Author: Brenon Daly

PE shops make the market for tech M&A in July

Brenon Daly

Contact: Brenon Daly

Spending on tech deals in July hit its second-highest monthly total so far this year, driven by the widespread dealmaking of private equity (PE) firms. Buyout shops figured into eight of last month’s 10 largest acquisitions, either as a seller or a buyer. The big-dollar prints by financial acquirers in July continue the recent surge of unprecedented activity by PE firms, which have largely displaced corporate buyers as the ‘market makers’ for tech M&A.

Overall, the value of tech transactions announced around the globe in July hit $28.9bn, roughly one-quarter more than the average month in the first half of the year, according to 451 Research’s M&A KnowledgeBase. Our research shows that PE firms accounted for some 40 cents of every dollar spent on tech deals last month — two to three times higher than the market share financial buyers held in recent years. Further, unlike the previous PE boom in the middle of the past decade that was dominated by single blockbuster transactions, the current record activity is coming from virtually all deal types.

Just in July, we saw financial acquirers announce transactions ranging from multibillion-dollar take-privates (the KKR-backed purchase of WebMD) to ‘synergy-based’ midmarket consolidation (Francisco Partners’ Procera Networks won a bidding war with another buyout shop to land Sandvine) to early-stage technology tuck-ins (Vista Equity Partners’ TIBCO scooping up one-year-old nanoscale.io). Overall, according to the M&A KnowledgeBase, PE firms announced a staggering 77 deals last month. That brought the year-to-date total to 511 PE transactions in the first seven months of 2017 — setting this year on pace to smash the full-year record of 680 PE deals recorded last year.

More broadly, last month featured a fair amount of old-line M&A, whether it was buyout firms trading companies among themselves (Syncsort) or mature tech industries consolidating (Mitel Networks reaching for ShoreTel or serial acquirer OpenText picking up Guidance Software, for instance). Those drivers put pressure on valuations paid at the top end of the market last month. According to the M&A KnowledgeBase, acquirers in July’s 15 largest deals paid just 2.4x trailing sales. Not one of last month’s 15 blockbusters got a double-digit valuation, although subscription-based ERP software startup Intacct came very close. For comparison, fully five of the 15 largest transactions in the first six months of 2017 went off at double-digit valuations.

No more high-rolling in infosec M&A

Brenon Daly

Contact: Brenon Daly

Casinos, which are always looking to have patrons spend more money, are notorious for making exits difficult to find. For that reason, the Mandalay Bay was the perfect setting for this week’s trade show for the information security industry, Black Hat. Why do we say that? Infosec companies — at least the big ones — are having difficulty in finding exits, too.

Not to overstretch the metaphor of the host city for Black Hat, but the infosec industry has stepped away from the high-roller tables. So far this year, just one infosec company (Okta) has made it public, while those that have headed toward the other exit haven’t enjoyed particularly rich sales. This year’s small bets are reversing the recent record run for M&A spending on infosec transactions.

Spending on overall infosec acquisitions in the first seven months of the year has put 2017 on pace for the lowest annual total in a half-decade, according to 451 Research’s M&A KnowledgeBase. This year’s paltry total of just $2.3bn in aggregate deal value means that 2017 will snap three consecutive years of increasing infosec M&A spending. Our M&A KnowledgeBase shows that in 2016, infosec buyers spent $15bn, more than any other year in history, while 2015 also came in as another strong year in 2015 with $10bn in transaction value.

To put the current dealmaking decline into perspective, consider this: The largest infosec print so far in 2017 wouldn’t even make the list of the 10 biggest infosec transactions of 2015-16. And while this year’s largest acquisition – CA’s $614m purchase of Veracode – represents a decent exit, it’s fair to say more was certainly expected from the application vulnerability startup. (Veracode had filed its IPO paperwork several months before the sale on the quiet, according to our understanding.) Similarly, this year’s second-largest VC exit saw TeleSign agree to a sale that valued it lower than its valuation in its previous funding round.

