Category: M&A

by Brenon Daly

Tech M&A spending rebounded in November after two decidedly weak months. Last month’s pickup put this year back on track to record slightly less than a half-trillion dollars’ worth of tech and telecom transactions for full-year 2019. However, that strength assumes the buying can broaden in the final month of what’s proving to be a softening period for recent tech dealmaking.

Across the globe, acquirers handed out $48bn in the just-closed month on tech deals, according to 451 Research‘s M&A KnowledgeBase. Our data indicates the value of transactions announced in November topped the combined total from both September and October. Yet, in one indication of the concentration of M&A activity in November, we would note that the M&A KnowledgeBase actually lists fewer $1bn+ prints in November than October, even as overall spending surged 70%, month over month.

More than half of November’s spending came in a single deal: Charles Schwab‘s $26.2bn purchase of rival TD Ameritrade. (The blockbuster consolidation meets our definition as a ‘tech’ transaction, albeit clearly as a fin-tech deal.) After that, however, both the number and – more significantly – valuation of acquisitions last month dropped off sharply.

In the second-largest tech transaction in November, buyout shop Apollo Global Management took Tech Data private for a pittance of its revenue. Granted, IT distributors like Tech Data operate on low margins with little protection for their business model. But even with that disclaimer, it’s striking that a company generating more than $35bn in sales fetched a terminal value of just $5.6bn. Similarly, Alphabet paid just 1.2x trailing sales for Fitbit in last month’s fifth-largest deal.

It wasn’t all cleanouts and closeouts, however. Lightly funded e-commerce browser plug-in Honey got a $4bn payday from PayPal, the kind of exit that keeps the VC dream alive. But far more often in November, deals got done at a mid- to low-single-digit multiple. In fact, the M&A KnowledgeBase shows November transactions going off at a median of just 1.8x trailing sales, a full turn lower than the average for deals announced from January to October.

With 11 months now in the books, tech acquirers have been averaging about $40bn in monthly M&A spending. (That’s down from an average of nearly $50bn per month in last year’s record run.) That decline can be traced back to buyers, particularly financial acquirers, stepping out of the market just since summer.

Our data shows the value of tech transactions in the back half of 2019 is on pace to be roughly 25% lower than the first half of the year. As we look ahead to the final weeks of the year, we expect a continuation of the trend of soft landings in the market – with fewer big-ticket deals and lower overall valuations – that we’ve seen recently. For tech M&A, this year will be a clear drop from last year.

Figure 1: Tech M&A activity

by Scott Denne

Pricing pressure has driven the number of megadeals to a new high. With Charles Schwab’s $26bn pickup of rival online brokerage TD Ameritrade, 2019 has witnessed four transactions valued north of $20bn – the most ever in a single year, according to 451 Research‘s M&A KnowledgeBase. While the number of similarly sized deals has been on the rise for a couple of years now, the rationales have changed as defensive consolidations have spurred all of the largest prints this year.

Charles Schwab’s all-stock acquisition of a competitor comes as it and other online brokerages engage in a price war – Charles Schwab, E*Trade, TD Ameritrade and Interactive Brokers all saw their stock prices swoon at the start of October as they announced commission-free equity trading. That’s reminiscent of the other three $20bn-plus deals this year, where payment providers all reached for rivals in a bid to expand into adjacent specialties and battle margin pressure with greater scale.

And in all four of 2019’s $20bn+ deals, the buyers are using their stock to afford a rival that’s of a similar size. In today’s transaction, Charles Schwab is handing over a 31% stake in its business to TD America shareholders. Earlier this year, Fiserv gave up 42.5% of its business to buy First Data; Global Payments shelled out a 48% stake for TSYS; and FIS handed over 47% (plus $3.5bn in cash) to Worldpay’s owners. But while massive stock swaps are rising, strategic acquirers have otherwise reduced their appetite for large prints. The M&A KnowledgeBase shows that strategics have spent $1bn or more on just 56 companies this year, 19% fewer than they had at this time last year.

