Author: Brenon Daly

Tech M&A goes from fitful to faltering

Brenon Daly

Contact: Brenon Daly

If tech M&A was stumbling in the first three months of the year, it face-planted in April. Spending on tech deals announced around the globe in the just-completed month slumped to just $12.9bn, the lowest monthly total since the start of 2015, according to 451 Research’s M&A KnowledgeBase. The paltry value of April’s tech transactions works out to just half the average amount spent in each of opening three months of this year.

Spending last month came in light largely because dealmakers didn’t buy big, announcing just three transactions valued at more than $1bn, according to the M&A KnowledgeBase. That’s less than half the monthly average of eight ‘three-comma’ deals over the past 12 months. And even the big prints that did get done in April were relatively small. Last month’s largest transaction (the $2.3bn KKR-led acquisition of Hitachi Kokusai Electric) barely squeaked into the top 10 of the biggest deals of 2017, landing at number eight on our M&A KnowledgeBase list.

Acquirers didn’t just put off big-ticket purchases in April – in many cases they didn’t buy at all. According to the M&A KnowledgeBase, deal volume in April sank to its lowest monthly level in three years. Tech shoppers announced just 258 transactions last month. April’s weak deal volume and spending put overall 2017 M&A activity well behind recent years. In fact, through the first four months of this year, both measures are lining up fairly closely with the pre-boom year of 2013.

Jive talk leads to a deal

Brenon Daly

Contact: Brenon Daly

Privately held software consolidator ESW Capital has continued its sweep through the ever-maturing business software market, paying a bargain price for faded enterprise communications vendor Jive Software. ESW, which serves as the family office of Trilogy Software founder Joe Liemandt, has notched more than 50 software acquisitions, mostly over the past decade. It typically acquires old-line software companies that, for one reason or another, find themselves out of step with their respective markets.

That’s certainly a description that could be applied to Jive, which was founded in 2001 and enjoyed a few bountiful days after its 2011 IPO, but has more recently found itself a bit of an orphan on Wall Street. It went public at $12 and shortly after the offering shares ran into the mid-$20s. However, the stock hasn’t been in the double digits for more than three years. As shares slumped, perhaps inevitably, acquisition rumors began surfacing around the company, with SAP and existing Jive partner Cisco named as potential buyers. (At that time, boutique bank Qatalyst Partners was rumored to be running the process. In the actual sale to ESW, Morgan Stanley, which led Jive’s 2011 IPO, is getting the print. On the other side, Atlas Technology Group advised ESW.)

Investors impatiently waited through several shifts in strategy at Jive, but recent moves hadn’t produced much growth at the company: Jive was a single-digit-percentage grower in both 2015 and 2016, while its customer count actually ticked slightly lower during that period. On the bottom line, Jive has always run in the red, although on the other side of last year’s restructuring, it has posted positive operating income.

Still, Jive’s struggles are reflected in ESW’s take-private offer. Terms call for the buyout firm to pay $5.25 for each of Jive’s roughly 79 million shares outstanding, for an announced equity value of $462m and an enterprise value of slightly more than $350m. Jive put up $204m in revenue, meaning it is being valued at just 1.7 times trailing sales in the deal, which is expected to close next month. That’s below any of the multiples paid by PE shops in erasing software vendors from US exchanges over the past year. According to 451 Research’s M&A KnowledgeBase, multiples paid in software take-privates since May 2016 have ranged from 2.3-7.9x trailing sales.

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

No ray of sunshine from Cloudera IPO

Brenon Daly

Contact: Brenon Daly

As far as Wall Street is concerned, the outlook for the tech IPO market is still cloudy after Cloudera’s offering. Sure, the data analytics platform vendor priced shares higher than its underwriters expected and investors pushed the freshly minted stock about 20% higher in aftermarket trading on Friday. But that solid start isn’t likely to necessarily draw other startups to the public market because Cloudera’s capital structure got so uniquely inflated.

