Author: Mark Fontecchio

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

Microsoft jumps into retail media

Mark Fontecchio

by Scott Denne

The sudden surge of Amazon’s advertising business has sparked acquisitions of software companies that help retailers become publishers. Microsoft is the latest entrant with the purchase of PromoteIQ, a maker of software that enables retailers to run product ads. As audience monetization becomes a feature of more e-commerce businesses, more deals could come.

For Microsoft, the pickup of PromoteIQ (formerly known as Spotfront) has overlap with its search advertising business. Product ads, often delivered alongside e-commerce search results, are essentially an evolution of paid search advertising. The target’s software provides retailers with workflows and controls to manage their sponsored product listings.

Amazon, more than any other company, has realized the potential for retailers to monetize their apps and websites through sponsored products. As we noted in a recent report, the online retail giant’s advertising business has tripled in less than two years to about $10bn in annual revenue. Despite that growth, the category is nascent enough that there’s not yet a widely accepted name for it. PromoteIQ refers to it as ‘vendor marketing,’ while Criteo and Triad, two of its larger rivals, call it ‘retail media.’

Given the early stages of the market, there are few sizeable players remaining for would-be buyers. Several midsized firms such as Adzerk, Crealytics, Koddi, Playwire and SYNQY offer retail media products. Another vendor, OwnerIQ, enables retailers to monetize purchase intent data gleaned from shoppers on their sites. As Amazon’s advertising revenue continues to balloon, targets in this space could get a look from acquirers in search (Google, Pinterest), e-commerce software (BigCommerce, Shopify) and retail-focused advertising (Quotient, Valassis).

Conversation pieces

Mark Fontecchio

by Scott Denne

As machine learning permeates the tech stack, spoken and written queries are displacing type and click, leaving companies – from enterprise software developers to consumer electronics manufacturers – to bolt natural-language interfaces onto their products. That has led to a sharp rise in acquisitions of firms developing conversational artificial intelligence (AI), a trend that’s likely to extend through this year.

Today, two such deals were announced, highlighting the range of applications for such technology. In one, Cisco’s Webex nabbed Voicea for the target’s ability to turn recorded meetings into notes and summaries. In the other, Vonage picked up Over.ai to bolster its call-center products with advanced interactive voice response. The scarcity of natural-language-processing expertise, mixed with the broad applicability of the tech, has fueled a surge of M&A.

According to 451 Research‘s M&A KnowledgeBase, 23 vendors developing chatbots or other conversational AI capabilities were acquired last year, up from 15 in 2017. So far in 2019, there have been about three such transactions per month. Based on our estimates, most of the disclosed deal values have printed below $30m, with several below $10m. Still, for conversational AI specialists, exiting sooner could be more profitable than waiting.

Although there’s widespread demand for conversational capabilities, few companies are likely to ink multiple purchases and the buyer universe will begin to dry up. And there may be a limited opportunity to build a large independent company in this market as most businesses look to their existing software providers for machine learning capabilities. In 451 Research‘s Voice of the Enterprise: AI & Machine Learning report, a plurality of organizations (38%) told us they’ll leverage machine learning by acquiring software with the technology already baked in.

What might have been (and what may still be) for Symantec

Mark Fontecchio

by Brenon Daly

If not for a last-minute snag in talks to sell itself, Symantec would be headed to this week’s Black Hat not as the single-largest vendor in the information security (infosec) market, but as a subsidiary. Negotiations with chip giant Broadcom reportedly broke down over price (what else?), meaning Big Yellow will be unattached and unchaperoned as the hacker’s ball opens in the desert. We wonder, though, how many more industry confabs will Symantec be attending in its current standing?

A public company for 30 years, Symantec generates almost $5bn of sales each year. Part of the difficulty for Symantec right now is embedded in those two facts about the company. Symantec isn’t moving any closer to the $5bn. In fact, in its most-recent fiscal year it actually slipped further away, as Big Yellow got a little smaller in 2018. Declining revenue doesn’t do much for Wall Street investors.

That’s particularly true in infosec, where budgets across the board are fat and getting fatter. A stunning 87% of IT professionals told 451 Research’s Voice of the Enterprise (VotE): Information Security, Budgets & Outlook 2019 that their companies will have more money to spend on security this year than they did last year. On average, respondents to our VotE survey said their security budgets are up 22%, an enviable bump compared with GDP-like growth rates for overall IT budgets.

And yet, Symantec hasn’t been able to enjoy much of the bountiful budgets. That led to the abrupt departure of the company’s chief executive earlier this year, with an interim CEO still leading the industry giant. Symantec’s new chief, who cut his teeth in the semiconductor industry, has a reputation as a straight-talking operator, and he serves a board of directors that tips far more toward finance than technology. Fully half of Symantec’s 12 board members, including virtually all of the directors added in the previous three years, are out-and-out financial professionals.

