Author: Scott Denne

Complexity bolsters valuations for infrastructure software 

Scott Denne

Contact: Scott Denne

Companies looking to exit the infrastructure management space broke records in 2016, although it was enthusiastic entrants that pushed up totals last year. Acquisitions of companies that provide tools to run IT infrastructure finished 2017 at a level that’s abnormally high on strong valuations.

Purchases of infrastructure management targets finished 2017 with $8.5bn in spending across 92 deals. According to 451 Research’s M&A KnowledgeBase, both are down from the record value and volume of transactions in 2016 ($14.8bn on 121 acquisitions). Despite the high-level decline, 2017 was a stronger environment for exits in the category.

More than any other buyer, Cisco set the tone for infrastructure management M&A as two of its purchases account for half of 2017’s deal value. The company opened the year with the $3.7bn acquisition of AppDynamics, valuing the would-be public company at more than 17x trailing revenue, the highest multiple ever paid for a software vendor with more than $50m in revenue. It followed that deal with the $610m pickup of SD-WAN specialist Viptela, a smaller company that it bought at an even higher multiple.

Above-average valuations weren’t limited to Cisco. Among the 10 largest transactions in the space, only one acquisition – Clearlake’s purchase of perennial target LANDESK – came in at less than 3.5x trailing 12-month revenue. A year earlier, three of the top 10 fell below that mark, including 2016’s two largest deals – the divestitures of HPE and Dell’s software units.

Those higher multiples came as hardware providers and legacy management firms sought to expand subscription revenue from products that help customers grapple with an increasingly complex IT environment. That same trend could well fuel infrastructure management M&A this year as infrastructure, software and data look to become more distributed and cloudy.

Workloads are heading to the cloud en masse, whether it takes the form of SaaS, IaaS, private clouds or any other type. According to 451 Research’s Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects 2017 survey, between 2017 and 2019 the amount of IT workloads running on the cloud is expected to increase to 60% from 45%. In that same study, 33% of respondents told us that within two years they would be sharing workloads and business functions across multiple clouds. While the underlying IT infrastructure is becoming interchangeable, the tools for managing it all are becoming indispensable.

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SS&C pays $4.9bn for DST amid a swell of big BPO deals 

Scott Denne

Contact: Scott Denne

Business process outsourcing (BPO) deals jumped to a record total in 2017, despite an overall decline in tech M&A. Today’s announcement that SS&C Technologies will buy its competitor, DST Systems, for $4.9bn sets up the category for another big year.

According to 451 Research’s M&A KnowledgeBase, BPO targets fetched $8.8bn, double the previous year’s total, as the sector saw more big-ticket purchases. That trend continues with the sale of DST, a provider of software and services to investment and wealth management companies, which marks the largest BPO transaction since Xerox’s 2009 pickup of ACS for $6.4bn. With today’s acquisition, there have now been nine BPO deals valued above $1bn in the past decade. Five of them have come in the past 18 months.

SS&C’s purchase values DST at $5.4bn, or 2.7x trailing revenue, a multiple that’s lower than SS&C’s two previous largest acquisitions – Advent Software ($2.5bn) and GlobeOp ($895m). A heftier services offering and slimmer margins are likely to blame for the difference in multiple – SS&C had a 15% operating margin last quarter, compared with DST’s 10%.

Still, DST is commanding a premium that’s well above that of a typical BPO vendor, continuing a trend of rising valuations in the space. According to the M&A KnowledgeBase, the median multiple among BPO targets last year was 2.4x, a number that in itself was extraordinary seeing as the median multiple for such transactions rarely clocks in above 1x in any given year.

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CFIUS stomps another

Scott Denne

Contact: Scott Denne

The US government scuttles yet another acquisition of a US company by a Chinese firm, helping to deplete a diminishing channel of tech M&A activity. The failure of Ant Financial to move its $880m purchase of MoneyGram past the Committee on Foreign Investment in the United States (CFIUS) cuts in half an already dwindling amount of US-bound tech M&A from China.

Such deals soared to $15bn in 2016, according to 451 Research’s M&A KnowledgeBase. But last year’s deal value dropped precipitously as acquirers faced tighter capital controls at home and a more protectionist administration in the US. Opposition from CFIUS has recently reduced 2016’s total. Orient Hontai Capital, a China-based private equity firm, abandoned its $1.4bn acquisition of adtech company AppLovin late last year when it couldn’t get past CFIUS. In September, President Trump, following CFIUS’s recommendation, blocked Canyon Bridge Capital’s $1.1bn acquisition of Lattice Semiconductor.

