Spring 2014

Technology Industry M&A Report

PROVIDING EXPERT INSIGHT TO ALL THINGS TECHNOLOGY.

Dear Clients, Friends and Colleagues:Once again it would seem that springtime in Chicago has been pushed back on the calendar. This winter was particularly harsh, being one of the worst on record for both snow fall and low temperatures. Still, it would appear that springtime is imminent and with it, a sense of general optimism from colleagues across the industry—most of whom report an increase in deal activity. Statistics seem to support this general optimism with the S&P 500, the Dow Jones Industrial Average, and the Sikich Tech Index all up versus one year ago. Revenue, cash, profits and R&D spend continue to climb for the Sikich Tech Index and reported M&A transactions are up slightly from the fourth quarter of 2013 and over 10% from first quarter of 2013.

This quarter’s guest article has been provided by Hash Pakbaz, PhD, the President and CEO of SBA Materials, a leader in the development of nano-porous/meso-porous materials used in applications from high-performance semiconductors to energy storage. In his article, Dr. Pakbaz discusses how the semiconductor industry is being influenced by the ever increasing costs of fabrication and the effect this is having on fundamental semiconductor innovation.

In addition, Jeff Rudolph provides some insights into “wireless” electricity, our “Good News” section highlights promising technology for repairing broken bones as well as a recent discovery that may imply the existence of multiple universes, and we examine recent acquisitions announced by Facebook.

As always, please feel free to send me your comments.

Respectfully, Kurt Estes

Good News in Technology Last December, the online Israeli innovation news website No Camels reported on a new technology that may result in much accelerated healing of broken bones. This same technology will even compensate for bone loss and create a “smoother” mending of a bone break than would ordinarily occur in nature. Often referred to as “wrapping paper” the product is actually an implantable membrane that wraps around the break in a bone. This membrane is selective and allows fluids that are crucial to bone regeneration to penetrate, but keeps out cells, vigor and soft tissue—all of which can impede the bone’s healing. Tests on sheep have shown that the membrane can reduce the time for a bone to heal completely from 28 weeks to as little as eight weeks. Dental applications may be seen as soon as late 2014 and human usage in the EU could occur by the middle of 2015.

In other “good” news—which some people may, frankly, view with indifference or perhaps some trepidation—Space.com reported on recent observations that suggest our universe may be one of many. On March 17th, scientists announced the discovery of direct evidence of primordial gravitational waves. These waves are described as ripples in the space-time fabric created just after the universe began some 13.8 billion years ago. In theory, these ripples suggest that parts of our universe expanded more rapidly than others just after the “Big Bang” during a short-lived phenomena referred to as cosmic inflation. This difference in expansion rates lend credence to the theory that “bubbles” of space-time were created. These bubbles would have potentially developed into other universes—potentially with laws of physics completely different from our own.

Copyright © 2014, Sikich Investment Banking. All rights reserved.

Sikich Investment Banking | Technology Industry M&A Report2

Wireless Electricity by Jeff Rudolph

We are almost free of wires. Bluetooth, Wi-Fi, cellular service and other RF (radio frequency) protocols have made many of our devices wireless giving us wireless Internet connectivity, video, printers, light controls, garage door openers— the list goes on. There is still one omnipresent wire: we remain tethered to the wall for electricity when batteries are inconvenient or insufficient. In fact, US consumers buy about $3 billion worth of single use batteries per year. While the cost of wired electricity is about $0.06 per kilowatt hour, the cost of a battery driven kilowatt hour is about $160.23 using the same metric. Couple that with the environmental issues of battery disposal, and it would seem that batteries are indeed a very costly solution. Of course, for plugged-in devices, there is the constraint of the location of the nearest outlet to charge your phone, or plug-in your TV or lamp. What if the delivery of electricity could be wireless?

That is the question MIT Physics Professor, Marin Soljacic, asked himself that spawned his research team at MIT to develop the technology to create “wireless electricity.” While the concept of wireless electricity has been around for over 100 years, the practicality of manufacturing a device that could actually do it is another matter. Soljacic, started WiTricity to do just that. WiTricity is the first to successfully use a principal known as highly coupled magnetic resonance. Using this technique, WiTricty is able to generate wireless electricity by successfully powering a TV and charging a cell phone.

