Category: M&A

A softer software market

Mark Fontecchio

by Scott Denne

The rising tide of 2018’s record software M&A market gave way to a top-heavy 2019 as fewer business application vendors fetched a 10-figure price but a record number nabbed 11 figures. And while the size of the market shrank a bit from last year’s high as both strategics and sponsors slowed their spending, the total stands well above the deal value and volume seen in a typical year. Despite the decrease in overall deal value, acquirers continued to pay premium multiples for those assets they did purchase, something they’re less likely to do in the new year.

According to 451 Research’s M&A KnowledgeBase, acquirers in 2019 bought a record 1,296 application software companies worth $83.2bn, about $12bn less than the previous year. A dramatic drop in transactions valued north of $1bn led the decline in spending. Yet the biggest software deals got bigger. Two acquisitions – Salesforce’s $15.5bn reach for Tableau and Hellman & Friedman’s $11bn Ultimate Software take-private – passed the 11-figure mark in 2019, something that only one other application vendor (Autonomy) had done since the start of the decade.

While only half as many application providers sold for $1bn or more in 2019 as did a year earlier, the 15 transactions that went off in 2019 stand as the second-highest total, according to the M&A KnowledgeBase. In other words, it may be more accurate to view 2019 as an inevitable decline that followed a sudden surge in 2018. In each year since 2010, we’ve consistently recorded about 12 application software deals valued at or above $1bn, meaning that 2019 was notably high, yet well below the 30 we saw in 2018.

And while the number of $1bn software transactions shrank, prices didn’t. The annual median for such deals finished a hair above 7x trailing revenue, the same level as the previous year, our data shows. Who was willing to pay those prices shifted in 2019, however. While private equity firms paid that same multiple in 2018, the median price paid by sponsors to acquire software companies for 10 figures declined a full turn last year. Strategic buyers moved in the other direction, paying a 9.3x median as they continued to pay higher prices in each of the past few years.

Although valuations for application software vendors held up amid a decline in overall spending last year, prices could well begin to fall in 2020. That’s the outlook of respondents to our M&A Leaders survey in October, where they projected a drop in private company valuations at a rate of five to one. Moreover, 2020 starts off with a tougher macro environment than its predecessor. In that same survey, nearly two-thirds of respondents (61%) said that ‘fear of a recession’ could weigh on deal flow in the coming 12 months.

Figure 1:

Source: 451 Research’s M&A KnowledgeBase. Includes disclosed and estimated values.

A shift in the market

Mark Fontecchio

by Brenon Daly

Tech M&A spending in 2019 dropped nearly 20% from the previous year’s record level, as mainstay acquirers stayed away, and an up-and-comer came up short. The combination of the tech industry’s bellwethers not buying and buyout shops slowing their record roll sank the value of tech and telecom acquisitions announced around the world last year to $460bn, according to 451 Research’s M&A KnowledgeBase.

Still, 2019 stands as the fourth-highest annual total since the internet bubble collapsed. The fact that last year hit such heights is rather remarkable, given that it was missing the main engine that has powered tech M&A over the past decades: big-cap acquirers.

As an indication of that, consider that our M&A KnowledgeBase shows that Oracle, Microsoft, IBM and SAP, collectively, did not put up a single billion-dollar print in 2019. It was the first time since 2003 the always-hungry quartet haven’t been in the ‘three comma club.’ Up until last year’s notable absence, the big buyers had been averaging three or four acquisitions between them valued at more than $1bn each year.

Further, our data indicates the ‘first gen’ quartet put up just half the number of overall deals in 2019 that they had been averaging over the past 15 years. It was as if the old guard, having shaped and driven the broader tech M&A market in the 2010s, stepped aside as the curtain came down on the decade. Last year marked the end of an era.

As that transition was playing out in the ranks of the strategic acquirers, the other main buying group was also facing changes of their own. Private equity (PE) firms announced fewer tech transactions in 2019 than they did in 2018, according to our M&A KnowledgeBase. That marked the first decline in deal volume in six years for deep-pocketed financial buyers, which had been the only ‘growth sector’ in the overall tech M&A market for the past few years.

Figure 1
Source: 451 Research’s M&A KnowledgeBase

And the Golden Tombstone goes to…

Mark Fontecchio

by Brenon Daly

For our final M&A Insight of 2019, we’re going to look back on the year of dealmaking in the tech industry. Or rather, we’re going to have the pros do it, and tell us what stood out for them.

