Category: M&A

What to look for in tech M&A in 2018

Brenon Daly

Contact: Brenon Daly

As we look back on 2017 and ahead to 2018, 451 Research has published its annual forecast for tech M&A, highlighting the trends that we expect to shape deal flow and the markets that we think will see much of the activity. The 2018 Tech M&A Outlook – Introduction serves as an overview of the broad M&A market, setting the stage for the upcoming publication of our comprehensive report that features analysis and predictions for eight specific IT markets on what deals are likely in 2018.

The full report, which we think of as an ‘M&A playbook’ for the enterprise IT market, has insightful forecasts for activity in application software, information security, mobility and other key sectors. The 80-plus-page 2018 Tech M&A Outlook report will be published at the end of January. It will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and Premium products, and will be available for purchase for 451 Research clients and others that don’t subscribe to our M&A KnowledgeBase products. (If you’re interested in purchasing the full 80-plus-page report, contact your account manager or click here.)

In the meantime, our introduction provides insights on some of the overall dealmaking trends that are also likely to shape activity and valuations in sector-specific transactions. Key highlights in our overview of the broader M&A market include:

  • After tech M&A spending in both 2015 and 2016 topped a half-trillion dollars, what happened that knocked the value of deals in 2017 down to just $325bn?
  • Many of the tech industry’s biggest buyers printed only half as many deals as they have in recent years. Is that the new pace of M&A at these serial acquirers, or will they rev up again in 2018?
  • The pending tax overhaul will likely add billions of dollars to the treasuries at major tech vendors. Why don’t we think that will necessarily lead to more M&A? If they don’t spend it on deals, what are tech companies going to do with the windfall?
  • Which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security tops the forecast once again, but what about emerging cross-sector themes such as machine learning and the Internet of Things?
  • How did private equity (PE) move from operating on the fringes of the tech industry to become the buyer of record? PE firms accounted for an unprecedented one out of every four tech transactions last year. Why do we think their share of the market will only increase?
  • VC portfolios are stuffed, as the number of exits in 2017 slumped to its lowest level since the recession. What challenges loom for startups and the broader entrepreneurial community without the return of billions of dollars from those investments?
  • For startups, will venture capital be flowing freely in 2018? Or will the polarized VC market (fewer rounds, but bigger rounds) continue this year?
  • Despite nearly ideal stock market conditions, why don’t we expect much acceleration in the tech IPO market in 2018? What needs to happen – to both supply and demand – for the number of new offerings to take off?

For answers to these questions – as well as other factors that will influence dealmaking in 2018 – see our just-published 2018 Tech M&A Outlook – Introduction.

Hosted services M&A sees another $15bn+ year

Mark Fontecchio

Contact: Mark Fontecchio

Hosted services M&A in 2017 had a second consecutive year of $15bn+ in spending, an unprecedented streak in the sector. While overall tech M&A spending dropped steeply, it was essentially flat in hosted services. Meanwhile, the median deal value rose as smaller and medium-sized players decided on sale or scale to survive, and as targets grew scarce, acquirers paid higher multiples.

An indicative transaction of these sector trends was also the largest of 2017 – Digital Realty Trust’s $6bn purchase of DuPont Fabros. The past three years have been rich with big-ticket deals in hosted services, but this acquisition stands out because of its outsized multiples – 14x trailing revenue and 23x EBITDA. Those are the highest-ever multiples in $1bn-plus hosted services transactions in 451 Research’s M&A KnowledgeBase, which dates back to 2002.

Digital Realty’s reach for DuPont Fabros was not an isolated incident, either. Three of the four highest value-to-revenue multiples in $100m+ hosted services deals happened in 2017, according to the M&A KnowledgeBase. Overall, the sector’s median EBITDA multiple of 16.1x was the highest since 2012. Three consecutive years of more than $10bn in deal value has consolidated more than 10 million square feet of operational space, according to 451 Research’s Datacenter KnowledgeBase. That has removed many big players from the market, making larger targets scarcer, and thus more valuable in 2017.

In 2018, we expect hosted services M&A to continue to be robust to account for enterprises increasingly pushing workloads to the cloud. According to a 451 Voice of the Enterprise survey last year, the percentage of IT workload spending in the cloud is expected to jump from 27% in 2016 to 46% in 2018. Managed hosting and colocation providers must scale vertically – offering more services – and geographically to suit enterprise needs for functionality and availability, respectively. Large public hosted service providers that are still on the market could fetch a premium, while thousands of smaller players could sell or merge with one another to become competitive.

