Category: M&A

Sunny weather for hybrid cloud deals

Mark Fontecchio

by Scott Denne, James Curtis, Steven Hill

To stay relevant during a massive shift toward the use of public clouds, makers of on-premises IT hardware and software need products that help customers develop, run and manage their infrastructure on multi-cloud and hybrid cloud environments. The hunt for those products has been a catalyst for recent acquisitions, including, most notably, IBM’s $34bn pickup of Red Hat. Two other deals that match that theme were struck today, one by Hewlett Packard Enterprise and one by Red Hat, while it awaits the close of its sale to IBM.

The transactions cover different segments of IT – Red Hat purchased storage software, while HPE bought a data platform. Yet both illustrate that helping clients navigate mixed cloud environments has become a strategic priority for legacy IT technology firms. In its deal, Red Hat reached for NooBaa, a provider of object-storage management software for data that resides across multiple clouds.

In the other transaction, HPE nabbed BlueData, a maker of virtualization software for data workloads. That acquisition gives HPE software to bundle with its HPC systems, enabling it to offer both on-premises hardware and the software to run elastic data workloads across a hybrid environment. It’s a move HPE needed to make as more data and analytics tasks are transitioning from on-premises infrastructure at a faster pace than other IT workloads.

According to 451 Research’s Voice of the Enterprise: Cloud, Hosting and Managed Services, Workloads and Key Projects, 19% of organizations will use public cloud offerings as their primary IT environment by 2020, compared with 11% who did so this year. Data workloads are moving to the cloud even faster, with 27% saying that a public cloud (such as AWS or Azure) will be the primary environment for data processing, analytics and business intelligence, compared with 12% this year.

‘Buy now’

Mark Fontecchio

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.

Autodesk reinforces its construction biz with PlanGrid

Mark Fontecchio

by Scott Denne

Autodesk tops off a blockbuster year in construction software with the $875m acquisition of PlanGrid, a maker of project management applications. In acquiring the SaaS startup, Autodesk inks its largest deal and provides the latest indicator of the construction industry’s status as a maturing software market.

PlanGrid should augment the design and modeling focus of Autodesk’s construction and workflow software with the its more document-based approach. The acquirer also gets a new path to market. Where Autodesk typically sells subscriptions to IT departments of architectural firms, general contractors and the like, PlanGrid mainly sells its software on a by-project basis.

The construction market is propelling the topline at both firms – PlanGrid’s ARR expanded about 50% over the past year to roughly $65m, while Autodesk’s construction unit (its biggest) grew 28% in the most recent quarter, compared with 22% for the overall business. Autodesk’s peers and competitors have been equally eager to capture their share of that growth.

In 2018, purchases of construction-related technology vendors spiked to $4.2bn, more than the combined total deal value for 2017 and 2016. According to 451 Research’s M&A KnowledgeBase, three of the four largest transactions in that category were announced this year and all four in the past 12 months (Oracle disclosed its $1.2bn pickup of Aconex in the closing days of 2017.) Like Autodesk with PlanGrid, Trimble made its largest acquisition on record with the $1.2bn purchase of construction software provider Viewpoint in April.

Capital One builds up its M&A credit

Mark Fontecchio

by Scott Denne

Anticipating a digital disruption in finance, Capital One has printed its third tech acquisition of the year with the purchase of Wikibuy, a comparison shopping site. Today’s deal sets a new high-water mark for tech M&A for the consumer credit firm and comes as other banking and insurance companies look to add technology assets in anticipation of changes to the banking and insurance industries.

Capital One opened the year with the pickup of Notch, a machine learning consultancy. In the spring, it reached for Confyrm, an antifraud specialist. Prior to today’s transaction, Capital One had never bought more than two tech vendors in a single year and had only hit that mark twice, according to 451 Research’s M&A KnowledgeBase.

While those earlier deals address the operational side of disruption by adding to Capital One’s arsenal of risk management and credit-scoring tools, today’s move expands its footprint with consumers. Wikibuy provides a price-comparison website, along with services that offer consumers price updates on certain products. The transaction could help Capital One start to play a role, beyond payments, in its customers’ financial lives.

Taken together, these deals follow three or four years of public prognostications by Capital One’s management of a coming digital disruption in banking. Now the company appears to be turning toward tech consolidation to prepare for it. In that respect, it’s not unique among its peers. Allstate, for example, inked its second-ever tech acquisition with the purchase of credit-monitoring service InfoArmor in August. Three months earlier, Principal Financial Group made its first tech deal by acquiring RobustWealth, a maker of customer engagement software for financial advisers.

According to our surveys, the notion of a coming disruption to financial industries is widely anticipated. In 451 Research’s Voice of the Enterprise: Digital Pulse survey, 62% of respondents in finance anticipated a highly disruptive impact on their industry over the next five years – only media and telecom scored at or above that level.

A blockbuster year for blockbuster deals

Mark Fontecchio

by Brenon Daly

Flush with cash and filled with confidence, tech acquirers have put up more billion-dollar deals so far this year than any other year. 451 Research’s M&A KnowledgeBase lists 100 acquisitions valued at more than $1bn already in 2018. For those who don’t have a calendar handy, the pace works out to the head-spinning rate of more than two announced transactions every week since January. Back in the recent recession, tech buyers were taking about a month to do the same number of $1bn+ deals.

The unprecedented activity at the top end of the tech M&A market is being driven by record levels of big-ticket purchases by both of the main buying groups: tech companies and buyout firms. Corporate acquirers, which account for two-thirds of the billion-dollar prints, have seen many of the market mainstays start buying again. And buying big.

For instance, IBM hadn’t paid more than a billion dollars for any company in two and a half years before announcing the $33.4bn purchase of Red Hat last month. That’s the largest-ever software acquisition. For the first half of this decade, Big Blue averaged roughly a billion-dollar deal every year. Elsewhere, German giant SAP had been missing from the list of blockbuster buyers since 2014, until it put together a $10bn double-dip this year. It paid $2.4bn for Callidus Software in January, and followed that up last week with the $8bn pickup of IPO-bound startup Qualtrics.

The recent growth in deals by strategic acquirers, however, has been outpaced by financial buyers. An ever-increasing number of private equity (PE) firms have found an ever-increasing number of ways to shop big in tech. At the start of the current decade they were averaging about a dozen billion-dollar transactions each year. This year, they are on pace to do three times that number.

Fittingly, buyout shops are using their full M&A playbook to get to a record number of $1bn+ deals. They have done large take-privates (Vista Equity-Apptio, Thoma Bravo-Imperva); they have done carve-outs (The Blackstone Group’s $17bn purchase of Thomson Reuters’ financial markets business); and, especially, they have done secondaries (Rocket Software, Eagleview Technologies and BMC Software have all traded one set of PE owners for another). Further, all of that activity comes at a time of relatively high valuations across the tech landscape for these notoriously price-sensitive buyers.

Overall, the activity at the top is important to the broader tech M&A market because the deals are the main contributor to this year’s surge in acquisition spending, which is nearing an all-time annual record. This year’s billion-dollar transactions account for all but $100bn of the total $545bn we tally for all of tech M&A so far in 2018.

But the importance of blockbuster deals goes well beyond their dollars. Big buyers inking big transactions tends to embolden other companies and their boards to pursue their own ambitious acquisitions. That’s how the number of $1bn tech deals in a single year gets pushed into the triple digits for the first time ever.

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

Mixed buyers harvest security targets

Mark Fontecchio

by Scott Denne

In making its latest security purchase, BlackBerry joins a pageant of infosec acquirers chasing after ballooning budgets. With BlackBerry’s $1.4bn pickup of Cylance, there have now been 15 acquisitions of infosec vendors valued above $250m this year, according to 451 Research’s M&A KnowledgeBase. Only three of those were printed by buyers who make infosec their primary business.

To be sure, BlackBerry isn’t new to the security market. Since its mobile device business began its decline earlier this decade, it has focused on mobile device management software and expanded on its reputation for secure communications since the purchase of encryption specialist Secusmart in 2014. Still, this deal marks its most significant dive into cybersecurity. (In fact, it’s the company’s most significant acquisition in any category as it’s three times the size of its previous organizational high – the $425m pickup of Good Technology in 2015.)

Many of this year’s acquirers resemble BlackBerry in being on the edges of infosec and looking to go deeper. Splunk, for instance, printed its $350m reach for Phantom Cyber just as its security revenue was expanding to 50% of its topline. Others had little presence in cybersecurity: TransUnion and Reed Elsevier, both already in the risk business, got deeper into digital risk by nabbing antifraud firms. Also, AT&T moved into the market with the acquisition of AlienVault. And, of course, reflecting the broader trend in tech M&A, private equity (PE) firms are the largest category of infosec acquirer.

