Category: M&A

VC is looking easy this year

Mark Fontecchio

By Scott Denne

Halfway through the year, venture capitalists have already reaped a near-record amount of value from their portfolio companies. In any dissection of venture exits, a large deal or two can drive the annual total. This year is no exception, as the second-highest-priced VC exit since the dot-com days printed in May. Still, the rise in value isn’t limited to the high end of the market.

According to 451 Research’s M&A KnowledgeBase, VCs globally have sold $46.4bn worth of tech portfolio companies through the first half of the year. That’s already 45% higher than the amount from all of last year’s exits and just shy of the record for annual VC-backed sales – $50bn in 2014. Facebook’s $19bn reach for WhatsApp, the largest acquisition of a venture-funded company, led that year’s totals. Embedded in this year’s figure is the second-largest, Walmart’s $16bn purchase of Flipkart.

Still, this year’s record-setting pace isn’t propped up by a single transaction. Since 2002, only four VC portfolio companies have sold for more than $5bn – three of them came in the first half of this year. Even looking at the VC exit market without those rare $5bn-plus exits, this year’s first half generated more VC exit value than the first half in 15 of the past 16 years. In fact, more companies than ever are benefiting from higher prices. The running median value of a venture exit this year, at $123m, sits more than twice as high as last year’s median of $56m – a number that’s roughly in line with values between 2014 and 2016.

Many of the reasons for the surge are the same as those driving the broader tech M&A market toward another record, including increased activity among strategic acquirers buoyed by a tax windfall, a pageant of IPOs, the continued rise of private equity, and other trends that we’ll discuss in a webinar on Tuesday (more info here). Amplifying those trends, VCs benefit from a widespread fear of changes wrought by new technologies.

According to 451 Research’s Voice of the Enterprise: Digital Pulse, 46% of IT decision-makers predicted that digital technology would have a large impact on their companies’ markets over the next five years, compared with just 14% who forecast little or no impact. Those anticipated changes are playing out not just in the valuations, but in the type of deals getting done. Case in point: the $1.9bn pickup of oncology trial software developer Flatiron Health by Roche, a pharmaceutical firm that had never spent $100m on an information technology provider. Or Microsoft’s new tack in building software developer relationships via its $7.5bn acquisition of GitHub.

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

On track for a half-trillion

Mark Fontecchio

By Brenon Daly

Boosted by a record number of transactions valued at more than $1bn in the just-closed Q2, tech M&A spending across the globe surged to its highest quarterly level in a year and a half. The value of tech and telecom acquisitions announced around the globe from April to June more than doubled from the same period last year to $143bn, according to 451 Research’s M&A KnowledgeBase.

During Q2, private equity (PE) firms continued spending at an unprecedented rate, but it was the return of the so-called strategic acquirers that played a strategic role in driving the tech M&A market higher. Many of the tech industry’s biggest names shook off the timidity they have shown in recent years and started buying boldly once again.

Tech companies that have typically gone a long way in setting the tone in the overall M&A market accounted for 20 of the 30 tech deals announced last quarter, according to our M&A KnowledgeBase. And they paid up in the ‘three comma’ deals. Our calculations showed corporates paid an average of 6.8 times trailing sales, two full turns higher than the average 4.8x multiple paid by their financial rivals in their 10 billion-dollar-plus deals.

Undoubtedly, some of that corporate confidence to take on their financial rivals has come as their already stuffed treasuries received the windfall of this year’s tax law changes. Secure in their finances and, for the most part, posting solid growth, tech companies could afford to get adventurous in their acquisitions. To get a sense of this year’s acceleration in tech M&A, consider this: Spending so far in 2018 already exceeds the full-year totals from 2008-13, when tech companies were regaining their footing from the credit crisis.

