Category: M&A

Marvell’s belated bid to be a chip consolidator 

Scott Denne

Contact: John Abbott, Scott Denne

With its $6bn reach for Cavium, Marvell Technology Group proves that a few large targets remain as the semiconductor industry emerges from a record streak of consolidation – a streak that happened with Marvell on the sidelines. Although deal value in semiconductor M&A remains well below the record levels of 2015 and 2016, the transactions getting done are commanding higher amounts.

Cavium becomes the fourth chipmaker to be acquired for more than $1bn this year, compared with 10 in all of last year, according to 451 Research’s M&A KnowledgeBase. Yet only one of the $1bn-plus deals this year has been done for less than $5bn, whereas half of 2016’s 10-digit semi transactions fell below that threshold.

Marvell doubles its market opportunity by purchasing Cavium and enters the high-growth datacenter market. Its current portfolio spans storage controllers, networking PHYs and SOCs for enterprise switches, and Wi-Fi and Bluetooth SOCs for wireless connectivity. To that Cavium adds compute, networking, storage and security components for the datacenter, including multi-core and datacenter processors, Ethernet adapter and datacenter switches, Ethernet and fiber-channel storage connectivity, and FIPS and virtual offload security.

Benefits of scale and volume include a full portfolio that will enable cross-selling, as well as pooled R&D expenses, where there is currently a lot of duplication – moving up to 10nm and 7nm process technology is a huge burden that can now be consolidated. Diversification will also reduce Marvell’s exposure to low-growth sectors, such as hard disc drive controllers and notebooks, and Cavium’s to the dwindling fiber-channel business. The two companies are located close to each other, easing integration challenges.

The change marks a departure from Marvell’s past M&A strategy. Since the start of 2002, the most it had ever paid for any asset was $600m, with most of its deals falling well short of that mark. Moreover, this is its first acquisition since early 2012 and only the third time it has bought an entire company, rather than a business unit.

Subscribers to 451 Research’s Market Insight Service will have access to a detailed report on this transaction later today.

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

Williams-Sonoma orders augmented reality

Scott Denne

Contact: Scott Denne

Retailers have inked a handful of deals in an effort to fend off competition from Amazon and adapt to a blossoming era of mobile-enabled shopping. Yet few buyers have reached for companies with advanced technology, instead opting to bolt on digital media, e-commerce and services businesses. Williams-Sonoma’s $112m pickup of Outward counters that trend and shows that retailers could become true tech buyers as digital commerce entails more than stitching on a website.

With its acquisition of Outward, Williams-Sonoma, a maker of upscale household wares and (through its Pottery Barn subsidiary) furniture, obtains technology that enables 3-D renderings of its inventory for use across multiple digital platforms, including a forthcoming augmented reality (AR) app that helps customers visualize furniture purchases in their own homes.

It was that mobile capability that drove Williams-Sonoma to pay $112m for a company that raised just $11.5m in venture capital. The buyer believes that more immersive capabilities on its mobile website and app have already led to sales and will continue to do so in the future. According to a study done by 451 Research’s VoCUL in the first quarter, 35% of consumers research a purchase on their smartphone at least once a week before going to a store.

For other retailers looking to follow Williams-Sonoma, there are a handful of assets remaining. Although furniture shopping is a niche application of AR, such startups have gotten their fair share of venture capital, having raised a total of $34.8m across six vendors, including Marxent, Modsy and Hutch, according to 451 Research’s M&A KnowledgeBase Premium. Today’s deal, along with Amazon’s purchase of Body Labs and Bed & Beyond’s acquisition of Decorist, could spark retailers to buy more ecommerce technologies.

Still, if past is precedent, retailers aren’t likely to rush into acquiring companies like Outward, which has filed for eight patents related it its imaging technology and was built by a team of Qualcomm veterans. Instead, they’re likely to continue to snag their e-commerce counterparts as they’ve done so far this year. According to the M&A KnowledgeBase, 11 of the 26 deals by brick-and-mortar stores in 2017 have been acquisitions of online retailers.

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

Cloudflare signals new push into mobile 

Scott Denne

Contact: Scott Denne

Positioned near the top of one budding corner of the CDN market, Cloudflare is angling to take a share of another with the purchase of Neumob. Its latest deal, a departure from Cloudflare’s mostly infosec M&A in the past, gets the Internet performance-optimization vendor software to bolster the performance of mobile apps.

Offering a service that protects and accelerates websites has made Cloudflare into a business with more than $170m in venture capital and annual revenue in the same neighborhood (subscribers to 451 Research’s M&A KnowledgeBase Premium can access a detailed profile of the company). Its security capabilities have pushed it near the top of the fastest-growing segment of the CDN market, defending against distributed denial-of-service (DDoS) attacks.

According to 451 Research’s VotE: Information Security survey, 38% of respondents planning to implement an anti-DDoS service were considering Cloudflare, second only to Akamai, which scored less than three percentage points higher. 451 Research’s Market Monitor service projects that this portion of the CDN market will expand by 40% this year, so it’s understandable that two of Cloudflare’s three previous acquisitions would fortify its security features.

In Neumob, it’s picking up a company whose software analyzes the signal available to a mobile device and adjusts the API calls to make the most of that signal. Although terms weren’t disclosed, it’s likely a modest-sized deal given that Cloudflare plans to shut down the service and integrate the software with its own. Neumob had about 20 employees and had raised $11m in funding. While such mobile acceleration targets have drawn strategic interest, most, like Neumob, were acquired at an early stage. Last year, privately held Instart Logic purchased Kwicr and Salesforce nabbed Twin Prime, a pair of startups with similar amounts of funding as Neumob.

Still, a decade since the birth of the smartphone, mobile app acceleration remains a pressing problem. In a survey by 451 Research’s VoCUL earlier this year, 47% and 44% of businesses told us it was ‘very important’ to provide their customers with mobile apps for customer service and shopping, respectively. At the same time, consumers’ gluttonous appetite for mobile apps shows no sign of abating. In a separate VoCUL study in the second quarter, 15.6% of consumers said they had downloaded six or more apps on their smartphone in the last month, a slight increase from the same survey done a year earlier.

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

Salesforce’s sleepy M&A strategy 

Scott Denne

Contact:Scott Denne

This week Salesforce opens up Dreamforce, its annual customer conference – and, as usual, it is sparing no expense to host tens of thousands of people in downtown San Francisco. The same can’t be said of its recent M&A efforts. The CRM giant’s last substantial acquisition – the $680m purchase of audience data management vendor Krux – printed as last year’s conference began. And although it’s been silent since, we’d expect Salesforce to resume the strategy it left off with when it begins buying again.

Leading up to last year’s show, Salesforce was coming toward the end of a record acquisition spree that, according to 451 Research’s M&A KnowledgeBase, spanned 12 deals and cost $4bn before the year was out. This year, like many of the partners, customers and investors Salesforce is hosting at Dreamforce, it’s got a bit more to digest than usual. So far, it has printed just two transactions and spent $20m of its cash on M&A (per its most recent quarterly report). Salesforce isn’t alone. Other major enterprise software vendors – IBM, Microsoft, Adobe and Oracle – have been uncharacteristically quiet this year.

When Salesforce and others emerge from their hiatus, they could have a slightly different take on SaaS dealmaking than in the past. In the first round of SaaS acquisitions early in this decade, buyers had the same strategy for software M&A that they deployed in the client server era. Back then, acquirers could leverage their strong connections in the IT department to funnel in more products. With SaaS transactions, the buyer is often the line of business, not IT, so those existing relationships don’t hold up as well.

Today, businesses from all corners are looking to leverage their data to help find new customers and cater to those they already have. For this reason, Salesforce’s chance to build out a sales channel is to expand its role in how businesses capture, segment and share data about their customers’ characteristics, behavior, preferences and history.

Salesforce has already embarked on this destination. With its pickup of Krux, it gained an asset that collects and augments data about anonymous prospects, a complement to Salesforce’s roots as a CRM firm. When Salesforce resumes buying, we expect it to hunt for additional acquisitions that would position its software as the lodestar of its customers’ data strategy.

With its legacy CRM offering, Krux and a host of artificial intelligence applications in tow, Salesforce should look to add apps that make it easier for companies to gather more intelligence about customers. One way it could go about this would be to acquire Janrain or another identity management application provider that helps businesses gather and manage data from user registrations on websites and apps. It could also consider customer loyalty application specialists such as CrowdTwist or SessionM that provide software for building out loyalty programs that entice consumers to share more of their personal data with the vendors they frequent.

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

Piling up the chips

Brenon Daly

Contact: Brenon Daly

Unveiling what would be the largest tech transaction in history, Broadcom said it is prepared to hand over $103bn in cash and stock, and assume some $25bn in debt, for Qualcomm. The unprecedented 12-digit pairing represents a consolidation of the two consolidators behind the semiconductor industry’s two largest consolidations.

To get a sense of the sheer scale of Broadcom’s ambitions, consider that this single deal would roughly match spending on all acquisitions in the chip industry from 2008-14, according to 451 Research’s M&A KnowledgeBase. However, regulatory challenges mean this marriage of giants highly is unlikely to go through. And that assumes Qualcomm even picks up negotiations with Broadcom and its relatively low opening bid.

Thus far, Qualcomm has pretty much dismissed Broadcom’s offer. That doesn’t mean Broadcom, which is being banked by six separate firms, won’t push the deal.

