Category: M&A

LendingTree’s uncommon interest in internet M&A 

Scott Denne

Contact:  Scott Denne

A sudden streak of dealmaking for LendingTree has culminated in today’s purchase of MagnifyMoney.com as the financial comparison site angles to accelerate its growth beyond mortgages. That streak makes LendingTree an outlier as few other Internet companies have been in a buying mood lately.

MagnifyMoney marks LendingTree’s third acquisition since November, when it bought CompareCards, a deal that ended a 12-year M&A drought for the buyer. In the waning years of that drought, LendingTree’s top line has expanded (up 51% last year to $384m) while new lines of business have sprouted. Five or six years ago, almost 90% of revenue came from its mortgage comparison product – now it’s less than half. MagnifyMoney, which aggregates offers from multiple types of financial services, further diversifies the business – as did CompareCards and last week’s reach for DepositAccounts.com.

The kind of transactions that LendingTree has been printing – adding new services while soaking up smaller competitors – has become rare. According to 451 Research’s M&A KnowledgeBase, consolidation among consumer internet vendors has declined. Only 66 deals have been inked this year, compared with 101 at this point last year, a number that itself was down 50% from 2015.

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Soft start to sales-enablement M&A 

Scott Denne

Contact: Scott Denne

Startups developing sales-enablement software have been the targets of a recent spate of acquisitions after indulging in readily available venture capital for the burgeoning category. But the early deals appear modest and bigger exits still seem a ways out.

Among the startups in this category, three have sold in the past two months – all of them with modest headcount after several years in the market, suggesting equally modest growth. Two of those, KnowledgeTree and Heighten Software, were lightly funded. The third, ToutApp, raised $20m, making it more representative of the two dozen or so venture-backed startups selling software that enables sales teams to automate processes, share content and analyze their pipelines.

Gobs of venture money combined with an early, confounding market has meant that revenue traction comes via cash-burning investments in evangelism and marketing. Such a situation isn’t likely to draw the most natural acquirers – the largest CRM companies (Salesforce, Oracle and Microsoft) that today address the nascent need for sales enablement mainly through their app stores.

When other categories of sales software have come into their own, those would-be buyers made big purchases. Take configure, price and quote (CPQ) software: both Oracle and Salesforce inked nine-figure acquisitions in that sector. But sales enablement hasn’t yet become as widely embedded into sales workflow as CPQ, so there’s little motivation for CRM vendors to make a strategic-sized investment in a sales-enablement startup until those offerings gel into an obvious complement (or threat) to CRMs.

Still, there’s potential for a steady stream of modest exits for sales-enablement providers. As Marketo did with ToutApp, other B2B marketing software companies could look to this category to build products that connect marketing and sales processes. Likewise, vendors in enterprise content management, file sharing, conference calling and collaboration could reach into this category for software to target a key vertical.
Source: 451 Research’s M&A KnowledgeBase

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Trust-busting in the Trump era

Brenon Daly

Contact: Brenon Daly

Despite President Trump often positioning himself as ‘dealmaker in chief,’ his administration just cast a chill over M&A. The Federal Trade Commission has said that it plans to block the proposed combination of DraftKings and FanDuel, the two largest websites for betting on fantasy sports. The deal was announced last November, just two weeks after the election of Trump supposedly signaled a more business-friendly climate in Washington DC.

That expectation has helped drive Wall Street to record highs, with the broad-market US indexes all surging about 20% since the vote. The confidence in the stock market was initially expected to extend to the M&A market, which has historically been closely correlated with Wall Street. In April, for instance, a plurality of respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster said Trump’s economic policies have stimulated dealmaking. The 41% who reported a ‘Trump bump’ to M&A was almost twice the level that said the president’s policies have slowed acquisition activity.

And yet, regulators are moving to spike a combination of two startups that just might represent the only way for either of them to survive. It sounds a bit dramatic, but then, the landscape is littered with startups that have spent their way out of business. Even raising $1bn in venture backing — as DraftKings and FanDuel combined to do — doesn’t guarantee survival. Not when startups with low-margin transactional business models spend money hand over fist on advertising against each other in what is a barely differentiated service.

