Verint disconnects

by Scott Denne

Verint Systems occupies a prime portion of the customer experience software market with an aging portfolio. Now it’s splitting off a smaller, low-growth part of its business in a deal that could give it more currency for acquisitions as the call-center software vendor updates its software suite to meet the changing needs – and rising budgets – of customer service groups.

With an investment from Apax Partners, Verint plans to separate its customer experience software business and its cyber-intelligence unit into two publicly traded companies. Apax will invest $400m across two tranches for a minority stake in the customer experience division. The buyout shop already knows part of the business – it was a previous owner of ForeSee Results (through its ownership of ForeSee, a customer survey specialist that Verint bought in 2018, is a key part of VerintUnified VoC product.

But voice of the customer (VoC) is only a modest, if faster growing, part of Verint’s customer experience business today. Even after the split, Verint will be an on-premises call-center software company that’s growing in the high-single digits. There’s an opportunity to accelerate that growth given the market it plays in.

Our data show that customer service is drawing an outsized share of budgets and attention as businesses contend with rising customer expectations across more communications channels. The days of calling the company to complain seem quaint as customers turn to chat, email and social media. According to a recent survey from 451 Researchs Voice of the Enterprise: Customer Experience & Commerce, 54% of organizations said they’re increasing their investments in customer service software in the next 12 months. And 25% of them said the customer service group has primary responsibility for the customer experience.

Although it’s been pushing past call-center products via M&A for the past couple of years, Verint has mostly done so with modest-sized acquisitions in the $25-75m range, according to 451 Researchs M&A KnowledgeBase. As a stand-alone customer experience provider, it could well have a higher stock price, giving it currency for larger deals – Wall Street sent Verint’s shares up 15% on news of the split. The vendor also has 25% EBITDA margins, so it should continue to generate cash for purchases.

Social media management should be a priority for Verint after the split. Owning a broad suite of tools for managing and monitoring engagements on social media would bring it into an area it’s already familiar with – tracking and managing customer interactions – and give it a software portfolio beyond customer service as its clients, according to our surveys, are seeing their mandates extend from customer service into customer experience.

Figure 1: Departments with primary responsibility for customer experience

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

Data providers are ready to deal

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 Researchs 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 Researchs 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

High on low-code

by Scott Denne

The value of acquisitions in the low-code application development software market is rising. With Temenos’ $559m purchase of Kony, we’ve now recorded more deals and higher total value in this corner of the software market than all of 2018.

In reaching for Kony, Temenos, a developer of banking software, gets both a generic low-code tool and a portfolio of prebuilt digital banking applications. Although few low-code acquisitions we’ve tracked are vertically specific, applications developed with these tools often replace vertical-specific applications. That has helped bring private-equity investors, which have demonstrated an affinity for vertical software companies, into the space. Sponsors have printed three of the last five low-code vendor purchases.

Since these tools are often the foundation for multiple applications within an enterprise, they tend to have low churn rates – something that appeals to both strategic acquirers and sponsors. Kony, for example, has about a 5% attrition rate. So far this year, $1.7bn have been spent across four acquisitions in this market, according to 451 Researchs M&A KnowledgeBase. That’s up from $1.3bn in three deals in 2018.

Part of the reason for the rise is that buyers are reaching for larger targets. Kony projects its topline will grow to $120m in 2020. QuickbaseNintex and Mendix were all nearing or above $100m in their recent sales. (Subscribers to 451 Research’s M&A KnowledgeBase can access our estimates of those transactions by clicking on the links in the company names.)

Acquisitions of low-code app development vendors (includes disclosed and estimated deal values)

Middling exits in sales analytics

by Scott Denne

Companies developing predictive analytics for sales teams have done a poor job of predicting their own exit opportunities. In this corner of the sales-software market, several companies have exited, although most appear to be ‘acqui-hires,’ including the most recent deal, Anaplan’s acquisition of Mintigo.

Although Anaplan didn’t disclose the terms of its first acquisition as a public company, we expect the total came in below the $50m that Mintigo raised from investors. Anaplan only disclosed the acquisition during its earnings call, emphasizing that the purchase was done to land the target’s 50 employees, not for its B2B sales software. That would be a familiar outcome for the half dozen or so companies that launched earlier this decade to develop predictive analytics for B2B sales.

