Morgan Stanley’s big play for little investors

by Scott Denne

Fintech deals keep coming as Morgan Stanley shells out $13bn of its stock for online financial broker E*TRADE. As we’ve previously noted, payments and financial services firms accounted for an outsized share of this year’s and last year’s deal activity as they look to acquisitions to align with changes to the tech landscape.

Morgan Stanley’s move isn’t driven so much by E*TRADE’s technology as much as it’s driven by access to the target’s retail clients. Over the past five years, Morgan Stanley has transformed its business through a focus on wealth management, particularly at the high end of that market. That business today accounts for just over half of its pretax profit, up from one-quarter five years ago. The E*TRADE buy extends that business into smaller retail investors – the seller manages an average of $70,000 per client, less than one-tenth of Morgan Stanley’s average client.

E*TRADE isn’t exactly a tech vendor, but it wouldn’t be able to service so many small clients without its online interface. And that’s illustrative of many of the recent fintech deals we’re seeing – it’s not that financial services providers are buying tech so much as they’re buying into markets that are opened by tech. While online brokerages, which have been around since the dot-com days, aren’t new, the growth of the category and the entry of startups have driven competition to new heights, causing most players to drop their fees and find buyers.

Banks aren’t the only companies in financial services printing major acquisitions to move into tech-enabled markets. For example, Visa, in its largest-ever tech deal, paid $5.3bn last month for Plaid, a maker of payment-processing APIs for software developers as more payments happen via e-commerce sites, mobile apps and other software interfaces. We’re likely to continue to see transactions along a similar vein as financial services firms broadly expect technology to impact their market. According to 451 Researchs Voice of the Enterprise: Digital Pulse, Budgets & Outlook, one of every three employees of finance companies expect digital technologies to significantly disrupt their business model in the next three years, compared with just one in four across all industries.

Figure 1: Level of digital disruption expected in next three years

Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Budgets & Outlook 2018

Blocking a buy

by Brenon Daly

It’s never easy to make sense of Washington DC. And yet, the decisions made in the nation’s capital can dramatically shape the flow of business, often determining what can get bought and sold, along with who can do the buying and selling. That’s true for both products as well as the companies behind the products.

Consider the recent decision by the Federal Trade Commission (FTC) to block Edgewell’s proposed $1.3bn cash-and-stock purchase of online razor vendor Harry’s. The pairing of the old-line shaving giant, which sells its Schick and Edge offerings through traditional retail outlets, and Harry’s direct-to-consumer (D2C) product didn’t appear problematic when it was announced last May. After all, rival consumer package goods titan Unilever had closed a similar acquisition of Dollar Shave Club in mid-2016 in short order and without any hoopla.

The FTC’s move has huge implications for both this particular transaction and far beyond it. For Edgewell, the company has said it now expects to face litigation by Harry’s due to the broken deal, likely further increasing the cost of the once-planned, now-punted expansion. Further, as noted in S&P’s Capital IQ transcript of Edgewell’s most recent quarterly earnings report, the company is licking its wounds from the FTC decision, adding that it was ‘out of the market for big, transformational (acquisitions).’

The unanimous FTC decision surprised most M&A market observers. Buying a D2C startup as a way to expand a company’s distribution routes or decrease reliance on troubled traditional retail outlets has been a time-tested acquisition strategy. 451 Research‘s M&A KnowledgeBase lists more than 300 transactions that feature the term ‘direct to consumer,’ including deals by such household names as luggage maker Samsonite, cosmetic supplier Cody’s, mattress maker Serta and retailing titan Walmart, among others.

Further, most dealmakers told us they didn’t expect Washington DC to have much of an impact on their work in 2020. In the 451 Research Corporate Development Outlook last December, just one in five survey respondents indicated that they thought ‘antitrust concerns’ or broader regulatory review would lower the number of tech deals in the coming year. The overwhelming majority (79%) thought transactions such as Edgewell-Harry’s would move along as they pretty much always had.

Figure 1: Tech M&A activity
Source: 451 Research’s Tech Corporate Development Outlook

Filling up on restaurant tech

by Michael Hill

Point-of-sale (POS) vendors have built up an appetite for restaurant technology as the number of tech acquisitions they’ve made in that vertical has jumped since the start of the year. The uptick in these segment-specific deals arises from the food and hospitality industry’s penchant for embracing digital commerce innovation combined with weak overall demand for POS systems and software.

According to 451 Researchs M&A KnowledgeBase, POS companies have inked seven restaurant tech purchases since the start of the year, almost as many as the eight they printed in 2018. Many of the acquisitions so far have been done to consolidate in the restaurant sector, while others were made to extend the buyers’ POS software suites into adjacent categories.

For example, restaurant POS startup Toast, which has amassed nearly $250m in funding since 2016, recently reached for StratEx, a provider of automated HR management software to restaurants that covers onboarding, payroll, benefits administration, scheduling, attendance and applicant tracking. As we noted in earlier coverage of Toast, the past few years have shown the food service segment to be among the earliest to embrace digital commerce innovations.

Restaurants have more advanced POS needs than the average retail business, demanding capabilities such as table management and online ordering, in addition to payment processing and customer management. And restaurants often spend more on POS systems than any other tech purchase, so nesting multiple applications inside these mission-critical systems offers a path to market for other restaurant-focused software products. HR management software such as StratEx’s aligns with restaurant POS, as that system doubles as a punch clock at most restaurants.

Other recent transactions appear to follow a similar recipe: start with POS and mix in other back-office applications. Take Lavu’s pickup of accounts payable specialist Sourcery Technologies earlier this month. With that move, the buyer is aiming to upsell restaurants with POS software that unifies restaurant sales with vendor management.

Part of the motivation for the string of deals in this space could be the modest growth for the overall POS market, which our surveys show is expected to be relatively flat in the coming months. According to 451 Research’s most recent Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets survey, only 42% of respondents said they expect their organization to maintain or increase its budget for POS software in the next quarter, the lowest reading for any of the nine software categories covered in the survey.

Annual acquisitions of restaurant technology vendors by POS providers

Adobe’s M&A experience

by Scott Denne

As Adobe opens Adobe Summit – its annual digital marketing event starting today – the odds are against it using the main stage to announce a major acquisition. After all, 2018 was a record year for the marketing and media software vendor, which printed two $1bn-plus purchases, the first time it’s ever done so in a single year, our data shows. Still, Adobe may have deals left to do as competition intensifies around an expanding market.

In the first iteration of digital marketing, Adobe jumped out to an early lead, largely through its acquisition of website analytics specialist Omniture almost a decade ago. But now the fight has shifted to include new categories such as e-commerce, ad-tech and customer data platforms. That shift is reflected in the tag line for this year’s event – ‘The Digital Experience Conference,’ a change from past billings of the event as ‘The Digital Marketing Event.’ For Adobe, the change has been more than an exercise in corporate branding.

Last year, it paid $1.7bn for Magento, moving beyond marketing and into e-commerce software, and inking its first 10-figure purchase since Omniture ($1.8bn), according to 451 Research’s M&A KnowledgeBase. That transaction was largely a reaction to Salesforce’s earlier pickup of Demandware, which along with the acquisition of Krux in 2016, helped turn the buyer into a major power in customer experience software. Adobe’s other major purchase of 2018, the $4.8bn acquisition of Marketo, a B2B marketing automation provider, was clearly a foray into Salesforce’s turf. Adobe remains the larger of the two in experience software – it posted $2.4bn in sales of such software last year vs. Salesforce’s $1.9bn, although the latter business accelerated at a faster pace (37% annual growth compared with Adobe’s 27%).

Demand from marketers and other line-of-business executives underlies those deals. According to 451 Research’s VoCUL: Corporate Software report, 15% of all businesses are using or about to be using customer experience management (CEM) software. The adoption rates are even higher among organizations investing in a digital transformation project, where 100% of such respondents use CEM software.

With a newfound willingness to spend and a mandate that extends beyond marketing, we see multiple sectors where Adobe could expand its portfolio. It could look to counter SAP’s $8bn reach for customer feedback analytics vendor Qualtrics by purchasing that company’s competitor, Medallia. Such a move would align with Adobe’s ambition to be the system of record for customer data, although it would likely carry a price tag similar to Marketo. Or it could buy an ad server, which would give it additional customer data and a link between Adobe’s creative design software and its ad-tech products by providing creative management and optimization capabilities. Video specialist Innovid and Flashtalking, a rival with a broader portfolio, are the most compelling targets in this market.

‘Buy now’

by Brenon Daly

As holiday-sated workers troop back to the office, they are expected to go through the annual ritual of logging onto their favorite online shopping sites and, collectively, throwing a few billion dollars into those virtual cash registers. The unofficial holiday of Cyber Monday pits retailers of all stripes against each other in an annual test of who can get online shoppers to click the ‘buy’ button.

For retailers not named Amazon, drawing in more of those digital dollars has meant making ever-larger M&A bets. This year has already seen two of the four largest acquisitions of online retailers since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase. The big prints have pushed this year’s spending on internet retailers to a record level, with the value of 2018 deals roughly matching the previous five years combined.

Looking at the blockbuster online retail transactions in 2018, however, we’re struck by the disconnect between the most-basic tenant of any market: supply and demand. Specifically, there’s a notable divergence between how an acquirer plans to use the target company to bolster its e-commerce site (supply), compared with what customers actually want from an e-commerce site (demand). One of our recent surveys of hundreds of online shoppers suggests that companies might do well to focus on optimization, rather than acquisition.

Consider the rationale for the two largest online retailing deals in 2018, which, admittedly, skewed overall spending in the sector compared with previous years. Walmart spent $16bn last summer for a majority stake in India-based e-commerce giant Flipkart, as part of a geographic expansion by the world’s largest retailer. A few months earlier, Swiss jewelry retailer Richemont handed over $3bn to expand into the clothing market as it purchased YOOX Net-A-Porter.

Broadly speaking, both of those transactions were driven by the buyer’s desire to expand into new markets. But merely offering more stuff – whether new products or new geographies – doesn’t necessarily lead to more sales. Without streamlining the acquired property, offerings turn into clutter. That’s an inconvenient fact that undermines much of the rationale for big e-commerce purchases like this year’s pair of billion-dollar deals.

As clearly shown in a recent survey by 451 Research’s Voice of the Connected User Landscape (VoCUL), more online stuff can slow sales, and send would-be buyers to other sites. In fact, three of the four top attributes that respondents to the VoCUL survey said they valued the most when shopping online had to do with being able to find and purchase things quickly. Would-be acquirers in the online retailing market should remember that when it comes to commerce, convenience is key.

Retail’s plodding path

Contact:  Scott Denne

It’s hard to find an industry that’s more threatened by emerging technology than retail. In addition to dangers from Amazon and a bevy of younger online retailers, stores are forced to adjust to changes in consumer behavior that impact everything from marketing to inventory management and logistics. Despite all that, the exit environment for startups selling retail technologies is narrowing as retailers and consumer goods companies generally show less inclination to invest in new technology than other industries.

There are exceptions. Take L’Oreal’s recent purchase of augmented reality vendor ModiFace. In reaching for the virtual makeover vendor with 70 engineers specializing in augmented reality and machine learning, L’Oreal hopes to expand new channels for customer engagement – a path it started down in 2014 with the launch of its augmented reality mobile app, Makeup Genius. Still, our surveys of retail technologists, along with acquisition data from 451 Research’s M&A KnowledgeBase, suggest that L’Oreal will be an outlier.

Retailers and related consumer products providers are less likely to be planning to adopt augmented or virtual reality technology in the next 24 months. In 451 Research’s VoCUL: Corporate Mobility and Digital Transformation survey, 24% of retail respondents told us their organization planned to use such technologies, compared with 29% of other respondents. Retail indexed lower in most other categories of emerging technologies as well, including artificial intelligence, where 35% of retail respondents planned to adopt, compared with 47% across all other verticals.

The reticence to invest in newer technologies translates into a decline in dealmaking. According to the M&A KnowledgeBase, acquisitions of retail technology firms – anything from e-commerce businesses to supply-chain software firms that specialize in serving retailers – declined 30% in 2017, with just 232 transactions.

After a few years of expanding, valuations among this group are coming down a bit. For the first time since 2012, we didn’t track a single multiple at or above 8x trailing revenue in 2017 for businesses with more than $2m in annual revenue. The decline in the highest multiples comes as overall deal value for the category rose to $18bn, from $16.8bn a year earlier, as buyers – both retailers and the tech vendors that service them – sought out more mature businesses at higher prices, but lower multiples, than startups dabbling in the latest technology.

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

CommerceHub in sellers’ market

Contact: Scott Denne

A pair of private equity (PE) firms has taken CommerceHub off the public markets in a $1.1bn acquisition. The deal carries a scorching multiple that punctuates the value of e-commerce software as retailers struggle to make digital engagement a centerpiece of their business.

GTCR and Sycamore Partners’ joint purchase of CommerceHub values the firm at 10x trailing revenue, or 32x EBITDA – atypical multiples for an e-commerce software provider with the target’s growth. With that valuation, CommerceHub finds itself in the same neighborhood as Demandware and hybris, which each fetched about 11x revenue in their respective sales to Salesforce and SAP.

Yet CommerceHub’s revenue expanded by just 11% last year, compared with Demandware and hybris, which both posted topline growth in the 50% neighborhood leading up to their exits. Ariba offers a more accurate, if aging, comp for CommerceHub – both vendors provide back-end commerce services, such as integration between retailers and suppliers, whereas Demandware and hybris build customer-facing software. CommerceHub is fetching a multiple that’s a full turn above Ariba’s 2012 sale, despite the latter company having double the growth rate and being triple the size of the former.

In part, today’s multiple reflects higher prices being paid by buyout shops as their investments in tech M&A rise. According to 451 Research’s M&A KnowledgeBase, the median multiple paid by a PE acquirer last year rose to 3x, up from 2.5x a year earlier. Moreover, that median has hovered above 2.5x every year since 2014. In the preceding decade, it never once hit that level, and in only three years did the median reach 2x.

All that’s not to say nothing but a flood of PE money drove up CommerceHub’s price. Digital commerce technology is evolving into a core element of customer engagement and retailers need timely, accurate product information, which CommerceHub facilitates, to integrate into their customer-facing marketing and commerce software systems. According to 451 Research’s VoCUL Quarterly Advisory Report: Digital Transformation Leaders and Laggards, digital commerce and web experience management are the two most common areas of investment for enterprises, as 27% of enterprises told us they plan to deploy or upgrade those technologies in late 2017 and early 2018.

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

Williams-Sonoma orders augmented reality

Contact: Scott Denne

Retailers have inked a handful of deals in an effort to fend off competition from Amazon and adapt to a blossoming era of mobile-enabled shopping. Yet few buyers have reached for companies with advanced technology, instead opting to bolt on digital media, e-commerce and services businesses. Williams-Sonoma’s $112m pickup of Outward counters that trend and shows that retailers could become true tech buyers as digital commerce entails more than stitching on a website.

With its acquisition of Outward, Williams-Sonoma, a maker of upscale household wares and (through its Pottery Barn subsidiary) furniture, obtains technology that enables 3-D renderings of its inventory for use across multiple digital platforms, including a forthcoming augmented reality (AR) app that helps customers visualize furniture purchases in their own homes.

It was that mobile capability that drove Williams-Sonoma to pay $112m for a company that raised just $11.5m in venture capital. The buyer believes that more immersive capabilities on its mobile website and app have already led to sales and will continue to do so in the future. According to a study done by 451 Research’s VoCUL in the first quarter, 35% of consumers research a purchase on their smartphone at least once a week before going to a store.