The reason why so few sizable infosec startups are looking to exit is mostly because they don’t have to exit. Thanks to ever-increasing CISO spending, venture capitalists are back writing big checks to subsidize infosec startups. And when we say ‘big checks,’ we mean the size that used to come in IPOs or the rounds that got announced during the 2014-15 boom in late-stage investing, when single rounds of $100m were announced from across the startup landscape. While those growth rounds were relatively plentiful across the IT scene two or three years ago, infosec is the only industry where the big checks are once again rolling in. In just the past three months, a half-dozen infosec startups have each raised rounds of about $100m.

Tech IPOs need to take the summer off

Brenon Daly

Contact: Brenon Daly

In the tech IPO market, as with most trends, it’s better to be early than late. That’s not always the case, of course, but typically the first few startups that emerge from a prolonged pause for new offerings do so with a ‘bankable’ story for Wall Street. It’s as if they are going public out of desire, rather than necessity. By the end of the cycle, however, the motivations for IPOs don’t often reflect that same confidence, a fact that investors tend to sniff out and discount accordingly.

As we ease into a summer break for new issues, it’s worth noting that we have certainly seen that cycle in the IPO market so far this year. By and large, the handful of enterprise-focused startups that have been first to (public) market in 2017 have raised more capital, created more market value and rewarded shareholders more than the companies that have followed. MuleSoft, Alteryx and Okta all emerged onto Wall Street with solid offerings in the spring, representing the first enterprise tech IPOs following last November’s US election. (New offerings had been on hold as investors assessed the impact of the unexpected election results on their existing portfolio of companies before placing more speculative bets on IPOs.)

On the other side, the companies that have emerged from the pipeline more recently haven’t found Wall Street to be such a welcoming place. The most recent tech offerings — storage startup Tintri and online meal delivery vendor Blue Apron — both cut the pricing of their IPOs, but even that hasn’t been enough. (The discount for Tintri was particularly sharp, leaving the company, which had raised $260m in the private market, with just $60m in proceeds from public-market investors. Built on some $320m in total funding, Tintri currently has a market value of slightly more than $200m.)

The valuation declines for both companies have continued uninterrupted on the stock market, leaving Blue Apron and Tintri underwater from their IPO prices, never mind the much higher valuations they received as private entities. In contrast, MuleSoft and Okta are both roughly twice as valuable as they were when they last received funding as private companies. For the tech IPO market to get back on track in the second half of 2017, it might be well-served to take the summer off and look to restart in the fall, rather than dragging out the current cycle.

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

Despite the jumpstart, the tech IPO market still sputtering

Brenon Daly

Contact: Brenon Daly

Though undoubtedly well-intentioned, the Jumpstart Our Business Startups (JOBS) Act has nonetheless turned out to be a bit of a misnomer. When it was originally signed into law in April 2012, the JOBS Act was heralded as a way to remove some of the perceived obstacles that kept young companies from pursuing an IPO. Over the past half-decade, however, the law has come up way short in jumpstarting the tech IPO market.

Undeterred by that, the authors of the JOBS Act have expanded the law, opening the way for all companies — rather than just the ones that met the original ’emerging growth’ criteria — to go public while limiting the amount of information they disclose. The change goes into effect today.

However, we can only imagine that the expanded JOBS Act will have as negligible impact on the tech IPO market as the original law had. That’s generally the case when bureaucrats introduce regulation to solve a market-based problem, and that goes double for when regulators focus on the wrong problem in the market. To be clear, the lingering problems in the tech IPO market are due to a breakdown of the fundamental components of any market: supply and demand. (See our recent full report on the tech IPO market.)

