Author: Brenon Daly

Don’t bet against Bezos

Brenon Daly

Contact: Brenon Daly

A day after Amazon’s Jeff Bezos put out an open-ended tweet to the world asking where he should donate his money, we now know at least one early recipient of his philanthropy: Whole Foods Market. OK, the $13.7bn acquisition of the grocer isn’t exactly charity, but nor is it an example of a hardened dollars-and-cents M&A strategy.

Instead, it might be most accurate to think of the Amazon-Whole Foods pairing as a blend of giving and buying, a deal that’s being attempted by one of the few CEOs who could possibly get away with spending billions of dollars of shareholder money to effectively take his company backward in time. For lack of a better term, think of Bezos’ move as a ‘patronage purchase.’

Whole Foods, which was being stung by a gadfly hedge fund, needed a buyer for the 430-store chain. (From our side, we were half expecting the grocery chain’s CEO, John Mackey, to try a Kickstarter-funded management buyout.) Amazon — or more accurately, Bezos — is convinced that the world’s largest online retailer needs a brick-and-mortar presence.

Undoubtedly, there’s a certain logic to building up the distribution network for physical goods, which account for the bulk of Amazon’s revenue. However, those sales aren’t particularly attractive, at least economically. To put some numbers on that, consider the operations for Whole Foods, a real-world business that Amazon is buying, compared with AWS, a cloud business that Amazon has built. Conveniently, both businesses generated roughly the same amount of revenue in the most recent quarter, $3.7bn. Leave aside the fact that AWS grew 43% while Whole Foods flatlined and just look at the operating margin: Whole Foods posted just $171m of operating income, only one-fifth the $890m that AWS generated.

Conventional corporate strategy would typically encourage a company to allocate resources to the business with the highest return (AWS), rather than spending billions of dollars to buy its way into a low-growth, low-margin adjacent market. But then, Bezos has never been conventional.

Historians will remember that Bezos pushed ahead with a $1.25bn convertible note offering for Amazon in 1999. At the time, the deal — the largest-ever convertible by a tech vendor — flew in the face of conventional corporate finance, giving those investors bearish on the money-burning company even more reason to mock ‘Amazon dot bomb.’ However, given that those notes converted at a price of $156 each, compared with the current market price for Amazon shares of nearly $1,000 each, it’s fair to say that Bezos has created a certain amount of goodwill on Wall Street. (Investors gave him the benefit of the doubt on the Whole Foods pickup, nudging Amazon shares slightly higher after the announcement.)

Similarly, by all accounts, Bezos’ purchase of the existentially threatened The Washington Post in 2013 has brought renewed growth to that stalwart newspaper. And while that $250m acquisition was done from Bezos’ own pocket (rather than Amazon’s treasury), it actually lines up fairly closely with the proposed reach for Whole Foods. Both groceries and newspapers represent once-thriving industries that have been decimated by a combination of technology and shifting consumer consumption patterns. In contrast, Amazon has built a half-trillion-dollar market cap on both of those trends, making it hard to bet against Bezos.

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

The one and only exit for infosec’s unicorns

Brenon Daly

Contact: Brenon Daly

In just the past month, four different information security (infosec) startups have all pulled in single rounds of funding that typically would have only been available from an IPO. In addition to filling company coffers, however, the roughly $100m slug of capital raised by each of the quartet — CrowdStrike, Tanium, Netskope and Illumio — may also influence company strategy, at least when it comes time to seek an exit. Rather than pursue a sale of the business, which is the most likely outcome for any startup, these infosec unicorns will likely eye the door that leads to Wall Street.

In other words, when it comes to the two exit options available to these security startups, they should be modeling themselves more on Okta than on AppDynamics. The reason? Of the 17 sales of VC-backed vendors valued at more than $1bn since January 1, 2014, not a single startup has come from the infosec market, according to 451 Research’s M&A KnowledgeBase. Mandiant came close to a 10-digit exit in its early 2014 sale to FireEye, but the announced value of that deal stands at $989m. (Of course, FireEye paid for the vast majority of that in stock, which lost half of its value within four months of the transaction and has never regained its early-2014 level.)

