Author: Mark Fontecchio

I am a research manager for 451 Research's M&A KnowledgeBase.

A spring sputter for tech M&A

Mark Fontecchio

by Brenon Daly

The momentum that had sustained the high-rolling tech M&A market through the opening quarter of 2019 petered out in April. Spending in the just-completed month plummeted to a paltry $15.4bn, just one-third the average of the first three months of the year, according to 451 Research‘s M&A KnowledgeBase. More significantly, the total value of tech and telecom acquisitions announced in April stands as the lowest monthly total in the M&A KnowledgeBase in four years.

Last month’s slump started at the top. Buyers in April announced just four tech transactions valued at more than $1bn. That’s the fewest big-ticket prints announced in any month since the fall of 2017, and just half the number that acquirers were putting up each month in 2018. Further, the deals that did get done last month had a distinctly down-market look to them.

Rather than the expansion-minded and expensively priced purchases that acquirers inked last year, the billion-dollar deals in April came back down to earth, as cost-cutting consolidation emerged as the main driver of these large transactions. Our data shows the four companies acquired for more than $1bn last month were each relatively mature assets that all traded for less than 2.5x trailing sales.

The largest purchase announced last month demonstrates that trend very clearly. French ad agency Publicis once again turned to M&A to boost its otherwise sagging top line. It paid $4.4bn, or just 2x sales, for the 9,000-person marketing services firm Epsilon. Similarly, Siris Capital Group took 30-year-old printing company Electronics for Imagining (EFI) private at just 1.4x times last year’s revenue. EFI hadn’t really grown since 2016, a trend that was forecast to continue this year.

Dropped phones

Mark Fontecchio

by Brenon Daly

Strategy doesn’t count for much in a shrinking market. Consider all the effort that tech vendors put into profiting from the emergence of the mobile phone, a wonderous device that helped move computing and communications out of the office. Whether through R&D or M&A, companies spent billions of dollars in designing, making and selling the shiny new gadgets that seemingly everyone wanted. And yet, in just over a decade, the trend has largely played out.

In a recent 451 Research survey, the number of consumers who said they planned to purchase a smartphone in the coming three months slumped to its lowest-ever reading. Just 7% of some 2,800 potential buyers surveyed by 451 Research’s Voice of the Connected User Landscape (VoCUL) indicated that they will be picking up a new device in the next 90 days. That’s about half the level of planned purchases from VoCUL’s springtime surveys at the start of the current decade.

Purchases of smartphones, like most other consumer tech products, tend to be driven by release cycles. New devices mean new buyers. And while that cyclicality still shapes the demand captured in our VoCUL surveys, the overall ranges have come down. Lower highs coupled with lower lows unequivocally point to a market in decline.

Peak to trough, the smartphone market has tumbled from just a few years ago when one in four consumers convinced themselves that they needed to buy a new device to a level now of just one in 14, according to our survey work. As demand for smartphones ebbs to a historic low, the strategies used by various tech firms to supply this once-promising market have been laid bare.

Across the board, companies don’t have a lot to show for their smartphone efforts. (Certainly nowhere near the enduring value created by the emergence of the PC industry in the previous generation.) That’s true whether the company tried to buy or build its way into the handset market. Tech giants that have successfully acquired dominant positions in other emerging tech markets stumbled with smartphones, writing off billions of dollars of their M&A spending (Microsoft) or unwinding deals altogether (Google).

Meanwhile, vendors that stayed in-house and focused on engineering must-have devices undermined their efforts by mistiming or mispricing their phones. (Amazon, the world’s most successful online retailer, couldn’t even really give away its Fire phone.) Even market leaders have resorted to building in gimmicks to spur demand that that blew up in their faces (Samsung’s Galaxy Note 7) or crumbled in their hands (Samsung’s stillborn foldable phone). No matter what they have tried, smartphone makers just haven’t been able to keep buyers coming back for more like they once did.

Exclusive: Ivanti in market

Mark Fontecchio

by Brenon Daly

One of the larger private equity (PE)-backed rollups may be rolling into a new portfolio. Several market sources have indicated that Clearlake Capital Group currently has infrastructure software giant Ivanti in market, with second-round bids expected soon. If the process moves ahead, the buyer is almost certain to be a fellow PE shop, with the price likely to be in the neighborhood of $2bn.

