Author: Brenon Daly

A mule that’s actually a unicorn

Brenon Daly

Contact: Brenon Daly 

Unlike a fair number of late-stage startups, MuleSoft is no donkey trying to pass itself off as a unicorn. The fast-growing data-integration specialist has tripled revenue over the past three years, and appears to be on track to put up about $250m in sales this year. More importantly, MuleSoft is not hemorrhaging money. That should play well on Wall Street, which has telegraphed that it will no longer reward the growth-at-any-cost strategy at startups that want to come public (ahem, Snap Inc).

Assuming MuleSoft does indeed make it to the NYSE, where it will trade under the ticker MULE, it would mark the first enterprise technology IPO since last October. Of course, Snap is currently on the road, telling potential investors that its business model, which consists of hardware and disappearing messages, is the next Facebook rather than the next Twitter. But we’ll leave aside the offering from that consumer technology vendor, which just might be able to convince investors that losing a half-billion dollars last year, which is about $100m more than it booked as revenue, is a sustainable or even desirable business model.

Instead of Snap’s planned IPO, MuleSoft’s offering lines up more closely with fellow infrastructure software provider AppDynamics. (At least up to the point where Cisco comes in with a too-good-to-be-ignored $3.7bn offer.) A glance at the prospectus from each vendor shows both growing at a rapid clip (AppDynamics posted a slightly higher rate, even off a bigger base) and posting GAAP numbers that were at least headed out of the red (MuleSoft lost less than AppDynamics, on both an absolute and relative basis). Also, both firms had annual customer retention rates, measured by dollars spent, of roughly 120%. Wall Street eats up that sort of metric.

MuleSoft raised roughly $250m in total funding, most recently announcing a $128m round in mid-2015. With investors clamoring for growth tech companies right now, MuleSoft could certainly start life as a public entity with a double-digit multiple. Maybe not the nearly 18x trailing sales that AppDynamics commanded in its sale to Cisco. (After all, that was terminal value, not trading value.) But MuleSoft could almost undoubtedly convince Wall Street that it’s worth a premium to Talend, a rival data-integration vendor that came public last summer and currently trades at about 7x trailing sales. MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing twice as fast. That profile will likely boost MuleSoft’s initial valuation on Wall Street to north of $2bn, or 10x its trailing sales of $190m.

2016 enterprise tech IPOs*
Company Date of offering
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016
Nutanix September 30, 2016
Coupa October 7, 2016
Everbridge October 11, 2016
BlackLine Systems October 27, 2016
Quantenna Communications October 27, 2016
Source: 451 Research *Includes Nasdaq and NYSE listings only

How secure is your deal, legally?

Brenon Daly

Contact: Brenon Daly 

For all of the attention paid to the financial and strategic aspects of M&A, it certainly pays to remember that, at their core, acquisitions are fundamentally legal processes. The terms and conditions of any acquisition effectively codify all of the other points that come up over the weeks or even months of negotiating a deal. Pricing, timing, governance, executive responsibilities – all of those key M&A considerations, along with dozens of other smaller-but-still-thorny concerns, are ultimately spelled out in a legally binding agreement.

Most of the final provisions of any deal surface during the earlier due-diligence period, which, depending on your particular view of law, can be a process to either help optimize the outcome of the combination or simply lessen the chances that you’ll get screwed in the transaction. Given the direct influence that due diligence has in shaping the ultimate acquisition agreement, it’s worth noting what the two sides are paying attention to when they strike a deal.

One key area of M&A-related examinations that’s getting an increasingly sharper focus is information security. A survey last October of 150 senior members of the tech M&A community, including a number of lawyers, revealed that not a single respondent reduced the amount of due diligence they did on a target company’s cybersecurity practices last year. Further, in the most recent edition of the M&A Leaders’ Survey from 451 Research and law firm Morrison & Foerster, fully eight out of 10 (82%) respondents said the level of scrutiny actually increased over the course of 2016, with the remaining 18% saying it held steady.

