Category: technology stocks

For tech M&A, April is another month further from the peak

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in April slumped to its lowest total in 15 months, as buyers either looked to pick up bargains or stepped out of the market altogether. The $18bn in total deal value recorded in 451 Research’s M&A KnowledgeBase for the just-completed month comes in at less than half the average monthly tally from last year’s record run, further lowering the post-peak levels we’ve already recorded so far in 2016.

Many of the transactions announced in April also indicated how acquirers have swung to ‘value’ – rather than ‘growth’ – buys amid a broad slowdown in tech, particularly among its old-line vendors. Both of last month’s largest acquisitions valued the targets, which were each founded around 1990, at just 1x trailing sales. (The paltry multiple for both Lexmark and Polycom reflects how the tech industry has left behind many of its sizable-but-shrinking pioneers.)

More broadly, four of the 10 largest deals went off at less than 2x trailing sales, according to the M&A KnowledgeBase. Also putting pressure on overall multiples were greying companies divesting businesses that they decided not to support at a time when growth is difficult to find. CA Technologies, Teradata, HP Inc and Vodafone all punted businesses last month. The only real above-market valuations among April’s big prints were awarded to more recently founded SaaS providers, with Cvent getting 8x trailing sales in its take-private and Textura garnering more than 7x revenue in its sale to Oracle.

With four months now in the books, overall spending on M&A around the globe stands at just $90bn. That puts 2016 roughly on track for a full-year total of about $270m, which would be less than half the amount in 2015 and one-third lower than 2014. That lower level certainly squares with the results of our recent survey of dealmakers, in which a record number said they would be less active in the M&A market for the rest of the year. (See the full report on the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.)

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

Survey: After years of big plans and big buys, tech acquirers signal a slowdown

Brenon Daly

After pushing M&A spending to a 15-year high last year, a record number of tech acquirers have indicated that they will be stepping out of the market in 2016. For the first time in the four-year history of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number saying they would be cutting back on their shopping. That’s a significant deterioration in M&A sentiment compared with past surveys, which, on average, have seen more than four times as many respondents project an increase than a decrease.

In our late-April survey, fully one-third (33%) of respondents said they would be slowing their acquisition activity over the next six months, compared with just 38% who reported that they would be accelerating their M&A program. Taken together, the responses mark the most bearish tone ever from our respondents, who represent many of the most well-known buyers in the tech industry as well as their advisers. In our previous surveys, the average forecast has been overwhelming bullish, with more than half of respondents (55%) anticipating an acceleration in activity and only 13% saying the opposite. (Subscribers to 451 Research can see our full analysis of the M&A Leaders’ Survey.)

 

2016 MA outlook

The SecureWorks IPO: delayed, downsized and discounted

Brenon Daly

by Brenon Daly

So much for the comeback of the tech IPO market. Although SecureWorks did manage to make it public on Friday, the managed security service provider – along with its 17 underwriting banks – had to trim both the size and price of its offering to get investors interested. In afternoon trading on the Nasdaq exchange, SecureWorks shares were changing hands around its offer price of $14, which is lower than the range it laid out earlier.

Recent enterprise tech IPOs*

Company Date of offering
Box, Inc Jan. 23, 2015
GoDaddy April 1, 2015
Apigee April 24, 2015
Xactly June 26, 2015
Rapid7 July 17, 2015
Pure Storage Oct. 7, 2015
Mimecast Nov. 20, 2015
Atlassian Dec. 10, 2015
SecureWorks April 22, 2016

*Includes Nasdaq and NYSE listings only

SecureWorks’ underwhelming debut comes as the first enterprise tech offering since Atlassian hit the market in December. In the intervening months, concerns about slowing economic growth have swept through the world’s equity markets. Here in the US, the Nasdaq Composite Index dropped 15% in the first six weeks of this year. During that bear market, tech companies prudently opted not to continue with their offerings, much as a ship captain would not choose to set sail in stormy seas.

However, by late April, as SecureWorks launched its delayed offering, the storm had mostly passed. The Nasdaq has recovered its losses from earlier in the year, and Wall Street was no longer shaky ground. An April survey of individual investors by ChangeWave (a subsidiary of 451 Research) showed a dramatic turnaround in sentiment: Only one-third of respondents to our April survey said they were ‘less confident’ in the stock market than they were three months ago. That was just half the level at the start of 2016, and the lowest reading in more than a year. On the other hand, almost one-quarter of the respondents indicated they are feeling ‘more confident’ in Wall Street, which was the most-bullish reading we’ve had in three years.

