Author: Mark Fontecchio

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

A barbell lift in Q3

Mark Fontecchio

by Brenon Daly

At the top end of the market, tech deal flow in the just-completed Q3 resembled a barbell. Blockbuster transactions came thick and fast in both the quarter’s opening month of July and the closing month of September, but were split in August, when seemingly all of the acquirers went on vacation. 451 Research’s M&A KnowledgeBase shows both July and September put up twice as many billion-dollar-plus tech deals as the dog days of August.

Inevitably, the start-stop-start pattern of big prints in Q3 also shaped the overall monthly totals of announced deal value. All M&A tends be fairly lumpy, skewed by occasional large transactions. But the activity in Q3 was particularly episodic. According to the M&A KnowledgeBase, July acquisition spending hit a relatively high level of $51bn, then fell by half to $23bn in August but then rebounded sharply in September, more than tripling to $79bn. September spending represented the highest monthly total in more than two years.

Bookended by big months, Q3 kept alive this year’s streak of consecutive quarterly M&A spending increases. Dealmakers around the globe handed out $154bn on tech and telecom transactions in the July-September period, slightly more than they spent in Q2 and about one-quarter more than they spent in Q1, according to the M&A KnowledgeBase. We would note that the continued increase came even as private equity (PE) firms turned into uncharacteristic clutchfists last quarter, with both the number of PE deals and the spending dropping for the first time in 2018.

Overall, the strength of Q3 puts 2018 on track to rival the highest annual spending level since the dot-com collapse. 451 Research subscribers can see our full report on Q3 M&A activity, as well as a look ahead to the final quarter of the year, on our site on Tuesday.

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

A monkey riding a bull

Mark Fontecchio

by Brenon Daly

Already valued at about $2bn in the private market, SurveyMonkey held that ‘double unicorn’ valuation as it debuted in the public market. The company priced its upsized offering above the expected range, and watched the freshly printed stock jump about 50% on the Nasdaq. Yet even with all that bullishness, the IPO was more about value confirmation than value accretion.

Still, the online survey provider does enjoy a rather healthy valuation. With roughly 125 million shares outstanding (on a nondiluted basis), Wall Street is valuing SurveyMonkey at about $2.25bn. That’s roughly nine times the 2018 revenue that we project for company. (Our math: So far this year, SurveyMonkey has increased revenue about 14%. Assuming that rate holds through the second half of this year, 2018 sales would come in at about $250m.)

In the IPO, the company raised $180m plus another $40m from a separate direct sale to Salesforce Ventures. That goes on top of the roughly $1bn that the company had previously raised in debt and equity. The company’s main backer, hedge fund Tiger Capital Management, still owns about one-quarter of the company. (In addition to being the largest shareholder of SurveyMonkey, Tiger is also its largest customer, according to the company’s prospectus.)

Having probably taken in all the financing it could reasonably expect to collect as a private company, SurveyMonkey might well look at today’s IPO as a necessity. (It will be using $100m of the proceeds to pay off its debt.) The fact that Wall Street investors received the dot-com survivor so warmly not only splashes a bit of liquidity in the 19-year-old company, but may have other companies of its scale and vintage also give a closer look at the public market. As everyone on Wall Street knows, you always want to sell into demand.

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

Marketing deals rise, once again, on Marketo

Mark Fontecchio

by Scott Denne

Marketo has now twice driven marketing tech M&A to new heights. Adobe’s $4.8bn acquisition of the marketing automation vendor pushes the total value of marketing deals past its previous record, set in 2016, a year when Vista Equity Partners’ $1.8bn take-private of the same company was the largest transaction in the category. Although only a year separates those record runs, the motivations of the largest buyers in each year are far apart.

According to 451 Research’s M&A KnowledgeBase, $13.2bn worth of marketing software and services companies have been acquired this year, already well above 2016’s $8.6bn. A surge of private equity buyers paying healthy multiples propelled the latter year’s total – the second-largest marketing tech deal that year was EQT’s $1.1bn purchase of Sitecore. This year, it’s strategic buyers looking to play defense that’s driving up the total.

Take ad agency Interpublic, which spent $2.3bn for Acxiom’s marketing database services business to fend off the consulting shops and SIs that are pouring into advertising as the market goes digital. Similarly, AT&T’s $1.6bn acquisition of AppNexus makes up part of the telecom giant’s plan (along with its pickup of Time Warner) to keep from being just a pipe for Amazon, Facebook, Google and Netflix.