Broadcom is negotiating from a position of strength, while Qualcomm is suffering through a well-publicized legal fight with major customer Apple and has still come up empty in its high-risk effort to buy its way into new growth markets. (Qualcomm originally hoped to close its $39.2bn purchase of NXP Semiconductors, which makes chips for cars and Internet of Things deployments, by the end of this year. That appears unlikely, and Broadcom has said it wants to acquire Qualcomm whether NXP closes or not.)

Broadcom’s relative strength also comes through in the pricing of the transaction as it is currently envisioned. At an enterprise value of $130bn, Broadcom is valuing Qualcomm at just 3.9x its pro forma 2017 sales of $33bn. (That assumes Qualcomm, which will put up about $24bn in sales in 2017, does buy NXP, which will generate $9bn in sales.) That’s substantially lower than the 5.5x sales Qualcomm plans to pay for NXP on its own, and a full three turns lower than the nearly 6.9x 2017 sales where Broadcom trades on its own.

Lenovo nabs another PC biz 

Scott Denne

Contact:Scott Denne

Fujitsu spun off its PC business into a separate subsidiary almost two years ago in anticipation of a sale to Lenovo. The terms don’t appear to have improved with age. With the ¥17.9bn ($157.4m) purchase of a 51% stake in Fujitsu’s PC business, the always-thrifty Lenovo hits a new low on price.

With this deal, which will also see Development Bank of Japan take a 5% stake in the spinoff, the target fetches an enterprise value of $309m, or just a hair under 0.1x trailing revenue. In its 2004 pickup of IBM’s PC business, which until today stood as the lowest valuation for a Lenovo acquisition, the Beijing-based company paid slightly more than 0.1x. According to 451 Research’s M&A KnowledgeBase, Lenovo has never spent more than 0.6x trailing 12-month revenue.

Lenovo frequently buys unwanted business units, as it did with IBM’s PC business and Google’s Motorola Mobility a decade later. Although the rationale for those deals was North American growth, at the time of each of those transactions, Lenovo’s PC and smartphone businesses, respectively, had little footprint in the US. With Fujitsu, it obtains an asset with only limited sales outside of Japan. Instead, the ability to add scale and drive down component prices motivated today’s acquisition.

Through the first half of its fiscal year, Lenovo’s profit margin dropped by one-quarter. Lenovo must increase those margins as top-line growth isn’t available. According to 451 Research’s VoCUL service, only 7% of North American consumers planned to buy a laptop in the next six months, an all-time low. Corporate business isn’t likely to make up the difference. A separate VoCUL survey of business buyers shows anticipated purchases of desktops and laptops diving to record lows.

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

Under Armour’s decline continues despite aggressive M&A 

Scott Denne

Contact:Scott Denne

As technology vendors intrude on a broad set of markets, companies from outside the tech industry are searching for assets to fend off the challenge. Under Armour was an early mover in that trend, but its continued decline this year shows that tech M&A isn’t an adequate defense.

In 2015, the athletic apparel company paid more than $500m to acquire three different health and fitness app providers – MyFitnessPal, Endomondo and Gritness. According to 451 Research’s M&A KnowledgeBase, non-tech buyers made $20.6bn in tech deals that year, an active, but not record, year that set the stage for 2016 and 2017, where companies outside of tech have spent $55.5bn and $48.1bn on tech M&A.

Under Armour said its acquisitions would enable it to find new ways to connect with customers and build brand equity. While it may have realized some of those benefits, it wasn’t enough to prevent an overall collapse of its growth rate as its wholesale channel got squeezed by retail closures and bankruptcies. The company’s third-quarter sales declined 5%, sending the stock down by one-quarter, part of a 58% retreat since the start of the year.

Its purchases haven’t helped much either. Revenue from those 2015 deals (plus a similar acquisition from 2013) generated just $65m through the first three quarters, up 5% from a year ago. That’s not to say that it shouldn’t have bought those businesses. Under Armour’s direct-to-consumer sales (roughly one-third of its revenue, encompassing its branded stores and online sales) are expanding this year and having a direct line to consumers in the form of owned-and-operated mobile apps likely played some part in that. And those apps could have a larger role in its recovery should Under Armour choose to decrease its reliance on retail partners.

It’s hard to say what the company could have done differently. Without those acquired assets, its decline may well have been steeper. And it can’t be chided for complacency, given the aggressive prices it paid – in total tech M&A it spent over $700m for assets that today, almost three years after its largest purchases, generate less than $100m in annual revenue. When it comes to retail, Under Armour’s woes suggest that tech acquisitions won’t shield a business from a transformation in consumer behavior.

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

Tech M&A stumbles out of summer

Brenon Daly

Contact: Brenon Daly

This summer’s momentum in the tech M&A market petered out as autumn arrived. Spending in the just-completed month of October slumped to its second-lowest monthly total of the year. Across the globe, acquirers announced just $17bn worth of tech and telco purchases in October, equaling only slightly more than half the average monthly deal value in the nine previous months, according to 451 Research’s M&A KnowledgeBase.