The concept works as follows: electricity is passed through a coil to generate a short-range magnetic field. If another coil is placed in the magnetic field, an electric current will flow thorough it and the magnetic field will transfer electric power from one coil to the other coil. This is known as magnetic induction. The problem is that the effective range of the magnetic field is not great, thus limiting the distance that something can be powered wirelessly. WiTricty uses resonance to have the magnetic field travel further. They do this by vibrating both coils at the exact same resonant frequency. Since the electricity is being transferred with a magnetic field it is very safe. After all, the earth itself is within a magnetic field. WiTricty has produced viable commercial products and continues to work with manufacturers to integrate their technology in various products.

While we will most likely not be able to remove all instances of wires and single-use batteries in this lifetime, their use can be greatly reduced with WiTricty’s break through technology, along with other advances made by companies in the same field. As with many technologies they rapidly go down in price and increase in functionality. I believe the same trend will hold true for wireless electricity. It won’t be long before I will be able to hang my TV above my fireplace without having to somehow install an outlet in the bricks.

Jeff Rudolph is the Partner in Charge of Technology Services at Sikich LLP and can be reached at jrudolph@sikich.com.

There is still one omnipresent wire: we remain tethered to the wall for electricity when batteries are inconvenient or insufficient.

Sikich Investment Banking | Technology Industry M&A Report3

continued on page 6

A Look at the Future of the Semiconductor Industry by Hash Pakbaz, PhD, President and CEO of SBA Materials

“Magic” was the word used by a senior executive of a large semiconductor firm during a presentation at the recent Industry Strategy Symposium (“ISS”) conference to describe the most advanced semiconductor processors in use today. Indeed, layers only a few atoms thick are used to manufacture parts of the transistors; and the processors, produced in the billions, work reliably. Complementary Metal Oxide Semiconductor (“CMOS”) manufacturing has been following Moore’s law—which states that the number of transistors on integrated circuits doubles roughly every two years—for several decades and as the transistor is living through its 60s, it has come a long way from when it was first born. Likewise, the industry that supports the manufacture of CMOS devices has come a long way from the early days of Intel. Recent consolidation has led to four companies dominating CMOS manufacturing, and the chain reaction in the supply chain consolidation has sped up with tool manufacturers and materials suppliers rapidly following to balance leverage in the industry. Such consolidation is one of the signs of a “mature” industry, where a few players dominate the market and its ecosystem.

Another measure of a mature industry is the reduction in appetite for risk when deciding on changes that impact the core business. The reduction in transistor size, as predicted by Moore’s law, enabled the proliferation of mobile smart devices, which in turn has led to the rapid growth of the semiconductor manufacturing industry. The magicians that have enabled the industry to keep up with Moore’s law have overcome significant challenges in development and manufacturing. As capital investment increases and becomes more concentrated, the focus to achieve the next generation “transistor shrink” is to push the existing toolsets and materials to as many have repeatedly declared their limits. To ensure that factory output continues to keep up with demand and the new capital provides the necessary returns, appetite for risk, particularly in adopting revolutionary materials and processes, has greatly decreased. This is not to say research and development in revolutionary materials and processes by the key players in the industry has come to a stop; materials such as carbon nanotubes, graphene, and advanced deposition and patterning processes such as direct self assembly are under study. However, the rate of transition of results from such activities to commercial products, as it would be consistent with historical data from other industries in the same stage in their lifetimes, has been slower and will continue to slow down.

This trend has had a big impact on commercializing VC-backed innovations in materials and processes. Over the past decade, there has been a great shift in investment dollars from the

Another measure of a mature industry is the reduction in appetite for risk when deciding on changes that impact the core business.

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Sikich Investment Banking | Technology Industry M&A Report4

Industry Perspective1

For the 12-month period ending March 31, 2014, the Sikich Technology Index2 (the “Index”) is up 23%. The Cable and Satellite, Computer Hardware, Computer Storage & Peripherals, Data Processing, Electronic Components, Home Entertainment Software, Internet Retail, Internet Software and Services, Semiconductors, and Systems Software sectors3 outperformed the S&P 500 and Dow Jones Industrial Average (up 20% and 13% respectively). However, the Telecommunication Services, IT Consulting, and Communications Equipment sectors underperformed relative to the S&P 500 and Dow Jones Industrial Average. Facebook (NASDAQ:FB), which is within the Internet Software and Services sector, experienced over 135% rise in stock price. Later in the newsletter, we will discuss Facebook’s revenue growth as well as announced acquisitions and the impact on stock price. While Facebook’s stock price rose 135% over the period, Symantec (NASDAQ:SYMC) saw its stock price drop 18%. Much of the drop is attributable to the termination of CEO Steve Bennett; however, a lack of innovative products, particularly in the wake of the Target data breach, has pushed the price of the stock down.