Given the composition of Symantec’s board and executives, reports of a sale to a financially focused operator such as Broadcom shouldn’t have surprised anyone. (At least not after the chipmaker-turned-enterprise-software-provider shelled out $19bn for CA Technologies, a diversified software vendor that nonetheless shares a similar financial profile and vintage as Symantec.) Although Broadcom wasn’t able to consolidate the infosec giant, the reported negotiations did give a useful glimpse into the most likely outcome for Symantec: a full sale to a financial firm.

The company currently garners an enterprise value of about $16bn, or roughly 3.3 trailing sales. Even with an acquisition premium, Symantec’s LBO valuation would likely be slightly below the prevailing multiple of 4.1x trailing sales in take-privates announced so far this year on US exchanges, according to 451 Research‘s M&A KnowledgeBase. Looking specifically at the infosec market, our data shows buyout firm Thoma Bravo has paid 4-5.5x trailing sales in its three purchases of publicly traded security companies in the past three years.

Source: 451 Research’s Voice of the Enterprise: Macroeconomic outlook – Business Trends Q2 2019

Blackstone bags big exit in tightening market

Mark Fontecchio
by Scott Denne

In selling Refinitiv to London Stock Exchange (LSE) Group for $14.1bn in stock, Blackstone Group has managed the largest-ever sale of a PE-backed tech company. The deal comes amid an overall decline in PE exits, particularly among the largest assets. Although the shifting PE exit environment isn’t a dramatic swing, it’s notable given the rise in PE acquisitions in recent years.

The transaction values Refinitiv, a financial markets data provider, at $27bn when factoring in its debt. That’s nearly $4bn less than where the company was valued when Blackstone and two co-investors spun it off of Thomson Reuters last year, paying $17bn for 55% of the business. That’s not to say Blackstone is losing money on the deal – it put in $3bn of its own cash and will get more than that in LSE equity. Moreover, it won’t begin selling any of those shares for at least two years after the close, so its ultimate exit is still a ways off.

Still, in announcing such an exit, Blackstone’s an outlier. According to 451 Research’s M&A KnowledgeBase, PE firms have sold 156 tech vendors since the start of the year, approximately the same rate of exits as 2017, but 22% lower than 2018 – a record year for PE exits. The decline is more significant among larger deals. Our data shows that buyout shops have divested just nine companies (including Refinitiv) for $1bn or more this year, on pace for the fewest such exits since 2014.

The buyer it found is as remarkable as the record price it fetched in the sale of Refinitiv. LSE hasn’t spent more than $1bn on a tech purchase since 2007. And more broadly, strategic acquirers have only bought six $1bn PE portfolio companies this year. In 2018, they provided 20 of the 31 PE exits valued above $1bn.

The slowdown in exits comes as sponsors have expanded their pace of $1bn-plus acquisitions of tech companies. According to the M&A KnowledgeBase, PE firms have inked at least 25 10-figure tech transactions in each of the past three full years, whereas they would typically print 10-15 such deals in each of the years from 2010 to 2016. Blackstone, due to a lockup agreement as part of today’s announcement, will have to wait at least five years before fully exiting its position. But if current exit trends hold, many of its peers could be awaiting 10-figure exits for just as long and with far less certainty.

Dynatrace’s dynamic debut

Mark Fontecchio

by Brenon Daly

Dynatrace’s IPO represents the third major transition in recent years for the application performance management (APM) company. Like the other two, today’s shift has proved wildly lucrative. Dynatrace created more than $7bn in market value as it moved from private equity to public trading.

Although not unprecedented, Dynatrace’s partial swapping out of financial sponsor Thoma Bravo for Wall Street investors is still somewhat unusual. (Post-offering, the PE firm still owns about 70% of Dynatrace.) By our count, just three of the two dozen enterprise-focused technology vendors, including Dynatrace, that have gone public in the US since the start of 2018 have come from PE portfolios. Dynatrace raised roughly $570m in its offering, some of which will go toward paying down its nearly $1bn in debt, which, again, stands in contrast to the typical VC-fueled growth for most tech IPO candidates.

In many ways, the partial change in ownership for 14-year-old Dynatrace is the culmination of the other two changes, the first being a technology overhaul followed by a shift in business model. As we noted in our full report on the IPO, Dynatrace revamped its product a half-decade ago, integrating all of its monitoring into a single platform. (It no longer sells its legacy product, which it refers to as ‘classic,’ except to existing customers.)

