On this week’s episode of M&A Masters, we’re joined by special guest, Sean Alford, Senior Vice President of Corporate Development at J2 Global, an internet information and services company that includes IGN, Mashable, Humble Bundle, and more across digital media and cloud services segments.
Sean says, “It’s pretty systematized when you handle the volume of transactions that we handle, you figure out what works and what doesn’t work. And through the course of the 180 plus transactions that we’ve done, we’ve figured out the playbook that works. And there are different playbooks that work for different situations. We’ve got these different playbooks that we’re able to slot into different scenarios, and it helps to have had the reps and to have made mistakes and learn from them and improve the process as a result.”
We chat about applying strategies to various transactions, as well as:
- The ideal targets for the different J2 global segments
- Pressing pause at the start of the pandemic to clarify processes
- Warranty policies on transactions
- Fourth quarter 2020 and first quarter 2021 expectations
- And more…
Listen now…
Mentioned in this episode:
Transcript
Patrick Stroth: Hello there. I’m Patrick Stroth, President of Rubicon M&A Insurance Services. Welcome to M&A Masters where I speak with the leading experts in mergers and acquisitions. And we’re all about one thing here. That’s a clean exit for owners, founders and their investors. Today I’m joined by Sean Alford, Senior Vice President for J2 Global. J2 Global is a leading internet information and services company consisting of over 40 brands. Sean leads J2’s m&a program which seeks to acquire and support internet enabled companies in a variety of sectors, including media technology and services. Since 2000, J2 global has completed over 186 acquisitions. That’s a lot of deals. Sean, as the first strategic acquirer to join our podcast, welcome, and thanks for joining me today.
Sean Alford: Yeah, thanks for having me.
Patrick: Sean. Before we get into J2 Global, let’s set the table and tell us what led you to this point in your career?
Sean: Yeah, sure. So I started my career as an attorney at a law firm in New York. I was with the Proskauer Rose firm in New York for a number of years. And I got to know the CEO of Ziff Davis at the time, Vivek Shah through some investing activity that I was doing outside of my legal practice. And through conversations with him over a number of years, I ended up joining him at Ziff Davis to run the m&a program. And you fast forward to now. I oversee m&a at J2 Global, which is the parent company to Ziff Davis, where I’ve been for I think it’s three years now it’s it’s three years would feel like dog years because we’ve done incredible amount, from an m&a standpoint deployed almost a billion dollars of capital, actually north of that in that time, and done about 35 deals in that time. So, so we’re having fun, and we’re doing a lot of deals.
Patrick: Well let’s talk about J2 Global here and its commitment to the lower middle market, which I feel very strongly about. Talk about why the lower middle market, what the philosophy is, your your your theme in just how you did because one thing is really impressive is just the sustainability where you’re starting at the dot com era, for those in our audience thinking, remember that period, and you’ve been going for 20 years, which really says a lot to the sustainability and the success that you guys have, have had.
Sean: Yeah, and that 20 year, history clearly predates me, but J2 has, has had a history of programmatic m&a, and it is focused on that lower middle market, which we think is generally underserved. And I think you can look at the way that it’s underserved from two angles, it’s underserved from the business and operations angle, where small to medium sized businesses aren’t always served the same way that large enterprises are when it comes to software tools and applications and services that they need to operate their businesses. But then I think the the market, the acquisition market, the m&a market, for lower middle market businesses, small to medium sized businesses is also underserved without the same amount of capital in the system.
So we’ve actually benefited from both sides of that. On the one hand, we buy businesses that serve SMB customers. So you look at a lot of our software businesses, the market for them is small to medium sized businesses, we see that as a huge opportunity that’s going to continue to grow and where there’s going to continue to be attractive acquisition opportunities. And then on the other side of it, that is where we spend a lot of our time on the m&a front, we we don’t have to compete with a lot of the large institutional investors, the the blue chip can have 10s of billions of dollars, private equity fund types, the large, multibillion dollar strategics don’t always spend time in the lower middle market, because they’re not set up to spend time on their market. And we are so that’s, that’s been something that’s differentiated us on the m&a front.