Buyout firm Clearlake has built Ivanti from a series of acquisitions, with the bulk of the business coming from the January 2017 purchase of LANDESK Software. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates for the price and valuation of that significant secondary transaction.) After it bought LANDESK, Clearlake rolled a pair of existing portfolio companies into that platform, which then took the name Ivanti in early 2017. The rechristened business went on to pick up another two companies later that same year.

Although two years is a relatively short holding period for a buyout shop, Clearlake is looking to take advantage of a hot secondary market. Large PE-to-PE deals have become a popular way for buyout firms to put their record amounts of cash to work in transactions that – rightly or wrongly – they tend to view as less risky than other big-ticket acquisitions. The M&A KnowledgeBase lists roughly a dozen secondary deals valued at more than $1bn over the past year.

A classic rollup, Ivanti offers a broad basket of infrastructure software products, with a particular focus on ITSM and information security. According to our understanding, the business runs at a roughly 30% EBITDA margin. Subscribers to the premium edition of the M&A KnowledgeBase can see our full profile of Ivanti, including financial performance, competitors and other key measures.

Slack set to enter a loose market

Mark Fontecchio

by Scott Denne

Another enterprise startup plans to test Wall Street’s seemingly insatiable appetite for business technology vendors. Slack has unveiled its prospectus for a direct listing on the NYSE, forgoing an initial public offering. Like other recent enterprise tech companies to enter the public market, Slack, though heavily funded at premium valuations, still appears to have room to trade up in its debut.

The firm’s forthcoming listing follows closely on the IPO of fellow workplace communications software developer Zoom Video. The latter company fetched an astonishing 60x trailing revenue in its first day of trading – a level it retained in the week since. Slack would need only a fraction of that multiple to leap beyond the roughly $6bn valuation it boasted in its most recent fundraising. There’s every reason to think it could.

As we noted in our coverage of Zoom’s first day, enterprise companies (those selling technology to businesses) have gotten a bullish reception in the public markets, with many of the 2018 and 2019 crop of IPOs trading above 20x revenue. To match its private company valuation, Slack, which posted $401m in revenue in its recently closed fiscal year, would need to fetch a 15x multiple. Its shares have recently traded hands in private transactions at twice that level. And given the parallels between it and Zoom, investors could carry it even further.

Both vendors are roughly equal in size (Zoom generated $330m in trailing revenue), with a similar growth rate. Slack came up just a few percentage points shy of doubling its topline, while Zoom rose a bit above that. The two companies also play in separate corners of the workplace productivity market that are both expected to garner increasing enterprise investments in the coming year. According to 451 Research’s VoCUL: Corporate Mobility and Digital Transformation, 40% and 43% of respondents plan to invest in team collaboration (Slack’s purview) and online meetings (Zoom’s specialty), respectively, over the next 12 months.

A new player in a new game

Mark Fontecchio

by Brenon Daly

Twenty years after the IPO of CDN giant Akamai, rival startup Fastly has announced its own plan to go public. We mention that at the open because one of the main selling points of Fastly’s pitch to Wall Street is setting itself apart from the competition. In its just-filed prospectus, Fastly uses the term ‘legacy CDNs’ more than 20 times.

The repetition isn’t meant to flatter. Eight-year-old Fastly discusses Akamai – and, to a lesser extent, Limelight Networks – in connection with the limitations of their offerings, which are meant to speed up and secure internet traffic.

Already having collected a rich, double-digit valuation in the private market, Fastly is making the economically rational effort to put some distance between itself and its discounted public-market comps. (Even with its shares near their highest level since the dot-com collapse, Akamai garners just 4.5x trailing sales, while Limelight lags far behind at not even 2x trailing sales.)

Like most other ‘new generation’ IT providers, Fastly plays up its growth rate while playing down the cost of that growth. Sales at the company rose about 40%, year over year, in 2018 to $145m. In comparison, Akamai is a single-digit percentage grower, although it is roughly 10 times larger than Fastly. Fastly also runs in the red, largely because its gross margins are just 54%, 10 percentage points lower than those at Akamai.

For us, though, the biggest difference between the two companies isn’t their technology or their business models or their target customers. Instead, it’s the IPO itself. It’s hard to imagine, but Akamai went public in 1999 on just $4m in sales and a staggering $58m loss. (It was a time of ‘irrational exuberance’ after all.) In other words, at the time of Akamai’s IPO, its entire business was smaller than the revenue that’s probably generated by a single key customer at Fastly.

