Author: Brenon Daly

Trust-busters push BazaarVoice to unplug PowerReviews

Brenon Daly

Contact: Brenon Daly

As industry consolidation goes, Bazaarvoice’s mid-2012 purchase of rival PowerReviews was definitely a small-scale move. The deal only added a little more than $10m – or a boost of about 10% – to the top line at Bazaarvoice, a consumer reviews site that had just gone public at the start of 2012. And while the two startups regularly beat up on each other, they were arguably facing much more formidable competition from rating-and-review offerings that were often baked into the websites of many of the largest and most-active online retailers.

In other words, there was little to suggest that the proposed $152m cash-and-equity transaction would even register any antitrust attention, much less any trustbusting. And yet, on Tuesday afternoon, Bazaarvoice bowed under the pressure of a lawsuit brought a year ago by the US Department of Justice and essentially unwound that acquisition. Bazaarvoice plans to divest PowerReviews to small Chicago-based vendor Viewpoints Network.

Viewpoints has raised just $5m in funding since its founding in 2006 and told us that it won’t need to raise more to cover the purchase of PowerReviews. That suggests Bazaarvoice is recouping only a fraction of the $152m that it paid for PowerReviews two years ago. Viewpoints currently has 20 employees and, post-acquisition, will have about three times that number. Further, it will substantially boost its revenue when it buys PowerReviews, which we estimate is running at about $10m in revenue.

Of course, that assumes the planned acquisition goes through. (Expectations are that the deal will close before the end of July.) At this point, only a letter of intent has been signed between the parties. It still needs to be finalized, and then regulators have to approve the latest purchase of PowerReviews. As we have seen, regulatory clearance is not always a given.

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A tale of two IPO markets

Brenon Daly

Contact: Brenon Daly

It’s not quite the clichéd ‘best of times, worst of times’ in the tech IPO market right now, but there’s a clear split in fortunes for companies coming to market. Whimsical consumer technology firms are back in favor, while the more serious enterprise-focused tech vendors are struggling to find buyers for their equity. That was shown in sharp relief in the divergent receptions of two tech companies – one from each of the broad sectors – that debuted Friday morning.

Representing enterprise tech vendors, we have Five9. On paper, the call-center software provider would appear to have a bullish profile for Wall Street: a pure SaaS delivery model, solid growth (30%+ in 2013) and a big opportunity in front of it (the company sizes its existing market at some $22bn). And how did that go over with investors? Well, Five9 had to take a sharp discount to even get public. It had planned to sell its shares at $9-11, but instead priced at just $7 and closed Friday at $7.52.

While Five9 was discounting its offering, the IPO from its consumer counterpart, GrubHub, was headed very much in the opposite direction. The online takeout ordering service sold more shares than originally planned at a higher price than originally planned. After pricing its offering at an above-range $26 per share, it closed at $34 on the NYSE.

The discrepancy in valuation between the enterprise and consumer companies is even more startling. Wall Street says Five9, which has roughly 48 million (undiluted) shares outstanding, is worth about $360m. That works out to about 4.3x 2013 revenue of $84m. On the other hand, GrubHub is valued at some $2.7bn, or nearly 20x 2013 revenue.

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What’s behind door number two? An IPO

Brenon Daly

Contact: Brenon Daly

For tech startups considering the two possible exits so far this year, an IPO is clearly door number two. Sure, there’s plenty of money to be made in taking a company public. And the valuations that Wall Street is handing out for recent debutants – notably the double-digit multiple for Varonis Systems and a solid 6x trailing sales for A10 Networks – are far from paltry. But there hasn’t been anything that comes close to a ‘WhatsApp’ in the IPO market so far this year.

Granted, the $19bn sale of the five-year-old mobile messaging startup is something of an anomalous event, so we will go ahead and set aside that transaction. But even leaving out the largest-ever sale of a VC-backed vendor, there were still three other sales of VC-funded firms in the first quarter that went off at more than $1bn. When we look at the other exit, we would note that not a single tech firm that went public in the first three months of 2014 created more than $1bn of market value.

Further, as we skim down the list in The 451 M&A KnowledgeBase of VC-backed startups that have opted for a trade sale so far this year, it’s hard not to see that IPOs – despite all of the talk about how the JOBS Act has made it easy to go public and a ‘record’ Q1 – have fallen out of favor.