Patrick: Yeah, I feel the exact same way underserved is probably the best description, I would say for the lower lower middle market, which is a shame because I mean, it’s a great opportunity for us, but it is a vast array of opportunities that there are, you know, literally over a million companies in America that would fit that lower middle market definition. And the from the m&a perspective as we see it. They’re at risk of being overlooked, underserved and overcharged for services from institutions and so forth. And so it’s great when you either have a strategic plan J2 Global or boutique firms out there that really want to go and work with with those companies owners in the lower middle market as with other places, they’ve got a variety of places to look for an exit. Okay, why would they think to come to a strategic as opposed to other other maybe non institutional, but other family offices, private equity, other other outlets?
Sean: Yeah, so there, there are a couple factors that distinguish us from from the competition, if you will, when it comes to m&a. Number one, you know, I think you could compare us to private equity in the sense that we do buy businesses and let them to continue to operate independently. And a lot of sellers like that. They like the independence and we’re set up in a way that allows a lot of the businesses that we acquire, to operate with independence. The difference between us and private equity is that we are permanent capital. So we buy to hold and sustain and grow over time, we’re not under pressure to flip a business or not under pressure to dramatically change your business immediately.
And we’re patient. So, you know, along with along with that comes our capital structure, private equity puts debt on to the companies that it acquires all of our debt is held upstairs at the parent level. And as a result, the businesses that we own and operate don’t necessarily feel the pressure of interest, service and payments. So that’s, that’s one distinguishing characteristic. A lot of founders like that model, where they can sell into someone and they aren’t banking on an exit five to seven years from now, they get true liquidity at the time of closed now, there may be some structure in our deals where there’s an urn out and certain performance metrics have to be hit. But it’s very different from a private equity model, where oftentimes founders are rolling more than 50% of their net worth into the next deal, and they don’t get the full liquidity at closed.
The other thing that distinguishes us from a lot of folks is the domain expertise that we have in house. So in the verticals in which we invest, we have sector experts and domain experts who in some cases have been in the space, they were operating for 20 plus years, we have experts in cybersecurity. For our cybersecurity portfolio, we have experts in consumer privacy, for our consumer privacy businesses, when it comes to secure file transfer eFax, and healthcare communications case, again, sector expert piece, same thing goes for health and gaming and broadband. And all of our categories were set up in a unique way where we don’t necessarily have to outsource the diligence, and outsource the planning, and synergizing if you will have the opportunity that a lot of financial buyers have to because we’ve got the in house expertise.
And I think, particularly when you’re talking about founders, it’s easier for them to have a conversation with someone who’s been speaking the same language for 20 years, but knows the same players who understand the industry dynamics, and doesn’t look at a raw p&l only focused on revenue and EBITDA and free cash flow. While that’s important to us, we’ve got a bench of professionals with deep relationships and sector expertise that then makes for an easier transaction.
Patrick: I think also, because you’ve done again, 186 acquisitions, you’ve got a whole game plan or a process set up. So I think if if a owner or founder, they don’t do m&a deals every day. So I have a feeling that you’re used to having novices that you’re dealing with. And so your onboarding is probably I would think, as painless as possible. And that must be a great, great advantage as well.
Sean: Was pretty systematized. I think you’re right. I mean, when you when you handle the volume of transactions that we handle, you figure out what works and what doesn’t work. And through the course of the 180 plus transactions that we’ve done, we’ve figured out the playbook that works. And there are different playbooks that work for different situations. So we know how to work with the bootstrapped founder who’s ready to sell, we know how to work with the private equity fund, who is just looking to exit from investment they’ve been in now for five plus years. We know how to work with the corporate who is trying to carve out a business that’s non core. We know how to work with the venture capital fund. We thought something was going to be a rocket ship and maybe maybe it is or it was but if for whatever reason they’re ready tax. We’ve got these different playbooks that we’re able to fly into different scenarios, and it helps to have had the reps in to have made mistakes and learn from them to improve the process as a result.
Patrick: I can imagine with strategic acquires versus private equity, financial buyers, if you’re in management, the tradition is that well, if your private equity or financial buyers, they look to retain management, whereas strategics don’t necessarily they’re gonna, they’re gonna put their own management in j two is completely different. You are almost like private equity in that, that you’re going to go ahead and maintain management, I think that just helps them cross that chasm to get to the next level.