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

Complexity bolsters valuations for infrastructure software 

Scott Denne

Contact: Scott Denne

Companies looking to exit the infrastructure management space broke records in 2016, although it was enthusiastic entrants that pushed up totals last year. Acquisitions of companies that provide tools to run IT infrastructure finished 2017 at a level that’s abnormally high on strong valuations.

Purchases of infrastructure management targets finished 2017 with $8.5bn in spending across 92 deals. According to 451 Research’s M&A KnowledgeBase, both are down from the record value and volume of transactions in 2016 ($14.8bn on 121 acquisitions). Despite the high-level decline, 2017 was a stronger environment for exits in the category.

More than any other buyer, Cisco set the tone for infrastructure management M&A as two of its purchases account for half of 2017’s deal value. The company opened the year with the $3.7bn acquisition of AppDynamics, valuing the would-be public company at more than 17x trailing revenue, the highest multiple ever paid for a software vendor with more than $50m in revenue. It followed that deal with the $610m pickup of SD-WAN specialist Viptela, a smaller company that it bought at an even higher multiple.

Above-average valuations weren’t limited to Cisco. Among the 10 largest transactions in the space, only one acquisition – Clearlake’s purchase of perennial target LANDESK – came in at less than 3.5x trailing 12-month revenue. A year earlier, three of the top 10 fell below that mark, including 2016’s two largest deals – the divestitures of HPE and Dell’s software units.

Those higher multiples came as hardware providers and legacy management firms sought to expand subscription revenue from products that help customers grapple with an increasingly complex IT environment. That same trend could well fuel infrastructure management M&A this year as infrastructure, software and data look to become more distributed and cloudy.

Workloads are heading to the cloud en masse, whether it takes the form of SaaS, IaaS, private clouds or any other type. According to 451 Research’s Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects 2017 survey, between 2017 and 2019 the amount of IT workloads running on the cloud is expected to increase to 60% from 45%. In that same study, 33% of respondents told us that within two years they would be sharing workloads and business functions across multiple clouds. While the underlying IT infrastructure is becoming interchangeable, the tools for managing it all are becoming indispensable.

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

And the Golden Tombstone goes to…

Brenon Daly

Contact: Brenon Daly

If you have a hard time thinking of a truly blockbuster tech deal last year, you’re not alone. Even people who buy companies for a living struggled to single out any 2017 transaction.

As we do every year, we asked in our 451 Research Corporate Development Outlook Survey for dealmakers to look at the handiwork of their peers around the tech industry and select what they thought was the most significant transaction of the year. Survey respondents work at tech companies of all varieties, but regardless of their industry, the majority of their picks each year usually settle on one or two high-profile deals.

That wasn’t at all the case for our most recent survey. For starters, the pool of 2017 nominees was unprecedentedly broad and shallow. Corporate buyers put forward a record 12 separate transactions for the deal of the year.

From that long list, however, we don’t actually have a winner. Or rather, we have three winners. For the first time in more than a decade of giving out our Golden Tombstone award, we have a tie. Fittingly enough for the diffuse deals that characterized last year, we have a tie between three transactions: Intel’s $15.3bn reach for Mobileye, Cisco outbidding the public market for AppDynamics and Broadcom’s unsolicited bid for Qualcomm. We’re still working on cutting the Golden Tombstone into three pieces so each of the winners can have their own chunk of M&A immortality.

SS&C pays $4.9bn for DST amid a swell of big BPO deals 

Scott Denne

Contact: Scott Denne

Business process outsourcing (BPO) deals jumped to a record total in 2017, despite an overall decline in tech M&A. Today’s announcement that SS&C Technologies will buy its competitor, DST Systems, for $4.9bn sets up the category for another big year.

According to 451 Research’s M&A KnowledgeBase, BPO targets fetched $8.8bn, double the previous year’s total, as the sector saw more big-ticket purchases. That trend continues with the sale of DST, a provider of software and services to investment and wealth management companies, which marks the largest BPO transaction since Xerox’s 2009 pickup of ACS for $6.4bn. With today’s acquisition, there have now been nine BPO deals valued above $1bn in the past decade. Five of them have come in the past 18 months.

