Category: VC

A record year for tech M&A, and so much more

Brenon Daly

Contact: Brenon Daly

Sure, the number of deals and spending on them in 2015 blew away anything we’ve seen since we were surfing the Web on Netscape browsers, but there was a whole lot more going on inside last year’s activity. 451 Research subscribers can get our full report on what happened last year and what’s likely to play out this year. Looking inside the record deal flow we recorded in 451 Research’s M&A KnowledgeBase, for instance, we saw a number of highlights from 2015:

  • Acquirers have never announced more tech, media and telecom (TMT) transactions valued in the billions of dollars than they did in 2015, including two of the three largest pure tech transactions in history.
  • Last year saw an unexpectedly large number of tech giants either sit out the record M&A activity altogether (Symantec, the former JDS Uniphase) or significantly dial back their acquisition programs (SAP, Oracle, Yahoo, Intuit).
  • The value of divestitures by US-listed tech companies hit a new record, coming in at twice the average annual amount over the past half-decade.
  • Private equity firms announced the most acquisitions ever for the industry, more than doubling the number of deals they did during the recent recession.
  • Even as interest rates ticked higher, buyout shops paid unprecedentedly rich multiples at the top end of the market in their purchases.
  • Despite the record number of startups valued at $1bn or more, just one VC-backed company recorded a 10-digit exit in 2015, down from an average of four exits each year over the previous three years.

Our report not only highlights these trends, but also maps them to the views from the main participants in the tech M&A community to give a sense of what will shape acquisitions in the coming year. See the full report.

Valuations of significant* tech transactions

Year Enterprise value-to-sales ratio
2015 3.6x
2014 4.4x
2013 3.3x
2012 2.9x
2011 3.2x
2010 3.4x
2009 2.6x
2008 2.4x
2007 3.8x

Source: The 451 M&A KnowledgeBase *Average multiple in 50 largest acquisitions, by equity value, in each year.

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

Even after record year, tech bankers say pipeline isn’t a problem for 2016

Brenon Daly

Contact: Brenon Daly

After working through a year that saw tech M&A spending soar to its highest level in a decade and a half, tech investment bankers say their pipelines are still relatively full for 2016. More than seven out of 10 respondents (72%) indicated that the total value of as-yet unclosed transactions is higher now than it was this time last year, according to the annual 451 Research Tech Banking Outlook Survey. This year’s bullish forecast is five times higher than the 14% that said their pipelines are drier than they were a year ago.

Although bankers’ assessment of their pipeline for this year ticked a bit lower from our previous survey, it is still the third-strongest response we’ve tallied since the recent recession. It is even more noteworthy when we consider that half of the bankers (51%) said in a separate question that we are at or near the end of the current M&A cycle. That was 10 times higher than the 5% who said the cycle is either just beginning or close to the beginning.

On the more important question about valuations (as opposed to activity), bankers are unprecedentedly bearish for this year. Nearly two-thirds of respondents to our survey (64%) indicated that they see deal pricing coming down in 2016, compared with just 14% that anticipate valuations ticking higher. That’s almost a direct reversal of typical valuation outlook over the past half-decade given by M&A advisers.

451 Research subscribers can click here to view the rest of the results of our annual survey of senior tech investment bankers and their forecast on how busy they expect to be – including buyouts and IPOs – and what tech sectors will see the most activity in 2016.

Change in dollar value of tech mandates

Year Increase Stay the same Decrease
December 2015 for 2016 72% 14% 14%
December 2014 for 2015 77% 17% 6%
December 2013 for 2014 65% 19% 16%
December 2012 for 2013 58% 21% 21%
December 2011 for 2012 67% 21% 12%
December 2010 for 2011 83% 10% 7%
December 2009 for 2010 68% 12% 20%
December 2008 for 2009 26% 22% 52%

Source: 451 Research Tech Banking Outlook Survey

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

Tech’s corporate acquirers pull back on M&A plans

Brenon Daly

Contact: Brenon Daly

After a record run for tech M&A spending in 2015, an unprecedented number of the main buyers in the market expect to cut back on their shopping in the coming year, according to our annual survey of corporate development executives. Respondents gave their most bearish forecast for acquisition plans in the nine years of the 451 Research Tech Corporate Development Outlook Survey. Fewer than one-third (31%) of respondents said their firms would be increasing activity in the coming year, a full 20 percentage points lower than the average level over the previous eight surveys.

