M&A – Page 41 – Inorganic Growth

Value investing: China’s newest export

May 12, 2016 Scott Denne

As acquirers back down from last year’s frenetic pace of dealmaking, there’s one group that’s opening their wallets – buyers from China. The value of transactions from this cohort, like the rest of the market, is down from 2015 highs, coming in at $12bn compared with $21bn through the first four months of the year. Yet the volume of deals is set to outpace last year’s totals.

China coming into its own as a major economic power accounts for much of the momentum. Also, the broader M&A market has shifted toward value-based buys and away from growth. That’s a core element for many China-based businesses. And when they’re hunting for value, they’re homing in on North American targets. Through April, China-based tech vendors have printed 10 such deals for $9.3bn – those numbers are approximately double the pace of any other year in the past decade, according to 451 Research’s M&A Knowledgebase.

And in reaching for North American companies, China-based acquirers have been uniquely cheap. Only once in the past 10 years has the M&A KnowledgeBase recorded such a transaction coming in above 3x trailing revenue, with only four deals above 2x. This year is no exception. Lexmark, which was picked up by a consortium led by Apex Technology, was valued at $3.5bn, or 1x, making it the largest multiple of the year among American firms selling to China. The largest deal (and lowest multiple) was Tianjin Tianhai Investment Company’s purchase of Ingram Micro for $6bn, or 0.1x.

China’s stock markets have come down substantially over the past 12 months, although valuations there still trend high, leaving room for M&A arbitrage. Shares of Apex (Lexmark’s soon-to-be owner) most recently traded on the Shenzhen Stock Exchange at 13.5x, while Tianjin Tianhai (Ingram’s acquirer) trades at 13.2x.

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

Salesforce’s marketing connection

May 11, 2016 Scott Denne

Contact: Scott Denne

Salesforce moved into marketing with its boldest acquisitions, but they’ve generated only modest returns. Despite above-average market success, its Marketing Cloud is the smallest cloud within the company and the second-slowest in growth. As it kicks off its annual marketing conference, the environment is ripe for Salesforce to build on its existing capabilities, as digital marketers are ready to spend.

Salesforce’s Marketing Cloud posted $654m in revenue last year, up 29%. That kind of growth in marketing software would be the envy of several other enterprise software vendors – particularly HP Inc and Teradata, both of which recently fobbed off their low-growth marketing assets. Yet marketing feels malnourished at Salesforce. The CRM giant paid $2.5bn, $689m and $326m to pick up marketing automation provider ExactTarget and social marketing specialists Buddy Media and Radian6, respectively. Today, those businesses are the core of Salesforce’s Marketing Cloud – which accounts for just 10% of total revenue and is the second-slowest cloud in growth behind the legacy, and much larger, Sales Cloud. Compare that with its customer-service software business, which jumped 38% to $1.8bn and has its origins in the $32m acquisition of InStranet in 2008.

As Salesforce kicks off its annual Marketing Cloud conference, Connections, there’s much it could do to bolster this unit. For one, there’s still work to be done in integrating Marketing Cloud into a shared UI across other Salesforce offerings. The company has long pitched the vision of a single view of the customer, although today less than one-third of its clients purchase Salesforce products across multiple categories.

Starting with email marketing, Salesforce has added multiple marketing applications, unified around its Journey Builder offering for designing rules-based campaigns. And although Salesforce’s marketing team hasn’t gone shopping in three years, its Marketing Cloud could benefit greatly from the inclusion of additional identity data to better track online and offline customer interactions. Reaching for LiveIntent would bring these capabilities to Salesforce, as well as enhance its email service with some additional personalization capabilities. Alternatively, it could look to buy an audience management platform vendor such as Lotame or Krux. Both have developed cross-device matching as part of their products. In fact, Salesforce recently expanded its partnership with the latter vendor to enable Marketing Cloud customers to match their data with that from third-party providers.