Figure 1: $20bn+ tech M&A

by Scott Denne

There’s a consensus emerging that tech M&A valuations have peaked and are set for a decline. In the earnings call just ahead of his company’s acquisition of Carbonite this week, OpenText’s CEO said that M&A valuations appear to be coming down – a view that lines up with the results from a recent survey. Yet the deals getting done show little signs of pricing pressure.

Across the broader market, prices have only dropped fractionally from last year’s high. The median multiple for targets in OpenText’s traditional hunting ground – information management and application software – stands at 6.5x through 2019, from 6.6x last year, according to 451 Research’s M&A KnowledgeBase. In its $792m purchase of Carbonite, OpenText didn’t exactly pay a premium, although the target did fetch a higher multiple than other OpenText acquisitions.

The price landed somewhere between 2.8x and 3.2x trailing revenue, depending on how one accounts for the revenue from a recent substantial purchase by Carbonite (subscribers to 451 Research’s Market Insight can access our full report on that deal). But either way, the multiple sits on the high end of what Open Text historically pays. According to the M&A KnowledgeBase, OpenText typically pays 2.1x on acquisitions done this decade and we’ve never before recorded it paying above 2.9x.

Although it paid around the high end of its range for Carbonite, OpenText and its management aren’t the only ones expecting a decline in deal valuations. In the M&A Leaders‘ survey from Morrison & Foerster and 451 Research, five times as many respondents said they expect private company M&A valuations to drop over the next 12 months as those who anticipate an increase – the largest gap between bears and bulls that we’ve recorded in any of the last 11 runs of the survey.

Figure 1: Tech M&A valuation outlook

by Michael Hill

Buyers in the manufacturing space are opening their wallets for Internet of Things (IoT) targets because they can. IoT budgets in the vertical are increasing and, as a result, companies involved in the manufacturing industry are spending more on purchases than other IoT-friendly verticals. And targets developing IoT technologies for manufacturing and industrial applications are garnering more attention.

Since 2017, acquirers in the manufacturing vertical have spent $863m on IoT deals, compared with markets such as retail, which has spent $450m on IoT targets over the same period, and healthcare, which has spent $291m. Moreover, purchases of IoT technologies for manufacturing and industrial applications continue to tick up, with 12 such vendors having been acquired this year, matching the previous full-year record, according to 451 Research‘s M&A KnowledgeBase.

Along with the steady increase, the types of transactions getting done have shifted toward IoT targets that are factory-floor-ready, compared with the middleware- and consulting-focused deals that previously dominated the vertical. In other words, companies selling tech to manufacturing businesses are seeking targets that solve a specific business problem, rather than software or service providers with generalized IoT tech or IoT expertise.

Just last month, in fact, SKF, a 112-year-old manufacturer of bearings and rotational equipment, bought predictive maintenance SaaS specialist Presenso to help users of its products keep tabs on equipment performance. And earlier this year, industrial health and safety management software vendor Sphera Solutions snapped up Petrotechnics for its operational risk management expertise, giving the buyer the ability to recognize risks to business processes using real-time data drawn from IoT devices.

The increasing M&A activity is buoyed by expanding IoT budgets in manufacturing. Manufacturers are spending more on IoT across the board. According to 451 Research’s Voice of the Enterprise: IoT, Budgets & Outlook, the average manufacturing respondent said their IoT budget would rise by 44% in the next 12 months, up seven percentage points from when the same question was asked of them one year prior.

Figure 1: IoT tech M&A spending by vertical

by Brenon Daly

A decade and a half since the term ‘machine learning’ first appeared as the rationale for an acquisition in 451 Research‘s M&A KnowledgeBase, the must-have technology has become the single-biggest driver for tech deals in the IT market. Technology companies – looking to make their offerings more efficient, more predictive or more secure – have snapped up hundreds of ML startups. And the pace of deals has only accelerated.

The M&A KnowledgeBase shows 2019 is tracking to nearly 300 ML-themed acquisitions. That’s almost double last year’s total and a full tenfold increase from the number of ML transactions just a half-decade ago. This year’s diverse set of acquirers of the technology shows the near-universal appeal. Buyers include mainstay tech vendors looking to make their products smarter (Oracle, Microsoft) as well as non-tech companies looking to get additional value from all of the data flowing from their existing products (McDonald’s, Mastercard).

