Category: technology stocks

With sharp elbows and deep pockets, PE gets busy

Brenon Daly

Contact:  Brenon Daly

With sharp elbows and deep pockets, private equity (PE) shops have announced more deals so far this year than the opening quarter to any year since the end of the recent recession. Already in 2017, 451 Research’s M&A KnowledgeBase has tallied 165 transactions by PE firms and their portfolio companies, a 15% jump from the previous record in Q1 2016. More broadly, buyout shops are currently about twice as busy as they were just a half-decade ago. Cash-rich financial acquirers represent the only significant group that’s accelerating activity in an otherwise slowing tech M&A market.

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing shops have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital Group and TA Associates have already announced as many deals in 2017 as each of the firms would typically print in an entire year.

Of course, merely having record amounts of money doesn’t necessarily mean that firms will do more shopping. After all, that hasn’t been seen among corporate acquirers, which stand as the main rivals to PE shops. Tech companies that trade on the NYSE and Nasdaq have never had fatter treasuries than they do now, but the number of acquisitions they announced in 2016 dropped 11% compared with 2015, according to the M&A KnowledgeBase. In contrast, PE firms registered almost exactly the inverse, with the number of transactions increasing 13% in 2016 from 2015.

As financial acquirers step up their activity and strategic buyers step back, the once-yawning gap between the rival buying groups is narrowing. In the years immediately after the recent recession, tech companies listed on US exchanges regularly put up twice as many prints as PE firms. However, for full-year 2016 and so far in 2017, M&A volume for corporate acquirers is only about 30% higher than their financial rivals, according to the M&A KnowledgeBase.

MuleSoft gets a thoroughbred valuation in its IPO

Brenon Daly

Contact: Brenon Daly 

After a four-month shutout, the enterprise tech IPO market is back open for business. Infrastructure software vendor MuleSoft surged onto the NYSE, more than doubling its private market valuation. It sold 13 million shares at an above-range $17 each, and the stock promptly soared to $24.50 in late-Friday-afternoon trading. That puts the fast-growing company’s market valuation at slightly more than $3bn, twice the $1.5bn value that venture investors put on it.

MuleSoft’s debut valuation puts it in rarified air. Based on an initial market cap of $3.1bn, investors are valuing the company at a stunning 16.5x its trailing sales of $190m. That multiple is twice the level of fellow data-integration specialist Talend, which went public last July. Talend currently trades at a market cap of about $875m, or 8.3x its trailing sales of $106m. The valuation discrepancy indicates that investors are once again putting a premium on growth: MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing nearly twice as fast. (See our full report on the offering as well as MuleSoft’s ‘hybrid integration’ strategy – what it is and where it might take the company in the future.)

The IPO netted MuleSoft $221m, or $206m after fees. That’s undoubtedly a handy amount, but we would note that it is still less than the $260m it raised, collectively, from private market investors. (Somewhat unusually, there are three corporate investors on the company’s cap table.) All of those MuleSoft backers are substantially above water on their investment following the IPO. That bullish debut is likely to draw more high-flying startups to Wall Street after a discouraging 2016, when only two enterprise tech unicorns went public. This year will likely match that number next month, when Okta debuts. The identity management startup revealed its IPO paperwork earlier this week, putting it on track for a mid-April debut.

 

With Okta, infosec no longer conspicuously absent from the IPO market

Brenon Daly

Contact: Brenon Daly 

Even as several other fast-growing enterprise IT sectors have all seen unicorns gallop onto Wall Street, richly valued information security (infosec) startups have stayed off the IPO track. The sector hasn’t seen a $1bn company created on a US exchange in more than two-and-a-half years. Infosec has been conspicuous by its absence from the tech IPO market, especially considering that no other single segment of the IT market has as many viable public company candidates. Fully one-quarter of the startups in the ‘shadow IPO’ pipeline maintained by 451 Research’s M&A KnowledgeBase Premium come from the infosec space. (See related report.)