The environment is ripe for Salesforce to build on its existing capabilities. Although much of the basic functionality of digital marketing – website analytics and email marketing – is maturing, the overall space has plenty of momentum for Salesforce to capitalize on. According to a recent survey by ChangeWave Research, a service of 451 Research, 17% of marketers plan to increase spending on digital marketing in the coming quarter. That’s higher than at any point in the previous two years and a larger anticipated increase in spending than any other category in the January survey.

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

Earnouts are on the outs

May 6, 2016May 6, 2016 Brenon Daly

by Brenon Daly

At its most basic, an acquisition is just the end result of strategy and structure. The first part of the equation (strategy) tends to command most of the attention, while the structure of a transaction often gets dismissed as mere ‘paperwork.’ It’s a bit like a wedding. Most of us don’t celebrate the signing of a marriage certificate – a document that, like an acquisition agreement, is legally binding. No, the reason we get together to sappily toast the couple and awkwardly dance to ‘Brick House’ is to celebrate the idea of two people joyfully spending their lives together. In both marriage and M&A, the grand vision for the union is more emotionally satisfying than the nuts and bolts of the agreement.

Yet, terms matter. They not only shape specific deals and the ultimate return on those transactions, but also provide useful indicators about the broader market. Consider the case of earnouts, which are additional payments an acquirer makes if a target company hits certain milestones. Typically, as any dealmaker can tell you, earnouts are used to bridge valuation differences.

So, what to make of the fact that earnouts have fallen dramatically out of favor? According to 451 Research’s M&A KnowledgeBase, so far this year dealmakers have included the provision just half as often as the same period in each of the two previous years. Earnouts haven’t been used this sparingly since the recession year of 2009.

One possible reason for the sharp decline is that buyers no longer feel the need to stretch on valuation. That certainly came through in the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, where a record two-thirds of acquirers and their advisers predicted that private company acquisition valuations would be coming down for the remainder of 2016. And the fact that buyers no longer feel they need to include as many financial kickers as they once did to purchase the companies they want suggests that they have the upper hand in negotiations right now.

Vonage pushes further into business communications with Nexmo buy

May 5, 2016 Mark Fontecchio

Contact: Mark Fontecchio

Vonage pays $230m for Nexmo, which offers enterprise voice and text messaging APIs. The deal, Vonage’s largest in 451 Research’s M&A KnowledgeBase, pushes the VoIP provider further into the realm of unified business communications. Vonage has now spent about $600m on M&A in the past few years to pivot from a consumer-focused VoIP supplier into a business communications vendor. The gamble has paid off, with the company’s overall sales growing once again and its business revenue jumping exponentially.

Nexmo is Vonage’s biggest reach yet. Its previous nine-figure (or close to it) acquisitions – starting with Vocalocity in 2013, Telesphere Networks in 2014 and iCore Networks last year – involved business-focused VoIP providers, so Vonage stayed within its wheelhouse. With its cloud-based voice, messaging and chat APIs, Nexmo broadens Vonage’s horizons into business communications services, helping companies more easily embed voice and messaging services within their mobile apps. For that privilege, Vonage is paying a healthy multiple on Nexmo’s trailing 12-month revenue (see estimate here). The multiple is Vonage’s highest to date and one of the largest we’ve seen in mobile messaging and application development. Nexmo’s revenue is also growing at a fast 40% clip, according to Vonage.

Vonage’s overall sales grew 3% to $895m last year, but its business revenue more than doubled to $219m. Two years ago, the company had $8m in business revenue. Now its business revenue is higher than all of rival 8×8’s sales. By our math, at least three-fourths of that increase in business revenue came from its purchases of Telesphere, iCore and SimpleSignal. Meanwhile, its consumer revenue dropped 12% to $676m. Vonage’s challenge has been – and will continue to be – how quickly it can replace its disintegrating consumer revenue with business dollars, whether that be through continued M&A or more organic growth.

What do the ‘latent take-unders’ on Wall Street mean for startups?

