Author: Mark Fontecchio

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

Bill.com braves bleak market for unicorns

Mark Fontecchio

by Scott Denne

Bill.com is looking to break a two-month dry spell of business technology IPOs as the SMB-focused payments software vendor unveils its prospectus. The offering comes as many other new listings have struggled to retain their momentum following frothy debuts, darkening the outlook for companies like Bill.com seeking to retain their unicorn status beyond their public offering.

With $121m in trailing revenue, Bill.com could come to market with a similar topline as PagerDuty, the IT management software firm that teed off this year’s round of enterprise IPOs back in April when the market valued it at 23x. Since then, its valuation has sunk to 10x, the multiple that Bill.com will need to fetch to retain the valuation from its last venture round. Landing a few turns higher seems doable, given that Bill.com’s sales grew 63% from a year earlier, compared with PagerDuty’s 47% (at the time of its IPO), and that the latter’s losses were more than three times larger than the $12m trailing net loss Bill.com posted.

Still, the company will be running up against the expanding opinion that many privately held unicorns are overvalued. In the most recent M&A Leaders‘ Survey from 451 Research and Morrison & Foerster, 62% of respondents said they expect the average unicorn startup to carry a valuation on its first day of trading that’s flat or down from its last venture round. In the same survey a year earlier, only 39% predicted such an unwelcoming environment.

Figure 1: Expectations for unicorn debuts

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Valuations stay high amid expected decline

Mark Fontecchio

by Scott Denne

There’s a consensus emerging that tech M&A valuations have peaked and are set for a decline. In the earnings call just ahead of his company’s acquisition of Carbonite this week, OpenText’s CEO said that M&A valuations appear to be coming down – a view that lines up with the results from a recent survey. Yet the deals getting done show little signs of pricing pressure.

Across the broader market, prices have only dropped fractionally from last year’s high. The median multiple for targets in OpenText’s traditional hunting ground – information management and application software – stands at 6.5x through 2019, from 6.6x last year, according to 451 Research’s M&A KnowledgeBase. In its $792m purchase of Carbonite, OpenText didn’t exactly pay a premium, although the target did fetch a higher multiple than other OpenText acquisitions.

The price landed somewhere between 2.8x and 3.2x trailing revenue, depending on how one accounts for the revenue from a recent substantial purchase by Carbonite (subscribers to 451 Research’s Market Insight can access our full report on that deal). But either way, the multiple sits on the high end of what Open Text historically pays. According to the M&A KnowledgeBase, OpenText typically pays 2.1x on acquisitions done this decade and we’ve never before recorded it paying above 2.9x.

Although it paid around the high end of its range for Carbonite, OpenText and its management aren’t the only ones expecting a decline in deal valuations. In the M&A Leaders‘ survey from Morrison & Foerster and 451 Research, five times as many respondents said they expect private company M&A valuations to drop over the next 12 months as those who anticipate an increase – the largest gap between bears and bulls that we’ve recorded in any of the last 11 runs of the survey.

Figure 1: Tech M&A valuation outlook
Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Ballooning budgets boost manufacturing IoT acquisitions

Mark Fontecchio

by Michael Hill

Buyers in the manufacturing space are opening their wallets for Internet of Things (IoT) targets because they can. IoT budgets in the vertical are increasing and, as a result, companies involved in the manufacturing industry are spending more on purchases than other IoT-friendly verticals. And targets developing IoT technologies for manufacturing and industrial applications are garnering more attention.

Since 2017, acquirers in the manufacturing vertical have spent $863m on IoT deals, compared with markets such as retail, which has spent $450m on IoT targets over the same period, and healthcare, which has spent $291m. Moreover, purchases of IoT technologies for manufacturing and industrial applications continue to tick up, with 12 such vendors having been acquired this year, matching the previous full-year record, according to 451 Research‘s M&A KnowledgeBase.

Along with the steady increase, the types of transactions getting done have shifted toward IoT targets that are factory-floor-ready, compared with the middleware- and consulting-focused deals that previously dominated the vertical. In other words, companies selling tech to manufacturing businesses are seeking targets that solve a specific business problem, rather than software or service providers with generalized IoT tech or IoT expertise.

Just last month, in fact, SKF, a 112-year-old manufacturer of bearings and rotational equipment, bought predictive maintenance SaaS specialist Presenso to help users of its products keep tabs on equipment performance. And earlier this year, industrial health and safety management software vendor Sphera Solutions snapped up Petrotechnics for its operational risk management expertise, giving the buyer the ability to recognize risks to business processes using real-time data drawn from IoT devices.

The increasing M&A activity is buoyed by expanding IoT budgets in manufacturing. Manufacturers are spending more on IoT across the board. According to 451 Research’s Voice of the Enterprise: IoT, Budgets & Outlook, the average manufacturing respondent said their IoT budget would rise by 44% in the next 12 months, up seven percentage points from when the same question was asked of them one year prior.

Figure 1: IoT tech M&A spending by vertical
Source: 451 Research’s M&A KnowledgeBase

Data providers are ready to deal

Mark Fontecchio

by Scott Denne

ZoomInfo has picked up Komiko as business data providers look to expand into software to increase the value of their data. Suppliers of data about companies and their employees for use in B2B sales and marketing face pressure as marketers shift budget toward software. DiscoverOrg, ZoomInfo’s parent company, has already inked two deals since the start of the year to give it new ways to gather data, including its acquisition of ZoomInfo (subscribers to 451 Research‘s M&A KnowledgeBase can access our estimate of the purchase here).

Now, with Komiko, it’s looking to strengthen its position by integrating that data into the software ecosystem. Combining ZoomInfo’s contact data with Komiko’s ability to gather data from email and integrate it into CRM and other marketing apps could help ZoomInfo take a piece of its customers’ CRM budget, rather than just squaring off against other data providers. Although Komiko, which has just a handful of employees, was likely a small acquisition, it shows that data providers are looking to print more tech and software transactions.

At least one of DiscoverOrg’s competitors, Dun & Bradstreet, has gone well beyond integration and into building software with its recent reach for Lattice Engines (see our estimate here). Those deals come as B2B marketers are expanding their budgets for more advanced data applications, such as customer intelligence and data enrichment, at the expense of traditional tactics like lead scoring, according to a recent report from 451 Research‘s Voice of the Enterprise: Customer Experience and Commerce. That could have other data suppliers looking to buy software vendors, a development we explored in a recent report.

Figure 1:

Source: 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019

Learning about machine learning

Mark Fontecchio

by Brenon Daly

A decade and a half since the term ‘machine learning’ first appeared as the rationale for an acquisition in 451 Research‘s M&A KnowledgeBase, the must-have technology has become the single-biggest driver for tech deals in the IT market. Technology companies – looking to make their offerings more efficient, more predictive or more secure – have snapped up hundreds of ML startups. And the pace of deals has only accelerated.

The M&A KnowledgeBase shows 2019 is tracking to nearly 300 ML-themed acquisitions. That’s almost double last year’s total and a full tenfold increase from the number of ML transactions just a half-decade ago. This year’s diverse set of acquirers of the technology shows the near-universal appeal. Buyers include mainstay tech vendors looking to make their products smarter (Oracle, Microsoft) as well as non-tech companies looking to get additional value from all of the data flowing from their existing products (McDonald’s, Mastercard).

To learn more about machine learning’s impact on corporate strategy and product development, 451 Research will be hosting a special Cycle of Innovation Summit in Menlo Park, California, tomorrow morning. (There are still a few seats available. 451 Research clients can register for the ML-focused Summit, which runs Tuesday, November 12 from 8:00-11:00am PST, on the event‘s website.) During the special event, we will be looking at the full ML market, including perspectives on how businesses are building value through ML offerings and how startups are realizing value via ML exits. Among the trends we will be highlighting:

For all of its buzz in IT, ML is still more of a concept than a product at the majority of vendors. Just one in five tech buyers and users said their company has ML up and running, according to a survey from 451 Research’s Voice of the Enterprise (VotE): AI & Machine Learning. Yet more alluringly, the same number of respondents (20%) said their company is currently developing an ML deployment.

To get started in ML, a plurality of customers told us they are looking to existing tech providers to bake in smarts to their products. Nearly four in 10 respondents (38%) said they are running ‘ML-enhanced applications,’ which was the top-rated source for the tech in our VotE survey. That drive is the primary reason our data shows M&A activity in the sector is running at an all-time high.

Figure 1:

PE bolt-on deals could ratchet up

Mark Fontecchio

by Scott Denne

Tech acquisitions by private equity (PE) firms have softened a bit from a record 2018 (a development we covered recently) as sponsors take on new platforms at a slower pace. But purchases of bolt-on assets for the platforms they already own haven’t meaningfully declined. And as data from our recent M&A Leaders‘ survey suggests, the shift toward more additive acquisitions by buyout shops could well expand into 2020.

According to 451 Research‘s M&A KnowledgeBase, PE firms are on pace to print just 1% fewer bolt-on deals than they did last year, while acquisitions of new platforms are falling short of last year’s total by about 5%. Most recently, we’ve seen a surge of such transactions since the start of the quarter – just this week we’ve logged 13 of them, including DoubleVerify’s pickup of Ad-Juster. That deal by the Providence Equity Partners portfolio company marks its third of the year (it had only made one purchase in the decade before Providence Equity bought a majority stake in the ad-tech vendor in 2017).

Bolt-on acquisitions have become a regular feature of PE tech transactions as more firms have gravitated toward buying high-priced growth companies, and then using additional deals to augment revenue expansion and lower the effective multiple paid for the platform. According to our data, the median multiple paid for a platform acquisition hit 4.4x trailing revenue last year, while the median price for a bolt-on was a turn lower.

As they have already done this year, buyout shops could turn more toward adding to existing portfolio companies and away from reaching for new ones as they become sensitive to price. In our recent M&A Leaders‘ survey, 80% of respondents partially blamed rising valuations for the slowdown in PE purchases this year and 56% of them expect PE deals to carry lower multiples in the next 12 months. Just 7% anticipate increasing multiples in PE transactions.

Figure 1:

Survey: rising signs of decline for tech M&A

Mark Fontecchio

by Scott Denne

Dealmakers are forecasting a frosty follow-up to an unusually chilly summer for the tech M&A market. In the latest iteration of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, respondents handed in the most pessimistic report we’ve seen in any previous fourth quarter.

The 40% of tech M&A practitioners that told us deal activity would increase represents only a slight drop from our year-ago reading, when 43% predicted an increase. Yet in this survey, 28% said deal activity would decrease, nearly double the rate of the previous survey and only the second time that more than one in four respondents have forecast a decline.

The results come as acquirers delivered their lightest level of spending on tech M&A targets in two years. As we discussed in our most recent quarterly M&A report, summer spending on tech M&A targets dropped 25% below each of the previous two quarters. Even many of those respondents projecting an increase in deals didn’t put forth a rosy outlook on pricing. At a rate of five to one, respondents predicted that private company M&A valuations would decrease in the next 12 months.

Prices have already fallen a bit from last year’s record levels. According to 451 Research‘s M&A KnowledgeBase, among private tech vendors selling for $100m or more, the median multiple stands at 5x trailing revenue in 2019, down from 5.3x last year.

We’ll publish the full analysis of the fifteenth edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster survey later today. The report, available to subscribers to 451 Research’s Market Insight service, will also include the outlook for private equity, strategic and crossborder acquisitions.

Figure 1:

Slumping in the home stretch

Mark Fontecchio

by Brenon Daly

After slumping to the end of Q3, tech M&A rebounded slightly in the opening month of the final quarter of 2019. Acquirers spent $28bn on 358 tech and telcom transactions announced around the world in October, according to 451 Research‘s M&A KnowledgeBase. Although spending in the just-completed month doubled from September’s lowly totals, our data shows that October still came in about 30% lighter than the average monthly spending through the first three quarters of the year.

October’s low overall deal value came despite some pretty high valuations in last month’s prints. The M&A KnowledgeBase indicates that buyers paid an average of 3.6x trailing sales in the transactions they announced last month. While acknowledging there tends to be a high degree of variability in valuations in any given month, we would nonetheless note that last month’s average price-to-sales ratio is a full turn higher than the average of 2.6x paid in deals announced from January through September.

Certainly, the M&A KnowledgeBase has some pricy prints for October. That includes both of last month’s largest transactions:

In last month’s blockbuster deal, Digital Realty paid $7.3bn in equity – an eye-popping 13x trailing sales and 30x trailing EBITDA – for European rival Interxion.

Sophos got a ‘growthy‘ valuation of 5.5x trailing sales in its $3.8bn take-private by buyout shop Thoma Bravo.

The relatively soft October spending comes after an even softer September. (Our database shows that the total value of tech acquisitions in the two most recent months barely equals the average spending for a single month in the first half of 2019.) Taken together, the late-summer slowdown has effectively removed 2019 from the top rank of tech M&A, with full-year 2019 spending on transactions on track to drop about 20% from 2018.

Figure 1:

Same play, smaller screen

Mark Fontecchio

by Scott Denne, Jessica Montgomery

Google has jumped into wearables with the $2.2bn pickup of Fitbit. But don’t expect the buyer, which makes almost all of its money from search and advertising, to invest heavily in turning around the fortunes of the beleaguered fitness tracker. Instead, expect it to follow the same plan as it did with Motorola – use the target’s team, tech and assets to make products that show other hardware vendors what can be done with Google’s OS software.

Our surveys show that Fitbit remains the leading maker of fitness trackers, although by any measure the company’s best days are behind it. Its topline expanded just 5% in the most recent quarter and its stock has tumbled from nearly $50 per share in the weeks after its 2015 IPO (Google is paying $7.35 per share). According to 451 Research‘s VoCUL: Endpoints & IoT, Consumer Wearables report, planned purchases of fitness trackers have steadily declined since mid-2017, dropping to 3% in our August reading. And within the category, Fitbit is losing ground – just 20% of those planned purchasers said they intend to buy a Fitbit, down from 37% a quarter earlier.

In smartwatches, Fitbit hasn’t become a formidable presence. Fewer than 2% of planned smartwatch buyers have their eye on a Fitbit, compared with Apple’s 74%. It’s the former company’s lead that has compelled Google to make a move here. With the purchase of Fitbit, which itself had bought Pebble, a pioneer of the smartwatch category, Google could attempt to develop watches that highlight the capabilities of Wear OS (its smartwatch version of Android) and draw app developers to its software, much as it did with Motorola and continues to do with its Pixel phones.

For Google (now officially known as Alphabet), the acquisition of Motorola was a response to an existential threat – the increasing adoption of smartphones. If the company hadn’t found a way to make its search engine easily accessible on mobile devices, it could have been shut out of the market. Even with the prevalence of Android (our most recent VoCUL survey showed that nearly 40% of current smartphone owners have an Android phone), Google has paid Apple billions of dollars to be the default search engine on Apple devices.

Google’s purchase of Fitbit is far smaller than its $12.5bn reach for Motorola. And that’s, well, fitting. Although it’s important to Google that its OS gets into every major compute interface, smartwatches haven’t yet gained the kind of traction that smartphones have enjoyed. According to VoCUL, 10% or fewer respondents typically say they plan to buy a smartwatch in the next 90 days, whereas the smartphone market tends to be 10-20% in recent quarters, and higher when the category was less mature.

For those seeking a more detailed view of wearables, the broader IoT market and its impact on M&A, 451 Research will be hosting its Cycle of Innovation Summit in Boston next Tuesday morning (11/5).

Figure 1:

A sudden spike in patient-monitoring M&A

Mark Fontecchio

by Scott Denne

UnitedHealth Group becomes the latest acquirer to scoop up a patient-monitoring vendor with its purchase of Vivify Health. Through the first 10 months of the year, there’s been a surge of acquisitions that involve patient monitoring as insurance carriers and medical software firms seek to capitalize on a nascent market that’s buoyed by the two most potent themes in emerging technology today – the Internet of things (IoT) and machine learning.

According to 451 Research‘s M&A KnowledgeBase, the acquisition of Vivify, a developer of software for remote patient monitoring and care, marks the eleventh tech deal of 2019 involving a company with patient-monitoring capabilities. That’s up from just six last year and two more than we’ve recorded in any full year. The expanding interest in patient monitoring comes as new technologies are emerging to enable healthcare providers to monitor patients remotely (through wearables and other connected devices) and run analysis on the monitoring data they’ve long collected in hospitals.

In 451 Research’s Voice of the Enterprise: AI & Machine Learning, Adoption & Uses Cases report, 45% of respondents in the healthcare industry said they currently use machine learning for patient monitoring. Related to that, in our Voice of the Enterprise: IoT, Organizational Dynamics survey, 72% of healthcare respondents said their organizations have the endpoints in place to collect data for patient monitoring, yet few of them have such a project up and running.

Improved patient monitoring could lead to lower costs for insurance providers like UnitedHealth, although it’s still early days for this corner of healthcare. Our IoT study shows that more organizations have the endpoints in place than are actually deploying IoT-related monitoring projects. Still, the potential cost savings and healthcare’s affinity for IoT could lead to an expansion of patient monitoring, as our survey showed that healthcare remains ahead of other verticals in IoT adoption.

For those seeking a more detailed view of the rapidly emerging IoT market, 451 Research will be hosting a special event next week focused on the technology and implementation trends that are spurring the record M&A activity in IoT. Clients can register for our Cycle of Innovation Summit in Boston next Tuesday morning (11/5) on the event’s website.

Figure 1: