Category: M&A

No ‘Trump slump’ seen for tech M&A

Brenon Daly

Contact: Brenon Daly

As President Donald Trump approaches the end of his ceremonially important first 100 days in office, his approval rating has slumped to an unprecedented low. In fact, for the first time in modern politics, more people say they disapprove of Trump’s early moves as president than say they approve of them. However, there is one community that continues to support Trump, or at least say he’s been good for business: dealmakers.

Four out of 10 (41%) respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster indicated that President Trump’s economic policies have stimulated dealmaking, almost twice the 22% that said his policies have slowed M&A. The results from the latest survey show a substantial reversal from our previous survey last October, which came amid an acrimonious battle with Hillary Clinton for the White House. At that time, nearly one-third (31%) said the election battle had slowed acquisition activity, compared with just 6% that said deals had sped up.

However, any boost that Trump and his policies might give to M&A won’t extend globally, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster. Quite the opposite, in fact. Nearly half of respondents (47%) said Trump and his trade policies will slow cross-border acquisition activity, nearly twice the 26% that said the policies of President Trump – who campaigned on an ‘America First’ platform – will accelerate international dealmaking. We would highlight the fact that the bearish forecast for cross-border M&A is almost exactly the inverse of the positive influence Trump is expected to have on overall tech dealmaking, according to our survey respondents.

Survey sees tech M&A heading up and to the right

Brenon Daly

Contact:  Brenon Daly 

Despite a slow start to 2017, tech M&A activity is expected to accelerate over the course of the year, according to the prevailing view in the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. (See full report.) Slightly more than half of the respondents (52%) forecast that deal flow will top last year’s level, more than three times the 15% of respondents who indicated that year-over-year activity would decline in 2017. The projection in our just-completed survey represents the most-bullish outlook in two years.

If the sentiment does come through in increased activity for the rest of the year, it would also mark a dramatic reversal from the start of 2017. In the first quarter, tech acquirers announced 12% fewer transactions than they did in Q1 2016 or Q1 2015, according to 451 Research’s M&A KnowledgeBase. Of course, 2017 comes after the two highest years of tech M&A spending since the internet bubble burst. Collectively, acquirers in 2015 and 2016 announced deals valued at more than $1 trillion, according to the M&A KnowledgeBase.

451 Research subscribers can view the full report on the most-recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster, which includes the outlook for overall activity and valuations in the tech M&A market, as well as highlights specific trends and drivers for deals in 2017 and beyond.

Paying for performance: Dentsu picks up its M&A pace 

Scott Denne

Contact: Scott Denne 

Dentsu hasn’t been very active in acquiring digital marketing shops until recently. Now, as it sees an opening with marketers looking to change how they compensate their agency partners, it is moving fast to take advantage. The company announced today the purchase of India-based SVG Media Group, the latest in a string of deals it has made to expand its performance advertising capabilities.

According to 451 Research’s M&A KnowledgeBase, Dentsu has acquired 29 companies since the start of 2016. That’s the same number of tech businesses it bought in the previous 13 years combined. A combination of rising ad fraud and displeasure at opaque agency billing practices, mixed with the growing ability to link media spending to specific outcomes, has marketers rethinking how they pay ad agencies. They are placing more emphasis on performance-based pricing models, a notable departure from the historic practice of paying agencies a percentage of advertising budgets.

SVG Media fits into this role, as it sells pay-for-performance media services and ad networks. Earlier this month, SVG reached for conversion optimizer Leapfrog Online and customer analytics firm DIVISADERO, a bolt-on to the $920m it spent last year to snag CRM agency Merkle.

Although Dentsu may be an extreme case, it is part of an overall rise in acquisitions of digital agencies. Last year saw a record 164 digital agencies acquired. The pace so far this year is a bit below that, but well ahead of any other year. The drive for performance-focused digital marketing accounts for a substantial chunk of that upswing, although there are other factors such as the lack of mobile specialists and the movement of ad spending toward digital channels. Dentsu and other ad agencies aren’t the only buyers here. Consulting firms like Accenture and IBM have been inking acquisitions to capitalize on the same weakness.

