Author: Mark Fontecchio

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

PE’s UK holiday

Mark Fontecchio

by Scott Denne

Amid the uncertainty surrounding Brexit, private equity (PE) firms are slowing their activity in the UK for the first time in five years. With an October deadline on the horizon and little clarity about how the UK’s exit from the EU might proceed, buyout shops are scooping up fewer targets in that country than they did last year. Most of the decline, however, has occurred at the edges of the market.

According to 451 Research’s M&A KnowledgeBase, PE firms and their portfolio companies have bought just 45 UK-based tech targets in 2019, on pace for an 18% decline from last year’s total (122). That shift counters a years-long increase, as the number of sponsor acquisitions of UK-based vendors has previously risen each year since 2014. Questions about a target’s ability to hire or sell its wares abroad post-Brexit seem to be having the most impact on those buyers that don’t often purchase UK-based companies, and lowering the appetite for discounted targets.

The most frequent acquirers remain active. The PE firms that have bought the highest number of UK-based vendors this decade (TA Associates, Vista Equity, Inflexion and HgCapital) have all continued to purchase there this year. All but Inflexion have acquired more than one UK-based company in 2019. And the decline seems concentrated on deals with below-market valuations. The pace of UK-based vendors trading to buyout shops for more than 3x trailing revenue has risen, our data shows, while transactions where companies sell for less than 2x have declined.

Slack ropes in premium valuation

Mark Fontecchio

by Scott Denne

An unusual route to the public markets didn’t stop Slack from capitalizing on soaring prices for new offerings. In its direct listing on the NYSE, Slack, like recent enterprise IPOs, commanded a scorching valuation, catapulting it well past what it fetched as a private company.

The workplace communications vendor’s stock quickly ran up to $41 per share, more than 3x the price of its series H round less than a year ago. The company currently trades above 50x trailing revenue, with a market cap that’s just north of $20bn. Still, that valuation falls a bit shy of fellow workplace tech provider Zoom Video, which fetches over 70x trailing revenue. Although both valuations are exorbitant, Zoom doubled revenue last quarter, while Slack rose 86%. Both are roughly the same size, but only Zoom is profitable. Slack still puts half its revenue toward sales and marketing.

Slack’s multiple matches what infosec vendor CrowdStrike garnered in its IPO last week. And PagerDuty, a firm that’s one-quarter of Slack’s size, with a topline that’s expanding at less than 50% annually, boasts a 35x multiple following its April IPO. The premium valuations for enterprise companies come as confidence in the stock market is leveling out after a turbulent end to 2018. In each of the last four months of 451 Research’s VoCUL: Consumer Spending survey, 20% or more of all respondents have claimed to be more confident in the stock market than they were 90 days ago, the highest level since last summer.

PE firms paying SaaSy valuations

Mark Fontecchio

by Michael Hill

A years-long increase in SaaS acquisitions by private equity (PE) firms is flattening out. Yet sponsors are spending far more than in the past for those targets – typically paying more for SaaS vendors than strategic acquirers do – as businesses shift more of their budgets toward hosted software offerings.

According to 451 Research’s M&A KnowledgeBase, PE shops have bought roughly the same number of SaaS targets as this time last year, following several years of increasing the volume of those deals 25% or more each year. Despite that, sponsors have spent more than $20bn on SaaS acquisitions so far in 2019, compared with $24.7bn for the entirety of 2018. Much of the jump stems from Hellman & Friedman’s $11bn take-private of Ultimate Software. Still, even without that transaction, PE firms have spent nearly three times as much on SaaS purchases this year as they did during the same period last year.

And 2019’s larger deals are coming at a premium. So far, the median trailing revenue multiple for a SaaS target in a sale to a buyout shop or PE portfolio company stands at 4.9x, a turn higher than any full year this decade. Our data also shows that 2019 marks the first year that PE firms have paid higher multiples than strategic buyers, whose acquisitions of SaaS vendors carry a 4.5x median multiple this year.

The increase in valuations comes as businesses are pushing more of their IT budgets into SaaS. According to our most recent Voice of the Enterprise: Cloud, Hosting and Managed Services, Budgets & Outlook – Quarterly Advisory Report, 67% of respondents expect to increase their spending on SaaS this year. What’s more, 38% expect SaaS to be their largest area of spending growth among cloud and hosted services.

