale it in the market. It’s more and more the case for, as you see more and more companies that are able to get products off the ground but not necessarily scale. I do think that we’re seeing it be more common, especially for earlier stage companies. It’s not a horrible thing, but it is something is very important to find a ride home for the team – and that, to me, is the most important thing. As an investor, we’ve had a couple of companies that have gone through this; and for us, we’re mostly concerned with team. Maybe we make a dollar for a dollar, maybe we make 50 cents, maybe we make two to one, or three to one: it’s not going to move the needle dramatically on the fund. What we’re really trying to do is make that sure we find the entrepreneurs a good home, and that that’s the right fit. And hopefully, even in those scenarios, if it’s a really good team, you can still end up with an okay outcome and there’s probably two or three interested buyers for a really excellent team, because that team can move the needle for another company. It can be a decent outcome, too: it doesn’t have to be always horrendous.

Cromwell Schubarth: The other thing we’ve seen a bit of, not so much most recently, but last year certainly, was the IP [Intellectual Property] driven deal, particularly in the mobile space, where people were buying large groups of patents. From the legal perspective, what are you looking at when you’re looking at that kind of a deal?

Jamie Leigh: I just call my patents lawyers to look at it all. [laughter] On the buy side, I think it’s usually more straightforward, because you have a team who’s identified – and I see this more regularly on the health care side than I do on the technology side, because when someone wants something like that on the technology side, what they really want is the team, too. You end up with a slightly more robust asset sale, even if just a portion of the business is coming out. On the buy side, it’s straightforward because someone has identified something that they want; they can draw a circle around it, and it’s fairly simple. It’s just a matter of money and doing diligence on the assets to sort of understand what you’re taking on in terms of infringement profile or other competitors in the market.

On the sell side, it can be very complicated because you see extremely large companies who have built up just massive patent portfolios over time. As these companies figure out how they play long term in the global marketplace, one of the ideas that’s regularly pitched to them, either internally or externally, is monetization of some type of portfolio. And sometimes that totally make sense, because the company has taken a right turn, with enough time to really understand that they don’t really need this pool any more, and so it’s something work monetizing. When you have these very large legacy businesses, extracting that can be quite complicated if there’s still interrelated IP with products or development. If that’s the case, these are way more complicated deals than people think when they have breakfast with the latest idea from their investment banking team. It takes a lot of diligence internally to get that patent portfolio extractable. Many different teams may or may not use that technology, and it takes quite a bit of legwork before you’re ready to even go out and start pitching the ideas to potential buyers. You want to be very certain of what it is that you’re selling and how much you think it’s worth.

On the other side of the spectrum, if you’re a smaller company – and sometimes it really does make a lot of sense, because you do still have a viable team or a viable product that you want to take on a go-forward basis, and it may make a lot of sense for the investors to do some type of liquidity event with a segment of the business that is really not going to take you forward. You know you’ve developed this way, the product’s diverged right and left; and you can monetize left, there’s not a lot of interplay, and off you go. I think it can be very, very successful. It’s been something that advisors have focused mainly on the very large companies, but I’m starting to see people poke around that a little bit for smaller companies, too.

Cromwell Schubarth: John, are you seeing that? As far as smaller companies selling IP?

John Sensiba: We see more and more litigation around IP. And when we do see it, yeah, it’s a very complex deal. You have to have engineers involved…outsiders just don’t understand the interplay sometimes with IPs. You get a ten-page list of patents and you’re kind of going, “I have no idea what to do with this.” And very few people do – unless you’re the engineering team. You’ve got to bring in some pretty smart people to be able to handle that. It definitely adds complexity and length to any deal that gets done. But we’re not seeing a ton of it at the smaller level right now.

Cromwell Schubarth: I’d like to throw a question out to the table, because we’ve run through most of what we were going to talk about. But is there something going on in mergers and acquisitions today that we haven’t talked about, that’s interesting or something you’re concerned about right now?