Revenue for the Index jumped 15% from the prior quarter and grew 6% from the prior year. Quarter gains were due in large part to Apple (NASDAQ:AAPL), Amazon (NASDAQ:AMZN), Microsoft (NASDAQ:MSFT), and Facebook. For its part, Microsoft’s Devices and Consumer segment grew 13% to $12 billion. This segment is important to Microsoft as it tries to compete in the mobile tablet market. In fact, the company experienced 123% (up $893 million from $400 million) quarterly growth for its Surface tablet. Facebook beat analyst expectations with quarterly revenues of $2.6 billion, up 63% from the prior quarter. Not only did the total increase in revenue appeal to investors but also the announcement that Facebook achieved over $1 billion in revenue from mobile ad revenue.

The Index showed substantial EBITDA growth for the Index on both a quarterly and yearly, 25% and 49% respectively. IBM (NYSE:IBM), experienced a growth of 36% in EBITDA over the prior quarter. According to IBM, margin improvement occurred due to its shift away from hardware to services. Its services business is key for margin improvement as the company realizes efficiencies through long-term contracts.

M&A Activity and Metrics4

As discussed in the introduction, the number of technology-related transactions is up slightly from the prior quarter and year, 2% and 5% respectively. Total disclosed deal value of $158 billion in the first quarter is an extraordinary gain of 146% from the fourth quarter of 2013 and 1231% from the first quarter of 2013! The individual deal contributing to this massive increase was Verizon Communications (NYSE:VZ) acquisition of Vodafone Group Plc’s (NASDAQ:VOD) 45% stake in Verizon Wireless for approximately $130 billion. Removing this large

Technology Industry EBITDA ($ in billions)

Source: Capital IQ

Cash on Balance Sheet ($ in billions)

Source: Capital IQ

Technology Industry R&D ($ in billions)

Source: Capital IQ

Source: Capital IQ

Technology Industry Revenue ($ in billions)

1 Capital IQ2 The Sikich Technology Index is made up of 41 publicly-traded companies

predominantly based in the US with a minimum market capitalization of $1B, covering a wide range of non-life science technologies.

3 As defined by Capital IQ4 Capital IQ

continued on page 6

$30.2 $28.2 $33.0 $29.8 $25.1 $28.0$11.9 $14.5

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13 Disclosed deals for the $25 -50M range, EBITDA multiples were not disclosed

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13 Disclosed deals for the $25-50M range, EBITDA multiples were not disclosed

Sikich Investment Banking | Technology Industry M&A Report5

Q1 Most Active Buyers

Q1 Disclosed Deal Count & Median Multiple by Deal Size

M&A Transactions by Region

Key Technology Market Statistics

Public Market Performance

Source: Capital IQ Source: Capital IQ

Source: Capital IQ

Source: Capital IQ

Source: Capital IQ

Median Transaction Multiples (on closed transactions) Closed Deal Count & Value

Source: Capital IQ

Top Acquirers (By Deal Volume) Top Acquirers (By Deal Size)

Acquirer NameNumber of Deals Acquirer Name

Deal Size ($ M)

Yahoo! Inc. 6 Verizon Communications Inc. $130,284

IBM 2 AT&T, Inc. $4,914

Xumanii International Holdings Cor 2 ServiceLink, L.P. $4,084

LX Ventures Inc. 2 Hellman & Friedman; JMI Equity $1,800

Autodesk, Inc. 2 NCR Corp. $1,650

Apple Inc. 2 Oracle Corporation $1,567

Cadence Design Systems Inc. 2 VMware, Inc. $1,540

Genesys Telecom Labs 2 Open Text Corporation $1,165

Google Inc. 2 SoftBank Corp. $1,105

Mitel Networks Corporation 2 Dealertrack Technologies, Inc. $994

Total 24 Total $149,103

Sikich Investment Banking | Technology Industry M&A Report6

Future of the Semiconductor Industry continued from page 3

hardware and device sector (think back to the dotcom days) to the software and social media sector. For example, due to the challenging environment for adoption of new, advanced materials, the market size for these materials is shrinking. Consequently, venture capital investment into this space has also decreased substantially, despite the overall growth in market size of the final devices that could benefit from their adoption. However, to ensure the survival of strategically important start-ups, more recently, corporate venture capital has stepped in to fill in the gap that exists in funding by traditional venture capital. Further, there are exceptions to the reluctance to develop step-change technologies from time-to-time in areas where the improvements in device performance face dramatic risk requiring dramatic action.