In Adobe’s case, reaching for Marketo seems motivated by its increasing competition with Salesforce. Adobe could have outbid Vista Equity back in 2016 for less than the roughly 12x trailing sales it’s paying today. (Vista paid 7.9x in that earlier transaction). Owning Marketo provides Adobe with a defense against Salesforce’s historical strength among B2B firms. In a similar vein, Adobe’s $1.7bn purchase of Magento in May seemed a strike at Salesforce’s earlier acquisition of Magento rival Demandware and also came at an uncharacteristic valuation (11.2x). Prior to those two most recent deals, Adobe had only once paid more than 8x for a vendor with at least $10m in revenue.

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

With HCTS around the corner, hosting M&A sees slowdown from record highs

Mark Fontecchio

by Mark Fontecchio

With 451 Research’s Hosting & Cloud Transformation Summit (HCTS) set to kick off next week, hosted services M&A activity has been a bit quiet in 2018, retreating from recent record highs. Massive multitenant datacenter (MTDC) consolidation in previous years has cut the number of sizable targets available for purchase, drastically reducing M&A spending. However, as enterprises increasingly migrate IT workloads off-premises, hosting providers are offering more managed hosting and cloud services, and inking deals to help them do it.

According to 451 Research’s M&A KnowledgeBase, hosted services acquisitions total $8.1bn in spending so far this year. That pace would put 2018’s year-end total at about $11.5bn, well below outsized spending in 2016 and 2017. That said, the flow of hosting deals has been notoriously lumpy. For example, 2016 saw nearly half of its record spending of $15.6bn come in Q4.

Could that happen again this year? While unlikely, it’s possible. The two largest strategic acquirers, Equinix and Digital Realty Trust, spent an average of $6bn on acquisitions in each of the past three years. In 2018, however, they’ve spent just a fraction of that, the only transaction being Equinix’s $781m purchase of Infomart Dallas. Equinix, with nearly $1bn in cash, is the more feasible of the two to ink a blockbuster deal in Q4, as Digital Realty is likely still working on integrating its largest-ever acquisition, the $6bn purchase of DuPont Fabros in mid-2017.

As for financial buyers, private equity firms have taken much-larger positions in hosted services recently, with five $1bn+ transactions since 2016, which is more than they inked in all of the previous decade. While the $3.8bn in spending by buyout firms so far this year exceeds all of 2017, it is still about half the record $7.6bn in 2016. One potential large target is a group of hundreds of datacenters – mostly in North America and Europe – that CenturyLink obtained in its 2016 pickup of Level 3, which could be sold together or possibly split up. There was also an activist investor pushing QTS Realty Trust to sell earlier this year following accusations of mismanagement, although that sentiment has died down a bit.

Meanwhile, most hosted services M&A this year has happened outside of strictly colocation. Of the three $1bn+ deals, two were for services other than – or in addition to – MTDC. They were Siris Capital’s $2bn purchase of Web.com (web hosting) and GTT Communications’ $2.3bn acquisition of Interoute (fiber and cloud networking). Other $100m+ transactions in cloud and managed services this year include Orange buying Basefarm and Internap reaching for SingleHop. There have even been hosting providers acquiring cloud migration and integration vendors, which we wrote about last month. Examples there include Rackspace buying Salesforce integrator RelationEdge, as well as Green House Data purchasing Microsoft integrator Infront Consulting.

For those attending HCTS, be sure to join 451 Research and ING for an opening breakfast on Tuesday morning to discuss the overall tech M&A market, which is currently running at near-record rates. That will be followed by a more focused session on Tuesday afternoon on consolidation trends in the datacenter and managed service market. We look forward to seeing many of you there.

Two different companies, two different exits

Mark Fontecchio

by Brenon Daly

Maybe Anaplan can pull off what its rival Adaptive Insights failed to do: make it to Wall Street. The two corporate performance management (CPM) vendors put in their IPO paperwork just four months apart, but the outcomes for the two companies are looking very different. While Adaptive Insights is probably more at home inside the portfolio of an existing enterprise software provider, Anaplan’s stronger financial profile makes it far more likely to go public and continue this year’s bullish run of enterprise software offerings.

By any number of measures at these two vendors, Anaplan’s financials are more in line with what public market investors want to see. (We would note that measuring financials is essentially what the software from each of these companies actually does.) Anaplan is half again as big as Adaptive Insights, and it’s increasing sales at a more rapid clip (40% growth for Anaplan, compared with 30% at Adaptive Insights.) Anaplan’s scale and trajectory put it more in line with other recent enterprise software debutants such as Pluralsight and Zuora.

The fact that Anaplan has lost roughly twice as much as Adaptive Insights in recent quarters due to comparatively rich sales and marketing spending probably won’t trouble public market investors, who have been focused on the top line of this year’s IPOs rather than the bottom line. Lingering concerns around Anaplan’s red ink will likely be eased if Wall Street looks at the company’s customer retention rate of roughly 120%, which puts it in the top segment for SaaS vendors. For comparison, Adaptive Insights renewed customer contracts each year at only about 100% of their value.

