Author: Mark Fontecchio

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

Broken promise

Mark Fontecchio

by Scott Denne

Verizon’s struggles to extract value from its massive investments in digital media became official this week as the company announced that it would write down much of the value of its AOL and Yahoo acquisitions. Given the amount of value it’s lost across those two deals, there’s little doubt now that Verizon will never emerge as a prolific acquirer of digital media vendors, despite owning two businesses that were once among the most active.

In 2015 and 2016, Verizon paid a combined $9.2bn to acquire AOL and Yahoo to transform its telecom network – and the consumer data flowing through it – into a challenger to Facebook and Google. The anticipated benefits have failed to materialize. In the third quarter, Oath (Verizon’s name for the combined AOL and Yahoo business) saw its topline shrink by 7% to $1.8bn, putting the company well short of its 2020 annual revenue target of $10bn. As gains in mobile and video advertising have failed to compensate for declines in desktop and search, Verizon wrote down $4.6bn of the $4.8bn goodwill it carried on the combined transactions.

For would-be sellers of digital media firms, it could mean a major buyer is out of the market. Before joining the telco, AOL and Yahoo were among the most active acquirers of digital media – in the two years before Verizon bought AOL, the two companies spent a combined $2.8bn on 53 tech purchases.

Verizon’s Oath wasn’t nearly as active. According to 451 Research’s M&A KnowledgeBase, Verizon only acquired one company to add to Oath in the past two years, picking up full ownership of Yahoo’s Australian venture. The write-down makes it likely that trend will continue now that Verizon has officially owned up to its overpayment.

In with a bang, out with a whimper

Mark Fontecchio

by Brenon Daly

After a record pace throughout much of 2018, the enterprise tech IPO market has basically ground to a halt. And with the traditional extended holiday break for new offerings, it’s looking like the year will wrap with a two-month drought in IPOs. That’s quite a drop-off from the start of the year, when nearly two B2B tech startups were coming public each month.

Overall, our tally shows that twice as many enterprise-focused tech vendors came public in the first half of this year than the second half. (To be clear, we are counting only B2B companies that listed on the NYSE and Nasdaq. That excludes, for instance, this year’s surprisingly numerous biotech offerings as well as the handful of consumer tech startups that came to market in 2018.)

Of course, recent IPO activity has been hit hard by the fact that the broader US stock market has been hit hard. A survey by 451 Research’s Voice of the Connected User Landscape done during some of the volatile days in October showed that three times as many investors had lost confidence in the equity market since last summer as had gained confidence in it. When Wall Street feels like shaky ground, it’s hard for new offerings to find their footing.

None of that precludes new offerings next year. But to the extent that uncertainty continues to cast clouds over Wall Street in 2019, the overall climate could table IPOs for smaller, more speculative enterprise tech startups. Big names tend to be ‘bankable’ regardless of what’s happening in the broader market. (That development is also being driven by VCs, who are concentrating more money into fewer companies.)

That’s starting to play out in the related consumer technology sector. Lyft announced last week that it had put in its IPO paperwork, putting it on track for an offering in the opening months of next year. And not to be outdone, Uber is also reportedly putting its offering in place. Meanwhile, on the enterprise tech side, there’s been plenty of speculation that Palantir will exchange its long-held secrecy for a public listing in 2019.

As welcome as those new names would be, however, they won’t do much for the broader tech IPO market. No one holds out these so-called ‘decacorns’ as representative of the much bigger startup community. As anomalies, they are not going to lead other companies to market or help set a bullish tone for other tech IPOs. Instead, smaller tech vendors will be relegated to observers on Wall Street, watching on as large-cap private companies become large-cap public companies in a rather mechanical process.

Webinar: ML implementations and acquisitions

Mark Fontecchio

by Brenon Daly

There’s no faster-growing segment of the relatively mature enterprise software market right now than machine learning (ML). Join 451 Research on Wednesday morning for a special webinar on the collection of technologies that help companies get smarter about their operations, customers and partners. The webinar will cover not only how ML works, but also what it’s worth.

Whether it’s using ML to vault ahead of rivals or to explore bountiful new markets, ML can truly alter the fortunes of a business. And yet, even with the near-universal relevance of ML (who doesn’t want smarter software?), the technology is only starting to find its way into companies.

In a recent survey of 550 IT decision-makers, Nick Patience, 451 Research’s head of software research, found that just 17% said they have deployed ML technology. Further, most of those use cases were rather narrowly defined.

