Category: technology stocks

Another ‘down round’ IPO?

Brenon Daly

Contact: Brenon Daly

Another unicorn is set to gallop onto Wall Street, as MongoDB has put in its IPO paperwork. The open source NoSQL database provider plans to raise $100m in the offering, on top of the $311m it drew in from private-market investors over the past decade. As has been the case in other recent tech offerings, however, some of those later investors in MongoDB may well find that the IPO represents a ‘down round’ of funding.

Any discount for MongoDB likely won’t be as steep as the discount Wall Street put on the previous data platform provider to come public, Cloudera. Investors currently value the Hadoop pioneer at $2.2bn, slightly more than half its peak valuation as a private company. For its part, MongoDB, which last sold stock at $16.72, has more than 100 million shares outstanding, giving it a valuation of roughly $1.7bn.

While not directly comparable, Cloudera and MongoDB do share some traits that lend themselves to comparison. Both companies have their roots in open source software, and wrap some services around their licenses. (That said, MongoDB has gross margins more in line with a true software vendor than Cloudera. So far this year, it has been running at 71% gross margins, compared with just 46% for Cloudera.) Further, both companies are growing at about 50%, even though Cloudera is more than twice the size of MongoDB.

Assuming Wall Street looks at Cloudera for some direction on valuing MongoDB, shares of the NoSQL database provider appear set to hit the public market marked down from the private market. Cloudera is valued at slightly more than six times its projected revenue of $360m for the current fiscal year. Putting that multiple on the projected revenue of roughly $150m for MongoDB in its current fiscal year would pencil out to a market cap of about $920m. Given its cleaner business model and less red ink, MongoDB probably deserves a premium to Cloudera. While MongoDB certainly may top the $1bn valuation on its debut, reclaiming the previous peak price seems a bit out of reach.

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.

One and done for tech M&A in August

Brenon Daly

Contact: Brenon Daly

For tech M&A in August, there was one big print and then everything else. The blockbuster transaction, which saw Vantiv pay $10.4bn for UK-based rival payments processor WorldPay Group, accounted for almost half of the $22.7bn spent on tech deals around the globe this month, according to 451 Research’s M&A KnowledgeBase.

After the massive fintech consolidation, however, the value of transactions declined sharply. No other deal announced in August figures into the M&A KnowledgeBase’s list of the 25 largest transactions announced in the first eight months of 2017.

The slowdown at the top end of the tech M&A market pushed this month’s spending level to the lowest total for the month of August since 2013. More recently, the value of deals in August came in slightly below the average monthly spending so far this year.

Altogether, tech acquirers across the globe have spent just less than $200bn so far this year, according to the M&A KnowledgeBase. At this point in both 2016 and 2015, spending on transactions had already topped $300bn.

With eight months now in the books, 2017 is on pace for the lowest level of M&A spending in four years. The main reason for the slumping deal value is that many of the tech industry’s most-active acquirers have largely moved to the sidelines, especially when it comes to big prints. IBM, Hewlett Packard Enterprise and Oracle all went print-less in August.

In contrast, the rivals to those strategic buyers, private equity (PE) firms, continued their shopping spree. PE shops announced 77 deals in August, an average of almost four each business day. That brings the total PE transactions announced this year to 600, a pace that puts 2017 on pace to smash last year’s record number of deals by roughly 30%. (For more on the record-setting activity of buyout shops, be sure to join 451 Research for a webinar next Thursday, September 7, at 1:00pm ET. Registration is available here.)

Private equity does a number on the public markets

Brenon Daly

Contact: Brenon Daly

Private equity (PE) is doing a number on the public markets. No longer content with siphoning dozens of tech vendors off the exchanges each year, buyout shops are now moving earlier in the IPO process and targeting companies that may only be thinking about someday going public. These rapacious acquirers are not only harvesting the current crop of tech vendors on the NYSE and Nasdaq, but also snapping up the seeds for next season’s planting as well.

Consider the recent activity of the tech industry’s most-active PE shop, Vista Equity Partners. Two months ago – on the same day, as a matter of fact – the firm ended Xactly’s two-year run as a public company and snagged late-stage private company Lithium Technologies, a 16-year-old vendor that had raised some $200m in venture backing. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates of terms on the Vista Equity-Lithium deal here.) And just yesterday, Vista Equity once again went startup shopping, picking up software-testing firm Applause.

To be clear, neither Lithium nor Applause would have been considered dual-track deals. Both startups undoubtedly needed time to get themselves ready for any eventual IPO. And while it might seem like a PE portfolio provides a logical holding pen for IPO candidates, buyout shops don’t really look to the public markets for exits. As far as we can tell, Vista Equity hasn’t ever taken one of its tech vendors public. The same is true for Thoma Bravo. Instead, the exit of choice is to sell portfolio companies to other PE firms or, to a lesser degree, a strategic acquirer. (Buyout shops prefer all-cash transactions rather than the illiquid shares that come with an IPO so they can speed ahead raising their next fund.)

The PE firms’ expansive M&A strategies – directed, effectively, at both ends of the tech lifecycle on Wall Street – aren’t going to depopulate the public markets overnight. However, those reductions aren’t likely to be offset by an increase in listings through an uptick in IPOs anytime soon. That means tech investing is likely to get even more homogenized. It’s already challenging to get outperformance on Wall Street, where passive, index-driven investing dominates. With buyout shops further shrinking the list of tech investments, it’s going to be even harder for money managers to stand out. With their latest surge in activity, PE firms have made alpha more elusive on Wall Street.

To see how buyout shops are reshaping other aspects of the tech industry and the long-term implications of this trend, be sure to read 451 Research’s special two-part report on the stunning rise of PE firms. (For 451 Research subscribers, Part 1 is available here and Part 2 is available here.) Additionally, a special 451 Research webinar on the activity and outlook for buyout shops in tech M&A is open to everyone. Registration for the event on Thursday, September 7 at 1:00pm EST can be found here.

An unhappy anniversary for buyout shops

Brenon Daly

Contact: Brenon Daly

A decade ago, the financial world started its most recent journey toward ruin. Although the total collapse wouldn’t come for another year, the first tremors of the global financial crisis were felt in August 2007. At the time, few observers could have imagined that a bunch of bad bets made on shady mortgages could reduce some of the world’s biggest banks to heaps of rubble.

For some financial institutions, the destruction was self-inflicted. But others were simply collateral damage, counterparties to risky trades that they may not have fully understood but took on nonetheless. Whatever the cause, the result, which was just starting to be realized 10 years ago, was that everyone was in over their head.

As banks went into survival mode, the financial system dried up. Lenders, already worried about the bad debt on their books, stopped extending loans. It became a credit crisis, with whole chunks of the economy grinding to a halt. There was also a dramatic – if underappreciated – impact on the tech M&A market: the crisis effectively ended the first buyout boom.

Private equity (PE) firms were just hitting their stride when the crisis took away the currency that made their deals work: debt. Don’t forget that just months before August 2007, PE shops had announced mega-deals for First Data ($29bn) and Alltel ($27.5bn). Both of those acquisitions were $10bn bigger than any tech transaction ever announced by a financial acquirer up to that point.

Those deals turned out to be the high-water marks for PE at the time, with the water receding unexpectedly quickly. Of the 10 largest PE transactions listed in 451 Research’s M&A KnowledgeBase for 2007, only one of them came after August. More broadly, the last four crisis-shadowed months of 2007 accounted for just $7bn of the then-record $106bn in PE spending that year.

The late-2007 collapse in sponsor spending continued through 2008-09, as the recession broadened and deepened. The value of PE deals in both of those years dropped more than 80% compared with 2007, according to the M&A KnowledgeBase. The PE industry’s recovery from the credit crisis would take a long time, much longer than the relatively quick bounce-back in the equity markets, for instance. Overall spending by buyout firms wouldn’t hit 2007 levels again until 2015.

For more on the impact of PE activity in the tech market, be sure to join 451 Research for a special webinar on Thursday, September 7 at 1:00pm ET. Registration is free and available by clicking here.

Unready to step on the stage, Blue Apron is unlikely to step off

Brenon Daly

Contact: Brenon Daly

Welcome to Wall Street, Blue Apron, but what are you doing here? That’s a question making the rounds among a few investors Thursday as the meal delivery outfit publicly reported financial results for the first time since its IPO. And how were Blue Apron’s numbers? Well, suffice to say that the company’s shares, which have been underwater since the offering in late June, sank even further. In roughly six weeks as a public company, Blue Apron has lost nearly half of its value.

Rather than specifically look at the top line or the mess of red ink that Blue Apron reported for its second quarter, it might be worthwhile to focus on a broader point that might have been lost in the quarterly song and dance: Blue Apron probably should have never come public in the first place. The five-year-old company was simply not mature enough to join the NYSE.

But since Blue Apron — needing the cash — went through with the offering, it finds itself in the very awkward position of casting around to find a way to be a sustainable business, and doing it in front of the whole world. Everyone gets to see all of the missteps: the sequential decline in customers and orders, the costs rising faster than sales, the employee layoffs. It’s a bit like a teenager going through the clumsy, fitful process of growing up while on a stage.

However, the company doesn’t appear to going anywhere, with CEO Matt Salzberg saying Blue Apron is committed to building ‘an iconic consumer brand.’ And he’s taken steps toward that goal. Although the IPO very much represented a ‘down round’ for Blue Apron, it nonetheless adds nearly $280m to its treasury. That buys a fair amount of time, as does the company’s dual-class structure of shares, which effectively makes it impossible for shareholders — who, don’t forget, are the actual owners of Blue Apron — to force it to consider any strategies from outside.

