Webinar: 2020 Tech M&A Outlook

by Brenon Daly

Tech M&A has started a bit sluggishly in 2020, but what about the rest of the year? Are tech buyers going to continue sitting on their hands, or will they be reaching for their checkbooks as the year moves along? And if they do go shopping, where will they be looking?

For answers to all of those questions and more, join 451 Research tomorrow (February 5) at 1:00pm EST for a special webinar, 2020 Tech M&A Outlook. (Register here.) During the hour-long webinar we will look at the broad-market trends shaping overall deal flow, as well as a special focus on two of the areas that we expect to see a surge in acquisition activity in the coming year:

Over the past decade, machine learning (ML) has been the fastest-growing theme in all of tech M&A: 451s Research M&A KnowledgeBase shows that deal volume has been clipping higher at a CAGR of north of 50% over that period. As ML matures in the coming years, how will that affect acquisition activity?

Similarly, information security (infosec) has seen a dramatic uptick in dealmaking, with the annual number of prints in the sector running 50% higher in the back half of the past decade than during the opening half. That growth culminated in 2019 hitting a record for both the number and spending on infosec acquisitions. Where does the infosec M&A market go from here, and what sectors are going to see the most activity?

Again, tomorrow’s 2020 Tech M&A Outlook webinar will get you everything you need to know about what’s coming in the year ahead. We hope you can join 451 Research for our annual look at the multibillion-dollar tech M&A market.

Tech buyers step down

by Brenon Daly

After spending on tech acquisitions in 2019 slumped about 20% from the previous year, 2020 is starting even weaker. Dealmakers around the world handed out just $28bn on tech and telecom transactions in January, according to 451 Researchs M&A KnowledgeBase. Spending in the just-closed month represents the softest open for tech M&A in three years.

Furthermore, January 2020 has seen acquirers move lower in almost a step-function fashion compared with recent years. (Granted, a single month is an almost absurdly short time period in which to draw any conclusions.) Nonetheless, our data shows 2020 is starting at roughly $10bn lower than the average monthly spending in 2019, which was roughly $10bn lower than the average monthly spending in 2018.

In our 2020 Tech M&A Outlook: Introduction, we offer some reasons for the likely ‘lower highs and lower lows’ for the overall market in the coming year. One of our key rationales: The tech M&A industry is on the cusp of a generational transition. The old-guard acquirers that had shaped the market for decades are simply not doing deals at the same pace they once did.

For instance, in our M&A Outlook report, we note that activity in 2019 from typical M&A market-makers such as IBM, SAP, Microsoft and Oracle dropped to its lowest aggregate level in a decade and a half. Our data shows that last year the quartet, collectively, announced just one-third as many acquisitions as they did at their peak. Again, with the disclaimer that one month doesn’t make a year, we would note that not one of those four major acquirers have put up a print so far in 2020.

Instead of the ‘usual suspects’ at the top end of our M&A KnowledgeBase, new buyers – those that have only recently begun shopping in tech – did last month’s most significant deals. The largest strategic acquisition came from Visa, which plunked down $5.3bn for Plaid. Meanwhile, financial buyer Insight Partners double-dipped last month, spending $5bn for storage veteran Veeam and $1.1bn for IoT security startup Armis.

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

Food delivery companies gobble up more than market share

by Michael Hill

Hungry for more than geographic expansion, food delivery companies are driving up deal spending as they look beyond the usual targets for acquisitions. While buyers remain busy consolidating a fragmented market, they are making additional bets on the technology behind those services and other offerings that could expand their addressable market.

According to 451 ResearchM&A KnowledgeBase, the total value of deals done by food delivery companies rose to nearly $13bn from just $359m two years earlier, thanks in large part to a pair of blockbuster transactions – TakeAway’s $8.3bn reach for Just Eat and Delivery Hero’s $4bn pickup of Woowa Brothers. But while those moves were motivated by geography and increased market share, other, less showy deals showcased increased buyer imagination.