October’s spending represents a sharp decline from September and, more broadly, the entire third quarter. (See our full Q3 report.) Spending on tech deals in September, which featured this year’s two largest acquisitions, came in more than three times higher than October. The September surge helped boost overall Q3 deal value to a quarterly level more in-line with the boom years of 2015 and 2016. (The two previous years stand out as banner years for tech M&A. At this point in the year, deal makers had spent 85% more in 2015 and 50% more in 2016 than they have so far in 2017.)

However, deal makers abruptly hit the brakes in October, particularly when shopping for big-ticket targets. Our M&A KnowledgeBase records just three transactions last month valued at $1bn or more, down from a monthly average of five 10-digit deals so far in 2017. Without a continuation of those billion-dollar deals, the start of Q4 is tracking much more closely to the first two quarters of this year, rather than the breakout Q3. Overall, with 10 months now in the books, 2017 is on pace for about $340bn in full-year M&A spending, which would represent the lowest annual total in four years.

Faster IT could have buyers chasing performance testing deals 

Scott Denne

Contact:Nancy Gohring

The pressure on IT departments to move faster could continue to stimulate M&A in the performance testing sector. IT teams are increasingly embracing DevOps practices to shorten development cycles, stay competitive and meet customer needs. We’ve observed, however, a corresponding decline in software reliability – in some cases, because teams opt not to properly test new software developments in their quest for speedy releases. And that could lead to acquirer interest in performance testing vendors that make it easier to do continuous testing and for development teams to test their products early in the process.

The top goal that IT decision-makers cited for their IT environments in the next year is to respond faster to business needs, according to our Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects 2017 survey. In that study, more than one-third of all respondents told us that moving faster was their top goal for the coming year, ahead of cutting costs, which garnered fewer than one-quarter of responses.

The trend has already led to three performance testing deals since September 2016, when CA picked up BlazeMeter. Akamai’s reach for SOASTA and Tricentis’ Flood.io buy were the other two, more recent, acquisitions. One final development that we believe is influencing the performance testing market is the merger that saw HPE’s LoadRunner become part of MicroFocus. LoadRunner once dominated the performance testing landscape, and although its share has been eroded by newer entrants, it is still entrenched in many organizations that have invested heavily in using the tool. MicroFocus’ acquisition of HPE’s software business, however, casts uncertainty around the future of LoadRunner.

With those developments pressing on the performance testing market, we anticipate that both new and legacy application performance monitoring providers will explore purchases in this space. Subscribers to 451 Research’s Market Insight Service can click here to access a detailed report on performance testing M&A activity.

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

Elliott prints first take-private 

Scott Denne

Contact: Scott Denne

Often a bidder, never a buyer, Elliott Management looks set to make its first take-private of a tech company, reaching an agreement to buy network-monitoring vendor Gigamon for $1.6bn. The infamous activist investor has often agitated for sales of publicly traded tech companies and launched offers of its own, but has yet to bring one over the finish line.

Elliot’s list of unsuccessful – and typically unsolicited – bids for public tech companies goes at least as far back as its 2008 offers for Epicor and Packeteer (although it had once invested alongside Francisco Partners in a 2006 take-private). More recently, it was rebuffed by LifeLock, which negotiated with Elliott before reaching a deal to sell to Symantec. It’s worth noting, however, that Elliott was only unsuccessful in its role as buyer. As an investor, it has often made money on unsuccessful bids. For example, in the case of LifeLock, Symantec’s acquisition ultimately drove the value of Elliott’s LifeLock shares roughly 80% higher than the price it paid six months earlier.

For Gigamon, a sale to Elliott seems preferable to staying public. A downward revision of its guidance at the end of last year opened the door for Elliott to accumulate a 7% stake in the business. And today it’s announcing a sale to Elliott, rather than hopping on an investor call to explain a third-quarter miss on its revenue guidance. Despite that trajectory, Gigamon is fetching a healthy valuation, trading for 5.3x trailing revenue, two turns above the valuation that rival Ixia fetched in its sale to Keysight earlier this year.

Unlike earlier attempts, Elliott pursued Gigamon through its dedicated private equity (PE) vehicle, Evergreen Coast Capital. The combination of activism and private equity in a single investment group adds yet another strategy to a PE landscape that’s grown increasingly diverse as limited partners continue to cram cash into PE funds, leading to a record number of tech buyouts. In the official start to its PE strategy, Elliott joins an expanding list of PE investors willing to pay more than $1bn on tech transactions. So far this year, almost one in five $1bn-plus PE deals have been printed by a firm that’s never done a transaction of that size, compared with just one in 10 last year, according to 451 Research’s M&A KnowledgeBase.

*Click here for estimate
Source: 451 Research’s M&A KnowledgeBase

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