Category: M&A

An imbalance in the market for unicorns

Brenon Daly

Contact: Brenon Daly

The herd of unicorns gets bigger every day. But as the supply of these startups valued at more than $1bn continues to swell, we can’t help but note that on the other side of the equation, the demand isn’t really keeping pace, at least not outside a handful of elite investors. For the most part, the broader market hasn’t opened the exits for these unicorns to realize the value that’s being lavished on them.

So far this year, for instance, we haven’t seen any sales of VC-backed startups for more than about a half-billion dollars, according to 451 Research’s M&A KnowledgeBase. Further, in a 451 Research survey last December, four out of 10 (42%) corporate M&A executives told us they expect the M&A valuations for privately held companies to actually decline in 2015 compared with their valuations last year. That was the most bearish forecast for exit values of startups from their would-be buyers since the recession year of 2009.

Meanwhile, the IPO market isn’t particularly rewarding these days, either. Box – a unicorn that had been a darling of the late-stage investment community through nearly a dozen rounds of funding – hasn’t created any additional value as a NYSE-listed company than it did as a private company. (And based on the fact that an astounding 40% of Box’s shares are sold short, Wall Street is very clearly betting that its flat-lined valuation is still too high.)

Despite the recent muted returns for VCs, unicorns continue to get fed. For instance, Slack, a collaboration tool that’s less than two years old, has reportedly doubled its valuation since previously notching a $1.2bn price in an October funding.

Obviously, we’re looking at an extremely short exit period of just the first quarter of 2015. And we’re conscious that in most cases, investors are placing bets today that they hope will pay off maybe a half-decade from now. But for right now, when we look at both ends of the market for highly valued startups, we can see how you buy a unicorn but we wonder how you go about selling it.

Projected change in private company M&A valuations

Period Increase Stay the same Decrease
December 2014 for 2015 29% 29% 42%
December 2013 for 2014 29% 55% 16%
December 2012 for 2013 28% 39% 33%
December 2011 for 2012 35% 26% 39%
December 2010 for 2011 71% 20% 9%
December 2009 for 2010 58% 36% 6%
December 2008 for 2009 4% 9% 87%
December 2007 for 2008 39% 28% 33%

Source: 451 Research Tech Corporate Development Outlook Survey

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For tech M&A, 2015 picks up where 2014’s record level left off

Brenon Daly

Contact: Brenon Daly

Despite an ice-cold start to 2015, tech dealmakers came roaring back into the market in early spring, putting spending on tech deals in the just-completed Q1 only slightly behind last year’s record rate. In the first three months of 2015, the total value of deals in the tech, media and telecom (TMT) market around the globe hit $119bn. That’s the third-highest quarterly spending total since the recent recession ended, and puts 2015 nearly on track with the free-spending M&A levels from last year, according to 451 Research’s M&A KnowledgeBase.

At more than twice the average quarterly spending over the past half-decade, the Q1 total of $119bn comes in only a few big prints away from the $128bn we recorded in Q1 2014. (See our full report on Q1 2014 M&A.) Last year’s opening quarter stands as the highest quarterly spending level since 2002, and launched 2014 on its way to the most M&A money spent in a year since the Internet bubble popped in 2000. (See our full 2015 M&A Outlook .) And so far in 2015, there isn’t much of a drop-off from 2014. Annualized, the first three months of this year would put the total value of all TMT deals in 2015 solidly above $400bn – a level it has only breached three times in the past 13 years. (See our full report on Q1 2015 M&A.)

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2015 1,000 $119bn
Q4 2014 1,028 $65bn
Q3 2014 1,047 $102bn
Q2 2014 1,005 $149bn
Q1 2014 844 $128bn
Q4 2013 787 $59bn
Q3 2013 859 $81bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn

Source: The 451 M&A KnowledgeBase

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What does Matomy’s MobFox say?

