Category: M&A

Same play, smaller screen

Mark Fontecchio

by Scott Denne, Jessica Montgomery

Google has jumped into wearables with the $2.2bn pickup of Fitbit. But don’t expect the buyer, which makes almost all of its money from search and advertising, to invest heavily in turning around the fortunes of the beleaguered fitness tracker. Instead, expect it to follow the same plan as it did with Motorola – use the target’s team, tech and assets to make products that show other hardware vendors what can be done with Google’s OS software.

Our surveys show that Fitbit remains the leading maker of fitness trackers, although by any measure the company’s best days are behind it. Its topline expanded just 5% in the most recent quarter and its stock has tumbled from nearly $50 per share in the weeks after its 2015 IPO (Google is paying $7.35 per share). According to 451 Research‘s VoCUL: Endpoints & IoT, Consumer Wearables report, planned purchases of fitness trackers have steadily declined since mid-2017, dropping to 3% in our August reading. And within the category, Fitbit is losing ground – just 20% of those planned purchasers said they intend to buy a Fitbit, down from 37% a quarter earlier.

In smartwatches, Fitbit hasn’t become a formidable presence. Fewer than 2% of planned smartwatch buyers have their eye on a Fitbit, compared with Apple’s 74%. It’s the former company’s lead that has compelled Google to make a move here. With the purchase of Fitbit, which itself had bought Pebble, a pioneer of the smartwatch category, Google could attempt to develop watches that highlight the capabilities of Wear OS (its smartwatch version of Android) and draw app developers to its software, much as it did with Motorola and continues to do with its Pixel phones.

For Google (now officially known as Alphabet), the acquisition of Motorola was a response to an existential threat – the increasing adoption of smartphones. If the company hadn’t found a way to make its search engine easily accessible on mobile devices, it could have been shut out of the market. Even with the prevalence of Android (our most recent VoCUL survey showed that nearly 40% of current smartphone owners have an Android phone), Google has paid Apple billions of dollars to be the default search engine on Apple devices.

Google’s purchase of Fitbit is far smaller than its $12.5bn reach for Motorola. And that’s, well, fitting. Although it’s important to Google that its OS gets into every major compute interface, smartwatches haven’t yet gained the kind of traction that smartphones have enjoyed. According to VoCUL, 10% or fewer respondents typically say they plan to buy a smartwatch in the next 90 days, whereas the smartphone market tends to be 10-20% in recent quarters, and higher when the category was less mature.

For those seeking a more detailed view of wearables, the broader IoT market and its impact on M&A, 451 Research will be hosting its Cycle of Innovation Summit in Boston next Tuesday morning (11/5).

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A sudden spike in patient-monitoring M&A

Mark Fontecchio

by Scott Denne

UnitedHealth Group becomes the latest acquirer to scoop up a patient-monitoring vendor with its purchase of Vivify Health. Through the first 10 months of the year, there’s been a surge of acquisitions that involve patient monitoring as insurance carriers and medical software firms seek to capitalize on a nascent market that’s buoyed by the two most potent themes in emerging technology today – the Internet of things (IoT) and machine learning.

According to 451 Research‘s M&A KnowledgeBase, the acquisition of Vivify, a developer of software for remote patient monitoring and care, marks the eleventh tech deal of 2019 involving a company with patient-monitoring capabilities. That’s up from just six last year and two more than we’ve recorded in any full year. The expanding interest in patient monitoring comes as new technologies are emerging to enable healthcare providers to monitor patients remotely (through wearables and other connected devices) and run analysis on the monitoring data they’ve long collected in hospitals.

In 451 Research’s Voice of the Enterprise: AI & Machine Learning, Adoption & Uses Cases report, 45% of respondents in the healthcare industry said they currently use machine learning for patient monitoring. Related to that, in our Voice of the Enterprise: IoT, Organizational Dynamics survey, 72% of healthcare respondents said their organizations have the endpoints in place to collect data for patient monitoring, yet few of them have such a project up and running.

