Category: investment banking

For PE, $20bn deals are so 2007

Brenon Daly

Contact: Brenon Daly

Looking to put its mountainous cash holdings to work, private equity (PE) has become a velocity play. Deal-hungry financial acquirers have scaled back the size of the checks they write, but have compensated for that by writing a lot more checks.

This year, for instance, buyout shops have put up twice as many $1bn+ tech transactions as they did during the pre-credit crisis peak, but only half as many big ones. As PE firms lower their sights, their current overall M&A spending is coming up well short of the amount they threw around in the previous generation.

To understand this shift in price preference, it’s useful to compare PE dealmaking at the top end of the market in 2017, which will see an overall record number of sponsor-backed transactions, with the previous high-water year for PE spending in 2007. This year, 451 Research’s M&A KnowledgeBase has recorded 24 acquisitions by PE firms valued at $1bn or more, with total spending on those deals of $69bn. In contrast, 2007 saw fewer than half that number of billion-dollar transactions (11 vs. 24), but spending on those big-ticket deals was one-quarter higher ($85bn vs. $69bn).

A decade ago, buyout shops were looking to bag elephants. The prices of the two largest transactions in 2007 were both a full $10bn higher than this year’s biggest PE print, according to the M&A KnowledgeBase. (And for the record, this year’s sole buyout blockbuster – the late-September PE-led $17.9bn purchase of Toshiba’s flash memory business – looks more like the consortium deals we saw last decade than the PE transactions we’ve seen recently.)

For the most part, however, those blockbuster deals from last decade, with their 11-digit price tags, haven’t delivered the hoped-for returns. PE firms are now hoping that by going small, they can get a bigger bang.

Cybersecurity turns into a busy bazaar

Brenon Daly

Contact: Brenon Daly

The holiday shopping season kicked off last week, and for one tech sector, it was a particularly bountiful time for picking up some companies. Information security (infosec) acquirers announced an unprecedented seven transactions during the week that started on Cyber Monday. The pace represented a dramatic acceleration from the year-to-date average of just two deals announced each week.

With last week’s flurry, the number of infosec acquisitions in 2017 has already eclipsed last year’s total, even as overall tech M&A volume this year is heading for a mid-teens percentage drop from last year, according to 451 Research’s M&A KnowledgeBase. (This year already ranks as the second-busiest year for infosec, with deal volume tracking to roughly 50% higher than the start of the decade.) Probably more important than the sheer number of transactions was who was doing the dealing:

-McAfee announced its first purchase since throwing off the shackles of full ownership of Intel last year. By all accounts, McAfee’s step back into the M&A realm with cloud security startup Skyhigh Networks came at a sky-high price.
-An infrequent acquirer, Trend Micro reached for a small application security startup based in Montreal, IMMUNIO. It is only the third acquisition the Japan-based company has done since 2011.
-Thoma Bravo continued this year’s record level of infosec M&A by private equity (PE) firms, taking Barracuda Networks private for $1.6bn. The M&A KnowledgeBase indicates that 2017 is on pace for more PE purchases in this market than any year in history, likely to come in about quadruple the number of sponsor-backed infosec deals in 2012.

Expanding the timeframe beyond just last week, we see a number of other trends this year that have contributed to strong infosec deal volume in 2017, which should continue in 2018. For starters, the industry’s largest stand-alone vendor has stepped back into the market in a big way. Symantec has inked five transactions so far in 2017, more than it has done, collectively, in the previous half-decade. Meanwhile, other infosec providers have either reemerged as buyers (Juniper acquiring Cyphort after a four-year infosec M&A hiatus) or started their own acquisition program (Qualys has announced two deals in the past four months, after printing just one transaction since the company’s founding in 1999).

November tech M&A slumps to pre-boom levels

Brenon Daly

Contact: Brenon Daly

Dealmaking in 2017 is going out with a whimper. Acquirers in November spent just $15.7bn on tech transactions across the globe, the lowest monthly total in three years, according to 451 Research’s M&A KnowledgeBase. The sluggish November activity comes after a similarly anemic October, with both months coming in only about half of the average monthly spending for the first nine months of 2017. Also, the number of deals announced in the just-completed month slumped to its lowest level of the year.