Take DoorDash’s acquisition in August of Scotty Labs. The target develops remote-controlled autonomous vehicle software for businesses that DoorDash could eventually use to power its own fleet of autonomous delivery vehicles. Two months earlier, there was Indonesia-based food delivery app maker Go-Jek’s purchase of AirCTO, a Bangalore-based provider of recruitment software that uses artificial intelligence to screen prospective job candidates.

In earlier years, all deals done by delivery companies were pickups of smaller competitors. According to M&A KnowledgeBase data, in 2017, for example, all 23 of the acquisitions by food delivery companies were for fellow delivery services. In fact, 17 of those transactions were announced by BiteSquad in a single October day in the name of expanding its services to more than 30 new US metro areas.

However, 2019 wasn’t the first time these buyers stretched beyond their core market. GrubHub’s 2018 pickup of mobile payments and loyalty services provider LevelUp, for instance, as we discussed in a report on the deal, took the buyer beyond food delivery with technology that should enable it to offer more commerce software and services to restaurants just as those businesses are investing there. Indeed, as the food delivery market continues to consolidate, those who maintain a seat at the table will likely be those who have an appetite for expanding their addressable market.

Figure 1: Food delivery buyer volume and value

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

Payments pay out

by Jordan McKee, Scott Denne

A surge of industry consolidation pushed payments M&A to a new peak last year. Although few targets remain that could fetch the $10bn-plus price tags of 2019’s giant transactions, the payments industry, and the vendors that have long dominated it, remain vulnerable to trends that emerged with the global shift toward digital commerce and the digitalization of physical commerce, so dealmaking is likely to continue to thrive in this market.

According to 451 Research’s M&A KnowledgeBase, buyers shelled out $85.7bn for 81 payments technology providers in 2019, roughly 6x the amount from 2018. To put that in perspective, for every $5 spent on tech acquisitions, $1 went toward the purchase of a payments firm, including spending on three of the year’s four largest deals – FIS’s $36bn reach for Worldpay, Fiserv’s $22bn First Data buy and Global Payments’ $21bn TSYS pickup. While there are few payments targets left that could command that kind of price, those transactions, which brought the acquirers massive scale and distribution, set the stage for further M&A.

As we highlighted in a recent report, increased deal activity has come largely in response to (and as a result of) the presence of high-profile and heavily funded venture-backed vendors in the payments space. Through the rest of this year, we expect to see payments acquisitions focused around high-growth sectors such as integrated payments, cross-border transactions and omnichannel commerce – market opportunities that are emerging as the lines blur between physical and digital commerce.

In omnichannel commerce, for example, payments are a fundamental part of enabling customer experiences that overlap online and offline shopping, such as buy online/pick up in-store and buy in-store/ship to home. Such services are enabled via a payments processor that can process multi-channel transactions. Our surveys show that there’s a substantial market opportunity here. According to 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, 48% of organizations are actively pursuing an improvement in cross-channel customer experience. This could lead to processors that have traditionally focused on e-commerce (e.g., Stripe, Paysafe, Cybersource, Adyen) seeking in-store assets, plausibly acquiring point-of-sale software providers or in-store-focused firms.

Figure 1: The importance of customer experience initiatives

Source: 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019

Where have you gone, Joe DiMaggio?

by Brenon Daly

In addition to wrapping up a decade, 2019 also marked the end of an era in tech M&A. The industry’s longtime buyers are no longer buying like they did when they were in their prime. It was as if the old guard, having shaped and driven tech M&A for years, stepped aside as the curtain came down on the decade. Their departure has left a billion-dollar-sized hole in the market.

We noted this transition and its implications as a key market trend in our recently published M&A Outlook: Introduction. In the report, we highlight the fact that the 451 Researchs M&A KnowledgeBase does not have a single transaction valued at more than $1bn for stalwart acquirers Microsoft, IBM, Oracle and SAP – the first time the group hasn’t had a single member in the ‘three-coma club’ since 2003. Our data indicates that the quartet, collectively, had been averaging almost four $1bn+ deals each year for the past decade and a half. (See our full report.)