At the same time, however, our survey of tech buyers and users showed they are planning to be much more expansive and aggressive with ML. Looking ahead, roughly half of the respondents expect to have ML technology up and running by mid-2019, up from just one in six right now. The soaring forecast for ML implementations is unprecedented in the relatively mature software industry.

That same sort of pattern is playing out in acquisitions in this market, as suppliers look to pick up ML technology at an ever-increasing pace. Already this year, buyers have announced more ML deals than any year in history, according to 451 Research’s M&A KnowledgeBase. At the current rate, the M&A KnowledgeBase will record roughly 140 ML-related prints for the full-year 2018, twice the number from just two years ago and more than three times the number in 2015.

To get smart on machine learning and get even smarter on doing ML deals, 451 Research will be hosting a special hour-long webinar on Wednesday, December 12 at 11:00 ET. We will be looking at both the technological underpinnings of this rapidly emerging technology trend, as well as how suppliers are using M&A to respond to this unprecedented demand. Join us later this week to learn more about the most-transformative enterprise technology trend in the market right now.

IBM sells software for once

Mark Fontecchio

by Scott Denne

Amid the growing perception that technology is disrupting a wide range of industries, it’s worth noting that the software business itself is one of those industries. And perhaps no company is responding to that shift as dramatically as IBM. With a record acquisition recently announced, Big Blue has now made a record divestiture, shedding several software assets in a $1.8bn sale to HCL Technologies.

Throughout its history, IBM has frequently turned to a combination of acquisitions and divestitures to reorient its business. Those earlier sales, however, were almost entirely in services and hardware, while this deal marks its largest software divestment to date. In today’s transaction, Big Blue is selling software units that specialize in security (Appscan and BigFix), marketing (Unica, Commerce and Portal) and collaboration (Domino, Notes and Connections). All received scant attention from IBM in recent years and none reside in the areas that the company considers to be its strategic priorities, such as artificial intelligence (AI), blockchain and cloud computing.

It was that latter trend that sparked the recent $33.4bn purchase of Red Hat, setting an all-time record for the largest software deal. Having lost to Amazon and Microsoft in the first phase of the shift toward cloud computing, IBM sees another opportunity as the market shifts to hybrid- and multi-cloud environments. Today’s divestitures did nothing to aid the company in pursuit of that market.

Others have taken a similar tack, sensing that changes are coming to their sectors. In 451 Research’s VoTE: Digital Pulse survey, 47% of respondents among B2B software and IT tech vendors told us that digital technology would be highly disruptive to their organization’s market. Nuance Communications, for example, recently shed its document imaging business in a $400m sale as it focuses its resources on a raft of new challengers in the AI and voice recognition space. According to 451 Research’s M&A KnowledgeBase, public companies around the globe have divested a collective $6.5bn in software assets so far this year, the second-highest annual total in the current decade.

Survey says…

Mark Fontecchio

by Brenon Daly

Talk about the wisdom of the crowds. In a pair of 451 Research surveys last December, the tech M&A community accurately forecast this year’s stunning resurgence in dealmaking. In separate surveys last year, both corporate development executives and senior investment bankers predicted that 2018 would be a banner year for tech M&A, reversing two consecutive annual declines.

Strategic buyers gave their strongest outlook to any survey since the recession, while an above-average number of advisers indicated last year that they expected an uptick in acquisition activity this year. Tellingly, the bullishness from both groups has come through in actual deal flow, with this year on track for the highest level of annual spending since the dot-com collapse. (451 Research subscribers can see our full report on last year’s survey of corporate acquirers and bankers.)

Having presciently predicted activity in 2018, what do the main buyers in the tech M&A market and their advisers see coming in 2019?

To get the forecast, 451 Research is currently surveying both groups. If you work in a M&A capacity at a company or are a seasoned investment banker (VP and above), we would like to hear from you. The surveys are quick and painless, taking just 5-10 minutes. There’s even a fun question or two in both of the surveys. (If you haven’t received an emailed link for the survey, please contact me.)

In return, we’ll send all respondents an advanced look at the key findings of the survey, so they’ll know exactly where the market is heading next year. Again, to take part, simply email me and I’ll get you the correct survey. Thank you for offering your take on tech M&A in 2019.

Raining on the M&A parade

Mark Fontecchio

by Brenon Daly

Not everyone is loving the record pace of tech M&A this year. In a novel survey, 451 Research’s Voice of the Enterprise (VotE) recently asked more than 1,000 IT users for their take on the seemingly ceaseless stream of acquisitions that has unalterably reshaped the tech landscape. Their verdict: they are hesitant about doing business with those companies after the deal closes.