For the first time in survey history, virtually the same number of corporate development executives forecast that their firms would be scaling back their M&A programs (28%) as said they would be increasing acquisition activity (31%) in the coming year. In previous surveys, the percentage of respondents projecting an increase has vastly outweighed those anticipating a decrease, ranging from roughly two to 10 times as many as respondents.

If the bearish sentiment does come through in the activity, 2016 would snap three consecutive years of higher M&A spending, culminating in a record of nearly $600bn worth of announced tech, media and telecom (TMT) acquisitions in 2015, according to 451 Research’s M&A KnowledgeBase.

451 Research subscribers can see our full report on the outlook from corporate development executives regarding M&A valuations, private equity activity and just how many – or rather, how few – startups will go public in 2016.

Projected change in M&A activity

Year Increase Stay the same Decrease
December 2015 for 2016 31% 41% 28%
December 2014 for 2015 58% 36% 6%
December 2013 for 2014 45% 42% 13%
December 2012 for 2013 38% 42% 20%
December 2011 for 2012 56% 30% 14%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: 451 Research Tech Corporate Development Outlook Survey

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

November: a middling month for M&A

Brenon Daly

Contact: Brenon Daly

Although the number of tech deals in November dropped to the second-lowest monthly total so far in 2015, the aggregate value of last month’s transactions landed smack in the middle of announced M&A spending levels this year. The $39.3bn worth of spending on tech, media and telecom (TMT) acquisitions in the just-finished month is the median monthly amount for 2015, with five months coming above that amount and five below. Meanwhile, the number of prints in November came in at just 317, about 12% lower than the average rate in the previous 10 months, according to 451 Research’s M&A KnowledgeBase.

By definition, the lower-than-average M&A volume but straight-down-the-middle spending level means last month saw a fair number of big prints. Indeed, the KnowledgeBase tallied 10 transactions with an equity value of at least $1bn announced in November. (That brought the year-to-date total for billion-dollar-plus deals to 74.) However, not one of last month’s acquisitions topped $6bn. For context, in the previous 10 months, we had seen 14 transactions worth at least $6bn.

Looking within deal flow at the top end of the tech M&A market, we can see that much of it came from old-line consolidation. Five of the six largest acquisitions featured buyers reaching for targets that operate in the same market. For instance, videogame maker Activision Blizzard announced plans to pay $5.9bn for fellow videogame maker King Digital Entertainment, while the ever-maturing semiconductor industry saw a pair of 10-digit deals last month.

November’s solid spending level pushed this year’s post-Internet bubble record for M&A spending even higher. With still a month to go, the 2015 total for global TMT M&A spending has already topped $560bn, according to the KnowledgeBase. That works out to $140bn higher than the previous full-year record in 2007. Viewed another way, this year’s level has already added on a full quarter’s worth of spending from the previous record level.

Monthly M&A activity, 2015

Month Deal volume Deal value
November 317 $39bn
October 384 $113bn
September 378 $33bn
August 333 $27bn
July 435 $23bn
June 380 $35bn
May 311 $123bn
April 369 $47bn
March 340 $61bn
February 339 $49bn
January 358 $11bn

Source: 451 Research’s M&A KnowledgeBase

InfoSec startups wonder: why bother with Wall Street?

Brenon Daly

Contact: Brenon Daly

Why bother with Wall Street? An increasing number of tech startups – particularly those in the red-hot information security market – are saying ‘thanks, but no thanks’ to going public, and instead raising IPO-like rounds from private investors. So rather than an IPO for security startups being an ‘initial public offering,’ it stands for ‘inflated private offering.’

This trend toward big checks reached new heights this week with a $250m round raised by Tenable Network Security from Insight Venture Partners and Accel Partners. Yes, that’s right: a quarter-billion dollars in a single investment, with no SEC headaches, no public financial disclosure and very few stops on an abbreviated roadshow. If that kind of relatively hassle-free money is sloshing around the security landscape, why wouldn’t a company divert some of it to its own treasury?

