Author: Brenon Daly

Will Wal-Mart be the next to discount its e-commerce deal?

Brenon Daly

by Brenon Daly

The retail industry is learning the costly lesson that clicking an online shopping cart button has relatively little in common with pushing a shopping cart down a store aisle. The deals that retailers have struck to bridge the physical and digital worlds just haven’t been ringing the cash registers. The latest example: Nordstrom wrote off more than half of its $350m acquisition of Trunk Club.

It wasn’t supposed to be this way. The ‘bricks and clicks’ pairings made sense, at least in the pitchbook. Retailers needed to be more represented in places where their customers were actually shopping. (The National Retail Federation recently forecast that a record 56% of shoppers plan to buy online this upcoming holiday season, tying for the top spot among all customer destinations.)

In addition to the need to go digital, buyers were also lulled into a false sense of confidence by oversimplifying the fundamental premise of these proposed deals: Acquire a complementary Web-based storefront, with all of the accompanying technology and talent, and then just slap that in front of the massive back end that the big retailer has already built.

These theoretical transactions seemed a perfect fit, taking care of the specific challenges each vendor felt in its particular model. For the e-tailer, creating supply chains and delivery centers would likely cost tens if not hundreds of millions of dollars of capital expenditure, which is rarely a high-returning use of risk capital such as VC. (Not to mention those venture dollars, in general, are getting harder to pull in.) For retailers, they would get the digital smarts around marketing and selling on the Web, without having to painstakingly repurpose existing resources or slowly hire scarce digital talent.

And yet, that has turned out to be a spurious strategy. Online retailing isn’t any more of an extension of traditional retailing than online media is an extension of traditional media. With Nordstrom’s tacit admission that its M&A push into the ether hasn’t generated the expected returns, we wonder about a significantly larger bet – roughly 10 times the size of Nordstrom’s purchase of Trunk Club – that Wal-Mart has placed on Jet.com.

The retailing giant’s pickup of Jet.com last August stands as the largest e-commerce transaction of the past 15 years and the biggest sale of a VC-backed startup in two and a half years. However, the early returns on that blockbuster pairing don’t appear promising. In a survey by 451 Research’s Voice of the Connected User Landscape in mid-September, just after Wal-Mart closed the deal, more people projected they’d be spending less at Jet.com than spending more at the website through the end of the year.

cw-online-retailer-forecastSource: 451 Research’s Voice of the Connected User Landscape

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

Where is the tech M&A market heading?

Brenon Daly

Contact: Brenon Daly

With an astonishing $450bn of deal value announced so far this year, 2016 has already hit the second-highest annual spending level for tech M&A since the internet bubble burst in 2000. And while this year probably won’t eclipse last year’s record, we would note that 2016 activity is coming against a backdrop of political and economic change that’s almost unprecedented in developed countries. Acquirers are continuing to buy, despite the uncertainty introduced by events such as Brexit or even the recent election cycle in the US.

But will the current M&A boom continue? Is 2017 going to see just a continuation of the strong deal flow? Or will the uncertainty give buyers pause as they head into next year?

To get a sense of where the tech M&A market is heading, join 451 Research and Morrison & Foerster next Tuesday at 1pm EST for a webinar on what senior M&A executives and advisers are forecasting for the market in 2017 and beyond. (To register, click here.) Topics we’ll cover in the complimentary hour-long webinar include:

  • Recent activity and trends in the tech M&A market.
  • What bankers, corporate execs and others expect to see in tech M&A next year – and beyond.
  • What impact the divisive US presidential election will have on dealmaking.
  • How significant are the expected regulatory changes in the wake of the just-completed election cycle?
  • On the all-important question of valuation, what do tech buyers forecast they will have to pay for startups in the coming months?

We hope you can join 451 Research and Morrison & Foerster next Tuesday as we make sense of what’s driving tech M&A activity right now and how that will play out next year and beyond. To register, click here.

mofo-ma-forecast-oct-2016

In Trump, a tech M&A watchdog with more bite

Brenon Daly

Contact: Brenon Daly

Regardless of how you voted – and whether today you’re mischievously grinning and flipping the finger at Washington DC or hastily planning a move to Canada – there are still deals to be done. There might not be as many of them, as has certainly been the case in the run-up to the election, with monthly transaction volume dropping about 10% since last summer. But tech companies are still going to want to consolidate rivals, buy their way into promising adjacent markets and roll the dice on unproven startups as they look to M&A to drive growth.