Specifically, four out of 10 respondents to our VotE: Digital Pulse, Vendor Evaluations survey said they had concerns that one of their key vendors would get snapped up within the next year. That’s a legitimate concern when we consider that this year, we’ve already seen over 100 major tech vendors acquired for more than $1bn, according to 451 Research’s M&A KnowledgeBase. Further, survey respondents told us that most transactions break down because of product, not pricing.

Disruptions and distractions caused by the acquisition were – by far – the main reason for the dour assessment given to deals. Roughly one-third of respondents who had concerns about M&A cited those two reasons, which was twice as high as any of the other concerns. In contrast, just one out of 10 (11%) cited ‘price increase’ as a reason for the concern. (Note to all the would-be trust-busters in Washington DC: you can relax your scrutiny of tech transactions just a little bit.)

The VotE survey is important because it draws responses from IT users, or as we like to call them, ‘customers.’ In many cases, the VotE respondents are the very people who have supplied the growth that made the acquired company attractive to the buyer in the first place.

Further, it is these customers – not the acquirer or its phalanx of paid supporters of the deal – that will ultimately determine the returns on the thousands of tech transactions done each year. (Our VotE survey captures their ‘vote’ on M&A, if you will.) And yet, a significant number of them are saying that, post-close, it may not be business as usual with their suppliers. That’s a decision that could potentially swing hundreds of millions of dollars in IT spending to different vendors.

Of course, a skeptical take doesn’t necessarily doom a deal. But the bearish outlook from customers does stack the odds a bit higher against buyers getting the hoped-for returns from the acquisitions they are inking. The sentiment in our survey stops short of saying ‘buyer beware’ – instead, it’s more ‘buyer be aware.’

Sunny weather for hybrid cloud deals

Mark Fontecchio

by Scott Denne, James Curtis, Steven Hill

To stay relevant during a massive shift toward the use of public clouds, makers of on-premises IT hardware and software need products that help customers develop, run and manage their infrastructure on multi-cloud and hybrid cloud environments. The hunt for those products has been a catalyst for recent acquisitions, including, most notably, IBM’s $34bn pickup of Red Hat. Two other deals that match that theme were struck today, one by Hewlett Packard Enterprise and one by Red Hat, while it awaits the close of its sale to IBM.

The transactions cover different segments of IT – Red Hat purchased storage software, while HPE bought a data platform. Yet both illustrate that helping clients navigate mixed cloud environments has become a strategic priority for legacy IT technology firms. In its deal, Red Hat reached for NooBaa, a provider of object-storage management software for data that resides across multiple clouds.

In the other transaction, HPE nabbed BlueData, a maker of virtualization software for data workloads. That acquisition gives HPE software to bundle with its HPC systems, enabling it to offer both on-premises hardware and the software to run elastic data workloads across a hybrid environment. It’s a move HPE needed to make as more data and analytics tasks are transitioning from on-premises infrastructure at a faster pace than other IT workloads.

According to 451 Research’s Voice of the Enterprise: Cloud, Hosting and Managed Services, Workloads and Key Projects, 19% of organizations will use public cloud offerings as their primary IT environment by 2020, compared with 11% who did so this year. Data workloads are moving to the cloud even faster, with 27% saying that a public cloud (such as AWS or Azure) will be the primary environment for data processing, analytics and business intelligence, compared with 12% this year.

‘Buy now’

Mark Fontecchio

by Brenon Daly

As holiday-sated workers troop back to the office, they are expected to go through the annual ritual of logging onto their favorite online shopping sites and, collectively, throwing a few billion dollars into those virtual cash registers. The unofficial holiday of Cyber Monday pits retailers of all stripes against each other in an annual test of who can get online shoppers to click the ‘buy’ button.

For retailers not named Amazon, drawing in more of those digital dollars has meant making ever-larger M&A bets. This year has already seen two of the four largest acquisitions of online retailers since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase. The big prints have pushed this year’s spending on internet retailers to a record level, with the value of 2018 deals roughly matching the previous five years combined.

Looking at the blockbuster online retail transactions in 2018, however, we’re struck by the disconnect between the most-basic tenant of any market: supply and demand. Specifically, there’s a notable divergence between how an acquirer plans to use the target company to bolster its e-commerce site (supply), compared with what customers actually want from an e-commerce site (demand). One of our recent surveys of hundreds of online shoppers suggests that companies might do well to focus on optimization, rather than acquisition.