Kevin Spain: Something that we haven’t maybe touched on… There is something interesting around software as a service that is happening right now, that we haven’t seen in enterprise technology in a long time. There’s an understanding among a lot of the bigger buyers of software as a service companies. I think Microsoft’s an example, obviously, acquiring Yammer; SAP acquired SuccessFactors a couple of years ago. One of the interesting trends that we have seen is this idea that these kinds of buyers recognize that what they are buying is so different from their core business, that they are willing – more than they probably ever have before – to allow these companies to sort of operate in a very stand-alone fashion.
A great example is Oracle. They’ve acquired a couple of SaaS businesses over the last couple of years, and in at least one of those cases, they actually kept the finance team of the company that they acquired. And that’s pretty unusual for Oracle, because they’ve got a pretty robust G&A [General and Administrative] team and finance team there – and usually that’s something that they would shut down, in a company that they’re buying. But in this particular case, there’s enough that’s different about a recurring revenue SaaS business, and how you account for and how you manage it from a finance perspective, that they actually saw value in keeping that intact, in leaving that in place. That’s an interesting dynamic we’re seeing, in the market we play in, where integration is often much looser than it has been in the past. There’s a desire, in the interest of trying to get to a more successful outcome, to sort of leave these businesses as independent as possible – more so than I’ve seen in the last five or ten years.

Cromwell Schubarth: Is anybody else seeing that?

Jon Soberg: Yeah, we’re seeing that. I’d extend it even beyond SaaS enterprise, we’re seeing it in multiple different places. Especially if you are acquiring a team that’s really good and has executed or built a very interesting product, there’s a strong desire to not mess with that. If it’s successful, you don’t necessarily want to screw it up and make it part of something that may or may not keep some of that magic. Those are the cases, too, where you get often the best outcomes, but the best multiples, too, on the sell side, because they really have figured out that they value the product and the team and the way they execute.

Brett Rochkind: What we’re seeing is all of large technology or software company giants that will remain. They’re using their cash flow to buy businesses; you have those more mature legacy businesses, the BMCs, the Compuwares, the M4s [M4 Financial], that are effectively these cash flow hubs, that are coming off the public market. You’ve got the little companies and emerging companies in SaaS, with exception of probably Salesforce, that are basically all ripe to be acquired by those other guys. There’s almost this bifurcation, in many respects, where what you’re left with is very large, actually cheaply traded companies. MSB and Oracle are corporations still actually growing, and their acquisitions are clearly growing. They’re able to change in some cases the business models of the companies they’re acquiring, and the margin structure of many of those companies, to drive additional cash flow to fuel more acquisitions. You have these public hubs of cash flow that are trading at – you look at Google’s multiple, and others have talked a lot about this, Apple’s multiple. These aren’t very high levels. I don’t think it’s actually a tech depression, but you have single digit multiples of earnings and cash flow, attributed to some of these businesses that are still growing very nicely in the public market. And then you have private market companies where you look at the cash flow that companies like Inforum, BMC and others are generating, and they’re redeploying that to acquire some of the underappreciated public market assets. You’ve got this interesting phenomenon going on; yet, at the same time, because so much market cap [capitalization] is kind of leaving the public markets, and the number of companies that are out there, and it’s getting concentrated in those areas, there’s this appetite for all these IPOs – of kind of the next generation of emerging companies. It’s kind of an interesting dynamic where everything’s kind of for sale, with the exception of those big, big companies. And everyone wants to have access to that same, small pool of those kind of emerging growth assets. They have cash, waiting there to be bought, obviously with record low interest rates. And debt, in addition to that. It’s an interesting time, in that respect, from the standpoint of where the public market is, and where there’s so much cash to be deployed in this very small, narrow piece of the market.

Jamie Leigh: And you also have investors – because they had to hang on through some darker times recently – are willing to make the choice not to exit. Firms have gotten more comfortable saying, “Nope – not this year.” I think that plays in a very interesting way. I represent a company that has gone through the process of IPO or M&A exit choice now, twice. They said no both times. You’re seeing more willingness to stay private longer, and maybe grow as a private company through acquisition. They look to the two- or three-year time horizon, when there’s an even better pitch, for exit.

