Category: technology stocks

What do the main buyers in the tech M&A market see for the year ahead?

Brenon Daly

Contact: Brenon Daly

Last year was a big year for tech M&A, but what was the biggest deal of year? To find out, we asked the main buyers in the tech M&A market: corporate development executives. As part of a broader survey, we had them look at the handiwork of their peers and give us their pick for the most significant tech transaction of 2014.

So which deal got the Golden Tombstone? Facebook’s $19bn cash-and-stock acquisition of WhatsApp. The purchase last February by the 10-year-old social network represents the largest VC-backed exit in history. It drew twice as many votes as the second-place transaction, SAP’s $8.3bn reach for Concur Technologies, which is the largest-ever SaaS acquisition.

Additionally, we asked the corporate acquirers what they expected for the coming year. Their responses point to a continuation of the record run of tech M&A. More than half of corporate development executives (58%) indicated that they expect their company to pick up the pace of dealmaking in 2015. That stands as the highest forecast in a half-decade and compares with just one in five respondents (6%) projecting a slowdown in their M&A activity in the coming year.

Other highlights from the survey of corporate development executives include a bearish outlook for startup valuations, a record forecast for IPOs and the expectation of unprecedented amount of competition in deals from their private equity rivals in 2015. Subscribers: See the full report.

Top vote getter for ‘most significant tech transaction’

Year Deal
2014 Facebook’s acquisition of WhatsApp
2013 IBM’s acquisition of SoftLayer
2012 VMware’s acquisition of Nicira
2011 Google’s acquisition of Motorola Mobility
2010 Intel’s acquisition of McAfee
2009 Oracle’s acquisition of Sun Microsystems
2008 Hewlett-Packard’s acquisition of EDS
2007 Citrix’s acquisition of XenSource

Source: 451 Research Tech Corporate Development Outlook Survey

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With buyers old and new placing big bets, tech M&A hits record in 2014

Brenon Daly

Contact: Brenon Daly

Spending on tech deals surged to a new record in 2014, driven not only by massive consolidation by old-line telco buyers, but also by the ever-increasing prices of bets placed on next-generation technology. Tech buyers across the globe announced transactions valued at $440bn last year, according to the 451 Research M&A KnowledgeBase. That topped the previous record (set in 2007) by 5% and, more dramatically, comes in at twice the average annual spending on tech deals since the credit crisis.

The nearly half-trillion dollars’ worth of deal value was, of course, dominated by telecommunications and media transactions. Last year’s two largest acquisitions (AT&T’s $48.5bn play for DIRECTV, and Comcast’s $45.2bn reach for Time Warner Cable) accounted for slightly more than 20% of the total yearly spending.

Add to that European telcos and cable outfits, which also took advantage of a highly attractive debt market, and bought up rivals at an unprecedented rate in 2014. Major buyers on the Continent included Altice, Vodafone and British Sky Broadcasting. Altogether, telco and media deals around the world accounted for roughly half of last year’s total spending.

The other half came from a series of speculative deals by emerging tech icons – emboldened by record amounts of cash and, in many cases, record prices for their stock. For instance, Facebook – which finished last year with shares trading around an all-time high – not only paid the highest price for a VC-backed startup ($19bn for WhatsApp) but also rolled the dice on a virtual reality company that barely had a prototype product (it paid $2bn in March for Oculus VR). Similarly, Google dropped $3.2bn on Nest Labs. The maker of ‘smart’ thermostats may offer Google a way into broader home-automation offerings. Or not.

More established tech stalwarts also paid up for deals last year. SAP announced the largest-ever SaaS transaction, its $8.3bn acquisition of Concur Technologies in the summer. SAP valued the travel and expense management application vendor three times more richly than SAP itself is valued. Oracle inked its largest deal in a half-decade, handing over $5.3bn for old-line hospitality software provider MICROS Systems in June.

And finally, in addition to strategic acquirers, financial buyers got back to business in 2014, announcing more than $50bn worth of transactions, according to the 451 Research M&A KnowledgeBase. Included in last year’s total are a number of headline-grabbing LBOs (TIBCO Software, Riverbed Technology, Compuware), as well as a healthy number of sponsor-driven midmarket transactions.