At long last, one of the infosec unicorns is (finally) ready to step onto the public market: cloud-based identity management startup Okta has publicly revealed its paperwork for a $100m offering that should price next month. The company, which raised nearly $230m in venture backing, had already achieved a $1bn+ valuation in the private market – and will head north from there in the public market.

Wall Street will undoubtedly find a lot to like in Okta’s prospectus. The company is doubling revenue each year, with virtually all of its sales coming from subscriptions. (Professional services accounts for roughly 10% of total revenue, a lower percentage than most of the big-name SaaS vendors.) Subscription revenue gives a certain predictability to a company’s top line, especially when coupled with the ability to consistently expand those subscriptions. Okta notes in its prospectus that its customer retention rate, on a dollar basis, is slightly more than 120%, an enviable rate for any subscription-based startup. Put it altogether and revenue at Okta for the fiscal year that ended in January is likely to be in the neighborhood of $160m, up from $86 in the previous fiscal year and just $41m in the fiscal year before that.

Having quadrupled revenue in just two years, Okta’s red ink isn’t likely to worry many investors. Through its first three fiscal quarters (ended October 31, 2016), Okta lost $65m, up from $55m in the same period the previous fiscal year. As is often the case with SaaS providers, Okta’s losses stem primarily from heavy spending on sales and marketing. Early on, Okta was spending slightly more than $1 on sales and marketing to bring in $1 of subscription revenue. It has since slowed the spending, with the result that in its latest quarter it spent $32m on sales and marketing to bring in $38m in subscriptions. (For comparison, Box – one of the more egregious spenders – shelled out $47m on sales and marketing to generate exactly the same subscription revenue as Okta ($39m) in its most recent quarter when it originally filed to go public in 2014.)

Okta’s IPO would represent the first new $1bn valuation for an infosec vendor on the NYSE or Nasdaq since CyberArk’s offering in September 2014. Sophos went public (rather quietly) in 2015 on the London Stock Exchange, and the two domestic infosec IPOs since then (Rapid7 and SecureWorks) both currently trade underwater from their offering. In contrast to the recent infosec shutout, startups from several other IT sectors have all been able to enhance their $1bn private-market valuation on Wall Street, including Nutanix, Atlassian, Twilio and Pure Storage. That list will get a little longer as MuleSoft is set to debut at more than a $2bn market cap, up from $1.5bn in its final round as a private company.

A shift in strategies clips tech M&A valuations

Brenon Daly

Contact: Brenon Daly 

The speculative fever that helped spike tech M&A valuations at the start of 2017 has quickly been doused. After a mini-boom in high-multiple deals in January, last month came up virtually empty on richly valued exits as buyers stopped rolling the dice on acquiring startups and, instead, fell back on more old-school acquisition strategies. As a result, the broad-market price-to-sales multiple dropped a full turn from January to February, according to 451 Research’s M&A KnowledgeBase.

In the opening month of the year, tech acquirers appeared ready to write big checks for the startups they wanted. Cisco, Atlassian and Castlight Health all paid double-digit multiples for VC-backed companies in January, compared with just one buyer in February. Last month, Palo Alto Networks paid $105m for LightCyber, which works out to, barely, a 10x multiple of trailing sales, according to reports. Meanwhile, Cisco and Castlight both paid valuations closer to 20x sales and Atlassian – in its largest-ever purchase – spent $425m for Trello, a collaboration app that had only been available for a little more than two years and generated scant revenue.

Partly boosted by those handsomely valued startup exits, the average tech vendor sold for 5x trailing sales in January, according to the M&A KnowledgeBase. But in February, that broad-market valuation dropped to just 4x trailing sales. Last month’s multiple was dragged down by more conservative deal structures, such as divestitures (ARRIS Group buying the castoff Ruckus Wireless business for just 1.3x sales) and consolidation (private equity-backed Saba Software gobbling up publicly traded Halogen Software for just 2.4x sales).