Obviously, as has come out in Verizon’s ongoing attempt to purchase Yahoo’s operating business, cybersecurity considerations can have a dramatic impact on a deal. The acquisition will now drag on a few months longer and the price will be lowered by $350m, or 7%, because of the massive data breaches that Yahoo revealed after the late-July announcement. As Verizon moves ahead with its plan to acquire the faded purple website, the transaction is nonetheless a reminder that cybersecurity concerns in M&A need to figure into boardroom discussions, not just courtroom disputations.

451 Research M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

After a slow start in January, what does the rest of the year hold for tech M&A? Will 2017 rebound like 2016, which had a similarly slow opening month only to surge later in the year to finish with the second-highest annual spending total since the internet bubble burst? Or will this year settle back down to more typical post-recession levels, which would mean a decline of about 50% in spending from 2016’s total?

Join 451 Research tomorrow for an hour-long webinar as we look at the recent activity and forecasts from both corporate and financial acquirers, the valuations they are paying (and expect to pay) as well as what broad forces are likely to shape deals in the coming year. Additionally, we’ll look at specific themes that are likely to play out in key sectors of the IT market, including software, security and mobility. The webinar starts at 10:00am PST on Tuesday, February 7, and you can register here.

Lots of tech deals, but few dollars, to start 2017

Brenon Daly

Contact: Brenon Daly

After slumping sharply in the two months following the unexpected results of the US election, the number of tech acquisitions picked back up in January. M&A spending, however, didn’t follow suit. In the just-completed month, tech buyers around the globe announced 330 deals, with the aggregate value of those transactions totaling just $18bn, according to 451 Research’s M&A KnowledgeBase. January spending represents the lowest monthly level in two years, and just half the average monthly amount in 2016.

At the top end of the market, the M&A KnowledgeBase tallied just five deals valued at more than $1bn. That’s down from last year’s average of eight big-ticket transactions each month. Further, with one notable exception, the ‘three-comma deals’ so far this year have all gone off at below-market multiples. For instance, Keysight Technologies is paying just 3.2 times trailing sales for application testing vendor Ixia, which had been posting declining revenue. Clearlake Capital Group is paying an even lower multiple for LANDESK, owned by fellow buyout firm Thoma Bravo, according to our understanding.

A discount didn’t apply to last month’s largest transaction, Cisco’s reach for AppDynamics. The networking giant, which has been busily buying software vendors, paid an astounding 17.4x trailing sales for the application performance monitoring provider. (The $3.7bn deal marks the largest sale of a VC-backed company in three years.) Part of that rich valuation can be attributed to the fact that Cisco had to outbid the public market for AppDynamics, which was just a day away from setting the price of its planned IPO when Cisco announced the acquisition. Still, AppDynamics’ valuation is the highest multiple ever paid for a software firm with more than $50m in revenue, according to the M&A KnowledgeBase.

January’s deal volume, on the other hand, reversed two months of sharp declines to close 2016. The number of tech transactions in both November and December dropped to three-year lows, according to the M&A KnowledgeBase. Buyers last month included ServiceNow, Amazon Web Services and Oracle. Meanwhile, companies that double-dipped in the M&A market to start 2017 included Microsoft, Hewlett Packard Enterprise and the recently public Everbridge.

Recent tech M&A activity, monthly

Period Deal volume Deal value
January 2017 330 $18bn
December 2016 268 $39.5bn
November 2016 284 $39.6bn
October 2016 334 $83.2bn
September 2016 312 $30.1bn
August 2016 306 $31.5bn
July 2016 345 $94.1bn
June 2016 384 $67bn
May 2016 329 $23.8bn
April 2016 349 $20.7bn
March 2016 343 $23.9bn
February 2016 323 $28.3bn
January 2016 384 $21bn

Source: 451 Research’s M&A KnowledgeBase

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

The tech IPO window: open but unused

Brenon Daly

Contact: Brenon Daly

With AppDynamics stepping into Cisco’s ever-expanding software portfolio rather than continuing its march toward Wall Street, tech startups have once again been shut out of the public markets in the opening month of a year. Last January also didn’t see a single enterprise tech IPO, starting a drought that lasted until late April. Q1 2016 was the first quarter since the recent recession not to have a tech company come to market – and the current quarter is in danger of repeating that, despite some of the most-welcoming conditions on Wall Street.