While the two companies decide whether to fight the FTC ruling, some startup executives and their backers may need to reconsider their potential exits. For the most part, regulators during the Obama administration didn’t trouble themselves with the rare bits of consolidation in Silicon Valley. (The two largest VC-backed sites for freelance work — oDesk and Elance — got together in 2013 without any review from Washington.) Based on the DraftKings-FanDuel decision, however, dealmakers might need to plan on more trust-busting in the Trump era. For instance, the far-fetched talk about a pairing between Uber and Lyft should now be considered dead before it ever gets born.

Don’t bet against Bezos

Brenon Daly

Contact: Brenon Daly

A day after Amazon’s Jeff Bezos put out an open-ended tweet to the world asking where he should donate his money, we now know at least one early recipient of his philanthropy: Whole Foods Market. OK, the $13.7bn acquisition of the grocer isn’t exactly charity, but nor is it an example of a hardened dollars-and-cents M&A strategy.

Instead, it might be most accurate to think of the Amazon-Whole Foods pairing as a blend of giving and buying, a deal that’s being attempted by one of the few CEOs who could possibly get away with spending billions of dollars of shareholder money to effectively take his company backward in time. For lack of a better term, think of Bezos’ move as a ‘patronage purchase.’

Whole Foods, which was being stung by a gadfly hedge fund, needed a buyer for the 430-store chain. (From our side, we were half expecting the grocery chain’s CEO, John Mackey, to try a Kickstarter-funded management buyout.) Amazon — or more accurately, Bezos — is convinced that the world’s largest online retailer needs a brick-and-mortar presence.

Undoubtedly, there’s a certain logic to building up the distribution network for physical goods, which account for the bulk of Amazon’s revenue. However, those sales aren’t particularly attractive, at least economically. To put some numbers on that, consider the operations for Whole Foods, a real-world business that Amazon is buying, compared with AWS, a cloud business that Amazon has built. Conveniently, both businesses generated roughly the same amount of revenue in the most recent quarter, $3.7bn. Leave aside the fact that AWS grew 43% while Whole Foods flatlined and just look at the operating margin: Whole Foods posted just $171m of operating income, only one-fifth the $890m that AWS generated.

Conventional corporate strategy would typically encourage a company to allocate resources to the business with the highest return (AWS), rather than spending billions of dollars to buy its way into a low-growth, low-margin adjacent market. But then, Bezos has never been conventional.

Historians will remember that Bezos pushed ahead with a $1.25bn convertible note offering for Amazon in 1999. At the time, the deal — the largest-ever convertible by a tech vendor — flew in the face of conventional corporate finance, giving those investors bearish on the money-burning company even more reason to mock ‘Amazon dot bomb.’ However, given that those notes converted at a price of $156 each, compared with the current market price for Amazon shares of nearly $1,000 each, it’s fair to say that Bezos has created a certain amount of goodwill on Wall Street. (Investors gave him the benefit of the doubt on the Whole Foods pickup, nudging Amazon shares slightly higher after the announcement.)

Similarly, by all accounts, Bezos’ purchase of the existentially threatened The Washington Post in 2013 has brought renewed growth to that stalwart newspaper. And while that $250m acquisition was done from Bezos’ own pocket (rather than Amazon’s treasury), it actually lines up fairly closely with the proposed reach for Whole Foods. Both groceries and newspapers represent once-thriving industries that have been decimated by a combination of technology and shifting consumer consumption patterns. In contrast, Amazon has built a half-trillion-dollar market cap on both of those trends, making it hard to bet against Bezos.

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The one and only exit for infosec’s unicorns

Brenon Daly

Contact: Brenon Daly

In just the past month, four different information security (infosec) startups have all pulled in single rounds of funding that typically would have only been available from an IPO. In addition to filling company coffers, however, the roughly $100m slug of capital raised by each of the quartet — CrowdStrike, Tanium, Netskope and Illumio — may also influence company strategy, at least when it comes time to seek an exit. Rather than pursue a sale of the business, which is the most likely outcome for any startup, these infosec unicorns will likely eye the door that leads to Wall Street.

In other words, when it comes to the two exit options available to these security startups, they should be modeling themselves more on Okta than on AppDynamics. The reason? Of the 17 sales of VC-backed vendors valued at more than $1bn since January 1, 2014, not a single startup has come from the infosec market, according to 451 Research’s M&A KnowledgeBase. Mandiant came close to a 10-digit exit in its early 2014 sale to FireEye, but the announced value of that deal stands at $989m. (Of course, FireEye paid for the vast majority of that in stock, which lost half of its value within four months of the transaction and has never regained its early-2014 level.)

