A floppy market for disk storage M&A

Stephanie Turner

by Scott Denne

As we noted in 451 Research‘s Tech M&A Outlook 2020, the emergence of a new set of buyers propped up the tech M&A market last year, and that’s continued to be the case this year. The trend is particularly pronounced in the storage market, where the traditional acquirers have hit the brakes on M&A as storage shifts to the cloud.

NVIDIA became the latest company to join the ranks of newly minted storage acquirers with its purchase of SwiftStack. As detailed in our report on that transaction, NVIDIA likely doesn’t have its eye on the enterprise storage market. Instead, it’s buying technology to enable its GPUs to perform machine-learning tasks without bottlenecks. Similarly, Amazon and StorCentric have also emerged as new buyers of storage targets in the last 18 months – both acquired startups that were founded to spark a second wave of flash storage systems, a movement that hasn’t really taken off (a development we analyzed here).

Meanwhile, the most active storage acquirers have halted deal making. EMC, for example, hasn’t printed a new storage acquisition since its 2015 sale to Dell – and Dell itself, once a frequent buyer of storage tech, hasn’t done a deal in the space since the EMC acquisition. Western Digital bought Kazan Networks in a $22m deal this fall. But prior to that, none of the previous decade’s 10 most frequent storage acquirers had nabbed a company in the space since 2017. And that’s weighed on exits. According to 451 Research‘s M&A KnowledgeBase, 2018 and 2019 saw, respectively, the fewest and second fewest acquisitions of storage companies of any year since 2002. And this year is pacing to finish below the 20 deals we recorded in 2018.

The drooping totals come as companies move more data into cloud services and away from investing in the kind of large-scale storage systems that the most prolific acquirers in this market have offered. According to 451 Research‘s Voice of the Enterprise: Digital Pulse, 27% of respondents said their organization will decrease its budget for storage infrastructure, nearly double the number (16%) that anticipate rising storage budgets in 2020. As customers decrease spending on storage systems, acquirers for companies selling storage could become harder to find, just as the urgency to exit grows.

Figure 1: Anticipated decline in server, storage and datacenter spending
Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Budgets and Outlook

Love in the time of cholera

Stephanie Turner

by Brenon Daly

The coronavirus hasn’t infected the tech M&A market. At least not yet. Even as business around the world reels from the deadly outbreak, acquirers in February announced a surprisingly large number of deals, including a surprisingly large number of big deals. In February spending on tech and telecom rose to $42bn, a 40% uptick from this year’s opening month, according to 451 Research’s M&A KnowledgeBase.

The increase in tech M&A spending in the just-completed month stands in sharp contrast to the severe declines in most every other market. February’s final week on the US equity market was particularly brutal, with stock prices posting their biggest losses since the start of another global pandemic, the Credit Crisis in 2008. The decade-long bull market, which has helped support the recent record M&A run, officially entered ‘correction’ territory as February closed.

Concerns over the impact of the coronavirus, which has infected nearly 100,000 people and killed some 3,000 of them, has heightened as the virus has spread. According to an analysis of financial reports in S&P Capital IQ, the word ‘coronavirus’ appeared in more than 1,900 corporate and event transcripts in February. That’s fully 10 times the number of mentions of the virus in January.

Of course, any slowdown in the M&A market due to the epidemic will take several weeks (if not months) to fully show up in activity levels. Virtually all deals announced in February had already closed several weeks prior, before worries about the coronavirus had snuffed growth rates and halted expansion plans around the globe. And our M&A KnowledgeBase shows that there were several large prints in February, including nine deals valued at $1bn or more. February’s level basically matched the record monthly pace for big-ticket transactions set in the banner year for tech M&A of 2018.

However, much like the disruption to the supply chains, which Apple and Microsoft (among many other tech companies) have said will hurt their future business, the full impact of the coronavirus on the tech M&A market will likely crimp activity throughout the coming months and years. As a historical comparison, our data shows that spending on tech deals only recovered to pre-Credit Crisis levels four years after that recession officially ended.

Figure 1
Source: 451 Research’s M&A KnowledgeBase

Demographics as destiny

Stephanie Turner

by Brenon Daly

In sports, the old joke goes that to be successful, athletes need to pick their parents wisely. In much the same way, to be successful, tech startups not only need to pick their parents wisely, but also their birthdate. Demographics are destiny, at least when it comes to exits.