SS&C’s purchase values DST at $5.4bn, or 2.7x trailing revenue, a multiple that’s lower than SS&C’s two previous largest acquisitions – Advent Software ($2.5bn) and GlobeOp ($895m). A heftier services offering and slimmer margins are likely to blame for the difference in multiple – SS&C had a 15% operating margin last quarter, compared with DST’s 10%.

Still, DST is commanding a premium that’s well above that of a typical BPO vendor, continuing a trend of rising valuations in the space. According to the M&A KnowledgeBase, the median multiple among BPO targets last year was 2.4x, a number that in itself was extraordinary seeing as the median multiple for such transactions rarely clocks in above 1x in any given year.

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

To detractors, Trump is a buffoon; to dealmakers, he’s a boon

Brenon Daly

Contact: Brenon Daly

Despite all the ‘fire and fury’ around President Donald Trump, when it comes to tech deals, the president is good for business. At least that’s the view of a majority of buyers at some of the largest and most-active companies in the market.

By a more than two-to-one margin, respondents to the 451 Research Tech Corporate Development Outlook Survey said the Trump White House will help spur M&A in 2018. Specifically, 59% said the current administration will ‘stimulate’ dealmaking this year, compared with just 23% saying it will ‘inhibit’ dealmaking.

Somewhat surprisingly, the nearly six out of 10 respondents who forecast a ‘Trump bump’ in the tech M&A market is 10 percentage points higher than our previous survey. The increase over the past year in Trump’s standing among dealmakers stands in sharp contrast to the president’s overall popularity, which has dropped to record lows over that same time. Since Trump took over as CEO of America, the percentage of people who disapprove of the president has steadily risen from 41% to 55%, according to Nate Silver’s FiveThirtyEight, which calculates the figure based on a weighted blend of numerous polls.

Even with the divergent views about the White House, corporate acquirers mostly told us the overall economic picture isn’t really snagging deals these days. See the full 451 Research Tech Corporate Development Outlook Survey for more insights from many of the main buyers in the tech M&A market.

 

Tech companies have long, long shopping lists

Brenon Daly

Contact: Brenon Daly

Despite a lackluster year for tech M&A in 2017, corporate acquirers overwhelmingly forecast that their companies will be looking to shop again this year. More than six out of 10 (62%) respondents to the annual 451 Research Tech Corporate Development Outlook Survey indicated that their firms would be more active with acquisitions in 2018. That was the most-bullish outlook since the end of the recent recession, coming in more than three times higher than the 18% of corporate buyers who expect their companies to step out of the market. (To see the full 451 Research report, click here.)

The company-specific outlook, which came from major acquirers across the tech landscape, is far more buoyant than their view of the broader M&A market, however. Looking ahead at the overall dealmaking environment for corporate buyers, only slightly more than four out of 10 respondents (43%) said it would be more favorable in 2018 than it was in 2017. On the other side, fully one-quarter (25%) predicted that general tech M&A conditions would deteriorate this year.

Although the broad-market outlook – with slightly more than four out of 10 respondents projecting an improved M&A environment in the coming year – ticked higher from last year’s survey, it is still lower than the two surveys before that, when tech acquisition activity did indeed hit multiyear highs. In those two previous 451 Research Tech Corporate Development Outlook Surveys, slightly more than half of the respondents forecast a favorable environment for their fellow strategic buyers. In both 2015 and 2016, spending on tech deals topped $500bn for the first time since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase.

To see what else corporate acquirers told us about their financial rivals (PE firms), valuations and even what President Donald Trump is doing to the business of M&A, click here.
 

Every reason to shop, yet tech companies still empty-handed

Brenon Daly

Contact: Brenon Daly

As tech companies said goodbye to 2017, most of them did so with fond memories of the past year. Public companies nearly all saw steady gains on Wall Street, with more than a few hitting record highs. Record amounts of venture money flowed to startups, while more-established companies looked ahead to their already-stuffed treasuries getting even fuller when the benefits of the recently passed tax program kick in. And probably most importantly, customers are saying they are ready to spend on tech like they haven’t been since the recent recession.

In a November 2017 survey by 451 Research’s Voice of the Connected User Landscape, fully 50% of the 872 respondents said their company is giving a ‘green light’ for IT spending. That was the highest reading since 2007, and 13 basis points higher than the average survey response for the month of November for the previous five years. During that 2012-16 period, in fact, respondents unanimously said their companies were more likely to cut their IT spending than increase it.

