Author: Brenon Daly

The where and how of tech M&A in 2017

Brenon Daly

Contact: Brenon Daly

After a surprisingly strong year for tech M&A spending in 2016, it’s natural to look ahead to this year and wonder how – and where – dealmaking will play out. To get a sense of that, we asked the primary players in the market for their specific forecasts on acquisition activity, valuations and even IPOs. 451 Research subscribers can see the full report on our tenth-annual 451 Research Tech Corporate Development Outlook Survey, as well as our twelfth-annual 451 Research Tech Banking Outlook Survey.

In addition to both survey groups offering their broad forecasts for tech M&A, we also asked specific questions about topics that will undoubtedly shape the market in the coming year. A quick highlight from each of the surveys:

  • A plurality of corporate acquirers are anticipating a ‘Trump rally’ in the tech M&A market in 2017. Half of the respondents (49%) expect the political and economic changes from the president-elect’s policies to ‘stimulate’ M&A activity – three times the percentage (16%) that said the policies will ‘inhibit’ dealmaking in the coming year.
  • Tech bankers expect even more M&A spending on enterprise security in the coming year. They also picked that as the top sector for 2016, and they were on to something: Spending on enterprise security soared to a record $16.7bn, more than the two previous years combined, according to 451 Research’s M&A KnowledgeBase.

Again, to see our full report on the M&A outlook from many of the most-active corporate acquirers, click here; and to see our full report on the views and predictions from senior tech investment bankers, click here.

A half-trillion-dollar year for tech M&A

Brenon Daly

Contact: Brenon Daly

Even after a record tech M&A run in 2015, dealmakers still had ambitious shopping plans for 2016. Across the globe, tech acquirers announced $500bn worth of transactions in the just-completed year, ranking 2016 as the second-highest annual total for spending since the internet bubble burst in 2000, according to 451 Research’s M&A KnowledgeBase. The unexpectedly strong spending last year came as the number of deals valued at $1bn or more soared to a new record, thanks in no small part to unconventional buyers ready to write big checks.

Although overall M&A spending dropped just 15% year over year in 2016, the year started much slower. In the opening months, the value of announced transactions was running at only half of 2015’s average monthly level. Only a summer surge pulled last year above a middling performance. In the back half of 2016, companies shrugged off the political shakeups in the European Union and the US and inked big deals. Nearly two-thirds (63%) of last year’s total announced M&A spending came in the final six months of the year, according to the M&A KnowledgeBase.

Even with the decline in the aggregate value of tech transactions in 2016, spending has still increased for three of the past four years. That surge, which has seen the annual amount of money spent on acquisitions more than double over the period, has expanded the pool of tech buyers beyond the ‘usual suspects’ of big-name corporate acquirers. For example, private equity firms announced more transactions in 2016 than any year in history, with spending soaring to its highest level since before the recent recession, when ‘club deals’ were all the rage. Also, Asian-based tech companies accounted for 16 of the 98 transactions valued at $1bn or more, an unprecedented share of the top end of the M&A market for the traditionally conservative shoppers.

As to where that leaves tech M&A for 2017, we’ll have some predictions about that from the main participants in the market later this week. In mid-December, 451 Research surveyed – separately – both corporate development executives and senior investment bankers to get a sense of their plans and pipeline for the coming year. One high-level finding: for the first year in the decade of surveying both groups, the forecasts didn’t exactly line up with one another. Uncharacteristically, bankers sounded a bearish tone for 2017, while corporate executives plan to ramp up their shopping. Look for full reports on the outlook and reasoning from both groups later this week.

 

Late-cycle tech M&A late in the year

Brenon Daly

Contact: Brenon Daly

As 2016 winds down, the deals so far this month are looking a little tired as well. At the top end of the market, December’s prints have been dominated by classic late-cycle M&A, with well-established buyers such as telcos and private equity (PE) firms consolidating a number of mature sectors. Since the start of the month, tech and telecom acquirers have spent $35.1bn on 204 transactions around the world, according to 451 Research’s M&A KnowledgeBase.

