Author: Scott Denne

Divestitures push infrastructure M&A to a new high

Scott Denne

Contact: Scott Denne

Shuffling ownership, rather than a reach for strategic technologies, drove acquisitions of infrastructure management technologies to new highs in 2016. As we head into next year, we expect the rising spending on cloud – both SaaS and IaaS – to ignite dealmaking, while take-privates and divestitures decline.

Total M&A spending on infrastructure management jumped 57% to $15.2bn, with the volume of transactions rising to 152 from 146 as we near the end of 2016. Big-ticket acquisitions led to the increased spending in infrastructure software. The same is true of many other categories of tech that had a record 2016 – software applications, internet and semiconductors, for example. Unlike those sectors, aging assets with reliable cash flows, rather than growth opportunities at high valuations, characterized dealmaking in infrastructure management.

The two largest transactions in this space – Hewlett Packard Enterprise’s $8.8bn sale of its software business to Micro Focus and Francisco Partners’ purchase of Dell’s software unit (which we estimate had a multibillion-dollar price tag) – were both divestitures that were scooped up for their ability to generate cash, not growth. While there could continue to be some profit-driven consolidation, private equity looks to be less of an influential player in this category as debt became more expensive in the waning months of 2016 and many of the largest firms have already executed sizeable take-privates in this category in recent years.

Amid an overall slowdown in IPOs, just one infrastructure management vendor, Apptio, debuted on one of the major US exchanges. Despite (and partially because of) that slow volume, there’s an appetite for growth that could be an outlet for infrastructure startups in 2017. With just 25% in annual growth in its most recent quarter, Apptio currently fetches 5x trailing revenue on the public markets.

What’s likely to lead to the next wave of M&A in 2017 is the growing dependence of businesses on SaaS and IaaS. According to 451 Research’s most recent Voice of the Enterprise survey, the share of respondents who said their companies use SaaS increased from 54% in 2015 to 63% this year, while those using IaaS were up from 33% to 39% – private cloud usage, on the other hand, declined in the same survey.

Those trends could push incumbents toward new technologies, or provide an opportunity for growth businesses to increase their footprint in infrastructure. However, few – if any – targets that specialize in cloud are likely to command the multibillion-dollar price tags that the software units of HPE and Dell scored.

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Debt, SaaS boost number of big-ticket software deals

Scott Denne

contact: Scott Denne

The combination of relatively receptive debt markets and a craving for SaaS vendors has pushed large-cap software M&A to a new high in 2016. According to 451 Research’s M&A KnowledgeBase, there have been 14 software acquisitions valued at $1bn or more, four more than last year and two more than the previous record. Among this year’s big prints, six were SaaS targets, compared with just one for all of last year.

NetSuite’s sale to Oracle tops the list of this year’s software deals at $9.5bn. Oracle’s need to expand its cloud suite into new lines of business and, relatedly, its push into midmarket enterprises drove that transaction. (The purchase by the serial acquirer stands as the second-largest in its history.) Meanwhile, rival Salesforce printed its largest deal with the $2.8bn reach for e-commerce SaaS firm Demandware as it continues to use M&A to extend its cloud beyond its core CRM offering. These two prints, both valuing their targets at 11x, led to a rise in multiples on large software transactions.

We recorded six $1bn-plus software deals that topped the 5x trailing revenue mark this year, triple last year’s total for above-market multiples, according to the M&A Knowledgebase. The median price-to-sales multiple rose to 4.8x in 2016, up from 3.6x in 2015, a year when Permira’s $5.3bn take-private of aging Informatica was the biggest software print. That acquisition was representative of a typical private equity (PE) transaction last year. In 2016, buyout shops dramatically changed their strategies, a key reason for the overall record number of significant software deals.