The impact of the missing mainstays goes far beyond just the rarified top end of the M&A market. Not only are Microsoft, SAP, Oracle and IBM not putting up big prints, they are barely putting up any prints at all. According to the M&A KnowledgeBase, the quartet acquired a total of only 16 companies among them in 2019. That’s just half the number of purchases the four companies have averaged annually over the previous 15 years, and less than one-third the number they did in peak years.

Further, all four buyers have substantially more cash on hand and substantially higher stock prices right now than when they had their M&A machines revving. And yet, despite the unprecedented resources to do deals, their pace plummeted last year to each company averaging a transaction every quarter, down from an average of a purchase every month in the mid-2000s.

That slowdown has literally taken billions of dollars out of the broader tech M&A market. Our numbers show a staggering $262bn in total acquisition spending for Microsoft, IBM, Oracle and SAP since 2002. (The aggregate amount – again, more than a quarter-trillion dollars – captures only announced deal values and our proprietary estimates on prices, so undoubtedly undercounts the actual outlays from the four buyers.)

Even just based on the disclosed and estimated prices, the M&A KnowledgeBase shows the median deal value, collectively, for the quartet is $200m. Using the admittedly roughly measured representative price of $200m per transaction, we can put a price on their slowdown in dealmaking. If the quartet had merely announced the number of acquisitions in 2019 that they had averaged over the previous 15 years, another $3bn would have flowed into the tech M&A market last year.

Source: 451 Research’s M&A KnowledgeBase

Going vertical makes machine learning deal volume horizontal

by Scott Denne

Last year marked a banner year for machine learning M&A. Purchases of vendors building products around that emerging technology, as well as firms whose offerings enable others to build machine learning products, soared in 2019. Yet the change was more than quantitative. As that new technology pervades older industries, it’s bringing in new acquirers and the rationale behind many machine learning deals has evolved.

According to 451 Researchs M&A KnowledgeBase, acquisitions of machine learning providers rose 75% to 278 in 2019. In other words, machine learning accounted for one of every 13 tech transactions last year. Within that number, purchases of companies selling into a specific vertical produced the most prominent rise as buyers nabbed 112 vendors building machine learning offerings that address problems within a particular industry, more than double the 53 they bought earlier.

In previous years, many acquirers were content to pick up general-purpose tech and expertise to bolster their machine learning portfolios. Serial shoppers Microsoft, Google, Salesforce and Apple, for instance, each picked up more than 10 businesses in recent years to expand their products’ machine learning functionality. As we previously noted, buyers have already become more discriminating, and more likely to seek tech that fills specific gaps in the product portfolio.

But the application of machine learning to certain markets has not only kept acquirer interest in the burgeoning technology high, it has also brought new buyers into the tech M&A market as staid industries see opportunities and risks that come with the emergence of machine learning. For example, in one of the largest machine learning deals last year, Prudential Financial printed its first tech acquisition with the $2.4bn pickup of Assurance IQ to expand its online sales via software that customizes insurance products around data signals.

As the universe of buyers and the range of rationales for machine learning transactions continues to expand, this technology will likely continue to have an outsize impact on the tech M&A market. At least that’s the take from the 451 Research Tech Banking Outlook, where 91% of bankers surveyed anticipate that machine learning purchases will accelerate in 2020.

Figure 1:

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

Your guidebook for the changing M&A landscape

by Brenon Daly

For tech M&A, 2019 not only wrapped up a decade, it also ended an era. As we look ahead, it’s becoming increasingly clear that business in the 2020s won’t just be a continuation of the 2010s. To help you navigate the changes, 451 Research has just published its signature 2020 Tech M&A Outlook: Introduction, covering what we see shaping the multibillion-dollar market in the coming years.