Unlike this year, last year’s Q1 shutout was sparked by a double-digit percentage slide in US equity indexes in the opening six weeks of 2016. The Dow Jones Industrial Average, which is currently above the symbolically significant 20,000 level, bottomed out below 15,600 last February. (From trough to top, that represents almost a 30% gain in the Dow, adding more than a trillion dollars of market value.) Last winter’s bear market was even worse for highly valued tech names, which is what most of the tech IPO candidates aspire to be.

With investors selling their existing tech holdings, it was hard to find buyers for any new tech listings. In the imbalanced market at the start of last year, the financially prudent decision for startups tracking to an IPO was simply to wait until summer, when tech came back in favor among investors. By our count, seven of the nine enterprise-focused tech vendors that went public in 2016 debuted in the second half of the year. The debuts were actually even more concentrated than that, as two-thirds of tech IPOs last year came in just the six-week period leading up to the US elections in early November. Not a single tech provider has gone public in the three months since the election.

Part of the scarcity is due to seasonality. (Companies tend to prefer to finish Q4, which is almost inevitably their biggest quarter, and then go to market with full-year financials and a valuation that’s based on the coming year’s projected sales.) And yet, while IPO-minded startups have been focused on closing business and getting their financial paperwork in order, companies already public have been enjoying an extended, and somewhat unexpected, ‘Trump rally’ on Wall Street.

Indexes have posted a roughly 10% surge since the election, as investors bet that having a businessman as US president – who’s working with a Republican-controlled Congress – will be able to stimulate more economic growth. Perhaps more important to the relatively fragile IPO market, the instability and uncertainty from broader political and economic events has receded sharply. (For instance, the CBOE’s Volatility Index is currently just half the level it was during the run-up to the election.) The shift in sentiment is even more dramatic in our own surveys of individual investors.

In the two monthly surveys by 451 Research’s Voice of the Connected User Landscape (VoCUL) since Trump was elected, more than four out of 10 investors have said they are ‘more confident’ about the direction of the stock market now than they were 90 days earlier. That’s roughly twice the percentage that said they were ‘less confident’. Those are the most-encouraging assessments of Wall Street in a 451 Research survey since the end of the recession. And yet in the most bullish of recent bull markets, not a single tech startup has made it public in 2017.

The IPO window may be as open right now as it’s been in years, but investors would never know it. With two months remaining in the first quarter – and current stock market indexes more than 20% higher than they were in Q1 2016 – the net result for new enterprise tech offerings from last Q1 and the current quarter could well be the same: an IPO shutout.

How to get your tech M&A playbook for 2017

Brenon Daly

451 Research’s annual look back on the year that was and look ahead to the year that’s coming in technology M&A has been moved in front of our paywall. (Click here to access the report.) The broad-market overview highlights many of the trends that drove acquisition spending to a surprisingly strong $500bn in 2016, and predicts how those will play out in 2017. The 5,500-word introductory report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – opens our full M&A Outlook, an 80+-page analysis of M&A drivers and predictions on M&A and IPO trends and activity in specific sectors of the IT market.

The full report, which serves as an ‘M&A playbook’ for many of the tech industry’s main acquirers, offers an in-depth forecast of trends that will likely shape dealmaking in eight segments of enterprise information technology, including information security, mobility and software. The full M&A Outlook report will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and M&A KnowledgeBase Premium, and will be available for purchase for 451 Research clients and others that don’t subscribe to our premium KnowledgeBase products. 451 Research will publish our full M&A Outlook – including the Introduction, which is available now, and the eight individual sector reports – in early February.

PE-backed StorageCraft crafts another deal

Brenon Daly

Contact: Steven Hill Brenon Daly

In the year since TA Associates picked up StorageCraft Technology, the data-protection vendor has been working to build out a broader vision for metadata-rich data protection and management. Its latest move adds scale-out NAS appliance vendor Exablox, already an existing partner. Terms weren’t disclosed. The purchase of Exablox is StorageCraft’s second acquisition since being bought by private equity firm TA Associates, and comes five months after it snagged data analytics startup Gillware Online Backup.