Consider Mandiant, a 10-year-old information security provider running at more than $100m in bookings. Last summer, the company indicated to us that it was looking to raise one round of late-stage capital and then go public in 2015. Instead, it sold to FireEye for just under $1bn, mostly in the acquirer’s own freshly printed stock. Elsewhere, AirWatch garnered some 15x bookings in its $1.5bn sale to VMware, a valuation that rival MobileIron is unlikely to trade at – not initially, anyway – when it comes public later this year.

And even down in the mid-cap market, Coverity gave up on its long-held plan to go public, selling instead to one of its customers, Synopsys. From our perspective, Coverity certainly looked like a reasonable candidate to be a public company: it had little pressure to sell (having taken in just one round of funding and sitting on about $25m) and was growing at a 20-30% clip while nearing $100m in sales. Instead, it sold for $375m, valuing itself at 4.7x trailing sales. That’s about a turn higher than the broader tech M&A multiple, but lower than what Wall Street typically hands out for companies sharing Coverity’s profile.

But the IPO, which has always enjoyed a sort of premium standing among most VCs and executives, appears on the cusp of reclaiming its top-ranked position. At least two enterprise tech vendors are currently on file for what will almost certainly be hot offerings. Both Arista Networks and Box will undoubtedly be ‘billion-dollar babies’ when they come to market in early summer. You can read more about both the recent M&A market, which is clipping along at a record level currently, as well as the outlook for IPOs in our Q1 M&A report published earlier this week.

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For tech M&A, the go-go days are going again

Brenon Daly

Contact: Brenon Daly

At least for the opening quarter of 2014, the go-go days are going again. Overall M&A spending in the tech, media and telecom (TMT) market set a record for the first three months of any year since the Internet bubble popped in 2000. Across the globe, the aggregate value of Q1 deals totaled $128bn, according to The 451 M&A KnowledgeBase. That puts 2014 on a run rate to hit an astonishing half-trillion dollars in M&A consideration for the full year.

Spending in the just-completed January-March period came in at roughly three times the level of a typical quarter in the years since the end of the recession. (On its own, the equity value of the proposed Comcast-Time Warner Cable transaction roughly equals the amount spent on all TMT deals in a typical post-recession quarter. But even backing out that mammoth transaction, Q1 spending would still stand as a post-recession quarterly record of $83bn.)

To indicate just how far Q1 stands out from the recent recession, consider this: total M&A spending in just Q1 2014 came in only 10% lower than the full year of 2009. So far this year, we’ve seen such blockbuster prints as the second-largest TMT transaction overall since 2002 (Comcast’s pending acquisition of Time Warner Cable), as well as the biggest price ever paid for a VC-backed startup (WhatsApp’s $19bn exit to Facebook).

While those two deals helped push M&A spending in Q1 to a new high-water mark, we saw solid activity across a number of submarkets that haven’t been busy since before the recession. Large-scale consolidation continued on a steady pace (Comcast-Time Warner Cable, plus several European telco transactions), but underneath that, the midmarket saw an above-average number of deals, with the median value surging to a post-recession record high. (Also, valuations of those midmarket transactions in Q1 basically matched the big-ticket deals, which hasn’t necessarily been the case in recent years.)

And finally, deal flow at the start of this year reflects an unprecedented level of youthful exuberance. Facebook, with its back-to-back purchases of WhatsApp and Oculus VR, obviously stands out. But we would add Google and FireEye to the list of acquirers that did uninhibited, speculative transactions so far in 2014. Look for our full report on Q1 M&A activity and valuations, plus our assessment of the current tech IPO market, in our next 451 Market Insight.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2014 816 $128bn
Q4 2013 787 $59bn
Q3 2013 829 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $59bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: The 451 M&A KnowledgeBase

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451 Research Tech M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

The momentum that drove tech M&A spending to a post-recession record level in 2013 is continuing to roll into this year. In just the first three weeks of January, we’ve already seen blockbuster transactions such as Google’s effort to reach inside your home with its $3.2bn purchase of Nest Labs; the largest-ever tech acquisition by a Chinese company (Lenovo’s pickup of IBM’s x86 server business); and VMware going mobile, inking the biggest deal in its history by paying $1.54bn for AirWatch.

But what does the rest of 2014 look like? What broad-market trends are likely to continue to impact deal flow this year? And what specific drivers are expected to shape M&A and IPOs in some of the key enterprise IT markets, such as SaaS, mobility and information security? Well, we’ll have a few answers for you as we look ahead in our annual Tech M&A Outlook webinar. The hour-long event is scheduled for Tuesday, January 28 at 1:00pm EST, and you can register here.