For other retailers looking to follow Williams-Sonoma, there are a handful of assets remaining. Although furniture shopping is a niche application of AR, such startups have gotten their fair share of venture capital, having raised a total of $34.8m across six vendors, including Marxent, Modsy and Hutch, according to 451 Research’s M&A KnowledgeBase Premium. Today’s deal, along with Amazon’s purchase of Body Labs and Bed & Beyond’s acquisition of Decorist, could spark retailers to buy more ecommerce technologies.

Still, if past is precedent, retailers aren’t likely to rush into acquiring companies like Outward, which has filed for eight patents related it its imaging technology and was built by a team of Qualcomm veterans. Instead, they’re likely to continue to snag their e-commerce counterparts as they’ve done so far this year. According to the M&A KnowledgeBase, 11 of the 26 deals by brick-and-mortar stores in 2017 have been acquisitions of online retailers.

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

Retailers go shopping online 

Contact: Scott Denne

It’s been a tough year for retail. More than a dozen retailers – the latest being Toys R Us – have filed for bankruptcy, while others – JC Penney and Macy’s, for example – have grappled with lower-than-expected sales and store closings. As they face the acute threat from online sellers, Amazon in particular, they have adjusted their acquisition strategies to be more ambitious in scale, yet narrower in scope.

According to 451 Research’s M&A KnowledgeBase, spending on tech M&A by retailers spiked this year and last, with each cresting above $4bn in spending, whereas each of the four years prior to that, total spending fell safely below $1bn. (Two deals – Walmart’s $3.3bn purchase of and PetSmart’s $3.4bn reach for Chewy – account for most of that boost, yet even excluding those transactions, spending by retailers in 2016 and 2017 sits slightly higher than normal.)

Aside from the increase in spending, retailers have executed a shift in M&A strategy. Where they had once been inclined to pick up companies outside their core competency, buying websites, logistics or gaming companies, they’re now more likely to snag their online counterparts, as Signet Jewelers recently did – amid declining in-store sales – with its $328m acquisition of R2Net. As their customers have done more of their shopping online, retailers have done the same. This year and last, retailers printed more deals for e-commerce vendors than all other categories combined, a contrast to their earlier buying habits.

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

Grand Junction buy shows that Target’s digital strategy goes through its stores

Contact: Scott Denne

While Walmart is attacking Amazon by air with its asset, Target is planning a ground assault. Its acquisition of Grand Junction marks Target’s reentry into the tech M&A market after a nearly three-year absence. And although the price is likely modest – the target only has a dozen or so employees – it aligns with the big box retailer’s expansion strategy.

The deal adds to the list of steps Target is taking to adapt its business to the growth in digital shopping by leveraging its physical assets to improve fulfillment (both in cost and quality of service). The company has worked with Grand Junction on its first experiment with running same-day delivery out of one of its Manhattan locations. It’s also opening a new distribution facility designed to test supply chain and logistical innovations, integrating its existing stores with its digital supply chain and launching 100 new small-format locations.

Even its previous tech acquisition, PoweredAnalytics, expanded its physical capabilities by analyzing data to adjust the in-store experience. Its focus on adapting its physical assets to digital shoppers makes Target’s M&A strategy unique. Walmart, for example, has gone after established e-commerce businesses, starting with, to build a niche in online retail in areas like fashion where Amazon hasn’t yet made its mark. Other traditional retailers and consumer goods vendors have bolted on firms that bring them into new markets, such as Barnes & Noble Education’s recent reach for student media provider Student Brands or Whirlpool’s pickup of recipe site Yummly.

Although retailers and consumer goods companies still make up just a fraction of overall tech M&A, their activity has grown as they encounter an accelerating pace of store closures and bankruptcies as shopping shifts to online channels. According to 451 Research’s M&A KnowledgeBase, those buyers have spent $4.7bn across 22 tech transactions in 2017, the same pace as last year’s record level of dealmaking.

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