As part of the transition to a platform, Dynatrace also changed how it sold its product, as well as how it accounted for those sales. Gone were licenses, in favor of subscriptions. And while the company has undeniably made progress in its transition to a new, more valuable business model, it has also been undeniably aided in its efforts by a rather expansive definition of ‘subscription’ revenue.

Accounting purists might have a hard time signing off on Dynatrace’s practice of including term and perpetual licenses, as well as maintenance and support revenue, all as subscription revenue. Basically, the company lumps all sales of its non-classic product – regardless of whether it is true SaaS or license-based – into the subscription line on its income statement.

Our quibbles about accounting are rather minor, and certainly didn’t stand in the way of professional investors, who have long since given up on GAAP, from rushing to buy newly issued shares of Dynatrace. The stock surged 60% shortly after its debut on the NYSE. With roughly 286 million (undiluted) shares outstanding, Dynatrace began life as a public company with a value of $7.4bn. That’s one-third more than the current value of APM rival New Relic, which has been public since Dynatrace first started its product transition some five years ago.

Big deals are no big deal for July

Mark Fontecchio

by Brenon Daly

Even a surge in big-ticket transactions in several mature segments of the tech market couldn’t boost overall July M&A totals. Spending on tech deals around the globe this month slumped to just $33bn, down about 20% from the monthly average in the first half of the year, according to 451 Research’s M&A KnowledgeBase.

This month’s decline comes despite acquirers announcing 10 separate tech transactions valued at over $1bn. That’s a notable acceleration from the first six months of 2019, when a total of just 40 billion-dollar deals were announced. Our data shows that July marks the first month to hit a double-digit number of $1bn+ acquisitions since last October.

What the big-ticket transactions gained in volume in July, they lost in overall value. On average, the M&A KnowledgeBase indicates that buyers paid just 2.5x trailing sales in the $1bn+ deals they announced in July, down from roughly 4x trailing sales in significant transactions announced since the start of 2018. The richest valuation paid in this month’s billion-dollar purchases (Cisco handing over $2.8bn, or 6.8x trailing sales, for Acacia Communications) stands as only the tenth-highest multiple of any billion-dollar deal announced so far this year.

More broadly, the relatively slow start in July puts the current Q3 on pace for the fifth consecutive quarter of flat to lower M&A spending, according to the M&A KnowledgeBase. Still, we don’t want to overstate the decline. Based on the spending through the first seven months of the year, we are on track to record some $490bn worth of tech M&A, which would rank 2019 as the third-highest annual spending level since 2002.

Take-privates take a break

Mark Fontecchio
by Scott Denne

Repelled by rising stock prices, private equity (PE) firms are on pace to print the fewest take-privates of tech companies in five years. The deals that are getting done this year involve, more often than not, businesses that have fallen off their recent highs. Yet many are still commanding premium valuations.

According to 451 Research‘s M&A KnowledgeBase, buyout shops have acquired 10 NYSE- or Nasdaq-traded vendors this year, setting the stage for the fewest such transactions since 2014, when they purchased just 12 (there are typically 20-25 such deals annually). The Nasdaq has risen 25% since the start of the year, although our data suggests that sponsors are reaching for targets that haven’t benefited from that by picking up companies whose share prices have fallen below their 52-week highs.

Take last week’s announcement that HGGC would purchase Monotype. The $820m transaction, at $19.85 per share, is almost 10% below the stock’s highpoint over the past year. It’s not alone. Per-share prices in seven in 10 of 2019’s take-privates landed below their 52-week high. An eighth vendor, Ultimate Software, edged out its high by less than 1% in its $11bn sale.

That’s not to say these companies are going cheap. Ultimate, for example, sold for 10x trailing revenue. And Monotype, despite the turbulence in its stock, was still able to fetch 3.4x. In fact, our data shows that the median valuation for these take-privates is running at 4.1x, its highest point in this decade. Although PE firms have increased what they’re willing to pay, stock prices might just be increasing faster.

Unspent euros

Mark Fontecchio

by Brenon Daly

The synchronized growth that characterized the world’s economy in recent years has broken down. Individual protectionism has replaced broad cooperation. The fallout from this shift to self-serving economic and political policies, however, is being unevenly distributed around the globe, with weak countries suffering even more.

Consider the EU, a semi-unified body that has half again as many people as the US (512 million vs. 325 million) but generates less overall economic activity than the US. With its fractious membership and ever-increasing separatist sentiment, the EU finds itself fraying more right now than at any point in its half-century history. Raucous political discord complicates the EU’s efforts toward economic expansion.

The International Monetary Fund has noticed that, recently lowering its forecast for economic expansion in the EU to a mere 1.3% in 2019, just half the comparable rate of the US. As alarming as that outlook is, it is still a ‘tops down’ view from a group of technocrats. A far more informed view comes from the actual participants in the economy, the people whose livelihood depends on successfully reading and adapting to real-world business conditions.

