Category: M&A

For tech IPO market, it’s variety not volume

Brenon Daly

Contact: Brenon Daly 

This time last year, the only sound coming from the tech IPO market was crickets chirping. Not a single company made it public in Q1 2016, the first quarterly shutout since the end of the recent recession. So far this year, there’s a lot more going on, even if the recent activity lags what we might have expected after a prolonged listless period for new listings.

What the current IPO market lacks in depth, however, it more than makes up for in variety. Just since 2017 opened, we’ve seen a number of ‘outlier’ events, including a multibillion-dollar dual-track exit, a unicorn rewarded on Wall Street, the largest consumer Internet offering in three years, and even a company use the circuitous route of a blank-check deal to go public. You know it’s a strange time for IPOs when a company that had been planning to go public on the Nasdaq but opted for a sale instead goes ahead and rings Nasdaq’s opening bell when that deal closes, as AppDynamics did.

There are other indicators of just how hard the tech IPO market is to read right now, including:
-AppDynamics scrapping its planned offering after Cisco swept in with a too-rich-to-pass-up $3.7bn offer in January, days before the software vendor was set to debut on Wall Street. As rich as AppDynamics’ sale was, however, the deal looked like a discount when fellow infrastructure software provider MuleSoft did hit the market almost two months later. MuleSoft’s trading valuation nearly matches AppDynamics’ terminal value, which included a premium.
-Both of the enterprise-focused tech firms that have gone public so far this year (MuleSoft and Alteryx) raised more money from private market investors than they did from Wall Street.
-And what to say about the IPO of Snap, which lost more money in 2016 than it took in as revenue? A five-year-old company that starts its prospectus by talking about ‘eyeballs,’ and then doesn’t give investors any say about how the business should be run in any case? A media company that went public just as it was experiencing its slowest audience growth? Despite all of those questionable metrics, Snap created more than twice the market value of all enterprise tech IPOs last year.

With Okta set to debut next week and several Hadoop vendors reportedly close to revealing their paperwork, the tech IPO market has enough to keep it going for the next few weeks. However, that doesn’t necessarily mean that Wall Street will be as welcoming as it has been. The US equity indexes are about 25% higher than they were during the bear market that mauled investors in the opening months of 2016. Yet all of the indexes have recently reversed, and are in the red for the past month. Meanwhile, 451 Research surveys of investors have shown a steady erosion of confidence in the stock market, which could give them pause before buying shares in any of the unknown and unproven tech startups looking to go public.

With sharp elbows and deep pockets, PE gets busy

Brenon Daly

Contact:  Brenon Daly

With sharp elbows and deep pockets, private equity (PE) shops have announced more deals so far this year than the opening quarter to any year since the end of the recent recession. Already in 2017, 451 Research’s M&A KnowledgeBase has tallied 165 transactions by PE firms and their portfolio companies, a 15% jump from the previous record in Q1 2016. More broadly, buyout shops are currently about twice as busy as they were just a half-decade ago. Cash-rich financial acquirers represent the only significant group that’s accelerating activity in an otherwise slowing tech M&A market.

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing shops have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital Group and TA Associates have already announced as many deals in 2017 as each of the firms would typically print in an entire year.

Of course, merely having record amounts of money doesn’t necessarily mean that firms will do more shopping. After all, that hasn’t been seen among corporate acquirers, which stand as the main rivals to PE shops. Tech companies that trade on the NYSE and Nasdaq have never had fatter treasuries than they do now, but the number of acquisitions they announced in 2016 dropped 11% compared with 2015, according to the M&A KnowledgeBase. In contrast, PE firms registered almost exactly the inverse, with the number of transactions increasing 13% in 2016 from 2015.

As financial acquirers step up their activity and strategic buyers step back, the once-yawning gap between the rival buying groups is narrowing. In the years immediately after the recent recession, tech companies listed on US exchanges regularly put up twice as many prints as PE firms. However, for full-year 2016 and so far in 2017, M&A volume for corporate acquirers is only about 30% higher than their financial rivals, according to the M&A KnowledgeBase.

Adobe’s search for markets beyond the web 

Scott Denne

Contact: Scott Denne 

Adobe is extending its ambitions beyond the website. Having thrived in the first iteration of digital marketing, the vendor is turning its attention to the next one – where software has a role in all of a business’ customer interactions, not just those coming in through the homepage. It needs a wider set of software to capture that larger market opportunity and fend off old adversaries in web marketing, as well as new ones in segments such as mobile marketing, e-commerce software and customer service that are eyeing the same prize.

Today Adobe opens Summit, its annual marketing conference, with the theme of building customer experiences. It’s roughly the same theme as last year’s show, with the subtle shift that much of the content has a more instructional bent, whereas last year Adobe was more intent on convincing marketers that customer experience matters in the first place. In the intervening time, there’s been a correspondingly subtle shift in the company’s M&A strategy. Its most recent acquisition wasn’t just a bolt-on to sell into its existing sales channel like past deals. It was an attempt to open up a new path to market for its products.

Adobe entered digital marketing almost eight years ago with the $1.8bn purchase of website analytics company Omniture and followed that, according to 451 Research’s M&A KnowledgeBase, with $2bn worth of M&A that took its capabilities beyond the website, but always with an eye toward adding products that it could upsell to web-oriented digital marketers. In the last quarter, its marketing unit grew 26% year over year to $477m in revenue.

Its latest acquisition, TubeMogul, stands out not so much for its size ($540m) as for the fact that its video media-buying software is built for brand managers and TV media planners – a group with far different priorities than digital marketers, and access to larger budgets. The deal, along with Adobe’s messaging, show that it’s ready to start exploring purchases that will enable it to sell to marketers that don’t have a website-first bent and to other customer-facing parts of a business.

Increasing its appeal to mobile app developers and app-centric marketers would be a logical next step from Adobe’s roots in web marketing. Both mParticle and TUNE would serve as a cornerstone acquisition in that space – the latter for its breadth of mobile analytics and marketing tools, the former for its customer data platform that plugs into most mobile app tools. Adobe may also look to add to its e-commerce capabilities by reaching for a larger social media management product or even expanding into customer service software. Whatever its next move, Adobe seems intent on doing more these days than refreshing its website-based marketing business.

M&A drives Intel’s future 

Scott Denne

Contact:  Scott Denne 

Intel missed the last big shift in computing. Now it’s spending aggressively to make sure that it doesn’t miss the next one. The storied chip company is using $15.3bn of its $20bn in cash to acquire Mobileye, a maker of semiconductors for assisted and autonomous driving applications. The price puts an unheard of valuation on its latest target – a valuation that suggests that Intel is still smarting from missing out on the mobile phone market. Mobileye is the latest in a line of acquisitions that show that Intel is no longer willing to bet on R&D alone to carve out its place in emerging markets like artificial intelligence (AI) and the Internet of Things (IoT).
The multiple that Intel is paying for Mobileye smashes the previous record for an acquisition of a similarly sized tech company. The purchase values the target at 41x trailing sales ($14.7bn in enterprise value on $358m in 2016 sales). According to 451 Research’s M&A Knowledgebase, that’s the highest multiple ever paid for a tech business with more than $100m in annual sales. Prior to this deal, Sirius Satellite Radio held the record from the 21.5x it paid for XM Satellite Radio 10 years ago.

Despite the valuation, Mobileye isn’t Intel’s largest acquisition. That was Altera, which it picked up in 2015 for $16.7bn to help it secure its spot in cloud datacenters and push into industrial IoT. Intel isn’t relying on a few big strategic transactions to enter emerging tech markets. In the 21 months that separate its Altera and Mobileye acquisitions, Intel purchased 11 other companies, mostly startups, including a maker of aerial drones, a pair of computer-vision vendors, and Nervana, a pre-revenue developer of AI chips (click here to see 451 Research’s estimate for that deal).

Compare that activity with 2005-2009, when Intel was plodding its way into mobile phones and never inked more than three acquisitions per year. That doesn’t mean that its attempt at the mobile phone market wasn’t costly. Between 2012 and 2014 (the last time it broke out its mobile business), Intel’s mobile unit put up a combined operating loss of $9bn and made a negligible boost to the overall topline. Intel abandoned that market as part of a restructuring midway through 2016.

Raymond James & Associates advised Mobileye on its sale, while Citigroup Global Markets and Rothschild Group banked the buyer.

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

Spotify looks to machine learning as competitors raise the volume

Scott Denne

Contact: Scott Denne 

Spotify hopes that machine learning will be its encore. Two years ago, the company seemed to be pulling away from its pint-sized competitors with its then-novel on-demand music-streaming service. Now Apple and Amazon have gotten into this space, where they can leverage their large audiences and deep pockets.
Spotify has neither of those advantages. Instead, the company hopes that better data will enable it to compete with the internet’s largest vendors. On the one hand, trying to beat the likes of Amazon and Google through better data seems laughable. But music is a different beast. The data that’s easy to collect doesn’t tell you much. The data that’s hard to get provides more value.

Take the problem of music recommendation and discovery. Analyzing the relationships among simple data – artist, track and category – leads to results that are obvious and uninteresting. Telling a fan of Led Zeppelin that they might also like Aerosmith, while likely true, is of no value as such a person is likely familiar with both bands. Using that same data to make ‘long-tail’ recommendations scales up the chances of inaccurate results as it forces recommendations of less-popular music.

Although the music itself is becoming a commodity, Spotify is looking to draw non-commodity data from it. Take this week’s acquisition of Sonalytic. The London-based startup is developing tech that identifies songs from short clips and musical stems, even when masked by changes in pitch, tempo and so on. Similarly, its 2014 purchase of The Echo Nest brought it technology that combined digital processing of music with natural-language-processing algorithms. By understanding the music, not the metadata, Spotify is positioned to make better recommendations, beyond identifying what’s already popular.

Similarly, a more nuanced picture of audiences could help Spotify attract artists to its platform – not just as a place to host their catalogue, but also for the analytics tools it provides. Those tools could entice artists to encourage sharing and listening of their music on Spotify and open avenues to grow its business beyond a simple subscription app into other parts of the music industry, such as promotion.

Spotify needs these efforts to bear fruit soon as its competitors are gaining ground fast. According to 451 Research’s VoCUL surveys, the company’s paid app is making only modest subscriber gains – 7% of people surveyed in December said they intended to use the paid service over the next 90 days, up from 5% a year earlier (its free service hovered at about 17% in recent surveys). Meanwhile, Apple Music went to 12% from 7% in a year and Amazon Prime Music is consistently above 20% in those surveys.

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

A shift in strategies clips tech M&A valuations

Brenon Daly

Contact: Brenon Daly 

The speculative fever that helped spike tech M&A valuations at the start of 2017 has quickly been doused. After a mini-boom in high-multiple deals in January, last month came up virtually empty on richly valued exits as buyers stopped rolling the dice on acquiring startups and, instead, fell back on more old-school acquisition strategies. As a result, the broad-market price-to-sales multiple dropped a full turn from January to February, according to 451 Research’s M&A KnowledgeBase.

In the opening month of the year, tech acquirers appeared ready to write big checks for the startups they wanted. Cisco, Atlassian and Castlight Health all paid double-digit multiples for VC-backed companies in January, compared with just one buyer in February. Last month, Palo Alto Networks paid $105m for LightCyber, which works out to, barely, a 10x multiple of trailing sales, according to reports. Meanwhile, Cisco and Castlight both paid valuations closer to 20x sales and Atlassian – in its largest-ever purchase – spent $425m for Trello, a collaboration app that had only been available for a little more than two years and generated scant revenue.

Partly boosted by those handsomely valued startup exits, the average tech vendor sold for 5x trailing sales in January, according to the M&A KnowledgeBase. But in February, that broad-market valuation dropped to just 4x trailing sales. Last month’s multiple was dragged down by more conservative deal structures, such as divestitures (ARRIS Group buying the castoff Ruckus Wireless business for just 1.3x sales) and consolidation (private equity-backed Saba Software gobbling up publicly traded Halogen Software for just 2.4x sales).

If nothing else, the mixed picture for valuations so far in 2017 matches the expectation of senior bankers we surveyed last December about the coming year. In the 451 Research Tech Banking Outlook Survey, respondents were basically as likely to anticipate M&A pricing ticking up (32%) as sliding down (30%) in 2017. That’s the most-balanced forecast response ever recorded. In virtually all of our previous 11 surveys, one view – either squarely bullish or decidedly bearish – has dominated.

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

CA’s two M&A strategies come together in Veracode

Brenon Daly

Contact: Brenon Daly 

CA Technologies plucks Veracode out of the IPO pipeline, paying $614m for the application security scanning startup. The acquisition bridges the two areas where CA has been shopping recently: security and DevOps. According to 451 Research’s M&A KnowledgeBase, all 10 of CA’s transactions in the four years leading up to the Veracode purchase have either brought additional technology for software development or security, primarily related to identity and access management. Including Veracode, CA’s recent shopping spree has cost the company slightly more than $2bn.

Originally a spinoff of Symantec, Veracode raised $122m from investors over the past 11 years, including a late-stage round in September 2014 that was expected to bridge the company to the public market. Shortly afterward, it tapped J.P. Morgan Securities to lead the planned offering. (J.P. Morgan gets the print for advising Veracode on its sale.) The IPO paperwork was filed with the SEC but never publicly revealed.

As it angled toward Wall Street, however, Veracode’s revenue growth slowed a bit, according to our understanding. (Subscribers to the M&A KnowledgeBase can see our estimate of Veracode’s top line.) Also working against an IPO for Veracode has been the rather lackluster market for new tech offerings overall, compounded by a slump on Wall Street for the two previous information security vendors to come public on US exchanges, SecureWorks and Rapid7. In opting for a sale rather than an IPO, Veracode secured a valuation that essentially matches the multiple that CA paid in its similarly sized pickups of fellow infrastructure software providers Automic Software in December and Rally Software in May 2015.

Veracode has steadily expanded its customer base, more than doubling that count since 2014 to 1,400. And, based on 451 Research surveys of more than 200 information security buyers, the company still has room to move higher once it is acquired by CA, which is expected in Q2. In our Voice of the Enterprise: Information Security survey in late 2016, Veracode ranked only as the fourth-most-popular supplier of application scanning, trailing open source tools from Qualys and IBM.

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

After a two-year surge, a two-month slump in tech M&A

Brenon Daly

Contact: Brenon Daly 

The tech M&A market is still struggling to get going in 2017. For the second straight month, spending on tech acquisitions around the globe totaled just half the average monthly level from last year. According to 451 Research’s M&A KnowledgeBase, tech acquirers announced just $19bn worth of transactions in the just-completed month of February, almost exactly matching the low spending level of January. Put together, the opening months of this year represent the weakest back-to-back monthly spending totals since 2013.

Similarly, the number of announced deals in February slumped to its lowest monthly level in more than three years. The 238 transactions tallied for February in the M&A KnowledgeBase represents a 30% slide from January deal volume and a 25% year-over-year decline from the average activity levels in February 2016 and February 2015.

The decline is due primarily to several of the well-known corporate acquirers either slowing their M&A machines or unplugging them altogether so far this year. For instance, neither SAP nor Intel have put up a 2017 print. Meanwhile, IBM has announced just one small transaction this year, down from a head-spinning pace of seven acquisitions in the first two months of 2016.

On the other hand, private equity (PE) firms have continued their record-setting pace. Buyout shops, which represent the sole ‘growth market’ in tech M&A right now, announced 23 deals in February – almost as many as they did in February 2015 and February 2016 combined. Three separate PE firms (Blackstone Group, H.I.G. Capital and The Riverside Company) announced at least two transactions last month.

The lackluster start to 2017 comes after tech M&A hit its two strongest years of the past decade and a half. (Tech acquirers dropped more than $1.1 trillion on deals over the 2015-16 spree, according to the M&A KnowledgeBase.) That recent record activity appears to have siphoned off some of the acquisitions in 2017. Senior tech investment bankers surveyed by 451 Research last December gave their weakest forecast for M&A spending in 2017 for any year since the recent recession.