Crucially, the JOBS Act only really addresses the ‘supply’ portion of the equation by, ostensibly, making it easier for companies to go public. But once companies make it to the NYSE or Nasdaq, they soon discover the real problem: Wall Street doesn’t particularly want them. Sure, tech vendors such as MuleSoft and Okta have both put up strong offerings so far in 2017. But we would argue that startups that can raise a quarter-billion dollars from private-market investors hardly need help raising capital through a public offering. (Indeed, both Okta and MuleSoft raised more as private companies than they did in their upwardly revised public offerings.)

Without increased demand from investors for newly issued equity from the hundreds of tech startups that have the financial profile to go public, the tech IPO market will continue to sputter. Paperwork from Washington DC won’t change that.

What’s missing in the tech M&A market?

Brenon Daly

Contact: Brenon Daly

When big acquirers step out of a market, they can leave behind a big hole. In the case of the current tech M&A market, it’s a multibillion-dollar hole. We noted in our full report on the just-closed second quarter that the value of tech and telecom acquisitions dropped 30% from Q1 to Q2, hitting a four-year low for quarterly spending of just $55bn in the April-June period, according to 451 Research’s M&A KnowledgeBase. The main reason for the recent slump in spending is the disappearance of many of the tech industry’s biggest buyers.

At the start of this year, many well-known acquirers — the ones that often serve as bellwethers for the tech industry — were actively inking significant deals. Intel, Cisco and Hewlett Packard Enterprise all announced acquisitions valued at more than $1bn in Q1. Since then, however, most of the busiest tech giants have shifted their M&A machines into neutral. In their place, two groups of buyers have emerged: old-line telcos and private equity (PE) firms.

Yet these newly assertive acquirers haven’t come close to closing the gap, in terms of M&A spending, left by the missing corporate shoppers. (That’s not for lack of effort among the financial buyers. PE firms announced a record level of tech transactions in Q2, eclipsing the number of deals done by US-listed corporate acquirers for the first time in history, according to the M&A KnowledgeBase. Our Q2 report has more details on activity and forecasts for the buyout shops.)

As one indication of what went missing when big-name corporate acquirers took an early summer hiatus from big-dollar deals, consider this: Only one of the five largest transactions announced in the first half of 2017 printed in Q2. That shift in strategy and spending by corporate buyers dramatically crimped deal flow at the top end of the tech M&A market. According to the M&A KnowledgeBase, the average value of the 20 largest tech transactions announced in the first three months of 2017 stood at $2.9bn. That’s 70% higher than the average of $1.7bn for the 20 largest deals announced in the just-completed Q2.

Ivanti keeps rolling along, adds RES Software

Brenon Daly

Contact: John Abbott, Brenon Daly

The rollup continues at Ivanti, the PE-backed company that itself is a bit of a rollup, created from the combination of LANDESK and HEAT Software in January. In its second acquisition under its new name, the Clearlake Capital portfolio company reached for user workspace management and IT automation firm RES Software. Although terms weren’t disclosed, subscribers to 451 Research’s M&A KnowledgeBase can see our deal record and proprietary estimate of the price and valuation in this transaction.

For years, RES fought it out in the virtual desktop management space with direct rival AppSense, while LANDESK, once part of Intel, tried to hold its ground in traditional desktop management. In 2010, Thoma Bravo stepped in to buy LANDESK from its then-owner Emerson Electric for $230m, supplementing it with a handful of smaller firms and topping it off with AppSense in March 2016. (While larger than RES, AppSense garnered basically the same multiple as RES in its sale to LANDESK. 451 Research M&A KnowledgeBase also has estimates for the AppSense sale.)

In January, Clearlake stepped in to buy LANDESK, a transaction that we understand valued the company at $1.15bn. The PE firm combined it with its own portfolio company, HEAT Software — itself a combination of FrontRange and Lumension — and eventually gave the cobbled-together infrastructure software giant its new name, Ivanti.

The rechristened company offers products in four main areas: client management, endpoint security, IT service and support software, and enterprise mobility management. Overall, it employs roughly 1,300. RES, with roughly 250 employees, adds complementary software tools. The startup is strongest in user workspace management and automation tools, but also has an enterprise app store, file sharing and synchronization, IT service management desk, and (most recently) endpoint security. RES also brings more of a European focus – the company was founded in Holland in 1999 and maintains a fairly strong business in the Benelux region.