Instant gratification in CrowdStrike’s IPO

Mark Fontecchio

by Brenon Daly

Other recent high-flying debutants in the information security (infosec) market have had to take some time to grow into their multi-unicorn status on Wall Street. Not so for CrowdStrike. The endpoint security vendor smashed all pricing expectations on its way to creating a stunning $12bn of initial market value in its IPO.

To put that number into perspective, CrowdStrike’s valuation is roughly equivalent to the M&A spending across the entire infosec market for any given year, according to 451 Research’s M&A KnowledgeBase. Or, sticking to comparisons in the IPO market, CrowdStrike’s debut market cap is twice the initial value created in IPOs by two other recent fast-growing cloud security startups:

Okta came public in April 2017 at a valuation of $2.4bn, and now commands a $14.5bn market cap.

Zscaler came public in March 2018 at a valuation of $3.7bn, and now commands a $10bn market cap.

In its most recent fiscal year, CrowdStrike posted revenue of $250m. Revenue more than doubled last year, helped in part by an astonishingly high dollar-based retention rate of roughly 140%. Although not yet profitable, the company showed some leverage in its model by holding its net loss at the same level over the past two years, even as it doubled revenue.

In the IPO, Wall Street is valuing CrowdStrike at nearly 50 times trailing sales. That’s a heady multiple, significantly eclipsing the current mid-30x price-to-sales multiples for both Okta and Zscaler.

CrowdStrike is, however, still looking up at the current trading multiple of Zoom Video Communications. Zoom shares have tacked on roughly 50% since debuting in April, giving the profitable and fast-growing videoconferencing startup a price-to-sales multiple of nearly 70x. If CrowdStrike could replicate Zoom’s trading in the aftermarket, the infosec startup would be tracking to nearly the same astronomical trading multiple later this summer.

Another cycle of data analytics consolidation

Mark Fontecchio
by Scott Denne

The ability to properly analyze data has become a core element of how organizations are evolving their operations. As such, we’ve seen two multibillion-dollar analytics software deals in a week – Google’s $2.6bn acquisition of Looker and Salesforce’s $15.1bn purchase of Tableau. Not only did those transactions bring back a key feature of 2018’s M&A market – big-name companies printing big-ticket deals at scorching valuations, as we noted yesterday – they also reflect the central role that data and analytics are expected to play in a modern enterprise.

Our surveys of IT professionals and managers show that improved analytics is a key reason for businesses to undergo digital transformation. According to451 Research’s Voice of the Enterprise: Digital Pulse, 43% of respondents that are executing or planning a digital transformation said ‘data-driven business intelligence and analytics’ is a primary purpose for that larger initiative. That central role of analytics helps explain why Google and Salesforce are looking to data visualization and analysis to build deeper relationships (and larger contracts) with customers.

For a similar surge in analytics software M&A, look back to 2007, the year IBM, Oracle and SAP each picked off the top three BI software vendors (Cognos, Hyperion and Business Objects, respectively). Yet Tableau’s acquisition, which stands as the largest-ever purchase of a business application provider, according to 451 Research’s M&A KnowledgeBase, dwarfs all those previous deals, the largest of which (Business Objects) was $6.8bn. And on valuation, Tableau commanded 12.2x (subscribers to the M&A KnowledgeBase can access our estimates of Looker’sforward and trailing multiples), while those earlier transactions fell shy of 5x.

We’ll be hosting an in-depth discussion of the importance of data to the future of business and its impact on valuations at our Cycle of Innovation Summit on Thursday morning in London. Those wishing to attend can request an invitationhere.

A pair of 2018 software deals in 2019

Mark Fontecchio

by Brenon Daly

When Google and Salesforce announced their recent blockbuster software acquisitions, we had to check the date of the deals. The two high-multiple purchases of analytics vendors didn’t look like anything that’s been printed in 2019. Instead, the pair of transactions looked like something of a 2018 vintage.

