Category: technology stocks

The tech IPO window: open but unused

Brenon Daly

Contact: Brenon Daly

With AppDynamics stepping into Cisco’s ever-expanding software portfolio rather than continuing its march toward Wall Street, tech startups have once again been shut out of the public markets in the opening month of a year. Last January also didn’t see a single enterprise tech IPO, starting a drought that lasted until late April. Q1 2016 was the first quarter since the recent recession not to have a tech company come to market – and the current quarter is in danger of repeating that, despite some of the most-welcoming conditions on Wall Street.

Unlike this year, last year’s Q1 shutout was sparked by a double-digit percentage slide in US equity indexes in the opening six weeks of 2016. The Dow Jones Industrial Average, which is currently above the symbolically significant 20,000 level, bottomed out below 15,600 last February. (From trough to top, that represents almost a 30% gain in the Dow, adding more than a trillion dollars of market value.) Last winter’s bear market was even worse for highly valued tech names, which is what most of the tech IPO candidates aspire to be.

With investors selling their existing tech holdings, it was hard to find buyers for any new tech listings. In the imbalanced market at the start of last year, the financially prudent decision for startups tracking to an IPO was simply to wait until summer, when tech came back in favor among investors. By our count, seven of the nine enterprise-focused tech vendors that went public in 2016 debuted in the second half of the year. The debuts were actually even more concentrated than that, as two-thirds of tech IPOs last year came in just the six-week period leading up to the US elections in early November. Not a single tech provider has gone public in the three months since the election.

Part of the scarcity is due to seasonality. (Companies tend to prefer to finish Q4, which is almost inevitably their biggest quarter, and then go to market with full-year financials and a valuation that’s based on the coming year’s projected sales.) And yet, while IPO-minded startups have been focused on closing business and getting their financial paperwork in order, companies already public have been enjoying an extended, and somewhat unexpected, ‘Trump rally’ on Wall Street.

Indexes have posted a roughly 10% surge since the election, as investors bet that having a businessman as US president – who’s working with a Republican-controlled Congress – will be able to stimulate more economic growth. Perhaps more important to the relatively fragile IPO market, the instability and uncertainty from broader political and economic events has receded sharply. (For instance, the CBOE’s Volatility Index is currently just half the level it was during the run-up to the election.) The shift in sentiment is even more dramatic in our own surveys of individual investors.

In the two monthly surveys by 451 Research’s Voice of the Connected User Landscape (VoCUL) since Trump was elected, more than four out of 10 investors have said they are ‘more confident’ about the direction of the stock market now than they were 90 days earlier. That’s roughly twice the percentage that said they were ‘less confident’. Those are the most-encouraging assessments of Wall Street in a 451 Research survey since the end of the recession. And yet in the most bullish of recent bull markets, not a single tech startup has made it public in 2017.

The IPO window may be as open right now as it’s been in years, but investors would never know it. With two months remaining in the first quarter – and current stock market indexes more than 20% higher than they were in Q1 2016 – the net result for new enterprise tech offerings from last Q1 and the current quarter could well be the same: an IPO shutout.

How to get your tech M&A playbook for 2017

Brenon Daly

451 Research’s annual look back on the year that was and look ahead to the year that’s coming in technology M&A has been moved in front of our paywall. (Click here to access the report.) The broad-market overview highlights many of the trends that drove acquisition spending to a surprisingly strong $500bn in 2016, and predicts how those will play out in 2017. The 5,500-word introductory report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – opens our full M&A Outlook, an 80+-page analysis of M&A drivers and predictions on M&A and IPO trends and activity in specific sectors of the IT market.

The full report, which serves as an ‘M&A playbook’ for many of the tech industry’s main acquirers, offers an in-depth forecast of trends that will likely shape dealmaking in eight segments of enterprise information technology, including information security, mobility and software. The full M&A Outlook report will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and M&A KnowledgeBase Premium, and will be available for purchase for 451 Research clients and others that don’t subscribe to our premium KnowledgeBase products. 451 Research will publish our full M&A Outlook – including the Introduction, which is available now, and the eight individual sector reports – in early February.

ServiceNow adds some smarts to the platform with DxContinuum

Brenon Daly

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

Now available: 451 Research’s 2017 M&A Outlook

Brenon Daly

Contact: Brenon Daly

Each year, 451 Research looks ahead to the coming year in M&A, highlighting the trends that will shape deal flow and the markets that are expected to see much of the activity. The report, which serves as an ‘M&A playbook’ for 2017, is now available to 451 Research subscribers.