In 2015, LinkedIn acquired Fliptop to bolster the development team around its Sales Navigator product; a year later, eBay picked up the team that developed the now-defunct SalesPredict product; and in 2017 ESW Capital, a bargain-hunting PE firm, scooped up Infer. The exception, so far, is Lattice Engines, a growing business that sold to Dunn & Bradstreet at a respectable multiple (subscribers to 451 Researchs M&A KnowledgeBase can access our estimate of that deal here).

For the remaining vendors in the space, the exit potential looks a bit brighter. Most have evolved, if not outright pivoted, beyond stand-alone sales analytics. Everstring relaunched a little over a year ago as a provider of business data, 6Sense is expanding into a marketing suite on top of its intent data, and Leadspace is moving into sales analytics from its foundation of sales data management. Topline growth at these companies could compel business data providers or enterprise software companies to make more strategic acquisitions of sales analytics than we’ve seen so far.

Conversation pieces

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 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 Researchs 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 Researchs 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.

Customer feedback becomes a monkey business

by Scott Denne

As it pursues an audacious revenue goal, SurveyMonkey has inked its first acquisition in almost three years, spending $80m for Usabilla, a developer of voice-of-the-customer (VoC) software. Although SurveyMonkey debuted on Wall Street last year sporting 6% annual growth, the company plans to triple its topline in the next three years. It’s targeting a promising market, but faces an expanding roster of larger competitors.

Amsterdam-based Usabilla enables organizations to analyze customer feedback captured on their websites, apps and emails via its embedded scripts. The offering expands SurveyMonkey’s survey-based VoC software – an expansion it needs as it aims to land enterprise-wide licenses. SurveyMonkey’s revenue from such licenses rose 80% last year and made up 12% of its overall sales.

That initial success in selling enterprise licenses prompted the company to forecast a tripling of revenue in the next three years, which would bring it to about $750m annually. Last year, SurveyMonkey grew 16%. By marching into the enterprise, it will need to fend off competitors it didn’t encounter in its first two decades as a survey platform for teams and individuals.

Most notably, SAP nabbed SurveyMonkey’s main competitor, Qualtrics, in an $8bn deal last year. At the same time, call-center software vendors NICE and Verint Systems have expanded their VoC offerings through acquisition. According to 451 Research’s M&A KnowledgeBase, the latter bought ForeSee Results in December, a transaction that built off its 2016 purchase of OpinionLab. The former picked up net-promoter-score provider Satmetrix in 2017.

Those deals follow software budgets. In 451 Research’s VoCUL: Corporate Software report, 40% of software buyers told us that ‘customer feedback/voice-of-the-customer’ was among the reasons for using customer experience software, ranking higher than the more established category of ‘marketing automation.’

Zendesk focuses on sales with latest purchase

by Scott Denne

With its latest acquisition, Zendesk concentrates on its march toward $1bn in revenue with an asset that could help it bolster its enterprise sales. The helpdesk software provider adds sales force automation software to its suite with the purchase of FutureSimple (which does business as Base) and obtains a product that addresses the priorities of the largest businesses.

Terms of the deal weren’t disclosed, but there’s reason to believe that Base marks Zendesk’s largest acquisition yet. Zendesk had only inked three transactions before today – two that cost it about $15m each and one, BIME Analytics, that cost $45m. Base, by comparison, raised at least $52m in venture funding, according to 451 Research’s M&A KnowledgeBase, and has about 150 employees, compared with BIME’s 40.

The pickup of Base continues Zendesk’s expansion into other corners of customer engagement, beyond its roots as a helpdesk software developer. As we noted in our report on its purchase of marketing software vendor Outbound, Zendesk needs a broader suite to reach its goal of $1bn in annual revenue in 2020. It finished last year with $430m, a 38% jump from the year before, a growth rate that leaves little room for deceleration if Zendesk is to hit its target.

Although historically targeting smaller businesses, Zendesk hopes to entice more large enterprises to use its applications to get to that goal. By nabbing pipeline management, lead-scoring and other sales automation capabilities, Zendesk injects itself into a top priority for large enterprises. According to 451 Research’s most recent VoCUL: Corporate Mobility and Digital Transformation Survey, 22% of businesses with more than $1bn in annual revenue reported that sales organizations will have the highest budget for software compared with other lines of business: only IT (51%) and Zendesk’s core market of customer service (31%) ranked higher.

