A floppy market for disk storage M&A

by Scott Denne

As we noted in 451 Researchs Tech M&A Outlook 2020, the emergence of a new set of buyers propped up the tech M&A market last year, and that’s continued to be the case this year. The trend is particularly pronounced in the storage market, where the traditional acquirers have hit the brakes on M&A as storage shifts to the cloud.

NVIDIA became the latest company to join the ranks of newly minted storage acquirers with its purchase of SwiftStack. As detailed in our report on that transaction, NVIDIA likely doesn’t have its eye on the enterprise storage market. Instead, it’s buying technology to enable its GPUs to perform machine-learning tasks without bottlenecks. Similarly, Amazon and StorCentric have also emerged as new buyers of storage targets in the last 18 months – both acquired startups that were founded to spark a second wave of flash storage systems, a movement that hasn’t really taken off (a development we analyzed here).

Meanwhile, the most active storage acquirers have halted deal making. EMC, for example, hasn’t printed a new storage acquisition since its 2015 sale to Dell – and Dell itself, once a frequent buyer of storage tech, hasn’t done a deal in the space since the EMC acquisition. Western Digital bought Kazan Networks in a $22m deal this fall. But prior to that, none of the previous decade’s 10 most frequent storage acquirers had nabbed a company in the space since 2017. And that’s weighed on exits. According to 451 Researchs M&A KnowledgeBase, 2018 and 2019 saw, respectively, the fewest and second fewest acquisitions of storage companies of any year since 2002. And this year is pacing to finish below the 20 deals we recorded in 2018.

The drooping totals come as companies move more data into cloud services and away from investing in the kind of large-scale storage systems that the most prolific acquirers in this market have offered. According to 451 Researchs Voice of the Enterprise: Digital Pulse, 27% of respondents said their organization will decrease its budget for storage infrastructure, nearly double the number (16%) that anticipate rising storage budgets in 2020. As customers decrease spending on storage systems, acquirers for companies selling storage could become harder to find, just as the urgency to exit grows.

Figure 1: Anticipated decline in server, storage and datacenter spending
Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Budgets and Outlook

Love in the time of cholera

by Brenon Daly

The coronavirus hasn’t infected the tech M&A market. At least not yet. Even as business around the world reels from the deadly outbreak, acquirers in February announced a surprisingly large number of deals, including a surprisingly large number of big deals. In February spending on tech and telecom rose to $42bn, a 40% uptick from this year’s opening month, according to 451 Research’s M&A KnowledgeBase.

The increase in tech M&A spending in the just-completed month stands in sharp contrast to the severe declines in most every other market. February’s final week on the US equity market was particularly brutal, with stock prices posting their biggest losses since the start of another global pandemic, the Credit Crisis in 2008. The decade-long bull market, which has helped support the recent record M&A run, officially entered ‘correction’ territory as February closed.

Concerns over the impact of the coronavirus, which has infected nearly 100,000 people and killed some 3,000 of them, has heightened as the virus has spread. According to an analysis of financial reports in S&P Capital IQ, the word ‘coronavirus’ appeared in more than 1,900 corporate and event transcripts in February. That’s fully 10 times the number of mentions of the virus in January.

Of course, any slowdown in the M&A market due to the epidemic will take several weeks (if not months) to fully show up in activity levels. Virtually all deals announced in February had already closed several weeks prior, before worries about the coronavirus had snuffed growth rates and halted expansion plans around the globe. And our M&A KnowledgeBase shows that there were several large prints in February, including nine deals valued at $1bn or more. February’s level basically matched the record monthly pace for big-ticket transactions set in the banner year for tech M&A of 2018.

However, much like the disruption to the supply chains, which Apple and Microsoft (among many other tech companies) have said will hurt their future business, the full impact of the coronavirus on the tech M&A market will likely crimp activity throughout the coming months and years. As a historical comparison, our data shows that spending on tech deals only recovered to pre-Credit Crisis levels four years after that recession officially ended.

Figure 1
Source: 451 Research’s M&A KnowledgeBase

Demographics as destiny

by Brenon Daly

In sports, the old joke goes that to be successful, athletes need to pick their parents wisely. In much the same way, to be successful, tech startups not only need to pick their parents wisely, but also their birthdate. Demographics are destiny, at least when it comes to exits.