Consider the prevailing acquisition valuations for different age groups of information security (infosec) vendors in 451 Research‘s M&A KnowledgeBase. (To be clear, the deals are sorted by the founding date of the target, regardless of when the transaction was announced. Our data covers all infosec sectors going back to 2002.) The conclusion: When a company comes to market goes a long way toward determining what it’ll be worth when it leaves the market.

Infosec providers born in the 1980s, on average, garnered 3.3x trailing revenue when they sold. Representative transactions of that vintage include big platform deals such as Symantec’s blockbuster sale of its enterprise security unit to Broadcom (4.5x) and the just-printed carve-out of RSA Security from Dell. (M&A KnowledgeBase subscribers can see our estimated terms for the most recent RSA transaction.)

Similarly, infosec vendors dating back to the 1990s were valued at an average 3.6x trailing revenue in their sales. For these ‘tweener’ companies – not quite massive platforms, not quite sprightly startups – we would point to the Avast Software-AVG Technologies consolidation (3.2x) and Webroot’s sale to Carbonite (2.9x) a year ago.

Valuations ticked higher for companies founded in the first decade of the current millennium. Our data shows this ‘teenage’ cohort got valued at 5x trailing sales. Deals include the recent take-private of ForeScout Technologies (5.5x) and our estimate of terms on AlienVault‘s sale to AT&T in mid-2018.

By far, however, the youngest vendors fetched the richest pricing. Companies born in just the past decade pocketed, on average, a stunning 23x sales when they exited. Boosting this valuation are the half-dozen startups acquired recently by Palo Alto Networks as well as Phantom‘s high-priced sale to Splunk, according to our understanding.

Of course, we would intuitively expect younger, less-developed companies to enjoy higher relative valuations, if just because of basic math. (In price/sales multiples, small denominators yield larger end results.) But that doesn’t fully account for the tremendous M&A premium lavished on the youngest startups. There’s also the allure of youth, which changes the calculation as well.

With their limited history, startups focus on the future. Extrapolating from early successes, these up-and-to-the-right startups are convinced that their businesses will only know success, that they will always have a triple-digit growth rate. Naturally, when it comes time to sell, fast-growing startups expect to be rewarded. That’s true even – or, especially – if their financials are more aspirational than actual.

Figure 1: M&A valuations
Source: 451 Research’s M&A KnowledgeBase

Streaming deals keep flowing

Stephanie Turner

by Scott Denne, Jessica Montgomery, Michael Nocerino

As the media and telecom giant carves out its position in a transforming television landscape, Comcast acquires XUMO, a streaming video services provider. It’s the latest in a cascade of deals as Comcast and its peers adjust to an ongoing shift in consumer viewing habits. While Netflix, Amazon, Disney and other companies that can throw billions into content creation and distribution have largely locked down the subscription-supported streaming video market, ad-supported video remains up for grabs.

Comcast’s reach for XUMO loosely resembles Viacom’s acquisition of Pluto TV. Both targets provide a streaming video service that hosts multiple video channels, supported by advertising. But where Pluto primarily goes to market via a consumer app, XUMO partners with TV OEMs to preinstall the software into their smart TVs in exchange for a share of the ad revenue generated by the service.

XUMO’s existing relationships with LG and other OEMs give Comcast a valuable distribution channel and, eventually, XUMO’s software could offer a replacement for Flex, the streaming video hardware Comcast hands out to its internet customers. Although terms of the deal weren’t disclosed, those considerations likely lifted XUMO’s valuation ahead of the multiple on Viacom’s year-ago pickup of Pluto (subscribers to 451 Research’s M&A KnowledgeBase can view our estimate of terms of that deal here).

Viacom and Comcast aren’t the only ones inking deals for streaming video content and service providers. Last year saw Altice nab Cheddar in a $200m transaction that followed T-Mobile’s $325m purchase of Layer3 TV and AMC Networks’ acquisition of RLJ Entertainment, a deal that valued the target at $517m, or 5.5x trailing revenue. More acquisitions of ad-supported streaming services could be on the way. 451 Research has confirmed media reports that Fox is considering a purchase of Tubi and Comcast’s NBCUniversal has explored buying Walmart’s Vudu.

The addressable market for ad-supported services could expand significantly as ownership of smart TVs surges – and our surveys show that to be the case. According to 451 Research’s VoCUL consumer population representative survey, usage of smart TVs to stream video rose by nearly half in the six months between the second and fourth quarters of 2019, with 22% of people saying they use those devices in the most recent survey. (The fourth-quarter data will be published shortly, the second-quarter data can be found here.) A larger market could lead to buyers for additional services, such as Philo, Plex or sports-focused FuboTV.