So SecureWorks wasn’t necessarily heading out into stormy weather. Yet it still had to give up a fair amount to get public, which doesn’t seem to make much sense. (And Wall Street is nothing if not rational and judicious.) Sure, the company is unprofitable. But red ink has never stopped investors from buying, even when a company counts its revenue in the tens of millions of dollars but its net losses in the hundreds of millions of dollars. (For the record, SecureWorks is nowhere near that level, having lost $72m on revenue of $340m in its most-recent fiscal year, which ended in January.)

If SecureWorks’ so-so IPO wasn’t entirely due to the broad market or the company, maybe it had something to do with the offering itself. The basics of the SecureWorks IPO could be summarized like this: An established tech company acquires a fast-growing startup, then spins off a minority stake of a class of equity that effectively gives shareholders no voice in the direction or outcome at the company. That’s virtually the same structure as the VMware IPO, which hasn’t necessarily been kind to the company’s minority shareholders.

CW wall street April 2016

What happened to Alphabet’s M&A bets?

Brenon Daly

Contact: Brenon Daly

As part of an effort to provide more strategic focus as well as financial transparency, Google reorganized and renamed itself Alphabet last October. In the half-year since that change, the company has lived up to the ‘alpha’ part of its new moniker, handily outperforming the Nasdaq, which is flat for the period. But when it comes to ‘bet,’ it hasn’t been placing nearly as many M&A wagers as it used to.

So far in 2016, the once-prolific buyer has announced just two acquisitions, according to 451 Research’s M&A KnowledgeBase. That’s down substantially from the average of six purchases that Google/Alphabet has announced during the same period in each of the years over the past half-decade. (Nor do we expect this year’s totals to be bumped up by Google buying Yahoo, as has been rumored. That pairing would roughly be the sporting world’s equivalent of the Golden State Warriors nabbing the Los Angeles Lakers.)

The ‘alpha’ part of Alphabet is, of course, the Google Internet business, which includes the money-minting search engine, YouTube, Android and other digital units. This division generates virtually all of the overall company’s revenue and is the primary reason why Alphabet is the second-most-valuable tech vendor in the world, with a market cap of over a half-trillion dollars. For more on the company’s progress in dominating the digital world, tune in on Thursday for its Q1 financial report and forecast.

Google/Alphabet M&A

Period Number of announced transactions
January 1-April 18, 2016 2
January 1-April 18, 2015 6
January 1-April 18, 2014 8
January 1-April 18, 2013 4
January 1-April 18, 2012 4
January 1-April 18, 2011 8

Source: 451 Research’s M&A KnowledgeBase

Will Zuora play in Peoria?

Brenon Daly

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

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

CallidusCloud’s accretive acquisitions

Brenon Daly

Contact: Brenon Daly

With the $4m purchase of assets from ViewCentral, CallidusCloud has added on to one of its first add-on businesses. The company, which started life 20 years ago selling sales compensation management software, has used a bakers’ dozen deals since 2010 to expand its portfolio into software for employee hiring, marketing automation and on-the-job training. ViewCentral brings billing and payment technology to CallidusCloud’s learning management offering, a product that has its roots in the mid-2011 acquisition of Litmos.

By themselves, the small transactions, which have cost the company an average of just $5m a pop, aren’t all that significant. But collectively, they have expanded the market for CallidusCloud and given it the opportunity to increase high-margin revenue by selling additional products. (In 2015, the company said it did more than 80 multi-product deals.) CallidusCloud’s strategy of inorganic growth also stands in sharp contrast to rival Xactly, which has stayed out of the M&A market as it has maintained its focus on selling its core sales compensation management offering. (See our recent report on Xactly’s strategy and market position.)

Obviously, the M&A activity at the two companies isn’t the sole difference between CallidusCloud and Xactly, any more than it fully accounts for the relative valuation discrepancy between them. Still, it is worth considering how the acquisition-based portfolio expansion has paid off for CallidusCloud, at least in its standing on Wall Street. CallidusCloud currently garners twice the valuation of its smaller rival. (CallidusCloud trades at about $930m, or 4.4x times 2016 projected sales of $212m, compared with Xactly, which trades at $215m, or 2.3x times this year’s projected sales of $95m.) Further, since it came public last June, Xactly has shed about one-fifth of its value, while CallidusCloud shares are slightly in the green over that period.

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

Tech buyout shops play small ball

Brenon Daly

Contact: Brenon Daly

The pinched debt market so far this year has buyout shops scaling back their purchases, but doing more of them. Already this year, private equity (PE) acquirers have announced 68 transactions, with several larger firms such as The Carlyle Group and Vista Equity Partners having already put up two or three prints. The pace of PE activity is almost 20% higher than the start of the two previous years, according to 451 Research’s M&A KnowledgeBase.

However, spending on those deals has dropped dramatically, with the value of PE transactions so far in 2016 just half the average of the two previous years. Buyout shops have announced deals valued at $5.3bn since January 1, down from $9.7bn in the same period last year and $11.6bn during the same period in 2014, according to the M&A KnowledgeBase. To get a sense of how far the size has fallen, consider this: the biggest transaction so far this year would rank as only the sixth-largest PE deal printed during the same period of 2014 and 2015.

Fittingly, the biggest PE purchase so far this year is a divestiture (Airbus’ sale of its defense electronic business to KKR). Hewlett Packard Enterprise, CA Technologies and Intuit have also all sold divisions to buyout firms. The other notable driver of activity has been secondary transactions, where PE firms sell portfolio companies to other PE shops. Examples of these buyout-to-buyout deals in 2016 include Infogix and Sovos Compliance.

Taken together, the strategies that buyout firms have used so far this year are much more conservative than what we saw in the two previous years. (For instance, exactly a year ago, Informatica went private in a PE-backed transaction for $5.3bn, which valued the slow-growing data integration software provider at about 5x trailing sales and 25x EBITDA.) In many ways, this year’s activity simply reflects PE firms picking up smaller and less expensive targets, effectively doing deals with ‘walking around money’ rather than depending on lenders. But as those lenders (slowly) return to the market this year, we may well see buyout shops start to bag bigger targets once again.

PE-backed M&A

Period Deal volume Deal value
January 1 – April 7, 2016 68 $5.3bn
January 1 – April 7, 2015 53 $9.7bn
January 1 – April 7, 2014 61 $11.6bn

Source: 451 Research’s M&A KnowledgeBase

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That giant sucking sound on Wall Street

Brenon Daly

Contact: Brenon Daly

After a hard freeze last winter, there are signs of new growth on Wall Street this spring, with a pair of tech startups reportedly soon set to join the ranks of US public companies. After more than three months of silence, both SecureWorks and Nutanix have recently updated their IPO paperwork and have indicated that their offerings are back on track. In a more receptive market, the two companies would already be public by now. (Assuming that Nutanix does indeed debut, for instance, it will have been on file with the SEC more than twice as long as Pure Storage, which went public last fall.)

The offerings would also come after a quarter in which startups were shut out of the public market. Not a single tech vendor went public in Q1, the first time that has happened since the recession years. (451 Research subscribers: See our full report on Q1 activity, including the IPO shutout and the implications on the tech M&A market.)

Yet, even if SecureWorks and Nutanix do manage to join the public market, the new arrivals will do little to offset the number of tech companies leaving the public ranks. Already this year, we’ve seen 16 firms erased from the Nasdaq and NYSE exchanges, according to 451 Research’s M&A KnowledgeBase. (To be clear, we are including only full acquisitions, and excluding divestitures.) The departures have ranged from household names (Ingram Micro, ADT) to somewhat faded businesses (LoJack, LeapFrog). Altogether, the announced transactions for public companies have siphoned off nearly $32bn of value from the two main US exchanges.

The net outflow of tech firms from the US exchanges is, of course, nothing new. (In 2015, according to the M&A KnowledgeBase, 79 tech companies got erased.) But it stands out all the more this year as – thus far – there haven’t been any offsetting offerings. And even as SecureWorks, Nutanix and others work their way toward a listing, other vendors are looking like they could very well get pushed off of Wall Street. Both Citrix and Qlik have drawn interest from a hedge fund with a record of pushing businesses to sell.

Projected number of tech IPOs

Period Average forecast
December 2015 for 2016 19
December 2014 for 2015 33
December 2013 for 2014 29
December 2012 for 2013 20
December 2011 for 2012 25
December 2010 for 2011 25
December 2009 for 2010 22
December 2008 for 2009 7
December 2007 for 2008 25

Source: 451 Research Tech Corporate Development Outlook Survey

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For tech IPOs in Q1, it’s a startup shutout

Brenon Daly

Contact: Brenon Daly

Call it a startup shutout. Not a single tech company went public in the just-completed first quarter, marking the first time since the recent recession that we haven’t seen a tech IPO in a quarter. The lack of tech offerings so far this year stands out even more when we consider the dozens of startups in recent years that have indicated – either directly or indirectly – that they are of a size and mind to go public.

Consider the plight of one of the two tech vendors that recently revealed its IPO paperwork, Nutanix. The fast-growing provider of hyperconverged infrastructure officially filed its IPO prospectus, which was supported by no fewer than a dozen underwriting banks, in late December and fully planned to debut in Q1. And yet, despite all of the time, effort and expense in putting together the paperwork to go public, Nutanix remains private. The company hasn’t even updated its original filing from three months ago. (For comparison, SecureWorks filed its paperwork shortly before Nutanix and rather belatedly amended its filing in March, and is expected to launch its offering in April.)

Meanwhile, the other exit available to startups – an outright sale – isn’t looking like the richly rewarding process it once was. Sure, Jasper Technologies enjoyed a 10-digit exit to Cisco in early February. But we would point out that no other VC-backed tech startup has sold for more than $400m so far this year. Rather than Jasper’s exit, we might highlight a pair of other transactions involving IPO wannabes as far more representative of the current environment.

Take the case of Yodle. The digital marketing firm had been on file to go public since 2014, but hadn’t updated its original filing. Instead of dusting off its prospectus, it accepted a relatively low bid of $342m, or 1.6x sales, from hosting provider Web.com in February. Or even consider the sale of iSIGHT Partners to FireEye in February for $200m upfront plus an addition $75m earnout. According to our understanding, the $200m upfront is only slightly more than the company’s valuation in its funding a year ago. Around the time of the funding, iSIGHT had been indicating that it planned to debut either in 2016 or 2017.

451 Research subscribers can view our analysis of the recent IPO and M&A activity and our outlook for the rest of 2016 in our Q1 report, which will be on our website later today and in tomorrow’s 451 Market Insight.

Projected ‘competition’ from IPOs for target companies

Year More competition About the same Less competition
December 2015 for 2016 13% 36% 51%
December 2014 for 2015 26% 46% 28%
December 2013 for 2014 46% 34% 20%
December 2012 for 2013 15% 38% 47%
December 2011 for 2012 33% 42% 25%

Source: 451 Research Tech Corporate Development Outlook Survey

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Tech M&A begins its slide from the peak

Brenon Daly

Contact: Brenon Daly

After hitting a high-water mark last year, tech M&A activity has started 2016 by receding to a more normal level. Total spending on tech, media and telecom (TMT) deals across the globe in the just-completed first quarter hit $72bn, according to 451 Research’s M&A KnowledgeBase. That is only slightly more than half the average quarterly level in 2015’s record run but is roughly in line with the quarterly average from the two years leading up to the boom. Meanwhile, deal flow continued strong, with the number of January-March transactions topping 1,000 for the seventh consecutive quarter.

However, in keeping with the sense that the M&A market has moved into its post-peak phase, there have been a lot of low-multiple deals since the start of the year. One extreme example: Ingram Micro. The tech distribution giant – which, admittedly, runs at a distressingly low 1% operating margin – will put up more than $40bn of sales, but sold for just $6bn to a Chinese conglomerate in mid-February. Elsewhere, massive divestitures by both Dell and Lockheed Martin each went off at about 1x revenue.

Even viewed more broadly, valuations are getting squeezed. According to the M&A KnowledgeBase, the average multiple for the 10 largest transactions so far this year came in at just 2.3x trailing sales, which is at least a full turn lower than the average multiple at the top end of the market in any of the previous three years. In the 20 largest deals announced so far in 2016, just one has commanded a valuation greater than 8x trailing sales. Incidentally, that transaction (Cisco’s $1.2bn reach for Internet of Things platform provider Jasper) also stands as the largest VC-backed exit in Q1 by a large margin. The second-largest price paid recently for a portfolio company was just $400m.

Obviously, some of the pressure in the M&A market simply reflects the pressure in the equity market, which suffered through a short but sharp decline at the start of the year. (In the first six weeks of 2016, the Nasdaq plummeted almost 15%, with indexes from other exchanges around the world recording double-digit percentage declines during that period as well.) That bear market – along with one of the tightest credit markets, particularly for high-yield debt, in recent memory – has had more than a few dealmakers scrambling to recast prices and restructure terms to get acquisitions closed. Although most of the indexes recovered at least some or all of the early 2016 losses, the whipsawing stock market has nonetheless complicated pricing acquisitions, which could slow the rate of M&A in the coming months as well as put further pressure on valuations.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2016 1,020 $72bn
Q4 2015 1,052 $184bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
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