Big changes are in the air, however. For some time there has been much talk of the Internet of Things (IOT) and wearables. It is widely stated and even more widely repeated that not only consumers have an unmet need to have all their belongings (includes “sub-belongings” which are pieces of a bigger belonging such as a door lock for your house) connected to each other and the internet, they also need to have their vital signs,

and location and movement of various body parts monitored. By gathering and analyzing the massive data (“big data”) generated from all such connected devices by various entities, a utopia will emerge where such entities will be able to predict with great accuracy what the consumer will need, including services such as medical care, and make the consumer aware of the solution by highly targeted advertising or even arranging for the delivery of the solution before the need traverses from the sub-conscious to the conscious mind, eliciting action. Using historical case studies, one can predict the forward trajectory and the evolutionary phases the segment is very likely to follow although timing and speed at which the events will unfold are more difficult to deduce based on history. The inevitable outcome is that a few rapidly growing (in revenue and profits) ventures will emerge, from the cloud and dust created by the many, that have identified a real need and invented an effective solution to address this need. Tangible evidence that investment in this area can lead to strong returns can be found in acquisitions of device manufacturers such as Nest labs and Oculus VR.

Since it is generally accepted that IOT and wearables will have some ability to compute onboard (“smart devices”), the trajectory can have big implications for the CMOS manufacturing industry and its ecosystem such as tool and materials suppliers. The trajectory has been extensively discussed and laid out by such authors as Clay Christensen, a leading researcher in industry disruption. Fundamentally, the demand characteristics of such emerging markets do not fit the profile of the mature industry attempting to serve them: the emerging market starts as highly fragmented with each fragment a small market (low volumes) in contrast to the existing ecosystem that excels at making very similar things at a very high volume and low cost. This mismatch points to great opportunity available to innovators to enter the computing engine market through “disruptive” technologies. These will include new manufacturing technologies such as printed electronics, new materials such as printable semiconductors and innovative device assembly and packaging technologies. This phase of the evolution is not a threat to the existing ecosystem; however, over time the momentum generated by rapid advances in performance of these new devices allow suppliers to amass cash and increase spending in R&D. Inevitably this leads to the displacement of the incumbents in their core markets. As always, timing is everything and this process happens too slowly for the pioneers and in a flash for the incumbents!

Dr. Hash Pakbaz is the President and CEO of SBA Materials and can be reached at hashpakbaz@sbamaterials.com.

Over the past decade, there has been a great shift in investment dollars from the hardware and device sector (think back to the dotcom days) to the software and social media sector.

Sikich Investment Banking | Technology Industry M&A Report7

Selected Transactions This quarter we highlight two announced high-profile transactions by Facebook and we will delve into the valuation and strategic rationale.

After the announcement of the acquisition of WhatsApp, most people were asking, “What is WhatsApp and why is worth $19 billion?” WhatsApp is a mobile messaging app that allows users to exchange messages, group messages, images, and video and audio files. WhatsApp, like Apple’s iMessage and Blackberry’s BBM, sends messages without charging SMS fees (a $100 billion market for network carriers). However, unlike the other services, WhatsApp allows for cross-platform (e.g., Apple to Android) exchange of messages. WhatsApp, at the time of the announcement, touted 450 million monthly active users (“MAUs”) and 315 million daily active users. To put this in perspective, Twitter has approximately 240 million monthly active users. In fact, if we take a further look into the number of monthly active users in relation to other companies valued over $1 billion we see that the acquisition may not be overvalued. As the table below shows, WhatsApp, on an EV/MAU multiple of $42 is significantly lower than the multiples of other companies. Given its already substantial user base coupled with the fact that it is adding 1 million new users each month, the valuation expectations may not be far-off.

Strategically, the acquisition makes sense on two fronts. The first, as we alluded to earlier, allows Facebook to compete directly with messaging services provided by mobile phone makers such as Apple. Secondly, WhatsApp processes 50 billion messages a day, which as mentioned before, circumvents SMS charges. As a result, Facebook has the opportunity to gain a major share of the $100 billion messaging market.

1 User data as of March 2014; data from various company websites2 Public company enterprise value from Capital IQ; Private company most recent

post-money valuation from PitchBook3 http://newsroom.fb.com/news/2014/03/facebook-to-acquire-oculus/

Facebook’s other major announcement was the acquisition of virtual-reality goggle maker Oculus VR (“Oculus”) for $2 billion. Oculus currently manufactures the Oculus Rift goggles and sells developer kits for immersive gaming. Oculus will begin selling product this year and already sold approximately 60,000 units (for $350 each) to gaming developers leading to revenues of $21 million. At this price range, in order to justify the $2 billion valuation, Facebook/Oculus would need to sell nearly 6 million units! Clearly, this acquisition has more strategic value than financial.

