Category: M&A

Baking in security isn’t a good recipe for Intel

Brenon Daly

Contact: Brenon Daly

Intel’s multibillion-dollar experiment in bringing security in-house and baking it into its silicon is over. The chipmaker announced plans to mostly unwind its six-year-old acquisition of McAfee, which stands as the largest information security (infosec) transaction in history. However, Intel’s divestiture of a majority stake of its infosec division is being done at a substantial discount to the original purchase.

Under terms, Intel will retain a 49% stake in the infosec business, which will revert to the McAfee name, with private equity firm TPG Capital acquiring a 51% stake. The buyout shop will pay $1.1bn in cash and assume $1bn in debt. (The co-owners of McAfee plan to raise a total of $2bn in debt, with $1bn of that held by TPG and $1bn held by Intel.) Altogether, the transaction gives McAfee an enterprise value of $4.2bn, compared with an enterprise value of $7bn for McAfee in Intel’s mid-2010 puzzling purchase.

Sales at Intel’s infosec unit totaled $1.1bn in the first half of this year, according to the company. Annualizing that amount would put revenue at $2.2bn, meaning McAfee is valued at less than two times sales in its divestiture. That’s a relatively low multiple for infosec companies. In its 2010 purchase, for instance, Intel paid roughly 3.5 times sales for McAfee. Furthermore, rival Symantec currently trades at roughly the same 3.5x multiple.

Intel’s divestiture of McAfee, which had been rumored for some time, underscores the fact that infosec is an industry in transition. The move means that two of the largest and longest-standing security companies have undergone dramatic corporate overhauls since just the start of the year. Back in January, Symantec sheared off its Veritas storage business so that it could focus entirely on security. It then followed that up in summer by announcing the second-largest infosec transaction, according to 451 Research’s M&A KnowledgeBase. Symantec paid $4.65bn for Blue Coat Systems, an acquisition that, unusually, installed Blue Coat executives into the top three spots at the acquiring company.

Dell-EMC closes, but there’s still dealing to be done

Brenon Daly

Contact: Brenon Daly

Whenever a newly joined couple move in together, there are always a few items that just don’t fit as the two houses are merged into one. These things can range from minor overlapping bits (dishes that don’t quite match) to bulky odd-lot items (that rather ugly plaid couch that was hidden away in a corner of the basement). Invariably, the domestically blissed couple has to sort through their stuff to figure out what’s coming and what’s going.

As Dell and EMC officially close their union today, the process of sorting out their combined house assumes a new urgency. (See our full coverage of the transaction.) Of course, the two companies have already begun rationalizing their holdings in anticipation of coming together, most notably with Dell raising more than $5bn over the past half-year by shedding ill-fitting divisions. These divestitures have essentially involved Dell unwinding earlier acquisitions that didn’t deliver promised returns, notably Perot Systems, as well as Quest Software and SonicWALL.

We suspect the next bit of unwinding will likely come from Dell reversing EMC’s previous acquisition of Documentum. (This move has been mulled for several years, but now seems more likely as Dell takes on tens of billions of dollars of debt to pay for the largest-ever acquisition in the tech industry.) Somewhat like Veritas within Symantec, Documentum has never really fit inside EMC. It is even harder to see the strategic rationale for the content management software inside Dell, which has sold off most of its software assets. Dell is (once again) focusing on hardware, with product revenue accounting for roughly three-quarters of the combined company revenue of $74bn.

Documentum serves as the main piece of EMC’s Enterprise Content Division (ECD), a $600m unit that is a bit lost inside a $24bn company. (We would note that ECD accounts for just 2.5% of overall revenue at EMC – exactly the same portion of revenue generated at Dell by its software business, which was divested in June.) ECD would represent less than 1% of the combined company revenue, likely relegating it even further to an ‘afterthought’ sale.

