Deal-makers: Tech buyouts expensive but doable

  • Tech pros tout lower leverage levels in deals
  • Shy away from outbidding strategic buyers
  • Targets found well outside of Silicon Valley

Speaking during a panel at the PartnerConnect West 2014 conference at The Ritz-Carlton at Half Moon Bay, Devin Mathews, partner at newly-launched ParkerGale LP and a managing partner of Chicago Growth Partners, said he’s looked at about 700 deals in the past few years through about 200 different intermediaries. His goal is to invest at a pace of two investments a year. Reports surfaced earlier this week that ParkerGale is seeking $200 million for its first fund after Chicago Growth Partners decided not to raise a new fund.

”We buy companies in New Jersey or many other places outside of Silicon Valley,” said Mathews, who pointed out that companies offering technology and services tied to mobile cloud computing and financial technology remain in favor right now. But, he warned, “You can get destroyed in tech if you don’t know what you’re getting into.”

Mathews said he typically uses leverage in buyouts of up to 3x EBITDA. While leverage and purchase price multiples have jumped in deals such as Vista Equity Partners’s take-private of Tibco Software, leading to a “very expensive” environment in parts of the tech sector, high prices may be worth it if a company offers growth and fits an investment angle that others may have overlooked, he said.

Peter Spasov, partner, buyout shop Marlin Equity Partners, said technology M&A remains a “lively” area for the firm, which targets lower-middle companies. The firm tends to make equity investments of under $30 million per deal from its smaller fund and equity investments of up to $100 million from a larger fund. 

”I’m not seeing a slowdown,” Spasov said. ”We expect this year to be as active as any, if not more…There’s a lot of competition and high prices. It’s tough to beat out a strategic buyer.”

Spasov said he’s seeing strong interest in advertising technology companies, as well as software-as-a-service providers.

Jeremy Holland, principal of origination, The Riverside Co, said buyout shops also appear to be keen on 3-D printing companies, but information technology distribution specialists remain less desirable. Buyout shops often say they buy firms through a proprietary process, but it turns out that definitions of proprietary vary by firm. Some buyout specialists claim they closed a proprietary deal even if they bought a company in an auction so long as they they had a unique plan for the asset.

Holland said nearly all of his platform deals come from auctions because larger transactions usually attract more buyers. But the firm has been able to track down some add-on deals of late by negotiating directly with company owners or participating in a limited auction through various brokers and boutique investment bankers that find deals. The firm uses “light leverage” of 5x EBITDA or less in its tech buyouts to allow portfolio companies to channel more capital into growth rather than debt payments.

The comments came during a panel, ”Tech LBOs: Finding The Once In A Lifetime Opportunity.”