Category: investment banking

Survey: Steady as she goes for tech M&A

Brenon Daly

Contact: Brenon Daly

Undeterred by the recent slowdown in M&A activity, tech acquirers have largely left their bullish forecast for dealmaking unchanged. For the third consecutive time, essentially half of the respondents to the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster indicated that they expected an acceleration in acquisition activity.

The 51% that forecast a pickup over the next year in M&A in our most-recent edition is more than twice the 19% that projected a decline. The results lined up very closely with the sentiment from both the year-ago survey as well as our previous survey in April.

More broadly, the outlook from the three recent surveys reflects an unusual bit of stability in what is an inherently lumpy business. A bit of history: Over the previous half-dozen years of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, swings of 10 or even 20 percentage points from one edition to the next haven’t been uncommon.

451 Research subscribers can click here for the full report on the views from 150 top dealmakers, including their forecasts on M&A valuations, their thoughts on where startups should be looking to exit, and how they see the pitched fight with cash-rich private equity buyers playing out.

Barely a ripple in the pool of tech M&A buyers

Brenon Daly

Contact: Brenon Daly

New companies are constantly wading into the tech buying pool. As welcome as those new entrants are, however, their arrival has barely caused a ripple in the overall tech M&A market. Unconventional buyers – including retailers looking to jumpstart online sales and consumer product vendors looking to digitally connect their wares – have come up far short in offsetting the dealmaking absence of the mainstay tech acquirers. The resulting void of several hundred transactions has left 2017 on track for the lowest overall tech M&A volume in four years, according to 451 Research’s M&A KnowledgeBase.

Already this year, the M&A KnowledgeBase lists several first tech deals from well-known names from outside the tech industry such as IKEA, Albertsons, Signet Jewelers and Whirlpool. These debutants join other non-tech giants that have recently reached for startups, including Bed Bath & Beyond, Hudsons Bay Company, Unilever and Deere & Company.

Given that digital deals by analog companies tend to be viewed as ancillary to their businesses, they will likely never have the same M&A pace of tech vendors themselves. For instance, we noted in our recent Q3 report on tech M&A that heavy machinery manufacturer Deere & Company, which bought a tiny machine-learning startup in early September, had gone about three years since its previous tech transaction. In the interim, other acquirers inked more than 11,000 tech deals, according to the M&A KnowledgeBase.

As these non-tech buyers dabble in deals, the bellwether acquirers have dramatically slowed their pace. Consider the recent activity of some of the companies that have traditionally set the tone in the tech M&A market. Salesforce has put up just one print so far this year. Serial acquirer Oracle hasn’t announced an acquisition in six months. IBM is averaging a deal every other month in 2017, just half the rate it acquired companies in both 2016 and 2015.

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

ForeScout looks ahead to Wall Street

Brenon Daly

Contact: Brenon Daly

For all the ‘next generation’ hype throughout much of the information security (infosec) market, 17-year-old ForeScout represents a bit of a throwback. For instance, ForeScout has been around twice as long as the other infosec company to make it public this year, Okta. Further, its business is primarily tied to old-line boxes, while Okta and other startups of a more-recent vintage have pushed their businesses to the cloud.

That comes through in the numbers. At ForeScout, sales of products (physical appliances, mostly) still accounts for about half of the company’s revenue. The remaining half comes from maintenance fees, with just a sliver of professional services revenue. There’s no mention in ForeScout’s IPO paperwork of ‘bookings’ or ‘billings’ or any other business metric favored by companies delivering their offering through a newer subscription model

While not flashy, ForeScout’s business model works. (There aren’t too many startups that are generating a quarter-billion dollars of revenue and increasing that by one-third every year.) ForeScout posted $167m in sales in 2016, and $91m in the first half of 2017. (Growth over that period has been consistent at roughly 33%.) Assuming that pace holds through the end of 2017, ForeScout would put up about $220m in revenue, or roughly triple the amount of sales it generated in 2014.

However, in our view, much of that performance has been more than priced into the company, which secured a $1bn valuation in the private market. That said, we also don’t imagine that ForeScout will be one of those unicorns that stumbles when it steps onto Wall Street. (Post-IPO valuations for recent offerings from Snap, Blue Apron, Cloudera and Tintri are all lingering below the level they secured from VCs.)

ForeScout likely won’t enjoy anywhere near the platinum valuation that Okta commands. (The cloud-based identity vendor currently trades at a market valuation of $2.7bn, or 11x this year’s forecast revenue of $245m.) Instead, to value ForeScout, Wall Street might look to another product-based infosec provider, Fortinet.

The two companies don’t exactly line up, either in terms of strategic focus or scale. (Fortinet generates far more revenue each quarter than ForeScout will all year, while ForeScout is growing about twice as fast as Fortinet.) Nonetheless, Wall Street currently values Fortinet at roughly 4.3x current year’s revenue. Slapping that valuation on ForeScout would get the company to a $1bn valuation, but not much higher.