Consider the prevailing acquisition valuations for different age groups of information security (infosec) vendors in 451 Researchs M&A KnowledgeBase. (To be clear, the deals are sorted by the founding date of the target, regardless of when the transaction was announced. Our data covers all infosec sectors going back to 2002.) The conclusion: When a company comes to market goes a long way toward determining what it’ll be worth when it leaves the market.

Infosec providers born in the 1980s, on average, garnered 3.3x trailing revenue when they sold. Representative transactions of that vintage include big platform deals such as Symantec’s blockbuster sale of its enterprise security unit to Broadcom (4.5x) and the just-printed carve-out of RSA Security from Dell. (M&A KnowledgeBase subscribers can see our estimated terms for the most recent RSA transaction.)

Similarly, infosec vendors dating back to the 1990s were valued at an average 3.6x trailing revenue in their sales. For these ‘tweener’ companies – not quite massive platforms, not quite sprightly startups – we would point to the Avast Software-AVG Technologies consolidation (3.2x) and Webroot’s sale to Carbonite (2.9x) a year ago.

Valuations ticked higher for companies founded in the first decade of the current millennium. Our data shows this ‘teenage’ cohort got valued at 5x trailing sales. Deals include the recent take-private of ForeScout Technologies (5.5x) and our estimate of terms on AlienVaults sale to AT&T in mid-2018.

By far, however, the youngest vendors fetched the richest pricing. Companies born in just the past decade pocketed, on average, a stunning 23x sales when they exited. Boosting this valuation are the half-dozen startups acquired recently by Palo Alto Networks as well as Phantoms high-priced sale to Splunk, according to our understanding.

Of course, we would intuitively expect younger, less-developed companies to enjoy higher relative valuations, if just because of basic math. (In price/sales multiples, small denominators yield larger end results.) But that doesn’t fully account for the tremendous M&A premium lavished on the youngest startups. There’s also the allure of youth, which changes the calculation as well.

With their limited history, startups focus on the future. Extrapolating from early successes, these up-and-to-the-right startups are convinced that their businesses will only know success, that they will always have a triple-digit growth rate. Naturally, when it comes time to sell, fast-growing startups expect to be rewarded. That’s true even – or, especially – if their financials are more aspirational than actual.

Figure 1: M&A valuations
Source: 451 Research’s M&A KnowledgeBase

VC exits lack Karma

by Scott Denne

Two months into the new year, 2020’s market for venture exits isn’t shaping up to be a continuation of last year’s evenly distributed liquidity. Instead, it’s looking like a repeat of 2018’s blockbuster-but-unbalanced returns. Intuit’s $7.1bn acquisition of Credit Karma marks the latest in an unprecedented pace of mega-deals for VC-backed vendors, at a time when more mundane exits are as hard to come by as ever.

According to 451 Researchs M&A KnowledgeBase, Intuit’s purchase marks the third time in two months that a VC portfolio company has been bought for $5bn or more. Put another way, one of every three VC-backed tech vendors that have sold for more than $5bn since the dot-com bubble have done so in the current year. Of course, that’s not entirely due to the generosity of buyers – most targets have taken on far more money than their earlier peers to achieve such outcomes. Credit Karma, for its part, raised about $370m (and another $500m secondary investment from Silver Lake). Plaid and Veeam, the two other venture-backed firms with $5bn M&A exits this year, raised similar amounts.

In 2019, VCs divested 739 companies, the first year they’ve crested 700 since 2016, returning to a typical volume of annual exits and no deal values reaching the $5bn mark. Although there are more exceptionally large exits so far this year, they are more exceptional than ever. For most venture-funded startups, buyers are scarce. Our data shows that 94 such vendors have found buyers since the start of the year, compared with 122 during the same period in 2019. That 22% drop comes as the most prolific startup shoppers are curtailing their purchases.

Of the 10 most active startup acquirers since 2010, only four have printed a purchase this year. Microsoft, for example, hasn’t bought a venture-backed company in four months, while Cisco has been on a six-month drought. Oracle also hasn’t printed such an acquisition in the four months since it bought CrowdTwist, a transaction that ended an 11-month streak without a startup purchase. While vendors like Visa (acquirer of Plaid) and Intuit – neither of which had ever previously spent more than $500m on a startup – reach for the occasional rising star, there’s a distinct lack of interest in less-brilliant assets in venture portfolios.