More importantly, the trends that have pushed tech M&A to near-record levels should continue through the end of this year. At the midpoint of the year, 2018 is on track to see buyers shell out some $520bn for the tech companies they want to acquire. Assuming that pace holds in the second half of the year, 2018 would mark only the second time in our M&A KnowledgeBase that the value of announced transactions has topped a half-trillion dollars in a single year. 451 Research subscribers can look for our full report on Q2 M&A activity later today on our website.

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

AT&T ties data to content with AppNexus buy

Mark Fontecchio

By Scott Denne

Days after refashioning itself as a media company with the close of its Time Warner acquisition, AT&T has inked a deal to help connect its new business with its old. The telecom giant has purchased AppNexus, one of the largest independent ad-tech vendors, as it seeks to use its data-rich telecom networks to bolster ad prices for the richly funded content produced by Time Warner.

AT&T’s legacy business and its newly acquired content arm are menaced by the increasing reach of online video services and the consolidation of digital advertising among a handful of tech providers. As audiences flow online, AT&T’s wireless and satellite TV services face subscriber churn. Meanwhile, its Time Warner business must fend off Google and Facebook, which continue to syphon advertiser budgets through data-driven offerings. The acquisition of AppNexus could make AT&T competitive with those firms through ad sales tools that enable it to develop new, data-driven advertising products.

Although terms of the transaction weren’t disclosed, the target likely fetched north of $1bn. In addition to media reports of a $1.6bn price tag, AppNexus has raised venture capital above that level since 2014. And although ad-tech vendors haven’t been the most richly valued assets of late, AppNexus is a unique company in that the business is larger than most, if not all, independent ad-tech providers and it has a suite of tech products that cater to both advertisers and media companies.

As a wireless carrier and TV service provider, AT&T has an immense stock of data about media consumption habits, location and customer demographics, but few paths to monetize those assets. By owning AppNexus, AT&T can use its data to improve the value of the ads it sells via additional audience data, slice up its ad sales into more nuanced segments, and extend audience-based ad sales across AppNexus’ ad exchange.

We’ll have a more detailed report on this deal in tomorrow’s 451 Market Insight.

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

Managing an exit for Alert Logic?

Mark Fontecchio

By Brenon Daly, Scott Crawford

The field is tilted against companies trying to secure their information: they face an ever-growing number of attackers, but a shortage of defenders. To get around this imbalance, an increasing number of vendors are looking to hand off at least some of their security to other firms, which can manage headaches and heartaches that come with process. The offerings, which can range from single products all the way to broader portfolios from managed security service providers (MSSPs), have found buyers among thinly stretched CISOs. A recent survey of security professionals by 451 Research’s Voice of the Enterprise showed MSSPs ranking the second-highest increase in spending over the next year.

Against this backdrop of overall growth in the market, it’s worth noting that – unlike other areas of the information security (infosec) market – there haven’t been any significant prints recently, at least not among the pure MSSPs. According to 451 Research’s M&A KnowledgeBase, the most recent deal for a substantial MSSP came more than three years ago, when SingTel paid $810m for Trustwave. Since then, most of the M&A activity around hosted security has come from infosec vendors looking to acquire people and technology so they can offer their own product as a managed service. (For instance, earlier this month, CounterTack bought GoSecure, an 80-person startup that provides managed detection and response services.)

That could be changing. Long-rumored to be an acquisition candidate, Alert Logic would likely be the next blockbuster print in the spectrum of vendors that offer security as a service. This brings up a distinction not always clear in this space. Alert Logic is recognized by many as a provider of security SaaS, but the boundaries between that and managed security services keep getting blurrier, as traditional MSSPs move from one direction to reinforce managed services with hosted technologies, and from the other, security SaaS vendors augment their offerings with managed services. Alert Logic is among the poster children for the latter. (That approach also shows up in Alert Logic’s financials. According to our understanding, the company operates with gross margins of roughly 70%, much higher than a pure MSSP.)