It’s all business on Wall Street

Mark Fontecchio

by Scott Denne

Amid a short burst of high-profile tech IPOs, enterprise offerings are soaring, while consumer-focused companies are getting a less-bullish reception. In their public debuts, both Zoom Video and Pinterest priced above their range and traded up from there. The former, a video-conferencing specialist, reaped a hefty valuation increase in its debut. The social networking vendor, however, stayed just above its last private funding.

To be sure, Pinterest hardly received a bearish reception. It began trading at about $24 per share, for a 25% bump, bringing it slightly up from the price of its series H round in 2017. Currently, Pinterest is valued at $13bn, or nearly 16x trailing sales. Zoom, by comparison, jumped 75% from its IPO price when it entered the Nasdaq, garnering a $16.2bn market cap, or 60x trailing sales.

The discrepancy between enterprise- and consumer-tech offerings isn’t limited to these two. Last month, Lyft made a lackluster debut – its shares now trade 20% below its initial price. A few days later, PagerDuty, an IT ops provider, jumped 60% when it hit the public markets. The comparative reliability of enterprise-tech stocks accounts for some of the discrepancy.

As we noted in our coverage of PagerDuty’s IPO, many of last year’s enterprise IPOs still trade at or near 20x revenue. And many of the past consumer unicorns have faltered – Snap’s shares have fallen more than half from its 2017 IPO and Blue Apron is practically a penny stock. Perhaps more importantly, the recent enterprise debutants left room in their cap table for a first-day bump, while consumer companies extracted all they could from private investors, at the highest price they could, before turning to the public markets. Zoom raised $160m on the way to its IPO, while Pinterest took in almost 10x that amount.

 

When England sneezes, Europe catches a cold

Mark Fontecchio

by Brenon Daly

As Europe fractures politically, it is slowing economically. The International Monetary Fund (IMF) recently forecast that Europe would post the lowest growth of any major region of the globe in 2019. The IMF clipped its outlook for economic expansion across the EU to an anemic 1.3%, which is just half its forecast for US growth.

The slowdown across the Continent is starting to hit M&A. Tech deals by Western Europe-based acquirers in Q1 2019 slumped to its lowest quarterly level in two years, according to 451 Research’s M&A KnowledgeBase. More tellingly, the ‘market share’ held by European buyers is starting to erode.

In both 2017 and 2018, the M&A KnowledgeBase shows European buyers accounted for one in four tech acquisitions and 16% of overall M&A spending. So far this year, both of those measures are running three percentage points lower (22% of deals and just 13% of spending).

Much of the fall-off in M&A can be traced back to the UK, which has always been Europe’s biggest buyer of technology companies. With Brexit still unresolved, dealmakers there remain uncertain. Based on Q1 activity, UK-based acquirers are on pace in 2019 to announce the fewest tech transactions since 2013. When it comes to dealmaking, if England sneezes, Europe catches a cold.

Publicis nabs Epsilon for $4.4bn

Mark Fontecchio

by Scott Denne

Faced with a receding topline, Publicis once again turns to a blockbuster acquisition to bring it back to growth. The ad-agency holding company has printed its largest tech deal to date with the $4.4bn purchase of marketing services firm Epsilon. While the move increases Publicis’ ability to offer data-driven marketing services, the buyer’s outlook on the transaction appears overly optimistic, as was the case in its previous $1bn-plus tech acquisition.

With its (now) second-largest tech deal, the $3.7bn pickup of Sapient in late 2014, the France-based advertising giant sought to make itself into ‘the leader at the convergence of communications, marketing, commerce and technology.’ Two years later, it wrote down $1.5bn of that purchase price. In the roughly four years since the Sapient buy closed, Publicis’ stock price has lost 30% of its value, while its 2018 net revenue dropped by almost 4%.

And like that earlier transaction, Publicis offered up an ambitious outlook for Epsilon. The acquirer expects the asset to deliver 5-10% annual growth. But as part of Alliance Data Systems, Epsilon hit the low end of that range just twice in the past five years and hasn’t reached the high end of that range since 2013. Last year, its topline shrank by 4%. Publicis claims that Epsilon’s 2018 results were caused by anomalies, such as retail bankruptcies. But that excuse gets at why the projected benefits of this deal may not materialize. Both Publicis and Epsilon serve traditional brand categories, including automotive, CPG and retail, so it’s not getting exposure to any new growth markets.

