Category: technology stocks

Piling up the chips

Brenon Daly

Contact: Brenon Daly

Unveiling what would be the largest tech transaction in history, Broadcom said it is prepared to hand over $103bn in cash and stock, and assume some $25bn in debt, for Qualcomm. The unprecedented 12-digit pairing represents a consolidation of the two consolidators behind the semiconductor industry’s two largest consolidations.

To get a sense of the sheer scale of Broadcom’s ambitions, consider that this single deal would roughly match spending on all acquisitions in the chip industry from 2008-14, according to 451 Research’s M&A KnowledgeBase. However, regulatory challenges mean this marriage of giants highly is unlikely to go through. And that assumes Qualcomm even picks up negotiations with Broadcom and its relatively low opening bid.

Thus far, Qualcomm has pretty much dismissed Broadcom’s offer. That doesn’t mean Broadcom, which is being banked by six separate firms, won’t push the deal.

Broadcom is negotiating from a position of strength, while Qualcomm is suffering through a well-publicized legal fight with major customer Apple and has still come up empty in its high-risk effort to buy its way into new growth markets. (Qualcomm originally hoped to close its $39.2bn purchase of NXP Semiconductors, which makes chips for cars and Internet of Things deployments, by the end of this year. That appears unlikely, and Broadcom has said it wants to acquire Qualcomm whether NXP closes or not.)

Broadcom’s relative strength also comes through in the pricing of the transaction as it is currently envisioned. At an enterprise value of $130bn, Broadcom is valuing Qualcomm at just 3.9x its pro forma 2017 sales of $33bn. (That assumes Qualcomm, which will put up about $24bn in sales in 2017, does buy NXP, which will generate $9bn in sales.) That’s substantially lower than the 5.5x sales Qualcomm plans to pay for NXP on its own, and a full three turns lower than the nearly 6.9x 2017 sales where Broadcom trades on its own.

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.

An autumn chill on Wall Street

Brenon Daly

Contact: Brenon Daly

This time of year has always been a bit unnerving for investors, and for good reason. Late October has seen some of the most dramatic declines on Wall Street, including the granddaddy of them all, the Great Crash of 1929. Additionally, earlier this week marked the 30th anniversary of Black Monday, when the Dow Jones Industrial Average dropped an almost-unimaginable 23% in a single session. To put that into today’s money, that would equal the Dow dropping more than 5,000 points in one day.

Of course, both of those crashes came before the multibillion-dollar tech market had found its current standing. Nonetheless, even in the nascent industry, there were impacts. For instance, Microsoft, which had only come public a year and a half earlier, got caught in the market’s vicious downdraft in October 1987. Microsoft shares spent the next two years trying to get back to their pre-crash level.

But these days, the equity market in general – and tech stocks specifically – appears to only trade higher. Microsoft shares, which changed hands for less than $1 back in 1987 (on a split-adjusted basis), are currently at an all-time high. Investors value the Redmond, Washington-based company at $600bn, having added more than $100bn to its market cap since the start of the year. Shares of Apple have tacked on 40% so far in 2017. Facebook has posted even more of a gain.

The recent run has left the stock market expensive, with the price-to-earnings multiple for the S&P 500 Index approaching 20, a historically high level. That has made investors increasingly nervous, at least according to 451 Research surveys. Virtually every month so far in 2017, the number of respondents to 451 Research’s Voice of the Connected User Landscape (VoCUL) that tell us they are ‘less confident’ in Wall Street has ticked higher. The latest VoCUL survey shows more than twice as many bears as bulls when it comes to confidence in the stock market.

 

MongoDB maintains in its IPO

Brenon Daly

Contact: Brenon Daly

Despite a well-received IPO, MongoDB’s valuation basically flatlined from the private market to the public market. The open source NoSQL database provider priced shares at $24 each and jumped in mid-Thursday trading to about $30. The 25% pop on the Nasdaq basically brought MongoDB shares back to the price where the company sold them to crossover investors in late 2014.

MongoDB has slightly more than 50 million shares outstanding, on an undiluted basis. With investors paying about $30 for shares in the company’s public debut, that gives MongoDB a market cap of more than $1.5bn. It raised $192m in the public offering, on top of the $300m it raised as a private company.

That means Wall Street is valuing MongoDB, which will put up about $150m in the current fiscal year, at 10x current revenue. That’s a rather rich premium compared with the most-recent big-data IPO, Cloudera. The Hadoop pioneer, which went public six months ago, currently trades at about 6x current revenue. For more on MongoDB’s IPO, 451 Research subscribers can see our full report, including our sizing of the NoSQL database market, as well as an in-depth look at the evolution of the 10-year-old company’s technology and its competitors.

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.

Barely a ripple in the pool of tech M&A buyers

Brenon Daly

Contact: Brenon Daly

New companies are constantly wading into the tech buying pool. As welcome as those new entrants are, however, their arrival has barely caused a ripple in the overall tech M&A market. Unconventional buyers – including retailers looking to jumpstart online sales and consumer product vendors looking to digitally connect their wares – have come up far short in offsetting the dealmaking absence of the mainstay tech acquirers. The resulting void of several hundred transactions has left 2017 on track for the lowest overall tech M&A volume in four years, according to 451 Research’s M&A KnowledgeBase.

Already this year, the M&A KnowledgeBase lists several first tech deals from well-known names from outside the tech industry such as IKEA, Albertsons, Signet Jewelers and Whirlpool. These debutants join other non-tech giants that have recently reached for startups, including Bed Bath & Beyond, Hudsons Bay Company, Unilever and Deere & Company.