Infosec is conspicuous by its absence among the big-ticket purchases of venture-backed companies. Virtually every other major tech sector has realized some unicorn exit, including mobility (WhatsApp, AirWatch), e-commerce (Jet.com), storage (Cleversafe), the Internet of Things (Jasper Technologies) and cloud (Virtustream). The largest sale of a VC-backed infosec firm over the past three and a half years, according to the M&A KnowledgeBase, is Trustwave’s $810m sale to Singtel in April 2015. (Although Trustwave did raise venture money, notably from FTV Capital, it hardly fits the classic definition of a startup. Instead, it is more accurately viewed as a rollup, having consolidated 16 other businesses since its founding in 1995.)

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

Onapsis on the block?

Brenon Daly

Contact: Brenon Daly

Enterprise application security startup Onapsis quietly kicked off a sale process about a month ago, according to our understanding. Several sources have indicated that Onapsis, which focuses on hardening security for SAP implementations, has hired UBS to gauge interest among buyers. And while there undoubtedly will be acquisition interest in the startup, Onapsis may ultimately prove to be a bit of a tough sell. The reason? The most obvious buyers for the company don’t typically pay the type of valuations that Onapsis is thought to be asking.

In many cases, the heavy-duty SAP systems that Onapsis helps secure were implemented by one of the big consulting shops. So at least theoretically, it’s not a big leap to imagine one of these consultancies buying Onapsis and offering its platform, exclusively, to help safeguard these mission-critical systems and the data they generate. (Indeed, Onapsis already has partnerships with many of the big consulting firms, including KPMG, PWC, Accenture and others.) While that strategy may be sound, M&A always comes down to pricing. And that’s why we would think it’s probably more likely than not that eight-year-old Onapsis remains independent.

According to our understanding, Onapsis is looking to sell for roughly $200m, which would be twice the valuation of its September 2015 funding. The rumored ask works out to about 8x bookings in 2016 and 4.5x forecast bookings for this year. For a fast-growing SaaS startup, those aren’t particularly exorbitant multiples. Yet they may well price out any consulting shops, which have typically either picked up small pieces of specific infosec technology or just gobbled up security consultants. Any reach for Onapsis would require a consulting firm to pay a significantly richer price than the ‘tool’ or ‘body’ deals they have historically done.

A muted May for tech M&A

Brenon Daly

Contact: Brenon Daly

The summer slowdown has arrived early in the tech M&A market. Overall, tech acquirers announced relatively few transactions in the just-completed month of May, and many of the deals that did get done went off at a discount. According to 451 Research’s M&A KnowledgeBase, the value of announced tech deals around the globe in May hit just $25bn, as a raft of low-multiple transactions kept a lid on total spending. Additionally, the number of tech transactions in May remained below levels of recent years.

At the top end of the market, deal flow was decidedly mixed in May. On the one hand, acquirers announced five transactions valued at $1bn or more in May, nearly matching the highest monthly total so far this year recorded in 451 Research’s M&A KnowledgeBase. Big prints included Apollo Global Management’s $2bn take-private of West Corporation and RCN Telecom’s consolidation of Wave Broadband for $2.4bn. However, a number of those nine- and ten-digit deals came at below-market multiples. Of the 20 largest tech deals announced in May, fully nine of them were valued at just three times trailing sales or less, according to 451 Research’s M&A KnowledgeBase

The $25bn spent in May essentially matched the average monthly level of spending for 2017. However, it is only about half the amount, on average, that tech acquirers doled out each month over the record stretch during 2015-16. With five months of 2017 already in the books, this year is tracking to just $300bn worth of tech transactions this year. 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.