Consider the rationale for the two largest online retailing deals in 2018, which, admittedly, skewed overall spending in the sector compared with previous years. Walmart spent $16bn last summer for a majority stake in India-based e-commerce giant Flipkart, as part of a geographic expansion by the world’s largest retailer. A few months earlier, Swiss jewelry retailer Richemont handed over $3bn to expand into the clothing market as it purchased YOOX Net-A-Porter.

Broadly speaking, both of those transactions were driven by the buyer’s desire to expand into new markets. But merely offering more stuff – whether new products or new geographies – doesn’t necessarily lead to more sales. Without streamlining the acquired property, offerings turn into clutter. That’s an inconvenient fact that undermines much of the rationale for big e-commerce purchases like this year’s pair of billion-dollar deals.

As clearly shown in a recent survey by 451 Research’s Voice of the Connected User Landscape (VoCUL), more online stuff can slow sales, and send would-be buyers to other sites. In fact, three of the four top attributes that respondents to the VoCUL survey said they valued the most when shopping online had to do with being able to find and purchase things quickly. Would-be acquirers in the online retailing market should remember that when it comes to commerce, convenience is key.

Autodesk reinforces its construction biz with PlanGrid

Mark Fontecchio

by Scott Denne

Autodesk tops off a blockbuster year in construction software with the $875m acquisition of PlanGrid, a maker of project management applications. In acquiring the SaaS startup, Autodesk inks its largest deal and provides the latest indicator of the construction industry’s status as a maturing software market.

PlanGrid should augment the design and modeling focus of Autodesk’s construction and workflow software with the its more document-based approach. The acquirer also gets a new path to market. Where Autodesk typically sells subscriptions to IT departments of architectural firms, general contractors and the like, PlanGrid mainly sells its software on a by-project basis.

The construction market is propelling the topline at both firms – PlanGrid’s ARR expanded about 50% over the past year to roughly $65m, while Autodesk’s construction unit (its biggest) grew 28% in the most recent quarter, compared with 22% for the overall business. Autodesk’s peers and competitors have been equally eager to capture their share of that growth.

In 2018, purchases of construction-related technology vendors spiked to $4.2bn, more than the combined total deal value for 2017 and 2016. According to 451 Research’s M&A KnowledgeBase, three of the four largest transactions in that category were announced this year and all four in the past 12 months (Oracle disclosed its $1.2bn pickup of Aconex in the closing days of 2017.) Like Autodesk with PlanGrid, Trimble made its largest acquisition on record with the $1.2bn purchase of construction software provider Viewpoint in April.

Capital One builds up its M&A credit

Mark Fontecchio

by Scott Denne

Anticipating a digital disruption in finance, Capital One has printed its third tech acquisition of the year with the purchase of Wikibuy, a comparison shopping site. Today’s deal sets a new high-water mark for tech M&A for the consumer credit firm and comes as other banking and insurance companies look to add technology assets in anticipation of changes to the banking and insurance industries.

Capital One opened the year with the pickup of Notch, a machine learning consultancy. In the spring, it reached for Confyrm, an antifraud specialist. Prior to today’s transaction, Capital One had never bought more than two tech vendors in a single year and had only hit that mark twice, according to 451 Research’s M&A KnowledgeBase.

While those earlier deals address the operational side of disruption by adding to Capital One’s arsenal of risk management and credit-scoring tools, today’s move expands its footprint with consumers. Wikibuy provides a price-comparison website, along with services that offer consumers price updates on certain products. The transaction could help Capital One start to play a role, beyond payments, in its customers’ financial lives.

Taken together, these deals follow three or four years of public prognostications by Capital One’s management of a coming digital disruption in banking. Now the company appears to be turning toward tech consolidation to prepare for it. In that respect, it’s not unique among its peers. Allstate, for example, inked its second-ever tech acquisition with the purchase of credit-monitoring service InfoArmor in August. Three months earlier, Principal Financial Group made its first tech deal by acquiring RobustWealth, a maker of customer engagement software for financial advisers.

According to our surveys, the notion of a coming disruption to financial industries is widely anticipated. In 451 Research’s Voice of the Enterprise: Digital Pulse survey, 62% of respondents in finance anticipated a highly disruptive impact on their industry over the next five years – only media and telecom scored at or above that level.