To learn more about machine learning’s impact on corporate strategy and product development, 451 Research will be hosting a special Cycle of Innovation Summit in Menlo Park, California, tomorrow morning. (There are still a few seats available. 451 Research clients can register for the ML-focused Summit, which runs Tuesday, November 12 from 8:00-11:00am PST, on the event‘s website.) During the special event, we will be looking at the full ML market, including perspectives on how businesses are building value through ML offerings and how startups are realizing value via ML exits. Among the trends we will be highlighting:

For all of its buzz in IT, ML is still more of a concept than a product at the majority of vendors. Just one in five tech buyers and users said their company has ML up and running, according to a survey from 451 Research’s Voice of the Enterprise (VotE): AI & Machine Learning. Yet more alluringly, the same number of respondents (20%) said their company is currently developing an ML deployment.

To get started in ML, a plurality of customers told us they are looking to existing tech providers to bake in smarts to their products. Nearly four in 10 respondents (38%) said they are running ‘ML-enhanced applications,’ which was the top-rated source for the tech in our VotE survey. That drive is the primary reason our data shows M&A activity in the sector is running at an all-time high.

Figure 1:

by Scott Denne

Dealmakers are forecasting a frosty follow-up to an unusually chilly summer for the tech M&A market. In the latest iteration of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, respondents handed in the most pessimistic report we’ve seen in any previous fourth quarter.

The 40% of tech M&A practitioners that told us deal activity would increase represents only a slight drop from our year-ago reading, when 43% predicted an increase. Yet in this survey, 28% said deal activity would decrease, nearly double the rate of the previous survey and only the second time that more than one in four respondents have forecast a decline.

The results come as acquirers delivered their lightest level of spending on tech M&A targets in two years. As we discussed in our most recent quarterly M&A report, summer spending on tech M&A targets dropped 25% below each of the previous two quarters. Even many of those respondents projecting an increase in deals didn’t put forth a rosy outlook on pricing. At a rate of five to one, respondents predicted that private company M&A valuations would decrease in the next 12 months.

Prices have already fallen a bit from last year’s record levels. According to 451 Research‘s M&A KnowledgeBase, among private tech vendors selling for $100m or more, the median multiple stands at 5x trailing revenue in 2019, down from 5.3x last year.

We’ll publish the full analysis of the fifteenth edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster survey later today. The report, available to subscribers to 451 Research’s Market Insight service, will also include the outlook for private equity, strategic and crossborder acquisitions.

Figure 1:

by Brenon Daly

After slumping to the end of Q3, tech M&A rebounded slightly in the opening month of the final quarter of 2019. Acquirers spent $28bn on 358 tech and telcom transactions announced around the world in October, according to 451 Research‘s M&A KnowledgeBase. Although spending in the just-completed month doubled from September’s lowly totals, our data shows that October still came in about 30% lighter than the average monthly spending through the first three quarters of the year.

October’s low overall deal value came despite some pretty high valuations in last month’s prints. The M&A KnowledgeBase indicates that buyers paid an average of 3.6x trailing sales in the transactions they announced last month. While acknowledging there tends to be a high degree of variability in valuations in any given month, we would nonetheless note that last month’s average price-to-sales ratio is a full turn higher than the average of 2.6x paid in deals announced from January through September.

Certainly, the M&A KnowledgeBase has some pricy prints for October. That includes both of last month’s largest transactions:

In last month’s blockbuster deal, Digital Realty paid $7.3bn in equity – an eye-popping 13x trailing sales and 30x trailing EBITDA – for European rival Interxion.

Sophos got a ‘growthy‘ valuation of 5.5x trailing sales in its $3.8bn take-private by buyout shop Thoma Bravo.

The relatively soft October spending comes after an even softer September. (Our database shows that the total value of tech acquisitions in the two most recent months barely equals the average spending for a single month in the first half of 2019.) Taken together, the late-summer slowdown has effectively removed 2019 from the top rank of tech M&A, with full-year 2019 spending on transactions on track to drop about 20% from 2018.

Figure 1: