Going vertical makes machine learning deal volume horizontal

by Scott Denne

Last year marked a banner year for machine learning M&A. Purchases of vendors building products around that emerging technology, as well as firms whose offerings enable others to build machine learning products, soared in 2019. Yet the change was more than quantitative. As that new technology pervades older industries, it’s bringing in new acquirers and the rationale behind many machine learning deals has evolved.

According to 451 Researchs M&A KnowledgeBase, acquisitions of machine learning providers rose 75% to 278 in 2019. In other words, machine learning accounted for one of every 13 tech transactions last year. Within that number, purchases of companies selling into a specific vertical produced the most prominent rise as buyers nabbed 112 vendors building machine learning offerings that address problems within a particular industry, more than double the 53 they bought earlier.

In previous years, many acquirers were content to pick up general-purpose tech and expertise to bolster their machine learning portfolios. Serial shoppers Microsoft, Google, Salesforce and Apple, for instance, each picked up more than 10 businesses in recent years to expand their products’ machine learning functionality. As we previously noted, buyers have already become more discriminating, and more likely to seek tech that fills specific gaps in the product portfolio.

But the application of machine learning to certain markets has not only kept acquirer interest in the burgeoning technology high, it has also brought new buyers into the tech M&A market as staid industries see opportunities and risks that come with the emergence of machine learning. For example, in one of the largest machine learning deals last year, Prudential Financial printed its first tech acquisition with the $2.4bn pickup of Assurance IQ to expand its online sales via software that customizes insurance products around data signals.

As the universe of buyers and the range of rationales for machine learning transactions continues to expand, this technology will likely continue to have an outsize impact on the tech M&A market. At least that’s the take from the 451 Research Tech Banking Outlook, where 91% of bankers surveyed anticipate that machine learning purchases will accelerate in 2020.

Figure 1:

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

Autodesk reinforces its construction biz with PlanGrid

by Scott Denne

Autodesk tops off a blockbuster year in construction software with the $875m acquisition of PlanGrid, a maker of project management applications. In acquiring the SaaS startup, Autodesk inks its largest deal and provides the latest indicator of the construction industry’s status as a maturing software market.

PlanGrid should augment the design and modeling focus of Autodesk’s construction and workflow software with the its more document-based approach. The acquirer also gets a new path to market. Where Autodesk typically sells subscriptions to IT departments of architectural firms, general contractors and the like, PlanGrid mainly sells its software on a by-project basis.

The construction market is propelling the topline at both firms – PlanGrid’s ARR expanded about 50% over the past year to roughly $65m, while Autodesk’s construction unit (its biggest) grew 28% in the most recent quarter, compared with 22% for the overall business. Autodesk’s peers and competitors have been equally eager to capture their share of that growth.

In 2018, purchases of construction-related technology vendors spiked to $4.2bn, more than the combined total deal value for 2017 and 2016. According to 451 Research’s M&A KnowledgeBase, three of the four largest transactions in that category were announced this year and all four in the past 12 months (Oracle disclosed its $1.2bn pickup of Aconex in the closing days of 2017.) Like Autodesk with PlanGrid, Trimble made its largest acquisition on record with the $1.2bn purchase of construction software provider Viewpoint in April.

Private equity’s upbeat healthcare prognosis

by Michael Hill

Financial sponsors are poised to set a new high in the number of healthcare IT deals, and have already invested a record amount of money. The increasing spend comes as most healthcare businesses overhaul their digital strategies, providing a temporary opening for private equity portfolio companies to land new healthcare clients.

According to 451 Research’s M&A KnowledgeBase, private equity firms have bought 77 healthcare IT companies, on pace to best 2017’s 82. In the process, they’ve spent $8.5bn in a category that has only stretched above $4bn in one other year. The striking surge in healthcare comes amid a steady cadence of increasing PE investments in vertically specific technologies, where PE acquisitions have grown every year since 2012.