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

The buyout bonanza

Brenon Daly

Contact: Brenon Daly

As corporate acquirers work through an increasingly fractured tech landscape, their financial rivals are finding a bonanza of opportunities there. In particular, private equity (PE) firms got busy picking up castoff businesses and unloved companies in a spree of multibillion-dollar transactions in 2013. That sent spending by PE firms in 2013 to a post-recession record, both for the absolute amount spent as well as the proportion of PE dollars in overall spending on acquisitions. Fully one out of every four dollars handed out in tech M&A consideration came from buyout shops – nearly twice the level of any post-recession year.

The record in 2013 was driven by mammoth deals that haven’t been seen since prelapsarian days. Three of the 10 largest transactions in the entire tech sector last year involved PE shops. More broadly, cash-rich buyout firms showed they were ready once again to do big deals, targeting overlooked and out-of-favor public companies or huge units at tech giants that are shedding businesses as they seek elusive growth. There were plenty of big-ticket examples of both of these types of transactions in PE deal flow last year.

In terms of take-privates, Dell obviously topped the list. (Though the MBO stands as the largest PE deal since 2007, we would note that the transaction accounted for less than half of last year’s total PE spending. Even excluding the Dell MBO, spending on buyouts handily topped each of the annual totals since 2008.) Yet, three other LBOs also topped $1bn last year. Add to that, there were massive carve-outs and divestitures that boosted spending totals, including Qualcomm selling its Omnitracs unit to Vista Equity Partners and Intuit punting its financial services unit to Thoma Bravo, among other transactions.

PE activity

Year Deal volume Deal value Percentage of overall tech M&A spending
2013 184 $61bn 25%
2012 161 $25bn 14%
2011 204 $29bn 13%
2010 143 $27bn 14%
2009 103 $13bn 9%
2008 107 $17bn 6%
2007 150 $103bn 24%

Source: The 451 M&A KnowledgeBase

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FireEye puts the capital market to work in Mandiant deal

Brenon Daly

Contact: Brenon Daly

A little more than three months after going public, FireEye is handing some $883m of that newly minted equity – along with $107m in cash – to acquire Mandiant. We would note this is one of the few times in the past decade that a high-flying debutant has used its IPO to pull off a transaction like this. In fact, most of the other fast-growing enterprise tech companies that have gone public in the past two years and trade at double-digit valuations have done only small tuck-ins (Splunk, ServiceNow) or stayed out of the M&A market altogether (Workday, Tableau Software). And that’s despite having boatloads of cash and richly valued shares thanks to their offerings.

And to be clear, this equity-heavy acquisition wouldn’t have been possible without an IPO, or at the very least, privately held FireEye would almost certainly have had to give up far more of the company if it wanted to acquire Mandiant. (As it is, FireEye is only giving up 13% of the company, but will add about 40% to its revenue this year.) Recall that when FireEye raised a round almost exactly a year ago, the company was valued at slightly more than $1.1bn, according to our understanding. The company is now worth more than $6bn on the Nasdaq.

Based on total consideration of $990m, the deal stands as the eighth-largest infosec transaction. (The largest deal in the sector, of course, is well known to many of many FireEye executives, a number of whom came over from McAfee after its $7.7bn sale to Intel.) Although FireEye is handing over nearly $1bn for Mandiant, by many measures it is getting a bargain. For starters, there’s the currency it is using. FireEye will cover approximately 90% of the purchase of the startup with its own richly valued equity. At a market capitalization of $6.2bn, FireEye is valued at almost 40 times expected 2013 revenue of $157m. (For those who prefer non-GAAP financials, that works out to 25 times projected 2013 billings of $245m.)

The unusual acquisition certainly found solid support on Wall Street. Investors bid FireEye stock up more than 20% to the highest point of its short history. Shares of FireEye, which first traded in the mid-$30s in September, topped $50 in mid-Friday trading. We’ll have a full report on the transaction on the 451 Research website later today.

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

Clouds come into view for top tech deal of 2013

Brenon Daly

Contact: Brenon Daly

Before we flip the final page on the 2013 calendar, we have one unfinished item of business for this year: handing out the annual Golden Tombstone. The award is chosen each year by corporate development executives who look around at the handiwork of their peers in the tech industry, and then vote in our survey for whichever transaction they think had the biggest impact during the year. (It’s like an Oscar in the film industry, except Golden Tombstone isn’t trademarked, yet.)