For both financial and philosophical reasons, an imminent sale of Blue Apron is unlikely. Nonetheless, we would hasten to add that at its current valuation, shares are priced to move. Wall Street currently values the company at about $1bn, which we could use as an approximate enterprise value (EV) for any hypothetical transaction. (By our rough-and-tough math, we assume that backing out Blue Apron’s cash from the purchase price would be offset by an acquisition premium.)

At roughly $1bn, Blue Apron’s net cost would be less than the $1.1bn it will likely put up in sales this year. That’s a smidge below the average EV/sales multiple of nearly 1.3x in the handful of internet retailers that have been erased from Wall Street since the start of 2015, according to 451 Research’s M&A KnowledgeBase. As those exit multiples suggest, merely becoming an iconic consumer brand doesn’t necessarily pay off.

No more high-rolling in infosec M&A

Brenon Daly

Contact: Brenon Daly

Casinos, which are always looking to have patrons spend more money, are notorious for making exits difficult to find. For that reason, the Mandalay Bay was the perfect setting for this week’s trade show for the information security industry, Black Hat. Why do we say that? Infosec companies — at least the big ones — are having difficulty in finding exits, too.

Not to overstretch the metaphor of the host city for Black Hat, but the infosec industry has stepped away from the high-roller tables. So far this year, just one infosec company (Okta) has made it public, while those that have headed toward the other exit haven’t enjoyed particularly rich sales. This year’s small bets are reversing the recent record run for M&A spending on infosec transactions.

Spending on overall infosec acquisitions in the first seven months of the year has put 2017 on pace for the lowest annual total in a half-decade, according to 451 Research’s M&A KnowledgeBase. This year’s paltry total of just $2.3bn in aggregate deal value means that 2017 will snap three consecutive years of increasing infosec M&A spending. Our M&A KnowledgeBase shows that in 2016, infosec buyers spent $15bn, more than any other year in history, while 2015 also came in as another strong year in 2015 with $10bn in transaction value.

To put the current dealmaking decline into perspective, consider this: The largest infosec print so far in 2017 wouldn’t even make the list of the 10 biggest infosec transactions of 2015-16. And while this year’s largest acquisition – CA’s $614m purchase of Veracode – represents a decent exit, it’s fair to say more was certainly expected from the application vulnerability startup. (Veracode had filed its IPO paperwork several months before the sale on the quiet, according to our understanding.) Similarly, this year’s second-largest VC exit saw TeleSign agree to a sale that valued it lower than its valuation in its previous funding round.

The reason why so few sizable infosec startups are looking to exit is mostly because they don’t have to exit. Thanks to ever-increasing CISO spending, venture capitalists are back writing big checks to subsidize infosec startups. And when we say ‘big checks,’ we mean the size that used to come in IPOs or the rounds that got announced during the 2014-15 boom in late-stage investing, when single rounds of $100m were announced from across the startup landscape. While those growth rounds were relatively plentiful across the IT scene two or three years ago, infosec is the only industry where the big checks are once again rolling in. In just the past three months, a half-dozen infosec startups have each raised rounds of about $100m.

Tech IPOs need to take the summer off

Brenon Daly

Contact: Brenon Daly

In the tech IPO market, as with most trends, it’s better to be early than late. That’s not always the case, of course, but typically the first few startups that emerge from a prolonged pause for new offerings do so with a ‘bankable’ story for Wall Street. It’s as if they are going public out of desire, rather than necessity. By the end of the cycle, however, the motivations for IPOs don’t often reflect that same confidence, a fact that investors tend to sniff out and discount accordingly.

As we ease into a summer break for new issues, it’s worth noting that we have certainly seen that cycle in the IPO market so far this year. By and large, the handful of enterprise-focused startups that have been first to (public) market in 2017 have raised more capital, created more market value and rewarded shareholders more than the companies that have followed. MuleSoft, Alteryx and Okta all emerged onto Wall Street with solid offerings in the spring, representing the first enterprise tech IPOs following last November’s US election. (New offerings had been on hold as investors assessed the impact of the unexpected election results on their existing portfolio of companies before placing more speculative bets on IPOs.)

On the other side, the companies that have emerged from the pipeline more recently haven’t found Wall Street to be such a welcoming place. The most recent tech offerings — storage startup Tintri and online meal delivery vendor Blue Apron — both cut the pricing of their IPOs, but even that hasn’t been enough. (The discount for Tintri was particularly sharp, leaving the company, which had raised $260m in the private market, with just $60m in proceeds from public-market investors. Built on some $320m in total funding, Tintri currently has a market value of slightly more than $200m.)

The valuation declines for both companies have continued uninterrupted on the stock market, leaving Blue Apron and Tintri underwater from their IPO prices, never mind the much higher valuations they received as private entities. In contrast, MuleSoft and Okta are both roughly twice as valuable as they were when they last received funding as private companies. For the tech IPO market to get back on track in the second half of 2017, it might be well-served to take the summer off and look to restart in the fall, rather than dragging out the current cycle.

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