All of that points to Anaplan enjoying at least some premium valuation to its CPM rival. In its dual-track process, Adaptive Insights ended up selling to SaaS stalwart Workday for $1.6bn, or 13.6x trailing sales. That’s also roughly the current trading valuation for recent software debutant Zuora.

Although Zuora and Anaplan serve vastly different markets, they are identically sized ($109m in 1H 2018 revenue, with each putting up a majority of subscription sales combined with a bit of professional services) and share a similar growth trajectory. Putting the mid-teens price-to-sales valuation on Anaplan’s trailing sales of $168m puts the CPM provider in the neighborhood of $2.5bn market value, which would work out to roughly 10x forward sales, based on our estimates. Assuming that’s the case, Anaplan’s IPO exit could well be worth $1bn more than Adaptive Insights’ M&A exit.

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

A historic drop, a historic rebound

Mark Fontecchio

by Brenon Daly

The bankruptcy of Lehman Brothers, which came in a stunning and terrifying rush exactly 10 years ago, stands as a kind of highlight of an economy brought low. And fittingly enough for the largest Chapter 11 filing in US history, when the bank went under, it took a lot of other things down with it.

Credit disappeared, as would-be lenders began to wonder if other firms – on Wall Street and Main Street – might be going the way of Lehman. Equity markets plummeted, as investors rushed to escape the grasp of the brutal bear market. Businesses stopped spending, as they hunkered down to preserve rapidly evaporating liquidity.

The corporate capital constriction also hit M&A, most visibly at the top end of the market. To understand just how dire dealmaking was during the 2008-09 crisis, consider this: The number of transactions valued at more than $1bn announced in those two years sank to the lowest level since 2004, when the tech M&A market was only recovering from a largely self-inflicted recession at the turn of the millennium.

With just 30 acquisitions valued at more than $1bn in both 2008 and 2009, the number of big prints during the credit crisis dropped to less than half the level of the three previous years, according to 451 Research’s M&A KnowledgeBase. More tellingly, during the darkest days of the recent recession (essentially, the second half of 2008 and the first half of 2009), activity was just a fraction of that. Although the US economy started to find its feet again at the beginning of the current decade, thanks to unprecedented propping up from the Federal Reserve, tech acquirers took some time to find their way back to the top of the market. The M&A KnowledgeBase shows that it wasn’t until 2014 – almost a half-decade after the recession officially ended, with the Nasdaq Index having already tripled off its low – that the number of tech deals valued at more than $1bn reclaimed its pre-recession level.

Now, with equity markets trading near record levels, M&A activity in the rarified air has followed suit. In just the first half of this year, tech buyers – including big names such as Microsoft, Broadcom, Salesforce and others – printed more than 50 transactions valued at more than $1bn. The current record pace means acquirers are announcing two billion-dollar deals every week, a stunning acceleration compared with announcing fewer than two billion-dollar deals every month when the credit crisis was bottoming out.

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

Not wrong, just early?

Mark Fontecchio

by Brenon Daly

Call it a case of mistaken identity in the identity security market. In our exclusive report last week that BeyondTrust was nearing a sale, we speculated that One Identity would be the buyer for the often-in-play company. Instead, Bomgar has announced the purchase of BeyondTrust.

We regret missing the mark, which can be an occupational hazard while working in the opaque regions of the information economy. (Subscribers to 451 Research’s M&A KnowledgeBase can see our proprietary estimates for Bomgar’s acquisition of BeyondTrust by clicking here.)

In our defense, however, we were close. We had the correct family (private equity firm Francisco Partners) albeit the wrong sibling (Francisco-owned One Identity rather than Francisco-owned Bomgar). And, for the record, we have heard from numerous sources that One Identity and BeyondTrust have held in-depth M&A discussions ever since Francisco carved the software business out of Dell, which included the assets that became One Identity.

And while we didn’t necessarily get the right buyer for BeyondTrust right now, it may be a bit academic as far as Francisco is concerned. Longer term, we could well imagine that the PE shop will ultimately combine Bomgar, which it bought in April, with One Identity.

Buyout firms often consolidate holdings as a way to cut expenses and boost all-important cash flow. Admittedly, we’re speculating again. But there’s a lot of financial sense to making the move. If that does come to pass, then we like to think we weren’t wrong about the buyer for BeyondTrust, just early.

For now, though, 451 Research subscribers can look for our full report on Bomgar’s pickup of BeyondTrust on our site later today.

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

HR software in demand

Mark Fontecchio

by Scott Denne

A tight job market is opening exit opportunities for HR software companies. The record-low unemployment rate – it recently dipped below 4% for the first time in more than a decade – has increased interest in owning software developers that help businesses find, retain and train increasingly scarce employees, pushing such acquisitions to a remarkable level.