Sean: That’s right, that’s right, we we’ve put a tremendous amount of value on the people, they’re going to join our ecosystem. And that is a critical part of our diligence. And our underwriting is understanding the people who are running the business and understanding the value that they can add to that business under our ownership. So it is important to us.
Patrick: I was going to ask you originally about give us some examples of the value you’ve created for some of your acquisitions. But I got a pivot from that and ask you what’s different in doing deals. Now post pandemic, you’ve been able to continue doing deals, even though the pandemic, there have been changes. Let’s talk about that real quick. And then we’ll get into the success you’ve had. But what’s changed and what, what happened with you guys with COVID?
Sean: Yeah, so at the beginning of the year, we were off to our normal pace. And pretty fast clip, we came off of 2019, where we closed 12 transactions came into 2020, with a very healthy balance sheet, ready to keep up that level of activity if not increase it. And then March happened, and the global pandemic happened. And we very intentionally and deliberately paused our m&a program. We believe in predictable businesses, we invest with very high confidence. And we just found ourselves in a position where we weren’t able to do that. We weren’t able to predict other businesses, let alone our own. We weren’t able to underwrite with high confidence. So we pulled back and the good news for us is we don’t have to deploy capital.
We don’t we don’t have to invest. It’s not the private equity model where we have to put the cash to work we like to, but we don’t put cash to work for the sake of putting cash to work we we underwrite for a high confidence return. And in the second quarter, we couldn’t meet with people in person, we couldn’t conduct our typical diligence. And we had a hard time getting a clear line of sight to the performance and forecasting of any business that we looked at. So we pulled back, we shifted our focus internally, we went through a lot of exploration of our own portfolio and evaluation of our own cost structure and tried to refine where we could optimize internally. We got to the end of the second quarter. And we recognize that we may be in a new paradigm where you have to adjust the way that you evaluate businesses, the way that you do diligence, the way that you meet with companies. And we discovered a lot of the technology that’s in place today, has actually allowed us to do this for years.
Data rooms are all virtual zooms are commonplace. And they were they were commonplace before, I think we didn’t realize that all of us had cameras in our offices before. And with a global organization like Jay to, I think 80% of the people that I work with are in different locations. So we discovered after some reflection that we are set up to be able to transact in a virtual environment. And we are capable of transacting in a virtual environment, particularly in categories that we know really well, where there are businesses that we’ve known for a number of years, sometimes decades. So we got comfortable with that. And we also realize that, hey, maybe maybe the disruption that we’re seeing is going to be more V shaped than L shaped or U shaped and as we looked at our own businesses, we saw some of the rebound quickly and got comfortable, again, investing in sectors that we know really well and that we can have confidence in from a forecasting perspective.
So you get to the third quarter, and we turn the machine back on. We have closed now. I believe it’s five or six transactions. Since the start of the third quarter, including one of the largest transactions that we’ve done in Jay to the acquisition of retail me not, which is in a space that we know extraordinarily well, a business, we’ve been around for a very long time. And we’ve we’ve even as a part of the reflection in the second quarter where I said, we shifted our focus internally, we decided to sell a business. We looked at a business, our ANZ, Australia, New Zealand voice business, and there was an interested party, who was able to put a competitive and compelling value in that business. And we decided, you know, what, we’re in the business of unlocking value. And if someone else can value this more than we can value it, then they should be entitled to a transaction.
Patrick: Well, now you’ve come to this for the people that are listening, why don’t you describe exactly what your ideal target is.
Sean: Oh, Patrick, that’s a hard question. You know, I think the the ideal target varies by sector. So we have we have operators in all of our different businesses who each have their own m&a problem. And they would each answer that question very differently. And and they really are the folks who answer that question, what makes the most sense within the sector that they operate. Now there are there are also parent level deals. So at the J2 parents, there is another m&a program, which is typically looking at larger deals, they would stand on their own, where there would be an entirely new operating team, those of us deals, we’re really talking north of $500 million of enterprise value.