May 3, 2016May 3, 2016 Brenon Daly

by Brenon Daly

Either the acquirers of big tech companies on US exchanges are getting steals right now or Wall Street got duped last year. We say that because a majority of the public companies that have been acquired so far this year have signed off on deals – including takeover premiums – that value them at lower prices than they achieved on their own in 2015.

To put some numbers on the trend of latent ‘take-unders,’ we looked at the 13 tech vendors in 2016 that got erased from the NYSE or Nasdaq in deals valued at $500m or more, according to 451 Research’s M&A KnowledgeBase. In eight of the 13 transactions, companies sold for prices below their 52-week highs, with just five coming in above those levels. (We would note that while US equity indexes have whipped around a bit, they are basically flat over the past year.) Among the vendors that have tacitly agreed they are worth less now are TiVo, Polycom, Lexmark and Cvent.

Because of liquidity, public market valuations adjust far more quickly and visibly than private market valuations. We tend not to hear much about the ‘down-round’ sale of a startup. And yet, those discounted deals are coming, according to the recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster. A record two-thirds of the dealmakers (64%) we surveyed said private companies were likely to get sold for less during the remaining months of 2016 than they would have in the same period last year.

For tech M&A, April is another month further from the peak

May 2, 2016 Brenon Daly

Contact: Brenon Daly

Tech M&A spending in April slumped to its lowest total in 15 months, as buyers either looked to pick up bargains or stepped out of the market altogether. The $18bn in total deal value recorded in 451 Research’s M&A KnowledgeBase for the just-completed month comes in at less than half the average monthly tally from last year’s record run, further lowering the post-peak levels we’ve already recorded so far in 2016.

Many of the transactions announced in April also indicated how acquirers have swung to ‘value’ – rather than ‘growth’ – buys amid a broad slowdown in tech, particularly among its old-line vendors. Both of last month’s largest acquisitions valued the targets, which were each founded around 1990, at just 1x trailing sales. (The paltry multiple for both Lexmark and Polycom reflects how the tech industry has left behind many of its sizable-but-shrinking pioneers.)

More broadly, four of the 10 largest deals went off at less than 2x trailing sales, according to the M&A KnowledgeBase. Also putting pressure on overall multiples were greying companies divesting businesses that they decided not to support at a time when growth is difficult to find. CA Technologies, Teradata, HP Inc and Vodafone all punted businesses last month. The only real above-market valuations among April’s big prints were awarded to more recently founded SaaS providers, with Cvent getting 8x trailing sales in its take-private and Textura garnering more than 7x revenue in its sale to Oracle.

With four months now in the books, overall spending on M&A around the globe stands at just $90bn. That puts 2016 roughly on track for a full-year total of about $270m, which would be less than half the amount in 2015 and one-third lower than 2014. That lower level certainly squares with the results of our recent survey of dealmakers, in which a record number said they would be less active in the M&A market for the rest of the year. (See the full report on the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.)

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

Survey: After years of big plans and big buys, tech acquirers signal a slowdown

April 29, 2016April 29, 2016 Brenon Daly

After pushing M&A spending to a 15-year high last year, a record number of tech acquirers have indicated that they will be stepping out of the market in 2016. For the first time in the four-year history of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number saying they would be cutting back on their shopping. That’s a significant deterioration in M&A sentiment compared with past surveys, which, on average, have seen more than four times as many respondents project an increase than a decrease.

In our late-April survey, fully one-third (33%) of respondents said they would be slowing their acquisition activity over the next six months, compared with just 38% who reported that they would be accelerating their M&A program. Taken together, the responses mark the most bearish tone ever from our respondents, who represent many of the most well-known buyers in the tech industry as well as their advisers. In our previous surveys, the average forecast has been overwhelming bullish, with more than half of respondents (55%) anticipating an acceleration in activity and only 13% saying the opposite. (Subscribers to 451 Research can see our full analysis of the M&A Leaders’ Survey.)