Both Google-Looker and Salesforce-Tableau share all of the hallmarks of the significant deals that pushed software M&A to record levels last year: Deep-pocketed, brand-name software giants top an already high valuation for a company in a key segment of the emerging tech landscape. Consider the transactions fitting that description that 451 Research‘s M&A KnowledgeBase had already recorded at this point in 2018:

Microsoft’s seminal $7.5bn acquisition of DevOps kingpin GitHub.

Adobe’s $1.7bn purchase of e-commerce software provider Magento Commerce.

Salesforce’s $6.6bn reach for integration specialist MuleSoft, which had been the cloud company’s largest transaction until Tableau.

SAP’s $2.4bn pickup of CallidusCloud, a SaaS sales compensation management vendor.

All of those transactions went off at double-digit multiples, as did the Salesforce-Tableau and Google-Looker pairings. (Clients of the M&A KnowledgeBase can see our full estimates for both the trailing and forward valuation that the search giant paid in its largest deal in more than five years.)

Rather than the expansive (and expensive) software transactions of 2018, corporate acquirers so far this year have looked to consolidate much more mature markets. For instance, the M&A KnowledgeBase already lists three semiconductor acquisitions valued at more than $1bn in 2019, along with a similar number of massive deals in the electronic payments industry. Compared with those down-to-earth moves, the cloud plays of Google and Salesforce seem to belong to a different era of dealmaking.

A single unicorn sighting

Mark Fontecchio

by Brenon Daly

The total number of VC-backed startups hitting the exit so far this year has surged to a three-year high. But most of those deals are at the lower end of the market, according to 451 Research’s M&A KnowledgeBase. Actual unicorn sightings are extremely rare.

In fact, the M&A KnowledgeBase lists just one sale of a venture-backed company for more than $1bn so far in 2019. For comparison, last year the venture industry averaged one unicorn-sized exit every single month. The shift from last year’s ‘fewer – but bigger – deals’ for VCs to this year’s ‘more deals, but far fewer big ones’ could dry up billions of dollars of liquidity for venture firms.

Even excluding last year’s stampede of unicorns, our data shows that the previous half-decade (2013-17) averaged slightly more than four big $1bn+ exits each year for VC portfolio companies. Right now, 2019 is on track for half that number. And yet, the current number of VC-backed startups that have achieved billion-dollar valautions stands at a record high, roughly 10 times more startups than when Aileen Lee initially coined the term ‘unicorn’ in 2013.

Why haven’t venture-backed startups been realizing the same big paydays in 2019 as they have in recent years? Part of the answer is that the IPO market has been more welcoming than in years past, supplying exits this year to some of the most valuable private companies, including Uber, Lyft and Pinterest. (Don’t forget that three of the $1bn+ exits for VCs last year came when startups were snatched out of IPO registration.)

While dual-tracking may be slightly influencing the supply side of the M&A equation for venture startups, we would suggest that a significant shift in the other side (demand) is the main reason for this year’s drop-off. Simply put: The conventional buyers – the tech industry’s well-known names that tend to pay top dollar when they reach into VC portfolios – just aren’t doing deals like they once did.

To illustrate, the M&A KnowledgeBase indicates that SAP, Cisco and Microsoft all inked $1bn+ acquisitions of startups last year, paying roughly 20x in those transactions. So far in 2019, however, that big-cap trio has printed only small tuck-ins.

Medallia’s new CEO follows a tested path

Mark Fontecchio

by Scott Denne

With its second acquisition in as many months, Medallia’s new CEO appears to be following the same playbook he used to take his last company, Callidus, to a $2.4bn exit to SAP. In the 11 years leading up to that deal, sales software vendor Callidus bought 20 businesses and never spent $30m on a single deal. Medallia, a customer experience management software provider, is executing that strategy, but in a market with soaring budgets and swarming competitors.

This week, Medallia acquired Cooladata, a developer of behavioral analytics, to bolster its expansion from survey software into a broader portfolio that includes customer profiles, segmenting and reporting. The transaction follows last month’s purchase of Strikedeck (Medallia’s first ever) to add B2B capabilities to its platform. Although terms of neither deal were disclosed, both likely fetched Callidus-like prices. According to 451 Research’s M&A KnowledgeBase, Strikedeck had just 24 employees and Cooladata hadn’t raised any venture funding since a $5.6m series B round almost three years ago.