Xactly exits

Brenon Daly

Contact: Brenon Daly

Two years after coming public, Xactly is headed private in a $564m buyout by Vista Equity Partners. The deal values shares of the sales compensation management vendor at nearly their highest-ever level, roughly twice the price at which Xactly sold them during its IPO. According to terms, Vista will pay $15.65 for each share of Xactly.

Xactly’s exit from Wall Street comes after a decidedly mixed run as a small-cap company. For the first year after its IPO, the stock struggled to gain much attention from investors. Shares lingered around their offer price, underperforming the market and, more notably, lagging the performance of direct rival Callidus Software. However, in the past year, as Xactly has posted solid mid-20% revenue growth, it gained some favor back on Wall Street. In the end, Vista is paying slightly more than 5x trailing sales for Xactly.

The valuation Vista is paying for Xactly offers an illuminating contrast to Callidus, which has pursued a much different strategy than Xactly. Although both companies got their start offering software to help businesses manage sales incentives, the much-older and much-larger Callidus has used a series of small acquisitions to expand into other areas of enterprise software, notably applications for various aspects of human resources and marketing automation. According to 451 Research’s M&A KnowledgeBase, Callidus has done seven small purchases since the start of 2014. For its part, Xactly has only bought one company in its history, the 2009 consolidation of rival Centive that essentially kept it in its existing market.

Although Xactly is getting a solid valuation in the proposed take-private, it’s worth noting that Callidus – at least partly due to its steady use of M&A – enjoys a premium to its younger rival with a narrower product portfolio. Even without any acquisition premium, Callidus trades at about 7x trailing sales. Callidus is roughly twice as big as Xactly, but has a market value that’s three times larger.

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

Will the ‘Appian way’ lead more startups to Wall Street?

Brenon Daly

Contact: Brenon Daly

With Appian’s debut on the Nasdaq earlier this week, the tech IPO market has hit an early summer vacation. Right now, there are no tech companies on file, at least not publicly. So with no offerings (officially) to look ahead to, it’s worth taking a look back on what we’ve already seen from recent new listings.

The first impression is that there aren’t very many of them. By our count, just five enterprise tech vendors have made it public so far this year. Further, the pace for the remainder of 2017 isn’t expected to accelerate. Respondents to a recent survey from 451 Research and law firm Morrison & Foerster predicted just 15 tech IPOs this year. (451 Research subscribers can see our full report on the current IPO market, as well as a few of the firms that we think could be in Wall Street’s ‘class of 2017.’)

But to even hit that number of IPOs, we might suggest that Wall Street look to more companies like Appian rather than the other four tech vendors that also made it public this year. (See our full report on Appian’s offering.) What we mean by that is Appian is far more representative of the broader startup universe than high-profile unicorns such as Okta, Alteryx, MuleSoft or Cloudera. Certainly, more startups can relate to Appian’s capital structure than any of the other recent debutants. Appian raised just $48m as a private company, compared with $163m for Alteryx, $220m for Okta, $259m for MuleSoft and more than $1bn for Cloudera. In fact, all four of the unicorn IPOs raised more in a single round of private-market funding than Appian did in total VC funding.

Not having done an IPO-sized funding in the private market meant that Appian could come public with a more modest raise. (It took in just $75m, compared with this year’s previous IPOs that raised, on average, $190m for the four unicorns.) And, probably most importantly, the Appian offering showed that these types of IPOs can work, both for issuers and investors. (Appian created about $900m of market value, and saw its shares finish the first day of trading up about 25%.) So when it comes to IPOs for the second half of this year, the ‘Appian way’ could help a lot more startups make it to Wall Street.

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

The dried-up startup exit

Brenon Daly

Contact: Brenon Daly

The quintessential Silicon Valley deal is drying up. Sales of VC-backed tech startups, which once provided a steady flow of money to entrepreneurs and their backers, are down sharply so far this year, compared with recent years. And while the impact of the narrowing of that exit will be primarily felt along Sand Hill Road, the cause of the slump traces back to Wall Street.

So far this year, just 235 VC-backed tech companies have sold, according to 451 Research’s M&A KnowledgeBase. That paltry level represents the fewest startups sold in the first five and a half months of any year since 2010, even as the overall tech M&A market has broadened and increased the current number of total tech transactions by nearly 15% since the start of the current decade. Year to date, M&A volume for VC-backed vendors is running 13% lower than the average number of deals over the past five years, according to the M&A KnowledgeBase.

The sharp decline in exits comes as the ranks of the startups are swelling, with thousands of businesses receiving venture investment each year. So if the slowdown isn’t coming from the supply side, that leaves only the demand side. And indeed, we can narrow the cause of the recent slump to one particular set of startup buyers: US public companies.

For the first half of the current decade, according to the M&A KnowledgeBase, NYSE- and Nasdaq-listed vendors accounted for more than 40% of the purchases of VC-backed companies. In some years, that approached nearly half of the transactions. So far this year, the tech industry’s big fish have gobbled up the minnows in only slightly more than one-third of the deals. If the classic startup-sells-to-tech-giant transaction isn’t playing out as often as it once did, that’s primarily because many of the tech industry’s one-time biggest buyers have themselves been bought.

Some behemoths have been consolidated by fellow behemoths, with the net effect that the combined entity – perhaps still struggling with integrating a business that does hundreds of millions of dollars, or even billions of dollars, of revenue – doesn’t have the capacity to do anywhere near as many deals as the two stand-alone companies did. Consider the relative M&A rates for Dell and EMC on both sides of that blockbuster pairing. In other cases, tech giants have gone private, with buyout shops that tend to focus on financially optimizing existing businesses, rather than trying to bump up revenue growth through potentially costly acquisitions of shiny new startups. For instance, BMC has done only three purchases since its leveraged buyout four years ago, down from an average of four acquisitions in each of the three years leading up to its take-private.

Source: 451 Research’s M&A KnowledgeBase

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

The state of tech M&A in China

Brenon Daly

Contact: Brenon Daly

After six straight years of explosive growth of tech M&A, China’s great shopping spree is winding down. The combination of increasing domestic economic uncertainty and, more crucially, newly imposed currency restrictions has blunted both the drive and the means for buyers from the world’s second-largest economy to do tech deals. Based on spending so far this year, China-based acquirers are on pace in 2017 to hand over just one-quarter the amount they spent on tech acquisitions in 2016, according to 451 Research’s M&A KnowledgeBase.

Of course, last year stands as a record for the value of tech transactions by China-based buyers, with the $40bn worth of announced purchases equaling the total from the two previous years combined. In contrast, the M&A KnowledgeBase totals just $3bn worth of deals by China-based acquirers so far in 2017.

To illustrate just how tight China’s former free spenders have become, consider this: They have yet to announce a single tech transaction in 2017 valued at more than $1bn, after announcing a record 10 such big-ticket deals in 2016. Like acquisitions last year by China-based buyers in non-tech sectors, many Sino shoppers in 2016 went after high-profile targets across the tech sector, including Tencent reaching for videogame maker Supercell, as well as financial firms picking up Ingram Micro and Lexmark.

For a more in-depth look at the recent changes and the outlook for doing deals in China, be sure to join 451 Research’s webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. Tomorrow’s webinar is open to everyone, and you can register here.

Tech’s ‘usual suspects’ are back in the market for startups

Brenon Daly

Contact: Brenon Daly

After a prolonged period of restructuring and refocusing their own businesses, tech bellwethers are once again in the market for startups. Many of the industry’s biggest names are putting their record levels of cash and record-priced equity to work as they return to paying significant valuations for largely unproven companies. This year’s return of the recently rejuvenated ‘usual suspects’ of tech M&A comes after a few years when the big names were somewhat overshadowed by unconventional buyers rolling the dice on technology vendors.