Brett Rochkind: Yeah, look at the last cycle, 1999-2000, when a lot of those were stock for stock deals, right? So you’re trading acquisition currency. Many people went into it both because the values were, in many ways, artificially high, but also people were worried their stock currency was going to go away. You had buyers wanting into play and you had sellers wanting to exit. Here you have just mountains of cash – it’s just unprecedented levels of cash – many that are offshore, that’s another issue.

I was meeting with a bunch of corporate-dev people at some of the large tech companies and their level of interest in our offshore things we’ve invested in overseas outside the U.S. was extremely high. They had almost no price sensitivity to get into, because they had the choice of repatriating cash and paying full tax on it or just letting that mountain continue to build. It’s a really interesting phenomenon. Literally one of the corp-dev guys was like, “Let’s go through… The U.S. stuff is great, but let’s talk about all of your international companies and let me figure out where their tax entity is, and let me see if I can make acquisition for it in those markets.”

John Sensiba: That makes a lot of sense.

Jamie Leigh: There’s also so much pressure on the stockholder side in public companies, to deploy cash. I think that’s an increasing pressure over the last two or three years that corp-dev and exec teams on public companies really always have in the back of their minds. Now you have extremely sophisticated activist shareholders that aren’t the activist shareholders of five or ten years ago. These are real funds, with real money, with real savvy people that have very specific ideas for capital deployment in these very large companies that are just amassing cash. You have a lot of pressure on the strategic acquisition side there, too, to keep some of that activity at bay by continuing to have a platform and a strategy, and something that’s very public and visible in terms of using cash for good reason. That’s another interesting thing that we see on the public company side. A part of public company planning now, on a regular basis, is dealing proactively with potential activists. Particularly if you sit on a mountain of cash.

John Sensiba: And either declare a dividend or get it invested.

Cromwell Schubarth: John, is there something that you’re seeing that we haven’t talked about yet? That you think is important for people to be thinking about?

John Sensiba: There are lot of things we’re expecting to see, and have been for a couple of years, based on the cheap money and massive amounts of cash. So, at some point in time, we expect a cascade. But we really haven’t seen it yet. And it is, it’s pretty surprising.

Cromwell Schubarth: What do people think are the reasons why that isn’t happening?

John Sensiba: Well, I think last year it was just the fear… You [to Brett] used the term “pig” earlier and it was nice not to have to think of Portugal, Italy and Greece [laughter] – a year ago, that’s what it was, and Spain, for the PIGS. But all that stuff has kind of quieted down – not that the unsettled economic times are over with, globally. But I think you’ll hear a lot less noise and actual economic growth in the U.S., creates a level of confidence that is going to allow that cascade to happen. Maybe it won’t happen as quickly as we expected, but it’s got to happen sometime.

Brett Rochkind: It’s got to fit within the roadmap and strategy of the companies that are making those acquisitions. You clearly saw Oracle, beginning in the last decade, making big bets on things like PeopleSoft and others, and they did deploy some of that cash in those deals, and they fit in there very much on strategy. To the extent that saw something that was really on strategy, I think you would see big acquisitions. Things that have performed the best for many of these corporate acquirers have been things like PayPal for $1.5 billion, and that’s probably a $25 billion entity for eBay… YouTube – probably $20-plus billion and they paid 1.7… Instagram. It’s the level of risk, for both the activists as well as from your shareholders, when you make a big bet – particularly if it’s a little bit different than what strategy you’ve talked about. There are very few assets that would fit and be right on strategy of big deployment of capital. It’s just limited. Not to say it won’t happen: it probably will. I mean, Skype was an $8 billion jump and very small, relative to the size of market capital of Microsoft; and Kevin [Spain] mentioned Yammer. But you know, it’s just a matter of that alignment of assets. And the big one, clearly, a few years ago was Yahoo and Microsoft, which was on- strategy at the time –now Microsoft is probably happy they didn’t pursue that path. It’s just a matter of time but it’s all about when you find that kind of strategic alignment. You do have guys like Warren Buffett at Berkshire Hathaway, using this point in time to make very big bets on things like Heinz and then buying some of these more stable, cash flow-generating businesses in the public market, or at least majority interest. People do really want to be on strategy – not as focused on deploying big checks, but really being on-strategy in an effective manner.