Oracle gets back to buying

April 28, 2016 Scott Denne

Contact: Scott Denne

As valuations and deal volumes come off of last year’s high, Oracle is heading in the opposite direction. With today’s acquisition of Textura, the database giant has printed its fourth deal of 2016, after just two in all of last year. Despite that, it is not necessarily a bargain shopper. In today’s transaction, Oracle is paying $663m, or 7.6x trailing revenue, for construction management SaaS vendor Textura. Not cheap, but better than it would have spent a year ago for the target, when its shares were trading two turns higher. The purchase continues a trend that accounted for much of Oracle’s 2014 spending spree on vertically focused software (MICROS being the most notable example).

Oracle seems to come to the table more often when the market is a bit more favorable to buyers. Last year’s drop in acquisitions corresponded with an overall 18% annual rise in average valuation-to-revenue multiples (excluding those targets with less than $10m in TTM revenue), according to 451 Research’s M&A KnowledgeBase. Similarly, the largest jump in average valuation in the past decade – 36% in 2010 – witnessed Oracle’s second-lowest spending ($1.9bn) during that same period.

All signs point to a continued favorable environment for Oracle to go shopping. In our December 2015 survey of bankers and corporate development executives, nearly two-thirds of respondents anticipated a decrease in valuations in 2016. That’s almost double the previous high-water mark – or low-water mark, depending on your perspective – in our survey. Not to mention, overall deal value was down to $72bn in the first quarter of this year, from $121bn a year earlier. Even with today’s transaction, however, Oracle is still tracking below its historical pace.

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

Twitter should be more antisocial

April 27, 2016 Scott Denne

Contact: Scott Denne

Twitter’s biggest problem is that it fancies itself as the next (or at least the number two) Facebook. While Twitter is a substantial social network, its growth on that front has peaked and isn’t likely to come back in a big way. Instead of thinking of what it could be next, management seems focused on recapturing the growth of the past or, even more worrisome, turning to strategies that are best left to the largest Internet firms.

In its earnings call this week, the company emphasized what it perceives as Twitter’s strength: ‘Twitter is live.’ True, but ‘live’ isn’t a thing people are interested in. People care about live (something). As Twitter looks to invest its $3.5bn in cash, the company should leverage its strength in live commentary, live sharing and live video to build up communities and content around particular topics and interests. The core – and overly broad – platform should power a set of interest-driven media offerings, not be the main product itself. Commentary without context is unlikely to draw major brand advertisers to the platform. It could, however, draw them in with unique communities and the content to go along with them. Twitter has a perfect opportunity to build along those lines with its recent deal with the NFL to stream 10 games next season.

The amount of US monthly users on Twitter’s network has been flat for four consecutive quarters and international growth hasn’t fared much better. The company has been able to squeeze revenue growth out of a flat audience by developing its ad products. Those efforts are now losing momentum. Twitter reported revenue growth of 36% year over year, down from 48% in the previous quarter. It’s guidance for next quarter is flat.

This feels like a desperate situation. But it shouldn’t. Twitter is a media company that will shortly be larger (by revenue) than The New York Times. And it’s posting 36% growth – certainly unusual for a media company its size. The problem is that it doesn’t consider itself a media company. Management seems intent on scaling up the core platform as its top priority. It’s not likely to reignite the growth it saw in its early days – and it’s certainly unlikely to become the next Facebook, which is unfortunately the lens through which management views its potential.

Based on management comments, it appears the company is determined to invest in building out its ad-tech stack to become a one-stop shop for advertisers. Twitter simply doesn’t have the scale to accomplish this and lacks the ability to match identities across devices, which is becoming a core feature of Google and Facebook and a defining trend of digital advertising. And in video, the fastest-growing segment of digital advertising, the supply-side platforms and ad networks with the most scale have already been scooped up. Twitter’s strength lies in interest-driven data, rather than the demographic data that’s likely to continue to be the currency of video ad buys for at least a few more years.