Whether from telecom or PE, expanding budgets are the draw for most buyers. Across all of our surveys, security budgets have risen steadily and dramatically. Among respondents to 451 Research’s VoCUL: Corporate IT Spending survey, at least 18% have indicated rising security budgets in each of the past five quarters. In that same time, no other single software segment garnered higher than 12%. And in our security-focused panel, the responses have been more dramatic. In 451 Research’s Voice of the Enterprise: Information Security report, 80% anticipate rising budgets in 2018, compared with just 6% forecasting a decline.

VC exits soar for some

Mark Fontecchio

by Scott Denne

With its $8bn purchase of Qualtrics earlier this week, SAP helped push venture exits into the nosebleeds. About seven weeks remain in the year and the total value of acquired startups has already smashed the previous post-dot-com record. Yet the spoils aren’t evenly distributed. Those startups getting sold are often commanding a premium, although most aren’t getting sold at all.

According to 451 Research’s M&A KnowledgeBase, venture funds have sold a collective $75bn worth of tech vendors, 50% more than the previous record of $50bn. Rising prices, rather than deal volume, are driving that total. Since the dot-com days, VCs have sold five private companies for more than $5bn. Four of them have traded this year. Moreover, 11 have sold at $1bn-plus, more than the previous two years combined.

The trend isn’t limited to the big-ticket transactions. Overall, the businesses that are getting sold are selling for more. The median price tag for a venture-funded vendor stands at $123m this year, well above the typical $55-65m for the most recent years. Demand from acquirers isn’t the only reason for rising startup prices. Venture-backed companies are also raising more and bigger rounds, staying private longer and, therefore, fetching more when they do sell. Still, the number of venture-backed vendors to find a buyer this year – 520 so far – is on pace to be the lowest since 2009.

The perception that there’s a major tech-driven transformation afoot has sparked many of this year’s exits. Indeed, the largely untried idea of combining ERP, CRM and HR data with customer and employee sentiment drove SAP’s Qualtrics purchase. According to 451 Research’s Voice of the Enterprise: Digital Pulse report, 46% of respondents told us that they expect digital technology to highly impact their organization’s industry over the next five years. Whether acquirers view the looming transition as an opportunity or a challenge, it’s pushing them toward the perceived winners in each category and creating a willingness to pay up. There doesn’t appear to be much of a prize for second place.

Fear and uncertainty

Mark Fontecchio

by Brenon Daly

When investors flipped their calendars from October to November, they were also hoping to turn the page on the worries that knocked US stocks last month to their worst monthly performance in six years. They looked through last week’s political instability – the divisive midterm elections in the US, which, appropriately enough, produced a divided Congress – in favor of market stability. Calm had descended on Wall Street once again.

And then came this week. Stability eroded and confidence evaporated, prompting investors to dump stocks in early-afternoon trading today and, even more so, on Monday. Stock market indexes that had hung close to the level where they opened the month in the first week of November suddenly plummeted into the red. Instead of a rebound from October, trading in November has turned into more of the same from last month.

Most market participants track uncertainty through the CBOE’s Volatility Index, which is known as the VIX. (Fast-talking traders shorthand everything.) Without going too deeply into the makeup and implications of the VIX, the index measures investors’ expectations about the direction of stocks. The index tends to move higher when stocks move lower.

We certainly saw that in last month’s bear market, when the VIX surged to roughly twice the level it held in the summer months. And while the so-called ‘fear gauge’ did ease significantly in early November as US equity markets recovered, this week’s rout has spurred it higher. The VIX is one-third higher now than it was last week, and is approaching last month’s levels.

As a mechanical measure of human emotion, however, the VIX has its shortcomings. Its utility is also limited because it is, necessarily, tied to every single tick of the market. That makes it difficult to base long-term strategy – whether a significant investment or a meaningful acquisition – on an index that fluctuates every second.

At 451 Research, we have our own version of the VIX. As part of a monthly survey, our Voice of the Connected User Landscape (VoCUL) asks over 1,400 respondents how they feel about the stock market. Specifically, we ask about the all-important sentiment of confidence in the market right now compared with three months earlier. Both the timing and the structure of our question is designed to draw out a more durable forecast than the more-reactive VIX.

So what does our survey say? Given the uncertainty that ripped through Wall Street in October, it’s probably no surprise that investor sentiment deteriorated notably in the latest VoCUL survey. Just one in eight respondents indicated that they had more confidence in Wall Street now than in August, when the stock market was roughly 10% higher. The most recent outlook – with the bearish views outnumbering the bulls almost three to one – is among the dourest outlooks of the past three years.