Topics covered in the latest edition of the M&A Outlook include:

  • Besides the ‘usual suspects,’ which other tech acquirers stepped up their shopping in 2016 and are likely to accelerate that pace this year? If companies including Dell, Twitter and Dropbox aren’t buying any longer, where is the demand going to come from?
  • Specifically, which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security and mobility lead the forecast, but what about emerging cross-sector themes such as the Internet of Things and big data?
  • What’s shifted in the exit environment for VC-backed companies to open the way for some of the startups to realize ‘unicorn’ prices in the real world? And will 2017 (finally) see a rebound in the tech IPO market?
  • With president-elect Donald Trump set to officially take over as CEO of the US next week, why are corporate acquirers expecting a ‘Trump rally’ in the tech M&A market? What about buyers coming from China, who spent more acquiring US tech firms in 2016 than the previous five years combined?

The 5,500-word report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – thoroughly and insightfully covers last year’s activity as well as this year’s forecast. Get your copy of the M&A Outlook now.

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

The where and how of tech M&A in 2017

Brenon Daly

Contact: Brenon Daly

After a surprisingly strong year for tech M&A spending in 2016, it’s natural to look ahead to this year and wonder how – and where – dealmaking will play out. To get a sense of that, we asked the primary players in the market for their specific forecasts on acquisition activity, valuations and even IPOs. 451 Research subscribers can see the full report on our tenth-annual 451 Research Tech Corporate Development Outlook Survey, as well as our twelfth-annual 451 Research Tech Banking Outlook Survey.

In addition to both survey groups offering their broad forecasts for tech M&A, we also asked specific questions about topics that will undoubtedly shape the market in the coming year. A quick highlight from each of the surveys:

  • A plurality of corporate acquirers are anticipating a ‘Trump rally’ in the tech M&A market in 2017. Half of the respondents (49%) expect the political and economic changes from the president-elect’s policies to ‘stimulate’ M&A activity – three times the percentage (16%) that said the policies will ‘inhibit’ dealmaking in the coming year.
  • Tech bankers expect even more M&A spending on enterprise security in the coming year. They also picked that as the top sector for 2016, and they were on to something: Spending on enterprise security soared to a record $16.7bn, more than the two previous years combined, according to 451 Research’s M&A KnowledgeBase.

Again, to see our full report on the M&A outlook from many of the most-active corporate acquirers, click here; and to see our full report on the views and predictions from senior tech investment bankers, click here.

Late-cycle tech M&A late in the year

Brenon Daly

Contact: Brenon Daly

As 2016 winds down, the deals so far this month are looking a little tired as well. At the top end of the market, December’s prints have been dominated by classic late-cycle M&A, with well-established buyers such as telcos and private equity (PE) firms consolidating a number of mature sectors. Since the start of the month, tech and telecom acquirers have spent $35.1bn on 204 transactions around the world, according to 451 Research’s M&A KnowledgeBase.

Nearly half of this month’s total spending has come in a single deal: 21st Century Fox’s reach for British entertainment communications provider Sky. (It paid $14.8bn for the 61% stake of Sky that it didn’t already own.) In many ways, that old-line consolidation set the tone for dealmaking this month, which was characterized by conservative strategies and valuations. Other similar large transactions in December have included Equinix’s $3.6bn pickup of 29 datacenters from Verizon, Golden Gate Capital’s $1.8bn take-private of Neustar and Blackstone Group’s sale of Optiv Security to fellow PE shop KKR.

The valuation of these acquisitions underscores the fact that December dealmaking has featured more ‘value’ than ‘growth’ strategies. All five of this month’s biggest deals have gone off at less than 4.4 times trailing sales, which is the average multiple for the 50 largest transactions announced overall in 2016, according to the M&A KnowledgeBase. On average, buyers in December have paid 3.3x trailing sales, a full turn lower than they did in the previous months of the year.

2016 tech M&A activity, monthly

Period Deal volume Deal value
December 1-22 2016 204 $35.1bn
November 2016 272 $38.2bn
October 2016 323 $82bn
September 2016 298 $30bn
August 2016 304 $31.2bn
July 2016 339 $93.9bn
June 2016 383 $67bn
May 2016 328 $22.4bn
April 2016 348 $20.7bn
March 2016 339 $23.9bn
February 2016 322 $28.3bn
January 2016 383 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Despite favorable winds, few tech startups set sail to Wall Street

Brenon Daly

Contact: Brenon Daly

Calm seas and favorable winds usually encourage ships to launch onto the open ocean, but that hasn’t been the case for tech startups. The number of enterprise-focused companies that have set sail to Wall Street this year is once again mired in the single digits. That’s a disappointment given the abundant IPO-ready tech vendors and a bullish investor base that has pushed the broader US equity market to record levels in 2016.