Medallia’s buildout begins less than a year after CEO Leslie Stretch took the helm – just in time to see a surge in budgets for customer management software. According to 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019, 18% of respondents expect to increase their budgets for the broader category of CRM software, the highest reading of any quarter since the end of 2013. In a separate survey, 50% of respondents told us they were considering purchasing or upgrading customer experience analytics.

With the attention from customers have come new contenders and acquirers. SAP, for example, spent $8bn for Medallia’s main rival, Qualtrics, and SurveyMonkey is attempting to move upmarket into enterprise accounts, acquiring Usabilla for $80m along the way. Call-center software firms Verint and NICE have also printed deals in this space, scooping up Satmetrix and ForeSee, respectively. Not to mention that Adobe recently rebranded its marketing software portfolio as Experience Cloud. With a diverse set of players swirling into the customer experience market, converting conservative acquisitions into a major platform could be more of a stretch than it was for Callidus.

A mature May for M&A

Mark Fontecchio

by Brenon Daly

After slumping to the lowest monthly total in four years in April, spending on tech M&A rebounded in May as consolidation in old-line industries set the pace last month. Overall, the value of tech and telecom transactions announced across the globe in the just-completed month tripled compared with April, hitting $46bn, according to 451 Research’s M&A KnowledgeBase. The resurgence pushed May to the second-highest monthly spending of 2019, slightly ahead of the previous four months’ average.

But among last month’s big prints, more than a few of the targets had a bit of grey hair, at least by the standards of the youth-obsessed tech industry. The companies that sold for more than $1bn in May were all more than a decade old, with our data indicating the average founding date for the targets going all the way back to 2000.

Looking specifically at May’s M&A activity, nearly half of the deal value came in a single transaction in the rapidly consolidating payments market. Global Payments handed over $21.2bn in stock for transaction-processing provider TSYS, which was founded in 1983 and had about 13,000 employees. Other big prints last month included the $8.25bn take-private of fiber-optic networking rollup Zayo Group and Hewlett Packard Enterprise’s $1.4bn consolidation of fellow supercomputing vendor Cray.

Billion-dollar deals were relatively rare last month, however. The M&A KnowledgeBase lists just seven tech transactions valued at over $1bn in May, and just 31 deals during the first five months of 2019 overall. For comparison, that’s one-third the number of big prints listed in the M&A KnowledgeBase at this point last year. The drop-off at the top end of the market is the main reason that 2019 is tracking to roughly $100bn, or nearly 20% less M&A spending this year compared with last year.

A change of guard in the infosec market

Mark Fontecchio

by Brenon Daly

After an uncharacteristic half-year absence from the top end of the information security (infosec) market, a private equity (PE) shop has now put up the largest print in the bustling sector so far this year. Insight Venture Partners built on an earlier investment in Recorded Future to take a controlling stake in the threat intelligence startup in a deal valued at $780m.

Other than that, however, most of this year’s activity has been coming from newly resurgent strategic acquirers. In fact, except for Insight’s reach for Recorded Future, strategic acquirers account for all of the 10 largest infosec transactions listed in 451 Research’s M&A KnowledgeBase so far in 2019.

Already this year, Palo Alto Networks has announced three acquisitions totaling a cool $1bn in aggregate spending, Sophos has doubled up on deals, and FireEye has shelled out a quarter-billion dollars in its largest single purchase in a half-decade. Other infosec M&A mainstays such as Symantec, Akamai and Proofpoint have also been heard from this year, with all of them inking $100m+ acquisitions.

The key to many of these corporate deals getting done is that buyers are paying up. That’s particularly true for Palo Alto, which has made a practice of paying hundreds of millions of dollars for startups that measure their revenue in the tens of millions of dollars. But FireEye and Symantec have also paid double-digit valuations this year.

As strategic acquirers stretch on valuation, they have been able to elbow PE buyers aside. According to the M&A KnowledgeBase, buyout firms are behind just one of every five infosec transactions so far in 2019, down from at least one of four deals in each of the previous three years. Further, our data indicates that PE shops’ slumping market share of only 21% in infosec M&A so far in 2019 is a full 10 percentage points lower than their share of the overall tech M&A market.