Even as November featured a decidedly lackluster level of overall M&A activity, a few transactions stood out, including:
-After entirely sitting out the wave of semiconductor consolidation in recent years, Marvell Technology Group shelled out $6bn in cash and stock for Cavium. The deal stands as the largest tech transaction in November, topping the collective spending on the next four biggest acquisitions last month.
-The information security industry saw its largest take-private, as buyout firm Thoma Bravo paid $1.6bn for Barracuda Networks in a late-November deal. A single-digit grower that throws off $10-20m in free cash flow each quarter, Barracuda has long been considered a candidate to go private as it works through a transition from on-premises products to cloud-based offerings.
-Richly valued startup Dropbox stepped back into the M&A market in November for the first time since July 2015, purchasing online publisher Verst. From 2012-15, the unicorn (or more accurately ‘decacorn’) had inked 23 acquisitions, according to the M&A KnowledgeBase.

The recent tail-off in acquisition spending has left the value of announced tech transactions so far this year at just $302bn, according to the M&A KnowledgeBase. With one month of 2017 remaining, this year is all but certain to come in with the lowest annual M&A spending since 2013. This year is tracking to a 34% decline in deal value compared with 2016 and an even-sharper 45% drop from 2015.

Bull market bypasses tech IPOs

Brenon Daly

Contact: Brenon Daly

Although there’s still a month remaining in 2017, most startups thinking about an IPO – even those already on file ‘confidentially’ – have already turned the calendar to 2018. The would-be debutants want to have results from the seasonally strong Q4 to boast about during their roadshow with investors, as well as toss around a bigger ‘this year’ sales figure to hang their valuation on. There’s no compelling reason to rush out an offering right now.

That’s true even though the tech IPO market has been pretty active recently. By our count, a half-dozen enterprise-focused tech vendors have come public in just the past two months. (To be clear, that tally includes only tech providers that sell to businesses, and leaves out recent consumer tech companies such as Stich Fix and CarGurus.) The total of six enterprise tech IPOs since October is already higher than the full Q4 2016 total of four offerings.

While there has been an uptick in IPO activity, shares of the newly public companies haven’t necessarily been ticking higher, at least not dramatically so. There hasn’t been a breakout offering. Based on the first trades of their freshly printed shares, not one of the recent debutants has returned more than 20%. Half of the companies are trading lower now than when they debuted. Meanwhile, investors who aren’t interested in these new issues can’t seem to get enough of stocks that have been around a while, bidding the broad market indexes to record high after record high this year. The much-desired IPO ‘pop’ has gone a little flat here at the end of 2017, which might have some startups slowing their march to Wall Street in early 2018.

 

Piling up the chips

Brenon Daly

Contact: Brenon Daly

Unveiling what would be the largest tech transaction in history, Broadcom said it is prepared to hand over $103bn in cash and stock, and assume some $25bn in debt, for Qualcomm. The unprecedented 12-digit pairing represents a consolidation of the two consolidators behind the semiconductor industry’s two largest consolidations.

To get a sense of the sheer scale of Broadcom’s ambitions, consider that this single deal would roughly match spending on all acquisitions in the chip industry from 2008-14, according to 451 Research’s M&A KnowledgeBase. However, regulatory challenges mean this marriage of giants highly is unlikely to go through. And that assumes Qualcomm even picks up negotiations with Broadcom and its relatively low opening bid.

Thus far, Qualcomm has pretty much dismissed Broadcom’s offer. That doesn’t mean Broadcom, which is being banked by six separate firms, won’t push the deal.

Broadcom is negotiating from a position of strength, while Qualcomm is suffering through a well-publicized legal fight with major customer Apple and has still come up empty in its high-risk effort to buy its way into new growth markets. (Qualcomm originally hoped to close its $39.2bn purchase of NXP Semiconductors, which makes chips for cars and Internet of Things deployments, by the end of this year. That appears unlikely, and Broadcom has said it wants to acquire Qualcomm whether NXP closes or not.)

Broadcom’s relative strength also comes through in the pricing of the transaction as it is currently envisioned. At an enterprise value of $130bn, Broadcom is valuing Qualcomm at just 3.9x its pro forma 2017 sales of $33bn. (That assumes Qualcomm, which will put up about $24bn in sales in 2017, does buy NXP, which will generate $9bn in sales.) That’s substantially lower than the 5.5x sales Qualcomm plans to pay for NXP on its own, and a full three turns lower than the nearly 6.9x 2017 sales where Broadcom trades on its own.