Global tech M&A

Year Deal volume Deal value
2014 3872 $439bn
2013 3275 $255bn
2012 3644 $186bn
2011 3794 $232bn
2010 3293 $190bn
2009 3030 $143bn
2008 3098 $326bn
2007 3654 $420bn
2006 4036 $418bn
2005 3054 $360bn
2004 2091 $219bn
2003 1514 $60bn
2002 1922 $81bn

Source: The 451 M&A KnowledgeBase

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Buying a dried-up Riverbed

Brenon Daly

-by Brenon Daly, Christian Renaud

Announcing its largest-ever acquisition, private equity (PE) firm Thoma Bravo says it will pay $3.6bn for Riverbed. The take-private of the WAN optimization vendor comes after more than a year of pressure from activist hedge fund Elliott Management. Under terms, Thoma, which has a history of profitably acquiring infrastructure software providers, will hand over $21 for each of the roughly 170 million fully diluted Riverbed shares.

Thoma Bravo is valuing Riverbed at 3.4x the $1bn that the company has put up over the past year. (Sales growth has been underwhelming so far in 2014. Through the first three quarters of the year, Riverbed inched up its top line by 6% – just one-quarter the growth rate from full-year 2013.) The valuation is roughly in line with other recent significant take-privates such as Thoma’s leveraged buyout of Compuware and Vista Equity Partners’ LBO of TIBCO Software.

The primary reason why Riverbed’s growth has stalled – which precipitated the initial unsolicited approach from Elliott – is the considerable changes in market requirements (greater demand for traffic analysis and grooming) and enterprise networking (evolution to cloud-delivered services). A study by TheInfoPro, a service of 451 Research, earlier this year indicated that more customers were planning to cut their spending with Riverbed in 2014 than increase their spending with the vendor. We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

RVBD spend plan

 

Big Oil has big trouble; Big Data has big opportunity

Brenon Daly

Contact: Brenon Daly

If data is the new oil, as some futurists would have it, then the accompanying transfer of value came through loud and clear in Friday trading. As oil prices slumped to their lowest levels since the recession, a pair of data-centric startups skyrocketed onto the market. The IPOs of New Relic and Hortonworks, collectively, created $2.5bn of market value.

Both offerings priced above the expected range and then surged another 40% on a day that saw US stock markets tick lower, in part, because of the pronounced slump in oil prices. The debut left both companies trading at platinum double-digit valuations. (New Relic, which will put up about $115m in sales in the current fiscal year, is being valued on Wall Street at about $1.5bn, while Hortonworks, which will do roughly $50m in sales this year, garnered a $1bn valuation.)

New Relic, which collects billions of data points around the performance of applications and the IT systems that run them, priced its shares at $23 each and saw them soar to about $33 in mid-Friday trading. ( See our full report on the New Relic offering.)

Similarly, Hortonworks – a ‘big data’ vendor that sells a Hadoop distribution – priced its shares at an above-range $16 and then saw its stock change hands at roughly $23. (See our full report on the Hortonworks offering.)

Just to put a point of contrast between old oil patch and new digital economy, consider this: the cost of buying one share each of New Relic and Hortonworks is roughly the same as the cost of buying a barrel of benchmark crude oil. Wall Street was very clear on which investment option looks more rewarding right now.

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

In the IPOs of New Relic and Hortonworks, it’s the grownup vs. the startup

Brenon Daly

Contact: Brenon Daly

Although both New Relic and Hortonworks revealed their IPO paperwork on the same day, that’s pretty much all the similarities we could find between the two enterprise technology companies. The two candidates have wildly different delivery models, operating margins, customer counts and even maturity of business models. That’s not to say they both can’t find a home on Wall Street, but only one of them is likely to dwell in a ritzy neighborhood. (451 Research subscribers: look for our full reports on both the New Relic and Hortonworks offerings later today.)

Of the two offerings, New Relic looks to be the standout. The application performance management vendor is growing quickly, but maybe more importantly, it is starting to show some leverage in its business model. This stands in sharp contrast to some of the other unprofitable IPO candidates that talk distantly about the company hitting some magical ‘inflection point’ when the red ink turns black.

New Relic is already demonstrating greater efficiency in its model, which will undoubtedly appeal to Wall Street. Consider this: In the first six months of the company’s current fiscal year, its operating loss basically stayed the same even as revenue soared 84%. More specifically, New Relic actually lost less money in its most recent quarter, which wrapped in September, than it did in the same quarter a year earlier. It trimmed its quarterly loss even as the company added more than $10m, or 78%, to its top line.

