Category: VC

Webinar: What to expect in tech M&A in 2015?

Brenon Daly

Contact: Brenon Daly

With a record-breaking year in tech M&A behind us, what’s in store for 2015? Join 451 Research on Tuesday, January 27 at 1:00 PM EST for a look ahead on where acquirers are likely to be looking to do deals, and what they’re likely to pay. The webinar, which highlights the analysis and forecasts in our 2015 M&A Outlook, is free to attend – register here.

We’ll start with a look back at 2014 to highlight some of the trends and big-ticket transactions that helped push tech M&A spending to its highest level since the Internet bubble burst. What had buyers spending freely last year – including 75 transactions valued at more than $1bn – and will that carry over to this year?

Then, we’ll address other timely topics, including:

  • What does the data from our surveys of corporate acquirers and bankers, as well as insight from our analysts, tell us to expect for tech M&A in 2015?
  • Specifically, what sectors of the IT landscape will be active this year – and why? We will highlight trends from a handful of major markets (mobility, cloud, security, networking) that are likely to drive deals.
  • Private equity firms announced more tech acquisitions in 2014 than in any other year, often paying prices they would not have paid in the past. Is this the start of a new aggressiveness by financial acquirers?
  • What’s the outlook for the IPO market, and which startups might be ready to go public this year?
  • Startups may be pulling down sky-high valuations in recent funding, but the forecast among corporate buyers for the exit valuations of startups isn’t nearly as bullish. How big is the bid/ask spread likely to be this year?

The webinar draws from both the qualitative insight of more than 100 analysts at 451 Research, as well as a number of quantitative resources to get a sense of the broad influences that are shaping M&A in 2015. To register for the webinar, click here.

What do the main buyers in the tech M&A market see for the year ahead?

Brenon Daly

Contact: Brenon Daly

Last year was a big year for tech M&A, but what was the biggest deal of year? To find out, we asked the main buyers in the tech M&A market: corporate development executives. As part of a broader survey, we had them look at the handiwork of their peers and give us their pick for the most significant tech transaction of 2014.

So which deal got the Golden Tombstone? Facebook’s $19bn cash-and-stock acquisition of WhatsApp. The purchase last February by the 10-year-old social network represents the largest VC-backed exit in history. It drew twice as many votes as the second-place transaction, SAP’s $8.3bn reach for Concur Technologies, which is the largest-ever SaaS acquisition.

Additionally, we asked the corporate acquirers what they expected for the coming year. Their responses point to a continuation of the record run of tech M&A. More than half of corporate development executives (58%) indicated that they expect their company to pick up the pace of dealmaking in 2015. That stands as the highest forecast in a half-decade and compares with just one in five respondents (6%) projecting a slowdown in their M&A activity in the coming year.

Other highlights from the survey of corporate development executives include a bearish outlook for startup valuations, a record forecast for IPOs and the expectation of unprecedented amount of competition in deals from their private equity rivals in 2015. Subscribers: See the full report.

Top vote getter for ‘most significant tech transaction’

Year Deal
2014 Facebook’s acquisition of WhatsApp
2013 IBM’s acquisition of SoftLayer
2012 VMware’s acquisition of Nicira
2011 Google’s acquisition of Motorola Mobility
2010 Intel’s acquisition of McAfee
2009 Oracle’s acquisition of Sun Microsystems
2008 Hewlett-Packard’s acquisition of EDS
2007 Citrix’s acquisition of XenSource

Source: 451 Research Tech Corporate Development Outlook Survey

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In the IPOs of New Relic and Hortonworks, it’s the grownup vs. the startup

Brenon Daly

Contact: Brenon Daly

Although both New Relic and Hortonworks revealed their IPO paperwork on the same day, that’s pretty much all the similarities we could find between the two enterprise technology companies. The two candidates have wildly different delivery models, operating margins, customer counts and even maturity of business models. That’s not to say they both can’t find a home on Wall Street, but only one of them is likely to dwell in a ritzy neighborhood. (451 Research subscribers: look for our full reports on both the New Relic and Hortonworks offerings later today.)