Figure 1Annual volume of VC exits ($1bn-plus)

Source: 451 Research’s M&A KnowledgeBase. Includes disclosed and estimated values.

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

Buyout shops buy big in infosec

by Brenon Daly

Buyout shop Symphony Technology Group will carve out most of the information security (infosec) assets from Dell, paying $2.1bn in cash for RSA Security and several other businesses the namesake company picked up over the past decade and a half. The transaction, which had been rumored for months, represents the latest first-generation infosec vendor to land in a private equity (PE) portfolio.

STG will be joined in the purchase by Ontario Teachers’ Pension Plan Board and AlpInvest Partners, with the deal expected to close by Q3. The PE trio’s reach for 32-year-old RSA shares more than a few similarities with several other recent sponsor-led infosec transactions.

For instance, Sophos, which is also a 30-something-year-old veteran of the security industry, went private with Thoma Bravo last fall in a $3.8bn deal. Additionally, ForescouTechnologies is in the process of getting absorbed by a buyout group as it endures a sharp slowdown in sales. And, of course, six months ago, the enterprise security business of industry kingpin Symantec got cleaved off by Broadcom, a corporate acquirer that has built its software division borrowing heavily from the PE playbook.

For Dell, which also tends to operate a bit like a buyout shop, the divestiture wraps up a long holding period for RSA. Dell inherited the security business as part of its 2015 blockbuster $63bn acquisition of EMC. Since that transaction, Dell has shed a number of massive businesses, announcing multibillion-dollar sales of its services unit and infrastructure software division, as well as unwinding EMC’s earlier Documentum buy.

EMC used a similar ‘string of pearls’ M&A strategy with both Documentum and RSA, as the storage giant looked to expand into content management and security, respectively. However, based on proceeds that Dell is pocketing by undoing those two deals, RSA has lost a bit of luster.

According to 451 Research’s M&A KnowledgeBase, EMC paid $2.1bn for RSA in mid-2006. However, the ultimate tab kept climbing because RSA had been a fairly active acquirer. Our data shows the company put up at least one print every year for the first few years under EMC’s ownership. (Under Dell, RSA’s pace dropped sharply, with the most recent transaction being the relatively small purchase of Fortscale Security in April 2018.)

Altogether, by our calculation, EMC/RSA would have spent roughly an additional $1bn on M&A, on top of the original $2.1bn price tag for RSA. Subscribers to the M&A KnowledgeBase can see our proprietary estimates for key acquisitions for the EMC/RSA division, including the 2010 purchase of Archer Technologies, the 2011 reach for NetWitness and the 2013 pickup of Aveksa.

Acquirers see a bright future in computer vision

by Michael Hill

Purchases of computer vision startups have surged over the past 12 months, driven by a slate of marquee buyers that see potential for the technology in the form of new products and services. Use cases for this particular flavor of machine learning range from autonomous vehicle development to social media-oriented imaging applications to remote diagnosis of home appliance failures.

In 2019, acquisitions of computer vision vendors more than doubled to 10 from just four in 2018, according to 451 Research‘s M&A KnowledgeBase, while three such deals have been inked already this year. Acquirers include household names such as Facebook, Uber, Tesla and Snap, all of which appear to share the notion that computer vision can be a conduit for the delivery of new products and services.

For example, Facebook’s pickup of mobile artificial intelligence (AI) image-location specialist Scape Technologies could help it develop location-specific augmented reality (AR) applications, while application warranty provider Frontdoor’s reach for AR video-streaming software provider Streem positions it to service more customers and, as a result, generate revenue by applying the target’s technology across its home services portfolio.

Meanwhile, Uber and Tesla share a similar vision around the development of automated taxis that drove their respective purchases of Mighty AI and DeepScale. Snap’s acquisition of image-capture software developer AI Factory was predicated on the notion of incorporating more AI-based imaging options into its photo-messaging app.

If the recent rise in computer vision M&A is being driven by an appetite for new product development, then that appetite is being driven by digital strategy. According to 451 Research’s Voice of the Enterprise: Digital Pulse survey, 42% of respondents view the delivery of new digital products as the primary purpose of digital transformation.