So it’s really the once once every few years type of deal, not the bread and butter m&a. But, you know, I think that the question is really more appropriate for our operating executives. You know, I can tell you on the health side, Dan Stone, who’s the president of everyday health is really focused on how to transition into a provider services model where he is acquiring tools and services that help serve the healthcare provider market, digitally enabled internet enabled tools and services, but, but that’s an area of focus for him.
The answer is going to be very different for Steve Horowitz, who is the president Ziff Davis, is increasingly spending time around game publishing, we have this great business Humble Bundle, which is a distribution channel for PC games. And we’ve found some success in vertically integrating in that world and publishing games that we then distribute. So one of Steve’s focus along with Alan Patmore, who runs Humble Bundle is figuring out what game publishers we can acquire. And what game publishers what indie PC game publishers fit well within the Humble Bundle world. Now flip to the other side, J2 cloud services, the software side of J2, which is run by Nate Simmons. He’s the division president there. He comes from a cybersecurity background. So he is looking to build out the full suite of cybersecurity solutions that can serve the SMB market, which is we talked about at the top of the call is really important to us. Fanatically institutionally, it follows our playbook. That’s the market that we want to serve. So that was a long winded way of saying that they’re much smarter folks than me who can answer that question better than I can answer. Well, you’re spreading
Patrick: Well you’re spreading over 40 brands already and all these different sectors. You did a great summary there. So that this has been the first time you’ve been asked that question. So well done. With the experience that you and J2 Global have had leading and all of these acquisitions, there are tools and processes and things in the business world that have either come to help or accelerate or enhance the whole m&a process. And one of those being the evolution of rep and warranty insurance where it was once a cumbersome tool for your $500 million deals to where it is now a real slick, efficient product that helps enhance closing. Now lower middle market deals that a year ago wouldn’t have been eligible, but they are now eligible in deals sizes of $15 million. You know, down at that level. Good, bad or indifferent. Share with me the experience that you and j two global have had with rebel warranty on your deals.
Sean: Yeah, it’s really becoming very common. And we’re seeing an increasing willingness of sellers to pay for these policies, which was historically the realm for us. Why would we add expense to a deal for a policy, we’re finding more and more sellers, particularly financial sellers, private equity sellers, are willing to pay for the cost of the policy for the cleanliness of the deal. And we’ve found that through several reps have this now we’ve done this several times over the last 12 months. It can be pretty, pretty formulaic, and pretty easy, particularly with the underwriters, who we’ve now dealt with on a repeat basis.
They understand our program, they understand the way that we do diligence, they’re comfortable with our process, which makes these due diligence calls and their own diligence that much easier. And I think it helps also that there’s a very competitive market out there of underwriters who are willing to lean into deals and to, to do, as you said, smaller deals that maybe they wouldn’t have done 18 months ago. So we have, we have found the product to be helpful. You know, I guess we haven’t done enough of these to really get through the full full window, the full back into it. So I think the next call of 24 months, will really tell whether we’re more or less comfortable with this versus a more traditional escrow. But indications so far are that this could become just part and parcel of every deal the same way that escrows were 10 years ago, you just have an escrow, you have a rep and warranty policy, the way deals are done.
Patrick: Yeah, that’s what we were striving for, we were hoping with the sustainability of rep and warranty is that it’s just check the box on the list of items that need to be done for closing. And I would argue that probably the debate has been settled whether or not to use rep and warranty, it’s now recognized as a must have, unless there’s some element of the deal that’s so problematic, it would be eligible for insurance, but we’re very, very happy with it. Also, just because, in my opinion, m&a is the most exciting business event out there. And to the extent that we can contribute to the success of that life changing event for a lot of people, I mean, who wouldn’t want to do that. So we’re very excited about it.
We like the competition, because that does two things, as you know, with competition, it improves products or services, and it lowers costs, win win win for everybody. So the next thing is, now as we’re recording this, it won’t be there too later. But we’re at the eve of the election, we’re going through another spike in karate, Coronavirus, tests, and so forth and diagnoses. You’ve been emerging from a quiet period in your m&a and now you’re getting back up to speed, you’re probably at full speed. Look through your window. What kind of trends do you see either an m&a in general, or J2 Global for 2021?