And to be clear, that kind of money is available in infosec. So far this year, at least eight security startups have announced single rounds of funding that in years past would have only been available from Wall Street. In addition to this week’s whopper from Tenable, we also saw Illumio raise $100m in April, Zscaler raise $100m in early August, CloudFlare raise $110m in late September, Tanium raise $120m in early September, CrowdStrike raise $100m in mid-July and Okta and Netskope both raise $75m in early September.

Against this flurry of private-market fundings, we’ve seen just one infosec provider go public on US exchanges in 2015. In many ways, Rapid7’s decision to go ahead with its $100m IPO in June is almost endearingly recherché. But the out-of-step decision to go public also comes at a financial cost to Rapid7. Because of an inversion in conventional financing, the liquidity of Rapid7 shares and the transparency actually get discounted when compared with private-market fundings. Rapid7 isn’t even a unicorn, unlike the majority of still-private infosec startups that raised as much – if not more – than it did.

Classical economic theory holds that an imbalance such as this tends to correct over time. (The only open question is when, not if.) However, assuming we do return to a time when Wall Street is the primary – if not exclusive – source for, say, fundings of $100m or more, simply working through the existing backlog of infosec companies that have already done these big-money rounds in the private market could take several years. And, as we have seen in other markets that are temporarily distorted because of an overabundance of capital, working through that can be a painful process.

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

Webinar: What’s ahead for tech IPOs, M&A and all those unicorns?

Brenon Daly

Contact: Brenon Daly

After a record run for tech M&A, where do dealmakers see the market heading in the near term? Are they going to stay busy or catch their breath? And what do they expect to have to pay for startups in the transactions they make? What about the IPO market? And what’s going to happen to the ever-growing herd of unicorns over the next year?

For answers, join 451 Research and Morrison & Foerster on Thursday, November 12 at 10:00am PST for a webinar covering all of these topics and more. (Click here to register for the one-hour webinar.) We’ll be drawing on the findings from the latest M&A Leaders’ Survey from 451 Research and Morrison & Forester as well as highlighting trends in current market activity that have pushed spending on tech M&A to its highest level in 15 years. Already in 2015, buyers have shelled out more than a half-trillion dollars for deals they’ve announced. So the question remains: Where do we go from here?

Register now for a look at what’s behind the recent record and whether that will continue in 2016.

Unicorn outlook

Wrapping a ‘blue coat’ around SaaS apps

Brenon Daly

Contact: Brenon Daly

For the second time in about three months, 20-year-old infosec vendor Blue Coat has bought its way into the cloud, paying an astronomical multiple for cloud application control startup Elastica in a $280m deal. Paired with its recent purchase of Perspecsys, Blue Coat has rung up a $400m bill in building out an offering to help secure SaaS applications. That makes it the biggest buyer in this nascent market.

We view the pickups of Perspecsys and Elastica as a bit of a portfolio update and refresh ahead of what we expect to be an IPO for Blue Coat in early 2016. As one of the few large-scale infosec providers, Blue Coat has attracted acquisition interest in recent years. Before its take-private in late 2011, the company was rumored to have drawn a bid from HP. More recently, Raytheon was thought to be considering a run at Blue Coat before nabbing fellow PE-owned network security firm Websense instead. Earlier this year, Blue Coat’s original PE owner, Thoma Bravo, sold the company to Bain Capital. (Incidentally, Goldman Sachs worked Blue Coat’s LBO as well as the secondary transaction.)

Subscribers to 451 Research can see our report on this deal – including valuation, market context and integration outlook – on our website later today and in tomorrow’s 451 Market Insight.

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

Survey: the already weak tech IPO market looks even weaker in 2016

Brenon Daly

Contact: Brenon Daly

Despite 2015 being one of the weakest markets for tech IPOs in recent years, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster don’t expect a rebound in 2016. (See our full report on the survey.) In fact, more than four out of 10 (43%) forecast a further slowdown in public offerings next year, compared with three out of ten (29%) expecting a pickup in IPO activity. That’s a direct reversal of the already weak sentiment from the previous survey just last April.

By our count, only a half dozen enterprise tech companies have come to market on US exchanges so far this year. More alarmingly, the companies that have made it public in 2015 have continued to get roughed up on Wall Street. Half of this year’s debutants (Box, Apigee and Xactly) are currently trading below the valuations that venture investors put on them. (Similarly, Good Technology abandoned its yearlong effort to go public and instead took a relatively low-multiple sale in September that valued it at less than private-market investors had in previous funding rounds.)