Of the two offerings, New Relic looks to be the standout. The application performance management vendor is growing quickly, but maybe more importantly, it is starting to show some leverage in its business model. This stands in sharp contrast to some of the other unprofitable IPO candidates that talk distantly about the company hitting some magical ‘inflection point’ when the red ink turns black.

New Relic is already demonstrating greater efficiency in its model, which will undoubtedly appeal to Wall Street. Consider this: In the first six months of the company’s current fiscal year, its operating loss basically stayed the same even as revenue soared 84%. More specifically, New Relic actually lost less money in its most recent quarter, which wrapped in September, than it did in the same quarter a year earlier. It trimmed its quarterly loss even as the company added more than $10m, or 78%, to its top line.

In contrast, Hortonworks is still forming its business, without much – if any – regard to optimizing it. The three-year-old Hadoop distributor is a classic startup, with many of the concerns that come with early-stage businesses: customer concentration, heavy upfront spending and precariously thin margins. (Hortonworks’ professional services business, which actually runs at a negative gross margin, has been a serious drag on the company’s overall gross margin. Through the first three quarters of the year, Hortonworks has been running at just a 34% gross margin, less than half the 81% gross margin posted by New Relic.)

When we net out all the differences between New Relic and Hortonworks, we see a vast gulf between the two IPO candidates at the bottom line. Sure, both still run in the red, but New Relic is only a light red, while Hortonworks is hemorrhaging a blood red. To put some specific numbers on that metaphor: At its current rate, New Relic loses about 40 cents for every $1 it brings in as revenue. In contrast, Hortonworks loses a staggering $2.60 for every $1 it brings in as revenue.

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

Webinar: Tech M&A outlook

Brenon Daly

Contact: Brenon Daly

Last spring, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster accurately predicted a dramatic surge in tech M&A activity. So what do they see coming now?

We’ll take a lively and thought-provoking look at the results from our latest survey in a special webinar on Wednesday, November 5 at 1:00pm EST. To register for the webinar, simply click here.

Among the key findings we’ll be discussing:

  • Nearly half of the respondents expect overall tech acquisition activity, which has been running at a record rate in 2014, to accelerate through the next half-year.
  • The percentage of survey respondents who say the tech M&A market is likely to be busier from now through next spring is three times higher than the 16% forecasting a decline in acquisition activity.
  • The outlook for private company M&A valuations has never been more bearish. A record 34% of respondents project that sale prices for startups will head lower from now through next April, compared with 26% who anticipate prices ticking higher.

Again, the webinar will be held on Wednesday at 1:00pm EST. Registration is complimentary and can be found here.

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

Survey: no slowdown in record tech M&A pace

Brenon Daly

Contact: Brenon Daly

Even as tech M&A spending sprints along at a record clip in 2014, half of the respondents to the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster expect the pace to accelerate through the next six months. The 48% of survey respondents who say the tech M&A market is likely to be busier from now through next April is three times higher than the percentage forecasting a decline in activity. (451 Research subscribers: See our full report on the M&A Leaders’ Survey.)

Although the bullish forecast in our mid-October survey dropped from the high-water mark of 72% in our April 2014 survey, it essentially matches the level from surveys over the previous two years. For context, however, it’s also important to note that this outlook – with five out of six respondents indicating that dealmaking will either hold steady or pick up – is coming at a record time for tech M&A. Spending on tech transactions around the globe so far in 2014 is higher than the spending during the same period of 2012 and 2013 combined, according to The 451 M&A KnowledgeBase. (451 Research subscribers: See our full report on Q3 M&A and IPO activity.)

Survey respondents were less bullish in their outlook for private company M&A valuations. A record 34% of respondents predicted that sale prices for startups would head lower from now through next April, three times the percentage that said that in our survey just a half-year ago. We would attribute at least part of the deterioration to the fact that there were certainly bigger – and much higher-profile – sales of startups in the early part of 2014. Overall, according to the KnowledgeBase, the first half of 2014 has seen eight of the 10 largest deals announced so far this year, led by the largest-ever VC exit, WhatsApp’s sale to Facebook in February for $19bn.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
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

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

Small ball M&A paying off for salesforce.com

Brenon Daly

Contact: Brenon Daly

When it comes to M&A at salesforce.com, starting small has yielded higher returns than going big. The SaaS giant has returned to the ‘buy and build’ strategy with its latest step into a new market with Analytics Cloud. The data visualization offering, which was unveiled this week at Dreamforce, was underpinned by the acquisition of EdgeSpring back in June 2013.