For instance, the list for 451 Research’s M&A KnowledgeBase of who has printed significant acquisitions of VC-backed companies this year includes Cisco, CA Technologies and Hewlett Packard Enterprise. In 2017, there aren’t buyers like General Motors, as there was in 2016, or Delivery Hero, as there was in 2015. To generalize broadly, we might suggest that the driver in the startup M&A market has swung from fear to greed. What we mean by that is several of the 2015-16 big VC exits appear to be motivated by fear, specifically – as kids these days say – fear of missing out. The threat of being disrupted by technology appears to have driven earlier transactions such as Unilever’s $1bn purchase of Dollar Shave Club last July and old-line Ritchie Bros. Auctioneers’ $759m pickup of online platform provider IronPlanet last August.

This year’s resurgence of the well-known tech giants, which have both the means and the need to acquire faster-growing startups, has helped boost the number of significant VC exits in 2017 to almost as many transactions as the same period of the two previous years combined. According to the M&A KnowledgeBase, buyers so far this year have announced six deals valued at more than $500m. (That total includes transactions for which 451 Research has a proprietary estimate of the unannounced terms.) For comparison, the same period in 2016 and 2015 produced a total of just seven VC exits valued at more than a half-billion dollars.

Probably no group is happier to see renewed demand from these tried-and-true acquirers of startups than the main supplier of startups, Silicon Valley. VCs overwhelmingly rely on sales of their portfolio companies to generate returns and, thus, keep their firms in business. The acceleration in the pace of big deals for startups is helping to offset a rather lackluster IPO market, which offers the other exit for their portfolio companies. Not that many startups are taking that exit, as we detailed in our special report on the fertile, but barren, tech IPO landscape.

Dealing with the dragon

Brenon Daly

Contact: Brenon Daly

A little more than a year after a Chinese consortium acquired slumping printer maker Lexmark, the group has sold off the company’s software business to Thoma Bravo. The enterprise software unit had basically been for sale since the Chinese buyout group, which is led by a hardware-focused firm, closed its $2.5bn take-private of Lexmark. Although terms of the sale of the software division weren’t formally released, media reports put the price at $1.5bn.

Assuming that price is more or less accurate (we haven’t been able to independently verify it), the deal would stand as the largest inbound acquisition of a Chinese technology asset, according to 451 Research’s M&A KnowledgeBase. Obviously, there have been larger transactions involving Chinese targets. But all 16 of those deals listed in our M&A KnowledgeBase have seen fellow Chinese companies as the buyer. Overall, our data indicates that slightly more than half of all China-based tech vendors sell to Chinese acquirers, although the top end of the market is unanimously weighted toward domestic transactions.

Clearly, although owned by a Chinese group, the Lexmark software division is hardly a ‘Chinese company,’ in the sense of a domestically headquartered operation that does the majority of business in its home market. Lexmark had cobbled together its software unit from roughly a dozen acquisitions of enterprise software providers based in North America and Europe. (451 Research will have a full report later today on how the acquired software business will fit into Thoma Bravo’s portfolio and what impact the deal will have on the broader business process and content management markets.)

Nonetheless, this landmark transaction comes at a difficult time in US-Sino relationships. President Donald Trump has blasted the currency and trade policies of China, although he did tone down his criticism during last month’s meeting with his counterpart, Xi Jinping. Despite the apparent thaw, the relationship between the world’s two largest economies remains chilly. That’s having an impact on M&A, which is a form of ‘international trade’ of its own. In a survey last month of 150 tech M&A professionals, more than half of the respondents (55%) predicted that US acquisitions of Chinese companies would decline because of President Trump’s trade policies. Just 7% forecast an uptick, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.

For a more in-depth look at the trends and concerns around doing deals in China, be sure to join our webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. The webinar is open to everyone, and you can register here.