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

A pause in Big Software’s ‘SaaS grab’

Contact: Brenon Daly

After years of trying to leap directly to the cloud through blockbuster acquisitions, major software vendors have been taking a more step-by-step approach lately. That’s shown up clearly in the M&A bills for two of the biggest shops from the previous era trying to make the transition to Software 2.0: Oracle and SAP.

Since the start of the current decade, the duo has done 11 SaaS purchases valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. However, not one of those deals has come in the past 14 months, as the two companies have largely focused on the implications of their earlier ‘SaaS grab.’

During their previous shopping spree for subscription-based software providers, Oracle and SAP collectively bought their way into virtually every significant market for enterprise applications: ERP, expense management, marketing automation, HR management, CRM, supply chain management and elsewhere. All of the transactions appeared designed to simply get the middle-aged companies bulk in cloud revenue, with Oracle and SAP paying up for the privilege. In almost half of their SaaS acquisitions, Oracle and SAP paid double-digit multiples, handing out valuations for subscription-based firms that were twice as rich as their own.

In addition to the comparatively high upfront cost of the SaaS targets, old-line software companies face particular challenges on integrating SaaS vendors as part of a larger, multiyear shift to subscription delivery models. Like a transplanted organ in the human body, the changes caused by an acquired company inside the host company tend to show up throughout the organization, with software engineers re-platforming some of the previously stand-alone technology and sales reps having their compensation plans completely overhauled.

The disruption inherent in bringing together two fundamentally incompatible software business models shows up even though the acquired SaaS providers typically measure their sales in the hundreds of millions of dollars, while SAP and Oracle both measure their sales in the tens of billions of dollars.

For instance, SAP is currently posting declining margins, an unusual position for a mature software vendor that would typically look to run more – not less – financially efficient. But, as the 45-year-old software giant has clearly communicated, the temporary margin compression is a short-term cost the company has to absorb as it transitions from a provider of on-premises software to the cloud.

Of course, the transition by software suppliers such as Oracle and SAP – painful and expensive though it may be – simply reflects the increasing appetite for SaaS among software buyers. In a series of surveys of several hundred IT decision-makers, 451 Research’s Voice of the Enterprise found that 15% of application workloads are running as SaaS right now. More importantly, the respondents forecast that level will top 21% of workloads by 2019, with all of the growth coming at the expense of legacy non-cloud environments. That’s a shift that will likely swing tens of billions of dollars of software spending in the coming years, and could very well have a similar impact on the market capitalization of the software vendors themselves.

Xactly exits

Contact: Brenon Daly

Two years after coming public, Xactly is headed private in a $564m buyout by Vista Equity Partners. The deal values shares of the sales compensation management vendor at nearly their highest-ever level, roughly twice the price at which Xactly sold them during its IPO. According to terms, Vista will pay $15.65 for each share of Xactly.

Xactly’s exit from Wall Street comes after a decidedly mixed run as a small-cap company. For the first year after its IPO, the stock struggled to gain much attention from investors. Shares lingered around their offer price, underperforming the market and, more notably, lagging the performance of direct rival Callidus Software. However, in the past year, as Xactly has posted solid mid-20% revenue growth, it gained some favor back on Wall Street. In the end, Vista is paying slightly more than 5x trailing sales for Xactly.

The valuation Vista is paying for Xactly offers an illuminating contrast to Callidus, which has pursued a much different strategy than Xactly. Although both companies got their start offering software to help businesses manage sales incentives, the much-older and much-larger Callidus has used a series of small acquisitions to expand into other areas of enterprise software, notably applications for various aspects of human resources and marketing automation. According to 451 Research’s M&A KnowledgeBase, Callidus has done seven small purchases since the start of 2014. For its part, Xactly has only bought one company in its history, the 2009 consolidation of rival Centive that essentially kept it in its existing market.

Although Xactly is getting a solid valuation in the proposed take-private, it’s worth noting that Callidus – at least partly due to its steady use of M&A – enjoys a premium to its younger rival with a narrower product portfolio. Even without any acquisition premium, Callidus trades at about 7x trailing sales. Callidus is roughly twice as big as Xactly, but has a market value that’s three times larger.

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

ServiceNow adds some smarts to the platform with DxContinuum

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.