A high-water mark in PE deal flow

by Brenon Daly

High-water marks only become apparent when the waters recede. As time passes, the pinnacle stands out even more because everything that follows comes at a lower level. We see that in deal flow, too.

Consider the take-private of Ultimate Software, which did indeed prove to be the ‘ultimate’ LBO of 2019. No other deal came close to its size ($11bn) or valuation (11x). On average, the tech companies that got erased off US exchanges after the HR software vendor garnered an average valuation of just a smidge more than 3x trailing sales, according to 451 Researchs M&A KnowledgeBase.

Now, we have an early entry for the singular private equity (PE) transaction of 2020: Insight Partners’ $5bn recapitalization of Veeam. Both in terms of transaction structure and size, it is an outlier. And it will almost certainly remain that way for the full year, even as PE shops likely put up more than 1,000 prints again in 2020.

For starters, financial buyers have only just started shopping in venture portfolios, and are significantly underrepresented there. (Our data shows that PE firms over the two previous years have accounted for just 22% of purchases of venture-backed companies, which is fully 10 percentage points lower than the ‘market share’ they hold across all of tech M&A.) Within that, recaps – or a single financial sponsor replacing a syndicate of investors – are only a tiny slice of those deals.

Of course, Insight was already on Veeam’s syndicate, having invested $500m previously. But in most cases, VC-to-PE deals break down due to unbridgeable valuation gaps. (Oversimplified, the discrepancy goes something like this: VCs tend to value startups aspirationally, while PEs tend to value startups realistically.)

Beyond the unusual transformation of Insight going from minority shareholder to outright owner of Veeam, the transaction is also likely to stand on its own this year because of its size. The M&A KnowledgeBase lists only three tech deals by sponsors over the past year that are larger than the pending recap of the data-protection provider.

And over the course of the past year, PE business has dried up. Spending on transactions by buyout shops dropped 20% in 2019 compared with 2018, while last year also saw the first decline in the number of PE prints in six years. Further, 2020 may slow even more. In our annual survey of senior tech investment bankers, they told us their pipeline for PE work is not as full as their overall pipeline for the coming year. That’s the first time in three years they haven’t been busier with financial acquirers.

More public private equity

by Scott Denne

Although the volume of overall tech acquisitions by private equity (PE) firms has declined a bit from last year’s record, the number of take-privates continues to increase. The latest of such deals is Francisco Partners and Elliott Management’s $4.3bn purchase of LogMeIn – a typical take-private from what’s becoming an atypical source.

According to 451 Researchs M&A KnowledgeBase, buyout shops have erased 42 tech vendors from public markets this year, the second-most of any annual total and seven more than they bought in 2018. In acquiring those companies, they’ve spent $74bn, the second-highest annual outlay for such transactions. (The highest came in 2016, the year that Dell, a Silver Lake portfolio company, shelled out $63bn for EMC.)

In some ways, LogMeIn is a typical LBO – it’s a large, profitable public company that’s struggling to put up growth. Garnering a 3.4x trailing revenue multiple on the sale, its valuation sits right in line with the annual median for take-privates this year. But unlike LogMeIn, fewer vendors are coming off the major US exchanges.

As sponsors are spending more than usual on take-privates, they’re having to go further afield to do it. For just the second time in the decade, PE firms are purchasing fewer companies that trade on the Nasdaq or NYSE exchanges than public companies that trade elsewhere.

Paying up to restructure Instructure

by Brenon Daly

Dragged down by the uneven performance of its two main products, learning management software maker Instructure is headed toward a period of corporate rehabilitation behind closed doors. The company says it will be going private in a proposed $2bn LBO by Thoma Bravo, wrapping up a three-year stint on the NYSE. Under ownership of the buyout firm’s sharp-penciled operators, we expect Instructure’s portfolio to be thinned in short order.

Although the stock nearly tripled from its IPO price, the ed-tech vendor has been increasingly dogged by questions about its product lineup. For the first few years after its founding in 2008, Instructure had success in selling software to schools to manage their education programs. However, its effort to replicate the uptake that its Canvas offering had in schools with a product targeting learning in the workplace has foundered since its early-2015 launch.

The corporate learning management offering, Bridge, has been a bit of an albatross. Instructure acknowledged that in its recent quarterly report, adding that it had begun separating the underperforming Bridge division from the still-healthy Canvas unit. (Instructure doesn’t break out the respective financials of the two product lines.)

Based on early indications, that separation will likely be accelerated once the sale to Thoma Bravo closes, which is expected in Q1 2020. Consider this: In the release announcing the acquisition of the whole company, Thoma Bravo only references – and indeed, praises – Instructure’s Canvas offering. The Bridge product, which almost certainly burns cash, is conspicuously absent.