Now that Ant Financial has pulled its proposed purchase of MoneyGram, 2017’s total for China-US tech M&A sits barely above $1bn, and half of that comes via the pending sale of semiconductor testing vendor Xcerra, which recently refiled its application with CFIUS to allow for more time to review. The outlook for China-US deal-making is becoming exceedingly dim. In the September M&A Leaders’ Survey from 451 Research and Morrison & Foerster , 79% of respondents told us that such deal activity would decline under the Trump administration, up from 65% who anticipated a decline in our April survey.


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Daimler prefers sharing 

Scott Denne

Contact: Scott Denne

Daimler has topped off an industrious 2017 with the acquisition of Uber rival Chauffeur Prive. Not only has the German automaker printed more deals than its peers, its M&A strategy highlights the alternate route it’s taking toward the industry’s impending technological changes. While many automakers have spread investments across autonomous vehicles and ride-sharing apps, Daimler has fastened on the latter category.

The purchase of Chauffeur Prive lands Daimler’s ride-hailing business a French outpost, adding to services it picked up in Greece, Romania and other locales across four such deals this year and eight since 2014. It also printed two additional transactions this year in related categories with the acquisitions of a mobile payments company and a location-based social network provider, and joined a consortium of automakers with the purchase of Nokia Maps back in 2015.

Compare that with Ford Motor and General Motors, which have bought five autonomous vehicle makers between them and each nabbed one ride-hailing app in the past two years, according to 451 Research’s M&A KnowledgeBase. That’s not to say Daimler doesn’t plan to develop autonomous cars. Rather, it suggests that the Mercedes-Benz parent views ride-hailing and -sharing apps not as a new sales channel for its cars but as a new sales model. When automakers do roll out fully autonomous vehicles at scale – something 451 Research expects to happen in about five years – Daimler will have an extra lane to monetization.

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Oracle raises its construction cloud with $1.2bn deal 

Scott Denne

Contact: Scott Denne

Oracle has stepped off the M&A sidelines with the $1.2bn acquisition of construction software company Aconex, ending its longest dry spell since 2004. In buying Aconex, Oracle doubles what it has spent building its construction and engineering software business, zeroing in on a vertical that’s ripe for cloud applications.

Aconex brings to Oracle collaboration software for construction projects that will become part of a unit that already includes project portfolio management and payment management software that it gained from its purchases of Primavera Software and Textura – a pair of deals that cost it just over $1bn, according to 451 Research’s M&A KnowledgeBase.

 

Today’s transaction values Aconex at 9.4x trailing revenue, nearly two turns higher than where Textura landed. The difference is likely attributable to Aconex’s broader portfolio, along with its accelerating international sales. At the time of its 2014 IPO, the target’s sales in its home market – Australia and New Zealand – made up half of its business. That has now shrunk to less than one-third of revenue amid several years of topline growth above 20%.

Oracle has built several vertical-specific businesses, although it has inked more acquisitions in support of its construction division than other verticals. Unlike energy, restaurants and retail, most of the work in construction happens outside an office, store or other fixed location, so the expansion of cloud and mobile technologies brings with it new applications, not just the replacement of old ones. The downside to the business is that much construction software is bought on a per-project basis, rather than an enterprise license. Aconex has pushed against that barrier, as its subscription revenue now accounts for 46% of sales, up from 34% three years ago.

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

Tech’s impact on M&A happening outside the tech market 

Scott Denne

Contact: Scott Denne

The internet’s borders are expanding into retail, broadcasting, automotive and other legacy verticals as power over that network consolidates around a handful of companies. Such a revolution should spark a conflagration of tech M&A, but it hasn’t. Acquisitions of consumer tech companies hit a three-year low, and the biggest prints driven by those changes, including Disney’s $52.4bn purchase of Twenty-First Century Fox assets earlier this week, are happening outside of tech.

Consumer tech M&A has shed a streak of three consecutive record-breaking years for the simple reason that there are few tech targets large enough to help retailers, publishers, telecom companies and broadcasters fend off Amazon, Apple, Facebook, Google and Netflix. According to 451 Research’s M&A KnowledgeBase, consumer-facing internet and mobile companies have together fetched just $27bn this year, less than half the total acquisition value of any of the last three years and a dramatic fall from the $84bn spent on such companies in 2016.

Among the group of tech companies listed above, only Google has inked a $1bn-plus tech acquisition in the last three years, showing that they aren’t spending on M&A to safeguard their coveted posts. Although outside tech, Amazon spent $13.7bn on Whole Foods, for a brick-and-mortar presence for its burgeoning grocery business. Similarly, companies from legacy markets aren’t spending heavily on consumer tech companies because there are few assets that could have an immediate impact in their fight against the tech giants. Some are buying on technical infrastructure to launch new products, as Disney did with its $1.5bn BAMTech acquisition. In retail, Target and Williams-Sonoma have made similar tech infrastructure moves this month, with their respective buys of Shipt ($550m) and Outward ($112m). Additionally, we’ve seen a wave of AI acquisitions among automakers.

