PayPal adds money-transfer business before eBay split

Contact: Mark Fontecchio

PayPal agrees to pay $1.1bn in cash for Xoom, an online money-transfer company with a large international and mobile presence. Xoom allows people to move money internationally, often done through mobile devices, while taking a service fee for each transaction. The deal allows PayPal stronger entry into the money-transfer market on the eve of its split with parent company eBay.

The $1.1bn deal value equates to $25 per share, about a 30% premium to what Xoom was trading for a month ago. Xoom’s revenue grew 30% to $160m in 2014, but it reported an operating income loss because of a one-time $31m charge due to criminal fraud targeting the company’s finance department. The incident led to Xoom’s CFO resigning. J.P. Morgan Securities advised PayPal on the transaction, while Qatalyst Partners advised Xoom.

PayPal is expected to spin off from eBay on July 17, about 13 years after it came under the auction site’s ownership. In that time, PayPal’s business has grown dramatically – for example, its $1.8bn in EBITDA last year was 10x its revenue when eBay bought it. The payments provider has made 10 acquisitions in that time, according to 451 Research’s M&A KnowledgeBase, with totals pending of $2.2bn. More than half of that amount has come just this year, as PayPal has readied itself for separation from eBay. Xoom is its biggest deal ever, while the $285m purchase of Paydiant in March signaled PayPal’s strong desire to get into the mobile payments business.

A parade of big prints pushes Q2 tech M&A spending to record level

Contact: Brenon Daly

Blockbuster transactions in the cable, semiconductor and networking equipment industries helped push Q2 spending on tech, media and telecom (TMT) acquisitions to its highest quarterly level in 15 years. In the just-completed quarter, the value of TMT deals across the globe topped an astounding $196bn. That shattered the previous quarterly record and is actually higher than three of the six full-year totals we’ve recorded in 451 Research’s M&A KnowledgeBase since the recent recession ended.

The record Q2 spending rate, which accelerated from an already strong Q1, was boosted by the largest-ever tech deal (Avago’s $37bn purchase of Broadcom) as well as the second-largest telecom transaction since 2002 (Charter Communications’ $57bn rebound deal for Time Warner Cable). On their own, either of those transactions would have been considered a reasonable amount of spending for a full quarter in recent years. Instead, the pair simply led an unprecedented parade of big-ticket deals announced from April to June. The 22 prints in Q2 valued at $1bn or more included eight transactions worth at least $4bn and four worth more than $15bn. All four of the largest deals announced so far in 2015 have come since April.

Taken together, M&A spending in the first two quarters of 2015 hit a high-water mark of $316bn. Although it’s highly unlikely that deal flow will continue linearly at its current record rate, it’s worth noting that spending on TMT for the full year is on pace for an almost unimaginable $630bn. For a bit of perspective, that would be a full $200bn more than the highest annual total since the Internet bubble burst in 2000. 451 Research will have a full report on recent M&A activity, as well as the IPO market, on Monday.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2015 1,018 $196bn
Q1 2015 1,027 $120bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

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

Cisco closes in on OpenDNS

Contact: Brenon Daly

In its third-largest IT security acquisition, Cisco will pay $635m in cash for OpenDNS to shore up its threat-detection and -prevention portfolio. The deal comes a year after the networking giant participated in the 10-year-old startup’s series C funding round. (The $35m investment announced last May brought the total amount raised by OpenDNS to $51m.)

The purchase continues Cisco’s practice of paying rich multiples as it shops in information security. According to 451 Research’s M&A KnowledgeBase , Cisco has now acquired 18 security companies in the past decade and a half, mostly smaller startups. (All but three of those transactions cost the networking giant less than $200m.) We would note that although Cisco’s security business generates less than 5% of its total revenue, infosec acquisitions have accounted for 16% of the company’s overall M&A activity since 2002.

In its other large infosec purchases, Cisco paid $2.7bn, or nearly 11x trailing sales, for Sourcefire and $830m for IronPort Systems, which works out to slightly more than 8x trailing revenue. OpenDNS generated about $40m in trailing bookings and was on pace to double annual bookings to roughly $60m for full-year 2015.

That would mean Cisco is paying about 15x trailing bookings for fast-growing OpenDNS. Obviously, the price-to-revenue multiple for OpenDNS would be higher than that, likely falling in the neighborhood of twice the valuation that Cisco paid in its two other significant infosec deals. The valuation of the network security vendor stands out even more considering the recent focus in the IT security industry on endpoint protection, which has resulted in valuations there being pushed to historically high levels. Cisco expects to close the pickup of OpenDNS by the end of its first fiscal quarter, which wraps in October.