Improved patient monitoring could lead to lower costs for insurance providers like UnitedHealth, although it’s still early days for this corner of healthcare. Our IoT study shows that more organizations have the endpoints in place than are actually deploying IoT-related monitoring projects. Still, the potential cost savings and healthcare’s affinity for IoT could lead to an expansion of patient monitoring, as our survey showed that healthcare remains ahead of other verticals in IoT adoption.

For those seeking a more detailed view of the rapidly emerging IoT market, 451 Research will be hosting a special event next week focused on the technology and implementation trends that are spurring the record M&A activity in IoT. Clients can register for our Cycle of Innovation Summit in Boston next Tuesday morning (11/5) on the event’s website.

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Busy with ‘things’

Mark Fontecchio

by Brenon Daly

Big things are forecast for the Internet of Things. IoT spending is expected to nearly quadruple over the next five years, topping a half-trillion dollars. To get a place in that massive market, acquirers have gone on an unprecedented shopping spree so far this year.

Already in 2019, tech titans including Microsoft, Intel and Facebook have picked up some ‘things.’ Altogether, 451 Research‘s M&A KnowledgeBase lists more IoT transactions in the first 10 months of this year than any other full year in history. Overall, our data shows 2019 deal volume in the sector will roughly double from 2014, while soaring tenfold from the start of the decade, when the IoT trend was first taking off.

To look deeper at the rapidly emerging IoT market, 451 Research will be hosting a special event next week focused on the technology and implementation trends that are spurring the record M&A activity. (Clients can register for our Cycle of Innovation Summit in Boston next Tuesday morning (11/5) on the event’s website.) During the Summit, we will be highlighting a number of key forecasts for the IoT market, including:

Right now, more than four of 10 IT professionals (43%) tell us they already have IoT technology deployed, according to a recent survey from 451 Research‘s Voice of the Enterprise: Internet of Things, Organizational Dynamics 2019. Further, almost as many survey respondents (39%) say they either have a proof of concept ongoing or will have something up and running within the next year.

As to what those future IoT deployments will be doing, the market for ‘things’ is going to tip heavily toward businesses in the coming years. The current IoT sector is evenly split between consumer and business, according to a recent 451 Research Market Monitor study. However, as more industries connect more of their business, our Market Monitor forecasts the B2B IoT segment will grow at twice the rate of the B2C IoT sector. By 2024, enterprise spending will account for 70% of the overall IoT market, with consumer spending just 30%.

Again, we look forward to seeing many of you – investors, IT professionals and entrepreneurs – at our Cycle of Innovation Summit in Boston next week, as we look at how companies are building value in the IoT market.

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Battered by Brexit

Mark Fontecchio

by Brenon Daly

Despite EU and UK leaders agreeing to terms on the country’s departure from the larger political and economic body, there’s still no actual Brexit. A weekend vote on the accord now looms large in the British Parliament, with early forecasts indicating the hard-won deal will likely struggle to get final approval. Parliament rejected a similar agreement earlier this year.

Regardless of whether the ‘ayes’ or the ‘nays’ carry the vote about the EU bloc, Brexit has already notably diminished the UK’s standing in another large marketplace: tech M&A. British buyers as well as British sellers in 2019 are on pace to announce their fewest tech deals in a half-decade, according to 451 Research‘s M&A KnowledgeBase. The slowdown there is being felt much more broadly, since our data shows the UK has perennially ranked as the second-busiest M&A market in the world.

Deal volume – both on the buy- and sell-side – is on track this year to drop about one-quarter from the recent highs they hit. Incidentally, our M&A KnowledgeBase indicates that tech M&A in the UK peaked in 2015 – the year before the Brexit vote. Since the contentious vote in mid-2016 and the still-unresolved results, the number of British tech prints has dropped every year.

