Category: M&A

Medallia’s new CEO follows a tested path

Mark Fontecchio

by Scott Denne

With its second acquisition in as many months, Medallia’s new CEO appears to be following the same playbook he used to take his last company, Callidus, to a $2.4bn exit to SAP. In the 11 years leading up to that deal, sales software vendor Callidus bought 20 businesses and never spent $30m on a single deal. Medallia, a customer experience management software provider, is executing that strategy, but in a market with soaring budgets and swarming competitors.

This week, Medallia acquired Cooladata, a developer of behavioral analytics, to bolster its expansion from survey software into a broader portfolio that includes customer profiles, segmenting and reporting. The transaction follows last month’s purchase of Strikedeck (Medallia’s first ever) to add B2B capabilities to its platform. Although terms of neither deal were disclosed, both likely fetched Callidus-like prices. According to 451 Research’s M&A KnowledgeBase, Strikedeck had just 24 employees and Cooladata hadn’t raised any venture funding since a $5.6m series B round almost three years ago.

Medallia’s buildout begins less than a year after CEO Leslie Stretch took the helm – just in time to see a surge in budgets for customer management software. According to 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019, 18% of respondents expect to increase their budgets for the broader category of CRM software, the highest reading of any quarter since the end of 2013. In a separate survey, 50% of respondents told us they were considering purchasing or upgrading customer experience analytics.

With the attention from customers have come new contenders and acquirers. SAP, for example, spent $8bn for Medallia’s main rival, Qualtrics, and SurveyMonkey is attempting to move upmarket into enterprise accounts, acquiring Usabilla for $80m along the way. Call-center software firms Verint and NICE have also printed deals in this space, scooping up Satmetrix and ForeSee, respectively. Not to mention that Adobe recently rebranded its marketing software portfolio as Experience Cloud. With a diverse set of players swirling into the customer experience market, converting conservative acquisitions into a major platform could be more of a stretch than it was for Callidus.

A mature May for M&A

Mark Fontecchio

by Brenon Daly

After slumping to the lowest monthly total in four years in April, spending on tech M&A rebounded in May as consolidation in old-line industries set the pace last month. Overall, the value of tech and telecom transactions announced across the globe in the just-completed month tripled compared with April, hitting $46bn, according to 451 Research’s M&A KnowledgeBase. The resurgence pushed May to the second-highest monthly spending of 2019, slightly ahead of the previous four months’ average.

But among last month’s big prints, more than a few of the targets had a bit of grey hair, at least by the standards of the youth-obsessed tech industry. The companies that sold for more than $1bn in May were all more than a decade old, with our data indicating the average founding date for the targets going all the way back to 2000.

Looking specifically at May’s M&A activity, nearly half of the deal value came in a single transaction in the rapidly consolidating payments market. Global Payments handed over $21.2bn in stock for transaction-processing provider TSYS, which was founded in 1983 and had about 13,000 employees. Other big prints last month included the $8.25bn take-private of fiber-optic networking rollup Zayo Group and Hewlett Packard Enterprise’s $1.4bn consolidation of fellow supercomputing vendor Cray.

Billion-dollar deals were relatively rare last month, however. The M&A KnowledgeBase lists just seven tech transactions valued at over $1bn in May, and just 31 deals during the first five months of 2019 overall. For comparison, that’s one-third the number of big prints listed in the M&A KnowledgeBase at this point last year. The drop-off at the top end of the market is the main reason that 2019 is tracking to roughly $100bn, or nearly 20% less M&A spending this year compared with last year.

A valuation gap across the Atlantic

Mark Fontecchio

by Brenon Daly

Europe’s underdeveloped venture industry, combined with its slowing economic activity overall, is turning the Continent into a bargain market for tech M&A. Over the past half-decade, Western European acquirers have consistently paid roughly one turn lower than their North American counterparts. The valuation discrepancy on the two sides of the Atlantic is even slightly more pronounced when it comes to VC-backed startups.

According to 451 Research’s M&A KnowledgeBase, Western European buyers have paid a median valuation of 1.9x trailing sales in their tech deals across all sectors since the start of 2014. During that same time, our data shows North American acquirers paid 2.9x trailing sales overall. (To be clear, we are looking at buyers headquartered in the respective regions, regardless of the target’s location. Just to give some sense of scale, over the past half-decade, acquirers in America and Canada have announced nearly three times as many tech transactions as their European cousins.)

