Category: M&A

Unready to step on the stage, Blue Apron is unlikely to step off

Brenon Daly

Contact: Brenon Daly

Welcome to Wall Street, Blue Apron, but what are you doing here? That’s a question making the rounds among a few investors Thursday as the meal delivery outfit publicly reported financial results for the first time since its IPO. And how were Blue Apron’s numbers? Well, suffice to say that the company’s shares, which have been underwater since the offering in late June, sank even further. In roughly six weeks as a public company, Blue Apron has lost nearly half of its value.

Rather than specifically look at the top line or the mess of red ink that Blue Apron reported for its second quarter, it might be worthwhile to focus on a broader point that might have been lost in the quarterly song and dance: Blue Apron probably should have never come public in the first place. The five-year-old company was simply not mature enough to join the NYSE.

But since Blue Apron — needing the cash — went through with the offering, it finds itself in the very awkward position of casting around to find a way to be a sustainable business, and doing it in front of the whole world. Everyone gets to see all of the missteps: the sequential decline in customers and orders, the costs rising faster than sales, the employee layoffs. It’s a bit like a teenager going through the clumsy, fitful process of growing up while on a stage.

However, the company doesn’t appear to going anywhere, with CEO Matt Salzberg saying Blue Apron is committed to building ‘an iconic consumer brand.’ And he’s taken steps toward that goal. Although the IPO very much represented a ‘down round’ for Blue Apron, it nonetheless adds nearly $280m to its treasury. That buys a fair amount of time, as does the company’s dual-class structure of shares, which effectively makes it impossible for shareholders — who, don’t forget, are the actual owners of Blue Apron — to force it to consider any strategies from outside.

For both financial and philosophical reasons, an imminent sale of Blue Apron is unlikely. Nonetheless, we would hasten to add that at its current valuation, shares are priced to move. Wall Street currently values the company at about $1bn, which we could use as an approximate enterprise value (EV) for any hypothetical transaction. (By our rough-and-tough math, we assume that backing out Blue Apron’s cash from the purchase price would be offset by an acquisition premium.)

At roughly $1bn, Blue Apron’s net cost would be less than the $1.1bn it will likely put up in sales this year. That’s a smidge below the average EV/sales multiple of nearly 1.3x in the handful of internet retailers that have been erased from Wall Street since the start of 2015, according to 451 Research’s M&A KnowledgeBase. As those exit multiples suggest, merely becoming an iconic consumer brand doesn’t necessarily pay off.

Disney nabs BAMTech in $1.6bn play for streaming services

Scott Denne

Contact: Scott Denne

At the dawn of the internet, Bill Gates famously said, “Content is king.” For most of the 20 years since then, that sentiment seemed like a sick joke to content makers in print and music who saw their markets eviscerated by Google, Apple and other tech vendors. Now Walt Disney is paying $1.6bn to find out if the adage is finally coming true.

Facing fleeing customers from its cable networks and having handed over online distribution of its films to Netflix, Disney is aiming to take back direct control of its content by building out its own streaming services through its ownership of BAMTech. Disney will spend $1.6bn to purchase 42% of BAMTech, adding to the 33% stake it previously bought in the video-streaming services spinoff of Major League Baseball.

Its desire to own – rather than just be a customer of – BAMTech shows that Disney sees value not only in building its own streaming services but also in enabling other studios to do the same. In that respect, its strategy aligns with those of the major tech companies, most of which have made a push for original content through expensive licensing deals and original content production.

With the pending launch of its own streaming services (it plans to unveil one for sports and one for its entertainment library), Disney hopes to build a direct distribution channel that will generate more value for its content – both in terms of fees and of having direct data about its customers and their viewing preferences – than what the combination of Netflix, MSOs and advertisers are able to pay. Disney watched as the economics of print and music flowed to digital distribution channels. But in buying BAMTech, Disney is making a bet that quality content will reign supreme in video.

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

An M&A break for chip vendors

Scott Denne

Contact: Scott Denne

Intel’s $15.3bn acquisition of Mobileye, which closed today, extended a wave of big-ticket semiconductor deals into 2017, but only barely. Since that transaction’s announcement, only one other $1bn-plus chip purchase has printed, putting 2017 on pace to have the fewest such deals since 2013. There’s little indication that the rate of big semi acquisitions will pick up through the rest of the year.

Toshiba is currently seeking to sell its flash business, which would easily fetch more than $1bn and bring this year’s total of 10-digit purchases to three, leaving it far below recent category totals. Last year’s largest chip transactions – Qualcomm’s $39.2bn reach for NXP Semiconductors (a deal that an activist investor is pushing to renegotiate) and SoftBank’s $32.4bn pickup of ARM – featured two among the 11 companies that fetched more than $1bn. The previous year saw nine such companies get bought.