Somewhat unexpectedly, however, recent M&A spending has clipped along at exceptional levels. Based on annualized totals for year-to-date activity from our M&A KnowledgeBase, British buyers will spend a record amount on tech acquisitions in 2019, while spending on acquired UK-based tech companies is on pace for its second-highest annual level.

For dealmakers, Brexit has essentially meant fewer bets but much bigger bets. As an example, consider this week’s take-private of British endpoint security vendor Sophos. To erase Sophos from its home on the London Stock Exchange, Thoma Bravo is paying $3.8bn. To put that price into context, the Sophos take-private is more than the combined price of the buyout firm’s two next-largest information security LBOs.

As the sale of Sophos also shows, deals can still be struck in times of uncertainty, but extra work is required. More than three years since the original decision, Brexit has left open vexingly large questions for businesses, such as taxation rates, employee permits and supply chains. All of those have a direct impact on a company’s valuation, which is the key consideration in all acquisitions. Fittingly enough for the contentious three-year Brexit process, the British Parliament’s vote this weekend may only add to the volatility.

A change of seasons in tech M&A

Mark Fontecchio

Rising global uncertainty coupled with slowing economic growth combined to knock Q3 spending on tech acquisitions to the lowest quarterly level in nearly two years. Buyers around the world announced tech purchases valued at just $96bn from July to September, according to 451 Research‘s M&A KnowledgeBase. (451 Research subscribers can look for our full report on Q3 M&A activity on our site later today.)

The late-summer slowdown, where Q3 spending declined 25% from this year’s two previous quarters, has effectively removed 2019 from the top rank of tech M&A. Our data indicates that full-year 2019 is now on track to fall more than $100bn lower than recent strong spending years. That drops this year from an exceptional one to merely above-average.

To put some numbers on that, the third-quarter slump snapped the unexpectedly strong start to 2019 and, more symbolically, it likely ended this year’s march to top a half-trillion dollars of acquisition spending. Dealmakers had been very much on track for that significant $500bn+ threshold through the first half of this year. But now, with the change of seasons, it looks increasingly out of reach. Again, we’ll have a full report on Q3 M&A activity – including the quarter’s top prints, recent trends in private equity dealmaking and how the broader macroeconomic economy is shaping tech acquisitions – on our site later today.

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Run this search in the M&A KnowledgeBase to see more detail.

The end of Omniture’s overture

Mark Fontecchio

by Scott Denne

This past weekend marked 10 years since Adobe’s $1.8bn purchase of Omniture, the deal that arguably started the race among enterprise software vendors to build out customer experience software portfolios. Although that transaction marked the beginning, its decennial looks like the beginning of the end. While we tracked a record haul for customer experience software M&A in 2018, those companies are becoming increasingly harder to sell.

According to 451 Research‘s M&A KnowledgeBase, buyers spent $29.6bn in 2018 on vendors developing software for advertising, marketing, customer service, e-commerce and other forms of customer engagement. So far this year, just $8.3bn has been spent on such targets, on pace for the lowest annual total since 2015. Moreover, we’ve seen just five companies in this space sell for $200m or more, while each of the six previous full years have seen at least 10 deals of that size.

And the multiples on those acquisitions have fallen dramatically, our data shows. Last year almost every vendor in the category selling for that amount blew past the 5.2x trailing revenue that Omniture commanded. This year, however, such transactions fetched a median valuation of 2.3x, which is at least a full turn lower than the median valuation of similar deals in any single year over the past decade. This year, Dynamic Yield and TrendKite nabbed north of 8x in their respective sales to McDonald’s and Cision, while none of the other $200m cohort printed above 2.5x.

There’s little doubt that Adobe has seen success with its Omniture buy. The company expects to grow its Digital Experience business, the unit that houses Omniture (now Adobe Analytics) and several other related targets, by 23% to $3bn in the soon-to-close fiscal year. But other early, marquee investments in this sector weren’t as successful and there may not be as many deep-pocketed buyers as there once were. Both IBM and Teradata, for example, shed their marketing software units. Meanwhile Oracle, which still ranks as the most prolific acquirer in the segment, only printed one deal last year and none in almost 18 months.