By our count, just eight enterprise tech firms have made it public on the two major US exchanges so far this year, matching the total from 2015. The flatlining IPO total comes as US equity markets this year have vastly outperformed last year, while overall volatility has remained relatively muted. The lackluster tone for 2016 started early, with not a single tech company making it public in Q1. That marked the first quarterly shutout for tech IPOs since the end of the recent recession.

After a mini-bear market on Wall Street in the first quarter, both the Dow Jones Industrial Average and the S&P 500 moved into the green and haven’t slipped back since. (The Nasdaq took another quarter to get above water, but has been solidly positive since last summer on its way to posting what looks set to be a gain of just under 10% this year.) These advances have come as market uncertainty – as measured by the CBOE Volatility Index, or VIX – has stayed at historically low levels, spiking only in short-term reaction to the unexpected outcomes of June’s Brexit vote and the US presidential election in November.

Against this relatively welcoming backdrop, tech startups nonetheless passed on going public, and instead opted for M&A. We saw that this year from companies that had formally revealed their IPO plans (Blue Coat and Optiv were both acquired out of registration) as well as vendors that we had assumed were at some stage of IPO preparation (ServiceMax and Jasper Technologies).

As to where that leaves the IPO market for 2017, we’re currently surveying senior investment bankers and, separately, corporate development executives to get their outlook for new offerings next year. If you would like to participate in our annual survey, please email us and we will send you the correct survey for your thoughts on the IPO market as well as the M&A outlook for the coming year.

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
Everbridge October 10, 2016
BlackLine Systems October 28, 2016
Quantenna Communications October 28, 2016

Source: 451 Research’s M&A KnowledgeBase *Includes Nasdaq and NYSE listings only

A few unicorns make it in the real world

Brenon Daly

Contact: Brenon Daly

After two years of existing mostly on paper, unicorns have finally started making it into the real world. And in no small part, it’s thanks to companies that do the vast majority of their business in the real world. This year has seen a record number of seven sales of VC-backed companies for $1bn or more, according to 451 Research’s M&A KnowledgeBase. That’s as many ‘unicorn’ exits as the two previous years combined.

The increase in the number of ‘three-comma exits’ is largely due to the broader trend of digital transformation, as companies that used to only do business in the brick-and-mortar realm acquire their way online. For instance, last summer, e-tailer Jet.com sold to Walmart for $3.3bn, representing the largest sale of a VC-backed vendor in two and a half years. Additionally, consumer products giant Unilever, which traces its roots back to the 1890s and generates some $56bn in revenue, paid $1bn for four-year-old online retail site Dollar Shave Club.

Non-tech acquirers buying their way into tech were also visible in the next band of transactions, just below the fabled unicorn status. The list of the shoppers so far in 2016 that have paid $500-999m for VC-backed startups includes names that wouldn’t typically find themselves on a tech M&A hit list, notably Ritchie Bros. Auctioneers and General Motors. Altogether, nine venture portfolio companies have signed off on deals valued at $500-999m in 2016, which essentially matched the average of the previous two years, according to the M&A KnowledgeBase.

To the relief of VCs, this trend is likely to continue as old-line industrial and manufacturing vendors as well as retailers use M&A to find new avenues of growth. Many of these would-be buyers are also enjoying some of the highest stock prices they’ve ever had, which is boosting their confidence to do big-ticket acquisitions in untested markets. It’s unlikely there will ever be a stampede of unicorns into the physical world. But in the coming years, a few of the venture industry’s highest-valued startups will undoubtedly continue to make their way to acquirers that they probably wouldn’t have ever imagined when they first launched their startup.

Acquisitions of VC-backed startups*

Year Number of transactions valued at $500-999m Number of transactions valued at $1bn or greater
YTD 2016 9 7
2015 9 1
2014 8 6
2013 7 2
2012 7 4
2011 7 1

Source: 451 Research’s M&A KnowledgeBase *Includes estimated and disclosed deal values

PE: The only growth market in tech M&A right now

Brenon Daly

Contact: Brenon Daly

The buyout barons are busier than ever. Already this year, private equity (PE) shops have announced more tech transactions than any year in history. The unprecedented flurry of deals comes as more financial acquirers are buying their way into the ever-maturing tech industry, with newly hatched fledgling funds joining well-established multibillion-dollar outfits. This ever-increasing pack of PE players is vastly outpacing their corporate rivals when it comes to putting up deals.