Like enterprise software’s most celebrated names, PE firms also had an appetite for SaaS – almost one out of three $1bn software transactions this year involved a PE shop buying a SaaS vendor. More striking was their willingness to pay premium multiples for growth companies, some of which didn’t even put up any cash flow. For instance, Vista Equity Partners paid 8x to take both Cvent ($1.7bn) and Marketo ($1.8bn) off the public markets, while EQT paid 6.8x and 5.2x, respectively, for Press Ganey Associates ($2.2bn) and Sitecore ($1.1bn).

Like the PE firms, debt played a part in helping enterprise software giants ink this year’s largest software deals. Oracle sold $14bn in bonds weeks before announcing the NetSuite buy and Salesforce took out a $500m loan to help pay for Demandware. The rising cost of debt in the final months of 2016 could well indicate a lighter year for big-ticket software transactions going into 2017.

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Symantec looks for key to consumer growth in $2.3bn LifeLock acquisition

Scott Denne

Contact: Scott Denne

Five months after a multibillion-dollar bid to retool its enterprise security business, Symantec has made a parallel play for its consumer security unit. The maker of Norton antivirus software has acquired LifeLock, an identity-protection services company, for $2.3bn. The purchase could bring Symantec’s consumer business back to growth, but it seems to pull the infosec company further into two distinct markets – a problem it struggled with in the past, and mostly solved with its divestiture of Veritas in 2015.

At $2.3bn, Symantec values LifeLock at 3.5x trailing revenue, bringing the target its highest share price ($24) since its 2012 IPO. Symantec itself trades above 4x, so picking up a company that can help its consumer security business escape from years of declines at a discount to its own valuation is a positive. Wall Street seems to agree. Following an initial negative reaction, as of midday on November 21, Symantec shares are trading up almost 5% from Friday’s close.

Revenue from Symantec’s consumer business declined double digits in each of the last two years, although the slide slowed recently, declining just 3% last quarter. LifeLock, by comparison, grew trailing revenue to $650m, up 16% from the previous year. Although LifeLock’s services, which help detect and prevent identity theft, and Symantec’s antivirus offerings are quite different products, it’s easy to see how the two would be able to upsell each other’s existing customers.

Yet the deal seems to move Symantec’s consumer products further out of the orbit of its larger enterprise security business, which it expanded earlier this year with the $4.6bn acquisition of Blue Coat Systems. Symantec’s enterprise and consumer business already operate independently – the two businesses even have separate IT infrastructure to serve each unit. The addition of tech and services aimed at protecting the individual, rather than the device or network, makes that division more pronounced. That has us wondering whether this deal could set the stage for another Symantec spinoff.

Inmar nabs Collective Bias to connect online influencers with in-store sales

Scott Denne

Contact: Scott Denne

In a bid to bring hard metrics into the world of influencer marketing, Inmar, a digital promotions and analytics vendor, has acquired Collective Bias. The deal brings together two of the most potent trends in advertising – the appetite among marketers to link spending to purchases and the growing use of long-tail content as a marketing channel.

Collective Bias operates a network of social media content creators that it can leverage for branded content creation and distribution. The company already provides marketers with engagement metrics and under Inmar’s ownership will be able to extend that to actual sales. Inmar was founded in the 1980s as a coupon processor and has since expanded into digital coupons and other retail analytics that will enable it to draw a direct line between engagement with a Collective Bias campaign and consumer purchases.

Making the link between online ads and offline sales has become a substantial driver of acquisitions. That was the rationale behind such big-ticket deals as Oracle’s purchase of Datalogix, Nielsen’s pickup of eXelate and Neustar’s reach for MarketShare Partners. And as we discussed in a recent report, that trend will likely continue. Today’s transaction demonstrates that Inmar and other players in the payments ecosystem recognize the opportunity to use their data to fill this gap.

M&A activity around influencer marketing has seen a recent spurt. Both Facebook and Google, the two largest channels for distributing this content, made tuck-ins (CrowdTangle and FameBit, respectively) to improve their capabilities in this segment. Last summer, Monotype Imaging paid $130m for Olapic, a maker of software for managing branded, user-generated content. Given that deal and the size of Collective Bias (145 employees), today’s transaction may also have reached into nine figures.