This deal further extends an existing partnership between Exablox’s object-based core technology and StorageCraft, which has focused its recent strategy on metadata-based, long-term data management and protection. Both companies stressed that Exablox appliances will continue to be marketed for both primary storage and secondary storage applications, as opposed to a dedicated backup appliance only. The pairing has potential benefits for both companies, in particular adding StorageCraft’s ShadowProtect data protection and Gillware-based data intelligence enhancements to the Exablox platform.

From our perspective, the transaction reflects an increasing awareness of the importance of metadata as part of a larger vision for long-term data protection and management across the industry. Data growth is a given, and these vendors recognize that the next generation of storage requires greater intelligence about the data itself. Buying Exablox should allow StorageCraft to add closely integrated, on-premises storage offerings as an extension of its existing cloud, SaaS, storage analytics, data-protection and DR/BC portfolio. With the scarcity of funding available for storage and infrastructure companies, we expect more vendors to use deals such as StorageCraft’s reach for Exablox to expand their technology and market opportunity.

ServiceNow adds some smarts to the platform with DxContinuum

Brenon Daly

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

Now available: 451 Research’s 2017 M&A Outlook

Brenon Daly

Contact: Brenon Daly

Each year, 451 Research looks ahead to the coming year in M&A, highlighting the trends that will shape deal flow and the markets that are expected to see much of the activity. The report, which serves as an ‘M&A playbook’ for 2017, is now available to 451 Research subscribers.

Topics covered in the latest edition of the M&A Outlook include:

  • Besides the ‘usual suspects,’ which other tech acquirers stepped up their shopping in 2016 and are likely to accelerate that pace this year? If companies including Dell, Twitter and Dropbox aren’t buying any longer, where is the demand going to come from?
  • Specifically, which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security and mobility lead the forecast, but what about emerging cross-sector themes such as the Internet of Things and big data?
  • What’s shifted in the exit environment for VC-backed companies to open the way for some of the startups to realize ‘unicorn’ prices in the real world? And will 2017 (finally) see a rebound in the tech IPO market?
  • With president-elect Donald Trump set to officially take over as CEO of the US next week, why are corporate acquirers expecting a ‘Trump rally’ in the tech M&A market? What about buyers coming from China, who spent more acquiring US tech firms in 2016 than the previous five years combined?

The 5,500-word report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – thoroughly and insightfully covers last year’s activity as well as this year’s forecast. Get your copy of the M&A Outlook now.

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

Machine learning and the M&A machine

Brenon Daly

Contact: Brenon Daly

Coming off a 60% increase in the number of machine-learning-related transactions last year, the trend of adding ‘smarts’ to technology looks likely to drive even more deals in 2017. Senior investment bankers picked machine learning as the top M&A theme for the coming year in last month’s 451 Research Tech Banking Outlook Survey, with more than eight out of 10 respondents (82%) predicting an uptick in activity. That outlook for machine learning outpaced the view in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

One of the reasons why machine learning (and the related – but broader – theme of artificial intelligence) is expected to figure into so many transactions is that the technology is broadly applicable. Basically, any company that is looking to make its products more efficient – which, in turn, makes the users of those products more efficient – could be viewed as a potential acquirer of machine-learning technology. (To be clear, our view of machine learning is that the technology is a subset of artificial intelligence, focused on using algorithms that learn and improve without being explicitly programmed to do so. For a more in-depth look at the AI/ML market, see our recent sector overview led by my colleague Nick Patience.)

Certainly, machine learning appears to be an almost foundational technology when we consider the broad pool of buyers. Just in the past year, acquirers as diverse as Ford Motor, Salesforce, Intel and GE Digital have all announced machine-learning-related transactions, according to the M&A KnowledgeBase. Those deals have been part of a surge of M&A that saw buyers announce as many machine-learning-themed purchases in 2016 as they did from 2002-14, according to the M&A KnowledgeBase.