In our just closed 451 Research Tech Corporate Development Outlook survey, among our other questions to dealmakers, we asked them 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. (Corporate buyers who filled in our 13th annual survey have already received full responses, plus the context for the key forecasts for what’s coming in tech M&A in 2020. 451 Research subscribers will have to wait until the report is published in early January to get the wisdom of the crowds.)

Out of the more than 3,600 tech transactions we have in our 451 Research M&A KnowledgeBase for 2019, our survey respondents handed this year’s Golden Tombstone to Salesforce‘s $15.5bn purchase of data analytics vendor Tableau Software. The deal, which is the year’s largest software transaction and fifth-biggest tech acquisition overall, got twice as many votes as the runner-up – VMware’s $2.1bn reach for security company Carbon Black.

On the other side, we asked which significant tech transaction announced in 2019 they think will struggle to generate the hoped-for returns. Corporate buyers selected Broadcom’s $10.7bn pickup of Symantec’s faded enterprise security business as the most likely blockbuster to bust. The chipmaker-turned-enterprise-software-vendor paid a relatively rich 4.5x trailing sales for a business that hadn’t grown in three years. Plus, there’s the sheer scale of the transaction, which is the largest-ever information security acquisition, equaling an entire year’s worth of spend in the sector in some years.

With that, we will be unplugging for a bit to enjoy the holidays. Our next M&A sendout will be hitting your inbox on Thursday, January 2. In the meantime, we wish all of you peace and happiness for the holiday season, and nothing but accretive transactions in the coming year.

Figure 1
Source: 451 Research Tech Corporate Development Survey

Turn on, tune in, pay up

Mark Fontecchio

by Scott Denne

The few above-market valuations captured by ad-tech companies are increasingly reserved for those vendors remaking the TV advertising market. Although the overall value of acquisitions of ad-tech firms has continued to tumble from the market’s peak in 2015, targets that can help businesses capitalize of the evolving market for TV ads are still able to find buyers at premium prices.

The most recent example comes with The Rubicon Project’s announcement that it will spend nearly half of its equity to purchase Telaria, a maker of software for managing sales of digital video ads. Although both companies operate ad exchanges and publisher-facing ad software, Telaria was built around video, with a focus on connected TV advertising. Rubicon, on the other hand, was built for display ads, later expanding into mobile and online video. Its acquisition of Telaria values the target at 4.4x trailing revenue, while Rubicon itself, a larger and faster-growing company, commands just 2x on the NYSE. (We’ll have a detailed report on this deal later today for subscribers to 451 Research’s Market Insight service).

Telaria isn’t the only ad-tech vendor fetching a premium because of its connected TV capabilities. In its sale to Roku, DataXu nabbed a higher multiple than most of its peers as Roku sought a way to expand its reach in connected TV ads (subscribers to 451 Research’s M&A KnowledgeBase can see our estimates of that multiple here). And LiveRamp, seeking to expand its identity graph into television, paid $150m for Data Plus Math, a vendor with just 25 employees.

These transactions, and the accompanying valuations, come as TV viewing (the largest nondigital ad market) repositions from over the air to over the internet. The pace of this shift can be seen in 451 Research’s VoCUL: Communications & Media surveys. In the space of a single quarter, the rate of respondents telling us they use a streaming video device (Roku, Apple TV, etc.) to watch video every day rose to 26% from 21%. Similarly, those telling us they do the same on a videogame console jumped to 17% from 11% from our first–quarter to second–quarter survey.

Figure 1: Ad-tech M&A
Source: 451 Research’s M&A KnowledgeBase

More public private equity

Mark Fontecchio

by Scott Denne

Although the volume of overall tech acquisitions by private equity (PE) firms has declined a bit from last year’s record, the number of take-privates continues to increase. The latest of such deals is Francisco Partners and Elliott Management’s $4.3bn purchase of LogMeIn – a typical take-private from what’s becoming an atypical source.

According to 451 Research‘s M&A KnowledgeBase, buyout shops have erased 42 tech vendors from public markets this year, the second-most of any annual total and seven more than they bought in 2018. In acquiring those companies, they’ve spent $74bn, the second-highest annual outlay for such transactions. (The highest came in 2016, the year that Dell, a Silver Lake portfolio company, shelled out $63bn for EMC.)

In some ways, LogMeIn is a typical LBO – it’s a large, profitable public company that’s struggling to put up growth. Garnering a 3.4x trailing revenue multiple on the sale, its valuation sits right in line with the annual median for take-privates this year. But unlike LogMeIn, fewer vendors are coming off the major US exchanges.