Infosec is conspicuous by its absence among the big-ticket purchases of venture-backed companies. Virtually every other major tech sector has realized some unicorn exit, including mobility (WhatsApp, AirWatch), e-commerce (Jet.com), storage (Cleversafe), the Internet of Things (Jasper Technologies) and cloud (Virtustream). The largest sale of a VC-backed infosec firm over the past three and a half years, according to the M&A KnowledgeBase, is Trustwave’s $810m sale to Singtel in April 2015. (Although Trustwave did raise venture money, notably from FTV Capital, it hardly fits the classic definition of a startup. Instead, it is more accurately viewed as a rollup, having consolidated 16 other businesses since its founding in 1995.)

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The vanishing internet acquirer 

Scott Denne

Contact: Scott Denne

One of the most active acquirers of internet companies goes dark as Yahoo settles into its recess at AOL (now known as Oath). To be sure, the disappearance of Yahoo from the M&A scene happened well before the recent close of its sale to AOL. Yahoo hasn’t printed an acquisition in nearly two years, yet its official exit dampens an already stagnant environment for consumer internet deals.

Yahoo’s M&A machine shut down in 2015 – first through shareholder displeasure, then by its impending sale. In each of the two years before that, it printed an average of 24 transactions. Its more successful peers haven’t been much more aggressive lately. According to 451 Research’s M&A KnowledgeBase, last year saw 383 acquisitions of consumer internet businesses worth almost $60bn. Almost halfway through this year, we’ve tracked barely one-third as many deals and one-sixth of last year’s value.

Albeit for different reasons than Yahoo, the bigger and more successful internet giants have shied away from major purchases, despite seemingly ideal conditions. Amazon, Apple and Google have each inked five acquisitions this year. Facebook hasn’t done any. The stock prices of all four have run up this year – Google, the laggard of the bunch, sits 23% higher than where it was last year.

Yet not a single one of them has printed a $1bn deal since 2014. Back then they were chasing ancillary markets. Facebook shelled out $19bn for WhatsApp to push its social network into mobile messaging; Google, imagining synergies between mobile phones and smart homes, paid $3.2bn for Nest Labs; Apple wanted a new look for its accessories and headphones business so it bought Beats Electronics for $3bn; and Amazon stretched its (then) burgeoning presence in digital video into live videogames with the pickup of Twitch for $970m.

Today they’re still chasing ancillary markets, but the opportunities on their radar are too raw for them to make a large purchase. They’re pushing into self-driving cars, virtual reality and artificial intelligence assistants, markets that are too nascent to offer many big strategic targets.

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Private equity’s latest venture 

Scott Denne

Contact: Scott Denne

The bulging coffers of buyout funds are delivering a record amount of exits to venture capitalists, providing some measure of relief as strategic acquirers scale back dealmaking and the IPO market remains a selective venue. Yet relying on a different category of buyers could have venture investors rethinking how to value the products – startups – they sell to them.

So far this year, private equity (PE) firms have spent $4.8bn on 40 companies that have taken venture money. That nearly matches last year’s record dollar total ($5.2bn), according to 451 Research’s M&A KnowledgeBase, and is on track to pass the number of such deals in 2016.

Returns from both PE shops and strategic acquirers range from prodigious to paltry, although usually at vastly different multiples on the high end of the market. Take the two largest VC exits this year, Cisco’s $3.7bn acquisition of AppDynamics and PetSmart owner BC Partners’ purchase of Chewy for an estimated $3.4bn. Both delivered outsized returns, but Chewy went off at nearly 4x trailing revenue, which is above market for an e-commerce transaction although not in the same neighborhood as the 17.4x AppDynamics garnered.

In AppDynamics, Cisco is gambling that the application performance management vendor will mature into that lofty price. PE firms are less inclined to make such a wager. While PE shops are buying venture-backed companies – they account for a record 14% of venture exits so far this year – they’re looking for proof, not potential. Those tougher standards could start to trickle down to valuations in venture fundings as PE firms determine a larger share of the outcomes.

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Onapsis on the block?

Brenon Daly

Contact: Brenon Daly

Enterprise application security startup Onapsis quietly kicked off a sale process about a month ago, according to our understanding. Several sources have indicated that Onapsis, which focuses on hardening security for SAP implementations, has hired UBS to gauge interest among buyers. And while there undoubtedly will be acquisition interest in the startup, Onapsis may ultimately prove to be a bit of a tough sell. The reason? The most obvious buyers for the company don’t typically pay the type of valuations that Onapsis is thought to be asking.