Two consecutive record years of dealmaking in the category have left behind a dearth of targets for would-be buyers. According to 451 Research’s M&A KnowledgeBase, acquirers spent $116bn on chip vendors last year, breaking the previous year’s record of $90bn – a number that itself was more than double the previous record set in 2006. And since venture capitalists have been absent from the market for a decade, the pool of companies that could command such a price has shrunk notably.

For those potential targets that remain, a run-up in stock prices makes a surge of big deals seem unlikely. The 43% growth in the PHLX Semiconductor index in the past 12 months has outpaced the broader Nasdaq by 20 percentage points. Accelerating stock prices make companies less inclined to launch a sale process or divest large units and the rising multiples that come with a rising stock won’t appeal to buyout shops – the driving force behind this year’s tech M&A market.

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

Tremor Video shakes off its ad network roots with $50m divestiture

Scott Denne

Contact: Scott Denne

The dizzying number of vendors and dozens of subcategories of advertising technology have had many predicting for several years now an imminent wave of consolidation. Yet for the ad-tech vendors trading on US exchanges, specialization – not consolidation – has become the chosen strategy. Tremor Video has become the latest to adopt such a strategy by selling its video ad network to Taptica for $50m in cash.

Tremor, like Rubicon Project, which earlier this year divested its $100m acquisition of Chango, sees more opportunity to expand its relationships with ad sellers, rather than buyers, although the resemblance ends there. Rubicon is a longtime player in supply-side platforms (SSPs) and generates most of its revenue from that business. Tremor will shed most of its revenue with this deal – its remaining assets accounted for $29m of its $167m in 2016 sales.

While Tremor’s business with buyers has declined, its burgeoning SSP – a video ad exchange – expanded its top line by 84% in the past 12 months to $34m in trailing revenue. Without the weight of its buyside business, Tremor can leverage its newfound capital to invest in an anticipated growth in the supply of video advertising coming through over-the-top and connected TV channels.

That Tremor shed almost all of its revenue with little impact on its stock price – it was up about 2% at midday – speaks partly to the opportunities investors see for it to expand with a business model with software-like margins. It also speaks to just how little value investors place on ad networks that sell services to both sides of an ad sale.

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

Yelp delivers Eat24 to GrubHub in $288m deal

Scott Denne

Contact: Scott Denne

GrubHub has topped off a series of snack-sized deals with its largest acquisition in four years as it seeks to fend off burgeoning competition. Its latest move, the $288m purchase of Yelp’s Eat24 business, shows the food delivery incumbent getting creative in its M&A strategy as it pushes to build out network effects among multiple metropolitan areas before bigger companies sidestep into its market.

Today’s deal values the target at $150m more than Yelp paid for the property two-and-a-half years ago and comes with a valuation that’s in the neighborhood of 3x annual revenue. (Neither company disclosed Eat24’s revenue, but its gross sales imply revenue of $90-120m.) According to 451 Research’s M&A KnowledgeBase, that’s well above the median trailing revenue multiple of 1.4x for a public company divestiture in the past 24 months – a premium that’s more impressive considering that Yelp will continue to benefit from delivery orders placed through its restaurant directory.

In addition to the $288m in cash, Yelp’s restaurant reviews will link to delivery options from Eat24 and GrubHub, in exchange for collecting a fee for each order. With its previous deal, the pickup of 27 food delivery markets from Groupon’s OrderUp, GrubHub executed a similar arrangement to integrate its products into the seller’s platform. The company has been a frequent acquirer, inking three transactions so far this year on top of five over the past two years. But now it needs its acquisitions to do more than get it into new markets. Forging partnerships like the one it’s pursuing with Yelp could help pull more orders through its service, which should attract more restaurants, which should attract more orders.

While GrubHub is likely the largest online restaurant delivery company in the US today, it’s still early days for this market. By its own reckoning, 88% of people have never ordered food delivery online. GrubHub needs to work fast to expand and become the largest source of food orders in the markets it serves as other companies see an opportunity to enter this sector through ancillary strengths – Square is attempting to get in through its point-of-sale systems, Uber used its fleet of drivers and logistical prowess to launch UberEats and Amazon, with its demonstrated ability to destroy competitors in coveted markets, recently launched a restaurant-ordering service of its own.

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

In tech M&A, PE takes prominence

Brenon Daly

Contact: Brenon Daly

For the first time in tech M&A, financial acquirers are doing more deals than publicly traded strategic buyers. That’s a sharp reversal from years past, when private equity (PE) firms represented only bit players in the market, operating well outside the focus areas of US-listed acquirers. Even as recently as three years ago, US publicly traded companies were announcing more than twice as many transactions as PE shops.