Sean: I think it’s going to be a very busy year for us. And I think we’re going to see certainly in the fourth quarter, which will probably bleed into the first first quarter, some volatility in the public markets. But that’s not where we spend most of our time on the m&a front in the private markets. I do believe there will be a bit of a pullback in terms of valuation. I think we’re still riding on a high, you know, in part because of what the federal government has done appropriately in propping up the market. So I think we will, we’ll probably see some correction in the private markets that may not make their way into the public markets, which is interesting. I mean, there in my view there is there’s a disconnect between public markets and private markets right now where the same math doesn’t apply from one to the other.
So I expect we will be very busy, we’re in some categories that are white hot, we are in cybersecurity, which is I think, going to continue to be a very attractive investment category. Now my my hope is that the big players won’t creep down into the lower middle market and create more competition for us but they might on the gaming front again a white hot market where we spend a lot of time with IGN and humble bundle, I think will continue to be busy there I think that sellers will take advantage of the market. And the same thing goes for health. The hcit market is is another really hot market where a lot of companies will will be looking for an exit and be looking for liquidity.
I expect that to continue into 2021 we are oftentimes opportunistic buyers, and I believe that there will be many others opportunities for us to buy car companies at great prices. In 2021, I think that the wave of available capital is still going to be there. But I do think that companies could run into some challenges if this second wave persists and turns into a third wave. But I do think overall, the disruption that we’re seeing in this pandemic is going to be short term. And by short term, I mean, a couple of years. And we are long term investors, at J2. So we take a much longer outlook on the durability of a business and the sustainability of investments.
Patrick: Do you see a lot more distressed, m&a acquisitions, or as the pendulum’s swinging back in favor of the buyers then?
Sean: Not yet, not yet. I have been really blown away at some of the valuations that that we’ve seen since February, in the face of a global pandemic, and unemployment numbers that we’re seeing. The valuations that are sustaining are really remarkable. So we have not seen it swing back yet. And we’re not, you know, we’re not really itching to see the economy crumble, nobody wants that. But I think we are patiently waiting for a buyer friendly market to come back, which I believe that it will, in 2021.
Patrick: Would there be just a lot more earnouts and provisions like that. So you can kind of as a buyer, in in light of these, you know, frothy valuations maybe go to the target and say, well, we we understand the one Why don’t we see how we get forward once you put your money where your mouth is, and and agree to some some more milestone agreements. Do you see that trend happening more?
Sean: Absolutely, absolutely. And that’s the way that we’ve been able to bridge the gap in a lot of situations. There There are, we are oftentimes the preferred buyer. So again, through this network of executives, we have in relationships that we have, a lot of times sellers want to sell to us, they really want to sell to us, but they have someone else whispering in their ear about a higher price. They don’t necessarily agree with the plan of that other buyer or trust the other buyer, or whatever the case may be, they really want to sell to us. And the way we’ve been able to bridge and say, Look, we can we can get close to this, this frothy number that someone else is whispering to you about. But as you said, Patrick, you got to put your money where your mouth is, if you’re going to execute on this plan, and you’re going to make this business worth what you’re saying it’s worth, we’ve got to we’ve got to prove it. And where the relationship is strong and where there’s a good level of trust, we’re able to do that. And we’ve got a good track record of paying or else because we set them at levels that we expect will achieve.
Patrick: Well clearly you’ve got offers that are compelling enough for people to say yes, with 186 acquisitions in 20 years, like I said, it’s still really, really impressive. Tell our audience how they can find you and J2.
Sean: Yeah, sure, I would encourage you to check out our website, www.j2global.com. And there is an m&a section of that website and a link that you can click on to get in touch with our m&a team. And we’re always open to conversations with companies in the lower middle market. Happy to to have conversations with founders and sellers and others who you may be interfacing with.
Patrick: Well Sean Alford thank you very much. Very great story about you and J2. Congratulations for all the success and here’s to you and hopefully you can help keep propping up the economy with these lower middle market companies. So thank you again.
Sean: I appreciate it. Thanks Patrick