That won’t help ECD, which is already slowly shrinking inside EMC. Unusually for a software company, product sales account for only about one-quarter of the division’s revenue, with the remaining three-quarters coming from maintenance and support. Still, ECD is able to put up very respectable gross margins in the mid-60% range. That financial profile, which represents a mature and somewhat sticky offering, fits well with private equity requirements. So we could see Documentum going to a buyout shop, which is where Veritas landed, as well as Dell’s own software division.

However, if Dell does manage to sell Documentum, it would likely garner only about $1bn for the business. (For the record, EMC paid $1.8bn, mostly in equity, for Documentum in 2003.) That would value ECD at roughly 1.7 times sales, which is exactly the valuation Dell got when it unwound its own software business three months ago.

Even as summer heated up, tech dealmaking cooled down in August

Brenon Daly

Contact: Brenon Daly Kenji Yonemoto

After surging at the start of summer, tech M&A activity in August settled back to a more representative level. Acquirers around the globe announced 281 tech, media and telecom transactions valued at $30.5bn in the just-completed month, according to 451 Research’s M&A KnowledgeBase. The spending basically matches the August levels of the two previous years. However, it is just one-third the amount dealmakers spent in July and half of June’s spending.

The main reason why spending last month didn’t drop further than it did – August still ranked as the third-highest monthly total in 2016 – is primarily due to an unprecedented wave of private equity (PE) activity. Last month, buyout shops accounted for roughly half of all tech M&A spending, which is about three times their typical level. Overall, PE shops were buyers in five of the 10 largest transactions, including both of August’s biggest prints, according to the M&A KnowledgeBase.

While M&A spending held up last month, the same can’t be said for deal volume. The number of prints announced in August sank below 300 for the first time in two and a half years, according to the M&A KnowledgeBase. Deal volume dropped to just 281 transactions, down 18% from the monthly average in 2016. (Relatedly or not, stock trading volume last month also slid to some of the lowest levels in recent memory.)

With eight months of 2016 now complete, tech M&A spending has already cracked $300bn, putting it ahead of five of the seven full-year totals since the recent recession ended. Assuming the rest of the year continues at the same rate it has shown since January, 2016 would see some $450bn worth of deal flow. However, we suspect that the pace of spending in the remaining four months of the year could slow if several looming macro factors (an increasingly rancorous US election cycle, a long-considered interest rate hike, the continued deceleration of most of the world’s large economies) introduce more uncertainty into the picture.Jan-Aug MA totals

Rackspace pivots to private

Brenon Daly

Bruised by a fight in the clouds, Rackspace has opted to go private in $4.3bn leveraged buyout (LBO) with Apollo Global Management. The company, which has been public for eight years, is in the midst of a transition from its original plan to sell basic cloud infrastructure, where it couldn’t compete with Amazon Web Services, to taking a more services-led approach. Terms of the take-private reflect the fact that although Rackspace has made great strides in overhauling its business, much work remains.

Leon Black’s buyout shop will pay $32 for each share of Rackspace, which is exactly the price the stock was trading at a year ago. Further, it is less than half the level that shares changed hands at back in early 2013. Of course, at that time, Rackspace was growing at a high-teens clip, which is twice the 8% pace the company has grown so far this year.

In terms of valuation, Rackspace is going private at just half the prevailing market multiple for large LBOs so far in 2016. According to 451 Research’s M&A KnowledgeBase, the previous nine take-privates on US exchanges valued at more than $500m have gone off at 4.4x sales. (See our full report on the record number – as well as valuations – of take-privates in 2016.) In comparison, Rackspace is valued at just slightly more than 2x trailing sales: $4.3bn on $2bn of revenue, with roughly the same amount of cash as debt.

More relevant to Rackspace as it moves into a private equity (PE) portfolio is that even as the company (perhaps belatedly) transitions to a new model – one that includes offering services on top of AWS, Azure and other cloud infrastructure providers that Rackspace once competed against – is that it generates a ton of cash. Sure, growth may be slowing, but Rackspace has still thrown off some $674m of EBITDA over the past year.

The company’s 33% EBITDA margin is even more remarkable when we consider that Rackspace, which has more than 6,000 employees, is relatively well-regarded by its customers for its ‘fanatical’ support of its offerings. While we could imagine that focus on customer service as competitive differentiator might set up some tension under PE ownership (people are expensive and tend not to scale very well), Rackspace has the advantage of having built that into a profitable business. In short, Rackspace is just the sort of business that should fit comfortably in a PE portfolio.

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

The buyout barons get busy on Wall Street

Brenon Daly

Contact: Brenon Daly

Cash-rich buyout firms are still shopping on Wall Street, undeterred by recent record levels hit in US equity markets. The dramatically increased buying power of private equity (PE) shops has resulted in an unprecedented number of significant tech vendors erased from US exchanges so far this year. Already in just eight months of 2016, PE firms have announced nine take-privates valued at more than $500m, up from an average of about five transactions per year in the past half-decade, according to 451 Research’s M&A KnowledgeBase.

Part of the reason why PE shops are buying big companies is that they have amassed billions of dollars of capital, so they don’t have to sweat when writing the equity check. Further, credit is once again flowing relatively freely to help support these large deals. With money in hand, buyout firms are ready to do business. To get a sense of that, consider Vista Equity Partners’ $1.8bn acquisition of Marketo in May. According to the proxy filed with the SEC in connection with the transaction, Vista announced the purchase just one month after first informally floating the idea of buying the marketing automation specialist.

Of course, it also helps that buyout shops are willing to pay up to do their deals. In the case of Marketo, for instance, Vista is paying 7.9x trailing sales for company, which was growing at about 30%. Vista paid a comparable multiple in its similarly sized reach for Cvent in April. Meanwhile, the buyout pair of Silver Lake Partners and Thoma Bravo paid a full turn more last October for SolarWinds, a roughly $500m business that sold for $4.5bn. The valuation of the network management software provider looks equally as rich when we consider that it sold for 28x EBITDA, by our calculation.

On average, in the nine large take-privates so far in 2016, PE firms have paid an average of 4.4x trailing sales, according to the M&A KnowledgeBase. That, too, is the richest valuation we have recorded for PE shops, slightly ahead of the average of 4.1x trailing sales in 2015 but about twice the prevailing multiple in the previous three years. For more context: The recent take-privates are valued about half again as richly as the LBOs done during the previous buyout boom of 2006-07, when the average tech vendor went private for slightly less than 3x trailing sales, according to the M&A KnowledgeBase.

KB recent take-privates

Media.net becomes latest Chinese ad-tech target

Scott Denne

Contact: Scott Denne

Inflated stock value on China’s exchanges and a belief in a coming currency devaluation continue to fuel a boom in overseas M&A from the People’s Republic. The latest acquirer to add to that trend is Beijing Miteno Communication Industrial Technology, which announced the purchase of Media.net, a contextual advertising technology firm, for $900m in cash. With more than four months left to go in the year, China-based buyers have crushed their previous record on foreign acquisitions three times over by spending $13.1bn, compared with $3.7bn in all of last year.

We expect such deals to continue, particularly in ad-tech, as vendors in that country widely anticipate an eventual devaluation of their currency. Whether such a devaluation will occur isn’t known, but it’s generally accepted by much of the business community in the country and that has been a factor in the sudden spurt of M&A.

China-based acquirers have been particularly aggressive in their pursuit of ad-tech companies like Media.net. These businesses play well into the arbitrage strategy that’s driving much of China’s overseas acquisitions. The buyer trades at 12.6x trailing revenue on the Shenzhen Stock Exchange – adding Media.net at a 3.5x multiple should boost that nicely. That’s a dynamic we’ve seen in several, though not all, such purchases.

Advertising technology plays well in that arbitrage strategy and those businesses have become popular targets for Chinese shoppers. On a revenue basis, valuations tend to be lower in ad-tech than other tech sectors because gross margins are lower – 15-25% gross margins are quite common. Also, a recent dearth of US acquirers for those assets has driven prices even lower. According to 451 Research’s M&A KnowledgeBase, the median historic multiple on ad-tech transactions is 2.7x TTM revenue. That has dropped to 2.2x in the past 24 months.

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

Is Apigee set to be an acquiree?

Brenon Daly

Contact: Brenon Daly

After a dual-track process ended in an IPO in April 2015, Apigee is understood to be trying once again to sell itself. Several market sources have indicated that the API management vendor has retained Morgan Stanley to run the process. According to our understanding, a handful of large software infrastructure vendors are considering a bid for Apigee, which would likely trade for roughly $500-600m.

Apigee has had a tough run as a public company. In its 16 months on the Nasdaq, it has never traded above its IPO price of $17 per share. (Morgan Stanley led Apigee’s IPO.) During the broad market meltdown in February, Apigee stock touched $5. Although shares have nearly tripled in value in the half-year since then, the company is still underwater from its debut.

One reason for Wall Street’s bearishness is that Apigee is viewed as a ‘sub-scale’ software provider. It likely finished its most recent fiscal year, which ended at the end of July, with less than $100m in revenue. (For comparison, that is less than privately held MuleSoft, which is a sometimes rival to Apigee with its broader integration portfolio.) Further, Apigee is running in the red, losing about $10m in each of the past four quarters on a GAAP basis.

Possible bidders for Apigee, which currently has a market cap of $435m, include big software firms such as existing partners SAP and Pivotal, as well as CA Technologies. According to our understanding, CA was a serious suitor for Apigee before the IPO. That would have been on top of the existing API management CA obtained with its purchase of Layer 7 in April 2013.

Further, CA bought agile software development tools supplier Rally Software last year in a $480m transaction that lines up fairly closely – both strategically and financially – with a possible pickup of Apigee. Both play a part in the broader software lifecycle management market, and both found Wall Street to be a fairly inhospitable neighborhood. Rally garnered 5.5x trailing revenue in its sale to CA. However, Apigee is growing faster (roughly 30%, compared with about 20% at Rally) so would likely get a bit of a premium. Apigee currently trades at about $435m, or 4.7x trailing sales.

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

For some tech companies, it’s a matter of stumbling to the sidelines

Brenon Daly

Contact: Brenon Daly

We noted earlier this week that IT budgets are tightening, meaning growth could get harder to find as the year rolls along. Sluggish expansion and diminished outlooks have already hit some of the tech industry’s major names. And while they search uncertainly for a way to bump up their top lines, they aren’t necessarily looking to M&A. We’ve already seen a few key companies, particularly those accustomed to growing at a rapid clip, step out of the market.

  • Apple is shrinking after a decade and a half of uninterrupted growth that was the envy of the tech industry. In the previous three years, when it was growing revenue at an average of a mid-teens rate, the company printed about an acquisition every month, according to 451 Research’s M&A KnowledgeBase. Yet it hasn’t been nearly that active as revenue declined. Earlier this week, Apple bought an early-stage analytics provider – its first deal since January.
  • Former highflier FireEye has dramatically come back to earth. The security specialist now expects to earn just $100m in additional revenue in 2016, which is half the $200m in new revenue it posted in 2015. That means FireEye would generate mid-teens growth this year, just one-third the level it grew last year. FireEye hasn’t announced a deal in the past six months.
  • Like FireEye, Twitter is growing at only one-third the rate it was last year. (In its second quarter, Twitter increased revenue just 20%, compared with 61% in Q2 2015.) According to the M&A KnowledgeBase, Twitter has done 19 acquisitions since its IPO in November 2013. However, just one of those transactions has come in the past year, as the company has struggled with attracting new users and selling more ads to that decelerating audience.

As marquee tech firms find their growth slowing or even reversing, they are more likely to hunker down. The first order of business for a company that’s stumbling is to understand where it tripped up and what it needs to do to regain its stride. (As they say, growth masks a lot of problems.) Acquisitions – potentially expensive and often irrecoverably distracting – don’t really fit strategically when a vendor is doing layoffs (FireEye) or looking to sublease some of its headquarters (Twitter). If more of the tech industry does indeed feel the pinch of tightening IT budgets, the recent surge in M&A could slow substantially for the rest of the year.

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

Despite summer heat, some chill in the air on Wall Street

Brenon Daly

Contact: Brenon Daly

Just as this summer’s stock market rally is the only reason the major US equity indexes are in the green this year, the M&A surge since June is solely responsible for elevating 2016 above a sort of middling year for tech dealmaking. The recent activity in both markets has been fairly astounding. The Nasdaq has soared 8% just since the start of July. Meanwhile, tech acquirers announced deals worth $91bn last month – the third-highest monthly total since the end of the recession in 2009.

For both stock traders and dealmakers, the second half of 2016 has started with a sprint. But will the two markets, which are correlated, be able to sustain the pace? Or will the shared worries around global stability and economic growth slow them?

Focusing just on Wall Street, confidence there is waning, if only slightly. In the latest survey of investors by our ChangeWave Research service, nearly half (44%) of respondents indicated that they were ‘less certain’ about the direction of the US stock market now than they were three months ago. Although that is down from the levels reported during the bear market at the start of 2016, we would note that the pessimistic assessment in July – with more than three times as many respondents saying they were ‘less confident’ than said they were ‘more confident’ – came during the biggest stock market rally of the year.

Meanwhile, that lack of confidence is also being felt by a number of tech vendors, with recent growth forecasts being pulled in or even reversed. And even though some companies have sounded more cautious in their outlook during the ongoing Q2 earnings season, actually hitting those diminished expectations could prove more challenging than expected. Consider this: 22% of ChangeWave survey respondents said their IT budget in the second half of 2016 would be lower than the first half, compared with 17% who said they expect to have more to spend.

CW july 2016 Wall Street

Walmart fuels e-commerce strategy with $3.3bn Jet.com buy

Scott Denne

Contact: Scott Denne

Walmart prints the largest-ever e-commerce deal with its $3.3bn purchase of Jet.com. The acquisition helps Walmart fill specific gaps in its business and, more broadly, highlights the growing role of M&A among consumer-facing businesses that need to change their strategies to connect with a more connected population.

The world’s biggest retailer has struggled to achieve growth in recent years. Last year’s sales were down a hair and in the two previous years it posted just 2% growth, amid rising expenses. Part of its strategy to change that trend is to invest in e-commerce. However, e-commerce in the US was a negligible contributor to its growth last quarter and internationally, where Walmart is scaling up its e-commerce operations, it’s had trouble doing so. Founded in 2014, Jet has a team that knows how to scale up quickly – the business is already approaching $1bn in annual goods sold.

Jet’s differentiator is its ability to lower prices through a better understanding of shipping and fulfillment costs. That also aligns with a notable Walmart priority: the company plans to invest heavily in reducing its prices over the next few years to recapture what was once its edge in the offline retail market. Jet’s team may have limited ability to help Walmart on pricing its in-store goods; however, the target has the knowledge to enable Walmart to more effectively battle Amazon in terms of price.

Today’s transaction highlights the degree to which offline brands have embraced online technologies as an important avenue to engage with customers, rather than a secondary distribution channel. Until last year, large tech acquisitions by retail and consumer goods vendors were a rarity. No longer. Unilever’s entry into the shaving market via its pickup of Dollar Shave Club, recent deals by Nordstrom and Bed Bath & Beyond, and a string of mobile app purchases by athletic apparel giants Under Armour and adidas show that digital transformation isn’t limited to the IT department.

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