Yet, there isn’t a sizeable contender in most consumer tech markets. There isn’t a consumer-tech company that could give a broadcaster scale that approaches Netflix or transform a retailer into a credible threat to Amazon. That’s not to say a lack of attractive tech companies drove Disney to its purchase of Fox or provided the rationale for AT&T’s $85bn bid for Time Warner.

In making the acquisition, Disney gets more of what it knows best and gains scale in what is becoming the battleground for the next round of video distribution – original content. (Although not a tech target, and therefore not included in 451 Research’s M&A KnowledgeBase, it’s worth noting that as part of the deal, Disney becomes the majority owner of Hulu, a Netflix and Amazon streaming competitor.) Content is increasingly becoming the catalyst for the streaming subscriptions that threaten traditional broadcasting and cable. In a third-quarter survey by 451 Research’s VoCUL, 28.4% of Netflix subscribers told us ‘original content’ is what they most frequently consume on the service. That’s a jump of almost seven percentage points from the same survey at the start of 2017.

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

Connected home is key to Sigma Designs’ valuation 

Scott Denne

Contact:Scott Denne

The addition of products for emerging Internet of Things (IoT) markets has spurred higher valuations on many semiconductor deals amid a record amount of consolidation in the space over the past three years. Silicon Labs’ acquisition of Sigma Designs highlights how much higher those products are valued amid larger semiconductor portfolios. The terms of the $282m transaction revolve explicitly around the seller’s home automation hardware.

According to 451 Research’s M&A KnowledgeBase, the median valuation for a semiconductor vendor has hovered a bit below 2x trailing revenue for most of the past decade, although it surged to 2.9x amid a profusion of IoT-related purchases. Indeed, many chip deals with an IoT element have traded well above the standard valuation. Consider Qualcomm’s pending $39bn pickup of NXP Semiconductors (5.5x), SoftBank’s $32bn reach for ARM (20.9x) and Intel’s $15bn acquisition of Mobileye at an unheard of 41x trailing revenue.

The $282m price tag for Sigma Designs ostensibly values the company at about 1.5x trailing revenue, but only if certain conditions are met – the seller must have at least $40m in cash on its balance sheet and it must shutter or sell its Smart TV components business within a week. (That business accounts for the majority of its revenue, but isn’t related to IoT and is heading downhill, having lost 61% of its quarterly revenue since this time a year ago.)

If those conditions aren’t met, Silicon Labs will buy Sigma Designs’ home automation components business, Z-Wave, for $240m. In other words, Silicon Labs wants to buy Z-Wave for about 5-6x trailing revenue and doesn’t value the other business lines at all. There’s a logic to that premium valuation. The market for home automation is advancing with plenty of open space. According to a third-quarter survey by 451 Research’s VoCUL, 69.9% of consumers still don’t own any internet-connected home devices, although that’s down from 74.4% at the start of the year.

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​​​​​​​ CallidusCloud’s pocket-sized pickups 

Scott Denne

Contact: Scott Denne

CallidusCloud shells out $26m for Learning Seat, the most it’s ever paid in a single deal. That it’s hitting a new record on such a modest purchase shows that CallidusCloud, which embarked on a steady diet of snack-sized M&A at the start of the decade, has stayed disciplined in its acquisition strategy. Today’s transaction also illuminates a modest increase in appetite – both in deal value and volume – as the sales software vendor has reaped results from previous buys.

The company has now printed four deals this year, its busiest since 2011, when it inked five. But that year CallidusCloud was just setting out on its current M&A strategy of making tuck-ins and low-priced extensions to its core sales performance management software offerings. According to 451 Research’s M&A KnowledgeBase, the company bought only three businesses before 2011. Now, its strategy has proven results and its purchases are more ambitious, if still small. In 2011, only two of its transactions crested $5m – this year, all of them did.

Today’s acquisition adds content for CallidusCloud’s sales training products, a unit established by the $3m pickup of Litmos in 2011. Last quarter, Litmos (and associated training offerings) was its second-largest contributor to revenue. As that division’s contribution has grown, so has its position in the company’s M&A efforts – four of its last seven deals (including today’s) bolstered its training business.

CallidusCloud began its M&A adventure in 2010 amid crumbling revenue. Last year, it put up 16% growth, its SaaS sales jumped 25% and its stock rose about 7x. Of course, that’s not all due to the addition of learning management content and software. The company has enhanced its ability to sell multiple products across sales performance, enablement and execution. Last quarter, nearly half of its bookings came via multiproduct deals, compared with just 20% four years ago.

That’s a heartening development for many of the sales-enablement startups struggling to find an exit. CallidusCloud is among the most frequent acquirers of such companies and the exit environment for those firms, as we detailed in a previous report, reflects CallidusCloud’s own proclivities. With few exceptions, exits for sales-enablement startups have been sparse and small.