In contrast, Hortonworks is still forming its business, without much – if any – regard to optimizing it. The three-year-old Hadoop distributor is a classic startup, with many of the concerns that come with early-stage businesses: customer concentration, heavy upfront spending and precariously thin margins. (Hortonworks’ professional services business, which actually runs at a negative gross margin, has been a serious drag on the company’s overall gross margin. Through the first three quarters of the year, Hortonworks has been running at just a 34% gross margin, less than half the 81% gross margin posted by New Relic.)

When we net out all the differences between New Relic and Hortonworks, we see a vast gulf between the two IPO candidates at the bottom line. Sure, both still run in the red, but New Relic is only a light red, while Hortonworks is hemorrhaging a blood red. To put some specific numbers on that metaphor: At its current rate, New Relic loses about 40 cents for every $1 it brings in as revenue. In contrast, Hortonworks loses a staggering $2.60 for every $1 it brings in as revenue.

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

Webinar: Tech M&A outlook

Brenon Daly

Contact: Brenon Daly

Last spring, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster accurately predicted a dramatic surge in tech M&A activity. So what do they see coming now?

We’ll take a lively and thought-provoking look at the results from our latest survey in a special webinar on Wednesday, November 5 at 1:00pm EST. To register for the webinar, simply click here.

Among the key findings we’ll be discussing:

  • Nearly half of the respondents expect overall tech acquisition activity, which has been running at a record rate in 2014, to accelerate through the next half-year.
  • The percentage of survey respondents who say the tech M&A market is likely to be busier from now through next spring is three times higher than the 16% forecasting a decline in acquisition activity.
  • The outlook for private company M&A valuations has never been more bearish. A record 34% of respondents project that sale prices for startups will head lower from now through next April, compared with 26% who anticipate prices ticking higher.

Again, the webinar will be held on Wednesday at 1:00pm EST. Registration is complimentary and can be found here.

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

NetApp carves SteelStore out of Riverbed

Brenon Daly

Contact: Brenon Daly

NetApp’s first acquisition in more than a year and a half comes with a bit of a twist. The storage giant is only a few months removed from a period in which hedge fund Elliott Management was stirring for changes at the company. Having largely settled with the activist investor, NetApp has now picked up a division carved out from Riverbed Technology, which is currently being targeted by Elliott.

Terms call for NetApp to pay $80m for Riverbed’s SteelStore cloud storage gateway. The size of the business, which was formerly known as Whitewater, wasn’t disclosed. However, our understanding is that it was generating less than $10m in sales. Only 26 employees are going over to NetApp as part of the deal.

SteelStore was part of Riverbed’s broader portfolio expansion, an effort that hasn’t really paid off for the company. Some 70% of Riverbed’s revenue still comes from its core WAN optimization unit. The slowdown in that business is one of the main drags on Riverbed, which recently forecasted that sales in the current quarter may be flat.

However, according to our understanding of the transaction, it wasn’t driven by Riverbed, which is currently exploring ‘strategic alternatives,’ looking to jettison a non-core business. Instead, we gather that NetApp went after the division. Neither side used a financial adviser.

That dynamic may help explain the relatively rich valuation of the deal. (Though we would note that both EMC and Microsoft also paid princely multiples in their purchases of cloud storage gateways.) Also, price-to-sales multiples tend to get exaggerated by companies posting only tiny revenue.

And to be clear, virtually all of the cloud storage gateway startups are generating tiny sales. In a recent study of IT professionals at midsized and large enterprises conducted by TheInfoPro, a service of 451 Research service, only 4% of participating companies had deployed cloud storage gateways – a figure that was essentially unchanged from a similar TIP study in 2013. (See our full report .) With the cloud storage market still very much in its early stages, we would argue that a gateway startup is more at home in a storage vendor like NetApp than in a networking provider like Riverbed.

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

Survey: no slowdown in record tech M&A pace

Brenon Daly

Contact: Brenon Daly

Even as tech M&A spending sprints along at a record clip in 2014, half of the respondents to the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster expect the pace to accelerate through the next six months. The 48% of survey respondents who say the tech M&A market is likely to be busier from now through next April is three times higher than the percentage forecasting a decline in activity. (451 Research subscribers: See our full report on the M&A Leaders’ Survey.)

Although the bullish forecast in our mid-October survey dropped from the high-water mark of 72% in our April 2014 survey, it essentially matches the level from surveys over the previous two years. For context, however, it’s also important to note that this outlook – with five out of six respondents indicating that dealmaking will either hold steady or pick up – is coming at a record time for tech M&A. Spending on tech transactions around the globe so far in 2014 is higher than the spending during the same period of 2012 and 2013 combined, according to The 451 M&A KnowledgeBase. (451 Research subscribers: See our full report on Q3 M&A and IPO activity.)

Survey respondents were less bullish in their outlook for private company M&A valuations. A record 34% of respondents predicted that sale prices for startups would head lower from now through next April, three times the percentage that said that in our survey just a half-year ago. We would attribute at least part of the deterioration to the fact that there were certainly bigger – and much higher-profile – sales of startups in the early part of 2014. Overall, according to the KnowledgeBase, the first half of 2014 has seen eight of the 10 largest deals announced so far this year, led by the largest-ever VC exit, WhatsApp’s sale to Facebook in February for $19bn.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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

After staying out of the M&A market, Qualys is ready to deal

Brenon Daly

Contact: Brenon Daly

Having built a $1bn market capitalization largely on the back of its core vulnerability management (VM) technology, Qualys is now looking to further expand into new markets. And to get there, the company is considering M&A for the first time in its 15-year history.

Qualys, which opens its annual user conference today, has already organically added new offerings to its VM, including Web application security and compliance monitoring. However, that expansion has only come in the past several years. Further, those products currently generate less than 20% of total revenue at the company. Overall, Qualys has moved slowly, hanging a ‘beta’ tag on products for extended periods. (The need to expand its portfolio was something we highlighted during the company’s IPO two years ago.)

Yet when Qualys does make new offerings available, they tend to be well received. At the end of Q2, some 44% of its more than 6,500 customers had purchased more than one product from the company. That’s up from 30% at the end of 2013 and just 20% at the end of 2012. Cross-selling has been one of the main reasons Qualys has been able to accelerate growth in 2014 compared with last year.

Any acquisition by Qualys, which has about $100m in cash, would likely be small. Also, the technology would have to be multi-tenant. (The company’s revenue is entirely annual subscriptions: no licenses and, unlike most other SaaS vendors, no professional services.)

What technology might Qualys be looking to pick up? Mobility represents an obvious market, as a way to help secure the ‘extended enterprise.’ Other areas that Qualys has been developing but could use a boost via M&A include SIEM and compliance automation.

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

Small ball M&A paying off for salesforce.com

Brenon Daly

Contact: Brenon Daly

When it comes to M&A at salesforce.com, starting small has yielded higher returns than going big. The SaaS giant has returned to the ‘buy and build’ strategy with its latest step into a new market with Analytics Cloud. The data visualization offering, which was unveiled this week at Dreamforce, was underpinned by the acquisition of EdgeSpring back in June 2013.

The $134m price notwithstanding, EdgeSpring stands as a small deal for salesforce.com. (We profiled EdgeSpring shortly after it emerged from stealth and a half-year before it was acquired. At the time, it claimed more than 10 paying customers and about 30 employees.)

Certainly, there were bigger targets for a move into the analytics market by salesforce.com, which will do more than $5bn in revenue this fiscal year and says it has a ‘clear line of sight’ to $10bn in sales. For instance, both Qlik Technologies and Tableau Software offer their data visualization software on salesforce.com’s AppExchange. With hundreds of millions of dollars in revenue, either of those vendors would have established salesforce.com as a significant player in the data analytics market as well as moving the company closer to its goal of doubling revenue in the coming years.

However, in that regard, a purchase of either Qlik or Tableau would be comparable with salesforce.com’s reach for ExactTarget in June 2013, which serves as the basis for its Marketing Cloud. The deal was uncharacteristically large, with salesforce.com spending more on the marketing automation provider than it has in all 32 of its other acquisitions combined. More significantly, salesforce.com has struggled a bit with ExactTarget, both operationally (platform integration and cross-selling opportunities) and financially (margin deterioration).

In contrast to that big spending, salesforce.com dropped only about one one-hundredth of the price of ExactTarget on InStranet in August 2008 ($2.5bn vs. $32m). The purchase of InStranet helped establish Service Cloud, which is now the company’s second-largest business behind its core Customer Records Management offering. And salesforce.com says the customer service segment is much larger than the market for its sales software.

Those divergent deals are something to keep in mind when salesforce.com buys its way into a new market. If we had to guess, we would expect the company to next make a play for online retailing (maybe call it Commerce Cloud?). If that’s the case, we might suggest that it look past the big oaks like Demandware and focus on the seedlings that can then grow up in the salesforce.com ecosystem.

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