Nearly half of this month’s total spending has come in a single deal: 21st Century Fox’s reach for British entertainment communications provider Sky. (It paid $14.8bn for the 61% stake of Sky that it didn’t already own.) In many ways, that old-line consolidation set the tone for dealmaking this month, which was characterized by conservative strategies and valuations. Other similar large transactions in December have included Equinix’s $3.6bn pickup of 29 datacenters from Verizon, Golden Gate Capital’s $1.8bn take-private of Neustar and Blackstone Group’s sale of Optiv Security to fellow PE shop KKR.

The valuation of these acquisitions underscores the fact that December dealmaking has featured more ‘value’ than ‘growth’ strategies. All five of this month’s biggest deals have gone off at less than 4.4 times trailing sales, which is the average multiple for the 50 largest transactions announced overall in 2016, according to the M&A KnowledgeBase. On average, buyers in December have paid 3.3x trailing sales, a full turn lower than they did in the previous months of the year.

2016 tech M&A activity, monthly

Period Deal volume Deal value
December 1-22 2016 204 $35.1bn
November 2016 272 $38.2bn
October 2016 323 $82bn
September 2016 298 $30bn
August 2016 304 $31.2bn
July 2016 339 $93.9bn
June 2016 383 $67bn
May 2016 328 $22.4bn
April 2016 348 $20.7bn
March 2016 339 $23.9bn
February 2016 322 $28.3bn
January 2016 383 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Despite favorable winds, few tech startups set sail to Wall Street

Brenon Daly

Contact: Brenon Daly

Calm seas and favorable winds usually encourage ships to launch onto the open ocean, but that hasn’t been the case for tech startups. The number of enterprise-focused companies that have set sail to Wall Street this year is once again mired in the single digits. That’s a disappointment given the abundant IPO-ready tech vendors and a bullish investor base that has pushed the broader US equity market to record levels in 2016.

By our count, just eight enterprise tech firms have made it public on the two major US exchanges so far this year, matching the total from 2015. The flatlining IPO total comes as US equity markets this year have vastly outperformed last year, while overall volatility has remained relatively muted. The lackluster tone for 2016 started early, with not a single tech company making it public in Q1. That marked the first quarterly shutout for tech IPOs since the end of the recent recession.

After a mini-bear market on Wall Street in the first quarter, both the Dow Jones Industrial Average and the S&P 500 moved into the green and haven’t slipped back since. (The Nasdaq took another quarter to get above water, but has been solidly positive since last summer on its way to posting what looks set to be a gain of just under 10% this year.) These advances have come as market uncertainty – as measured by the CBOE Volatility Index, or VIX – has stayed at historically low levels, spiking only in short-term reaction to the unexpected outcomes of June’s Brexit vote and the US presidential election in November.

Against this relatively welcoming backdrop, tech startups nonetheless passed on going public, and instead opted for M&A. We saw that this year from companies that had formally revealed their IPO plans (Blue Coat and Optiv were both acquired out of registration) as well as vendors that we had assumed were at some stage of IPO preparation (ServiceMax and Jasper Technologies).

As to where that leaves the IPO market for 2017, we’re currently surveying senior investment bankers and, separately, corporate development executives to get their outlook for new offerings next year. If you would like to participate in our annual survey, please email us and we will send you the correct survey for your thoughts on the IPO market as well as the M&A outlook for the coming year.

2016 enterprise tech IPOs*

Company Date of offering
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016
Nutanix September 30, 2016
Everbridge October 10, 2016
BlackLine Systems October 28, 2016
Quantenna Communications October 28, 2016

Source: 451 Research’s M&A KnowledgeBase *Includes Nasdaq and NYSE listings only

A few unicorns make it in the real world

Brenon Daly

Contact: Brenon Daly

After two years of existing mostly on paper, unicorns have finally started making it into the real world. And in no small part, it’s thanks to companies that do the vast majority of their business in the real world. This year has seen a record number of seven sales of VC-backed companies for $1bn or more, according to 451 Research’s M&A KnowledgeBase. That’s as many ‘unicorn’ exits as the two previous years combined.

The increase in the number of ‘three-comma exits’ is largely due to the broader trend of digital transformation, as companies that used to only do business in the brick-and-mortar realm acquire their way online. For instance, last summer, e-tailer Jet.com sold to Walmart for $3.3bn, representing the largest sale of a VC-backed vendor in two and a half years. Additionally, consumer products giant Unilever, which traces its roots back to the 1890s and generates some $56bn in revenue, paid $1bn for four-year-old online retail site Dollar Shave Club.

