Category: M&A

Infosec hits the exits

Mark Fontecchio

BY Brenon Daly

At Black Hat last year, we half-cleverly noted how information security (infosec) vendors should feel right at home in Mandalay Bay, since exits were hard to find in both the infosec industry and the casino itself. Now, as the annual security conference gets set to open this weekend, it’s a much different picture. The exit door has been thrown wide open, with an unprecedented level of both IPOs and M&A in the cybersecurity market.

Start with IPOs. At this point last year, only one cybersecurity provider had made it public (Okta). As the conference gets set to open this weekend, three infosec startups have already debuted on Wall Street this year (Zscaler, Carbon Black and Tenable). Collectively, this year’s trio of new listings has created $9bn of market value, more than 10 times the amount of venture backing they raised altogether.

More significantly, the long-expected wave of consolidation in the overpopulated infosec market is beginning to take shape. For instance, 451 Research’s M&A KnowledgeBase lists 18 infosec acquisitions in July, which matches the highest-ever monthly total for the sector. Last month’s acceleration continues the already-strong dealmaking activity posted earlier this year, putting 2018 on track for the most infosec transactions in any year in history. This year’s unprecedented rate of M&A activity is being driven by an ever-increasing number of buyers that have been attracted to the fast-growing market.

Subscribers to 451 Research can look for a full report on the exit environment for infosec companies on our site early next week.

Omnicom nabs consulting shop Credera

Mark Fontecchio

by Scott Denne

Omnicom comes out of hibernation with its reach for customer experience consultancy Credera Technologies. Today’s announcement marks the ad agency holding company’s first tech deal in almost three years. The purchase comes amid a series of stinging earnings reports by Omnicom and its peers as they struggle to keep up with the evolving needs of marketers – needs that have helped large consulting shops gain ground in Omnicom’s market.

Credera brings to Omnicom a set of consulting services that encompass management consulting, user experience, product development and other disciplines that help businesses deploy digital technology for customer engagement. While it’s common for ad agencies to own firms that specialize in digital commerce, web development and other specialties that are closely linked to marketing, they don’t often acquire service providers that help clients make changes to the business itself. That Omnicom has done so speaks to the current struggles of ad agencies and the new types of competitors they face.

Omnicom lost more than 10% of its value after reporting just 2% organic revenue growth, with a decline in its North American advertising business dragging down results. (It wasn’t alone: a few days afterward, WPP disappointed investors with its first-half report.) With the growth of data-driven digital advertising, ad agencies face clients that now want to roll advertising into a larger digital transformation strategy.

The capabilities needed to pull off those projects – change management, software buying and data integration – are often beyond an ad agency’s expertise. That has helped Deloitte, Accenture and other consulting shops with technology chops to take a chunk of the agency market over the past few years. In our surveys, we see those types of digital transformation projects accelerating. In 451 Research’s VoCUL: Corporate Mobility and Digital Transformation Survey at the end of last year, 40% of respondents told us their company has a formal digital transformation strategy, up from 30% in the first half of the year.

Second-half surge for M&A

Mark Fontecchio

by Brenon Daly

After tech M&A spending in the first half of 2018 soared to the second-highest opening for any year since the recent recession, the second half of the year is starting even slightly stronger. In the just-completed month of July, acquirers around the globe announced tech purchases valued at $49bn, including 10 $1bn+ transactions, according to 451 Research’s M&A KnowledgeBase. Last month’s spending slightly topped the monthly average of the previous six months of $44bn.

Corporate acquirers once again led the robust tech M&A activity in July, continuing a recent resurgence after sitting out much of last year. The return of the big-name buyers came at the expense of rival financial acquirers, who had an uncharacteristically quiet July. Private equity (PE) spending last month slumped to its lowest level of 2018, while deal volume dropped to the second-lowest monthly total of the year.

Still, buyout barons are on pace for more tech acquisitions in 2018 than any year in history, with deal flow projected to top 1,000 prints. That would be nearly one-third of all tech transactions announced this year, twice the ‘market share’ buyout firms held at the beginning of the decade. Additionally, PE spending this year is tracking to roughly match the previous high-water mark of $134bn in 2015.