Scott Denne

Contact:Scott Denne

Matomy Media Group has spent the past eight years buying a portfolio of performance advertising products across multiple formats and categories. Its recent focus has been on mobile, an area where we expect it to continue to build and buy, given the immense growth in that segment of digital advertising, matched with the fact that mobile is bleeding into every part of its advertising business.

The Israel-based company often takes a one-and-done approach when it buys its way into a new advertising channel. And while it got into mobile apps with the acquisition of MobFox late in 2014, we expect that the company will still actively seek deals in the space that augment MobFox’s in-app banner and video ad exchange. Matomy posted 23% sales growth in 2014, and an increase in mobile capabilities could propel that further. 451 Research’s Market Monitor projects that the global mobile ad sector will grow 52.6% to $28.7bn this year on its way to $51.6bn by 2018.

Subscriber’s to 451Research’s Market Insight Service can access a detailed report on Matomy Media.

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

Lexmark doubles down on software

Brenon Daly

Contact: Brenon Daly

A half-decade into a software shopping spree, Lexmark has announced its largest consolidation, dropping $1bn on Kofax. The price roughly equals the total amount the company has spent on a dozen software firms since it established a software platform with the $280m purchase of Perceptive Software in May 2010. (Lexmark still refers to its software unit, which generated slightly less than a dime of every dollar of overall sales last year, as ‘Perceptive Software.’)

The Kofax buy, which is slated to close next quarter, would essentially double Lexmark’s software business. In 2014, that division generated $313m of sales, a touch more than the amount Kofax put up. However, the vast majority of Lexmark’s growth in software has come through M&A. On an organic basis, Lexmark has indicated that software revenue increased just 3% last year. For its part, Kofax has been growing at about twice that rate, although that has also been boosted by acquisitions. (Kofax announced four deals over the past two years.) Still, both companies are lagging the roughly 10% overall growth rates in the ECM and BPM markets that they serve.

At $1bn enterprise value, Lexmark is valuing Kofax at about 3.3x trailing sales. That’s exactly the multiple it paid for Perceptive but a full turn higher than its other significant deal, the $264m pickup of ReadSoft last May. To pay for its baker’s dozen of software transactions, Lexmark has funneled off cash from its legacy printer business. It plans to cover about $700m of the purchase of Bermuda-domiciled Kofax with offshore cash and borrow the remaining $300m at slightly more than a 1% rate. Goldman Sachs & Co advised Lexmark, while Lazard banked Kofax.

Like other hardware – and specifically, printer – providers, Lexmark has looked to buy its way out of that declining and low-margin market. (Its software business runs at a gross margin in the high-60% range, a full 30 basis points higher than the rest of the company.) Lexmark has been relatively focused in its M&A, targeting two core markets, while HP, for instance, has bought across a broad swath of the enterprise software sector, including application and data management, information security and datacenter technology. However, the Kofax acquisition is much larger and broader than any business Lexmark has nabbed so far.

We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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Telecity scoops up European colo peer Interxion

Scott Denne

Contact: Scott Denne Penny Jones Mark Fontecchio

TelecityGroup dishes out 45% of its stock to nab fellow European colocation player Interxion in a $2.2bn deal. The acquisition is the largest European multi-tenant datacenter transaction that we’ve tracked (nearly twice the size of Digital Realty’s purchase of Sentrum’s datacenter portfolio in 2012). The combined company will be better positioned to deflect some of the regional pricing pressure resulting from increased investment in the European datacenter market.

The deal values Interxion at 6.3x trailing revenue, or 15.3x EBITDA. Interxion shareholders are getting 45% of the combined company, but Interxion’s revenue and EBITDA contributions are slightly less than that percentage. We’d attribute the valuation bump to Interxion’s higher growth rate – 11%, compared with 7% for Telecity last year. Though this move is all about building a larger regional player, it’s worth noting that Interxion, through last year’s pickup of undersea cable hub SFR Netcenter, gets Telecity an outlet into other markets.

Subscribers to 451’s Market Insight Service can access a detailed report about this transaction here, as well as a strategic update on Telecity’s fourth-quarter results.

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

Telcos get busy again with M&A in February

Brenon Daly

Contact: Brenon Daly

Massive acquisitions by telcos, which pushed M&A spending to a recent record in 2014, once again helped to inflate the value of deals announced in the just-completed month of February. Overall, tech and telco acquirers spent $48bn on transactions across the globe, according to The 451 M&A KnowledgeBase. However, the three largest deals, which were all telco-related purchases, accounted for $30bn, or 60%, of the total spending in February.

Last month’s big-ticket acquisitions by BT Global Services, Frontier Communications and American Tower revived the telco shopping spree from 2014. Last year, telco and media purchases accounted for roughly half of the $439bn we tallied in M&A spending – the highest level in 14 years. (See our full report on M&A last year, as well as the outlook for this this year.) There were no significant telco transactions in January, which is one of the main reasons why M&A spending for the first month of 2015 was just one-fifth the amount spent in the second month of 2015.

Beyond the telco consolidation, there are clear indications that the broader tech M&A market is picking up the pace after the slow start. Expedia did its largest-ever deal last month, announcing the $1.4bn pickup of Orbitz Worldwide. And Canon, an infrequent acquirer, inked a $2.8bn buy. Even excluding the trio of telco deals, there were four transactions in February valued at more than $1bn – twice as many 10-digit acquisitions announced in January.

Additionally, the overall volume of M&A remained high in February. We tallied 331 transactions announced last month. That’s nearly one-third more than February 2014 or February 2013. Shoppers included Check Point Software, which announced its first acquisition in more than three years; four purchases by the insatiable acquirer Google; and a double-barrel set of deals by Under Armour.

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

A change in command at Courion?

Brenon Daly

Contact: Brenon Daly

After a fitful and protracted M&A process, Courion has been sold to a private equity (PE) firm, according to several market sources. The deal, which we understand is closed, but has not been announced, would be the third acquisition by a buyout shop of an identity-related security vendor in the past half-year. However, our understanding is that Courion got about half the valuation of the other two larger identity and access management (IAM) vendors that were recently acquired.

Several sources indicated Courion traded at around $70m, which works out to roughly 2x sales. Rivals BeyondTrust and SailPoint sold for closer to 3x sales and 5x, respectively. (Subscribers to 451 Research M&A KnowledgeBase can see our estimated terms for BeyondTrust and SailPoint.)

In addition to those financial acquirers, many of the largest strategic shoppers – including Microsoft, IBM and CA – have been snapping up IAM technology, in part to help secure cloud offerings. The reason? Security remains the top-ranked inhibitor of cloud technology adoption, according to ChangeWave Research, a service of 451 Research. In the cloud – with its centralized IT resources and pooled data – knowing who is who and who has access to what is fundamental. Further, when users are accessing corporate resources that live outside the firewall, often from devices no longer under enterprise control, perimeter-based access controls are no longer effective.

That has certainly resonated with customers. In a survey of more than 200 IT security professionals in 2014, 451 Research’s TheInfoPro found that one-quarter (24%) of respondents forecast that they would be spending more in 2015 on identity-related security technology than they did in 2014. Not a single respondent indicated they would be trimming their budget for this crucial technology. (Identity was the only specific sector – among the dozen that we asked about – that didn’t have a single response indicating lower year-on-year spending.)

As is often the case in emerging markets, however, the strong demand for IAM hasn’t been evenly distributed across the vendors. Symplified, an early entrant in the IAM market that raised nearly $50m in venture funding, wound down last summer and sold its assets to EMC for pennies on the dollar. And while Courion is a far cry from the scrap-sale of Symplified, the company had struggled to put up growth in recent years. That blunted VC’s interest in putting new money into Courion, which hadn’t raised in about a decade, and ultimately put pressure on its valuation.

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

Ericsson makes another OSS play

Scott Denne

Contact: Scott Denne

Ericsson takes another nip at the OSS/BSS market with its purchase of TimelessMIND. The acquisition of the Canadian provider of operations and billing support systems follows a record year for M&A at Ericsson as the networking equipment vendor battles the maturation of its core business. This is the fifth OSS/BSS supplier that Ericsson has picked up since its $1.2bn reach for Telcordia in mid-2011.

The Swedish carrier equipment vendor inked two such deals last year (MetraTech and GEOSS) on its way to seven acquisitions in the year, tying its personal best. With just 30 employees, though, TimelessMIND is among its smaller transactions. OSS/BSS is one of the categories Ericsson has focused on to extend its offering beyond carrier equipment. The company has stated goals of expanding into media infrastructure and cloud infrastructure. It also made a pair of energy management purchases last year.

Despite the dealmaking (13 announced transactions in the past 24 months), Ericsson isn’t returning to growth. Revenue was flat (in constant currency) at $29bn in 2014 and has been flat for several years. Its North American business declined 8% in the year, led by a slowdown in mobile broadband products. That decline was mitigated by growth in emerging markets and services. As the North American market is a leading indicator for its telecom business, Ericsson has a few more years to eek growth out of those new initiatives.

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

Syncsort boosts its mainframe-to-Splunk links with William Data buy

Scott Denne

Contact: John Abbott

Syncsort acquires mainframe networking monitoring and security tools provider William Data Systems in an effort to recast the mainframe for modern workloads and applications. Syncsort was formed in the mid-1960s to improve the native sort utility that came with early-generation IBM mainframes. But these days, Syncsort is more likely to be talking about modern apps like Hadoop and Splunk.

Syncsort says the networking and security data collected by WDS’s Zen product suite will complement its ‘Big Iron to Big Data’ strategy by linking high-volume transactional data from the mainframe to big data analytical platforms, including Splunk Enterprise and Splunk Cloud. The Zen tools, which span monitoring, alerting, tracing, vulnerability tracking, encryption and authentication, will be integrated into the recently launched Syncsort Ironstream product, which provides real-time mainframe operational intelligence from within Splunk Enterprise. It will also be used in conjunction with Syncsort’s Hadoop-based data-integration tools that connect the mainframe to Apache Spark, Tableau, Amazon Redshift, QlikView and other modern analytical platforms.

Syncsort hired a new management team in 2013, led by CEO Lonne Jaffe, who in previous corporate strategy roles at CA Technologies and IBM had been heavily involved in M&A. The company’s first buy was Circle Computer Group in September 2013, adding technology for moving large amounts of data between mainframe databases and more modern platforms, without changes to the applications.

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

Infosys makes first move into software, automation with Panaya buy

Scott Denne

Contact: Scott Denne Katy Ring

Infosys ushers in its new acquisition strategy with the $200m pickup of Panaya. Never a habitual dealmaker – the IT outsourcer has averaged less than one transaction a year, rarely spending more than $50m – its past M&A efforts have focused on IT and BPO vendors. With the purchase of Panaya, Infosys is taking a different track.

Since taking the helm last fall following a series of management departures amid shrinking market share, CEO Vishal Sikka has announced that ‘big data,’ artificial intelligence and, of course, ‘innovation’ would be the hallmarks of Infosys’ growth strategy. The Panaya buy shows that he meant it. Panaya sells software for managing and automating updates to ERP systems. That has clear cost synergies with Infosys’ core business, and also presents opportunities to expand new lines of revenue.

Not only is this Infosys’ first software acquisition, the valuation is well beyond what it’s accustomed to paying. Infosys’ management says the price tag values Panaya at 6x revenue. While they wouldn’t specify if that’s forward or trailing revenue, either of those is well past the 1-2x TTM revenue that Infosys paid in most of its prior deals (entirely services businesses).

We’ll have a more detailed report on this transaction in tomorrow’s 451 Market Insight.

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