VCs aren’t buying what VCs are selling

Brenon Daly

Contact: Brenon Daly

VCs aren’t buying what other VCs are selling, slamming shut a once-reliable exit door for startups. The recent shift in M&A has left the number of VC-to-VC acquisitions down about 40% so far this year compared with the previous three years, according to 451 Research’s M&A KnowledgeBase. The current weekly pace of two sales of VC-backed companies to other VC-backed companies would put this year’s total at about 105, representing the lowest full-year number of exits since the start of the decade.

There are several reasons for the decline in intra-industry deals, depending on the stature of the acquiring startup. In the rarified land of unicorns, there is a prevailing focus for VC portfolio companies on operational improvements, rather than inorganic expansion. Unlimited spending – whether it’s on KIND bars or Y Combinator graduates – has fallen out of fashion.

For instance, the M&A KnowledgeBase lists 24 acquisitions for Dropbox, which has raised more than $2bn in debt and equity. However, not one of those purchases has come in the past two years. It’s a bit different for Uber, which has its own ‘operational improvements’ to make. That besieged startup hasn’t done any deals in 2017, after doing two in each of the two previous years, according to the M&A KnowledgeBase.

Beneath that top tier of once-active, big-name startups is a fatter slice of VC-backed companies that have also cut their shopping, but for a different reason. In many cases, the startups simply don’t have the money for M&A because they haven’t been able to raise any new funding. This year is on pace to feature the fewest number of startups receiving venture investment since 2012, according to trade group National Venture Capital Association.

SailPoint sets sail for land of unicorns

Brenon Daly

Contact: Brenon Daly

In what would be one of the few private equity-backed tech companies to go public, SailPoint Technologies has put in its paperwork for a $100m IPO. The identity and access management (IAM) vendor, which has been owned by buyout shop Thoma Bravo for three years, should debut on Wall Street with a valuation north of $1bn. That is, unless SailPoint gets caught up in the current M&A wave that has seen a number of big buyers pick up identity-related security firms.

SailPoint reported $75m in revenue for the first half of 2017, an increase of 32% over the same period last year. Assuming that pace holds, the Austin, Texas-based company would finish this year with about $175m in sales. Depending on the product, SailPoint sells both licenses and subscriptions to its software. Subscriptions to its cloud-based offering, IdentityNow, are outpacing on-premises software sales, and currently account for some 42% of total revenue. License sales generate 34% of overall revenue, with the remaining 24% coming from services.

Transitioning to more subscription sales will undoubtedly boost SailPoint’s valuation. (Wall Street tends to appreciate the predictability that comes with multiyear subscriptions. In the case of IdentityNow, SailPoint indicated in its prospectus that the standard contract lasts three years.) That’s not to suggest that SailPoint will get the same platinum valuation as a pure SaaS provider such as Okta. That cloud-based IAM vendor, which went public in April, currently commands a $2.75bn market cap, or 11x this year’s sales. Of course, Okta is larger than SailPoint and growing at twice the pace.

Instead, we would look to some of the recent M&A pricing in the active IAM market to inform SailPoint’s valuation. For example, we understand that SecureAuth traded at more than 6x revenue in its sale in September to buyout firm K1 Investment Management. Ping Identity – which, like SailPoint, was in transition from license sales to subscriptions – also sold for about 6x sales last year. SailPoint is substantially larger than either of these fellow IAM firms, and is growing solidly. That should garner it a premium. But even using a conservative valuation multiple of 6x sales gets SailPoint into the land of the unicorns.

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

MongoDB maintains in its IPO

Brenon Daly

Contact: Brenon Daly

Despite a well-received IPO, MongoDB’s valuation basically flatlined from the private market to the public market. The open source NoSQL database provider priced shares at $24 each and jumped in mid-Thursday trading to about $30. The 25% pop on the Nasdaq basically brought MongoDB shares back to the price where the company sold them to crossover investors in late 2014.

MongoDB has slightly more than 50 million shares outstanding, on an undiluted basis. With investors paying about $30 for shares in the company’s public debut, that gives MongoDB a market cap of more than $1.5bn. It raised $192m in the public offering, on top of the $300m it raised as a private company.