From a technical point of view, it’s likely RES Automation Manager will be the most valuable asset that can be cross-sold to the rest of the Ivanti customer base. Virtual desktop management is a maturing space that’s now mostly dominated by Citrix, VMware, Microsoft, AWS and Google, alongside a growing set of desktop-as-a-service providers using technology from one or more of those companies. This broad competitive pressure weighed heavily on RES’s valuation, as surely as it did in the sale of rival AppSense a little more than a year ago.

Sizzle turns to fizzle in tech M&A, as Q2 spending slumps

Brenon Daly

Contact: Brenon Daly

After two consecutive years of surging tech M&A, we now have two consecutive quarters of slumping tech M&A. This year opened with Q1 spending on tech deals totaling only slightly more than half the average quarterly level of the recent two-year record run. Spending in Q2 dropped even further, leaving the value of tech deals announced around the globe for the April-June period at its lowest quarterly level in four years, according to 451 Research’s M&A KnowledgeBase.

Altogether, acquirers announced $56bn worth of global tech and telco transactions in Q2, according to 451 Research’s M&A KnowledgeBase. That represents a decline of 29% from the $79bn in Q1 2017, with all three of the past months suffering through a pronounced summer slowdown. (Our M&A KnowledgeBase shows every single month of Q2 came in below the average monthly spending in Q1.)

One of the main reasons for the drop from Q1 to Q2 is the recent disappearance of the big enterprise vendors doing big deals. In the first three months of the year, Intel, Cisco Systems and Hewlett Packard Enterprise all announced acquisitions valued at more than $1bn. However, since then, tech bellwethers have been replaced primarily by telco operators and private equity firms. (PE shops merit their own mention, as they printed more tech deals in Q2 than any quarter in history. However, in keeping with the current trend in the overall tech M&A market, their acquisitions were smaller than they have been. For instance, the number of PE-led deals with an equity value of more than $1bn dropped from nine in Q2 2016 to just five in Q2 2017.)

At the midpoint of 2017, this year is tracking to roughly $280bn worth of tech transactions. That would represent the lowest annual total in four years, and a dramatic slowdown from the roughly $500bn spent in 2016 and $600bn in 2015. We will have a full report on Q2 tech M&A activity for 451 Research subscribers next week, after an extended holiday weekend.

For PE, secondaries become primary

Brenon Daly

Contact: Brenon Daly

In many ways, the tech buyout barons have themselves to thank for the record run of private equity (PE) activity so far in 2017. The number of so-called ‘secondary transactions,’ in which financial acquirers sell their portfolio companies to fellow financial buyers, has increased for three consecutive years, according to 451 Research’s M&A KnowledgeBase. The pace of PE-to-PE deals has accelerated even more this year, with an unprecedented 64 secondary transactions already in 2017 — more than twice the average number in the comparable period over the past half-decade.

The fact that secondaries have become primary for PE shops represents a fairly noteworthy change in both the buyout shops and their backers, the big-money limited partners (LPs) of the funds. In years past, LPs have frowned on the practice because, in some cases, they might be investors in both the PE funds that are doing the buying as well as the ones doing the selling, which doesn’t really reduce their risk in that particular holding — nor do they truly exit that investment. The practice has been criticized by some for being little more than buyout shops trading paper among themselves.

For that reason and others, our M&A KnowledgeBase indicates that the number of PE-to-PE deals in the first half of the years from 2002-10, when the tech PE industry was relatively immature, averaged only in the mid-single digits. In others words, PE shops are currently doing 10 times more secondary transactions than they did in the first decade of the millennium. Recent tech deals that have seen financial buyers on both sides include Insight Venture Partners’ sale of SmartBear Software to Francisco Partners after a decade of ownership, TA Associates’ sale of Idera to HGGC, and Summit Partners’ sale of most of Continuum Managed Services to Thoma Bravo.