Given that digital deals by analog companies tend to be viewed as ancillary to their businesses, they will likely never have the same M&A pace of tech vendors themselves. For instance, we noted in our recent Q3 report on tech M&A that heavy machinery manufacturer Deere & Company, which bought a tiny machine-learning startup in early September, had gone about three years since its previous tech transaction. In the interim, other acquirers inked more than 11,000 tech deals, according to the M&A KnowledgeBase.

As these non-tech buyers dabble in deals, the bellwether acquirers have dramatically slowed their pace. Consider the recent activity of some of the companies that have traditionally set the tone in the tech M&A market. Salesforce has put up just one print so far this year. Serial acquirer Oracle hasn’t announced an acquisition in six months. IBM is averaging a deal every other month in 2017, just half the rate it acquired companies in both 2016 and 2015.

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

ForeScout looks ahead to Wall Street

Brenon Daly

Contact: Brenon Daly

For all the ‘next generation’ hype throughout much of the information security (infosec) market, 17-year-old ForeScout represents a bit of a throwback. For instance, ForeScout has been around twice as long as the other infosec company to make it public this year, Okta. Further, its business is primarily tied to old-line boxes, while Okta and other startups of a more-recent vintage have pushed their businesses to the cloud.

That comes through in the numbers. At ForeScout, sales of products (physical appliances, mostly) still accounts for about half of the company’s revenue. The remaining half comes from maintenance fees, with just a sliver of professional services revenue. There’s no mention in ForeScout’s IPO paperwork of ‘bookings’ or ‘billings’ or any other business metric favored by companies delivering their offering through a newer subscription model

While not flashy, ForeScout’s business model works. (There aren’t too many startups that are generating a quarter-billion dollars of revenue and increasing that by one-third every year.) ForeScout posted $167m in sales in 2016, and $91m in the first half of 2017. (Growth over that period has been consistent at roughly 33%.) Assuming that pace holds through the end of 2017, ForeScout would put up about $220m in revenue, or roughly triple the amount of sales it generated in 2014.

However, in our view, much of that performance has been more than priced into the company, which secured a $1bn valuation in the private market. That said, we also don’t imagine that ForeScout will be one of those unicorns that stumbles when it steps onto Wall Street. (Post-IPO valuations for recent offerings from Snap, Blue Apron, Cloudera and Tintri are all lingering below the level they secured from VCs.)

ForeScout likely won’t enjoy anywhere near the platinum valuation that Okta commands. (The cloud-based identity vendor currently trades at a market valuation of $2.7bn, or 11x this year’s forecast revenue of $245m.) Instead, to value ForeScout, Wall Street might look to another product-based infosec provider, Fortinet.

The two companies don’t exactly line up, either in terms of strategic focus or scale. (Fortinet generates far more revenue each quarter than ForeScout will all year, while ForeScout is growing about twice as fast as Fortinet.) Nonetheless, Wall Street currently values Fortinet at roughly 4.3x current year’s revenue. Slapping that valuation on ForeScout would get the company to a $1bn valuation, but not much higher.

451 Research subscribers can look for a full report on ForeScout’s filing later today.

A pause in Big Software’s ‘SaaS grab’

Brenon Daly

Contact: Brenon Daly

After years of trying to leap directly to the cloud through blockbuster acquisitions, major software vendors have been taking a more step-by-step approach lately. That’s shown up clearly in the M&A bills for two of the biggest shops from the previous era trying to make the transition to Software 2.0: Oracle and SAP.

Since the start of the current decade, the duo has done 11 SaaS purchases valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. However, not one of those deals has come in the past 14 months, as the two companies have largely focused on the implications of their earlier ‘SaaS grab.’

During their previous shopping spree for subscription-based software providers, Oracle and SAP collectively bought their way into virtually every significant market for enterprise applications: ERP, expense management, marketing automation, HR management, CRM, supply chain management and elsewhere. All of the transactions appeared designed to simply get the middle-aged companies bulk in cloud revenue, with Oracle and SAP paying up for the privilege. In almost half of their SaaS acquisitions, Oracle and SAP paid double-digit multiples, handing out valuations for subscription-based firms that were twice as rich as their own.

In addition to the comparatively high upfront cost of the SaaS targets, old-line software companies face particular challenges on integrating SaaS vendors as part of a larger, multiyear shift to subscription delivery models. Like a transplanted organ in the human body, the changes caused by an acquired company inside the host company tend to show up throughout the organization, with software engineers re-platforming some of the previously stand-alone technology and sales reps having their compensation plans completely overhauled.

The disruption inherent in bringing together two fundamentally incompatible software business models shows up even though the acquired SaaS providers typically measure their sales in the hundreds of millions of dollars, while SAP and Oracle both measure their sales in the tens of billions of dollars.

For instance, SAP is currently posting declining margins, an unusual position for a mature software vendor that would typically look to run more – not less – financially efficient. But, as the 45-year-old software giant has clearly communicated, the temporary margin compression is a short-term cost the company has to absorb as it transitions from a provider of on-premises software to the cloud.

Of course, the transition by software suppliers such as Oracle and SAP – painful and expensive though it may be – simply reflects the increasing appetite for SaaS among software buyers. In a series of surveys of several hundred IT decision-makers, 451 Research’s Voice of the Enterprise found that 15% of application workloads are running as SaaS right now. More importantly, the respondents forecast that level will top 21% of workloads by 2019, with all of the growth coming at the expense of legacy non-cloud environments. That’s a shift that will likely swing tens of billions of dollars of software spending in the coming years, and could very well have a similar impact on the market capitalization of the software vendors themselves.