Non-tech acquirers buying their way into tech were also visible in the next band of transactions, just below the fabled unicorn status. The list of the shoppers so far in 2016 that have paid $500-999m for VC-backed startups includes names that wouldn’t typically find themselves on a tech M&A hit list, notably Ritchie Bros. Auctioneers and General Motors. Altogether, nine venture portfolio companies have signed off on deals valued at $500-999m in 2016, which essentially matched the average of the previous two years, according to the M&A KnowledgeBase.

To the relief of VCs, this trend is likely to continue as old-line industrial and manufacturing vendors as well as retailers use M&A to find new avenues of growth. Many of these would-be buyers are also enjoying some of the highest stock prices they’ve ever had, which is boosting their confidence to do big-ticket acquisitions in untested markets. It’s unlikely there will ever be a stampede of unicorns into the physical world. But in the coming years, a few of the venture industry’s highest-valued startups will undoubtedly continue to make their way to acquirers that they probably wouldn’t have ever imagined when they first launched their startup.

Acquisitions of VC-backed startups*

Year Number of transactions valued at $500-999m Number of transactions valued at $1bn or greater
YTD 2016 9 7
2015 9 1
2014 8 6
2013 7 2
2012 7 4
2011 7 1

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

For tech M&A, the big hits just keep coming

Brenon Daly

Contact: Brenon Daly

Even though the overall number of tech deals is tracking to a roughly 10% decline this year compared with last year, the top end of the market is busier than ever. So far in 2016, acquirers have announced a record 90 transactions valued at more than $1bn, up from the previous record of 85 in 2015, according to 451 Research’s M&A KnowledgeBase. This year’s surge has been driven by the emergence of unconventional buyers, as well as conventional acquirers using novel strategies.

For instance, China-based buyers have announced 10 deals so far in 2016 valued at over $1bn, more than twice the average number over the previous three years. This year marks the first time China-based companies have cracked the double-digit-percentage market share for big prints.

More dramatically, private equity (PE) acquirers more than doubled the number of big-ticket tech deals they have done this year to a record 24 transactions. That means these deep-pocketed shoppers now account for one of every four ‘three-comma deals,’ according to the M&A KnowledgeBase. In one indication of how active this group has become, consider the fact that five separate buyout shops have announced more than one deal valued at $1bn+ since the start of 2016: TPG Capital, Vista Equity Partners, KKR, Apollo Global Management and Thoma Bravo.

In some ways, PE deals have become so popular that their strategic rivals have borrowed the playbook. A number of corporate divestitures – which in years past, would have likely landed in a PE portfolio before being cleaned and then sold to a strategic acquirer – went directly to corporate buyers. For instance, OpenText reached into EMC to pull out Documentum, while the services wings of both Dell and Hewlett Packard Enterprise were consolidated by IT services giants.

Corporate buyers have also been more creative recently in structuring transactions, which is something that PE firms have done more regularly. Micro Focus employed an unusual structure to assume control of HPE’s software business, which tripled the size of the British software vendor. Similarly, LogMeIn used a Reverse Morris Trust to dramatically scale up its business as it combined with Citrix’s GoTo division. Another corporate acquirer, Broadcom, went ahead with its $5.5bn purchase of Brocade Communications even though it knows it’s going to have to divest a huge chunk of that business.

Billion-dollar transactions

Period Number of deals worth $1bn+
YTD 2016 90
2015 85
2014 76
2013 49
2012 43
2011 52
2010 44
2009 32
2008 31
2007 77
2006 70
2005 70
2004 28

Source: The 451 M&A KnowledgeBase

PE: The only growth market in tech M&A right now

Brenon Daly

Contact: Brenon Daly

The buyout barons are busier than ever. Already this year, private equity (PE) shops have announced more tech transactions than any year in history. The unprecedented flurry of deals comes as more financial acquirers are buying their way into the ever-maturing tech industry, with newly hatched fledgling funds joining well-established multibillion-dollar outfits. This ever-increasing pack of PE players is vastly outpacing their corporate rivals when it comes to putting up deals.