Cromwell Schubarth: Well, is there anybody else? We’ve hit 15 minutes to spare.

John Sensiba: Let me ask one quick question. Change creates opportunity. And I don’t think there’s any more change happening right now, anywhere, than health care. That’s got the most disruption going on, in terms of health care delivery, insurance, Covered California – which is California’s insurance exchange. Do you see any investing opportunities in health care, or is it just too confusing to make sense of?

Kevin Spain: Well, we made four health care IT-related investments in the last five years, so we are big believers that out of chaos sometimes comes opportunity. We’ve been extremely deliberate about where we’re making those investments, because health care – as we all know – is a market that is full of land mines, if you don’t make the right bets. We think that there are definitely pockets of opportunity there. For example, we’ve invested in companies like Doximity, which is facilitating secure communication between physicians – which is still, amazingly, to this day, a problem that has yet to be solved. We just invested in a company called WellTalk, which is in the behavioral health space – helping insurance companies take wellness and disease management solutions to their patients. Almost for the first time, insurance companies now have to think about how to actually get their customers healthier. We definitely think there are some areas there, but what we really look for is a clear business model that doesn’t require lots of different constituents to sign off on it – which is a big problem in health care. And we also look for leaders of these companies that really know the health care market. We think that it is vertical; you have to understand where those land mines are. So we’re bullish, but careful.

Jon Soberg: We’ve looked very carefully at the space, but we have not made any investments in it yet, for a lot of the reasons that you mentioned. Without a deep understanding of who the players are and how they interact, it’s very difficult to make the right investments. We’re seeing that there’s a consumerization of health care, where you see a lot of direct to consumer type of applications that have some interest. You see a lot of things in the wellness space and, like you said [to Kevin Spain], in secure communications. There’s some low-hanging fruit, some ridiculously low-hanging fruit, here. So there are some real opportunities. To find a way to scale it, and somebody who knows how to navigate the land mines, is a big deal. Then you look at fields like bio-informatics that are just kind of coming up that are going to have massive changes to health care over the next few years, and going forward. We’re just starting to move in that space and over the next few years we’re going to see just huge inflection points in terms of opportunities and even breakthroughs in health care technologies.

Brett Rochkind: Particularly on the service side, the complexity of small businesses dealing with ObamaCare and the Affordable Care Act. TriNet is right in the middle of that, because they help small businesses and start-ups and professional firms deal with all that complexity of providing benefits to their employees, and payroll and other kinds of things related to health care. That’s a great play on the services side of it. Then on the IT side, we’d love to deploy more capital in this area. This is an area where I think there are some innovations, as Jon referenced, and that’s going to be very attractive over the coming decades. Clearly, there’s a lot talk about cost containment, electronic medical records. It’s just, there’s a limited supply of later stage investment opportunities in that area. There’s a limited supply of even earlier stage start-ups, which will then feed that later stage opportunity set for us. It’s a little bit of a challenge with the constituencies involved in what’s going on. But we’d love it: we’d love that to be a larger part of our portfolio.

John Sensiba: Going back to the general topic, the M&A activity that you’re going to see in health care over the next, maybe, three years is going to be pretty incredible. So if I was writing about M&A, I’d take a look at health care.

Cromwell Schubarth: Well, thank you for that tip. [laughter] And thank you for all the insight that you’ve shared with us today; it’s been a great discussion.

These materials have been prepared for informational purposes only and are not legal or financial advice.