So far in 2017, financial buyers (both through stand-alone purchases and deals done by their portfolio companies) have announced 511 tech transactions, slightly ahead of the 506 deals announced by tech vendors on the Nasdaq and NYSE, according to 451 Research’s M&A KnowledgeBase. Even more telling is the current trajectory of the two groups. PE firms, which have increased the number of acquisitions every single year for the past half-decade, are on pace to smash the full-year record of 680 PE transactions announced last year. Meanwhile, US-listed acquirers are almost certain to see a second consecutive decline in M&A activity, with the full-year 2017 number tracking to almost 20% below the totals of 2014 and 2015.

The dramatic shift in the tech industry’s buyers of record has been brought about by changes in both acquiring groups. PE shops have never held more capital than they currently hold, which means they need to find markets where they can put that to work. (The tech industry, which is aging but still growing, offers bountiful shopping opportunities.) Cash-rich buyout firms, which are built to transact, have simply taken the playbook they have used on their shopping trips through other markets such as manufacturing and retail, among others, and applied it to the technology industry.

In contrast to the ever-increasing number of PE shops and their ever-increasing buying power, the number of tech companies on the Nasdaq and NYSE has been dropping for years. (Indeed, the overall number of US traded companies has been declining for years, with some estimates putting the current count of listings at just half the number it was 20 years ago.) For instance, some 38 tech vendors have already been erased from the two US stock exchanges so far in 2017, according to the M&A KnowledgeBase.

Yet even those companies that still trade on the exchanges aren’t doing deals at the same rate they once did. In years past, some of the big-cap buyers — the ones that used to set the tone in the tech M&A market — would announce a deal every month or so. Now, public companies have slowed their pace, and PE firms have simply sprinted around them in the market.

Consider this tally, drawn from the M&A KnowledgeBase, of activity last month by the two respective groups. On the lengthy list of tech giants that didn’t put up a single print at all in July: Oracle, Microsoft, IBM, Hewlett Packard Enterprise, Salesforce and SAP. Meanwhile, financial acquirers went on a shopping spree. H.I.G. Capital, Francisco Partners, Clearlake Capital and Thoma Bravo (among other PE shops) all inked at least two prints last month.

PE shops make the market for tech M&A in July

Brenon Daly

Contact: Brenon Daly

Spending on tech deals in July hit its second-highest monthly total so far this year, driven by the widespread dealmaking of private equity (PE) firms. Buyout shops figured into eight of last month’s 10 largest acquisitions, either as a seller or a buyer. The big-dollar prints by financial acquirers in July continue the recent surge of unprecedented activity by PE firms, which have largely displaced corporate buyers as the ‘market makers’ for tech M&A.

Overall, the value of tech transactions announced around the globe in July hit $28.9bn, roughly one-quarter more than the average month in the first half of the year, according to 451 Research’s M&A KnowledgeBase. Our research shows that PE firms accounted for some 40 cents of every dollar spent on tech deals last month — two to three times higher than the market share financial buyers held in recent years. Further, unlike the previous PE boom in the middle of the past decade that was dominated by single blockbuster transactions, the current record activity is coming from virtually all deal types.

Just in July, we saw financial acquirers announce transactions ranging from multibillion-dollar take-privates (the KKR-backed purchase of WebMD) to ‘synergy-based’ midmarket consolidation (Francisco Partners’ Procera Networks won a bidding war with another buyout shop to land Sandvine) to early-stage technology tuck-ins (Vista Equity Partners’ TIBCO scooping up one-year-old nanoscale.io). Overall, according to the M&A KnowledgeBase, PE firms announced a staggering 77 deals last month. That brought the year-to-date total to 511 PE transactions in the first seven months of 2017 — setting this year on pace to smash the full-year record of 680 PE deals recorded last year.

More broadly, last month featured a fair amount of old-line M&A, whether it was buyout firms trading companies among themselves (Syncsort) or mature tech industries consolidating (Mitel Networks reaching for ShoreTel or serial acquirer OpenText picking up Guidance Software, for instance). Those drivers put pressure on valuations paid at the top end of the market last month. According to the M&A KnowledgeBase, acquirers in July’s 15 largest deals paid just 2.4x trailing sales. Not one of last month’s 15 blockbusters got a double-digit valuation, although subscription-based ERP software startup Intacct came very close. For comparison, fully five of the 15 largest transactions in the first six months of 2017 went off at double-digit valuations.

No more high-rolling in infosec M&A

Brenon Daly

Contact: Brenon Daly

Casinos, which are always looking to have patrons spend more money, are notorious for making exits difficult to find. For that reason, the Mandalay Bay was the perfect setting for this week’s trade show for the information security industry, Black Hat. Why do we say that? Infosec companies — at least the big ones — are having difficulty in finding exits, too.

Not to overstretch the metaphor of the host city for Black Hat, but the infosec industry has stepped away from the high-roller tables. So far this year, just one infosec company (Okta) has made it public, while those that have headed toward the other exit haven’t enjoyed particularly rich sales. This year’s small bets are reversing the recent record run for M&A spending on infosec transactions.