Singtel’s Amobee takes a Turn toward a broader ad-tech platform 

Scott Denne

Contact: Scott Denne 

Singtel doubles the size of its ad-tech business with the $310m acquisition of Turn Inc, one of the earliest vendors serving the programmatic advertising market. Together, the two companies manage about $1bn in media spending. Today’s combination could help bring economies of scale to both businesses, an important and rare element of the low-margin ad-tech sector. For Amobee, Singtel’s ad-tech unit, the deal brings it a broader platform – Amobee is mostly a mobile ad player – and a footprint in the North American market.

The $310m price tag assigns Turn a multiple, according to our understanding of the target’s revenue, that’s roughly in line with the 2.5x trailing revenue that Adobe paid for video media platform TubeMogul. Turn is getting a market multiple in its sale, although one that comes in at less than half the post-money valuation of its last venture round in early 2014.

That earlier valuation came during a period of hyper-growth for Turn and the programmatic ad market. Its peers have similar private valuations and Turn won’t be the only one in the space to exit below its previous private funding. There’s an emerging cohort of buyers for these technologies (as we predicted earlier) as growth for many of the vendors has tapered off. TubeMogul, although public at the time of its sale, also exited below the high-water mark of its stock price that it reached in 2014.

LUMA Partners advised Turn on its sale. We’ll have a more detailed report on this transaction it tomorrow’s 451 Market Insight.

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

A mule that’s actually a unicorn

Brenon Daly

Contact: Brenon Daly 

Unlike a fair number of late-stage startups, MuleSoft is no donkey trying to pass itself off as a unicorn. The fast-growing data-integration specialist has tripled revenue over the past three years, and appears to be on track to put up about $250m in sales this year. More importantly, MuleSoft is not hemorrhaging money. That should play well on Wall Street, which has telegraphed that it will no longer reward the growth-at-any-cost strategy at startups that want to come public (ahem, Snap Inc).

Assuming MuleSoft does indeed make it to the NYSE, where it will trade under the ticker MULE, it would mark the first enterprise technology IPO since last October. Of course, Snap is currently on the road, telling potential investors that its business model, which consists of hardware and disappearing messages, is the next Facebook rather than the next Twitter. But we’ll leave aside the offering from that consumer technology vendor, which just might be able to convince investors that losing a half-billion dollars last year, which is about $100m more than it booked as revenue, is a sustainable or even desirable business model.

Instead of Snap’s planned IPO, MuleSoft’s offering lines up more closely with fellow infrastructure software provider AppDynamics. (At least up to the point where Cisco comes in with a too-good-to-be-ignored $3.7bn offer.) A glance at the prospectus from each vendor shows both growing at a rapid clip (AppDynamics posted a slightly higher rate, even off a bigger base) and posting GAAP numbers that were at least headed out of the red (MuleSoft lost less than AppDynamics, on both an absolute and relative basis). Also, both firms had annual customer retention rates, measured by dollars spent, of roughly 120%. Wall Street eats up that sort of metric.

MuleSoft raised roughly $250m in total funding, most recently announcing a $128m round in mid-2015. With investors clamoring for growth tech companies right now, MuleSoft could certainly start life as a public entity with a double-digit multiple. Maybe not the nearly 18x trailing sales that AppDynamics commanded in its sale to Cisco. (After all, that was terminal value, not trading value.) But MuleSoft could almost undoubtedly convince Wall Street that it’s worth a premium to Talend, a rival data-integration vendor that came public last summer and currently trades at about 7x trailing sales. MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing twice as fast. That profile will likely boost MuleSoft’s initial valuation on Wall Street to north of $2bn, or 10x its trailing sales of $190m.

2016 enterprise tech IPOs*
Company Date of offering
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016
Nutanix September 30, 2016
Coupa October 7, 2016
Everbridge October 11, 2016
BlackLine Systems October 27, 2016
Quantenna Communications October 27, 2016
Source: 451 Research *Includes Nasdaq and NYSE listings only