As sponsors are spending more than usual on take-privates, they’re having to go further afield to do it. For just the second time in the decade, PE firms are purchasing fewer companies that trade on the Nasdaq or NYSE exchanges than public companies that trade elsewhere.

Canvassing for corporate votes

Mark Fontecchio

by Brenon Daly

Who better to pick this year’s top deal than the folks who actually do the deals? One question in 451 Research’s annual survey of corporate acquirers, which is only open for two more days, is which tech print in 2019 stood out to them the most. The top vote-getter receives our coveted Golden Tombstone award.

As the professional buyers look at the $450bn in M&A spending on 3,500 tech transactions so far this year, which single acquisition will get the nod from their peers? Could it be PayPal‘s sweet reach for Honey? Or will Salesforce elbow other deals aside? What about Broadcom becoming one of the largest information security vendors on the planet? Or is the take-private of Ultimate Software this year‘s ultimate transaction? (Of course, all of us here at 451 Research have our own pick for this year’s most-significant deal: Hello S&P Global, Inc.)

This year’s top tech transaction is just one of several questions that we have asked each year in all of our surveys of tech M&A professionals since 2007. Other areas that the quick and painless 451 Research Tech Corporate Development Outlook Survey explore include activity forecast, valuation expectations and even their take on the other exit, IPOs. For corporate acquirers interested in taking part in our annual survey, simply click here.

Figure 1: M&A activity

Source: 451 Research Tech Corporate Development Survey

Wanted: Bankers with 20/20 vision for 2020

Mark Fontecchio

by Brenon Daly

Every year since the middle of the previous decade, 451 Research has surveyed senior tech investment bankers for their thoughts on M&A in the year ahead. The forecasts have proven remarkably prescient, with advisers accurately calling a record rebound in activity in 2018 and a notable downtick in valuations in 2019. And now, we want to see if that 20/20 vision extends to 2020.

In addition to asking how full their pipelines are, we also ask bankers what is filling them up. In terms of specific markets, is it deals in application software, Internet or other specific markets that has bankers dreading 80-hour workweeks in the coming year? Or is it cross-sector trends such as cloud or IoT that will be keeping them busy? (Bankers have certainly been onto something recently with their pick of the bustling machine learning market.)

Whatever the case and whatever the pace, 451 Research wants to hear from managing directors and partner-level advisers about the coming year. We ask senior tech investment bankers to give us five minutes of their time for their outlook on tech M&A. In return, we’ll send along full survey results as well as anonymized commentary from fellow bankers about what they’re seeing in the market. (Collectively, survey respondents touch several hundred tech transactions each year across the entire IT landscape, so our survey offers a comprehensive view.)

To participate in 451 Research’s 15th Annual Technology Investment Banking Survey, simply click here.

Figure 1: M&A outlook, by tech theme
Source: 451 Research’s Technology Investment Banking Survey

Xerox in danger of making a bad copy

Mark Fontecchio

by Brenon Daly

Of all companies, Xerox should know not to make a bad copy. And yet, as the maker of printers and copiers escalates its pursuit of a much-larger rival, it is in danger of repeating the mistake another tech giant made when it, too, tried to pull in a chunk of the once-formidable Hewlett-Packard. That buyer still hasn’t recovered from that deal, more than three years later.

In terms of M&A strategy, the thinking behind Xerox’s bid for HP Inc is solid: wring out financial efficiencies by combining large businesses in markets that have little – if any – growth. Where the effort breaks down is that Xerox has the strategy a little backwards. It is a fraction of the size of the company it is trying to roll up. (Xerox sells less stuff in an entire year than HP Inc sells in a single quarter.)

And then there’s the small matter of how Xerox, which has an all-in enterprise value of just $13bn, plans to pull off its proposed $33bn purchase. (For a sense of scale of the transaction, 451 Research‘s M&A KnowledgeBase only lists 13 tech and telecom deals announced since 2002 with an equity value of more than $30bn.)

Xerox, which already has more than $4bn of net debt on its books, says it has the financing of the proposed pairing covered. Terms call for Xerox to hand over about $25bn in cash for HP, with the remaining nearly one-quarter of the price covered by its shares. For its part, HP Inc isn’t buying Xerox’s offer, either in terms of valuation or even feasibility.

But even assuming Xerox can not only raise but also then service several billion dollars of freshly incurred debt to pick up its larger rival, it’s worth wondering why the company would want to stretch itself financially for a significantly larger business that is significantly less profitable. Both gross margins and operating margins at HP Inc are about half the level of Xerox.