Figure 1: Primary purpose of digital transformation

Source: 451 Research’s Voice of the Enterprise: Digital Pulse, Workloads & Key Projects 2019

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

A coming-out party in app marketing

by Scott Denne, Keith Dawson

Although mobile apps have become an inveterate part of people’s lives, the software used to promote those apps hasn’t found much of a home within customer experience (CX) software stacks. Excepting those few companies whose apps are their business, most customers of large marketing clouds haven’t invested in app marketing. But there are signs that’s changing and with it, a larger universe of buyers could begin hunting for mobile app marketing targets.

Upland Software’s recent acquisition of Localytics marks one of the first instances where a broad CX software vendor has reached for a mobile app marketing provider. Localytics built its business providing app analytics and in-app content personalization, landing customers in traditional industries such as retail, telecom and media. The company generates $20m in revenue and was valued at 3.4x that amount in its sale – above the typical multiple for personalization specialists, a group of sellers that’s had trouble fetching above 3x multiples, as we noted in our recent coverage of Salesforcepurchase of Evergage.

Still, it took Localytics about a decade to achieve the size it did, as most businesses in traditional markets have yet to invest heavily in mobile app marketing tools. The idea that all of the CX components (sales tech, martech, servicetech) are being pulled by consumers toward mobility has been conventional wisdom for several years. Companies, though, are just beginning to implement the kinds of planning and technology deployment that will cement mobility at the center of their strategies. The acquisition of Localytics may be a sign that the broader CX vendors view mobility as a potential differentiator and short-term revenue opportunity.

According to 451 Researchs M&A KnowledgeBase, almost all previous purchases of mobile app marketing firms have been done by buyers from the same category. That’s not to say others haven’t grown a substantial business in app marketing. Companies like Applovin, IronSource and Appsflyer all generate annual net revenue in the nine figures, but have done so with a focus on mobile gaming – a trend we discussed in a recent report.

Although industries such as media, retail and telecom haven’t spent heavily on mobile app marketing, our surveys suggest those investments are ramping up. According to 451 ResearchVoice of the Enterprise: Customer Experience & Commerce, 42% of all businesses plan to interact with customers via a branded app in the next two years (48% say they already do). In that same survey, more than one in three (35%) said mobile marketing software would be among their organization’s highest marketing technology investments in the next 12 months. As customers invest, we anticipate more marketing software vendors to follow Upland in acquiring mobile app marketing capabilities.

BMO Capital Markets advised Localytics on its sale. Cowen & Co. advised the buyer.

Figure 1:

Source: 451 Research’s Voice of the Enterprise: Customer Experience & Commerce

Payments keep printing

by Scott Denne, Jordan McKee

Businesses are rethinking the role of payments in their growth strategies, a shift that’s pushing payment providers to print larger deals to meet their customers’ changing requirements. As we recently noted, 2019 saw a surge of big-ticket payment transactions that propped up the deal value total in last year’s tech M&A market. That trend hasn’t slowed this year, as the space has already witnessed two $5bn-plus acquisitions in the past month.

In mid-January, Visa printed its largest-ever tech transaction with the $5.3bn purchase of Plaid, a supplier of payment APIs that should enable Visa to move beyond credit card processing. At the start of February, Worldline reached for Ingenico to add a range of new payment services, leveraging the target’s roots as a point-of-sale (POS) vendor. In addition to being Worldline’s largest deal, it valued the Ingenico at 2.9x trailing revenue, nearly double the 1.6x median for POS providers over the past four years, according to 451 Researchs M&A KnowledgeBase.

Aside from topping the previous high-water marks of their respective acquirers, those transactions (and many of the previous ones in the space) have a shared rationale: Both were done to expand the buyers’ offerings across multiple payment channels, something that has become imperative as payments move beyond the finance and treasury departments. As we noted in 451 Researchs 2020 Trends in Customer Experience & Commerce, several notable companies have made such a change. Bookings.com, for instance, moved its payments team within its product group, while Spotify placed its payments unit within its growth-focused business division.

Meanwhile, 77% of businesses say the payments segment has become a highly strategic area. While this change is likely to spur further consolidation, it could also push payment vendors toward acquisitions in related areas such as customer loyalty, customer data management and content management.

Figure 1: Payments M&A

Source: 451 Research’s M&A KnowledgeBase. Includes estimated and disclosed deal values.