And right now, there are some significant shifts in the tech M&A market, wherever you happen to be working. As we highlight in the full report, these once-in-a-generation transitions include:

Longtime corporate acquirers aren’t doing deals like they once did. The decidedly middle-aged mainstays had dominated the tech M&A market since virtually the industry’s first print. But now, the Baby Boom-era vendors are being nudged aside by faster-moving and bigger-buying companies born in the past 20 years or so. Our report looks at which Millennials are driving the trend, and which we think are the next to join M&A’s big leagues.

Broad-market M&A valuations have soared to record levels, roughly doubling over the past decade. And yet, in the all-important matter of pricing, not everything is heading up and to the right. We chart the trends in several key markets, including a historic decoupling of valuations between strategic and financial buyers.

In venture capital, the past decade was dominated by attention to ‘unicorns,’ a term that was coined by a VC in 2013 to describe startups valued at $1bn+. By last year, however, unicorns didn’t look very special. Both acquirers and investors had become increasingly skeptical of money-burning startups. The ‘growth at any cost’ business models that had fueled the 2010s looked unsustainable in the new decade, a change that will have huge implications for startup fundraising as well as exits.

Again, our 2020 Tech M&A Outlook: Introduction is now available to 451 Research clients. Think of it as a guidebook for the changing landscape of the industry.

Source: 451 Research’s M&A KnowledgeBase

Thinned-out M&A pipelines

by Brenon Daly

After tech M&A spending dipped in 2019 from its record level in the previous year, senior tech bankers are bracing for acquisition activity to slow further in 2020. Only slightly more than six of ten (62%) of respondents to the 451 Research Tech Banking Outlook say the value of deals they are working is higher now than it was a year ago. Over the past decade of our survey, an average of 68% of bankers have reported fuller pipelines. The 2020 outlook comes as 2019 posted a roughly 20% year-over-year decline in spending on tech and telecom deals around the globe, according to 451 Researchs M&A KnowledgeBase. (See the full report.)

More ominously, a recent record one-quarter of respondents (24%) to our survey indicated that the value of deals they are currently working is lower now than it was a year ago. That’s the most-bearish outlook since the recession-scarred year of 2009 and is fully 10 percentage points higher than the average response since the start of the decade. Of course, the tech M&A market has expanded dramatically since emerging from the Credit Crisis. The M&A KnowledgeBase shows that overall spending on tech transactions is running more than three times higher in 2019 than it was a decade ago.

The fact that bankers, who tend to be an optimistic group with a bias toward activity, say their pipelines are thin as they head into 2020 is significant. The reason? Their predictions in previous editions of our Tech Banking Outlook have proven uncannily accurate, particularly on the downside. Since 2010, the level of bankers projecting a decline in the dollar value of their mandates for the coming year has only topped 20% in just three of our surveys (2010, 2013 and 2017).

Each of those years has indeed played out that way, with below-average annual spending on tech deals, according to the M&A KnowledgeBase. Now, we add 2020 to that list as the weakest of the weak forecasts.

For more specifics on the outlook from senior bankers – who, collectively, have had a hand in dozens of deals across a wide swath of the tech landscape – see our full report on our 15th annual Tech Banking Outlook. Highlights include:

How active will private equity (PE) be in 2020? Financial acquirers have been a virtually unstoppable force in the tech M&A market in recent years, accounting for nearly one of every three tech transactions, according to our data. That’s triple the market share they held in 2010. And yet, bankers forecast that the growth for PE isn’t necessarily going to continue in the coming year.

What tech sectors will be the busiest this year? Once again, we have a kind of ‘heat map’ for M&A, based on what bankers tell us they are actually working on. (Crucially, their assessment is based on their pipeline and ongoing workflow, rather than a vague, ‘What’s hot in 2020?’-type question.) See how your M&A priorities line up with the broad-market trends.


Source: 451 Research Tech Banking Outlook

A high-water mark in PE deal flow

by Brenon Daly

High-water marks only become apparent when the waters recede. As time passes, the pinnacle stands out even more because everything that follows comes at a lower level. We see that in deal flow, too.