All in all, the end of last year was a good time for publicly traded tech companies to do business. And they did, except in one crucial area: M&A. Tech acquirers announced one-quarter fewer deals in Q4 2017 compared with the final quarter of the previous three years, according to 451 Research’s M&A KnowledgeBase. Meanwhile, spending on tech and telco acquisitions in the October-December period slumped to the lowest quarterly level since Q2 2013.

Historically, there has been a relatively tight correlation between overall IT budgets, company valuations and M&A activity. To some degree, activity in all three of those markets is determined by a single shared characteristic (confidence), so it follows that there would be some interdependence in the trio. And yet, as we step from 2017 to 2018, that connection appears to be breaking down. Tech companies are enjoying record levels of confidence from customers and investors, yet are rather timid when it comes to shopping.

CFIUS stomps another

Scott Denne

Contact: Scott Denne

The US government scuttles yet another acquisition of a US company by a Chinese firm, helping to deplete a diminishing channel of tech M&A activity. The failure of Ant Financial to move its $880m purchase of MoneyGram past the Committee on Foreign Investment in the United States (CFIUS) cuts in half an already dwindling amount of US-bound tech M&A from China.

Such deals soared to $15bn in 2016, according to 451 Research’s M&A KnowledgeBase. But last year’s deal value dropped precipitously as acquirers faced tighter capital controls at home and a more protectionist administration in the US. Opposition from CFIUS has recently reduced 2016’s total. Orient Hontai Capital, a China-based private equity firm, abandoned its $1.4bn acquisition of adtech company AppLovin late last year when it couldn’t get past CFIUS. In September, President Trump, following CFIUS’s recommendation, blocked Canyon Bridge Capital’s $1.1bn acquisition of Lattice Semiconductor.

Now that Ant Financial has pulled its proposed purchase of MoneyGram, 2017’s total for China-US tech M&A sits barely above $1bn, and half of that comes via the pending sale of semiconductor testing vendor Xcerra, which recently refiled its application with CFIUS to allow for more time to review. The outlook for China-US deal-making is becoming exceedingly dim. In the September M&A Leaders’ Survey from 451 Research and Morrison & Foerster , 79% of respondents told us that such deal activity would decline under the Trump administration, up from 65% who anticipated a decline in our April survey.


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

Mainstays missing in the tech M&A market

Brenon Daly

Contact: Brenon Daly

A number of the mainstay acquirers that had helped boost the tech M&A market to recent record levels stepped out of the market in 2017, clipping spending on deals by more than one-third compared with 2016 and 2015. The value of tech and telco acquisitions around the globe in the just-completed year slumped to $325bn, after topping a half-trillion dollars in each of the two previous years, according to 451 Research’s M&A KnowledgeBase. Last year’s M&A spending ranks as the lowest in four years.

The primary reason for the drop in 2017 is that tech giants – the companies that had set the tone in the overall M&A market over the past decade – didn’t shop like they once did. For instance, Oracle and SAP have, collectively, announced 16 acquisitions valued at more than $1bn since 2010, according to our M&A KnowledgeBase. However, only one of those deals printed last year. (More broadly, Oracle took an uncharacteristically long eight-month hiatus from deal-making in 2017. The prolonged absence of corporate acquirers such as Oracle was one of the primary contributors to last year’s overall M&A volume slumping to a four-year low, according to our count.)

Also weighing a bit on 2017’s totals is that free-spending Chinese buyers, who had turned tech into a favorite shopping ground, all but disappeared from the top end of the market last year. Our M&A KnowledgeBase lists just one $1bn-plus acquisition by a China-based buyer in 2017, down from nine transactions in 2016 and seven in 2015. Currency restrictions imposed by China’s authorities in early 2017 drastically reduced the ability of Chinese companies to put money to work outside their country. Also, the simmering trade fight and sparring over currency policy between Beijing and Washington DC slowed M&A between the world’s two largest economies.

On the other hand, last year saw the full emergence of a new, powerful – and largely underappreciated – force in the tech M&A market: private equity (PE). As corporate acquirers retreated, financial acquirers accelerated. PE firms announced a record 876 transactions last year, more than twice the number they did just a half-decade ago, according to 451 Research’s M&A KnowledgeBase. Deal volume, which has increased for five consecutive years, jumped nearly 25% in 2017 from 2016, even as the number of overall tech acquisitions posted a mid-teens decline year on year.