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

VMware nabs Wavefront as infrastructure M&A hits new frequency 

Scott Denne

Contact: Scott Denne  and Kenji Yonemoto

Responding to the need for new monitoring and management tools to match the growing adoption of infrastructure technologies such as containers and cloud, VMware has reached for Wavefront. The deal embodies the craving for the latest technologies in infrastructure management M&A through the start of the year.

That craving stands in stark contrast to last year, when divestitures and aging assets led to a record $15.3bn spent on infrastructure management targets, according to 451 Research’s M&A KnowledgeBase. Less than four months into the year, buyers have already shelled out $5.6bn, skewing toward younger and growing businesses fetching higher multiples.

While VMware hasn’t disclosed terms of the transaction, it’s likely paying a premium valuation as Wavefront, an early-stage company with about 50 customers, landed a $52m series B less than six months ago. The acquisitions of AppDynamics ($3.7bn) and SOASTA ($200m) – which like today’s deal, were done to improve the buyers’ ability to cope with new types of application deployments – have helped drive up multiples. The median multiple for the category stands at 4.2x trailing revenue this year, compared with 3.4x in 2016.

The pressure to pay up for these technologies could continue. Our surveys show that new forms of application deployment are rising among enterprises. In 451 Research’s most recent Voice of the Enterprise report, 48% of respondents expected their spending on cloud to increase by more than 11% in 2017 and similar surveys have shown a growing shift toward using containers and microservices in production, not just testing and development, environments.

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

E-commerce’s discounted disruptors

Brenon Daly

Contact: Brenon Daly 

For the second time in as many weeks, a would-be digital disruptor of the commerce world has been snapped up on the cheap by an analogue antecedent. After the closing bell on Monday, sprawling marketing giant Harland Clarke Holdings, the owner of a number of advertising flyers that clutter postal boxes and newspapers, said it would pay $630m for online coupon site RetailMeNot. The amount is just one-quarter the price Wall Street had put on the company three years ago.

The markdown on RetailMeNot comes just days after Samsonite gobbled up eBags, a dot-com survivor that nonetheless sold for a paltry multiple. The $105m acquisition is supposed to help the world’s largest maker of luggage sell directly to consumers. Samonsite, which traces its roots back more than a century, certainly didn’t overpay for that digital know-how. Its purchase values eBags at just 0.7x trailing sales.

While a bit richer, RetailMeNot is still only valued at 2.25x trailing sales and 2x forecast sales in the bid from Harland Clarke. And that’s for a sizable company that’s growing in the low-teens range (eBags is about half the size of RetailMeNot but is growing at twice that rate). The valuations paid by the old-world acquirers of both of these online retail startups were clearly shaped more by the staid retail world than the supercharged multiples generally paid for online assets. It’s a reminder, once again, that disruption – that clichéd goal of much of Silicon Valley – doesn’t necessarily generate value. Sometimes trying to knock a market on its head just gives everyone involved a headache.

For tech M&A, above-market deals are running behind

Brenon Daly

Contact: Brenon Daly 

If spending on tech M&A was sporadic in the opening quarter of 2017, the valuations paid in those deals largely held to typical patterns. There were a handful of transactions sporting enviable double-digit multiples, along with a whole backlog of deals that printed in the low single digits. Between those bands, however, there was one range that generally features a host of transactions but has been relatively quiet so far this year: slightly above-market valuations.

Specifically, the January-March quarter recorded just three deals that valued target companies at 6-8x trailing sales, according to 451 Research’s M&A KnowledgeBase. That’s fewer than any quarter in 2016, and just slightly more than half the average number of similarly valued transactions each quarter last year. Given the generally lumpy nature of M&A, we obviously don’t want to make too much out of pricing trends in any single quarter. But it is important to note the falloff in activity because this valuation range often stands as a fairly accurate barometer for the health of the overall M&A market.