Our past winners have come from a number of varied and, for the most part, relatively well-established tech sectors. That’s not necessarily the case for this year’s winner. For the first time ever, a cloud deal took top honors: IBM’s mid-2013 acquisition of Softlayer.

The acquisition substantially boosts Big Blue’s hosting and cloud services, particularly around IaaS. That’s a key initiative for IBM, which has struggled to find any growth in the past two years, as competition in the cloud infrastructure arena – led by Amazon Web Services – gets increasingly cutthroat. IBM’s purchase of Softlayer received almost twice as many votes as the runner-up, Microsoft’s purchase of Nokia’s handset business.

And with that, we’ll wrap up 2013. But before we go, we hope all of you enjoy you a healthy and happy holiday season – and wish you nothing but accretive deals in 2014.

Top vote-getter for ‘most significant tech transaction’

Year Deal
2013 IBM’s acquisition of Softlayer
2012 VMware’s acquisition of Nicira
2011 Google’s acquisition of Motorola Mobility
2010 Intel’s acquisition of McAfee
2009 Oracle’s acquisition of Sun Microsystems
2008 Hewlett-Packard’s acquisition of EDS
2007 Citrix’s acquisition of XenSource

Source: 451 Research Tech Corporate Development Outlook Survey

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Tech companies find it hard to bid against Wall Street

Brenon Daly

Contact: Brenon Daly

Tech companies are increasingly being outbid for the startups they want to acquire by a deep-pocketed rival that hasn’t been heard from in a while: Wall Street. In our recent survey of corporate development executives, nearly half of the respondents (46%) reported that they expected the IPO market to offer more competition in 2014 for target companies. In the seven-year history of the 451 Research Tech Corporate Development Outlook Survey, the threat of dual tracking has never been ranked that high.

A quick look at some of the platinum valuations being lavished on recent IPOs certainly helps explain why startups are looking to exit to the public market rather than sell out. By our count, roughly a dozen tech companies that went public this year – representing, astoundingly, about half of the entire IPO class of 2013 – currently trade at a valuation of greater than 10 times trailing sales. A few recent debutants have been bid up by public investors to the point where they are trading at more than 30x trailing sales.

Looking ahead to next year, corporate development executives, who represent the main buyers in the tech M&A market, expect to see a record number of new offerings. On average, respondents guessed that 29 tech companies would go public in 2014. That’s higher than previous years, when the forecast has ranged basically from the low- to mid-20s. (You can see more on the IPO market outlook, as well as M&A activity and valuation forecast, in our full report on this year’s survey.)

Projected number of tech IPOs

Period Average forecast
December 2013 for 2014 29
December 2012 for 2013 20
December 2011 for 2012 25
December 2010 for 2011 25
December 2009 for 2010 22
December 2008 for 2009 7
December 2007 for 2008 25

Source: 451 Research Tech Corporate Development Outlook Survey

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451 Research’s annual M&A outlook survey

Brenon Daly

Contact: Brenon Daly

To many tech M&A market observers, the fact that deal flow in 2013 has dropped every single month this year – culminating in double-digit percentage declines from each of the past two years – is a bit puzzling. After all, companies have never had more money to put to work in M&A than they do now, and they are increasingly looking to acquisitions to provide whatever growth they can wring out of the ever-maturing IT market. And yet, deals haven’t happened.

Not to say ‘we told you so,’ but the notable ebb in the M&A market this year is exactly what the market told us last December would happen in 2013. A year ago, in the annual 451 Research surveys of dealmakers and their advisers, both groups clearly indicated that they expected to be less busy in 2013. Specifically, they predicted their lowest level of M&A activity since the end of the recession – a bearish forecast that has indeed come true. Deal volume in 2013 is tracking to its lowest full-year level since 2009.

In last year’s survey, fully one out of five corporate development executives – representing the main buyers in the tech M&A market – indicated that they expected to cut back on their dealmaking in 2013. (You can see our full report on those survey results.) An identical percentage of bankers, who are typically more optimistic, reported that their pipeline was drier than it had been. (You can see our full report on those survey results.)

So what should we expect for 2014? Well, that’s exactly what we hope to find out as we once again step in market with our annual M&A Outlook surveys. We always appreciate the time and insight that the M&A community gives to the surveys, and once again look to you to share with us the ‘wisdom of the crowds.’ If you are a corporate development executive, click here for this year’s survey; if you are a senior tech investment banker, click here for this year’s survey.

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