Navidar Review of ExactTarget Acquisition by Salesforce.com Reveals Courage, Limitless Potential for Community

The senior investment bankers at investment banking firm, Navidar Group , have completed more than 300 deals and $70 billion worth of mergers and acquisitions and other financing transactions — including the 2012 acquisition of iGoDigital by ExactTarget. As tech industry insiders, Managing Principal Christopher Day and his partners, Tim Walsh and Stephen Day, have fielded numerous calls from tech execs, investors and media regarding the $2.5 billion ExactTarget transaction.

Managing Principals Christopher Day, Tim Walsh and Stephen Day

As a result of all of those inquiries, Navidar created a review and analysis presentation that addresses the two most commonly asked questions:

1. How does ExactTarget’s acquisition price compare to other SaaS Software transactions?
2. Why was the transaction structured as a tender offer, which is less common than a merger?

The full review is available embedded above or  here, but we also asked Navidar a few questions of our own because this topic continues to dominate conversations in tech circles throughout the community.

TECHPOINT:  ExactTarget is one of the larger public SaaS software deal since 2009. (“Review” Pages 22 and 23.) Do you consider that trivial or significant?

NAVIDAR:  It is a notable observation as it demonstrates how SaaS Software leaders can be very effective at aggressively investing in sales & marketing to reach scale quickly. The revenue growth is then highly rewarded by public investors and strategic acquirers in terms of valuation based on revenue multiples rather than EBITDA or Net Income (a P/E multiple).

TECHPOINT:  Is there any truth to the assumption that a large deal such as this draws attention to Indy and softens the ground for other tech firms, whatever their desired outcomes?

NAVIDAR:  Large and sophisticated strategic acquirers generally prefer to acquire leaders at the right price and geographic location is a secondary concern. A deal of this profile helps to send the message to investors and other companies that Indianapolis must have a talent pool that may be deeper than they had otherwise thought. A deep talent pool is a leading criterion to attract investment. Future companies will still have to prove out their market leadership and differentiation just as ExactTarget did. A great example of this is what Eric Tobias at iGoDigital achieved. Without any institutional capital he created a highly differentiated web marketing solution right here in Indianapolis.

TECHPOINT:  The convergence of the CIO and CMO is a hot topic in tech and marketing trades. Page 6 Strategic Rationale seems to indicate that the growth and importance of marketing tech was the number one driver of this acquisition. Is that a true statement?

NAVIDAR:  In the Technology industry there is a recurring trend.  All new sectors begin with many best-of-breed point solutions.  Enterprises initially like to pick and choose from among the best-of-breed point solution providers to create the most effective overall solution. But over time these point solutions begin to consolidate into a broader solution set which we call a suite. That is what is happening in the marketing arena.  You see that from ExactTarget where they started in email and then began to expand into Web, mobile and social.  Now we are seeing the marketing software suite consolidating with the customer relationship management sector.

TECHPOINT:  The numbers reported in the media seemed BIG and wowed the general public, but in reality, the $2.5 billion was less than the 7.6x valuation average and 6.7x valuation median of comparable transactions. (“Review” Page 14.) Did ExactTarget’s stock performance and guidance drive this valuation multiple down or was there another reason?

NAVIDAR:  ExactTarget had exceeded all of its quarterly projections and was one of the faster growing SaaS companies. But despite that the share price was facing some headwinds. There were several contributing factors such as the concerns over the future pricing of email marketing and also the weaker performance of a direct competitor. So while the stock price premium was high, the enterprise value to revenue multiple fell slightly below the average and median for other similar SaaS acquisitions.

TECHPOINT:  Page 20 indicates that tender offers allow for more certainty that a deal will go through and that we will start to see more of them.  Other than the single step vs. two step process, why do you think this structure only represents 14% of M&A if it adds certainty? Shouldn’t it appeal to more acquirers?

NAVIDAR:  Historically the tender offer represented a faster timeline but a less probable outcome hence its lack of use in friendly acquisitions. However, there is a new structuring component of the tender offer that now makes the outcome more probable hence you will likely see it used more often going forward. This structuring component is called a “top-up” and it basically allows the seller to issue shares to reach the desired 90% tendered threshold at which point the minority shareholders can then be squeezed out.

TECHPOINT:  What do you think is the most interesting aspect of this deal?

NAVIDAR:  As Technology M&A bankers we tend to focus on valuation and deal structure. The deal structure is certainly an interesting element given that it is less common. It also appears that the employment agreements were not agreed to at the time of the announcement of the deal, which is unusual. Given all of the operating success of ExactTarget it is also interesting how much headwind the stock price had. The IPO was priced at $19 and the stock closed that day at $25.11. The day before the salesforce.com offer was announced the ET stock price was $22.10 per share. That sums up how tough it is to be a publicly traded company.  ET’s operating results deserved a better return which is in part why salesforce.com was willing to pay a higher than normal takeover premium.

TECHPOINT:  Do you think this acquisition will prompt more acquisitions of Indiana tech firms, or will it be a long time before we see another deal of this size?

NAVIDAR:  I think this transaction shows that Indianapolis is a great place to establish and grow a business without size limitations. Great companies, regardless of location, are going to attract capital and interest from strategic acquirers. I do not know of any other SaaS company on track in Indianapolis to reach this level of success in the next year or so. But there are others with the potential to do so over time.

TECHPOINT:  Do you have any indication as to the average financial gain for the approximately 1,000 ExactTarget employees who live and work in Indiana?

NAVIDAR:  In total we estimate that the gain for all employees with stock options was around $300 million. Approximately, 1,000 of the 1,700 live in Indiana. So there was significant wealth creation for Indiana residents. Just think how much wealth the state of Indiana could have created for itself if local funds had provided the venture capital backing rather than East Coast firms. A majority of the wealth that was created from this incredible success story left the state.

TECHPOINT:  You mention that ExactTarget is a blueprint for other startups. In what ways is it a blueprint? Can you complete more of the picture?

NAVIDAR:  The use of venture capital to fund operating losses for an extended period of time means almost certain loss of majority equity ownership by the founders. However, had they not done so then it is highly unlikely that this outcome would have been achieved.  It takes a lot of courage to cross over that line. ExactTarget aimed for the stars and then went after it aggressively all along the way without letting capital structure limit their growth.