Few startups could even imagine – much less collect – an investment of three-quarters of a billion dollars from a single investor in a single round, as Cloudera did from Intel three years ago. The chipmaker paid up for the privilege, putting a ‘quadra unicorn’ valuation of $4.1bn on Cloudera. Altogether, Cloudera raised more than $1bn from private market investors, making the $225m raised from public market investors seem almost like lunch money.

And then there’s the small matter of valuation. In its debut, Cloudera is only worth about half of what Intel thought it was worth when it made its bet. (As we noted in our full preview of Cloudera’s IPO, Intel’s investment appears even more bubbly when we consider that, at the time, Cloudera was generating less than half the quarterly revenue it currently puts up and its operating loss actually topped its revenue.)

As a longtime corporate investor, Intel can chalk up the overpayment for the stake of Cloudera to ‘strategic’ considerations. (Much like the chipmaker effectively wrote off its massive bet on security, unwinding half of its underperforming acquisition of McAfee at roughly half the valuation it initially paid in the largest infosec transaction in history, according to 451 Research’s M&A KnowledgeBase.) Besides, Intel can afford it: the day that Cloudera priced its IPO – thus confirming Intel’s overpayment – the chipmaker reported that it earned $3bn in the first quarter of this year alone.

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No ‘Trump slump’ seen for tech M&A

Brenon Daly

Contact: Brenon Daly

As President Donald Trump approaches the end of his ceremonially important first 100 days in office, his approval rating has slumped to an unprecedented low. In fact, for the first time in modern politics, more people say they disapprove of Trump’s early moves as president than say they approve of them. However, there is one community that continues to support Trump, or at least say he’s been good for business: dealmakers.

Four out of 10 (41%) respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster indicated that President Trump’s economic policies have stimulated dealmaking, almost twice the 22% that said his policies have slowed M&A. The results from the latest survey show a substantial reversal from our previous survey last October, which came amid an acrimonious battle with Hillary Clinton for the White House. At that time, nearly one-third (31%) said the election battle had slowed acquisition activity, compared with just 6% that said deals had sped up.

However, any boost that Trump and his policies might give to M&A won’t extend globally, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster. Quite the opposite, in fact. Nearly half of respondents (47%) said Trump and his trade policies will slow cross-border acquisition activity, nearly twice the 26% that said the policies of President Trump – who campaigned on an ‘America First’ platform – will accelerate international dealmaking. We would highlight the fact that the bearish forecast for cross-border M&A is almost exactly the inverse of the positive influence Trump is expected to have on overall tech dealmaking, according to our survey respondents.

Survey sees tech M&A heading up and to the right

Brenon Daly

Contact:  Brenon Daly 

Despite a slow start to 2017, tech M&A activity is expected to accelerate over the course of the year, according to the prevailing view in the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. (See full report.) Slightly more than half of the respondents (52%) forecast that deal flow will top last year’s level, more than three times the 15% of respondents who indicated that year-over-year activity would decline in 2017. The projection in our just-completed survey represents the most-bullish outlook in two years.

If the sentiment does come through in increased activity for the rest of the year, it would also mark a dramatic reversal from the start of 2017. In the first quarter, tech acquirers announced 12% fewer transactions than they did in Q1 2016 or Q1 2015, according to 451 Research’s M&A KnowledgeBase. Of course, 2017 comes after the two highest years of tech M&A spending since the internet bubble burst. Collectively, acquirers in 2015 and 2016 announced deals valued at more than $1 trillion, according to the M&A KnowledgeBase.

451 Research subscribers can view the full report on the most-recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster, which includes the outlook for overall activity and valuations in the tech M&A market, as well as highlights specific trends and drivers for deals in 2017 and beyond.

451 Research survey shows IT budgets are fat again

Brenon Daly

Contact: Brenon Daly

With the Q1 earnings parade just starting this week, Wall Street will be listening for whatever financial guidance it can get from companies about the current quarter as well as the rest of the year. For tech vendors, there should be a strongly bullish tone in those comments. The reason? Their customers are ready to spend again.