Telos Advisors advised XUMO on its sale to Comcast.

Figure 1: Changes in video-streaming devices

Source: 451 Research’s VoCUL: Connected Consumer

VC exits lack Karma

Stephanie Turner

by Scott Denne

Two months into the new year, 2020’s market for venture exits isn’t shaping up to be a continuation of last year’s evenly distributed liquidity. Instead, it’s looking like a repeat of 2018’s blockbuster-but-unbalanced returns. Intuit’s $7.1bn acquisition of Credit Karma marks the latest in an unprecedented pace of mega-deals for VC-backed vendors, at a time when more mundane exits are as hard to come by as ever.

According to 451 Research‘s M&A KnowledgeBase, Intuit’s purchase marks the third time in two months that a VC portfolio company has been bought for $5bn or more. Put another way, one of every three VC-backed tech vendors that have sold for more than $5bn since the dot-com bubble have done so in the current year. Of course, that’s not entirely due to the generosity of buyers – most targets have taken on far more money than their earlier peers to achieve such outcomes. Credit Karma, for its part, raised about $370m (and another $500m secondary investment from Silver Lake). Plaid and Veeam, the two other venture-backed firms with $5bn M&A exits this year, raised similar amounts.

In 2019, VCs divested 739 companies, the first year they’ve crested 700 since 2016, returning to a typical volume of annual exits and no deal values reaching the $5bn mark. Although there are more exceptionally large exits so far this year, they are more exceptional than ever. For most venture-funded startups, buyers are scarce. Our data shows that 94 such vendors have found buyers since the start of the year, compared with 122 during the same period in 2019. That 22% drop comes as the most prolific startup shoppers are curtailing their purchases.

Of the 10 most active startup acquirers since 2010, only four have printed a purchase this year. Microsoft, for example, hasn’t bought a venture-backed company in four months, while Cisco has been on a six-month drought. Oracle also hasn’t printed such an acquisition in the four months since it bought CrowdTwist, a transaction that ended an 11-month streak without a startup purchase. While vendors like Visa (acquirer of Plaid) and Intuit – neither of which had ever previously spent more than $500m on a startup – reach for the occasional rising star, there’s a distinct lack of interest in less-brilliant assets in venture portfolios.

Figure 1: Annual volume of VC exits ($1bn-plus)

Source: 451 Research’s M&A KnowledgeBase. Includes disclosed and estimated values.

Wipro’s Rational move into customer experience

Stephanie Turner

As customer experience (CX) continues to spur digital transformation projects, Wipro makes another reach in that category with the acquisition of Rational Interaction, a CX and marketing consulting shop. The deal comes as the surging pace of digital transformation projects is propelling the convergence of disparate services markets and remaking the IT services landscape.

The purchase of Seattle-based Rational and its 300 employees marks Wipro’s third acquisition of a CX consulting business, according to 451 Research‘s M&A KnowledgeBase. With the deal, Wipro is aiming to expand its market share of digital transformation projects – a growing market that it set out to capture three years ago with the launch of Wipro Digital, which now accounts for more than one-third of its revenue.

Wipro is not alone in expanding its capabilities to move into digital transformation as vendors continue to roll out those expansive modernization strategies. According to 451 Research’s Voice of the Enterprise: Digital Pulse, Workloads & Key Projects report, 70% of all organizations were either executing or developing a digital transformation strategy. As such, many of Wipro’s peers in IT services, management consulting, and advertising and marketing services have aimed to extend their ability to service expansive digital enterprise projects, rather than stand-alone IT, marketing, management or operations engagements.

Accenture, for example, put up 26 prints in 2019, making it the most active tech buyer last year as it expanded its digital chops in web design, software development, data analysis, brand development and infosec, among other areas. Ad-agency holding companies Interpublic and Publicis inked 10-figure pickups of Acxiom and Epsilon, respectively, to position themselves as data management experts. And four of the six deals done by Wipro’s regional rival, Tech Mahindra, last year brought on CX expertise.

Rational Interactive’s peers, with expertise in marketing, design and other customer experience capabilities, are likely to continue to be in demand as CX often spurs enterprise-wide digital projects. In the above-mentioned survey, 44% told us that ‘customer experience’ is the primary purpose behind their digital transformation initiative. And that’s bolstering the valuations of vendors with the relevant expertise. Our data shows that service providers in marketing and web design commanded a median 2x trailing revenue in acquisitions last year, almost a full turn higher than the median multiple across the broader IT services and outsourcer categories.