Consider the take-private of Ultimate Software, which did indeed prove to be the ‘ultimate’ LBO of 2019. No other deal came close to its size ($11bn) or valuation (11x). On average, the tech companies that got erased off US exchanges after the HR software vendor garnered an average valuation of just a smidge more than 3x trailing sales, according to 451 Researchs M&A KnowledgeBase.

Now, we have an early entry for the singular private equity (PE) transaction of 2020: Insight Partners’ $5bn recapitalization of Veeam. Both in terms of transaction structure and size, it is an outlier. And it will almost certainly remain that way for the full year, even as PE shops likely put up more than 1,000 prints again in 2020.

For starters, financial buyers have only just started shopping in venture portfolios, and are significantly underrepresented there. (Our data shows that PE firms over the two previous years have accounted for just 22% of purchases of venture-backed companies, which is fully 10 percentage points lower than the ‘market share’ they hold across all of tech M&A.) Within that, recaps – or a single financial sponsor replacing a syndicate of investors – are only a tiny slice of those deals.

Of course, Insight was already on Veeam’s syndicate, having invested $500m previously. But in most cases, VC-to-PE deals break down due to unbridgeable valuation gaps. (Oversimplified, the discrepancy goes something like this: VCs tend to value startups aspirationally, while PEs tend to value startups realistically.)

Beyond the unusual transformation of Insight going from minority shareholder to outright owner of Veeam, the transaction is also likely to stand on its own this year because of its size. The M&A KnowledgeBase lists only three tech deals by sponsors over the past year that are larger than the pending recap of the data-protection provider.

And over the course of the past year, PE business has dried up. Spending on transactions by buyout shops dropped 20% in 2019 compared with 2018, while last year also saw the first decline in the number of PE prints in six years. Further, 2020 may slow even more. In our annual survey of senior tech investment bankers, they told us their pipeline for PE work is not as full as their overall pipeline for the coming year. That’s the first time in three years they haven’t been busier with financial acquirers.

VCs finish the old decade with new friends

by Scott Denne

A late burst of large deals raised last year’s venture capital exit totals to spectacular from subpar as startup investors leaned on new names for exits. In the final six weeks of the year, five of the companies VCs sold were valued at $1bn-plus, after seeing just one such exit per quarter earlier in the year. And although the deal values jumped at the end of the year, VCs, throughout 2018, saw a steady stream of liquidity from vendors that have recently expanded their startup acquisitions.

According to 451 Research’s M&A KnowledgeBase, venture investors sold $40.4bn worth of tech targets in 2020, a dramatic drop from last year’s record $85.6bn but still finishing as the third-highest annual total since the dot-com days. The final weeks made all the difference. The $13bn combined value of just five acquisitions brought the annual total from just below the $28bn of VC exits from a typical year in the 2010s. And that surge came with little help from the buyers that propped up the exit market earlier in the last decade.

Instead, acquirers that have only recently emerged as major sources of liquidity boosted the annual totals. Here’s a sampling:

Just before Thanksgiving, PayPal spent $4bn for Honey, its largest-ever acquisition and only the second time it’s paid 10 figures for a startup (it bought iZettle for $2.2bn in May 2018).

With barely a week to go in the year, F5 Networks paid $1bn for Shape Security, a deal that followed its March purchase of NGINX for $670m, which was previously its largest acquisition.

After printing a pair of nine-figure startup purchases in 2018, Splunk joined the $1bn club, paying slightly more than that for SignalFx, an early-stage cloud performance-monitoring specialist.

By contrast, the companies that, from 2010-18, bought the most startups – Google, Microsoft, Cisco and Oracle – slowed their activity. As a group, those vendors acquire 31 startups in a typical year, our data shows. Last year they purchased just 20, the fewest ever in the decade, and only Google, with eight deals, including its $2.6bn pickup of Looker, was notably active. To put 2019 into context, Microsoft bought as many VC-funded vendors (five) last year as Palo Alto Networks, a security provider that has only inked 12 acquisitions in its entire history.

Figure 1:

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