Category: Private Equity

SailPoint sets sail for land of unicorns

Brenon Daly

Contact: Brenon Daly

In what would be one of the few private equity-backed tech companies to go public, SailPoint Technologies has put in its paperwork for a $100m IPO. The identity and access management (IAM) vendor, which has been owned by buyout shop Thoma Bravo for three years, should debut on Wall Street with a valuation north of $1bn. That is, unless SailPoint gets caught up in the current M&A wave that has seen a number of big buyers pick up identity-related security firms.

SailPoint reported $75m in revenue for the first half of 2017, an increase of 32% over the same period last year. Assuming that pace holds, the Austin, Texas-based company would finish this year with about $175m in sales. Depending on the product, SailPoint sells both licenses and subscriptions to its software. Subscriptions to its cloud-based offering, IdentityNow, are outpacing on-premises software sales, and currently account for some 42% of total revenue. License sales generate 34% of overall revenue, with the remaining 24% coming from services.

Transitioning to more subscription sales will undoubtedly boost SailPoint’s valuation. (Wall Street tends to appreciate the predictability that comes with multiyear subscriptions. In the case of IdentityNow, SailPoint indicated in its prospectus that the standard contract lasts three years.) That’s not to suggest that SailPoint will get the same platinum valuation as a pure SaaS provider such as Okta. That cloud-based IAM vendor, which went public in April, currently commands a $2.75bn market cap, or 11x this year’s sales. Of course, Okta is larger than SailPoint and growing at twice the pace.

Instead, we would look to some of the recent M&A pricing in the active IAM market to inform SailPoint’s valuation. For example, we understand that SecureAuth traded at more than 6x revenue in its sale in September to buyout firm K1 Investment Management. Ping Identity – which, like SailPoint, was in transition from license sales to subscriptions – also sold for about 6x sales last year. SailPoint is substantially larger than either of these fellow IAM firms, and is growing solidly. That should garner it a premium. But even using a conservative valuation multiple of 6x sales gets SailPoint into the land of the unicorns.

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

Synchronoss’ planned ‘pivot’ turns into a face-plant

Brenon Daly

Contact: Brenon Daly

With its attempt at a pivot having turned into face-plant, Synchronoss will unwind its massive, bet-the-company acquisition of Intralinks by divesting the collaboration software vendor to private equity (PE) firm Siris Capital Group. The buyout shop will pay about $1bn for Intralinks, which Synchronoss acquired last December for $821m.

It was a pairing that faced skepticism from the very start, because the business models and client base for the two companies had virtually nothing in common. The combination also ladled a hefty amount of debt onto Synchronoss, which then compounded problems around servicing that debt by having to restate its financials due to accounting errors. Shares of Synchronoss have lost two-thirds of their value since the acquisition announcement.

As Synchronoss stock cratered, Siris Capital began buying equity, ultimately becoming the company’s largest shareholder. Siris used that position to agitate during the company’s review of ‘strategic alternatives’ announced in early July. Not unexpectedly for the beleaguered company, the process proved fitful. Siris Capital initially offered to acquire all of Synchronoss but then pulled its bid as the company, which was advised by Goldman Sachs & Co and PJT Partners, continued to look for another buyer.

Instead of an outright acquisition of Synchronoss, Siris will carve out the Intralinks division and add that to its portfolio. The transaction is expected to close in mid-November. Further, the buyout firm will invest $185m into the remaining Synchronoss business, which will continue trading on the Nasdaq.

With the divestiture, 17-year-old Synchronoss effectively abandons its attempt to become a broad provider of enterprise software, and retreats back to servicing its long-standing client base of communications and media companies. The move is a reminder that software can be hard. Just ask Dell Technologies and Lexmark. Both of those tech companies also retreated from their M&A-driven effort to become software vendors, divesting their software portfolio to PE shops in billion-dollar deals over the past year.

Startups stuck in a billion-dollar backlog

Brenon Daly

Contact: Brenon Daly

Startups are increasingly stuck. The well-worn path to riches – selling to an established tech giant – isn’t providing nearly as many exits as it once did. In fact, based on 451 Research calculations, 2017 will see roughly 100 fewer exits for VC-backed companies than any year over the past half-decade. This current crimp in startup deal flow, which is costing billions of dollars in VC distributions, could have implications well beyond Silicon Valley.