Since Instructure had publicly disclosed last month that it was reviewing ‘strategic alternatives’ for the company, the sale isn’t surprising. (Certainly, Wall Street had been betting that Instructure would get a deal done. Investors, including several activist hedge funds, had pushed Instructure shares to an all-time high in anticipation of a transaction. Turns out they got a bit ahead of themselves, as Thoma’s bid represents a slight ‘take under’ relative to the stock’s previous closing price.)

Still, this is not some bargain buyout. At roughly $2bn, Thoma Bravo is paying about 8x TTM sales of $245m at Instructure. According to 451 Researchs M&A KnowledgeBase, that’s the highest multiple for any tech vendor erased from US stock exchanges in 10 months.

Exclusive: Saba for sale

by Brenon Daly

Amid an unprecedented private equity (PE) shopping spree in HR technology, the next big talent management platform provider to trade may well be Saba Software. Several market sources have indicated that current owner Vector Capital has the company in market, with a possible sale in the first half of next year. According to our understanding, the ask for Saba is more than $1bn.

A potential unicorn-sized exit for Saba would mark a stunning turnaround for a business that had been brought low by an accounting scandal earlier this decade. Vector Capital took Saba private in early 2015 for $268m, allowing the company to get its books in order behind closed doors rather than doing it on the public market. (Wall Street’s cop, the US Securities and Exchange Commission, fined Saba $1.7m for its fraudulent accounting from 2007 to 2012 as well as ‘clawing back’ $2.5m in bonuses paid previously to the company’s founder, who also served as CEO at the time.)

As Saba got its internal operations shored up, it looked to expand in the fragmented HR tech market. In early 2017, the vendor reached north of the border to consolidate Ottawa-based Halogen Software for $207m, and then last October, Saba added Europe-focused Lumesse. (Subscribers to 451 Research’s M&A KnowledgeBase can see our proprietary estimate of terms in the Saba-Lumesse transaction.)

Altogether, Saba is more than twice the size it was when it was erased from the ranks of publicly traded companies. (Although Saba first listed on the Nasdaq, it had fallen to Pink Sheet purgatory after it had to restate several years of financials.) Revenue at the talent management specialist tops $300m, while the business throws off more than $100m of EBITDA, according to our understanding.

We would note the financial profile for this potential exit of a Vector portfolio company lines up very closely with the financial profile of a just-realized exit of another Vector portfolio company. Subscribers to the M&A KnowledgeBase can see our proprietary estimate of terms in Vectors sale of Corel to KKR last summer.

HR technology has been a favorite sector for PE firms, which tend to face less competition from strategic vendors in this market than elsewhere in IT. Several buyout shops have already purchased huge HR platforms, including Vista Equity with iCims, Insight’s Bullhorn and Hellman and Friedman with joint ownership of two separate HR tech platform providers that measure their sales in the billions of dollars. If Vector does sell Saba, the buyer will almost certainly be a fellow PE firm.

Figure 1: HCM M&A activity
Source: 451 Research’s M&A KnowledgeBase

PE bolt-on deals could ratchet up

by Scott Denne

Tech acquisitions by private equity (PE) firms have softened a bit from a record 2018 (a development we covered recently) as sponsors take on new platforms at a slower pace. But purchases of bolt-on assets for the platforms they already own haven’t meaningfully declined. And as data from our recent M&A Leaders survey suggests, the shift toward more additive acquisitions by buyout shops could well expand into 2020.

According to 451 Researchs M&A KnowledgeBase, PE firms are on pace to print just 1% fewer bolt-on deals than they did last year, while acquisitions of new platforms are falling short of last year’s total by about 5%. Most recently, we’ve seen a surge of such transactions since the start of the quarter – just this week we’ve logged 13 of them, including DoubleVerify’s pickup of Ad-Juster. That deal by the Providence Equity Partners portfolio company marks its third of the year (it had only made one purchase in the decade before Providence Equity bought a majority stake in the ad-tech vendor in 2017).

Bolt-on acquisitions have become a regular feature of PE tech transactions as more firms have gravitated toward buying high-priced growth companies, and then using additional deals to augment revenue expansion and lower the effective multiple paid for the platform. According to our data, the median multiple paid for a platform acquisition hit 4.4x trailing revenue last year, while the median price for a bolt-on was a turn lower.

As they have already done this year, buyout shops could turn more toward adding to existing portfolio companies and away from reaching for new ones as they become sensitive to price. In our recent M&A Leaders survey, 80% of respondents partially blamed rising valuations for the slowdown in PE purchases this year and 56% of them expect PE deals to carry lower multiples in the next 12 months. Just 7% anticipate increasing multiples in PE transactions.

Figure 1:

Same transaction, very different valuation

by Brenon Daly

Two deals, both of them multibillion-dollar take-privates by buyout shops in the past week that, once completed, would return the targets to private equity (PE) portfolios after a brief stint as public companies. But that’s pretty much the end of the similarities between Cision and Sophos. There’s an ocean between the headquarters of the two vendors, and an ocean of difference between the two leveraged buyouts (LBOs).

Start with the headline valuation. Sophos is going private at 5.5x trailing sales, fully two turns higher than Cision’s 3.5x, which is more in line with prevailing LBO multiples. On a cash-flow basis, Sophos is garnering even more of a premium. (See more on Sophos valuation in our report on the pending LBO.)

By our count, Thoma Bravo is paying 48x EBITDA for Sophos, almost three times richer than the 17x Platinum Equity Partners is paying for Cision, according to 451 Researchs M&A KnowledgeBase. (We write that knowing that our EBITDA figures are far lower than the ‘adjusted’ figures that buyers and their bankers tend to use. For instance, we calculate Cision’s trailing EBITDA at $158m, while the company has guided for 2019 ‘adjusted EBITDA’ of about $270m. For most of the financial community, which tends to look through more costs than we do, Cision is a ’10x deal.’)

Whatever the exact numbers, it’s fair to say that Sophos is fetching an above-market valuation while Cision is more representative of what PE typically pays in LBOs. That’s fitting because, in many ways, Cision is generally thought of as the type of vendor that PE firms like to LBO. Broadly speaking, Cision – unlike Sophos – is a ‘value’ play that appears a bit out of place on growth-focused Wall Street.

In fact, Cision, which is a classic sponsor-backed rollup, only made it to the NYSE through a most unusual route: a so-called ‘blank check listing’ in mid-2017. Since then, the M&A KnowledgeBase shows it has spent $440m on four acquisitions. (For comparison, in that period, Sophos has only purchased three small startups.)

During its time on Wall Street, the rollup did little to distinguish itself. Platinum Equity is taking Cision off the Big Board at roughly the same price it came on. In contrast, Sophos gave public market investors more of what they wanted, roughly tripling its value on the LSE. Two very different companies, with two very different outcomes.

PE’s exit problem

by Scott Denne

Private equity (PE) exits are declining faster than at any time since the financial crisis. The change comes, in part, as PE firms, the most prominent source of exits for their peers, are slowing their purchases (a trend we covered recently). Yet it’s the disappearance of strategic acquirers that is most responsible for diminishing sales of PE portfolio companies.

After four consecutive years of growth, sales of tech vendors owned by PE shops are on pace to drop 24% from last year’s high. The rise in secondary deals (sales of companies from one sponsor to another) drove most of the previous year’s accelerating pace of exits (and now account for almost two of every three acquisitions of PE-backed vendors). But the vanishing strategic buyers are responsible for the largest decline in PE exit volume.

According to 451 Researchs M&A KnowledgeBase, 2019 is likely to become the first year since 2014 when strategic acquirers purchase fewer than 100 companies from financial sponsors, doing 34% fewer pickups of PE portfolio vendors than last year. Yet this isn’t part of an overall falloff in strategic M&A – those buyers are printing overall tech transactions at roughly the same pace as last year, our data shows.

But the types of deals they’re doing have changed. Strategic acquirers appear to have lost much of their appetite for the high-multiple growth companies that have become a staple of PE tech M&A in the past couple of years. So far this year, we’ve only tracked 72 acquisitions where a strategic buyer paid 4x trailing revenue or more, roughly 20% fewer than they did at this time in 2018.

The shift away from the expensive end of the tech M&A market comes as the number of businesses missing their sales targets continues to expand throughout this year. According to 451 Researchs Voice of the Enterprise: Macroeconomic Outlook, the number of respondents who say their organization’s revenue is ahead of their sales plan has dropped each quarter since September of last year. In the most recent edition of that survey, more respondents (24%) said sales were below plan than those that said sales were above plan (18%) for the first time since early 2017.

Figure 1:

Venture’s Vista

With Vista Equity Partners’ acquisition of a majority stake in Acquia, private equity (PE) firms are now on pace to deliver as many exits to VC funds as the previous record year. It’s appropriate (although maybe not surprising) to see a deal by Vista pushing PE purchases of startups toward a record streak – it has bought more of them than any of its peers.

According to 451 Researchs M&A KnowledgeBase, Acquia marks Vista’s 55th acquisition of a venture-funded company since the start of this decade. Only Cisco, Google and Microsoft have picked up more startups during the same time. And this year, Vista has been far more prolific, having printed nine such transactions, compared with six each from 2019’s next-most-prolific buyers of startups (Microsoft and VMware).

Last year, PE firms purchased 147 startups, 53% more than any other year, our data shows. With today’s announcement, sponsors are on pace to match that total, having bought 108 so far. In the overall tech M&A market, buyout shops are on pace to print 5% fewer deals than they did last year. The decline itself is hardly noteworthy – even if the year ended today, PE firms would have acquired more tech vendors in 2019 than they did in all but two other years.

But the growing ratio of VC-backed companies does show that the PE playbook continues to swing toward buying growth companies and adding value to them through bolt-on acquisitions. There’s every indication that Vista will run that playbook on Acquia. It’s a common strategy for Vista – of its 55 purchases of startups, 36 have been acquisitions done by its portfolio companies. Also Acquia, an open source content management software developer (subscribers to the M&A KnowledgeBase can see our estimate of Acquias revenue here), has recently become an acquirer in its own right, having inked two transactions since May.

Figure 1:

Cofense removes the Red Threat

by Brenon Daly


After a long and torturous process, email security startup Cofense has landed where it appeared headed pretty much the whole time: deeper in the portfolio of existing investor BlackRock. The private equity firm, which picked up roughly one-quarter of Cofense in a recap of the company in early 2018, added the 43% stake that had been held by a Russian investment firm. But it wasn’t an easy deal.

BlackRock’s transition from minority investor to majority owner of Cofense only came after some highly unusual – and highly disruptive – regulatory scrutiny from a secretive US national security agency. A few months after the deal was announced last year, the Washington DC-based Committee on Foreign Investment in the US (CFIUS) began pushing for the Russian investor, Pamplona Capital, to be removed from the syndicate. The reason? Perceived threats to national security.

Under scrutiny from CFIUS, business at Cofense stalled. Customers didn’t want to be buying from a potentially insecure security vendor. (Is the Kremlin reading your email?) Cofense’s growth rate, which had topped 40%, fell to about half that level, according to our understanding. The company had to do some layoffs due to the slowdown.

As growth tailed off, valuation followed suit. Although the exact price couldn’t be learned that BlackRock paid Pamplona for its stake, the transaction is understood to value Cofense at less than the $400m the two buyout shops paid for the company a year and a half ago. For comparison, rival email security provider KnowBe4 raised money this summer at a valuation of more than $1bn.

Still, with the removal of the Red Threat, Cofense at least has the opportunity to get back to business. And a fair amount of business is available. Our surveys of information security buyers and users continually show, broadly, that phishing and the related concern of user behavior is the top-ranked security ‘pain point’ facing organizations. That’s the good news for the company. The bad news: Cofense didn’t even make it into the top-five most-popular vendors for security awareness training, according to the 451 ResearchVoice of the Enterprise: Information Security, Workloads & Key Projects 2019.

Figure 1: Security awareness vendors

Blackstone bags big exit in tightening market

by Scott Denne

In selling Refinitiv to London Stock Exchange (LSE) Group for $14.1bn in stock, Blackstone Group has managed the largest-ever sale of a PE-backed tech company. The deal comes amid an overall decline in PE exits, particularly among the largest assets. Although the shifting PE exit environment isn’t a dramatic swing, it’s notable given the rise in PE acquisitions in recent years.

The transaction values Refinitiv, a financial markets data provider, at $27bn when factoring in its debt. That’s nearly $4bn less than where the company was valued when Blackstone and two co-investors spun it off of Thomson Reuters last year, paying $17bn for 55% of the business. That’s not to say Blackstone is losing money on the deal – it put in $3bn of its own cash and will get more than that in LSE equity. Moreover, it won’t begin selling any of those shares for at least two years after the close, so its ultimate exit is still a ways off.

Still, in announcing such an exit, Blackstone’s an outlier. According to 451 Research’s M&A KnowledgeBase, PE firms have sold 156 tech vendors since the start of the year, approximately the same rate of exits as 2017, but 22% lower than 2018 – a record year for PE exits. The decline is more significant among larger deals. Our data shows that buyout shops have divested just nine companies (including Refinitiv) for $1bn or more this year, on pace for the fewest such exits since 2014.

The buyer it found is as remarkable as the record price it fetched in the sale of Refinitiv. LSE hasn’t spent more than $1bn on a tech purchase since 2007. And more broadly, strategic acquirers have only bought six $1bn PE portfolio companies this year. In 2018, they provided 20 of the 31 PE exits valued above $1bn.

The slowdown in exits comes as sponsors have expanded their pace of $1bn-plus acquisitions of tech companies. According to the M&A KnowledgeBase, PE firms have inked at least 25 10-figure tech transactions in each of the past three full years, whereas they would typically print 10-15 such deals in each of the years from 2010 to 2016. Blackstone, due to a lockup agreement as part of today’s announcement, will have to wait at least five years before fully exiting its position. But if current exit trends hold, many of its peers could be awaiting 10-figure exits for just as long and with far less certainty.