Alert Logic has more than quadrupled revenue since it was recapitalized by private equity (PE) firm Welsh Carson Anderson & Stowe (WCAS) nearly five years ago. (Subscribers to the M&A KnowledgeBase can see our proprietary estimate of terms on that deal.) In addition to nearing the logical end of a holding period inside a PE portfolio, Alert Logic has also seen two top executives replaced this year. If it does trade, we estimate that Alert Logic’s price would be roughly double the amount WCAS paid, putting the transaction among the largest security services acquisitions.

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PE bags another elephant

Mark Fontecchio

By Brenon Daly

Extending this year’s record pace of private equity (PE) spending, Siris Capital plans to pay $2bn to take Web.com private. The transaction matches the largest deal Siris has made, according to 451 Research’s M&A KnowledgeBase. Debt-heavy Web.com, which has been public since 2005, has struggled with a declining number of subscribers in recent quarters.

The web hosting vendor has been slowly reorganizing its operations in recent quarters, and Siris’ offer reflects its transition. Terms call for the buyout shop to pay $25 for each share of Web.com, below the company’s share price last October. There’s a six-week ‘go shop’ included in the agreement, with the transaction expected to close in Q4.

Siris’ reach for Web.com marks the 10th deal announced by PE firms so far this year valued at $2bn or more. That nearly matches the total number of 11 similarly sized transactions announced in the first half of the two previous years combined, according to the M&A KnowledgeBase.

Of course, as active as the financial acquirers have been, they still have some distance to go to catch up to their corporate rivals, which had been largely unchallenged in the tech M&A market until just a few years ago. The M&A KnowledgeBase shows these strategic buyers have already announced 20 deals valued at $2bn or more this year. (451 Research subscribers can see more on the relentless rise of PE and the impact it is having on the tech landscape in our special two-part report: Part 1 and Part 2.)

Still, the dramatic increase in elephant hunting by PE firms is changing the top end of the tech M&A market. Of course, that is being driven by the unprecedented amount of capital buyout shops have to put to work. Estimates for the total amount of dry powder available to PE firms to go shopping in the tech industry is estimated in the hundreds of billions of dollars, with a handful of tech-focused shops raising single funds that top $10bn. Several other buyout firms have announced multibillion-dollar funds of their own. On top of that, the leverage available to PE shops multiplies their true purchasing power.

Buyout firms are putting that money to work at a record rate. Already this year, they have announced $71bn worth of transactions, according to the M&A KnowledgeBase. For perspective, that’s almost three times the average amount spent in the first half of the years since the start of this decade.

PayPal adds marketplace payments with $400m reach for Hyperwallet

Mark Fontecchio

By Jordan McKee

PayPal has shelled out $400m for Hyperwallet to improve its ability to serve the wide variety of marketplace businesses – from Expedia to Uber to Amazon – that have emerged in recent years. Marketplaces are growing rapidly and have more advanced payment needs than the average e-commerce business given their global nature and multiple stakeholders that are part of the transaction. PayPal has existing capabilities in marketplace payments, in part through its $800m acquisition of Braintree in 2013, but lacked a holistic platform and advanced capabilities. The gap it created allowed numerous marketplace payment specialists to emerge and scale, including Stripe, Adyen and YapStone.

Hyperwallet, which was founded in 2000 and has roughly 200 employees, has favorable margins on international payments with strong growth. Most importantly, the target brings PayPal a robust payout platform that can disburse funds in various ways to marketplace participants in upwards of 200 countries. Coupled with PayPal’s 218 million active consumer accounts, this should create the basis for a unique and highly efficient disbursement offering. Hyperwallet should complement PayPal’s Braintree business unit, with Hyperwallet CEO Brent Warrington reporting to Braintree head Juan Benitez when the deal closes, expected in Q4.