So far this year, PE buyers have announced a record 283 acquisitions, an increase of 11% from 2015 and 21% from 2014, according to 451 Research’s M&A KnowledgeBase. (We would also note that the deal flow covers virtually every strategy – carve-outs, bolt-ons, take-privates, secondaries – available to these firms.) If we assume the pace of buyout activity holds through December, PE shops will put up more than 300 prints in 2016, a 20% increase from last year. (For the record, M&A spending by buyout firms this year has set a post-recession record.)

As PE shops step up their activity, corporate acquirers are slowing down. Overall, the number of tech transactions is likely to decline about 10% this year, compared with 2015. (That’s assuming the pace in December continues at the rate of the preceding 11 months.) The drop-off in 2016 will be even sharper among US publicly traded buyers, which represent the most visible segment of the ‘corporate acquirers.’ Currently, tech vendors listed on the Nasdaq and NYSE are on pace to announce just 900 purchases in 2016, down from about 1,040 deals in each of the two previous years, according to the M&A KnowledgeBase.

Although PE is essentially the sole ‘growth market’ in tech M&A right now, it still represents only a small portion of the activity. In 2016, financial acquirers account for only one of every 12 transactions. Still, that’s a higher share of the market than either of the two previous years – and that looks likely to increase further in 2017. Even from the recent record level of activity, nearly half of respondents (45%) to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster last October predicted that buyout shops would spend more in 2017 than they have in 2016, compared with just one-quarter (28%) who forecast lower spending.

PE activity

Period Deal volume Deal value Percentage of overall tech M&A spending
YTD 2016 283 $69bn 15%
2015 253 $58bn 9%
2014 234 $42bn 10%
2013 201 $62bn 25%
2012 169 $28bn 15%
2011 212 $33bn 14%
2010 147 $29bn 15%
2009 103 $13bn 9%
2008 107 $17bn 5%
2007 159 $122bn 29%

Source: The 451 M&A KnowledgeBase

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

Synchronoss: Can middle-aged companies pivot, too?

Brenon Daly

Contact: Brenon Daly

Announcing the most significant overhaul of its 16-year-old company, Synchronoss has shed a large portion of its legacy telecom business and made an $821m acquisition of collaboration software provider Intralinks in an effort to evolve more fully into an enterprise software vendor. Synchronoss began its enterprise push last year, using smaller purchases to add identity management and enterprise mobility management technology to its portfolio. However, sales to businesses currently generate only a small slice of its overall revenue. With the divestiture and the addition of Intralinks, roughly 40% of the company’s total sales will come from enterprises.

Reflecting the importance of its new focus on enterprises, Synchronoss said the combined entity would be led by current Intralinks CEO Ron Hovsepian, reversing the typical post-acquisition leadership arrangement. Additionally, Synchronoss noted that Intralinks brings a direct sales force of more than 150 sales reps to the effort. However, Intralinks had only been increasing its revenue at a high-single-digit percentage rate so far in 2016. The transaction is expected to close late in the first quarter of 2017.

Synchronoss’ divestiture of a majority portion of its carrier activation business figures into the company’s pivot, as well. The sale of 70% of the unit for $146m to existing partner Sequential Technology reduces the legacy carrier-focused portion of revenue, as well as eases customer-concentration concerns for Synchronoss. The company is still trying to sell the remaining 30% of its activation unit, a process it indicated could take 12-18 months.

A portion of the funds from the divestiture, along with some cash on hand, will go toward covering a bit of the Intralinks buy. However, Synchronoss said it will have to borrow $900m to pay for most of the purchase. (Synchronoss is spending about twice as much on Intralinks as it has spent, collectively, on its previous 11 acquisitions since 2002, according to 451 Research’s M&A KnowledgeBase.) The new debt – along with the accompanying dilution of earnings to service it – unnerved some investors. Shares dropped 12% on the announcement, but are still up about 20% for the year.

Probably more of a concern on Wall Street, however, are the challenges associated with such a dramatic shift in business model – one that has a decidedly mixed record. Already this year, we have seen a number of high-profile companies backtrack on their earlier efforts to use M&A to become enterprise software vendors. Dell, Hewlett-Packard and Lexmark, among others, have all unwound or are trying to unwind billions of dollars of deals they did over the past decade to step from their original business into the enterprise software arena.

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