So far this year, PE buyers have announced a record 283 acquisitions, an increase of 11% from 2015 and 21% from 2014, according to 451 Research’s M&A KnowledgeBase. (We would also note that the deal flow covers virtually every strategy – carve-outs, bolt-ons, take-privates, secondaries – available to these firms.) If we assume the pace of buyout activity holds through December, PE shops will put up more than 300 prints in 2016, a 20% increase from last year. (For the record, M&A spending by buyout firms this year has set a post-recession record.)

As PE shops step up their activity, corporate acquirers are slowing down. Overall, the number of tech transactions is likely to decline about 10% this year, compared with 2015. (That’s assuming the pace in December continues at the rate of the preceding 11 months.) The drop-off in 2016 will be even sharper among US publicly traded buyers, which represent the most visible segment of the ‘corporate acquirers.’ Currently, tech vendors listed on the Nasdaq and NYSE are on pace to announce just 900 purchases in 2016, down from about 1,040 deals in each of the two previous years, according to the M&A KnowledgeBase.

Although PE is essentially the sole ‘growth market’ in tech M&A right now, it still represents only a small portion of the activity. In 2016, financial acquirers account for only one of every 12 transactions. Still, that’s a higher share of the market than either of the two previous years – and that looks likely to increase further in 2017. Even from the recent record level of activity, nearly half of respondents (45%) to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster last October predicted that buyout shops would spend more in 2017 than they have in 2016, compared with just one-quarter (28%) who forecast lower spending.

PE activity

Period Deal volume Deal value Percentage of overall tech M&A spending
YTD 2016 283 $69bn 15%
2015 253 $58bn 9%
2014 234 $42bn 10%
2013 201 $62bn 25%
2012 169 $28bn 15%
2011 212 $33bn 14%
2010 147 $29bn 15%
2009 103 $13bn 9%
2008 107 $17bn 5%
2007 159 $122bn 29%

Source: The 451 M&A KnowledgeBase

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Synchronoss: Can middle-aged companies pivot, too?

Brenon Daly

Contact: Brenon Daly

Announcing the most significant overhaul of its 16-year-old company, Synchronoss has shed a large portion of its legacy telecom business and made an $821m acquisition of collaboration software provider Intralinks in an effort to evolve more fully into an enterprise software vendor. Synchronoss began its enterprise push last year, using smaller purchases to add identity management and enterprise mobility management technology to its portfolio. However, sales to businesses currently generate only a small slice of its overall revenue. With the divestiture and the addition of Intralinks, roughly 40% of the company’s total sales will come from enterprises.

Reflecting the importance of its new focus on enterprises, Synchronoss said the combined entity would be led by current Intralinks CEO Ron Hovsepian, reversing the typical post-acquisition leadership arrangement. Additionally, Synchronoss noted that Intralinks brings a direct sales force of more than 150 sales reps to the effort. However, Intralinks had only been increasing its revenue at a high-single-digit percentage rate so far in 2016. The transaction is expected to close late in the first quarter of 2017.

Synchronoss’ divestiture of a majority portion of its carrier activation business figures into the company’s pivot, as well. The sale of 70% of the unit for $146m to existing partner Sequential Technology reduces the legacy carrier-focused portion of revenue, as well as eases customer-concentration concerns for Synchronoss. The company is still trying to sell the remaining 30% of its activation unit, a process it indicated could take 12-18 months.

A portion of the funds from the divestiture, along with some cash on hand, will go toward covering a bit of the Intralinks buy. However, Synchronoss said it will have to borrow $900m to pay for most of the purchase. (Synchronoss is spending about twice as much on Intralinks as it has spent, collectively, on its previous 11 acquisitions since 2002, according to 451 Research’s M&A KnowledgeBase.) The new debt – along with the accompanying dilution of earnings to service it – unnerved some investors. Shares dropped 12% on the announcement, but are still up about 20% for the year.

Probably more of a concern on Wall Street, however, are the challenges associated with such a dramatic shift in business model – one that has a decidedly mixed record. Already this year, we have seen a number of high-profile companies backtrack on their earlier efforts to use M&A to become enterprise software vendors. Dell, Hewlett-Packard and Lexmark, among others, have all unwound or are trying to unwind billions of dollars of deals they did over the past decade to step from their original business into the enterprise software arena.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Tech deal flow dries up in November

Brenon Daly

Contact: Brenon Daly

Despite the lowest monthly total for tech acquisitions in three years, M&A spending in November just about kept pace with the historically high levels of 2016. Overall, acquirers spent about $38bn on tech deals around the world in the just-completed month, slightly below the average of $42bn during the previous 10 months. November spending pushed the value of transactions announced so far in 2016 to more than $450bn, the second-highest annual total since the internet bubble burst in 2000, according to 451 Research’s M&A KnowledgeBase.