If nothing else, the mixed picture for valuations so far in 2017 matches the expectation of senior bankers we surveyed last December about the coming year. In the 451 Research Tech Banking Outlook Survey, respondents were basically as likely to anticipate M&A pricing ticking up (32%) as sliding down (30%) in 2017. That’s the most-balanced forecast response ever recorded. In virtually all of our previous 11 surveys, one view – either squarely bullish or decidedly bearish – has dominated.

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

CA’s two M&A strategies come together in Veracode

Brenon Daly

Contact: Brenon Daly 

CA Technologies plucks Veracode out of the IPO pipeline, paying $614m for the application security scanning startup. The acquisition bridges the two areas where CA has been shopping recently: security and DevOps. According to 451 Research’s M&A KnowledgeBase, all 10 of CA’s transactions in the four years leading up to the Veracode purchase have either brought additional technology for software development or security, primarily related to identity and access management. Including Veracode, CA’s recent shopping spree has cost the company slightly more than $2bn.

Originally a spinoff of Symantec, Veracode raised $122m from investors over the past 11 years, including a late-stage round in September 2014 that was expected to bridge the company to the public market. Shortly afterward, it tapped J.P. Morgan Securities to lead the planned offering. (J.P. Morgan gets the print for advising Veracode on its sale.) The IPO paperwork was filed with the SEC but never publicly revealed.

As it angled toward Wall Street, however, Veracode’s revenue growth slowed a bit, according to our understanding. (Subscribers to the M&A KnowledgeBase can see our estimate of Veracode’s top line.) Also working against an IPO for Veracode has been the rather lackluster market for new tech offerings overall, compounded by a slump on Wall Street for the two previous information security vendors to come public on US exchanges, SecureWorks and Rapid7. In opting for a sale rather than an IPO, Veracode secured a valuation that essentially matches the multiple that CA paid in its similarly sized pickups of fellow infrastructure software providers Automic Software in December and Rally Software in May 2015.

Veracode has steadily expanded its customer base, more than doubling that count since 2014 to 1,400. And, based on 451 Research surveys of more than 200 information security buyers, the company still has room to move higher once it is acquired by CA, which is expected in Q2. In our Voice of the Enterprise: Information Security survey in late 2016, Veracode ranked only as the fourth-most-popular supplier of application scanning, trailing open source tools from Qualys and IBM.

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

‘Eyeballing’ the farcical Snap IPO

Brenon Daly

Contact: Brenon Daly 

It might seem a bit out of step to quote the father of communism when looking at the capital markets, but Karl Marx could well have been speaking about the recent IPOs by social networking companies when he said that history repeats itself, first as tragedy and then as farce. For the tragedy, we have only to look at Twitter, which went public in late 2013. The company arrived on Wall Street full of Facebook-inspired promise, only to dramatically bleed out three-quarters of its value since then.

Now, in the latest version of Facebook’s IPO, we have last week’s debut of Snap. And, true to Marx’s admonition, this offering is indeed farcical. The six-year-old company has convinced investors that every dollar it brings in revenue this year is somehow three times more valuable than a dollar that Facebook brings in. Following its frothy offering, Snap is valued at more than $30bn, or 30 times projected 2017 sales. For comparison, Facebook trades at closer to 10x projected sales. And never mind that Snap sometimes spends more than a dollar to take in that dollar in revenue, while Facebook mints money.

Snap’s absurd valuation stands out even more when we look at its basic business: the company was created on ephemera. Disappearing messages represent a moment-in-time form of communication that people will use until something else catches their eye. (Similarly, people will play Farmville on their phones until they get hooked on another game.) Some of that is already registering at the company, which has seen its growth of daily users slow to a Twitter-like low-single-digit percentage. Any slowing audience growth represents a huge problem for a business that’s based on ‘eyeballs.’

And, to be clear, the farcical metric of ‘eyeballs’ is a key measure at Snap. In its SEC filing, the company leads its pitch to investors with its mission statement followed immediately by a whimsical chart of the growth in users of its service. It places that graphic at the very front of the book, even ahead of the prospectus’ table of contents and far earlier than any mention of how costly that growth has been or even what growth might look like in the future at Snap. But so far, that hasn’t stopped the company from selling on Wall Street.