The $134m price notwithstanding, EdgeSpring stands as a small deal for salesforce.com. (We profiled EdgeSpring shortly after it emerged from stealth and a half-year before it was acquired. At the time, it claimed more than 10 paying customers and about 30 employees.)

Certainly, there were bigger targets for a move into the analytics market by salesforce.com, which will do more than $5bn in revenue this fiscal year and says it has a ‘clear line of sight’ to $10bn in sales. For instance, both Qlik Technologies and Tableau Software offer their data visualization software on salesforce.com’s AppExchange. With hundreds of millions of dollars in revenue, either of those vendors would have established salesforce.com as a significant player in the data analytics market as well as moving the company closer to its goal of doubling revenue in the coming years.

However, in that regard, a purchase of either Qlik or Tableau would be comparable with salesforce.com’s reach for ExactTarget in June 2013, which serves as the basis for its Marketing Cloud. The deal was uncharacteristically large, with salesforce.com spending more on the marketing automation provider than it has in all 32 of its other acquisitions combined. More significantly, salesforce.com has struggled a bit with ExactTarget, both operationally (platform integration and cross-selling opportunities) and financially (margin deterioration).

In contrast to that big spending, salesforce.com dropped only about one one-hundredth of the price of ExactTarget on InStranet in August 2008 ($2.5bn vs. $32m). The purchase of InStranet helped establish Service Cloud, which is now the company’s second-largest business behind its core Customer Records Management offering. And salesforce.com says the customer service segment is much larger than the market for its sales software.

Those divergent deals are something to keep in mind when salesforce.com buys its way into a new market. If we had to guess, we would expect the company to next make a play for online retailing (maybe call it Commerce Cloud?). If that’s the case, we might suggest that it look past the big oaks like Demandware and focus on the seedlings that can then grow up in the salesforce.com ecosystem.

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

In HubSpot IPO, it’s the company and the company it keeps

Brenon Daly

by Brenon Daly

Wall Street typically doesn’t have the chance to learn too much about the companies that come public before the actual IPO. Certainly, the debutants don’t come with the track record of businesses that have lived in institutional investor portfolios for quarters on end. To alleviate some of that uncertainty, which is corrosive to any investment, a key selling point for some IPOs isn’t so much the company, but the company that it keeps.

Consider the case of HubSpot. (Subscribers: See our earlier preview of the HubSpot IPO .) The marketing automation (MA) vendor hit the NYSE on Thursday, creating more than $900m of market value. (The company priced its 5.75-million-share offering at an above-range $25 each, with shares ticking to $30 after the IPO.) HubSpot’s initial valuation works out to roughly 10 times trailing revenue, which is among the richest valuations for MA providers. In fact, it almost exactly matches the current trading valuation for MA high-flier Marketo.

While HubSpot is lumped in with Marketo, the two companies aren’t direct head-to-head rivals. They hawk their wares to very different customers, with HubSpot focusing solidly on the midmarket while Marketo targets bigger businesses. That shows up clearly in the fact that HubSpot has more than three times as many customers as Marketo, but generates roughly one-quarter the revenue of the larger – and faster-growing – MA vendor. (HubSpot has more than 11,600 customers, while Marketo has 3,300 or so.)

Undoubtedly, HubSpot is enjoying a bit of a boost by getting compared with an upmarket vendor. It wouldn’t find such bullishness if it went the opposite way, selling its marketing suite to small businesses. The public market proxy for that market is Constant Contact, which has had a choppy run on Wall Street and trades at a sharp discount to either Marketo or HubSpot.

Constant Contact sells to very small businesses. Nearly two-thirds of its roughly 600,000 customers have less than 25 employees. Still, it has built a sizeable business selling to corner stores, freelancers and other small operations. (Constant Contact will put up more revenue this year than Marketo and HubSpot combined.) What the marketing platform supplier hasn’t done so successfully is market its story to Wall Street. Constant Contact trades at about 3x trailing sales, just one-third the valuation of upmarket vendors HubSpot and Marketo.