As such, this acquisition may be an offensive move to challenge Google, particularly the Google Glass product. While Google Glass allows users to access the internet, it is not a virtual reality product. Facebook’s acquisition now firmly put the company ahead of Google in the virtual reality market. Additionally, virtual reality is a logical extension of Facebook’s identity, which is the ability to share information. In fact, Mark Zuckerberg believes that the acquisition “has the chance to create the most social platform ever3.” In the near term, Facebook games may use the virtual reality device buy virtual goods and services; however in the long-term one may be able to share actual experiences in real-time!

Private Companies1 Public Companies1,2

Spotify Pinterest Facebook Twitter LinkedIn Pandora WhatsApp

Active monthly users (millions) 24 27 1,230 241 187 75 450

Enterprise Value (millions) $4,000 $3,780 $160,625 $29,654 $20,808 $7,152 $19,000

EV / MAUs $167 $140 $131 $123 $111 $95 $42

WhatsApp is a mobile messaging app that allows users to exchange messages, group messages, images, and video and audio files.

www.sikich.com/ib

Copyright © 2014, Sikich Investment Banking. All rights reserved. Securities are offered through Sikich Corporate Finance LLC, a registered broker-dealer with the Securities Exchange Commission and a member of FINRA/SIPC. This document is a result of the efforts of Sikich Investment Banking (“Sikich”) and is for informational purposes only. It is not intended as an offer or solicitation with respect to the sale or purchase of a security. The opinions expressed here are the views of the writer and do not necessarily reflect the views and opinions of Sikich. Sikich shall not be liable for damages resulting from the use of or reliance upon the information presented herein.

Christopher L. GeierPartner-in-Charge, Investment Banking

T: 312.648.6660CGeier@Sikich.com

Rick HerbstPartner,

Investment Banking T: 312.648.6661

RHerbst@Sikich.com

Michael DockendorfManaging Director T: 312.648.6663

MDockendorf@Sikich.com

Robert StutzManaging Director T: 312.648.6658

RStutz@Sikich.com

Kurt EstesDirector

T: 312.648.6665KEstes@Sikich.com

Susan TomiloDirector

T: 312.235.6841STomilo@Sikich.com

Sikich Investment BankingThe Sikich team has over 100 years of combined experience working with technology related companies. Our team includes former tier one consulting partners, technology company executives, venture capitalists, and technology strategists. Our team’s experience includes working in a wide variety of technologies including: IT, all areas of telecommunications, Software and SaaS, nanotechnology, green technology, alternative energy, medical and life science, and electronics manufacturing and recycling.

Please contact one of our professionals to learn more about how Sikich can help your company.

To learn more about the Sikich Technology Practice or to subscribe to the Sikich Technology Industry M&A Report, please visit: www.sikich.com/ibtechpractice.

Sikich Technology GroupWe frequently serve as advisors to entrepreneur- and investor-owned companies, and we understand how to assess and groom these businesses in the context of today’s M&A marketplace. We assess and advise on the prudence and attractiveness of an immediate exit or alternatively, recommend strategic and tactical actions the company should take to maximize its value for a future liquidity event.

Our talent and comfort in working with technology-driven, high-growth businesses—whether they are emerging technology companies with new capabilities or unique business models, or more mature technology and services businesses—are key differentiating factors in which we take pride.

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Sikich LLP Merges with 403 LabsOn February 3rd, Sikich LLP announced its merger with 403 Labs, a full-service information security consultancy based in Brookfield, WI. Through this merger, Sikich will have the ability to develop its information security practice with additional resources and top talent whose specialties range from compliance audits and computer security assessments to penetration tests and computer forensic investigations. Additionally, Sikich will acquire the 403 Labs San Francisco office, adding to the firm’s western U.S. presence.

Sikich and its clients now have access to expanded technology service offerings in security and compliance, and can utilize additional resources and capital to enhance growth. The 403 Labs team will move into Sikich’s Milwaukee office.

Growth through Innovation WhitepaperLearn about various innovation tools companies use to enable growth with our Growth through Innovation Whitepaper. Click here to download a free copy of this report, or visit our website at www.sikich.com/ib to learn more.