451 Research subscribers can look for a full report on ForeScout’s filing later today.

Tech M&A: Questions about the quarter

Brenon Daly

Contact: Brenon Daly

Boosted by a September surge, spending on global tech acquisitions in the just-completed Q3 soared to the highest quarterly total of 2017. In fact, the $119bn worth of tech deals tallied by 451 Research’s M&A KnowledgeBase during the July-September period only slightly trailed the total amount spent during the first six months of 2017. Big prints dominated recent deal flow, with both of this year’s largest transactions coming in September. More broadly, Q3 accounted for six of the 10 biggest deals so far this year.

Spending on tech transactions in September hit its highest monthly level since October 2016, coming in twice as high as the average of the previous eight months of the year, according to the M&A KnowledgeBase. Yet even with that spike, the value of announced deals so far in 2017 has slumped to the lowest level for the opening nine months of any year since 2014. (The just-completed quarter reverses a particularly light Q2, which recorded the lowest quarterly value of transactions in four years.) At this point in the year over the past three years, tech acquirers, on average, had handed out $360bn – a full $100bn more than the roughly $260bn worth of announced spending so far in 2017.

Boosted by a September surge, spending on global tech acquisitions in the just-completed Q3 soared to the highest quarterly total of 2017. In fact, the $119bn worth of tech deals tallied by 451 Research’s M&A KnowledgeBase during the July-September period only slightly trailed the total amount spent during the first six months of 2017. Big prints dominated recent deal flow, with both of this year’s largest transactions coming in September. More broadly, Q3 accounted for six of the 10 biggest deals so far this year

However, focusing on the top end of the market in September, there’s some question about whether the recent momentum for momentous deals will continue through the final quarter of the year. A number of significant prints, including both of Q3’s biggest transactions, appear to be uncharacteristically large purchases done in unusual circumstances. We look at some of the reasons for that – as well as some of the imp lications of this new development – in our full report on Q3 tech M&A, which will be available to 451 Research subscribers later today.

 

Exclusive: A deal for Datto?

Brenon Daly

Contact: Brenon Daly

A unicorn is rumored to be on the block, with several market sources indicating that disaster-recovery startup Datto is looking for a buyer. We understand that Morgan Stanley is running the process. While Datto secured a $1bn valuation in a growth round of funding two years ago, we are hearing that current pricing would add a solid – but not exorbitantly rich – premium to that level.

According to our understanding, early discussions with buyers have bids coming in at about $1.3bn for Datto. Our math has that rumored price valuing the 10-year-old startup at 6.5x this year’s sales of roughly $200m. (Estimates in 451 Research’s M&A KnowledgeBase Premium, which features in-depth profiles and proprietary insight about specific privately held startups, indicate that Datto generated $160m in sales last year, up from $130m in 2015. Click here to see Datto’s full profile in our M&A KnowledgeBase Premium.) The company sells its backup and recovery products to SMBs, with virtually all sales going through the channel.

With its scale and business model, Datto appears almost certain to end up in the portfolio of a private equity (PE) firm, assuming the company does trade. There is precedent. Datto’s smaller rival Axcient was consolidated by eFolder earlier this summer in a transaction that was at least partially backed by financial sponsor K1 Investment Management.

More broadly, PE shops, which have never had more money to spend on tech in history, have been increasingly looking to the IT infrastructure market to make big bets. Already this year, buyout shops have announced three deals valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. Unlike those targets, which were all owned by fellow PE firms, Datto founder Austin McChord still holds a majority stake in his company.

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

A pause in Big Software’s ‘SaaS grab’

Brenon Daly

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.

Another ‘down round’ IPO?

Brenon Daly

Contact: Brenon Daly

Another unicorn is set to gallop onto Wall Street, as MongoDB has put in its IPO paperwork. The open source NoSQL database provider plans to raise $100m in the offering, on top of the $311m it drew in from private-market investors over the past decade. As has been the case in other recent tech offerings, however, some of those later investors in MongoDB may well find that the IPO represents a ‘down round’ of funding.

Any discount for MongoDB likely won’t be as steep as the discount Wall Street put on the previous data platform provider to come public, Cloudera. Investors currently value the Hadoop pioneer at $2.2bn, slightly more than half its peak valuation as a private company. For its part, MongoDB, which last sold stock at $16.72, has more than 100 million shares outstanding, giving it a valuation of roughly $1.7bn.

While not directly comparable, Cloudera and MongoDB do share some traits that lend themselves to comparison. Both companies have their roots in open source software, and wrap some services around their licenses. (That said, MongoDB has gross margins more in line with a true software vendor than Cloudera. So far this year, it has been running at 71% gross margins, compared with just 46% for Cloudera.) Further, both companies are growing at about 50%, even though Cloudera is more than twice the size of MongoDB.

Assuming Wall Street looks at Cloudera for some direction on valuing MongoDB, shares of the NoSQL database provider appear set to hit the public market marked down from the private market. Cloudera is valued at slightly more than six times its projected revenue of $360m for the current fiscal year. Putting that multiple on the projected revenue of roughly $150m for MongoDB in its current fiscal year would pencil out to a market cap of about $920m. Given its cleaner business model and less red ink, MongoDB probably deserves a premium to Cloudera. While MongoDB certainly may top the $1bn valuation on its debut, reclaiming the previous peak price seems a bit out of reach.