With the IPO market likely to be an unwelcoming place in 2016, a dispiritingly painful reception could be waiting for those late-stage companies aiming to raise capital once again in the private market rather than on Wall Street, according to our survey respondents. A staggering seven out of 10 anticipate that the valuations of late-stage funding will decline next year, compared with just 5% who project up-rounds. Another way to view the incredibly bearish forecast from our survey respondents is that for every one person from the tech M&A community who expects the privately held high-fliers to continuing soaring to higher valuations, 14 respondents predict gravity to set in.

See our full report on the survey results, which includes the outlook for IPOs as well as a near-term forecast for M&A activity and valuations.

IPO market outlook

Survey date Forecast increase Stay the same Forecast decline
October 2015 29% 28% 43%
April 2015 41% 32% 27%

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

The end of a bull run in tech M&A?

Brenon Daly

Contact: Brenon Daly

After sprinting at a record rate of M&A spending in 2015, tech dealmakers and investment bankers are planning to catch their breath. In the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster, a record low percentage of respondents forecasted an uptick in their acquisition activity over the next six months, while a record high number predicted a decrease.

Overall in the latest edition of the survey, the bulls were only slightly less bullish, while the bears were dramatically more bearish. The 44% of tech acquirers projecting an acceleration in M&A is only a handful of points below the previous low-water mark, but the 24% indicating a slowdown is more than twice the average negative forecast over the previous seven surveys.

Now in its eighth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster has now registered two ‘outlier’ results – one on the upside, back in spring 2014, and in the current survey, one on the downside. Back in our April 2014 survey, a record 72% of respondents forecasted an acceleration in M&A activity. That clear indication by the main tech buyers and their advisers to get busier did indeed come through in the prints. In the six quarters since that record forecast, the average quarterly spending on tech M&A stands at $120bn, almost exactly twice the average quarterly spending in the preceding six quarters, according to 451 Research’s M&A KnowledgeBase.

In our just-completed survey, we now have a similar – though inverse – significant deviation in responses. Recall that one-quarter of respondents predicted a decline in M&A activity through next spring, which is by far the highest level we’ve ever seen. The wisdom of the crowd, which comes through in our survey results, more or less accurately anticipated the start of a bull run in tech M&A a year and a half ago. In the latest survey, the crowd’s sentiment appears to have swung in the other direction. We’ll have a full report on the latest M&A Leaders’ Survey from 451 Research and Morrison & Foerster on our website later today and in tomorrow’s 451 Market Insight.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
October 2015 44% 32% 24%
April 2015 61% 30% 9%
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

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

Securing an IPO pipeline

Brenon Daly

Contact: Brenon Daly

As we saw in the recent lackluster debut of Pure Storage, there isn’t much demand on Wall Street for new offerings. The fast-growing storage startup became only the fifth enterprise tech vendor to go public in 2015. Virtually all of the tech IPOs, including Pure Storage, have broken issue, often falling below the valuation they achieved as private companies, when they were smaller and more speculative investments. However, there is one exception to the generally dismal tech IPO market: information security.

Consider the standout offering from Rapid7 . Since debuting three months ago, the threat-detection provider has not only delivered a tidy return to its earlier investors, but has also traded relatively strongly in the aftermarket. And it is doing all that while maintaining a rather rich valuation. Investors value Rapid7 at about $840m, roughly 8x the $100m or so in sales this year that the company will put up.

As with any market that indicates demand, supply will look to satisfy that demand. We understand there are at least three information security firms currently on file and hoping to go public before the end of the year:

  • Veracode: The code-scanning startup is rumored to have picked J.P. Morgan Securities to lead its offering. We gather the company ran a dual-track process, but is now set to go public. It raised a late-stage round about a year ago, bringing its total to about $120m.
  • LogRhythm: The SIEM vendor has navigated through the consolidation that has thinned the number of sizable independent vendors to just a handful. An IPO from LogRhythm would come almost eight years after rival ArcSight went public.
  • SecureWorks: We noted in May that Dell’s managed security service division is looking at spinning off a minority stake of the company. The move would give SecureWorks currency to pick up other MSSPs, as well as (possibly) raise money for Dell as it looks to pay for the largest-ever tech acquisition.

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