Yet this segment gets ignored, with more attention paid to splashy, headline-grabbing deals such as Cisco lavishing $3.7bn on AppDynamics, a company that barely cracked $200m in revenue last year. For a variety of reasons, however, we wouldn’t hold out this transaction as representative of the nearly 1,000 deals tallied last quarter in the M&A KnowledgeBase. (Cisco, which is trading at its highest level since the internet bubble, had to outbid Wall Street for AppDynamics, at a time when ‘dual tracking’ still isn’t much of a threat. As if to indicate that, indeed, those were rather singular influences on the deal, consider the fact that AppDynamics garnered the highest price for any VC-backed startup in three years.)

Instead, we would look below those one-off transactions. More relevant to most tech acquirers are deals where they have to stretch, but not contort, on pricing. These transactions – carrying, again, a 6-8x multiple and generally falling in the midmarket in terms of size – tend to serve more usefully as comparable deals for the corporate and financial acquirers that do the overwhelming majority of tech M&A. Here we’re talking about recent transactions such as Akamai reaching for SOASTA, or Hewlett Packard Enterprise further bulking up its storage portfolio with SimpliVity. Both of those deals fall into the 6-8x sales range (according to our understanding) and represent decidedly midmarket bets by big-name buyers. In other words, just the sort of transaction that’s vital to the broader tech M&A market, but generally gets overlooked – particularly so far this year.

After a slow start for tech M&A, business picks up late in Q1 

Brenon Daly

Contact: Brenon Daly 

After record spending in the tech M&A market in 2015 and 2016, dealmakers took a little while to get going this year. The value of tech transactions in both January and February slumped to the lowest consecutive monthly totals since 2013, according to 451 Research’s M&A KnowledgeBase. The two-year surge seemingly led to a two-month slump, as buyers digested their acquisitions. By the final month of the first quarter, however, acquirers were back in business, spending as much in March as they did in the two previous months combined.

Altogether, as tallied by the M&A KnowledgeBase, worldwide spending on tech and telecom deals in the first three months of 2017 hit $77bn, essentially flat with the opening quarter last year. However, the value of transactions announced in each of the subsequent quarters in 2016 accelerated dramatically from last year’s sluggish start, with average quarterly spending for Q2-Q4 coming in nearly twice the level of Q1.

Matching last year’s acceleration in spending may be a challenge for the rest of 2017, as buyers are on pace to do substantially fewer deals this year. That’s true for both broad tech M&A as well as the top end of the market. The first quarter’s deal volume of 910 represents a decline of roughly 12% compared with the January-March period in the previous two years. More significantly, tech acquirers announced fewer transactions valued at more than $1bn in the just-completed quarter than in any other quarter in more than three years.

Accenture buys Genfour for robotic process automation 

Scott Denne

Contact:  William Fellows 

Accenture is looking to stay ahead of a sudden surge of robotic process automation (RPA) offerings from consultants, outsourcers and software vendors. The company has acquired Genfour, a Wales-based RPA services provider, to tackle the most immediate opportunity for machine learning in IT services.

Many IT services providers were quick to jump on the artificial intelligence (AI) bandwagon and most have scaled that back a bit, recognizing that low-level process automation is a more immediate opportunity than large transformative AI projects. RPA typically involves using software to replace repetitive human tasks like processing forms or entering data. As we’ve discussed in other reports, although digital transformation projects get much of the attention from IT services firms, narrower automation projects are a much easier sell and more urgent for those services companies that have historically relied on overseas labor arbitrage to drive their businesses.

Founded in 2012 with a focus on the finance and utilities sectors, Genfour is one of a handful of RPA specialists. Others include services shop AutomateWork, software vendor Blue Prism, RPAi, Lateetud and Symphony Ventures. The need for RPA products has begun to trickle into M&A moves. It was part of the rationale behind CSC’s $720m acquisition of Xchanging 18 months ago, and business process management software provider Pegasystems spent $52.3m last April to purchase OpenSpan for its RPA capabilities.

Genfour marks Accenture’s third machine-learning acquisition in the past 12 months. Accenture is an outlier in that respect. Aside from IBM, most other IT services companies haven’t expanded their machine-learning offerings through M&A. Yet, with the push toward automation and an expected overall increase in machine-learning deal flow, we could see more consolidation. In 451 Research’s Tech Banking Outlook Survey, a full 82% of respondents projected an increase in deal flow in that category in 2017.