First, the numbers. So far this year, 451 Research’s M&A KnowledgeBase reports just 439 VC-backed companies have been acquired, putting full-year 2017 on pace for roughly 570 exits. That’s 16% fewer deals than the average number of VC exits realized from 2012-16, and the lowest number of prints since the recession year of 2009, when startups were mostly focused on survival rather than a sale.

The reason for the current slowdown in the prototypical startup-sells-to-brand-name-buyer transaction that has generated hundreds of billions of dollars in investment returns over the years is that the buyers aren’t buying. (We would note that’s only the case for the bellwether tech vendors, the so-called strategic acquirers. Rival financial buyers – both through direct investment and acquisitions made by their portfolio companies – have never purchased more VC-backed firms in history than they have in 2017, even as the overall number of venture exits declines. Private equity now accounts for 17% of all VC-backed exits, twice the percentage the buying group held at the start of the decade, according to the M&A KnowledgeBase.)

Parked in VC portfolios, startups can, of course, build their businesses, along with the accompanying value. What they can’t do as long as they are still owned by venture investors is realize that value, at least not tangibly or completely. That takes either a sale of the company outright or an IPO. (Wall Street hasn’t provided many exits at all for VC-backed companies since 2000, and isn’t ever likely to be a primary destination for startups.)

And although we’re talking about small companies, there’s already been a pretty big impact. Even if we take a conservative average exit price of $50m for startups, multiplying that across the 100 exits that won’t happen this year means a staggering $5bn won’t get distributed in 2017 that would have in previous years. Without capital once again flowing from corporate acquirers back to startups and VCs, the entire ecosystem runs the risk of stagnation.

Survey: Steady as she goes for tech M&A

Brenon Daly

Contact: Brenon Daly

Undeterred by the recent slowdown in M&A activity, tech acquirers have largely left their bullish forecast for dealmaking unchanged. For the third consecutive time, essentially half of the respondents to the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster indicated that they expected an acceleration in acquisition activity.

The 51% that forecast a pickup over the next year in M&A in our most-recent edition is more than twice the 19% that projected a decline. The results lined up very closely with the sentiment from both the year-ago survey as well as our previous survey in April.

More broadly, the outlook from the three recent surveys reflects an unusual bit of stability in what is an inherently lumpy business. A bit of history: Over the previous half-dozen years of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, swings of 10 or even 20 percentage points from one edition to the next haven’t been uncommon.

451 Research subscribers can click here for the full report on the views from 150 top dealmakers, including their forecasts on M&A valuations, their thoughts on where startups should be looking to exit, and how they see the pitched fight with cash-rich private equity buyers playing out.

bpost’s trek through Amazon 

Scott Denne

Contact:Scott Denne

Looking for a patch of ground in a rising market, bpost picks up a declining asset as it prints its first tech deal with the $820m purchase of Radial, eBay’s former commerce services unit. The acquirer, which operates the Belgian mail service and other logistics businesses, is aiming to capitalize on the growth of e-commerce in North America. Yet its projections ignore the extent of its vulnerability to an increasingly dominant Amazon.

Radial formed with the 2016 combination of retail fulfillment services firm Innotrac and the former eBay Enterprise business, which provided fulfilment, order management and other services. The two were bought out by investor syndicates and combined in 2016 by their shared owner Sterling Partners.

Its fortunes have tracked those of its customers, many of which have filed for bankruptcy since the start of 2016, including Aeropostale, RadioShack, Toys R Us and Sports Authority. Radial’s revenue is projected to decline to about $1bn from roughly $1.25bn last year.

At 8x trailing revenue, Radial fetches the same multiple that eBay Enterprise nabbed in its 2015 sale. That’s a rich multiple considering the earlier acquisition of eBay Enterprise included e-commerce software platform Magento, which has since been spun off and likely had higher margins than the services-heavy Radial.

That multiple may turn out to be less rich than bpost’s projections that the asset can expand its top line by 6-8% annually, considering that it’s coming off a year where it lost 20% of its revenue catering to the second tier of retailers. Not only are those the retailers that are most vulnerable to Amazon’s domination of commerce, the online goliath runs a fulfillment business of its own, making Radial vulnerable on two fronts – those customers that aren’t crushed by Amazon could very well side with it.

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

Tech M&A: Questions about the quarter

Brenon Daly

Contact: Brenon Daly

Boosted by a September surge, spending on global tech acquisitions in the just-completed Q3 soared to the highest quarterly total of 2017. In fact, the $119bn worth of tech deals tallied by 451 Research’s M&A KnowledgeBase during the July-September period only slightly trailed the total amount spent during the first six months of 2017. Big prints dominated recent deal flow, with both of this year’s largest transactions coming in September. More broadly, Q3 accounted for six of the 10 biggest deals so far this year.

Spending on tech transactions in September hit its highest monthly level since October 2016, coming in twice as high as the average of the previous eight months of the year, according to the M&A KnowledgeBase. Yet even with that spike, the value of announced deals so far in 2017 has slumped to the lowest level for the opening nine months of any year since 2014. (The just-completed quarter reverses a particularly light Q2, which recorded the lowest quarterly value of transactions in four years.) At this point in the year over the past three years, tech acquirers, on average, had handed out $360bn – a full $100bn more than the roughly $260bn worth of announced spending so far in 2017.

Boosted by a September surge, spending on global tech acquisitions in the just-completed Q3 soared to the highest quarterly total of 2017. In fact, the $119bn worth of tech deals tallied by 451 Research’s M&A KnowledgeBase during the July-September period only slightly trailed the total amount spent during the first six months of 2017. Big prints dominated recent deal flow, with both of this year’s largest transactions coming in September. More broadly, Q3 accounted for six of the 10 biggest deals so far this year

However, focusing on the top end of the market in September, there’s some question about whether the recent momentum for momentous deals will continue through the final quarter of the year. A number of significant prints, including both of Q3’s biggest transactions, appear to be uncharacteristically large purchases done in unusual circumstances. We look at some of the reasons for that – as well as some of the imp lications of this new development – in our full report on Q3 tech M&A, which will be available to 451 Research subscribers later today.

 

Exclusive: A deal for Datto?

Brenon Daly

Contact: Brenon Daly

A unicorn is rumored to be on the block, with several market sources indicating that disaster-recovery startup Datto is looking for a buyer. We understand that Morgan Stanley is running the process. While Datto secured a $1bn valuation in a growth round of funding two years ago, we are hearing that current pricing would add a solid – but not exorbitantly rich – premium to that level.

According to our understanding, early discussions with buyers have bids coming in at about $1.3bn for Datto. Our math has that rumored price valuing the 10-year-old startup at 6.5x this year’s sales of roughly $200m. (Estimates in 451 Research’s M&A KnowledgeBase Premium, which features in-depth profiles and proprietary insight about specific privately held startups, indicate that Datto generated $160m in sales last year, up from $130m in 2015. Click here to see Datto’s full profile in our M&A KnowledgeBase Premium.) The company sells its backup and recovery products to SMBs, with virtually all sales going through the channel.

With its scale and business model, Datto appears almost certain to end up in the portfolio of a private equity (PE) firm, assuming the company does trade. There is precedent. Datto’s smaller rival Axcient was consolidated by eFolder earlier this summer in a transaction that was at least partially backed by financial sponsor K1 Investment Management.

More broadly, PE shops, which have never had more money to spend on tech in history, have been increasingly looking to the IT infrastructure market to make big bets. Already this year, buyout shops have announced three deals valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. Unlike those targets, which were all owned by fellow PE firms, Datto founder Austin McChord still holds a majority stake in his company.

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

Trump’s death blow to a deal

Brenon Daly

Contact: Brenon Daly

Respondents to the previous edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster have once again delivered the wisdom of the crowds. When asked last spring about the outlook for US-China tech deal flow, respondents overwhelmingly predicted that President Trump’s policies would crimp M&A activity between the world’s two largest economies. Specifically, two-thirds (65%) of the 157 respondents from across the tech M&A landscape forecast a decline in purchases of US tech companies by Chinese buyers. That was more than four times the level (14%) that anticipated an increase.

In line with that April forecast, Trump has blocked the proposed $1.3bn acquisition of Lattice Semiconductor by a Beijing-based fund, citing national security concerns. Regulatory approval of the planned purchase by Canyon Bridge Capital Partners, which was announced last November, had been viewed as virtually impossible after The Committee on Foreign Investment in the US indicated that it would not sign off on the transaction. Trump delivered the death blow to the deal on Wednesday.

Trump’s move represents a rare bit of White House intercession in an acquisition. But it isn’t necessarily out of character for Trump, who has singled out China for some of his sharpest criticism as he has pursued a self-described ‘America First’ policy. Again, respondents to the M&A Leaders’ Survey last spring accurately predicted that Trump’s singularly unfriendly views toward China would disproportionately impact US-Sino deal flow. In the survey, fully one out of five respondents (20%) forecast that Chinese buyers of US tech companies, such as Lattice Semi, would ‘substantially’ cut their activity due to the Trump administration, compared with just 3% who said they expected overall cross-border M&A to drop off ‘substantially’ in the current regime.

451 Research and Morrison & Foerster are currently in market with the latest edition of the M&A Leaders’ Survey, and would appreciate your views on where the tech M&A market is and where it’s heading. In addition to broad market questions, we also revisit questions around Trump’s impact on cross-border M&A as well the specific outlook for China-based buyers. We would appreciate your time and thoughts. To participate, simply click here.

A private equity play in the public market

Brenon Daly

Contact: Brenon Daly

In a roundabout way, private equity’s influence on the technology landscape has also spilled over to Wall Street. So far this year, one of the highest-returning tech stocks is Upland Software, a software vendor that has borrowed a page directly out of the buyout playbook. Shares of Upland – a rollup that has done a half-dozen acquisitions since the start of last year – have soared an astounding 150% already in 2017.

Investors haven’t always been bullish on Upland. Following the Austin, Texas-based company’s small-cap IPO in late 2014, shares broke issue and spent all of 2015 and 2016 in the single digits. For the past four months, however, shares have changed hands above $20 each.

Upland’s rise on Wall Street this year essentially parallels the recent rise of financial acquirers in the broader tech market – 2017 marks the first year in history that PE firms will announce more tech transactions than US public companies. As recently as 2014, companies listed on the Nasdaq and NYSE announced twice as many tech deals as their rival PE shops. (For more on the stunning reversal between the two buying groups, which has swung billions of dollars on spending between them, see part 1 and part 2 of our special report on PE and tech M&A.)

Although Upland is clearly a strategic acquirer in both its origins and its strategy, it is probably more accurately viewed as a publicly traded PE-style consolidator. The company has its roots in ESW Capital, a longtime software buyer known for its platforms such as Versata, GFI and, most recently, Jive Software. Upland was formed in 2012 and, according to 451 Research’s M&A KnowledgeBase, has inked 15 acquisitions to support its three main businesses: project management, workflow automation and digital engagement.

Selling into those relatively well-established IT markets means that Upland, which is on pace to put up about $100m in revenue in 2017, bumps into some of the largest software providers, notably Microsoft and Oracle. To help it compete with those giants, Upland has gone after small companies, with purchase sizes ranging from $6-26m.

However, the company has given itself much more currency to go out shopping. Early this summer – with its stock riding high – it raised $43m in a secondary sale, along with setting up a $200m credit facility. Given Upland’s focus on quickly integrating its targets, it’s unlikely that it would look to consolidate a sprawling software vendor. But it certainly has the financial means to maintain or even accelerate its rollup of small pieces of the very fragmented enterprise software market.

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

Webinar: PE activity and outlook

Brenon Daly

Forget Oracle, IBM, or any of the other big-name, publicly traded acquirers that – until now – have always set the tone in the tech M&A market. If a tech deal printed in 2017, the buyer is more likely to be a private equity firm than any of the well-known serial acquirers on the US stock market. This is the first time in the history of the multibillion-dollar tech M&A market that financial acquirers have been busier than these strategic acquirers.

To understand how the ever-growing influence of buyout shops is reshaping both M&A and the tech industry, join 451 Research for an hour-long webinar on Thursday, September 7, 2017, starting at 1:00pm ET. Registration is available here: https://www.brighttalk.com/webcast/10363/274289.