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

Trump’s death blow to a deal

Brenon Daly

Contact: Brenon Daly

Respondents to the previous edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster have once again delivered the wisdom of the crowds. When asked last spring about the outlook for US-China tech deal flow, respondents overwhelmingly predicted that President Trump’s policies would crimp M&A activity between the world’s two largest economies. Specifically, two-thirds (65%) of the 157 respondents from across the tech M&A landscape forecast a decline in purchases of US tech companies by Chinese buyers. That was more than four times the level (14%) that anticipated an increase.

In line with that April forecast, Trump has blocked the proposed $1.3bn acquisition of Lattice Semiconductor by a Beijing-based fund, citing national security concerns. Regulatory approval of the planned purchase by Canyon Bridge Capital Partners, which was announced last November, had been viewed as virtually impossible after The Committee on Foreign Investment in the US indicated that it would not sign off on the transaction. Trump delivered the death blow to the deal on Wednesday.

Trump’s move represents a rare bit of White House intercession in an acquisition. But it isn’t necessarily out of character for Trump, who has singled out China for some of his sharpest criticism as he has pursued a self-described ‘America First’ policy. Again, respondents to the M&A Leaders’ Survey last spring accurately predicted that Trump’s singularly unfriendly views toward China would disproportionately impact US-Sino deal flow. In the survey, fully one out of five respondents (20%) forecast that Chinese buyers of US tech companies, such as Lattice Semi, would ‘substantially’ cut their activity due to the Trump administration, compared with just 3% who said they expected overall cross-border M&A to drop off ‘substantially’ in the current regime.

451 Research and Morrison & Foerster are currently in market with the latest edition of the M&A Leaders’ Survey, and would appreciate your views on where the tech M&A market is and where it’s heading. In addition to broad market questions, we also revisit questions around Trump’s impact on cross-border M&A as well the specific outlook for China-based buyers. We would appreciate your time and thoughts. To participate, simply click here.

A private equity play in the public market

Brenon Daly

Contact: Brenon Daly

In a roundabout way, private equity’s influence on the technology landscape has also spilled over to Wall Street. So far this year, one of the highest-returning tech stocks is Upland Software, a software vendor that has borrowed a page directly out of the buyout playbook. Shares of Upland – a rollup that has done a half-dozen acquisitions since the start of last year – have soared an astounding 150% already in 2017.

Investors haven’t always been bullish on Upland. Following the Austin, Texas-based company’s small-cap IPO in late 2014, shares broke issue and spent all of 2015 and 2016 in the single digits. For the past four months, however, shares have changed hands above $20 each.

Upland’s rise on Wall Street this year essentially parallels the recent rise of financial acquirers in the broader tech market – 2017 marks the first year in history that PE firms will announce more tech transactions than US public companies. As recently as 2014, companies listed on the Nasdaq and NYSE announced twice as many tech deals as their rival PE shops. (For more on the stunning reversal between the two buying groups, which has swung billions of dollars on spending between them, see part 1 and part 2 of our special report on PE and tech M&A.)

Although Upland is clearly a strategic acquirer in both its origins and its strategy, it is probably more accurately viewed as a publicly traded PE-style consolidator. The company has its roots in ESW Capital, a longtime software buyer known for its platforms such as Versata, GFI and, most recently, Jive Software. Upland was formed in 2012 and, according to 451 Research’s M&A KnowledgeBase, has inked 15 acquisitions to support its three main businesses: project management, workflow automation and digital engagement.

Selling into those relatively well-established IT markets means that Upland, which is on pace to put up about $100m in revenue in 2017, bumps into some of the largest software providers, notably Microsoft and Oracle. To help it compete with those giants, Upland has gone after small companies, with purchase sizes ranging from $6-26m.

However, the company has given itself much more currency to go out shopping. Early this summer – with its stock riding high – it raised $43m in a secondary sale, along with setting up a $200m credit facility. Given Upland’s focus on quickly integrating its targets, it’s unlikely that it would look to consolidate a sprawling software vendor. But it certainly has the financial means to maintain or even accelerate its rollup of small pieces of the very fragmented enterprise software market.

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

Webinar: PE activity and outlook

Brenon Daly

Forget Oracle, IBM, or any of the other big-name, publicly traded acquirers that – until now – have always set the tone in the tech M&A market. If a tech deal printed in 2017, the buyer is more likely to be a private equity firm than any of the well-known serial acquirers on the US stock market. This is the first time in the history of the multibillion-dollar tech M&A market that financial acquirers have been busier than these strategic acquirers.

To understand how the ever-growing influence of buyout shops is reshaping both M&A and the tech industry, join 451 Research for an hour-long webinar on Thursday, September 7, 2017, starting at 1:00pm ET. Registration is available here: https://www.brighttalk.com/webcast/10363/274289.