At its May investor day, PayPal’s CFO emphasized the importance of inorganic growth for the company’s long-term strategy, laying out plans to tap its strong balance sheet and spend $1-3bn annually on deals over the next few years. PayPal has a favorable position in the market but is facing mounting competitive pressure, especially on the merchant side of its business, which has been hit hardest by some of the above-mentioned entrants. In recent years, PayPal’s merchant capabilities have begun to lag market leaders, creating obvious gaps in its platform. With purchases in the past 30 days of iZettle for $2.2bn (SMB brick and mortar payments), Jetlore (commerce software) and now Hyperwallet (marketplace payouts), the company has wisely chosen to focus its M&A budget on merchants in an effort to deepen and diversify its value proposition.

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

MIPS takes Wave to the edge

Mark Fontecchio

By John Abbott, Scott Denne

Eyeing a move from training to endpoints, Wave Computing has acquired MIPS Tech, a pioneer in the development of RISC processors. The target, recently spun off of Imagination Technologies, provides the buyer, a designer of artificial intelligence (AI) semiconductors, the chance to sell its wares more broadly as organizations look to run AI algorithms directly on the endpoint.

Founded in 2010, Wave is one of multiple startups producing accelerators for AI workloads, and one of a smaller select group (along with Cambrian Systems, Cerebras Systems, Graphcore and Horizon Robotics) that have already raised over $100m in venture funding. Wave emerged from stealth in 2016 and made its compute appliance for training neural networks available to early-access customers in 2017. In March, Wave said it would be using the MIPS core as the integrated CPU within its next-generation Dataflow Processing Unit.

We noted in a previous report that MIPS would likely prove a valuable asset for AI applications. It’s been in business since the 1980s and has a significant embedded systems user base and a range of extensible cores. Once owned by SGI, MIPS ended up as part of UK-based GPU maker Imagination Technologies, but when Imagination was sold to China-based investor Canyon Bridge Capital Partners, US-based MIPS had to be divested separately to Tallwood Venture Capital for $65m. Tallwood is also an investor in Wave.

It’s likely that the power-efficient MIPS cores will be useful for the development of inference processors within edge devices, giving Wave an end-to-end story beyond its initial training focus, increasing its potential total addressable market significantly. MIPS will continue to be run as an independent unit, and will continue licensing its cores to third parties. 451 Research’s recent VotE: Internet of Things report shows that many companies are already making advanced calculations right on the endpoint – 40% of respondents claimed to run data analysis, cognitive computing or AI at the network edge or perimeter.

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

Dealmakers immune to ‘World Cup flu’

Mark Fontecchio

By Brenon Daly

With the World Cup kicking off today, economists are once again totting up the billions of dollars in worker productivity they estimate gets lost to viewing the quadrennial soccer tournament. We’ll leave the broader macroeconomic calculations, which have increasingly come into question in recent years, to those with bigger spreadsheets than us. How they come up with the precise cost of watching Messi and Ronaldo do their thing on the field would appear to be driven more by spongy anecdote than hard data.

As a counter to the forecasts of distraction and idleness during the World Cup, we would note that in our world of tech M&A, it turns out people can actually strike deals while watching players strike a soccer ball. In fact, our numbers for the previous event indicate that tech acquisition activity actually accelerated a little during the month-long period where employees supposedly tuned out their work and tuned into the largest sporting event. Dealmakers appear to be immune to the ‘World Cup flu.’ Looking back to the previous World Cup, which ran from mid-June 2014 to mid-July 2014, acquirers announced 340 tech transactions valued at $36bn, according to 451 Research’s M&A KnowledgeBase. That four-week total was slightly ahead of the average monthly level during 2014 of 332 deals worth $33bn. Nor did deal flow dry up immediately after that year’s World Cup. The M&A KnowledgeBase shows an unusual level of consistency of monthly activity from June to September of 2014, with monthly spending ranging within a tight band of $31-37bn.

Looking further back to the 2010 event hosted by South Africa, the World Cup didn’t have any discernable impact on tech M&A, despite the annoying sounds of the vuvuzela echoing around the globe. The June and July monthly totals almost exactly matched both the average number of tech deals and spending during that year, according to the M&A KnowledgeBase. The following month of August registered the highest monthly acquisition spending level of the entire year. So if any dealmakers are among the estimated 3.4 billion people who plan to cast at least one eye on the World Cup over the next few weeks, they can know that in years past, it’s been business as usual while the games go on.