In the latest example, Cornerstone OnDemand has reached for Workpop, a provider of software for hiring hourly and seasonal workers, as part of the buyer’s revamp of its recruiting suite. As we noted at the time of that company’s last acquisition – back in 2014 – Cornerstone OnDemand hasn’t been much of a buyer, although in making a purchase now, it’s joining a parade of dealmakers scooping up HR software targets.

According to 451 Research’s M&A KnowledgeBase, acquirers have hooked 70 HR software targets, more than any other full year in this decade. Still, in terms of deal value, 2018 isn’t likely to be a record. The year’s total stands at $2.35bn, while two earlier years (2012 and 2014) saw more than $5bn in HR software transactions.

While 2012 and 2014 each had a pair of $1bn-plus deals by Oracle, IBM, SAP and Charthouse Capital, this year’s boom has benefited midmarket targets as we’ve recorded 13 acquisitions valued at $100-500m, two more than any other full year. Although the jobs picture helps juice this market, much of the increase comes through the same trends that bolster the overall software M&A market – increasing activity from private equity firms and a surge in strategic buyers. The former category has already purchased more HR software businesses this year than ever before, while corporate acquirers are heading toward record territory.

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

Zendesk focuses on sales with latest purchase

Mark Fontecchio

by Scott Denne

With its latest acquisition, Zendesk concentrates on its march toward $1bn in revenue with an asset that could help it bolster its enterprise sales. The helpdesk software provider adds sales force automation software to its suite with the purchase of FutureSimple (which does business as Base) and obtains a product that addresses the priorities of the largest businesses.

Terms of the deal weren’t disclosed, but there’s reason to believe that Base marks Zendesk’s largest acquisition yet. Zendesk had only inked three transactions before today – two that cost it about $15m each and one, BIME Analytics, that cost $45m. Base, by comparison, raised at least $52m in venture funding, according to 451 Research’s M&A KnowledgeBase, and has about 150 employees, compared with BIME’s 40.

The pickup of Base continues Zendesk’s expansion into other corners of customer engagement, beyond its roots as a helpdesk software developer. As we noted in our report on its purchase of marketing software vendor Outbound, Zendesk needs a broader suite to reach its goal of $1bn in annual revenue in 2020. It finished last year with $430m, a 38% jump from the year before, a growth rate that leaves little room for deceleration if Zendesk is to hit its target.

Although historically targeting smaller businesses, Zendesk hopes to entice more large enterprises to use its applications to get to that goal. By nabbing pipeline management, lead-scoring and other sales automation capabilities, Zendesk injects itself into a top priority for large enterprises. According to 451 Research’s most recent VoCUL: Corporate Mobility and Digital Transformation Survey, 22% of businesses with more than $1bn in annual revenue reported that sales organizations will have the highest budget for software compared with other lines of business: only IT (51%) and Zendesk’s core market of customer service (31%) ranked higher.

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

Welcome to middle age, Google

Mark Fontecchio

by Brenon Daly

Like a lot of us, Google has gotten more conservative as it has grown older. The search giant, which was born on this day 20 years ago, has dramatically slowed its once-frenetic M&A program, cutting the number of deals it announces each year to the lowest level since the recent recession. It’s almost as if Google has turned into a bit of a homebody as it hits the corporate equivalent of middle age.

So far in 2018, Google has announced just seven deals, according to 451 Research’s M&A KnowledgeBase. While Google’s pace of almost one acquisition per month leaves most other corporate acquirers in the dust, it is a dramatic slowdown from the recent rate at the company. (We would note that even as Google invests less in its inorganic growth initiatives, it continues to amply fund its organic growth initiatives. The company is currently spending $5bn per quarter on research and development.)

In terms of M&A, from 2010-2014 – when Google was, effectively, an adventurous teenager – the company averaged more than two deals each month. Our M&A KnowledgeBase shows that Google’s pace peaked in 2014 at 36 acquisitions, a head-spinning rate of three deals every month. For comparison, there are highly valued, large-cap tech companies with oodles of cash, like Google, that don’t even average three deals every year.

Of course, the recent decline in deals has more to do with strategy than chronology. In early 2015, Google appointed a former investment banker with a reputation for fiscal discipline as its CFO. It followed that up a few months later by overhauling its business and even adopting a new name, Alphabet. The impact was immediate.

As we noted about a half-year into the new era, the newly renamed Alphabet is focusing much more on ‘alpha,’ in the sense of being the top dog of internet advertising, as well as delivering ‘alpha’ to shareholders (Google stock has more than doubled since it made the changes). However, that has come at the cost of the second part of its name – the company is making far fewer M&A bets. That’s even more the case today, as Google rolls into its third decade of business.

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