That’s not to say Publicis didn’t learn anything from its last foray into 10-figure tech M&A. It’s paying a more conservative price for today’s acquisition, valuing the target at 2x trailing revenue, compared with 2.5x for Sapient. The former, according to 451 Research’s M&A KnowledgeBase, matches the median multiple across all Publicis tech transactions. And in terms of EBITDA, Epsilon fetched just 10x, half of what Publicis was willing to hand over for Sapient.

Big or small, Wall Street likes them all

Mark Fontecchio

by Brenon Daly

On the same day the NYSE gave a warm welcome to a pair of enterprise tech vendors that are both running right around a level that, historically, would be the absolute minimum for a company to go public, investors also got their first official glimpse at the financials of a consumer tech behemoth that’s 10 times the size of the debutants. When the tech IPO market can cover that broad a spread, it truly is open for business.

Start with those companies that have already seen through their offering. The relatively slight build of both PagerDuty and Tufin Software Technologies didn’t really hurt them as they stepped onto the NYSE on Thursday. That’s particularly true for PagerDuty, a subscription-based IT incident-response software provider that put up just $118m in sales last year. Tufin, which recorded just $85m in sales in 2018, is about a year behind PagerDuty, assuming it holds its roughly 30% growth rate.

Nonetheless, PagerDuty priced its offering above the expected range and soared more than 50% on its debut. As we noted in our report on the offering, investors are valuing the company at some $2.8bn, or more than 20 times last year’s sales. Having already secured its standing as a unicorn in the private market, PagerDuty is now approaching ‘tricorn’ status in the public market.

Tufin debuted at a far more muted valuation, but still created more than $600m of market value. With 34.2 million shares outstanding (on a non-diluted basis), Tufin is trading at more than 7x 2018 revenue. As we outlined in our preview of the offering, Tufin’s valuation probably has less to do with how much revenue it generates than how it generates that revenue: back-end-loaded sales in a license/maintenance model.

But both those realized offerings on Thursday were very quickly and unceremoniously overshadowed by the anticipated debut of Uber. The ride-hailing company’s planned IPO, which will be brought to market by a herd of 29 underwriters, makes the offerings of Tufin and PagerDuty seem like a series B funding. Across the board, Uber’s financials – funding, revenue, losses – are orders of magnitude larger than either of the enterprise-focused IPOs. And yet, for all the variety of the companies and their offerings, each of them can find investors ready to throw more capital their way. The bulls are running right now.

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PagerDuty calls on an exuberant IPO market

Mark Fontecchio

by Scott Denne

Following a nearly six-month lull, the market for enterprise IPOs has picked up where it left off – handing out gushing valuations to high-growth SaaS companies. PagerDuty became the newest beneficiary, pricing above its range and moving well beyond that as the stock began trading. The multiple commanded by the IT operations software vendor sets the stage for another notable year for enterprise IPOs.

In its public debut today, PagerDuty’s share price jumped to $38, about 60% from where it priced its offering ($24). That surge leaves the company with a $2.8bn market cap, valuing it at 23.5x trailing revenue. It also gives PagerDuty a more favorable multiple than many of its peers. For example, the debutant trades within a turn of Elastic, a 2017 vintage IPO that’s double the size of PagerDuty – it posted $241m trailing revenue to PagerDuty’s $118m – and growing at a faster pace (70% vs. 50% year over year last quarter).

PagerDuty isn’t the only enterprise company feeling Wall Street’s good graces. Video-conferencing provider Zoom set a price range earlier this week implying a valuation of $7.7bn (about 28x revenue) on its forthcoming IPO. And infosec vendor Tufin saw a 30% bump in its debut today (we’ll cover that company in this space tomorrow). There’s little doubt that after a dip in equity prices last year Wall Street has, once again, become a welcoming place for enterprise startups – several of last year’s other IPOs trade at multiples in the 20x neighborhood.

The S&P 500 has risen 15% since the start of the year and the latest consumer confidence survey from 451 Research’s VoCUL shows faith in the US stock market coming back to the same levels as last autumn. Should new offerings continue to garner healthy valuations, this year’s IPO pipeline could fill up to compete with last year’s record of 15 enterprise technology debuts, despite the first quarter passing without one.

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