That said, some of those strategies – particularly those that involve foreign acquirers of US assets – may well get more scrutiny in the new Trump regime than they would have during a Clinton presidency. That would be our contention anyway, based on the protectionist sentiment that Trump espoused during his campaign. In particular, he has singled out China for some of his sharpest criticism. Trump has said he plans to bring a case, both in the US and at the World Trade Organization, against ‘unfair subsidiary behavior’ by the world’s most-populous country. If we look at how that contentious view could impact tech M&A, we can certainly make the case that Chinese buyers probably won’t be shopping as freely in the US in the coming years.

If that is indeed the case, the slowdown would end a dramatic acceleration in deal flow this year. Already in 2016, Chinese buyers have spent more money on US tech vendors than in the previous five years combined, according to 451 Research’s M&A KnowledgeBase. In terms of deal volume, they’ve done almost as many transactions in the first 10 months of 2016 as they did, collectively, over the past two years. This year’s shopping spree has included a number of well-known names, which is also likely to draw the attention of a populist president such as Trump. Chinese buyers have recently picked up Ingram Micro, which swings nearly $50bn worth of tech gear and services each year, 25-year-old printer maker Lexmark and even a majority stake in the gay dating app Grindr.

Regulatory review has always been a consideration in any significant tech deal. We would guess that with Trump’s election, he will probably look to strengthen the Committee on Foreign Investment in the United States (CFIUS). At least in tech transactions, that intra-agency committee hasn’t been as active as it was a decade ago. (Somewhat dramatically, we termed CFIUS an ‘angel of death’ after it blocked the proposed sale of 3Com in 2008 due to the participation of Chinese networking giant Huawei Technologies.) In Trump’s new regime, that watchdog will almost certainly have more bite.

kb-china-acqs-us

It’s win or go home for Oracle and its bid for NetSuite

Brenon Daly

Contact: Brenon Daly

Just like this year’s World Series, there’s a dramatic win-or-go-home contest playing out in the tech M&A market. The showdown pits the ever-acquisitive Oracle against one of Wall Street’s biggest investors. The stakes? The fate of the largest SaaS acquisition ever proposed.

At midnight tonight, Oracle’s massive $9.5bn bid for NetSuite will effectively expire. In the original offer three months ago, Oracle said it will pay $109 for each of the nearly 87 million (fully diluted) shares of NetSuite, valuing the subscription-based ERP vendor at $9.5bn. That wasn’t enough for NetSuite’s second-largest shareholder, T. Rowe Price. Instead, the institutional investor suggested that Oracle pay $133 for each NetSuite share, adding $2bn to the (hypothetical) price tag.

Oracle has declined to top its own bid. Nor will it adjust the other major variable in negotiations: time. (Oracle has already extended the deal’s deadline once, and says it won’t do it again.) In an unusually public display of brinkmanship in M&A, Oracle has said it will walk away from its $9.5bn bid if enough shareholders don’t sign off on its ‘best and final offer.’ As things stand, shareholder support is far below the required level, largely because of T. Rowe’s opposition.

Does T. Rowe have a case that Oracle is shortchanging NetSuite shareholders with a discount bid? Or is the investment firm greedily hoping to fatten its return on NetSuite by baiting Oracle to spend more money? If we look at the proposed valuation for NetSuite, it’s hardly a low-ball offer. On the basis of enterprise value, Oracle’s current bid values NetSuite at 11.1x trailing sales. That’s solidly ahead of the average M&A multiple of 10.3x trailing sales for other large-scale horizontal SaaS providers, according to 451 Research’s M&A KnowledgeBase. (For the record, T. Rowe’s proposed valuation of $11.6bn for NetSuite roughly equates to 13.7x trailing sales – a full turn higher than any other major SaaS transaction.)

With the two sides appearing unwilling to budge, NetSuite will likely return to its status as a stand-alone software firm. If that is indeed the case, NetSuite will probably have to get used to that status. The roughly 40% stake of NetSuite held by Oracle chairman Larry Ellison serves as a powerful deterrent to any other would-be bidder, which was one of the points T. Rowe raised in its rejection of the deal. Assuming 18-year-old NetSuite stands once again on its own, the first order of business will be to pick up growth again. (Although there’s still the small matter of a $300m termination fee in the transaction.) In its Q3, NetSuite reported that revenue increased just 26%, down from 30% in the first half of the year and 33% for the full-year 2015.