These types of transactions appear likely to remain the exit of choice for PE shops, as both the number of funds and the dollars available to them continue to surge to new highs. The increasing buying power of buyout firms stands in contrast to the diminished exits provided elsewhere for portfolio holdings. The tech IPO market has never provided much liquidity to PE shops. (For instance, neither Thoma Bravo nor Vista Equity Partners has seen any of their tech holdings make it public.) Meanwhile, corporate acquirers — the chief rival to financial buyers — have dialed back their overall M&A programs, and in some cases have found themselves outbid or outsprinted in PE-owned deals by ultra-aggressive buyout shops.

Hard times for software M&A

Brenon Daly

Contact: Brenon Daly

Software M&A has fallen on hard times. Spending on application software deals has dipped to its lowest level in recent years, with the value of purchases so far in 2017 dropping to less than half the amount in the comparable period of each of the past three years, according to 451 Research’s M&A KnowledgeBase. The reason? The bellwethers aren’t buying big.

Salesforce has only done one small acquisition so far this year, after a 2016 shopping spree that saw it ink 12 deals at a cost of $3.2bn, according to an SEC filing. Similarly, Oracle’s largest print in 2017 is less than one-tenth the size of last year’s $9.5bn consolidation of NetSuite, which stands as the largest-ever SaaS transaction. (Subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms of Oracle’s big print this year, its reach for advertising analytics startup Moat.) SAP has been entirely out of the market in 2017.

Since large vendors are also typically large acquirers, their absence has left application software a dramatically diminished sector of the overall tech M&A market. Application software accounts for just $7.7bn of the $132bn in announced deal value so far in 2017, according to the M&A KnowledgeBase. On an absolute basis, that’s the lowest level for the opening half of any year since the recent recession.

More tellingly, however, application software’s ‘market share’ has fallen to only about a nickel of every dollar that tech acquirers across the globe have handed out so far this year. Our M&A KnowledgeBase indicates that the 6% of total tech M&A spending in 2017 for application software is just half its share over the previous five years.

Trust-busting in the Trump era

Brenon Daly

Contact: Brenon Daly

Despite President Trump often positioning himself as ‘dealmaker in chief,’ his administration just cast a chill over M&A. The Federal Trade Commission has said that it plans to block the proposed combination of DraftKings and FanDuel, the two largest websites for betting on fantasy sports. The deal was announced last November, just two weeks after the election of Trump supposedly signaled a more business-friendly climate in Washington DC.

That expectation has helped drive Wall Street to record highs, with the broad-market US indexes all surging about 20% since the vote. The confidence in the stock market was initially expected to extend to the M&A market, which has historically been closely correlated with Wall Street. In April, for instance, a plurality of respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster said Trump’s economic policies have stimulated dealmaking. The 41% who reported a ‘Trump bump’ to M&A was almost twice the level that said the president’s policies have slowed acquisition activity.

And yet, regulators are moving to spike a combination of two startups that just might represent the only way for either of them to survive. It sounds a bit dramatic, but then, the landscape is littered with startups that have spent their way out of business. Even raising $1bn in venture backing — as DraftKings and FanDuel combined to do — doesn’t guarantee survival. Not when startups with low-margin transactional business models spend money hand over fist on advertising against each other in what is a barely differentiated service.

While the two companies decide whether to fight the FTC ruling, some startup executives and their backers may need to reconsider their potential exits. For the most part, regulators during the Obama administration didn’t trouble themselves with the rare bits of consolidation in Silicon Valley. (The two largest VC-backed sites for freelance work — oDesk and Elance — got together in 2013 without any review from Washington.) Based on the DraftKings-FanDuel decision, however, dealmakers might need to plan on more trust-busting in the Trump era. For instance, the far-fetched talk about a pairing between Uber and Lyft should now be considered dead before it ever gets born.