In a just-completed survey by 451 Research’s Voice of the Connected User Landscape (VoCUL), respondents indicated that their IT budgets for Q2 are the strongest they have been in six years. Specifically, our survey of more than 1,400 professionals involved in IT spending decisions showed that one in five (21%) plan to spend more in Q2 than they did in the opening quarter of 2017. That was half again as high as the 14% that said their current budgets have shrunk. In terms of where respondents said they have the most to spend, information security and enterprise applications topped the sector rankings, as they have for the four previous VoCUL quarterly surveys.

Taken together, the Q2 outlook marks only the third time in the past half-decade that the percentage of respondents with more money for IT spending has eclipsed those who said they had less money to put to work. And it appears that the momentum will extend beyond the current quarter, according to a separate question in the VoCUL survey. As they looked ahead to the second half of 2017, more respondents indicated bigger IT budgets than smaller budgets, compared with the first half of the year.

Of course, much of that fulsome forecast has already been priced into the stock prices of many of the tech companies that hope to satisfy the increasing demand voiced by the respondents to VoCUL’s quarterly surveys. So far this year, for instance, the Nasdaq 100 Technology Sector Index is up about 13% – three times the returns of broad-market indexes such as the Dow Jones Industrial Average and the S&P 500 Index.

E-commerce’s discounted disruptors

Brenon Daly

Contact: Brenon Daly 

For the second time in as many weeks, a would-be digital disruptor of the commerce world has been snapped up on the cheap by an analogue antecedent. After the closing bell on Monday, sprawling marketing giant Harland Clarke Holdings, the owner of a number of advertising flyers that clutter postal boxes and newspapers, said it would pay $630m for online coupon site RetailMeNot. The amount is just one-quarter the price Wall Street had put on the company three years ago.

The markdown on RetailMeNot comes just days after Samsonite gobbled up eBags, a dot-com survivor that nonetheless sold for a paltry multiple. The $105m acquisition is supposed to help the world’s largest maker of luggage sell directly to consumers. Samonsite, which traces its roots back more than a century, certainly didn’t overpay for that digital know-how. Its purchase values eBags at just 0.7x trailing sales.

While a bit richer, RetailMeNot is still only valued at 2.25x trailing sales and 2x forecast sales in the bid from Harland Clarke. And that’s for a sizable company that’s growing in the low-teens range (eBags is about half the size of RetailMeNot but is growing at twice that rate). The valuations paid by the old-world acquirers of both of these online retail startups were clearly shaped more by the staid retail world than the supercharged multiples generally paid for online assets. It’s a reminder, once again, that disruption – that clichéd goal of much of Silicon Valley – doesn’t necessarily generate value. Sometimes trying to knock a market on its head just gives everyone involved a headache.

Okta’s growth-story IPO finds an audience on Wall Street

Brenon Daly

Contact: Brenon Daly 

The unicorn parade on Wall Street continued Friday as security vendor Okta nearly doubled its private market valuation in its debut on the Nasdaq. The subscription-based identity and access management provider initially sold shares at $17 each, but investors bid them to about $24 in midday trading. With the surge, Okta is valued at some $2.4bn. (See our full preview of the offering.)

Okta becomes the third enterprise IT startup to come public so far this year, and it extends the strong performance of these new issues. It also joins the two previous IPOs – MuleSoft and Alteryx – in sporting a rather stretched valuation. Based on a market cap of $2.4bn, Okta is trading at about 15x trailing sales.

Granted, Okta’s sales are growing quickly, having nearly quadrupled in just the past two fiscal years to $160m. Still, the company is commanding quite a premium compared with fellow secure identity specialist CyberArk, which also just happens to be the last information security startup to create more than $1bn of value in its IPO. (To be clear, CyberArk, which went public in 2014, also sells identity-related products in the form of privileged identity management, but doesn’t really compete with Okta.)

Wall Street currently values CyberArk at about 8.2x trailing sales, or just slightly more than half the level that investors are handing to the freshly public Okta. Bulls would argue that Okta merits the premium given that it is growing twice as fast as CyberArk. But others might counter with a question about what that growth is costing each of the companies. Okta lost a mountainous $83m on its way to generating $160m in sales last year. In contrast, CyberArk, which has run in the black for the past four years, netted $28m from its 2016 revenue of $217m.