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

Ad breaks 

Scott Denne

Contact:Scott Denne

A four-year streak of expanding ad-tech M&A is set to end as strategic acquirers and foreign investors give way to price-sensitive buyers. There are several reasons why the streak is heading toward its conclusion, and today’s acquisition of Taykey highlights one such reason: despite the potential for programmatic advertising to reshape the advertising ecosystem, the complexity and variety of tools have outpaced advertisers’ ability or desire to deploy them.

Starting with 2013, the annual value of ad-tech dealmaking has jumped each year. According to 451 Research’s M&A KnowledgeBase, there was $2.3bn in ad-tech M&A spending last year, although just $1.8bn in 2017 with only a month to go. High-priced deals are notably lacking from this year’s total. While 2016 saw three companies exit at north of $500m, there’s only been one such transaction this year – Oracle’s purchase of Moat, one of only two targets that fetched more than 4x trailing revenue.

Last year, deals by enterprise software vendors (Adobe and Salesforce) along with overseas companies (China’s Beijing Miteno and Norway’s Telenor) spurred a 16% increase in spending on ad-tech targets, despite a drop in volume to just 66 transactions. This year, the volume continues to decline – just 56 companies have been bought so far – as those categories of buyers have grown quiet. Enterprise software providers have cooled their overall M&A spending after a pair of record years, while activity from foreign acquirers for any kind of US-based target has cooled, particularly the China-based buyers that took an interest in ad-tech in 2016.

Even if terms of Innovid’s pickup of Taykey were disclosed, the deal wouldn’t move the annual ad-tech M&A total. All signs point to a tuck-in: Innovid plans to shutter Taykey’s media and data businesses and fold the contextual analysis technology into its video ad server. Even those types of transactions will struggle to get done. There are few ad-tech firms like Innovid with stable, expanding revenue, and even fewer with access to capital to ink acquisitions – venture capitalists in the US have largely abandoned the space, and the public markets are even less welcoming.

Why have investors and acquirers retreated from ad-tech? Those that wanted to make a bet here already have. And, although the industry is undergoing a significant change as media consumption becomes ubiquitously digital, advertisers must pass through a gauntlet of challenges and opportunities to capitalize on that shift, entailing dozens of vendors ranging from what kind of audience data to use, who to partner with on measurement, how to gain visibility on the media supply chain, and how to scrutinize providers making vague promises on the power of artificial intelligence, blockchain and other technology themes that haven’t been part of the advertisers’ expertise.

All those choices mean there are a lot of Taykeys out there struggling to build a lasting business with advertisers across segments of ad-tech, including mobile location, identity resolution, cross-device matching, antifraud, brand safety, media buying and ad exchanges, to name a few. And there aren’t many Innovids with the appetite to buy them.

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

Marvell’s belated bid to be a chip consolidator 

Scott Denne

Contact: John Abbott, Scott Denne

With its $6bn reach for Cavium, Marvell Technology Group proves that a few large targets remain as the semiconductor industry emerges from a record streak of consolidation – a streak that happened with Marvell on the sidelines. Although deal value in semiconductor M&A remains well below the record levels of 2015 and 2016, the transactions getting done are commanding higher amounts.

Cavium becomes the fourth chipmaker to be acquired for more than $1bn this year, compared with 10 in all of last year, according to 451 Research’s M&A KnowledgeBase. Yet only one of the $1bn-plus deals this year has been done for less than $5bn, whereas half of 2016’s 10-digit semi transactions fell below that threshold.

Marvell doubles its market opportunity by purchasing Cavium and enters the high-growth datacenter market. Its current portfolio spans storage controllers, networking PHYs and SOCs for enterprise switches, and Wi-Fi and Bluetooth SOCs for wireless connectivity. To that Cavium adds compute, networking, storage and security components for the datacenter, including multi-core and datacenter processors, Ethernet adapter and datacenter switches, Ethernet and fiber-channel storage connectivity, and FIPS and virtual offload security.

Benefits of scale and volume include a full portfolio that will enable cross-selling, as well as pooled R&D expenses, where there is currently a lot of duplication – moving up to 10nm and 7nm process technology is a huge burden that can now be consolidated. Diversification will also reduce Marvell’s exposure to low-growth sectors, such as hard disc drive controllers and notebooks, and Cavium’s to the dwindling fiber-channel business. The two companies are located close to each other, easing integration challenges.

The change marks a departure from Marvell’s past M&A strategy. Since the start of 2002, the most it had ever paid for any asset was $600m, with most of its deals falling well short of that mark. Moreover, this is its first acquisition since early 2012 and only the third time it has bought an entire company, rather than a business unit.

Subscribers to 451 Research’s Market Insight Service will have access to a detailed report on this transaction later today.

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