Waving goodbye to Wall Street

Mark Fontecchio

by Brenon Daly

For software providers, Wall Street used to be a desirable location to set up shop. But now, an ever-increasing number of companies are waving goodbye to the neighborhood of public entities. Either the vendors bypass the fabled destination as they head to newer places with more privacy or, once public, they do a deal that’s the corporate equivalent of moving to the suburbs: consolidate with a larger software firm.

Already this year, the two major US stock exchanges have lost almost twice as many software companies as they have gained. According to 451 Research’s M&A KnowledgeBase, 15 publicly traded (or soon-to-be publicly traded) software providers have been acquired, compared with just eight new software listings.

Just today, the Nasdaq saw both medical software supplier athenahealth and cloud expense management specialist Apptio announce take-privates by buyout shops. And Qualtrics got picked off by SAP even before it had a chance to matriculate to the Nasdaq. (451 Research subscribers can look for our full report on SAP-Qualtrics on our site later today.)

The net reduction in publicly traded companies has erased tens of billions of dollars of market value from what had once been viewed as the place for software vendors to be, from both a marketing and financial point of view. For generations, software entrepreneurs founded and funded their businesses with a singular goal: IPO. Ringing the opening bell on the Nasdaq or NYSE was seen as a rite of passage for a company that aspired to grow out of its status as a ‘startup.’

Of course, tech vendors in general have been eschewing IPOs ever since the dot-com bust, in part due to regulatory changes on Wall Street. But the trend has accelerated in just the past half-decade as gigantic pools of private capital have, to some degree, replaced public market investors. For instance, Qualtrics managed to raise $400m from investors without an IPO. Domo raised almost twice that amount as a private company before its offering last spring.

All of that private-market capital has allowed software providers the luxury of operating behind closed doors for much longer, perhaps indefinitely. Institutional investors have accepted that new reality. Several deep-pocketed firms started putting money into the private market, which is a bit of a stretch for investors accustomed to the liquidity and transparency that comes with a public listing. But if software vendors won’t come to Wall Street, then Wall Street investors have to go to them.

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

PE goes gray

Mark Fontecchio

by Scott Denne

As it celebrates its 25th year in business, ConvergeOne is falling again into the hands of a private equity (PE) shop. With CVC Capital Partners’ $1.8bn acquisition of the communications integration services firm, ConvergeOne joins an expanding list of tech companies landing in PE portfolios when they’re well into adulthood. As buyout firms vary their strategies to incorporate growing businesses and venture-funded startups, there’s a sense that they’re making room for younger companies. But in reality, PE tech targets keep getting older.

According to 451 Research’s M&A KnowledgeBase, the median age of a PE acquisition has risen steadily through this decade. In 2010, the typical technology vendor was 12 years old upon joining a PE portfolio – four years younger than the typical 2018 purchase. (The analysis doesn’t include corporate spinoffs, whose founding dates are difficult to pin down.) Although PE firms are buying more young companies on an absolute basis, those targets make up a smaller share of PE deals. So far this year, they’ve bought 158 businesses – one out of five PE transactions – with less than a decade of operations, while in 2010, nearly one-third were below that age.

The graying of PE portfolio companies reflects a dramatic shift in the source of deals for PE shops. Acquisitions of vendors that have already been through at least one cycle of PE ownership are accelerating at the expense of all other sources of deal flow, including take-privates, buyouts of venture-backed businesses and corporate spinoffs. Excluding bolt-on transactions, such secondary acquisitions account for more than one out of every four tech purchases by PE firms this year.

In its latest move, CVC Capital becomes the third buyout shop to own ConvergeOne. Several companies are passing from one sponsor to another for the second or third time this year. In January, Marketron was bought by its fourth financial sponsor as the radio broadcasting software business approaches its 50th anniversary. And in one of the largest PE deals of the year, Carlyle Group spent $6.7bn to become the third PE owner of Sedgwick, a 47-year-old claims management outsourcer.

PE’s expanding footprint in tech M&A naturally results in a rise in secondary transactions as more of the available targets are PE-owned. By our count, PE firms and their portfolio companies have inked almost one out of every three tech deals this year. Yet the rising age of PE-owned companies suggests that those firms aren’t replenishing their stock of potential targets as fast as they are recycling it.

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