If nothing else, the valuation discrepancy underscores that growth is still the key metric for investors. Okta’s IPO is simply supply meeting demand, same as it ever was on Wall Street. Indeed, CyberArk has also experienced that. Shares of the company reached an all-time high – nearly 50% higher than current levels, roughly Okta’s current valuation – in 2015, when revenue was increasing north of 50%, compared with the mid-30% level now.

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

For tech M&A, above-market deals are running behind

Brenon Daly

Contact: Brenon Daly 

If spending on tech M&A was sporadic in the opening quarter of 2017, the valuations paid in those deals largely held to typical patterns. There were a handful of transactions sporting enviable double-digit multiples, along with a whole backlog of deals that printed in the low single digits. Between those bands, however, there was one range that generally features a host of transactions but has been relatively quiet so far this year: slightly above-market valuations.

Specifically, the January-March quarter recorded just three deals that valued target companies at 6-8x trailing sales, according to 451 Research’s M&A KnowledgeBase. That’s fewer than any quarter in 2016, and just slightly more than half the average number of similarly valued transactions each quarter last year. Given the generally lumpy nature of M&A, we obviously don’t want to make too much out of pricing trends in any single quarter. But it is important to note the falloff in activity because this valuation range often stands as a fairly accurate barometer for the health of the overall M&A market.

Yet this segment gets ignored, with more attention paid to splashy, headline-grabbing deals such as Cisco lavishing $3.7bn on AppDynamics, a company that barely cracked $200m in revenue last year. For a variety of reasons, however, we wouldn’t hold out this transaction as representative of the nearly 1,000 deals tallied last quarter in the M&A KnowledgeBase. (Cisco, which is trading at its highest level since the internet bubble, had to outbid Wall Street for AppDynamics, at a time when ‘dual tracking’ still isn’t much of a threat. As if to indicate that, indeed, those were rather singular influences on the deal, consider the fact that AppDynamics garnered the highest price for any VC-backed startup in three years.)

Instead, we would look below those one-off transactions. More relevant to most tech acquirers are deals where they have to stretch, but not contort, on pricing. These transactions – carrying, again, a 6-8x multiple and generally falling in the midmarket in terms of size – tend to serve more usefully as comparable deals for the corporate and financial acquirers that do the overwhelming majority of tech M&A. Here we’re talking about recent transactions such as Akamai reaching for SOASTA, or Hewlett Packard Enterprise further bulking up its storage portfolio with SimpliVity. Both of those deals fall into the 6-8x sales range (according to our understanding) and represent decidedly midmarket bets by big-name buyers. In other words, just the sort of transaction that’s vital to the broader tech M&A market, but generally gets overlooked – particularly so far this year.

After a slow start for tech M&A, business picks up late in Q1 

Brenon Daly

Contact: Brenon Daly 

After record spending in the tech M&A market in 2015 and 2016, dealmakers took a little while to get going this year. The value of tech transactions in both January and February slumped to the lowest consecutive monthly totals since 2013, according to 451 Research’s M&A KnowledgeBase. The two-year surge seemingly led to a two-month slump, as buyers digested their acquisitions. By the final month of the first quarter, however, acquirers were back in business, spending as much in March as they did in the two previous months combined.

Altogether, as tallied by the M&A KnowledgeBase, worldwide spending on tech and telecom deals in the first three months of 2017 hit $77bn, essentially flat with the opening quarter last year. However, the value of transactions announced in each of the subsequent quarters in 2016 accelerated dramatically from last year’s sluggish start, with average quarterly spending for Q2-Q4 coming in nearly twice the level of Q1.

Matching last year’s acceleration in spending may be a challenge for the rest of 2017, as buyers are on pace to do substantially fewer deals this year. That’s true for both broad tech M&A as well as the top end of the market. The first quarter’s deal volume of 910 represents a decline of roughly 12% compared with the January-March period in the previous two years. More significantly, tech acquirers announced fewer transactions valued at more than $1bn in the just-completed quarter than in any other quarter in more than three years.