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

Growth’s rich rewards

Mark Fontecchio

By Brenon Daly

With public market investors handing out sky-high valuations for software vendors that are coming public, the debutants are under a fair amount of pressure to start strong on Wall Street. So far in their inaugural reports as public companies, the class of 2018 has delivered. All four enterprise software providers – which are growing, on average, nearly 50% – have kept their businesses humming along as they have stepped onto the NYSE and Nasdaq.

In other words, the newly public software companies (Dropbox, Zuora, Smartsheet and DocuSign) are keeping their end of the bargain they struck with investors during their IPO to post growth that’s well above the market average. In return, Wall Street is continuing to value them at a level that’s well above the market average. Valuations for the quartet range from roughly 10-22 times trailing sales, averaging almost 18x. That’s a richer valuation than virtually any of the existing SaaS kingpins, and three or four times the public market valuations for conventional software vendors.

That run of outsized rewards for above-market growth for enterprise software IPOs appears all but certain to end when Domo comes public in a few weeks. The reason? Domo is decelerating. In its most-recent quarter (ending in April), the BI startup reported 32% growth, down from the high-40% range for both the year-ago quarter as well as the full fiscal year. The slowdown at Domo means the company is now growing at only about half the rate of the two other similarly sized enterprise software providers that have come public in 2018, Smartsheet and Zuora.

Of course, Domo faces a more existential concern than how much revenue it adds each quarter. As we noted in our full report on the planned IPO, the company has spent itself into a hole and needs the money from the offering to get out of it. At current rates, Domo has only enough cash in the bank to keep the business going for two quarters. Wall Street knows that and will price it into offering. Unlike this year’s other software debutants, Domo – with its slowing growth and dwindling treasury – will get discounted when it comes to market.

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GitHub shows Microsoft’s preference for platforms remains fully developed

Scott Denne

Contact: Scott Denne

In paying $7.5bn to own the preeminent repository of open source software code, Microsoft is inviting us to see how much its ideology around free software has changed. After all, the company’s previous CEO called Linux a ‘cancer’ and spent much of the previous decade threatening – and in one instance pursuing – litigation. And although Microsoft’s view of open source software has evolved, the acquisition of GitHub shows that its obsessions have not.

Microsoft has long been a builder and buyer of technology platforms. Although ‘platforms’ is an overused word in tech circles, in this case we mean the software or infrastructure upon which something of value can be built by outside parties. One could argue whether its largest purchase, LinkedIn ($26.2bn), fits such a definition. However, Windows and Azure undoubtedly do, as does Mojang, the developer behind Minecraft that it bought for $2.5bn in late 2014.

As a site that hosts 28 million software developers, the code they write and a marketplace for developer tools, GitHub certainly qualifies. Moreover, it matches another longtime Microsoft pillar: catering to developers. According to 451 Research’s M&A KnowledgeBase, Microsoft has printed 12 developer-related acquisitions in the past three years, although its history as a maker of developer tools extends well before that.

Philosophical alignment makes for copacetic press releases, but doesn’t motivate any company to hand out $7.5bn of its stock. In owning GitHub, Microsoft plans tighter integrations between the site’s workflow tools and its own Visual Studio development environment. And Microsoft should be able to get its other offerings – particularly Azure – in front of a new audience of developers.

Although the buyer plans to continue to enable GitHub customers to write code into any cloud offering, its own Azure is in need of a larger developer audience. Despite Microsoft’s roots as a developer-focused company – its first product in 1975 was a BASIC interpreter – its IaaS offering has fallen behind others in maintaining that group’s loyalty. According to 451 Research’s Voice of the Enterprise: Hosting and Cloud Managed Services, only 9.4% of Azure customers use the service’s development tools, compared with 12% of AWS customers.

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