In many cases, the heavy-duty SAP systems that Onapsis helps secure were implemented by one of the big consulting shops. So at least theoretically, it’s not a big leap to imagine one of these consultancies buying Onapsis and offering its platform, exclusively, to help safeguard these mission-critical systems and the data they generate. (Indeed, Onapsis already has partnerships with many of the big consulting firms, including KPMG, PWC, Accenture and others.) While that strategy may be sound, M&A always comes down to pricing. And that’s why we would think it’s probably more likely than not that eight-year-old Onapsis remains independent.

According to our understanding, Onapsis is looking to sell for roughly $200m, which would be twice the valuation of its September 2015 funding. The rumored ask works out to about 8x bookings in 2016 and 4.5x forecast bookings for this year. For a fast-growing SaaS startup, those aren’t particularly exorbitant multiples. Yet they may well price out any consulting shops, which have typically either picked up small pieces of specific infosec technology or just gobbled up security consultants. Any reach for Onapsis would require a consulting firm to pay a significantly richer price than the ‘tool’ or ‘body’ deals they have historically done.

A muted May for tech M&A

Brenon Daly

Contact: Brenon Daly

The summer slowdown has arrived early in the tech M&A market. Overall, tech acquirers announced relatively few transactions in the just-completed month of May, and many of the deals that did get done went off at a discount. According to 451 Research’s M&A KnowledgeBase, the value of announced tech deals around the globe in May hit just $25bn, as a raft of low-multiple transactions kept a lid on total spending. Additionally, the number of tech transactions in May remained below levels of recent years.

At the top end of the market, deal flow was decidedly mixed in May. On the one hand, acquirers announced five transactions valued at $1bn or more in May, nearly matching the highest monthly total so far this year recorded in 451 Research’s M&A KnowledgeBase. Big prints included Apollo Global Management’s $2bn take-private of West Corporation and RCN Telecom’s consolidation of Wave Broadband for $2.4bn. However, a number of those nine- and ten-digit deals came at below-market multiples. Of the 20 largest tech deals announced in May, fully nine of them were valued at just three times trailing sales or less, according to 451 Research’s M&A KnowledgeBase

The $25bn spent in May essentially matched the average monthly level of spending for 2017. However, it is only about half the amount, on average, that tech acquirers doled out each month over the record stretch during 2015-16. With five months of 2017 already in the books, this year is tracking to just $300bn worth of tech transactions this year. That would represent the lowest annual total in four years, and a dramatic slowdown from the roughly $500bn spent in 2016 and $600bn in 2015.

Take-Two’s second coming 

Scott Denne

Contact: Scott Denne

After nearly a decade on the sidelines, Take-Two Interactive has returned to the M&A game. Back then, the birth of the smartphone and explosion of low-cost mobile gaming loomed over developers of pricey console games. But now that the shift to digital is delivering expansion, not irrelevance, Take-Two and its peers are printing more acquisitions that align with that trend.

Take-Two’s latest move, the pickup of space simulation game Kerbal Space Program from developer Squad, marks its second purchase of the year, following its $250m reach for Social Point in February. Prior to those deals, Take-Two hadn’t bought anything since early 2008. Both recent transactions have brought on digital assets – Kerbal sells through PC downloads, while Social Point makes mobile games. (Unlike Social Point, Kerbal’s price tag wasn’t disclosed, suggesting it was the smaller of the two deals.) And they follow a 52% jump in Take-Two’s annual revenue to $572m and 55% increase in bookings from digital sales.

Other companies with a history of making games for the PlayStation and other consoles have adjusted their M&A strategies. Ubisoft, also experiencing growth amid greater digital revenue, has printed two gaming purchases this year as well, putting it on pace for its most acquisitive year since 2013. Warner Brothers Entertainment also ended a drought of its own – almost seven years since its last videogame acquisition – when it bought mobile developer Playdemic in February.

Greater digital sales provide gaming vendors with more predictability in sales, lower costs of revenue and a buffer against seasonality, in addition to revenue growth. Market disruptions, such as shifting sales channels and business models, are most often associated with opportunities for startups. But the experience of Take-Two and its rivals shows that startups aren’t the only companies that can win that game.

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