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Stocking up on an M&A currency

Mark Fontecchio

by Brenon Daly

Paper may be pricy these days, but it still has value as an M&A currency. So far this year, US public companies have been using their own shares at a near-record rate to pay for the tech deals they are doing.

451 Research‘s M&A KnowledgeBase shows that buyers have already announced transactions valued at more than $110bn this year that include at least some equity consideration. That puts full-year 2019 on track for the second-highest annual total since 2000. As paper has become more popular, it has figured into a broader spectrum of deals, most notably those transactions where the buyer is spending an unprecedented amount:

After doing only tiny tuck-ins, Shopify spent $450m earlier this week on robotics startup 6 River Systems. Shopify covered $180m, or 40%, of the cost with its own shares, which are up an astronomical 140% so far this year.

Splunk tripled the size of its largest-ever purchase with last month’s $1.1bn acquisition of SignalFx. Some $400m of the total consideration is coming as Splunk shares.

Salesforce used its own shares to cover the full price of its record $15bn pickup of Tableau Software in June. Our data indicates that in its next three largest acquisitions, Salesforce used all-cash structures in two of them, with only a minority portion of stock (20% of total consideration) in the third deal.

Taking hundreds of millions (or even billions) of dollars in payment in stock represents a pretty big gamble by targets and their backers this deep in the current decade-long bull market on Wall Street. Plenty of current signs – from an inverted yield curve to a slump in manufacturing output to an ongoing trade war between the two largest economies on the planet – point to a slowdown.

Already, companies are starting to feel the pinch. A just-published survey by 451 Research‘s Voice of the Consumer: Macroeconomic Outlook showed that fewer than one in five respondents said their organization was ahead of its sales plan for Q2. That was the lowest level of outperformance in three years. If sales momentum does indeed stall and companies take down their numbers, stock prices will invariably follow suit. That could leave selling companies holding a bunch of shares that aren’t worth nearly as much as they once were.

Shopify and other new buyers check out VC portfolios

Mark Fontecchio

by Scott Denne

Shopify has printed its first major acquisition, spending $450m in cash and stock for 6 River Systems. While the e-commerce technology vendor has inked a handful of tuck-ins, it hadn’t yet bought anything close to this size. In doing so, it joins a streak of new names to deliver significant VC exits this year. Although sales of startups are likely to fall below last year’s record haul, the emergence of new buyers has helped push exits for 2019 above a typical year.

According to 451 Research‘s M&A KnowledgeBase, 60% of venture-backed companies, including 6 River, that sold for $250m or more this year were bought by firms that had never paid that much for a startup. Some of this year’s buyers, including Shopify, Etsy and Uber, are youngish, growing businesses and former tech startups themselves Others are companies from more traditional industries that are new to acquiring tech providers, such as H&R Block with its reach for Wave Financial or McDonald’s, which bought Dynamic Yield in March.

Several others that have printed $250m-plus deals for venture-funded vendors this year only inked their first such purchase in 2018, including Blackstone Group, Palo Alto Networks and Splunk. The latter company printed its first $1bn-plus acquisition just last month, when it scooped up venture-funded SignalFx. Meanwhile, Palo Alto Networks has paid more than $1bn across four startup acquisitions in 2019.

In 2018, new buyers accounted for just 40% of $250m-plus startup transactions. Still, there were far more $250m-plus VC exits last year – 63 compared with 24 so far in 2019. Although the number of significant exits and the total deal value of VC exits are down from last year, that’s hardly an alarming sign for the venture community. In 2018, venture-backed companies brought in a post-dot-com record $86bn via tech M&A. This year, they’re on track to bring in $34bn, higher than all but two years in the current decade (not to mention it’s coming alongside a booming IPO market), and the $9.5bn coming from new acquirers has played an outsized role in venture liquidity this year.