GCA advised Collective Bias on its sale.

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xAd nabs WeatherBug amid improving forecast for consumer data

Scott Denne

Contact: Scott Denne

All of the venture money that poured into the early days of ad tech ensured that software wouldn’t be a differentiator – any given sub-segment of that market is home to at least half a dozen competitors, often many more. Instead, the market will be won or lost based on a more precious commodity than software developers and data scientists: access to more and better consumer data. With this in mind, xAd has acquired Earth Networks’ consumer app business, WeatherBug. In particular, the target’s mobile app offers an incentive for users to enable always-on location tracking, leading to more valuable consumer data.

The acquirer enables advertisers to target ads based on their location. That includes targeting ads to consumers near a particular location, targeting consumers who have been to a certain location in the past, and targeting audience segments based on their movement patterns. This kind of data is likely to supplant the value in tracking only online behavior. After all, what’s a better indicator of behaviors and preferences: where consumers spend time in real life or where they waste time online?

Vendors building these applications face a notable hurdle in obtaining differentiated data. Most of them draw location data from the information provided in bid requests on mobile ad exchanges. That data for any consumer only comes when they open an app that tries to fill an empty ad impression. And there’s a lot of poor-quality data flowing through that ecosystem. Many publishers have realized that adding any latitude and longitude digits to a bid request raises the value, so an outsized amount of location data places consumers at the geographical center of the US or at Amazon Web Services datacenters.

To get around that, xAd and its fellow location-targeting companies such as PlaceIQ and NinthDecimal have increasingly turned to partnerships with mobile app developers that can provide consumer locations with a greater degree of accuracy and on a more frequent basis. And apps like WeatherBug’s, which give consumers an incentive to enable always-on location tracking, are even more valuable. In addition to drawing frequent, reliable and unique consumer location data from WeatherBug’s 20 million monthly users, the deal also gets xAd a license to the weather data from the target’s former parent company.

The appetite for more and better data isn’t limited to ad tech. As predictive analytics and artificial intelligence become a meaningful differentiator of enterprise software, more of those vendors will have to seek out data to feed those capabilities. Today’s transaction is an example of that, as are larger ones such as Microsoft’s acquisition of LinkedIn, IBM’s purchase of The Weather Company’s technology business and Salesforce’s pickup of Krux.

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Samsung accelerates into car market with $8bn HARMAN buy

Scott Denne

Contact:Scott Denne

Samsung makes its largest tech acquisition on record with the purchase of Harman International Industries (HARMAN). Samsung made the $8bn gambit to jumpstart its push into the automotive market as that industry is poised to transform around advances in sensor technology, connectivity and artificial intelligence.

Ever the cautious buyer, Samsung hadn’t paid more than $350m for any tech acquisition in at least 14 years, according to 451 Research’s M&A KnowledgeBase, although it has picked up the pace of dealmaking recently. HARMAN marks the fifth transaction of the year for the Korean electronics conglomerate, making 2016 its most active year ever.

In picking up HARMAN, Samsung obtains a company that generated 65% of its $7bn in trailing revenue from sales to the automotive industry, a market where Samsung has little experience. HARMAN’s roots are in audio equipment and that business still accounts for one-third of its revenue. However, a plurality of its sales today – 44% – comes from its connected car segment, which was cobbled together through several purchases over the past four years with a particular emphasis on providing software capabilities for connected cars.

According to our surveys, more than one-third of consumers are interested in having wireless connectivity built into their cars to enable applications such as richer dashboards, music streaming and emergency services. That burgeoning demand has manifested itself in recent M&A activity.

Acquisitions of software, systems and component companies with a substantial play in the automotive vertical made a massive jump last year, driven by a combination of car-related chip deals, as well as pickups of GPS, mapping and other software vendors that cater to the sector. Although down from last year’s record amount, the $10.7bn of such transactions this year is well above the norm.

J.P. Morgan Securities and Lazard Freres & Co advised HARMAN on its sale. Evercore Partners banked Samsung.

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Broadcom goes wide in $5.5bn Brocade buy

Scott Denne

Contact: Scott Denne

Broadcom continues its strategy of buying a sustainable portfolio of semiconductors with the $5.5bn acquisition of Brocade. The target’s fiber-channel storage networking chips drew Broadcom’s interest, yet those chips account for very little of the value. Broadcom plans to recoup the difference when it sells Brocade’s IP networking business after the deal closes.

The company formerly known as Avago has run this play before. Shortly after the purchase of Broadcom last year (the transaction that gave the company its current name and much of its bulk), it divested bits of that vendor, including its Internet of Things (IoT) connectivity line. Broadcom’s strategy is to buy products that have long-term stability. IoT chips that are chasing an early-stage opportunity that’s possibly lucrative and certainly capital-intensive don’t fit. It also shed parts of LSI following its pickup of that firm at the end of 2013.

Yet today’s all-cash acquisition brings Broadcom into new – and risky – territory. In previous divestitures, it was selling semiconductor and component businesses that it wasn’t comfortable owning. The Brocade IP networking business is hardware and software. And in today’s deal, it’s not looking to unwind a secondary asset. IP networking is a major component of the target’s business.

Consider this: Broadcom shaved $1.1bn from the $6.6bn price tag on LSI by shedding two semiconductor business lines. Of the $5.5bn ($5.9bn in enterprise value) that it’s paying for Brocade, it’s presumably seeking a sale to bring back more than half of that given that the IP products unit accounts for about half of the revenue and all of the growth. That could prove to be challenging, given that Ruckus Wireless, a Wi-Fi provider that generates about one-third of Brocade’s IP sales, was on the market less than seven months ago and the top bidder in that process, Brocade, is no longer in the acquirer pool. And if Broadcom can’t find a buyer at a satisfactory price, it will be forced to retain a business that competes with many of its OEM customers.

Broadcom’s reach for Brocade values the target at 2.6x trailing revenue. According to 451 Research’s M&A KnowledgeBase, that’s the median multiple across all of its acquisitions over the past four years. On the other hand, storage networking specialists usually sell at or below 1x, making this deal look a bit pricier. Broadcom would have to divest the IP networking division for $3bn or more to get the effective multiple on today’s transaction into that range.

Evercore Partners advised Brocade on its sale. We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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AT&T pays $85.4bn for Time Warner amid strong demand for original content

Scott Denne

Contact: Scott Denne

Original content plays a starring role in telecom’s future as AT&T shells out $85.4bn for Time Warner. Facing competitive pressures in its core wireless business – revenue was down year over year in that segment last quarter – AT&T plans to leverage Time Warner (owner of HBO, Warner Brothers Studios and Turner Networks, among other properties) to provide original content for the latest online content distribution properties, such as its forthcoming streaming service, DIRECTV Now.

The availability of commercial-free, on-demand content initially drew eyeballs to streaming services such as Netflix, Hulu and Amazon Prime. As troubling as that was for TV and Internet service providers to watch, it was just a remake of the distribution of content – a business where they’re comfortable. Increasingly, though, as surveys by 451 Research’s VoCUL show, original content is the draw. In our most recent survey in June, the number of Netflix subscribers that cited original content as an important factor in their subscription rose seven points from December to 34% – the same percentage of subscribers to Time Warner’s HBO streaming service also cited original content. (Only Showtime had a higher percentage, with 36%).

Differentiated content comes with a substantial price tag. AT&T will spend $85.4bn in cash and stock (split evenly) to acquire Time Warner. After bolting on Time Warner’s existing debt, the target has an enterprise value of $106bn, or 3.8x trailing revenue. That’s almost a turn higher than the valuation of Walt Disney, a company with growth in the high-single digits (compared with Time Warner’s slight declines this year). AT&T has taken out a $40bn bridge loan to fund the transaction, which it expects to close next year. When it does, AT&T expects to continue to operate the acquired business as a separate unit with the same management team.

For Time Warner, the deal provides a way out of a challenging time for high-end content producers. When quality content was pricey to create and distribute, Time Warner and a handful of others could claim a monopoly on consumer attention. That’s no longer the case. Coupled with that, trends in advertising are beginning to favor entities that can provide targeted audiences – something AT&T plans to pursue with this move. For now, advertisers still look toward networks to reach large-scale audiences. But Time Warner and others, which have no direct links to their audiences, are at risk of being disintermediated by content distributors and service providers. In that respect, it makes sense for Time Warner to make a hedge against this trend by linking up with AT&T. It also helps explain why Time Warner management had little interest in a slightly smaller bid from 21st Century Fox in 2014.

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Wipro snags Appirio for SaaS scale

Scott Denne

Contact: Scott Denne

Wipro makes the latest and largest bid to bring SaaS expertise to its systems integration business with the $500m acquisition of Appirio. Accenture, CSC and IBM have all inked recent nine-digit deals for similar companies. None of their targets were quite as large as Appirio, which was cresting $200m in annual revenue at the time of its exit.

In terms of valuation, Appirio’s multiple occupies the lower part of the narrow band of valuations on comparable transactions. Bluewolf fetched 2.7x in its sale to IBM last March. Cloud Sherpas got the same from Accenture in September 2015. Fruition Partners came in at 2.4x when it was purchased by CSC in August 2015.

With Appirio, Wipro gets the last independent SaaS vendor with significant scale. Appirio’s size was likely a draw for Wipro, which will need to do more M&A as it stretches for an ambitious revenue target. When Abidali Neemuchwala took the helm in February, the company promised to get its revenue to $15bn by 2020. Wipro finished its most recent fiscal year with $7.7bn, up 9% from the previous year.

It will need about 18% growth per year to hit its target and has already been uncharacteristically aggressive in pursuit of that. In February, the company paid $460m for HealthPlan Services and with Appirio it has now inked two $400m+ deals in a single year. Prior to 2016, Wipro had only spent more than $100m on two transactions in the entire previous decade.

M&A isn’t the only ingredient in its drive to hit $15bn. The company has reorganized about a half dozen themes where it can find growth above and beyond the core IT infrastructure services market. One of those themes is a focus on digital design and customer experience consulting. In that respect, Appirio and Wipro are aligned. Consulting generates just roughly 5% of Wipro’s business – Appirio itself has spent the past year adding digital design capabilities.

William Blair & Company advised Appirio on its sale (as well as Bluewolf and Fruition on their exits).

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Growth amid stagnation keeps the IPO demand high

Scott Denne

Contact: Scott Denne

In what’s becoming a recurring story in the back half of 2016, another high-growth enterprise tech company has gone public with a big first-day pop and a double-digit multiple. Today it’s Coupa that’s reaping Wall Street’s generosity. The spend management software vendor debuted at $35 per share, just shy of double the offering price, and was up past $40 in early trading. Like other recent debuts, Coupa is coveted by investors because it’s been able to carve out pockets of growth in an otherwise stagnating IT market.

At the end of last month, Nutanix (valued at 10x trailing revenue) had a similar pop on its first day, backed up by 85% topline growth. Twilio now sits at 24x trailing revenue following a tripling of its stock price since its June IPO. For its part, Coupa currently sports a $1.8bn market cap and a 6x multiple on the strength of 66% revenue growth last year.

According to 451 Research’s Voice of the Connected User Landscape, 21% of respondents in an August survey anticipated their company’s IT spending would decrease in the next quarter, compared with 15% projecting an increase. A six-point distinction in a single survey isn’t particularly telling on its own. However, the long-term trend of that quarterly survey indicates a market that’s been flat for a while. Over the past six years, respondents forecasting an increase have outnumbered those expecting a decrease in only one out of every eight surveys. And the percentage expecting an increase has only topped 20% twice. Compare that with the three years leading into the last recession, when the number never dropped below 24%.

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