Figure 1: Purpose of digital transformation

Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Workloads & Key Projects 2019

RSA Conference: Mammon and malware

Stephanie Turner
by Brenon Daly

 

Ahead of next week’s RSA Conference, information security (infosec) companies are mastering their marketing and perfecting their pitches as they look to capitalize on the industry’s largest annual get-together. More than 650 companies will officially exhibit their security products and services, with probably at least that many vendors unofficially hawking their wares around the San Francisco-based conference. What’s drawing all of the interest in infosec?

The short answer is money. Or more specifically, the budget dollars that businesses allocate to secure themselves. Even in a time when overall IT is often being asked to ‘do more with less,’ IT folks are being given more for infosec. A lot more. That unprecedented growth is rapidly – and unalterably – reshaping the multibillion-dollar industry.

In a recent survey by 451 Research‘s Voice of the Enterprise: Information Security, Budgets and Outlook, nearly nine of 10 IT buyers and users told us their infosec budget was fatter for the coming year than it was in the previous year. That was 10 times the percentage of IT professionals who said they have fewer dollars to spend in the coming year.

And when the respondents to our survey say they have more money to spend, they are talking real dollars. On average, they indicated that their infosec budgets would be 22% higher in 2019 than in 2018. Compare that with broader IT budgets that basically track the US GDP growth of a low-single-digit-percentage increase.

Of course, more money means more hands reaching for it. In infosec, we see that in the ever-increasing number of infosec-focused startups as well as the ever-increasing number of established vendors buying their way into one of the last growth markets for IT spending.

We have already looked at how the growth in VC funding has distorted infosec, with freely flowing venture dollars leading to an overpopulated ecosystem. Our Darwinian take on the market, which we published ahead of the 2016 RSA Conference, is arguably even more relevant today. In the intervening four years, venture firms have poured billions of dollars into infosec startups.

In addition to those freshly formed and richly capitalized startups, existing vendors have also recast their strategies so they can pursue the growth in infosec. Typically, this means a combination of buying and building. Large-cap companies such as Cisco and IBM have both built infosec divisions that measure revenue in the billions of dollars through a series of acquisitions coupled with in-house development: 451‘s Research M&A KnowledgeBase shows the two giants have spent $11.5bn on nearly 40 infosec purchases since 2002.

As to what will dominate the talk on the RSA Conference show floor and at the cocktail events that follow, our infosec analyst team has some thoughts on the trends that are shaping the industry expansion as well as acquisition activity. See our recently published 2020 Tech M&A Outlook: Information Security to get a glimpse of the deals that are likely to get done after the conference packs up and heads out of town.

Figure 1: Infosec spending
Source: 451 Research’s Voice of the Enterprise: Information Security, Budgets and Outlook

Morgan Stanley’s big play for little investors

Stephanie Turner

by Scott Denne

Fintech deals keep coming as Morgan Stanley shells out $13bn of its stock for online financial broker E*TRADE. As we’ve previously noted, payments and financial services firms accounted for an outsized share of this year’s and last year’s deal activity as they look to acquisitions to align with changes to the tech landscape.

Morgan Stanley’s move isn’t driven so much by E*TRADE’s technology as much as it’s driven by access to the target’s retail clients. Over the past five years, Morgan Stanley has transformed its business through a focus on wealth management, particularly at the high end of that market. That business today accounts for just over half of its pretax profit, up from one-quarter five years ago. The E*TRADE buy extends that business into smaller retail investors – the seller manages an average of $70,000 per client, less than one-tenth of Morgan Stanley’s average client.

E*TRADE isn’t exactly a tech vendor, but it wouldn’t be able to service so many small clients without its online interface. And that’s illustrative of many of the recent fintech deals we’re seeing – it’s not that financial services providers are buying tech so much as they’re buying into markets that are opened by tech. While online brokerages, which have been around since the dot-com days, aren’t new, the growth of the category and the entry of startups have driven competition to new heights, causing most players to drop their fees and find buyers.

Banks aren’t the only companies in financial services printing major acquisitions to move into tech-enabled markets. For example, Visa, in its largest-ever tech deal, paid $5.3bn last month for Plaid, a maker of payment-processing APIs for software developers as more payments happen via e-commerce sites, mobile apps and other software interfaces. We’re likely to continue to see transactions along a similar vein as financial services firms broadly expect technology to impact their market. According to 451 Research‘s Voice of the Enterprise: Digital Pulse, Budgets & Outlook, one of every three employees of finance companies expect digital technologies to significantly disrupt their business model in the next three years, compared with just one in four across all industries.