If Xerox needs any further convincing that it might not want to go deeply in hock to buy HP Inc, it might want to reflect on an earlier deal with a lot of the same characteristics as the one Xerox is considering. In 2016, UK-based Micro Focus put together a cash-and-stock bid for the much-larger but less-profitable software business from Hewlett Packard Enterprise. Since that consolidation, which tripled the size of Micro Focus, the company has seen its market value cut in half.

 

Verint disconnects

Mark Fontecchio

by Scott Denne

Verint Systems occupies a prime portion of the customer experience software market with an aging portfolio. Now it’s splitting off a smaller, low-growth part of its business in a deal that could give it more currency for acquisitions as the call-center software vendor updates its software suite to meet the changing needs – and rising budgets – of customer service groups.

With an investment from Apax Partners, Verint plans to separate its customer experience software business and its cyber-intelligence unit into two publicly traded companies. Apax will invest $400m across two tranches for a minority stake in the customer experience division. The buyout shop already knows part of the business – it was a previous owner of ForeSee Results (through its ownership of Answers.com). ForeSee, a customer survey specialist that Verint bought in 2018, is a key part of Verint‘s Unified VoC product.

But voice of the customer (VoC) is only a modest, if faster growing, part of Verint’s customer experience business today. Even after the split, Verint will be an on-premises call-center software company that’s growing in the high-single digits. There’s an opportunity to accelerate that growth given the market it plays in.

Our data show that customer service is drawing an outsized share of budgets and attention as businesses contend with rising customer expectations across more communications channels. The days of calling the company to complain seem quaint as customers turn to chat, email and social media. According to a recent survey from 451 Research‘s Voice of the Enterprise: Customer Experience & Commerce, 54% of organizations said they’re increasing their investments in customer service software in the next 12 months. And 25% of them said the customer service group has primary responsibility for the customer experience.

Although it’s been pushing past call-center products via M&A for the past couple of years, Verint has mostly done so with modest-sized acquisitions in the $25-75m range, according to 451 Research‘s M&A KnowledgeBase. As a stand-alone customer experience provider, it could well have a higher stock price, giving it currency for larger deals – Wall Street sent Verint’s shares up 15% on news of the split. The vendor also has 25% EBITDA margins, so it should continue to generate cash for purchases.

Social media management should be a priority for Verint after the split. Owning a broad suite of tools for managing and monitoring engagements on social media would bring it into an area it’s already familiar with – tracking and managing customer interactions – and give it a software portfolio beyond customer service as its clients, according to our surveys, are seeing their mandates extend from customer service into customer experience.

Figure 1: Departments with primary responsibility for customer experience

Source: 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019

Locking the doors opened by new technology

Mark Fontecchio

by Brenon Daly

For most technology, security is somewhat of an afterthought. That’s particularly true for emerging enterprise technology, where shiny new gadgets and slick new software dazzle us with promise. Under the spell of early adoption, we focus on all of the great things the technology makes possible for us and our businesses. And then we get hacked.

Or something else happens to take off a bit of the luster of the new products. Reality intrudes on dream technology. Belatedly, we find that we just might need to put a lock on some of the doors opened by the new products. That’s one way to think about the recent record surge in acquisitions done to secure all of the ‘things’ that businesses are offering to make their current products more valuable or expand into more valuable markets.

The term ‘IoT security’ has popped up an unprecedented number of times so far this year in 451 Research‘s M&A Knowledgebase. In fact, deal volume in this rapidly emerging field is set to triple in 2019, compared with both 2018 and 2017. And to underscore the seriousness of the challenge around shoring up all of those IoT implementations, big buyers are doing these deals. Cisco Systems, Check Point Software and Palo Alto Networks have all put up IoT security prints so far this year, according to our data.

Yet all of this M&A activity may be too little, too late. Even with this dramatic acceleration in the number of IoT security deals, our data shows this crucial component for all of those implementations still accounts for only a lowly single-digit percentage of all IoT dealmaking. In other words, vendors are still overwhelmingly focused on shopping for IoT technology that they can add to their portfolios rather than making sure their IoT technology is secure.

Those priorities, however, are not necessarily serving customers. In fact, customers who plan to boost their IoT spending in the coming year told us that they plan to spend more on shoring up the IoT technology than anything they can necessarily do with the new technology they plan to buy. Almost half (46%) of respondents to 451 Research’s Voice of the Enterprise: Internet of Things, Budgets and Outlook 2019 indicated ‘improved security’ is the single biggest driver for their increase in overall IoT spending.

Figure 1: Drivers of increasing IoT spending in 2019

Source: 451 Research’s Voice of the Enterprise: Internet of Things, Budgets and Outlook 2019