But in July, it was strategic buyers who once again set the tone in the overall tech M&A market. Corporate acquirers, who have seen their treasuries swell dramatically due to this year’s tax law changes, accounted for eight of 10 of last month’s deals valued at more than $1bn. Noteworthy prints by some of the tech industry’s brand names in July included:

The largest software acquisition in history (Broadcom’s $18.9bn reach for CA Technologies)

A significant geographic expansion for a European IT services giant (France’s Atos handing over $3.4bn for US-based Syntel)

An uncharacteristically rich divestiture by a reeling software behemoth (PE shop EQT Partners paying $2.5bn, or almost 8x trailing sales, to carve the SUSE business out of Micro Focus)

With July slightly accelerating the monthly spending average, 2018 is on pace for $540bn worth of transactions for the full year. That would represent the second-highest annual total in the M&A KnowledgeBase, which goes back to 2002. Closer at hand, this year is all but certain to snap a two-year slide in M&A spending. In fact, probably before August ends, the value of announced tech deals in 2018 will eclipse the value of transactions from all of last year.

Strategics stretch for larger PE assets

Mark Fontecchio

by Scott Denne

Fortive’s $2bn acquisition of Accruent delivers the latest in a string of 10-figure private equity (PE) exits to come from strategic buyers. Corporations like Fortive, an industrial technology company, are plucking the largest tech assets out of PE portfolios at an elevated rate. Yet despite the increase, secondary exits – sales to other buyout shops – are expanding their share of PE exits.

With two-thirds of the year in the books, strategic acquirers have paid $1bn or more for 11 PE portfolio companies. According to 451 Research’s M&A KnowledgeBase, that’s the fastest pace of such acquisitions in a single year. That said, the pace of such deals is lumpy and could suddenly accelerate or decline. Before today’s transactions, two months had passed without a $1bn PE exit via a strategic sale, and a single day in May saw three such deals announced. On the day Fortive announced its purchase of Accruent from Genstar, SS&C paid $1.4bn to acquire Eze Software from TPG Capital.

In addition to the growth of large purchases, strategic acquirers are paying more for the companies they buy. Across all acquisitions out of PE portfolios, strategics have paid a median 3.7x trailing revenue, almost a full turn above last year’s prices and higher than the median multiple in any year over the previous decade. Favorable tax rates could account for some of the increase in prices from last year. Just as likely, though, the jump in prices reflects increasing competition from PE firms.

Although strategics still provide most of the total value of PE exits, secondary sales are increasing as a share of PE exits – a reflection of the bursting coffers and broader playbooks of PE funds. So far this year, secondary sales make up 40% of PE liquidity in the tech M&A market, compared with 33% last year. It’s odd that Accruent’s owner – Genstar Capital – has sold to a strategic now that those buyers make up a diminishing share of PE exit value. The facilities management software vendor traded one PE owner for another on two earlier occasions, in 2013 and 2016 – years when secondaries accounted for just one-quarter of PE liquidity.

Facebook’s facing limits

Mark Fontecchio

by Scott Denne

Facebook’s second-quarter revenue miss lays bare a problem that goes well beyond its momentary struggles with new European privacy regulations or the resentment it faces for sharing user data with Cambridge Analytica and its profiting from misinformation. The social media giant’s valuation is bumping into the limits of its addressable market – a market that its main rival looks more likely to win.

Facebook shed about 18% of its market cap after delivering 42% topline growth – enviable for almost any other company, although below what the street expected. Exacerbating the decline, it told investors to expect high-single-digit deceleration of its growth rate in each of the next two quarters. That’s a stark contrast to Google, its rival for dominance of the advertising market, which reported accelerating ad revenue earlier this week.