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

IPO = Interminable Private Offerings

Brenon Daly

Contact: Brenon Daly

For one pair of money-burning companies, IPO no longer stands for Initial Public Offering – instead, it’s Interminable Private Offerings. Unable to graduate to Wall Street, both Box and Good Technology have retreated, returning hat in hand to the ranks of late-stage investors for their next round of life-sustaining capital.

Good Technology, a mobile management software consolidator that has never come close to turning a profit, drew in another $80m on Wednesday. That comes almost three months after collaboration software vendor Box – a startup that spends more on sales and marketing than it takes in as revenue – pulled in $150m. (Tellingly, Box’s latest round was reportedly done at a flat valuation.)

Taken together, Good Technology and Box have now raised more than $800m in funding from private sources. In comparison, Good Technology had hoped to raise $100m from public investors, while Box plans a $150m offering, scaled back from an original $250m.

The new fundings are a clear setback to both Good Technology and Box, which have been on file to go public since May and March, respectively. Further, it may well give pause to other companies that were looking to Wall Street to subsidize their free-spending ways. After all, an S-1 is an expensive, time-consuming and very revealing bit of paperwork.

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

With its IPO, Cyber-Ark floats on high water

Brenon Daly

Contact: Brenon Daly

It seems the record-setting Alibaba offering didn’t suck up all the IPO money on Wall Street after all. Although investors handed out a staggering $25bn to the Chinese e-commerce vendor last week, they stepped right back into the market to buy newly minted shares of Cyber-Ark on Thursday. And boy, did they buy.

Cyber-Ark, an Israel-based identity and access management (IAM) provider, sold 5.4 million shares at an above-range price of $16 each. Once free to trade, shares doubled. (In early afternoon trading under the ticker ‘CYBR’ the stock was changing hands at $32.20, having never dipped below $30 on its debut.) Cyber-Ark’s IPO stands as the first tech offering (aside from Alibaba) in some three months.

The strong demand for Cyber-Ark pushed it to a rather princely valuation. With roughly 30 million shares outstanding, the company’s market cap is nosing toward the magical $1bn mark. That stands out because Cyber-Ark, while profitable, will put up less than $100m in sales in 2014. Further, those sales are coming from old-fashioned license and support, rather than the more highly valued subscription delivery model. The company has been increasing revenue in the 30-40% range in recent quarters. (See our full report on Cyber-Ark’s filing.)

Cyber-Ark is particularly richly valued when compared with other IAM providers, in both the IPO and M&A markets. It trades at more than twice the current multiple of Imprivata, which went public three months ago and is currently under water. (Imprivata focuses entirely on the healthcare market, while Cyber-Ark counts more than 1,500 customers across a range of industries.) Meanwhile, earlier this month, direct rival BeyondTrust got flipped to another PE portfolio in a deal that we estimate went off at about 3x trailing sales.

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

Did SAP exercise an an opportunistic option for OpTier?

Brenon Daly

-by Brenon Daly

Despite raising more than $100m in backing, OpTier quietly wound down this summer after a dozen years in business. Even more quietly, some of the assets from the formerly highly valued startup may have been snapped up on the cheap by SAP.

That’s according to several market sources, and an opportunistic purchase would certainly make sense. SAP licensed a fair amount of OpTier to monitor its cloud software internally, so it could have simply brought the technology in-house. Although a deal hasn’t been announced (much less terms for any transaction), we understand SAP paid $10-20m for much of OpTier’s IP.

Assuming our understanding is correct, it would mark a sharp comedown for OpTier. As recently as three years ago, the Israeli startup was reported to be seeking an exit of up to $300m in a process run by Morgan Stanley, which is also an investor in OpTier.

Although OpTier grew quickly through much of the past decade with its business transaction monitoring product, it was slow to step into the more valuable market of code-level application performance monitoring (APM). (See our 2012 report on the ‘pivot’ at OpTier .) For comparison, at least two APM startups founded after OpTier – AppDynamics and New Relic – are both valued in the neighborhood of $1bn and are expected to go public in 2015.

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