Category: M&A

Daimler prefers sharing 

Scott Denne

Contact: Scott Denne

Daimler has topped off an industrious 2017 with the acquisition of Uber rival Chauffeur Prive. Not only has the German automaker printed more deals than its peers, its M&A strategy highlights the alternate route it’s taking toward the industry’s impending technological changes. While many automakers have spread investments across autonomous vehicles and ride-sharing apps, Daimler has fastened on the latter category.

The purchase of Chauffeur Prive lands Daimler’s ride-hailing business a French outpost, adding to services it picked up in Greece, Romania and other locales across four such deals this year and eight since 2014. It also printed two additional transactions this year in related categories with the acquisitions of a mobile payments company and a location-based social network provider, and joined a consortium of automakers with the purchase of Nokia Maps back in 2015.

Compare that with Ford Motor and General Motors, which have bought five autonomous vehicle makers between them and each nabbed one ride-hailing app in the past two years, according to 451 Research’s M&A KnowledgeBase. That’s not to say Daimler doesn’t plan to develop autonomous cars. Rather, it suggests that the Mercedes-Benz parent views ride-hailing and -sharing apps not as a new sales channel for its cars but as a new sales model. When automakers do roll out fully autonomous vehicles at scale – something 451 Research expects to happen in about five years – Daimler will have an extra lane to monetization.

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Oracle raises its construction cloud with $1.2bn deal 

Scott Denne

Contact: Scott Denne

Oracle has stepped off the M&A sidelines with the $1.2bn acquisition of construction software company Aconex, ending its longest dry spell since 2004. In buying Aconex, Oracle doubles what it has spent building its construction and engineering software business, zeroing in on a vertical that’s ripe for cloud applications.

Aconex brings to Oracle collaboration software for construction projects that will become part of a unit that already includes project portfolio management and payment management software that it gained from its purchases of Primavera Software and Textura – a pair of deals that cost it just over $1bn, according to 451 Research’s M&A KnowledgeBase.

 

Today’s transaction values Aconex at 9.4x trailing revenue, nearly two turns higher than where Textura landed. The difference is likely attributable to Aconex’s broader portfolio, along with its accelerating international sales. At the time of its 2014 IPO, the target’s sales in its home market – Australia and New Zealand – made up half of its business. That has now shrunk to less than one-third of revenue amid several years of topline growth above 20%.

Oracle has built several vertical-specific businesses, although it has inked more acquisitions in support of its construction division than other verticals. Unlike energy, restaurants and retail, most of the work in construction happens outside an office, store or other fixed location, so the expansion of cloud and mobile technologies brings with it new applications, not just the replacement of old ones. The downside to the business is that much construction software is bought on a per-project basis, rather than an enterprise license. Aconex has pushed against that barrier, as its subscription revenue now accounts for 46% of sales, up from 34% three years ago.

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Tech’s impact on M&A happening outside the tech market 

Scott Denne

Contact: Scott Denne

The internet’s borders are expanding into retail, broadcasting, automotive and other legacy verticals as power over that network consolidates around a handful of companies. Such a revolution should spark a conflagration of tech M&A, but it hasn’t. Acquisitions of consumer tech companies hit a three-year low, and the biggest prints driven by those changes, including Disney’s $52.4bn purchase of Twenty-First Century Fox assets earlier this week, are happening outside of tech.

Consumer tech M&A has shed a streak of three consecutive record-breaking years for the simple reason that there are few tech targets large enough to help retailers, publishers, telecom companies and broadcasters fend off Amazon, Apple, Facebook, Google and Netflix. According to 451 Research’s M&A KnowledgeBase, consumer-facing internet and mobile companies have together fetched just $27bn this year, less than half the total acquisition value of any of the last three years and a dramatic fall from the $84bn spent on such companies in 2016.

Among the group of tech companies listed above, only Google has inked a $1bn-plus tech acquisition in the last three years, showing that they aren’t spending on M&A to safeguard their coveted posts. Although outside tech, Amazon spent $13.7bn on Whole Foods, for a brick-and-mortar presence for its burgeoning grocery business. Similarly, companies from legacy markets aren’t spending heavily on consumer tech companies because there are few assets that could have an immediate impact in their fight against the tech giants. Some are buying on technical infrastructure to launch new products, as Disney did with its $1.5bn BAMTech acquisition. In retail, Target and Williams-Sonoma have made similar tech infrastructure moves this month, with their respective buys of Shipt ($550m) and Outward ($112m). Additionally, we’ve seen a wave of AI acquisitions among automakers.

Yet, there isn’t a sizeable contender in most consumer tech markets. There isn’t a consumer-tech company that could give a broadcaster scale that approaches Netflix or transform a retailer into a credible threat to Amazon. That’s not to say a lack of attractive tech companies drove Disney to its purchase of Fox or provided the rationale for AT&T’s $85bn bid for Time Warner.

In making the acquisition, Disney gets more of what it knows best and gains scale in what is becoming the battleground for the next round of video distribution – original content. (Although not a tech target, and therefore not included in 451 Research’s M&A KnowledgeBase, it’s worth noting that as part of the deal, Disney becomes the majority owner of Hulu, a Netflix and Amazon streaming competitor.) Content is increasingly becoming the catalyst for the streaming subscriptions that threaten traditional broadcasting and cable. In a third-quarter survey by 451 Research’s VoCUL, 28.4% of Netflix subscribers told us ‘original content’ is what they most frequently consume on the service. That’s a jump of almost seven percentage points from the same survey at the start of 2017.

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Small software buys big, but…

Brenon Daly

Contact: Brenon Daly

The little brothers of the software industry have stepped in front of their bigger brothers in the M&A market. Medium-sized public software companies have been inking uncharacteristically large acquisitions this year, even as the well-known vendors have been fairly reserved. And while these midmarket software firms have been big spenders recently, the deals are often missing a zero or even two compared with prices the industry bellwethers have paid in years past for some of their purchases. That has helped knock overall software M&A spending to its lowest level in four years, according to 451 Research’s M&A KnowledgeBase.

As an example of the shift in buyers, consider Oracle. The software giant has averaged at least one transaction valued at more than $1bn each year over the past decade, according to the M&A KnowledgeBase. Yet this year, it hasn’t gotten anywhere close to doing a 10-digit deal, and, in fact, hasn’t announced any acquisitions since April. On the other side, several software companies that have only a fraction of the size and resources of Oracle have thrown around a lot more money on recent transactions than they ever have before. A few prints captured over the past few months in the M&A KnowledgeBase clearly show the trend of M&A inflation among the midmarket software buyers:

-At $275m in cash and stock, Guidewire Software’s reach for Cyence in October is $100m more than the SaaS provider has ever spent on any other transaction.
-Both of the largest purchases by security software vendor Proofpoint have come in the past month. Its $60m pickup of Weblife.io in late November and $110m acquisition of Cloudmark in early November compare with an average price tag of just $20m on its previous 12 deals done as a public company from 2013-16.
-Doubling the highest amount it has ever paid in a transaction, serial acquirer CallidusCloud spent $26m for Learning Seat earlier this month.
-In a pair of deals announced earlier this year, RealPage dropped more than a quarter-billion dollars on both of its targets, after not spending more than $100m on any of its previous two dozen acquisitions.
-Upland Software announced in mid-November the purchase of Qvidian for $50m, which is twice as much as the software consolidator has spent on any of its other nine acquisitions since coming public in November 2014.

These deals by midmarket software vendors (as well as other similarly sized buyers) go some distance toward making up for the missing big names. Yet they won’t fully cover the shortfall this year. Partially due to this change in acquirers, spending on software M&A in 2017 is tracking roughly one-third lower than it has been over the previous three years, according to the M&A KnowledgeBase.

Connected home is key to Sigma Designs’ valuation 

Scott Denne

Contact:Scott Denne

The addition of products for emerging Internet of Things (IoT) markets has spurred higher valuations on many semiconductor deals amid a record amount of consolidation in the space over the past three years. Silicon Labs’ acquisition of Sigma Designs highlights how much higher those products are valued amid larger semiconductor portfolios. The terms of the $282m transaction revolve explicitly around the seller’s home automation hardware.

According to 451 Research’s M&A KnowledgeBase, the median valuation for a semiconductor vendor has hovered a bit below 2x trailing revenue for most of the past decade, although it surged to 2.9x amid a profusion of IoT-related purchases. Indeed, many chip deals with an IoT element have traded well above the standard valuation. Consider Qualcomm’s pending $39bn pickup of NXP Semiconductors (5.5x), SoftBank’s $32bn reach for ARM (20.9x) and Intel’s $15bn acquisition of Mobileye at an unheard of 41x trailing revenue.

The $282m price tag for Sigma Designs ostensibly values the company at about 1.5x trailing revenue, but only if certain conditions are met – the seller must have at least $40m in cash on its balance sheet and it must shutter or sell its Smart TV components business within a week. (That business accounts for the majority of its revenue, but isn’t related to IoT and is heading downhill, having lost 61% of its quarterly revenue since this time a year ago.)

If those conditions aren’t met, Silicon Labs will buy Sigma Designs’ home automation components business, Z-Wave, for $240m. In other words, Silicon Labs wants to buy Z-Wave for about 5-6x trailing revenue and doesn’t value the other business lines at all. There’s a logic to that premium valuation. The market for home automation is advancing with plenty of open space. According to a third-quarter survey by 451 Research’s VoCUL, 69.9% of consumers still don’t own any internet-connected home devices, although that’s down from 74.4% at the start of the year.

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

TITUS goes from bootstrapped to buyout with Blackstone

Brenon Daly

Contact: Brenon Daly

Private equity (PE) firm Blackstone Group has picked up a majority stake in TITUS, marking an unconventional bootstrapped-to-buyout exit for the 12-year-old data classification startup. Terms weren’t revealed. With the acquisition, PE shops have now purchased more cybersecurity vendors in 2017 than any year in history, according to 451 Research’s M&A KnowledgeBase (see graphic below).

The transaction comes two years after Microsoft made a similar data security move, reaching for Israel-based startup Secure Islands. (Although the price of that deal wasn’t disclosed, subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms.) However, Secure Islands was a much smaller company than TITUS, both in terms of revenue and technology. Secure Islands focused primarily on extending security for Microsoft technology, specifically Office 365 and SharePoint, while TITUS has a broader technology platform. Also, according to our understanding, profitable TITUS generates more than four times the sales that Secure Islands did at the time it was acquired.

For Blackstone (in this case, through its Tactical Opportunities team), the purchase of TITUS represents a return to the information security (infosec) market, with a platform that lends itself to additional bolt-on acquisitions. (The firm used the buy-and-build strategy with infosec reseller/service provider Optiv before selling it to Kohlberg Kravis Roberts a year ago.) Once TITUS is in the portfolio, which should come before the end of the year, Blackstone could help cover the costs of buying into markets where TITUS currently partners. Specifically, markets such as data-loss prevention and archiving would be logical adjacent sectors for Blackstone-backed TITUS to look to shop in.

Cybersecurity turns into a busy bazaar

Brenon Daly

Contact: Brenon Daly

The holiday shopping season kicked off last week, and for one tech sector, it was a particularly bountiful time for picking up some companies. Information security (infosec) acquirers announced an unprecedented seven transactions during the week that started on Cyber Monday. The pace represented a dramatic acceleration from the year-to-date average of just two deals announced each week.

With last week’s flurry, the number of infosec acquisitions in 2017 has already eclipsed last year’s total, even as overall tech M&A volume this year is heading for a mid-teens percentage drop from last year, according to 451 Research’s M&A KnowledgeBase. (This year already ranks as the second-busiest year for infosec, with deal volume tracking to roughly 50% higher than the start of the decade.) Probably more important than the sheer number of transactions was who was doing the dealing:

-McAfee announced its first purchase since throwing off the shackles of full ownership of Intel last year. By all accounts, McAfee’s step back into the M&A realm with cloud security startup Skyhigh Networks came at a sky-high price.
-An infrequent acquirer, Trend Micro reached for a small application security startup based in Montreal, IMMUNIO. It is only the third acquisition the Japan-based company has done since 2011.
-Thoma Bravo continued this year’s record level of infosec M&A by private equity (PE) firms, taking Barracuda Networks private for $1.6bn. The M&A KnowledgeBase indicates that 2017 is on pace for more PE purchases in this market than any year in history, likely to come in about quadruple the number of sponsor-backed infosec deals in 2012.

Expanding the timeframe beyond just last week, we see a number of other trends this year that have contributed to strong infosec deal volume in 2017, which should continue in 2018. For starters, the industry’s largest stand-alone vendor has stepped back into the market in a big way. Symantec has inked five transactions so far in 2017, more than it has done, collectively, in the previous half-decade. Meanwhile, other infosec providers have either reemerged as buyers (Juniper acquiring Cyphort after a four-year infosec M&A hiatus) or started their own acquisition program (Qualys has announced two deals in the past four months, after printing just one transaction since the company’s founding in 1999).

​​​​​​​ CallidusCloud’s pocket-sized pickups 

Scott Denne

Contact: Scott Denne

CallidusCloud shells out $26m for Learning Seat, the most it’s ever paid in a single deal. That it’s hitting a new record on such a modest purchase shows that CallidusCloud, which embarked on a steady diet of snack-sized M&A at the start of the decade, has stayed disciplined in its acquisition strategy. Today’s transaction also illuminates a modest increase in appetite – both in deal value and volume – as the sales software vendor has reaped results from previous buys.

The company has now printed four deals this year, its busiest since 2011, when it inked five. But that year CallidusCloud was just setting out on its current M&A strategy of making tuck-ins and low-priced extensions to its core sales performance management software offerings. According to 451 Research’s M&A KnowledgeBase, the company bought only three businesses before 2011. Now, its strategy has proven results and its purchases are more ambitious, if still small. In 2011, only two of its transactions crested $5m – this year, all of them did.