Spending on overall infosec acquisitions in the first seven months of the year has put 2017 on pace for the lowest annual total in a half-decade, according to 451 Research’s M&A KnowledgeBase. This year’s paltry total of just $2.3bn in aggregate deal value means that 2017 will snap three consecutive years of increasing infosec M&A spending. Our M&A KnowledgeBase shows that in 2016, infosec buyers spent $15bn, more than any other year in history, while 2015 also came in as another strong year in 2015 with $10bn in transaction value.

To put the current dealmaking decline into perspective, consider this: The largest infosec print so far in 2017 wouldn’t even make the list of the 10 biggest infosec transactions of 2015-16. And while this year’s largest acquisition – CA’s $614m purchase of Veracode – represents a decent exit, it’s fair to say more was certainly expected from the application vulnerability startup. (Veracode had filed its IPO paperwork several months before the sale on the quiet, according to our understanding.) Similarly, this year’s second-largest VC exit saw TeleSign agree to a sale that valued it lower than its valuation in its previous funding round.

The reason why so few sizable infosec startups are looking to exit is mostly because they don’t have to exit. Thanks to ever-increasing CISO spending, venture capitalists are back writing big checks to subsidize infosec startups. And when we say ‘big checks,’ we mean the size that used to come in IPOs or the rounds that got announced during the 2014-15 boom in late-stage investing, when single rounds of $100m were announced from across the startup landscape. While those growth rounds were relatively plentiful across the IT scene two or three years ago, infosec is the only industry where the big checks are once again rolling in. In just the past three months, a half-dozen infosec startups have each raised rounds of about $100m.

Internet Brands pays healthy premium for WebMD in otherwise ailing internet M&A market

Scott Denne

Contact: Scott Denne

Private equity firms seem to be the only ones browsing for big consumer internet deals these days. Today’s acquisition of WebMD by Internet Brands marks the third billion-dollar purchase of a consumer internet company this year. The acquirers in those other deals, like KKR-owned Internet Brands, are also backed by PE firms.

Internet Brands’ $2.8bn acquisition of WebMD fits in the strategy, although not scope, of its past acquisitions. Since its days as Carsdirect, the company has rolled up 63 internet businesses across automotive, fashion and healthcare. Although the deal sizes of those were largely undisclosed, sites like dentalplans.com and racingjunk.com didn’t have the scale or notoriety of WebMD, and were certainly smaller deals – even Internet Brands itself was reported to have traded to KKR at just over $1bn in 2014.

In landing its biggest prize, Internet Brands paid a healthy valuation. At $66.50 per share, the deal prices the target company’s stock at a record level for the current iteration of WebMD (since its founding in the heyday of the dot-com bubble, WebMD has been through a couple of reorganizations, but has been trading on the Nasdaq since 2005). The acquisition values it at 3.9x trailing revenue, two turns above what Everyday Health – a competing health site that’s about one-third the size – took in its sale to j2 in 2016.

And while WebMD fetched a premium compared with its closest competitor, when compared with the broader market, it falls just shy of the 4.3x median multiple for similarly sized consumer internet deals across the last decade. As private equity firms account for an outsized amount of the consumer internet M&A market, premium valuations become harder to find. According to 451 Research’s M&A KnowledgeBase, $2 of every $3 spent on M&A in this category this year has involved a PE firm or PE-backed buyer, yet none of the $1bn-plus consumer internet deals this year – Bankrate, Chewy and WebMD – printed above 4x.

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

Ingenico moves past POS with $1.7bn Bambora buy

Scott Denne

Contact: Jordan McKee, Scott Denne

Ingenico scoops up yet another European payments service provider to fuel its evolution beyond a point-of-sale (POS) terminal supplier. Today’s $1.7bn pickup of Nordic mobile payments vendor Bambora marks its third acquisition of 2017, the payment giant’s busiest year of dealmaking to date.

Its two previous deals of the year brought it international expansion – into Ukraine and India. Yet where Ingenico has spent the most money has been growth beyond its core POS business into services and other payment channels. Prior to todays’ transaction, its $1.1bn purchase of e-commerce payments company GlobalCollect in 2014 had been its largest acquisition. It also spent $485m for transaction-processing services firm Ogone a year earlier. Since that deal, Ingenico has inked eight acquisitions, according to 451 Research’s M&A KnowledgeBase.

With the bulk of its revenue indexed to brick-and-mortar commerce – and more specifically, hardware sales – Ingenico realizes that it must craft a digital strategy that will ensure its relevance as more transactions flow into card-not-present channels. By reaching for omni-channel capabilities, Ingenico expands the role it can play within its retailer client base while embedding itself further in their commerce options.

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