By most estimates, the entire global ad market (digital and offline) sits at roughly $550-600bn and by that measure Facebook, whose sales come almost entirely from ads, commands nearly 10% of it. While it’s still growing, its market cap, which was about $620bn before earnings, implied that much of that market would shortly come under its control. Slowing growth tamps down those expectations, as does the larger share that Google’s taking – its yearly growth jumped four percentage points last quarter to 23%.

An ambitious set of acquisitions has given Google’s ad business – already twice the size of Facebook’s – a stronger trajectory. While Facebook’s major purchases have mostly been extensions of its core social media business, Google (now Alphabet) has bought a diverse set of products both inside and outside of advertising. Outside of advertising and media, it shelled out billions to buy, among others, a thermostat company (Nest), a phone maker (Motorola) and a mapping app (Waze). Although a bit of a spendthrift, Google generates 14% of revenue outside of advertising.

Even within advertising, Google printed big deals to move beyond search. For example, it paid $1.65bn for YouTube in 2006, when such an investment in online video seemed laughable, although that transaction has now given Google a foxhole to launch a digital assault on the TV market. According to 451 Research’s Voice of the Connected User Landscape, 58% of consumers watch video content on YouTube, more than any other free streaming service and double the number that stream from TV networks’ own websites.

By comparison, Facebook hasn’t made a large acquisition outside of social media since reaching for Oculus VR more than four years ago. In fact, it hasn’t made any $1bn deals since it bought that virtual reality headset vendor. This year, it has only purchased three startups, including workplace messaging service Redkix, which it announced Thursday. If Facebook plans to regain the value it lost with its latest earnings announcement, it’s going to have to ink some riskier acquisitions that increase its addressable market, or at least take it into new corners of advertising. A seed-funded company with yet another new spin on email isn’t going to be enough.

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

Life after a breakup

Mark Fontecchio
by Brenon Daly

A lot has happened since Qualcomm announced its as-yet-unclosed $44bn acquisition of NXP Semiconductors in October 2016. The would-be buyer has successfully fended off an unwelcome suitor in what would have been the tech industry’s largest transaction. It has seen a former king at the company look to raise an army and reclaim the throne. Meanwhile, as Qualcomm’s deal has languished in limbo, more than 150 other chipmakers have been gobbled up, according to 451 Research’s M&A KnowledgeBase.

While those matters are mostly closed, Qualcomm’s bid for NXP remains open. At least it remains open for another day. The deadline for gaining the last remaining regulatory approval for the transaction is Wednesday night, just hours after it is scheduled to report fiscal third-quarter results.

Qualcomm and NXP have the green light from all of the necessary national and international bodies except one: China. Qualcomm extended its bid for NXP last April, when it refiled its application to China’s Ministry of Commerce. At the time, the company said it would walk away from the deal if it didn’t get approval on July 25 and pay a $2bn breakup fee to NXP the following day.

Right now, that appears likely to happen. Investors have put almost a 20% discount on NXP shares, compared with Qualcomm’s already raised offer of $127.50 in cash for each share of NXP. Over the past month, the discrepancy between the two prices has widened in almost every trading session. In mid-afternoon trading on Tuesday, NXP stock was changing hands at about $102.

Of course, that period has also seen a near continuous escalation in the trade war between the US and China. (We recently noted how tech acquisitions and investments have suffered pretty serious collateral damage in the ongoing spat between the two economic superpowers. China is currently on pace to purchase the fewest number of US tech providers since the country began shopping here about a half-decade ago, according to the M&A KnowledgeBase.)

Assuming Wall Street’s terminal view of the deal does indeed come to pass, what will happen to the two sides? For NXP, it’s pretty simple: deposit the $2bn termination fee into its treasury and go on with business. (It’s a pretty significant windfall for the company, which generated only $2.2bn in profit in all of last year.)

For Qualcomm, which would remain inexorably tied to the ever-maturing cellphone market, the options are a bit more limited. Nonetheless, one move we can probably rule out: Unlike Broadcom, the chipmaker that tried to buy Qualcomm, we don’t see the 33-year-old semiconductor provider announcing a multibillion-dollar purchase of a software vendor. Even two weeks on, Broadcom’s $19bn acquisition of CA Technologies is still a bit of a head-scratcher.