Figure 1: Level of digital disruption expected in next three years

Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Budgets & Outlook 2018

Buyout shops buy big in infosec

Stephanie Turner

by Brenon Daly

Buyout shop Symphony Technology Group will carve out most of the information security (infosec) assets from Dell, paying $2.1bn in cash for RSA Security and several other businesses the namesake company picked up over the past decade and a half. The transaction, which had been rumored for months, represents the latest first-generation infosec vendor to land in a private equity (PE) portfolio.

STG will be joined in the purchase by Ontario Teachers’ Pension Plan Board and AlpInvest Partners, with the deal expected to close by Q3. The PE trio’s reach for 32-year-old RSA shares more than a few similarities with several other recent sponsor-led infosec transactions.

For instance, Sophos, which is also a 30-something-year-old veteran of the security industry, went private with Thoma Bravo last fall in a $3.8bn deal. Additionally, Forescout Technologies is in the process of getting absorbed by a buyout group as it endures a sharp slowdown in sales. And, of course, six months ago, the enterprise security business of industry kingpin Symantec got cleaved off by Broadcom, a corporate acquirer that has built its software division borrowing heavily from the PE playbook.

For Dell, which also tends to operate a bit like a buyout shop, the divestiture wraps up a long holding period for RSA. Dell inherited the security business as part of its 2015 blockbuster $63bn acquisition of EMC. Since that transaction, Dell has shed a number of massive businesses, announcing multibillion-dollar sales of its services unit and infrastructure software division, as well as unwinding EMC’s earlier Documentum buy.

EMC used a similar ‘string of pearls’ M&A strategy with both Documentum and RSA, as the storage giant looked to expand into content management and security, respectively. However, based on proceeds that Dell is pocketing by undoing those two deals, RSA has lost a bit of luster.

According to 451 Research’s M&A KnowledgeBase, EMC paid $2.1bn for RSA in mid-2006. However, the ultimate tab kept climbing because RSA had been a fairly active acquirer. Our data shows the company put up at least one print every year for the first few years under EMC’s ownership. (Under Dell, RSA’s pace dropped sharply, with the most recent transaction being the relatively small purchase of Fortscale Security in April 2018.)

Altogether, by our calculation, EMC/RSA would have spent roughly an additional $1bn on M&A, on top of the original $2.1bn price tag for RSA. Subscribers to the M&A KnowledgeBase can see our proprietary estimates for key acquisitions for the EMC/RSA division, including the 2010 purchase of Archer Technologies, the 2011 reach for NetWitness and the 2013 pickup of Aveksa.

Acquirers see a bright future in computer vision

Stephanie Turner

by Michael Hill

Purchases of computer vision startups have surged over the past 12 months, driven by a slate of marquee buyers that see potential for the technology in the form of new products and services. Use cases for this particular flavor of machine learning range from autonomous vehicle development to social media-oriented imaging applications to remote diagnosis of home appliance failures.

In 2019, acquisitions of computer vision vendors more than doubled to 10 from just four in 2018, according to 451 Research‘s M&A KnowledgeBase, while three such deals have been inked already this year. Acquirers include household names such as Facebook, Uber, Tesla and Snap, all of which appear to share the notion that computer vision can be a conduit for the delivery of new products and services.

For example, Facebook’s pickup of mobile artificial intelligence (AI) image-location specialist Scape Technologies could help it develop location-specific augmented reality (AR) applications, while application warranty provider Frontdoor’s reach for AR video-streaming software provider Streem positions it to service more customers and, as a result, generate revenue by applying the target’s technology across its home services portfolio.

Meanwhile, Uber and Tesla share a similar vision around the development of automated taxis that drove their respective purchases of Mighty AI and DeepScale. Snap’s acquisition of image-capture software developer AI Factory was predicated on the notion of incorporating more AI-based imaging options into its photo-messaging app.

If the recent rise in computer vision M&A is being driven by an appetite for new product development, then that appetite is being driven by digital strategy. According to 451 Research’s Voice of the Enterprise: Digital Pulse survey, 42% of respondents view the delivery of new digital products as the primary purpose of digital transformation.

Figure 1: Primary purpose of digital transformation

Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Workloads & Key Projects 2019