Transactions that helped push the November spending level higher included:

  • Samsung placed an ambitious $8bn bet on the emerging connected car market, acquiring HARMAN. In the past decade and a half, the Korean giant hadn’t spent more than $350m on a single tech purchase.
  • Announcing its third multibillion-dollar deal in as many years, Broadcom paid $5.5bn for Brocade. As part of the deal, Broadcom is expected to divest a major portion of Brocade’s business, which could help it recoup several billion dollars.
  • Symantec followed up a $4.7bn acquisition last spring to bolster its enterprise security business with the $2.3bn purchase of LifeLock in an attempt to revive its flagging consumer security division.

But the real story of tech M&A last month is the dramatic decline in overall deal volume, where November – like the result of last month’s US presidential election – saw a dramatic split. Basically, the first half of the month roughly matched the rate of acquisition announcements from 2016, but then activity plummeted: Dealmakers announced 156 transactions from November 1-15, but just 94 acquisitions (or 38% of the monthly total) from November 16-30, according to the M&A KnowledgeBase. Of the 20 largest deals last month, fully three-quarters of them (15 transactions) came in the first two weeks.

Undeniably, deal flow was somewhat slowed by the US Thanksgiving holiday in the next-to-last week of November. But even with that holiday, there were almost an equal number of business days in the first and second halves of the month. And, keep in mind, the first half of last month also featured its own interruption to business in the form of a national election. Ahead of the presidential election, nearly one-third of respondents (31%) to the M&A Leaders Survey from 451 Research and Morrison & Foerster indicated that the US presidential election had slowed their dealmaking activity. That impact appears to already be registering in actual deal flow as transaction volume in November dropped by 25% compared with the average number of monthly prints in 2016.

2016 tech M&A activity, monthly

Period Deal volume Deal value
November 2016 250 $37.7bn
October 2016 319 $82bn
September 2016 297 $29.9bn
August 2016 300 $30.9bn
July 2016 329 $93.7bn
June 2016 375 $66.7bn
May 2016 324 $23bn
April 2016 344 $19.6bn
March 2016 337 $23.9bn
February 2016 322 $28.3bn
January 2016 380 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Big Yellow and big buyouts push infosec M&A spending to record

Brenon Daly

Contact: Brenon Daly

What happens at the top end of a market usually goes some distance toward setting the overall tone in that particular market. At least that’s one way to view M&A in the information security sector, which has surged to a record level of spending led by transactions involving the two largest vendors. Up until recently, both Symantec and McAfee had been largely out of the market as the companies worked through earlier strategy bets that didn’t pay off.

So far this year, infosec shoppers have spent $14.3bn on deals, according to 451 Research’s M&A KnowledgeBase. That tops the previous record of $13.5bn in 2010. However, a look inside the deal flow indicates that the previous record was much more concentrated: the single-largest transaction in 2010 (Intel’s $7.7bn purchase of McAfee) accounted for more than half of that year’s overall deal value, while the single-largest transaction in 2016 (Symantec’s $4.7bn pickup of Blue Coat Systems) accounts for just one-third of this year’s spending.

Intel’s partial unwind of its experiment with McAfee is contributing to this year’s record. But more dramatically, it’s the reversal at Symantec that has boosted overall spending in the infosec space. After shying away from significant acquisitions in recent years, Big Yellow has now inked its two largest security deals in just the past the past five months. For perspective, the combined $7bn Symantec has shelled out since last summer for Blue Coat and LifeLock is more than it has spent, collectively, on its 25 other infosec purchases since 2002, according to the M&A KnowledgeBase.

In addition to large corporate buyers, big financial acquirers have also been contributing to this year’s record spending. Both TPG Capital’s carve-out of McAfee and PE-backed AVAST’s consolidation of AVG were valued in the billions of dollars. For comparison, the previous record year of 2010 didn’t feature any billion-dollar PE transactions.

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