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

Atos reaches to North America again with $3.4bn Syntel buy

Mark Fontecchio
By Katy Ring, Mark Fontecchio

With its appetite for scale and global credibility, France’s Atos continues to spend heavily on targets outside of Europe. Today’s $3.4bn acquisition of US-based MSP Syntel should assist the buyer in developing North American market share – a recurring theme among the purchases it’s made since the $1bn pickup of Xerox’s IT outsourcing business in 2014.

Including debt, the deal values Syntel at $3.6bn, or 3.8x trailing revenue – a substantial premium for Atos, which had never hit 1x revenue on any of its $1bn transactions. Atos isn’t just paying above its norm, the valuation for Syntel surpasses the industry norm. According to 451 Research’s M&A KnowledgeBase, IT services and outsourcing targets fetched a median 2.3x revenue in the past five years. The high multiple highlights Syntel’s substantial North American sales and its ability to deliver services globally.

Two of Atos’ three previous $1bn-plus acquisitions were for US companies, yet its North American revenue declined 3.4% to $1.1bn in the first half. In addition to marquee clients such as American Express, State Street Bank and FedEx, nearly all (89%) of Syntel’s sales come from that continent. Moreover, although Syntel is a US-based multinational provider of integrated technology and business services, it is an offshore supplier with 78% of its workforce in India, which could bolster another of Atos’ weaknesses – global delivery capabilities.

Syntel has built a reputation for modernizing IT divisions for enterprises in financial services, healthcare and retail, all while retaining operating margins of 25%. Atos will look to graft this high-margin, offshore engineering capability, rolling out Syntel’s delivery model to its existing Business & Platform Solutions accounts to improve margins from 9.1% this year to roughly 11.5%. Atos expects about $120m in annual cost synergies from the merged businesses by 2021, as well as cross-selling opportunities that could add an additional $250m in revenue by 2021.

Rothschild Group, J.P. Morgan Securities and BNP Paribas advised Atos, while Goldman Sachs banked Syntel. The deal is expected to close by the end of this year. We’ll have a full report on this transaction in tomorrow’s Market Insight.

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

Buyers tune in to TV deals

Mark Fontecchio
by Scott Denne

As TV audiences scatter across media devices, video services and formats, advertisers need to put them back together. While television content doesn’t seem to have lost its appeal, where viewers watch has grown more diverse. With that change, advertisers and content creators need software and data to buy and sell access to those audiences, leading to a jolt of deals in the space.

AT&T’s acquisition of AppNexus and Amobee’s purchase of Videology are two of the most significant. Driving both transactions is the idea that telcos can match their consumer data with content to improve the pricing and discovery of video and TV ad inventory by owning the technology for buying and selling digital ads. A deal today sees VideoAmp, a maker of software for TV media buying and planning, acquiring a boutique audience analytics firm, IronGrid, to help integrate data from different sources.

TV advertisers always purchased space on a show to reach the audience tuning in. As more TV is broadcast digitally, there’s an opportunity to reach desired audiences with greater precision. Yet, unlike in the past when viewing happened only through the TV set, people now use different devices and services to watch. According to a December survey from 451 Research’s Voice of the Connected User Landscape, 62% of cable and satellite TV customers also pay for online video streaming.

Telcos such as AT&T and SingTel (owner of Amobee) will likely continue to be acquirers here because internet and broadcast viewership data can link households with viewing behavior, helping to overcome the challenge of audience data spewing from different sources for the same or similar content. The shift to digital also provides broadcasters with a direct link to audiences for the first time, so we expect broadcasters like Sinclair and Meredith to seek acquisitions in this category. Alongside them, we anticipate tuck-in purchases from data providers and ad-tech vendors trying to expand their data sets and buy capabilities as they, like consumers, tune into an ever-expanding number of channels.