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Shaking off the dog days of summer

Mark Fontecchio

by Brenon Daly

Even deep in the dog days of summer, tech dealmakers stayed busy. This month, they’ve put up the second-highest monthly total of billion-dollar deals in 2019, helping to boost overall spending on tech acquisitions in August to unseasonable heights for the late-summer month. The $48bn tallied in 451 Research‘s M&A KnowledgeBase for the current month stands as a record level for any August since the recession a decade ago. Deal volume in August also hit its highest level of any month so far this year.

Looking more closely at the top end of the M&A market, this month’s parade of big prints has included virtually all the strategies available for doing deals valued in the billions of dollars: low-multiple buyouts by private equity players; consolidations in both mature and emerging markets; and growth-oriented expansion by the well-known and well-capitalized ‘usual suspects’ of tech M&A. Among the transactions that have stood out this month:

In the largest-ever information security (infosec) acquisition, Broadcom said it will pay $10.7bn for the enterprise security business of Symantec. Our M&A KnowledgeBase shows that single deal just about equals the value of all infosec transactions in a typical year, although annual totals do tend to bounce around a bit.

VMware also did its part to add a large chunk of change to this year’s already-record level of infosec M&A spending. The infrastructure technology giant handed over $2.1bn for endpoint security vendor Carbon Black, its first billion-dollar deal in more than a half-decade.

Nearly tripling the size of its largest purchase, Splunk announced its $1.1bn purchase of SignalFX. The acquisition comes as a pair of the target‘s rivals in the infrastructure monitoring market have headed to Wall Street in highly valued IPOs.

With the unusually strong August spending, the value of tech deals around the world announced so far this year totals $337bn, according to our M&A KnowledgeBase. Assuming the current pace holds for the rest of 2019, full-year spending would slightly top $500bn. That would rank 2019 as the third-highest total for any year since the internet bubble burst almost 20 years ago.

Figure 1: Tech M&A activity

A rare trip into rarified air

Mark Fontecchio

by Brenon Daly

Symantec’s blockbuster $10.7bn divestiture of its enterprise security business to Broadcom marks a rare trip into rarified air for the information security (infosec) M&A market. Through the first seven-plus months of 2019, 451 Research‘s M&A KnowledgeBase shows not a single deal in the segment valued at more than $1bn.

Obviously, the unusual carve-up of Big Yellow blows past that threshold. But setting aside this transaction, which we would very much describe as a one-time deal, a couple of trends are playing out in the infosec market that may make it tough to see many more of those three-comma deals coming for the rest of 2019. We suspect that this year’s total will end up looking up at the three separate billion-dollar transactions we tallied last year.

Helping to keep a lid on deals at the top end of the infosec sector right now are factors including:

Several of the industry’s largest vendors appear unlikely to pursue big-ticket transactions. In some cases, that’s due to internal upheaval (e.g., Symantec, which has announced five billion-dollar acquisitions in the past 15 years). In other cases, it’s due to a likely period of digestion (e.g., Palo Alto Networks, which has dropped $1.6bn in a half-dozen high-valuation deals over the past 18 months).

After only recently starting to print big purchases, private equity firms have slowed their activity at the top end of the market. That move down-market comes after buyout shops have been behind significant infosec take-privates in the past two years, including Barracuda and Imperva.

And most notably, VC dollars have replaced M&A dollars in the ‘unicorn universe.’ In just the past four months, Auth0, SentinelOne, Cybereason and Sumo Logic have all landed funding rounds that value the infosec startups at more than $1bn, according to the premium version of 451 Research’s Private Company Database.

As long as startups only have to give up a portion of their equity to VCs (rather than full ownership to an acquirer), funding will likely be the option of choice for popular infosec startups. Of course, taking money now at such an elevated level assumes that billion-dollar buyers will return at some point to provide big exits. That may well be the case, but it’s a pretty high-stakes gamble nonetheless.