Select multibillion-dollar SaaS deals

Date announced Acquirer Target Deal value Price/trailing sales multiple
July 28, 2016 Oracle NetSuite $9.3bn 11.1x
September 18, 2014 SAP Concur $8.3bn 12.4x
May 22, 2012 SAP Ariba $4.5bn 8.6x
December 3, 2011 SAP SuccessFactors $3.6bn 11.7x
June 1, 2016 Salesforce Demandware $2.8bn 11x
June 4, 2013 Salesforce ExactTarget $2.5bn 7.6x

Source: 451 Research’s M&A KnowledgeBase

Life in the public eye

Brenon Daly

Contact: Brenon Daly

Just as we’ve hit the home stretch for the current US election cycle, we’ve also entered crunch time for the otherwise sluggish tech IPO market. Any company that still plans to debut in 2017 will need to sprint to beat the holidays, which tend to stall offerings ahead of the turn of the calendar. Whether any startups actually make it to Wall Street depends at least in part on the events in Washington DC. (We have already noted that a recent survey from 451 Research’s ChangeWave service showed the Clinton vs. Trump circus has slowed consumers’ discretionary spending plans.)

In that way, political elections and tech offerings are somewhat intertwined. Further, there are some distinct similarities between the two events. Both involve candidates going out and seeing how popular they are with the public. Both also involve time-consuming and expensive journeys that wind toward a goal of serving the public at some level. And finally, both can bring long, rewarding stays in the public eye – alternatively, they can result in embarrassingly revealing and disconcertingly short stays. It all depends on how they serve their constituencies, whether voters or investors.

Not wishing to drag out the metaphor any longer – and certainly not wishing to spend any more attention on this dismal and depressing election cycle – we’ll shift our focus solely to the tech IPO market. We’ve already seen a half-dozen enterprise tech vendors make it public this year, and while one or two startups may add to that total, most are likely to look to join the ‘Class of 2017.’ Heading into next year, the outlook for tech IPOs appears strong. Slightly more than half of the respondents to the most recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster predicted an increase in the number of tech offerings from now through next spring. That was the survey’s most bullish forecast for IPOs in two years.

mofo-ipo-outlook-oct-2016

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

For tech M&A, it’s an ‘October surprise’

Brenon Daly

Contact: Brenon Daly

Once again, there was a gigantic ‘October surprise’ in the tech M&A market. In the just-finished month, Qualcomm put together a blockbuster $39.2bn play for NXP Semiconductors, accounting for nearly half of all spending on last month’s tech deals. A year ago, Dell’s mammoth $63.1bn purchase of EMC dominated October 2015 spending. Together, those October prints are the two largest non-telecom tech acquisitions of the past decade and a half, according to 451 Research’s M&A KnowledgeBase.

On its own, the Qualcomm-NXP pairing slightly exceeded an entire month’s worth of tech spending in 2016. When added to the other 304 transactions announced in October, the total for spending on tech deals across the globe hit $82bn. Also boosting last month’s total was CenturyLink’s $24bn reach for Level 3 Communications. (Including the assumption of debt, the enterprise value of that transaction swells to $34bn.) Altogether, October spending ranks as the second-highest monthly total of 2016, according to the M&A KnowledgeBase.

Outside of those two big prints, which accounted for slightly more than three-quarters of all announced deal value last month, dealmaking was a bit slower than usual at the top end of the market. In our M&A KnowledgeBase, we tallied just six transactions valued at more than $1bn last month, down from a monthly average of eight ‘three-comma deals’ through the first three quarters of the year. Overall deal flow was also a little slower than usual, with the number of announced transactions in October down almost 15% compared with the monthly average in the first half of 2016 and down almost 20% compared with the same month of the two previous years.

With two months of 2016 still remaining, this year has already topped full-year spending for every year except the post-internet bubble record level of 2015. While this year likely won’t challenge last year in terms of deal volume or the value of those transactions, it is outpacing 2015 in another key M&A consideration: valuations. Looking at the largest multiples paid in deals valued at $10bn or more over the past two years, four of the five transactions have printed in 2016, according to the M&A KnowledgeBase.

2016 tech M&A activity, monthly

Period Deal volume Deal value
October 2016 305 $81.8bn
September 2016 290 $29.8bn
August 2016 299 $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

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Big tech deals come at big prices

Brenon Daly

Contact: Brenon Daly

This year is proving to be a very rich vintage for tech M&A. At the top end of the market, acquirers are paying higher multiples than they’ve paid in any year since the end of the recession. Consider the rather mature semiconductor industry, where, historically, acquisition activity has been characterized by low-multiple consolidation. That hasn’t been the case so far in 2016, where chip deals have accounted for three of the four largest transactions. Rather than dragging down the broad-market valuation, they are actually boosting it substantially.

The chip industry’s platinum valuation was once again on display in Qualcomm’s $39.2bn purchase of NXP, the latest – and largest – blockbuster transaction in the semiconductor industry. In addition to Qualcomm-NXP, there have been two other semiconductor deals valued at more than $10bn. The average multiple in those big-ticket transactions stands at an astounding 11.9x trailing sales. That’s more than twice the average multiple of 5.4x trailing sales for the three chip deals valued at more than $10bn last year, according to 451 Research’s M&A KnowledgeBase.

And while chip companies have been spending freely, other big buyers are also paying up. Microsoft’s $26.2bn play for LinkedIn values the online professional network at more than 8x trailing sales. Oracle, which itself trades at a little more than 4x trailing sales, has offered to buy NetSuite in a transaction that values the SaaS vendor at more than 10x trailing sales. (Although it’s not certain that the deal will actually go through due to disgruntled shareholders.)

More than any other recent year, the driver for those large-scale transactions in 2016 has been growth, whether it’s innovating existing products through M&A (Microsoft-LinkedIn), obtaining a presence in the nascent but expanding market of mobility and the Internet of Things (semiconductor deals), or acquiring a faster-growing delivery model for software (Oracle-NetSuite). Overall, the 50-largest tech acquisitions so far this year have gone off at 4.7x trailing sales, according to the M&A KnowledgeBase. That’s the highest level since the recent recession and a full turn higher than the 3.6x trailing sales recorded in 2015.

2012-to-2016-kb-avg-valuation-multiple

Survey: Back to normal for tech M&A

Brenon Daly

Contact: Brenon Daly

After two straight forecasts of substantial deterioration in the tech M&A market, the outlook for activity has picked back up, according to the latest edition of the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. Nearly half of the respondents (47%) indicated they would be increasing their activity in 2017 compared to 2016. On the other hand, 20% of respondents said they would be slowing down on acquisitions next year, with the remaining one-third (33%) forecasting no change in their rate.

Broadly, the latest top-level results of the M&A Leaders’ Survey represent a more ‘normalized’ forecast for activity, following the most bearish outlook we’ve ever recorded. In our previous survey last April, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number indicating they would be cutting back on their shopping. For comparison, in the just-completed survey, more than twice as many respondents said they would be accelerating acquisition activity than said they would be slowing down.

The shift in sentiment comes as tech M&A spending accelerated dramatically through the summer, with the value of transactions announced in Q3 hitting the third-highest quarterly level since the end of the recent recession, according to 451 Research’s M&A KnowledgeBase.

Now in its tenth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster drew responses from 150 senior M&A professional on a variety of topics, including forecasts for types and structure of transactions, as well as the impact of recent events on their deal-making plans. Some of the highlights:

  • Private equity buyers are expected to play an increasingly significant role in the market. Nearly half of survey respondents (45%) forecast buyout shops would spend more in 2017 than they have in 2016, compared to just one-quarter (28%) who forecast lower spending.
  • Respondents indicated the White House clash between Donald Trump and Hillary Clinton is slowing deal flow far more than any disruption caused by the UK effectively severing economic and political ties with the European Union, following June’s Brexit vote.
  • Concerns about potential liability due to cybersecurity (think Verizon-Yahoo) are making buyers take a much closer look at the companies they plan to acquire.
  • Buoyed by a handful of strong recent tech offerings, the IPO market is expected to accelerate even more next year, according to a majority of survey respondents.

Respondents to the M&A Leaders’ Survey will get aggregate results, as well as selected comments and insight, emailed to them tomorrow. 451 Research subscribers should look for a full report on the survey later this week.

mofo-ma-forecast-oct-2016

A summer surge puts Q3 tech M&A back on record pace

Brenon Daly

Contact: Brenon Daly

For at least one quarter, it was as if we never turned the calendar on the record-breaking pace of tech M&A we saw in 2016. Dealmakers around the globe spent $153bn on 910 tech, media and telecom (TMT) transactions announced from July to September. That ranks the just-completed Q3 as the third-highest quarterly total since the end of the recession, according to 451 Research’s M&A KnowledgeBase. In fact, the rather unexpectedly strong M&A spending in Q3 exactly matched the average quarterly tally from 2015, when deal value hit its highest annual level since the internet bubble burst.

This summer’s surge brings the total spent by TMT acquirers around the globe so far in 2016 to $336bn, putting 2016 already ahead of the full-year totals for six of the past eight years. Looking ahead, if we assume the pace of spending from January-September continues in Q4, full-year 2016 deal value would hit some $440bn – the second-highest annual total since 2002, according to the M&A KnowledgeBase.

Spending in the summer quarter was dominated by a parade of blockbuster transactions. Overall, last quarter saw four of the five largest deals of the year announced. Significant Q3 transactions include:

  • Continuing its big-ticket expansion into technology growth markets, SoftBank paid $32.4bn for ARM Holdings. The deal stands as the second-largest semiconductor transaction in history, trailing only Avago’s $37bn purchase of Broadcom last year.
  • Intel ended its experiment of baking security directly into its silicon by divesting a majority stake of its McAfee division. The move values McAfee at just $4.2bn, meaning the business has lost about 40% of its value under Intel’s six-year ownership. For comparison, during that same period, Symantec’s market value has almost doubled.
  • Hewlett Packard Enterprise unwound a series of earlier software acquisitions that were supposed to drive its next leg of growth, taking a pretty big discount in the process. The portfolio, which was accumulated over a decade by its predecessor company, cost HPE more than $20bn to acquire, but was spun off to Micro Focus in a transaction valued at $8.8bn.
  • Oracle paid $9.3bn, or 11x trailing sales, for NetSuite, making the largest purchase of a subscription software vendor ever. NetSuite’s valuation was roughly twice the level that Oracle has paid for the license-based software providers it has bought over the years.
  • In the biggest sale of a VC-backed company in two and a half years, Walmart paid $3.3bn for e-commerce startup Jet.com.

Our full report on the blockbuster Q3 tech M&A activity will be available to 451 Research subscribers later today.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2016 910 $153bn
Q2 2016 1,043 $110bn
Q1 2016 1,039 $73bn
Q4 2015 1,063 $185bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn

Source: 451 Research’s M&A KnowledgeBase

Tech M&A this summer is a really big deal

Brenon Daly

Contact: Brenon Daly Kenji Yonemoto

It’s been a blockbuster summer for blockbuster deals. Since July, tech acquirers have announced more transactions valued at $1bn+ than any quarter since the recent recession. 451 Research’s M&A KnowledgeBase has tallied a record 33 ‘three-comma deals’ here in Q3, significantly above the average of roughly 20 transactions per quarter over the past two years. Overall, big-ticket purchases, which had a median value of $2.2bn, account for a staggering $130bn of the roughly $150bn in total spending on tech M&A this quarter.

The billion-dollar prints this summer came from across the IT landscape, according to the M&A KnowledgeBase, with three semiconductor deals valued at more than $1bn, the largest SaaS transaction in history and the biggest exit for a VC-backed startup in two and a half years. Another source that has (rather unexpectedly) contributed to deal flow at the top end of the market recently has been divestitures. Fully one-quarter of the $1bn+ deals in Q3 involved the sale of divisions of larger companies, such as Hewlett Packard Enterprise shedding its software unit and Intel divesting a majority stake of McAfee. (Several of the billion-dollar transactions announced in Q3, such as the HP Software and McAfee deals, effectively involve unwinding previous billion-dollar acquisitions.)

451 Research will publish a full report on M&A activity in Q3 early next week. But the headline for the quarter is certainly the record number of big prints, which helped push spending to the third-highest quarterly total since the end of the recession, according to the M&A KnowledgeBase.

1bn-deal-quarterly

Source: 451 Research’s M&A KnowledgeBase

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