Today’s acquisition adds content for CallidusCloud’s sales training products, a unit established by the $3m pickup of Litmos in 2011. Last quarter, Litmos (and associated training offerings) was its second-largest contributor to revenue. As that division’s contribution has grown, so has its position in the company’s M&A efforts – four of its last seven deals (including today’s) bolstered its training business.

CallidusCloud began its M&A adventure in 2010 amid crumbling revenue. Last year, it put up 16% growth, its SaaS sales jumped 25% and its stock rose about 7x. Of course, that’s not all due to the addition of learning management content and software. The company has enhanced its ability to sell multiple products across sales performance, enablement and execution. Last quarter, nearly half of its bookings came via multiproduct deals, compared with just 20% four years ago.

That’s a heartening development for many of the sales-enablement startups struggling to find an exit. CallidusCloud is among the most frequent acquirers of such companies and the exit environment for those firms, as we detailed in a previous report, reflects CallidusCloud’s own proclivities. With few exceptions, exits for sales-enablement startups have been sparse and small.

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

November tech M&A slumps to pre-boom levels

Brenon Daly

Contact: Brenon Daly

Dealmaking in 2017 is going out with a whimper. Acquirers in November spent just $15.7bn on tech transactions across the globe, the lowest monthly total in three years, according to 451 Research’s M&A KnowledgeBase. The sluggish November activity comes after a similarly anemic October, with both months coming in only about half of the average monthly spending for the first nine months of 2017. Also, the number of deals announced in the just-completed month slumped to its lowest level of the year.

Even as November featured a decidedly lackluster level of overall M&A activity, a few transactions stood out, including:
-After entirely sitting out the wave of semiconductor consolidation in recent years, Marvell Technology Group shelled out $6bn in cash and stock for Cavium. The deal stands as the largest tech transaction in November, topping the collective spending on the next four biggest acquisitions last month.
-The information security industry saw its largest take-private, as buyout firm Thoma Bravo paid $1.6bn for Barracuda Networks in a late-November deal. A single-digit grower that throws off $10-20m in free cash flow each quarter, Barracuda has long been considered a candidate to go private as it works through a transition from on-premises products to cloud-based offerings.
-Richly valued startup Dropbox stepped back into the M&A market in November for the first time since July 2015, purchasing online publisher Verst. From 2012-15, the unicorn (or more accurately ‘decacorn’) had inked 23 acquisitions, according to the M&A KnowledgeBase.

The recent tail-off in acquisition spending has left the value of announced tech transactions so far this year at just $302bn, according to the M&A KnowledgeBase. With one month of 2017 remaining, this year is all but certain to come in with the lowest annual M&A spending since 2013. This year is tracking to a 34% decline in deal value compared with 2016 and an even-sharper 45% drop from 2015.

Thoma Bravo goes fishing, lands a Barracuda

Brenon Daly

Contact: Brenon Daly

After four underwhelming years as a public company, Barracuda Networks will step off the NYSE in a $1.6bn take-private with Thoma Bravo. The all-cash transaction, which is expected to close within three months, is one of those rare deals that appears to fit both the buyer and the seller in equal measure. With $17bn sloshing around, private equity firm Thoma Bravo needs to put money to work and has made the information security market a favorite shopping ground, having previously taken four infosec vendors private.

For Barracuda, the proposed leveraged buyout (LBO) wraps a period of not truly finding a home on Wall Street. As a public company, Barracuda posted just one-third the return of the Nasdaq Composite over the same period. The $27.55 per share that Thoma Bravo is paying represents the highest price for Barracuda stock in two and a half years. At one point in 2015, shares of Barracuda changed hands above $40.

Part of the reason why Barracuda fell out of favor with investors is the company’s ongoing transition from an on-premises business to more of a cloud focus. The so-called ‘legacy’ revenue – much of which is tied to appliances – has been shrinking every quarter, but still represents roughly one-third of sales. Deemphasizing that business has boosted Barracuda’s operating margins, but has slowed overall revenue growth to the single digits. Going private to complete the transition to a higher-margin software business, while continuing to throw off $10-20m of free cash flow each quarter, makes sense for Barracuda.

On the other side, Thoma Bravo pays essentially a market multiple for a company that has figured out a way to turn a profit selling into the underserved SMB market. (The enterprise value of Thoma Bravo’s bid stands at $1.48bn, or 4x trailing 12-month sales at Barracuda. That roughly matches the 4.4x TTM sales/EV multiple that Thoma Bravo paid in its most recent infosec LBO, Imprivata.) Further, Thoma Bravo has some growth opportunities once it adds Barracuda to its portfolio, both in terms of products (for instance, the target’s managed security service) and markets (Barracuda still generates 70% of its revenue in the US).

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