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

Extreme’s not horsing around, buys Brocade’s datacenter networking assets 

Scott Denne

Contact: Jim Duffy 

As it stalks one horse, acquisition-hungry Extreme Networks has saddled up another. The suddenly feisty enterprise networking vendor has picked up Brocade’s datacenter business – another piece of Brocade that acquirer Broadcom is not interested in owning. Extreme is benefiting from that lack of interest, paying just a fraction of the asset’s annual revenue.

Even for a bargain shopper like Extreme, the deal comes at a steep discount. According to 451 Research’s M&A KnowledgeBase, Extreme has made just five acquisitions in the past 15 years. Three of them have come in the past seven months. The company recently bought Avaya’s networking business ($100m) and Zebra Technologies’ WLAN unit ($55m). In both transactions, it valued the target at about 0.5x revenue, the same multiple it paid in its 2013 purchase of Enterasys.

Extreme will pay $35m upfront and $20m in deferred payments for Brocade’s VDX, MLX and SLX routing and switching assets, plus its analytics software. Although revenue from the Brocade assets have declined amid the uncertainty over who might ultimately own them, the unit is expected to add $230m to Extreme’s top line in its next fiscal year. This deal, combined with its weeks-old stalking-horse bid for Avaya’s assets, could push its annual revenue beyond $1bn and make Extreme the third-largest wired and wireless enterprise networking equipment provider behind Cisco and HPE.

The divestiture comes as Broadcom is looking to close its acquisition of Brocade’s Fibre Channel business, while shedding the target’s networking equipment assets – Brocade’s Ruckus Wireless WLAN unit was snagged by ARRIS a few weeks ago. Today’s transaction is contingent upon the close of Broadcom’s purchase of Brocade, which is expected in July. Finalization of Extreme’s buy is expected 60 days after that. In addition to the cash consideration, Broadcom is already Extreme’s largest supplier and the acquirer says it will increase its current $100m annual spending with Broadcom.

Customer overlap was minimal, as Brocade’s datacenter business was targeting large enterprise core datacenters with more than 2,000 physical servers, while Extreme was concentrating on the campus edge (WLAN and access switching, and fewer than 2,000 servers). The two have joint customers, for example, that use Brocade in the datacenter and Extreme at the WLAN edge. Nonetheless, Extreme says it will obtain 6,000 customers using Brocade’s VDX, MLX and new SLX routers and switches.

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

Mastercard makes an antifraud deal of its own 

Scott Denne

Contact: Jordan McKee 

After December reaches by Visa and American Express for card-not-present (CNP) antifraud providers, Mastercard makes its move in this space. With the purchase of NuData Security, it gains digital identity and behavioral biometrics capabilities that will play an important role as EMV and growing transaction volumes continue to push fraud into digital channels.

A recent study of 500 US merchants by 451 Research underscored the severity of this problem, showing that 60% of respondents are experiencing an increase in fraudulent activity in their digital commerce channels compared with this time last year. This problem will only be exacerbated as the Internet of Things (IoT) spreads commerce into myriad new connected devices, increasing chargeback and data breach risks for merchants.

Given its scale and complexity, IoT presents a security threat an order of magnitude greater than anything the payments industry has previously experienced. Payment networks and their partners are increasingly being required to operate in foreign environments that differ greatly from traditional CNP channels, such as web browsers. The spread of commerce to new connected endpoints will require new technology, talent and security approaches to ensure that the integrity of the card issuance ecosystem remains intact.

While Mastercard has positioned its pickup of NuData as an IoT antifraud play – and could conceivably extend NuData’s technology into various IoT settings over time – we see near-term applicability to traditional CNP antifraud use cases. In particular, its work around digital identity and biometrics will help extend Mastercard’s security efforts from the network to the device, helping to combat the wave of fraud currently occurring in mobile and e-commerce. Terms of the deal weren’t disclosed. NuData had about 70 employees.

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