That means Wall Street is valuing MongoDB, which will put up about $150m in the current fiscal year, at 10x current revenue. That’s a rather rich premium compared with the most-recent big-data IPO, Cloudera. The Hadoop pioneer, which went public six months ago, currently trades at about 6x current revenue. For more on MongoDB’s IPO, 451 Research subscribers can see our full report, including our sizing of the NoSQL database market, as well as an in-depth look at the evolution of the 10-year-old company’s technology and its competitors.

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

Synchronoss’ planned ‘pivot’ turns into a face-plant

Brenon Daly

Contact: Brenon Daly

With its attempt at a pivot having turned into face-plant, Synchronoss will unwind its massive, bet-the-company acquisition of Intralinks by divesting the collaboration software vendor to private equity (PE) firm Siris Capital Group. The buyout shop will pay about $1bn for Intralinks, which Synchronoss acquired last December for $821m.

It was a pairing that faced skepticism from the very start, because the business models and client base for the two companies had virtually nothing in common. The combination also ladled a hefty amount of debt onto Synchronoss, which then compounded problems around servicing that debt by having to restate its financials due to accounting errors. Shares of Synchronoss have lost two-thirds of their value since the acquisition announcement.

As Synchronoss stock cratered, Siris Capital began buying equity, ultimately becoming the company’s largest shareholder. Siris used that position to agitate during the company’s review of ‘strategic alternatives’ announced in early July. Not unexpectedly for the beleaguered company, the process proved fitful. Siris Capital initially offered to acquire all of Synchronoss but then pulled its bid as the company, which was advised by Goldman Sachs & Co and PJT Partners, continued to look for another buyer.

Instead of an outright acquisition of Synchronoss, Siris will carve out the Intralinks division and add that to its portfolio. The transaction is expected to close in mid-November. Further, the buyout firm will invest $185m into the remaining Synchronoss business, which will continue trading on the Nasdaq.

With the divestiture, 17-year-old Synchronoss effectively abandons its attempt to become a broad provider of enterprise software, and retreats back to servicing its long-standing client base of communications and media companies. The move is a reminder that software can be hard. Just ask Dell Technologies and Lexmark. Both of those tech companies also retreated from their M&A-driven effort to become software vendors, divesting their software portfolio to PE shops in billion-dollar deals over the past year.

Startups stuck in a billion-dollar backlog

Brenon Daly

Contact: Brenon Daly

Startups are increasingly stuck. The well-worn path to riches – selling to an established tech giant – isn’t providing nearly as many exits as it once did. In fact, based on 451 Research calculations, 2017 will see roughly 100 fewer exits for VC-backed companies than any year over the past half-decade. This current crimp in startup deal flow, which is costing billions of dollars in VC distributions, could have implications well beyond Silicon Valley.

First, the numbers. So far this year, 451 Research’s M&A KnowledgeBase reports just 439 VC-backed companies have been acquired, putting full-year 2017 on pace for roughly 570 exits. That’s 16% fewer deals than the average number of VC exits realized from 2012-16, and the lowest number of prints since the recession year of 2009, when startups were mostly focused on survival rather than a sale.

The reason for the current slowdown in the prototypical startup-sells-to-brand-name-buyer transaction that has generated hundreds of billions of dollars in investment returns over the years is that the buyers aren’t buying. (We would note that’s only the case for the bellwether tech vendors, the so-called strategic acquirers. Rival financial buyers – both through direct investment and acquisitions made by their portfolio companies – have never purchased more VC-backed firms in history than they have in 2017, even as the overall number of venture exits declines. Private equity now accounts for 17% of all VC-backed exits, twice the percentage the buying group held at the start of the decade, according to the M&A KnowledgeBase.)

Parked in VC portfolios, startups can, of course, build their businesses, along with the accompanying value. What they can’t do as long as they are still owned by venture investors is realize that value, at least not tangibly or completely. That takes either a sale of the company outright or an IPO. (Wall Street hasn’t provided many exits at all for VC-backed companies since 2000, and isn’t ever likely to be a primary destination for startups.)

And although we’re talking about small companies, there’s already been a pretty big impact. Even if we take a conservative average exit price of $50m for startups, multiplying that across the 100 exits that won’t happen this year means a staggering $5bn won’t get distributed in 2017 that would have in previous years. Without capital once again flowing from corporate acquirers back to startups and VCs, the entire ecosystem runs the risk of stagnation.