In both regions, the broad market multiples have been led higher by the valuations for VC-funded companies. The M&A KnowledgeBase shows European buyers have paid a median of 4x trailing sales for venture-backed startups since 2014, while North American acquirers have been even more generous, paying 5.3x trailing sales.

That’s a fairly substantial premium for any startup, and it’s one that is paid far more often by North American buyers. In fully one of every five tech deals, a North American company picks up a VC-backed startup, which is almost twice the rate of European acquirers. With more plentiful funding, which can fuel faster growth rates, bigger paydays are being found on this side of the Atlantic. When it comes to tech M&A, risk capital can be rewarding.

LinkedIn set to move marketing services beyond its walls with Drawbridge

Mark Fontecchio

by Scott Denne

LinkedIn looks to be setting itself up for a second attempt to influence marketing spending beyond its own platform with its latest acquisition. The immensity of its audience profiles should have helped the company build a B2B advertising powerhouse, yet its influence has been barely felt beyond its own website and app. Five years ago, it tried to build out an ad network business but came up short. With the purchase of identity-resolution specialist Drawbridge, it appears set to try again, but differently.

The professional social network already has a substantial marketing business – it was selling roughly $700m annually in ads on its site when it was acquired by Microsoft in 2016. Reaching for Drawbridge should enable the company to find ways to leverage its data beyond its own site. The target developed technology that matches anonymous consumer profiles with devices, helping advertisers target the same audience across multiple devices – desktop, mobile and smart TVs. Such a technology would have little value in selling ads on LinkedIn itself as people must log in to the site to reach the content.

Still, LinkedIn is not likely to use Drawbridge to sell ads beyond its own properties. It tried that with the 2014 purchaseof B2B ad network Bizo, which it shut down less than two years later. Also, Drawbridge had started life as a programmatic ad network before selling its media sales business to Gimbal last year. More likely, LinkedIn will look to use the new assets to develop reporting and analytics capabilities for B2B marketers, as well as augment its ad-targeting data. Such a service would leverage both companies’ strengths in audience identity without saddling them with a low-margin ad business that both buyer and seller have already shunned.

According to 451 Research’s M&A KnowledgeBase, Drawbridge’s exit follows many of its peers in cross-device identity matching. The space has seen a wide disparity of prices. At the high end, ad network Tapad sold to Telenor for $360m. Most recently, Adbrain sold for scraps to The Trade Desk and Oracle picked up Crosswise in a seven-figure deal before that company hit $2m in annual revenue. While terms of Drawbridge’s sale weren’t disclosed, it likely falls between those extremes. Drawbridge had built a larger data business than any of its competitors, generating about $15-20m annually, and had raised roughly $60m from its venture investors.

Payments are getting pricey

Mark Fontecchio

by Scott Denne

Amid a wave of consolidation, payment providers are commanding a premium. Long-standing companies in that market are fending off a laundry list of changes, driving larger deals and a willingness to pay up. In less than a week, two acquisitions have printed with revenue multiples that are more than a full turn above where a typical payments vendor trades.

The expansion of digital wallets and P2P payment networks, advancements in integrating payments into software, mobile point-of-sale apps, and the continuing march of digital commerce (and mobile commerce within that) are all reshaping the payments industry. For example, global digital commerce is expected to crest above $6 trillion by 2022, more than double last year’s total, according to 451 Research’s Global Digital Commerce Forecast. Many players in the industry are combining to cope.

With today’s announcement that Global Payments will use $21.2bn of its stock to buy TSYS, there has now been $82bn in purchases of payment providers this year. Put another way, $4 of every $10 spent on a tech target this year has gone to a payments company, according to 451 Research‘s M&A KnowledgeBase. While this year’s total is a high point, the trend has been building for some time. Each of the two previous years also saw more than $10bn spent on payment targets, something that’s only happened in one other year since 2008.

To get its hands on its rival TSYS, Global Payments valued the business at 6.1x trailing revenue, well above the median 4x for payment companies across the entire decade, according to the M&A KnowledgeBase. Nuvei paid a similar multiple when it handed over $890m for SafeCharge last week to move into European markets. Those transactions helped propel the median multiple for payment deals up to 5.7x for 2019, according to our data. As the number of potential targets with scale shrinks, payments are looking pricey.

China’s M&A trade imbalance

Mark Fontecchio
by Brenon Daly

The economic protectionism and national isolationism that has brought the world’s two largest economies in conflict has cost both the US and China billions of dollars. Yet the wounds in the ongoing trade war aren’t evenly distributed. So far in the early days of the conflict, China has suffered more damage since it started with more to lose.

That imbalance – and the accompanying vulnerability – shows up in broader macroeconomic implications for the two countries. As my colleague Josh Levine recently noted, China’s exports to the US account for 3.5% of their GDP, while only a scant 0.6% of the US GDP is generated by exports to China.

The disparity also plays out in M&A activity, which is also a form of ‘trade,’ after all. As 451 Research’s M&A KnowledgeBase shows, the ledger there is rather imbalanced: Since 2002, China-based acquirers have spent three times more on US tech vendors than the other way around. In that period, China has done more shopping in the US than anywhere else, with American tech firms accounting for one of every six deals announced by a Chinese buyer. (For the record, a majority (60%) of tech transactions by Chinese companies involve a target also based in China.)

More notably, Chinese firms have announced billion-dollar purchases of key tech assets from such prominent US vendors as Uber, IBM and Lexmark. In contrast, there hasn’t been any comparable deal flow in reverse. China’s ‘Great Firewall’ has blocked a lot of business expansion – including acquisitions – by US tech companies in the world’s most-populous country.

The contentious relationship between China and the country that had been its largest supplier of tech targets is just the latest complication in the country’s nascent effort to emerge as an M&A powerhouse. Currency restrictions imposed by Beijing diminished their ability to pay for deals, while the recent domestic economic slowdown has made Chinese companies think twice about taking on any acquisitions. And even if the deals do get done, in the current highly politicized environment, there’s no guarantee now that regulators will sign off on it.

For all those reasons and more, China-based tech vendors have stopped shopping. They are currently averaging just one acquisition a month, according to the M&A KnowledgeBase. That’s just one-quarter the rate at which they were purchasing tech providers in the past half-decade. Assuming that pace holds, our numbers show that Chinese buyers will announce the fewest tech transactions in 2019 since 2003.

PE’s pricey paper

Brenon Daly

by Brenon Daly

Deals in which one private equity (PE) firm sells a company to another PE outfit are sometimes referred to as ‘paper trades.’ These transactions have become increasingly popular in recent years as yet another way for buyout shops to put their record levels of cash to work. By our count, secondary transactions currently account for almost one out of every five deals that PE firms announce, roughly triple their share at the start of the decade.

However, there’s a price for that popularity: the paper is getting a lot more expensive. PE firms paid an average of 4.5x trailing sales for tech vendors owned by fellow buyout shops since the start of 2018, according to 451 Research’s M&A KnowledgeBase. That’s 50% higher than the average PE-to-PE valuation from 2010-17.

There are a lot of reasons for the increase, not least of which is that overall valuations for the broader tech M&A market have been ticking higher, too. But that doesn’t fully explain it.

The M&A KnowledgeBase shows that the average multiple for tech deals since January 1, 2018 with buyout firms on both sides is nearly a full turn higher than the average multiple paid by PE shops to tech providers in that same period. Recent secondaries that secured price-to-sales multiples in the high single digits include Mailgun, Quickbase and the significant minority stake of Kaseya, according to our understanding.

So why do paper trades go off at a premium? Part of it is explained by the view that companies in a PE portfolio have largely been cleaned up, operationally. They are something of a ‘known quantity,’ which takes at least some of the risk out of the purchase.

From there, it’s just a short step for the new buyout owners to one of their favored activities: optimizing the businesses for cash flow. That financial focus, which is undeniably supported by the broad economic growth and continued increases in tech spending, has contributed to the current cycle of ‘pay big now, find a bigger buyer later.’ But if the economy turns, PE firms may well find that high-priced secondaries are one of the first types of deals to disappear, leaving them holding some very expensive paper.

Future farmers of Europe

Mark Fontecchio

by Michael Hill

Europe is leading the agricultural technology revolution as IoT and other emerging technologies transform large-scale agricultural operations into connected farms. A combination of European farm subsidies and European IoT deployments is boosting acquisitions of European agricultural technology (agtech) companies.

According to 451 Research‘s M&A KnowledgeBase, a record $4.8bn was spent on agricultural technology deals in 2018 – more than the previous five years combined. Of that record spend, $4.6bn went to Europe-based targets, which are currently on pace to exceed 2018 in terms of deal volume.

While a genuine showstopper of an agtech deal has yet to emerge this year, Merck’s $2.4bn reach for Antelliq, a French provider of livestock tracking software, certainly fit that description last year. As in that deal, the emergence of IoT is partly driving the trend (that deal was 2018’s largest acquisition of an IoT company). According to 451 Research‘s Voice of the Enterprise: IoT, businesses are expanding their IoT investments in EMEA. Our recent survey shows 21% of respondents are planning to deploy projects there, up four percentage points from the year before.

Farm subsidies from governments are also bolstering European agriculture, making companies that serve that market more attractive targets. According to the Organisation for Economic Co-operation and Development, since 2014 subsidies for European farmers, such as the EU’s Common Agricultural Policy, have grown 8%, while subsidies for US farmers, by comparison, have declined 13%.

A spring sputter for tech M&A

Mark Fontecchio

by Brenon Daly

The momentum that had sustained the high-rolling tech M&A market through the opening quarter of 2019 petered out in April. Spending in the just-completed month plummeted to a paltry $15.4bn, just one-third the average of the first three months of the year, according to 451 Research‘s M&A KnowledgeBase. More significantly, the total value of tech and telecom acquisitions announced in April stands as the lowest monthly total in the M&A KnowledgeBase in four years.

Last month’s slump started at the top. Buyers in April announced just four tech transactions valued at more than $1bn. That’s the fewest big-ticket prints announced in any month since the fall of 2017, and just half the number that acquirers were putting up each month in 2018. Further, the deals that did get done last month had a distinctly down-market look to them.

Rather than the expansion-minded and expensively priced purchases that acquirers inked last year, the billion-dollar deals in April came back down to earth, as cost-cutting consolidation emerged as the main driver of these large transactions. Our data shows the four companies acquired for more than $1bn last month were each relatively mature assets that all traded for less than 2.5x trailing sales.

The largest purchase announced last month demonstrates that trend very clearly. French ad agency Publicis once again turned to M&A to boost its otherwise sagging top line. It paid $4.4bn, or just 2x sales, for the 9,000-person marketing services firm Epsilon. Similarly, Siris Capital Group took 30-year-old printing company Electronics for Imagining (EFI) private at just 1.4x times last year’s revenue. EFI hadn’t really grown since 2016, a trend that was forecast to continue this year.

Exclusive: Ivanti in market

Mark Fontecchio

by Brenon Daly

One of the larger private equity (PE)-backed rollups may be rolling into a new portfolio. Several market sources have indicated that Clearlake Capital Group currently has infrastructure software giant Ivanti in market, with second-round bids expected soon. If the process moves ahead, the buyer is almost certain to be a fellow PE shop, with the price likely to be in the neighborhood of $2bn.

Buyout firm Clearlake has built Ivanti from a series of acquisitions, with the bulk of the business coming from the January 2017 purchase of LANDESK Software. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates for the price and valuation of that significant secondary transaction.) After it bought LANDESK, Clearlake rolled a pair of existing portfolio companies into that platform, which then took the name Ivanti in early 2017. The rechristened business went on to pick up another two companies later that same year.

Although two years is a relatively short holding period for a buyout shop, Clearlake is looking to take advantage of a hot secondary market. Large PE-to-PE deals have become a popular way for buyout firms to put their record amounts of cash to work in transactions that – rightly or wrongly – they tend to view as less risky than other big-ticket acquisitions. The M&A KnowledgeBase lists roughly a dozen secondary deals valued at more than $1bn over the past year.

A classic rollup, Ivanti offers a broad basket of infrastructure software products, with a particular focus on ITSM and information security. According to our understanding, the business runs at a roughly 30% EBITDA margin. Subscribers to the premium edition of the M&A KnowledgeBase can see our full profile of Ivanti, including financial performance, competitors and other key measures.