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

Splunk explores SIEM market with Metafor acquisition

Contact: Scott Crawford Dan Raywood Scott Denne

Splunk has made its third acquisition with the pickup of anomaly-detection startup Metafor Software. With this deal, Splunk will add fewer than 15 employees to its roster. And, although terms of the deal haven’t been disclosed, the acquisition (like its previous purchases) is likely modest. Splunk paid $21m in its acquisition of Cloudmeter at the end of 2013, and $9m for BugSense earlier that year.

That doesn’t mean it can’t have an outsized impact on Splunk. The deal expands two related core functionalities into the portfolio (machine learning and anomaly detection), which will raise its profile among both IT operations management and security buyers keen to broaden and improve capabilities for detecting unexpected or malicious activity.

The acquisition raises the bar for competitors in both IT operations management and security. Challengers such as LogRhythm and AlienVault are reshaping the competitive landscape for SIEM incumbents such as HP ArcSight. Meanwhile, IBM has gained considerably from Q1Labs capabilities, which were originally differentiated through network flow-based anomaly detection. Improved SIEM performance was a good deal of the rationale behind McAfee’s (now part of Intel) 2011 acquisition of NitroSecurity. All in this space are further challenged today by a number of emerging security-analytics plays that expand capabilities in security information management performance and volume in a variety of ways.

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

Western European MTDC M&A is on a ‘raised floor’ in 2015

Contact: Mark Fontecchio

Western Europe has seen landmark datacenter consolidation thus far this year – a trend we predict will continue in the near future. Data regulation requirements, increasing demand for high-quality datacenter space and latency concerns are three factors driving M&A in the datacenter market in 2015.

A lot is happening in the Western European multi-tenant datacenter (MTDC) market outside of the big deals, with smaller regional players looking to grow their service portfolios and extend their reach across the continent with smaller facilities outside of major metros. We expect to continue to see increased M&A activity throughout Europe as the region recovers from the economic crisis.

According to 451 Research’s M&A KnowledgeBase, there were 19 datacenter hosting acquisitions in the first five months of 2015, compared with just seven in the same period last year. What’s more striking is the deal value – some $4.7bn this year compared with $1.2bn in all of 2014. To be sure, the deal value in Western Europe this year is inflated by Equinix’s $3.6bn reach for TelecityGroup. But datacenter M&A in the region has always been dominated by oversized transactions. In 2012-14, single acquisitions accounted for 78%, 57% and 68% of total deal value.

Read more about Western European MTDC in our recent market review.

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

A steady Sophos now set to step on public stage

Contact: Brenon Daly

After an on-again, off-again march to the public market over the past decade, Sophos finally looks set to sell shares to the public for the first time. The 30-year-old, UK-based security vendor put in its paperwork last week for a $100m IPO on the London Stock Exchange (LSE). It was actually the second time the decidedly middle-aged Sophos filed to go public, and comes five years after it flirted with an IPO before selling a majority stake to Apax Partners instead.

During the half-decade in the private equity firm’s portfolio, Sophos has been a steady acquirer, picking up a company about every year. Its most recent deal, announced earlier this week, is the first time Sophos has acquired a cloud-based vendor. Sophos paid an undisclosed amount for email security and archiving startup Reflexion. The technology is expected to be integrated into Sophos Cloud later this year.

When Sophos does hit the LSE next month, we expect it to create a few billion dollars of market value. In its most recent fiscal year, which finished last March, Sophos increased revenue 18% to $447m. For comparison, Barracuda Networks – a diversified security provider that, like Sophos, serves the SMB market – posted an identical growth rate in its most recent fiscal year. (Although Sophos is growing off a revenue base that is more than half again as large as the $277m that Barracuda put up last year.) Since it went public in November 2013, Barracuda has doubled its market value to about $2bn.

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

A monster May for M&A

Contact: Brenon Daly

All three segments of tech, media and telecom (TMT) put up gigantic prints in May, pushing spending in the just-completed month to a level we’d typically see tallied over a half-year period in most post-recession years. The record monthly spending of $122bn was boosted by the largest-ever cable deal as well as the biggest pure tech transaction since the bubble burst. Both Charter Communications’ $56.7bn reach for Time Warner Cable and Avago Technologies’ $37bn purchase of Broadcom figure into the 10 largest TMT deals since 2002, according to 451 Research’s M&A KnowledgeBase

Undeniably, the two blockbuster prints dominated last month’s M&A, accounting for roughly three-quarters of the total spending. But even backing out those two acquisitions, spending came in at a robust $29bn, which is higher than the typical post-recession monthly average. More importantly, the activity spread to a broad number of markets, with billion-dollar-plus deals announced in May by hosting provider Equinix, ambitious telco Verizon and even EMC, which has found itself under scrutiny by activist shareholders, among others.

Last month’s astonishing level of spending – the only time in the past 13 years that monthly spending has topped $100bn – pushes total receipts for TMT M&A this year to $286m. That means that in just five months so far in 2015, acquirers have already spent more money on deals than they did for the entire year for every single year except one from 2009-14, according to the KnowledgeBase.

The one surprise from May, however, is the relatively shallow flow of deals. We tallied only 270 transactions, which stands as the lowest total for May since 2009. That’s down about 20% from the average of the preceding four months of 2015, and marks the first time in more than three years that we’ve seen a month-over-month decline in the number of prints.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 357 $11bn
February 2015 332 $48bn
March 2015 336 $61bn
April 2015 358 $44bn
May 2015 270 $122bn

Source: 451 Research’s M&A KnowledgeBase

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

Avago buys Broadcom in huge chip deal

Contact: Mark Fontecchio

Go big or go home has been the mantra in the semiconductor business of late, and there is no better example than Avago Technologies’ $37bn reach for Broadcom today. The purchase price is more than double the next-biggest chip deal that we’ve tracked, with the combined company becoming one of the largest global suppliers of semiconductors.

With four transactions for nearly $45bn, Singapore-based Avago has become the most active acquirer in the semiconductor sector since 2013 in volume and value, according to 451 Research’s M&A KnowledgeBase. Its two largest – for Broadcom today and LSI in 2013 – have diversified Avago’s chip portfolio with storage and networking semiconductors so it is less reliant on the volatile wireless business. They have also followed the pattern of consolidation that has infected the entire semiconductor market, with buyers seeking big targets with opportunities to cut operating expenses. To wit: Broadcom brings in about 30% more sales than Avago, but its profit margin is 14 percentage points lower. Avago wants to reach a 40% margin on the combined entity, which is higher than either company alone.

The 39.1x multiple of Broadcom’s enterprise value over trailing EBITDA is almost three times the median EBITDA multiple on billion-dollar chip deals, according to the KnowledgeBase. Broadcom’s continued growing revenue and the paucity of remaining large semiconductors targets are two main factors in that higher-than-usual valuation. The deal includes $17bn in cash and the rest in Avago stock, with Broadcom shareholders owning about 32% of the combined business. Avago will fund the acquisition with $8bn in cash, $9bn in new debt and 140 million Avago shares worth $20bn. The transaction is expected to close early next year. Both boards have approved the deal, but it’s still subject to approval by regulators and shareholders.

Webinar: 451 Research and Morrison & Foerster M&A Leaders’ Survey

Contact: Brenon Daly

Even as tech dealmaking clips along at a post-bubble record rate in 2015, the overwhelming view from the M&A Leaders’ Survey from 451 Research and Morrison & Foerster is that business is expected to get even more brisk as the year progresses. To find out more about the forecast, as well as how the survey sentiment maps to both the current M&A market and current M&A practices, join 451 Research and Morrison & Foerster on Tuesday, May 19 at 1pm EST (10am PST) for an information-packed webinar. Click here to register.

The webinar will cover not only the forecast for acquisition activity for the next six months, but also what buyers expect to have to pay to cover their purchases and what strategies will be driving those deals. Additionally, Morrison & Foerster will provide real-world insight on some of the key findings around recent trends in structuring transactions and other practical M&A considerations. To register for the complimentary webinar, simply click here.

M&A activity forecast for the next six months

Survey date Increase Stay the same Decrease
April 2015 61% 30% 9%
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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

Consumers get smart with home automation tech

A report by ChangeWave Research, a service of 451 Research, finds that the outlook is bright for home automation technology. Similarly, our M&A KnowledgeBase has seen significant acquisition activity in that space as well as the broader Internet of Things (IoT) arena. As a result, we expect increased interest in IoT and connected homes, both for consumers and tech dealmakers.

According to a recent ChangeWave survey of 2,152 consumers, more than half said they plan to use smart thermostats and home monitoring in the future. Other home automation technologies such as smart lighting and locks are also expected to see increased use down the road.

The survey found Nest Labs to be the second-most-popular smart thermostat manufacturer, behind Honeywell. Nest and parent company Google have been the most-active acquirers in home automation – since the start of 2014, Google has spent more than $3.7bn on the connected home, starting with its reach for Nest and then Nest’s purchases of Dropcam and Revolv. Other acquirers in the home automation space have included Silicon Labs and British Gas, which bought connected home devices and monitoring software, respectively.

From a broader perspective, the IoT sector has seen record-breaking M&A activity. Buyers this year have inked 39 IoT acquisitions for $14.8bn, which surpasses the $14.3bn deal value for IoT transactions in all of last year. Semiconductor deals have driven the bulk of spending thus far this year, with ARM, Intel and NXP Semiconductors each announcing two or more IoT-focused purchases.

Home-automation-future-use