And the view from them, as captured in a just-published Voice of the Enterprise (VotE) survey, is fairly dour. Customers in Europe aren’t spending nearly as freely as they are elsewhere. Our latest quarterly VotE survey looked at various spending plans and macroeconomic concerns from some 1,100 respondents, most based in North America.

As you might expect, almost all of them (90%) said the company they work for does business in their home region of North America. Europe emerged as the second-most-popular region, with more than four in 10 (43%) indicating their company currently rings up sales there.

However, when it came to assessing the current business climate in the various regions, respondents to our VotE survey ranked Europe in last place. Just slightly less than half of the respondents (48%) said their customers on the Continent had a ‘green light’ to spend on new products and services. That is almost 20 percentage points lower than North America, where two-thirds (66%) said their clients have a ‘green light’ to buy.

New names propel venture exits

Mark Fontecchio

by Scott Denne

As we noted in a recent report, the number of $1bn-plus venture exits has plummeted from last year’s high because so far, most of the tried-and-true startup acquirers are siting on the sidelines this year. Still, the total amount paid to acquire startups is tracking for an exceptionally high finish, and that’s coming as several companies print their largest acquisitions of venture-funded companies this year.

The most active acquirers of venture-backed startups have been largely inactive this year, leaving it to new buyers to write the largest checks. And although this year’s pace is behind last year’s record of $85.6bn, 2019 is on track for an exceptionally high $37.8bn.

The most frequent acquirers – Alibaba, Cisco Systems, Microsoft, SAP, among others – drove last year’s record sales of VC companies. According to 451 Research’s M&A KnowledgeBase, none of those buyers have paid nine figures for a startup this year. In fact, only one of the 10 most frequent buyers of VC companies over the last decade (Google) has printed a $100m-plus startup purchase in 2019.

This year’s largest deals, by contrast, have come from acquirers that are spending more on startups than they ever have before.

In the year’s largest exit, Uber, just ahead of its IPO, printed its first-ever 10-figure deal, paying $3.1bn for Careem, a Middle Eastern ride-share company.

Carbonite and Fortive both printed their first $500m-plus startup acquisitions.

F5 Networks did the same when it bought NGINX, its first acquisition of any kind in five years.

Palo Alto Networks has scaled up its deal-making in recent years, crossing the $500m mark for the first time with its purchase of Demisto.

Of all the organizations to pay $500m or more for a VC portfolio company this year, only Google had done so in a previous year, according to the M&A KnowledgeBase. Alphabet, Google’s parent company, is no stranger to acquiring startups – our data show it has acquired more (104) than any other buyers since the start of the decade. But its $2.6bn Looker acquisition was different than the deals it’s done previously. It’s the company’s first $1bn-plus startup purchase since 2014, and the first time it’s ever paid such an amount for an enterprise software business (venture-backed or otherwise).

Europe’s increasingly global M&A ambitions

Mark Fontecchio

by Brenon Daly

As economic growth slows across Western Europe, tech acquirers there are increasingly looking to do deals outside their home market. The 451 Research M&A KnowledgeBase indicates 2019 is on pace for fewest number of ‘local’ deals (with both Western European acquirers and targets) in a half-decade. Based on our data, this year will see one-third fewer Continental transactions than any of the previous three years.

The slump in shopping comes as Western Europe weathers a broad slowdown that the International Monetary Fund recently said would rank the region as the slowest-growing of all the major economic regions around the globe this year. The IMF forecast that European economic activity would increase a scant 1.3% in 2019, half the comparable rate of the US.

We have noted how that has cut the overall tech M&A activity by acquirers based in the once-bustling markets of the UK, Germany and elsewhere. Collectively, Western Europe is the second-biggest regional buyer of tech companies in the world, accounting for roughly one of every four tech acquisitions announced globally each year, according to our data.

What’s more, the decline comes through sharpest in those deals that are closest. Western European acquirers have picked up fellow Western European targets in just 29% of the tech deals they’ve announced so far this year, our M&A KnowledgeBase indicates. That’s down from the five-year average of 32%.

Granted, the shift in shopping locations isn’t huge, but it is significant. Decisions on where to buy can swing hundreds of millions of dollars into and out of a local tech scene. Further, there’s a rather ominous implication about the politically fractured and economically sluggish Western Europe.

If we make the economically rational assumption that M&A dollars get spent where they can generate the highest return, then Western European tech acquirers don’t appear to be finding anything too attractive around home. On both an absolute and relative basis, they are shopping locally less often right now than at any point in the past half-decade. Instead, the M&A strategy for Western European acquirers is taking them more and more on the road.