After a two-year surge, a two-month slump in tech M&A

Brenon Daly

Contact: Brenon Daly 

The tech M&A market is still struggling to get going in 2017. For the second straight month, spending on tech acquisitions around the globe totaled just half the average monthly level from last year. According to 451 Research’s M&A KnowledgeBase, tech acquirers announced just $19bn worth of transactions in the just-completed month of February, almost exactly matching the low spending level of January. Put together, the opening months of this year represent the weakest back-to-back monthly spending totals since 2013.

Similarly, the number of announced deals in February slumped to its lowest monthly level in more than three years. The 238 transactions tallied for February in the M&A KnowledgeBase represents a 30% slide from January deal volume and a 25% year-over-year decline from the average activity levels in February 2016 and February 2015.

The decline is due primarily to several of the well-known corporate acquirers either slowing their M&A machines or unplugging them altogether so far this year. For instance, neither SAP nor Intel have put up a 2017 print. Meanwhile, IBM has announced just one small transaction this year, down from a head-spinning pace of seven acquisitions in the first two months of 2016.

On the other hand, private equity (PE) firms have continued their record-setting pace. Buyout shops, which represent the sole ‘growth market’ in tech M&A right now, announced 23 deals in February – almost as many as they did in February 2015 and February 2016 combined. Three separate PE firms (Blackstone Group, H.I.G. Capital and The Riverside Company) announced at least two transactions last month.

The lackluster start to 2017 comes after tech M&A hit its two strongest years of the past decade and a half. (Tech acquirers dropped more than $1.1 trillion on deals over the 2015-16 spree, according to the M&A KnowledgeBase.) That recent record activity appears to have siphoned off some of the acquisitions in 2017. Senior tech investment bankers surveyed by 451 Research last December gave their weakest forecast for M&A spending in 2017 for any year since the recent recession.

A mule that’s actually a unicorn

Brenon Daly

Contact: Brenon Daly 

Unlike a fair number of late-stage startups, MuleSoft is no donkey trying to pass itself off as a unicorn. The fast-growing data-integration specialist has tripled revenue over the past three years, and appears to be on track to put up about $250m in sales this year. More importantly, MuleSoft is not hemorrhaging money. That should play well on Wall Street, which has telegraphed that it will no longer reward the growth-at-any-cost strategy at startups that want to come public (ahem, Snap Inc).

Assuming MuleSoft does indeed make it to the NYSE, where it will trade under the ticker MULE, it would mark the first enterprise technology IPO since last October. Of course, Snap is currently on the road, telling potential investors that its business model, which consists of hardware and disappearing messages, is the next Facebook rather than the next Twitter. But we’ll leave aside the offering from that consumer technology vendor, which just might be able to convince investors that losing a half-billion dollars last year, which is about $100m more than it booked as revenue, is a sustainable or even desirable business model.

Instead of Snap’s planned IPO, MuleSoft’s offering lines up more closely with fellow infrastructure software provider AppDynamics. (At least up to the point where Cisco comes in with a too-good-to-be-ignored $3.7bn offer.) A glance at the prospectus from each vendor shows both growing at a rapid clip (AppDynamics posted a slightly higher rate, even off a bigger base) and posting GAAP numbers that were at least headed out of the red (MuleSoft lost less than AppDynamics, on both an absolute and relative basis). Also, both firms had annual customer retention rates, measured by dollars spent, of roughly 120%. Wall Street eats up that sort of metric.

MuleSoft raised roughly $250m in total funding, most recently announcing a $128m round in mid-2015. With investors clamoring for growth tech companies right now, MuleSoft could certainly start life as a public entity with a double-digit multiple. Maybe not the nearly 18x trailing sales that AppDynamics commanded in its sale to Cisco. (After all, that was terminal value, not trading value.) But MuleSoft could almost undoubtedly convince Wall Street that it’s worth a premium to Talend, a rival data-integration vendor that came public last summer and currently trades at about 7x trailing sales. MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing twice as fast. That profile will likely boost MuleSoft’s initial valuation on Wall Street to north of $2bn, or 10x its trailing sales of $190m.