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

US-China: Gone and maybe not coming back

Mark Fontecchio

By Brenon Daly

As the trade war between China and the US continues to escalate, tech M&A between these two countries is suffering some pretty serious collateral damage from the battle. That makes sense since cross-border acquisitions are a form of trade, just as any other exchange of goods or services between two countries. But right now, relations between the two largest economies on the planet are making it pretty much impossible for them to get any tech deals done. What’s more, those deals may not even return when the current political hostilities have ended.

This year, which has already seen the two sides impose billions of dollars’ worth of tariffs on each other’s exports, is currently on pace for the fewest deals and lowest spending by Chinese companies on US-based tech businesses since China began shopping here in earnest a half-decade ago. According to 451 Research’s M&A KnowledgeBase, acquirers based in China have picked up only two US tech companies worth $137m so far in 2018. That puts this year on pace for just one-third the number of tech acquisitions announced by Chinese buyers in any of the previous four years.

While never a huge acquirer, China had emerged as a fledgling buyer of US technology vendors in recent years. For instance, Beijing-based IT giant Lenovo picked up significant hardware businesses cast off from IBM and Motorola Mobility in 2014, while more-recent activity saw China-based investment groups take out Lexmark and Ingram Micro, both in 2016. However, that mini-boom in M&A got snuffed almost overnight when China imposed severe restrictions on its currency in late 2016. That had the immediate effect of cutting Chinese spending on US tech providers by an incredible 95%, from a record $11bn in 2016 to just $500m in 2017.

Undeniably, the decline in 2017 was due to a change in internal Chinese policies. However, the further decline so far this year is more attributable to the ever-accelerating deterioration in US-Chinese relations. That’s likely to have implications for tech M&A between the two countries that last much longer than the current trade spat. Even assuming the two countries can resolve their trade difference (a large assumption given the tit-for-tat tariffs and a just-filed WTO complaint), China is unlikely to return to shopping for tech in the US, at least not like it did in the peak years.

Having seen how acquisitions in the US can potentially be ‘politicized’ and shot down, China is likely to focus its expansion in the technology industry via internal, rather than external, resources – building, rather than buying. It’s worth remembering that the country’s blueprint for upgrading its overall economy – and its technology industry, specifically – is called ‘Made in China 2025.’

Two great tastes that taste great together

Mark Fontecchio

By Brenon Daly

Chips and salsa? Sure. Chips and software? Not so much. Broadcom’s risky plan to pay $19bn for CA Technologies in an effort to become a software vendor left Wall Street puzzled, even mildly derisive. And when investors talk like that about a company, it’s almost invariably because they’re dumping it.

That’s certainly the case with shares of Broadcom, which plummeted 15% after the deal was announced. The decline slashed $15bn from Broadcom’s market value, almost equal to the amount of cash it is handing over for CA in the largest-ever purchase of a software provider. Weighing on the minds of investors is the tattered history of other hardware vendors that stumbled when they stepped into the enterprise software business.

The multibillion-dollar selloff is significant for two reasons – one that’s specific to acquiring a semiconductor firm and one that might have broader implications for large-scale tech M&A. For Broadcom, the reaction of Wall Street appears to be a penalty for it straying from a plan that had made it a favorite name among investors, who had doubled the value of the company since the start of 2016.

Much of that bullishness stemmed from the fact that Broadcom had been a disciplined financial operator, posting some of the healthiest margins in the semiconductor industry. (Recently, the company has been humming along with gross margins in the high-60% range and operating margins in the high-30% range.) It had a similarly disciplined approach to M&A, focusing on consolidating the mature semiconductor industry. That restrained strategy went out the window as it strayed into the unrelated field of enterprise software with CA.

More broadly, Wall Street’s stern reaction to Broadcom’s big bet reverses the support that investors have typically extended to acquirers in many of the tech industry’s largest transactions. In recent years, shares of buyers have largely been unmoved in the wake of blockbuster deal announcements, despite the dilution that can come with the acquisition as well as the possible integration difficulties.

But investors didn’t extend that confidence to Broadcom. In their view, the move from semiconductor giant to software provider is a step too far. 451 Research subscribers can view our full report on the massive transaction.

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