2016 enterprise tech IPOs*
Company Date of offering
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016
Nutanix September 30, 2016
Coupa October 7, 2016
Everbridge October 11, 2016
BlackLine Systems October 27, 2016
Quantenna Communications October 27, 2016
Source: 451 Research *Includes Nasdaq and NYSE listings only

451 Research M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

After a slow start in January, what does the rest of the year hold for tech M&A? Will 2017 rebound like 2016, which had a similarly slow opening month only to surge later in the year to finish with the second-highest annual spending total since the internet bubble burst? Or will this year settle back down to more typical post-recession levels, which would mean a decline of about 50% in spending from 2016’s total?

Join 451 Research tomorrow for an hour-long webinar as we look at the recent activity and forecasts from both corporate and financial acquirers, the valuations they are paying (and expect to pay) as well as what broad forces are likely to shape deals in the coming year. Additionally, we’ll look at specific themes that are likely to play out in key sectors of the IT market, including software, security and mobility. The webinar starts at 10:00am PST on Tuesday, February 7, and you can register here.

Lots of tech deals, but few dollars, to start 2017

Brenon Daly

Contact: Brenon Daly

After slumping sharply in the two months following the unexpected results of the US election, the number of tech acquisitions picked back up in January. M&A spending, however, didn’t follow suit. In the just-completed month, tech buyers around the globe announced 330 deals, with the aggregate value of those transactions totaling just $18bn, according to 451 Research’s M&A KnowledgeBase. January spending represents the lowest monthly level in two years, and just half the average monthly amount in 2016.

At the top end of the market, the M&A KnowledgeBase tallied just five deals valued at more than $1bn. That’s down from last year’s average of eight big-ticket transactions each month. Further, with one notable exception, the ‘three-comma deals’ so far this year have all gone off at below-market multiples. For instance, Keysight Technologies is paying just 3.2 times trailing sales for application testing vendor Ixia, which had been posting declining revenue. Clearlake Capital Group is paying an even lower multiple for LANDESK, owned by fellow buyout firm Thoma Bravo, according to our understanding.

A discount didn’t apply to last month’s largest transaction, Cisco’s reach for AppDynamics. The networking giant, which has been busily buying software vendors, paid an astounding 17.4x trailing sales for the application performance monitoring provider. (The $3.7bn deal marks the largest sale of a VC-backed company in three years.) Part of that rich valuation can be attributed to the fact that Cisco had to outbid the public market for AppDynamics, which was just a day away from setting the price of its planned IPO when Cisco announced the acquisition. Still, AppDynamics’ valuation is the highest multiple ever paid for a software firm with more than $50m in revenue, according to the M&A KnowledgeBase.

January’s deal volume, on the other hand, reversed two months of sharp declines to close 2016. The number of tech transactions in both November and December dropped to three-year lows, according to the M&A KnowledgeBase. Buyers last month included ServiceNow, Amazon Web Services and Oracle. Meanwhile, companies that double-dipped in the M&A market to start 2017 included Microsoft, Hewlett Packard Enterprise and the recently public Everbridge.

Recent tech M&A activity, monthly

Period Deal volume Deal value
January 2017 330 $18bn
December 2016 268 $39.5bn
November 2016 284 $39.6bn
October 2016 334 $83.2bn
September 2016 312 $30.1bn
August 2016 306 $31.5bn
July 2016 345 $94.1bn
June 2016 384 $67bn
May 2016 329 $23.8bn
April 2016 349 $20.7bn
March 2016 343 $23.9bn
February 2016 323 $28.3bn
January 2016 384 $21bn

Source: 451 Research’s M&A KnowledgeBase

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