Particularly in healthcare, much of the year’s surge comes from a single deal – Veritas Capital’s $4.3bn reach for Cotiviti in June. That deal valued the target, a patient-billing services provider, at 6.6x trailing revenue and a rich 20x trailing EBITDA. Those multiples are well above the broader healthcare tech market, where the median revenue multiple stands at 2.3x across all deals in the last 24 months. Still, Cotiviti isn’t alone in fetching a premium valuation from a PE firm. In April, Vista Equity Partners paid similar multiples in its purchase of healthcare BI specialist Allocate Software (M&A KnowledgeBase subscribers can see our estimate of that deal here.)

The dramatic rise in PE spend comes as healthcare companies reassess their digital investments. According to 451 Research’s Voice of the Enterprise Digital Pulse report earlier this month, nearly half (42%) of responding healthcare companies reported that they are planning and researching a digital transformation strategy. The abundance of healthcare customers in that pre-buying phase offers vendors a chance to develop new relationships that could pay out for years. However, as planning moves to execution, that opportunity will flatline.

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Oracle raises its construction cloud with $1.2bn deal 

Contact: Scott Denne

Oracle has stepped off the M&A sidelines with the $1.2bn acquisition of construction software company Aconex, ending its longest dry spell since 2004. In buying Aconex, Oracle doubles what it has spent building its construction and engineering software business, zeroing in on a vertical that’s ripe for cloud applications.

Aconex brings to Oracle collaboration software for construction projects that will become part of a unit that already includes project portfolio management and payment management software that it gained from its purchases of Primavera Software and Textura – a pair of deals that cost it just over $1bn, according to 451 Research’s M&A KnowledgeBase.


Today’s transaction values Aconex at 9.4x trailing revenue, nearly two turns higher than where Textura landed. The difference is likely attributable to Aconex’s broader portfolio, along with its accelerating international sales. At the time of its 2014 IPO, the target’s sales in its home market – Australia and New Zealand – made up half of its business. That has now shrunk to less than one-third of revenue amid several years of topline growth above 20%.

Oracle has built several vertical-specific businesses, although it has inked more acquisitions in support of its construction division than other verticals. Unlike energy, restaurants and retail, most of the work in construction happens outside an office, store or other fixed location, so the expansion of cloud and mobile technologies brings with it new applications, not just the replacement of old ones. The downside to the business is that much construction software is bought on a per-project basis, rather than an enterprise license. Aconex has pushed against that barrier, as its subscription revenue now accounts for 46% of sales, up from 34% three years ago.

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Motorola motors toward public-sector software and services

Contact: Scott Denne, Mark Fontecchio

Motorola continues to look to software and services to rescue its hardware business. The acquisition of Spillman Technologies is the latest in a string of such deals by the radio communications company, which has spent the past five years getting back to its legacy business in public safety through a spinoff and several divestitures. Those moves brought it relief from several price-sensitive commodity markets but left it in one with little growth – there aren’t a lot of new fire departments and police stations that have yet to invest in a radio system.

Acquiring Spillman Technologies, a developer of dispatch and records management software for police and fire agencies, gives Motorola a software offering to push into a sector where it’s entrenched. That’s similar to the rationale behind its two other recent software purchases: PublicEngines and Emergency CallWorks.

In addition to market maturity, weakness in foreign sales has also pushed down revenue for Motorola’s hardware products, yet its managed services business has grown. Its $1.2bn acquisition of Airwave Solutions in February drove 26% year-over-year growth in its services segment last quarter (organically, that unit grew in the low-single digits). While services still makes up less than half of its roughly $6bn topline, the combination of Motorola’s hardware and existing network management services along with Airwave’s network management business provides it a channel through which it can push new offerings and grab share in a market it already dominates. Motorola’s public-safety business is 10 times the size of Harris, its nearest competitor.

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Citrix stays tactical

Contact: Scott Denne

Citrix’s first acquisition of 2015 sets it up for another year of tactical M&A. Though up from 2013, we tracked just $65m in dealmaking by Citrix in 2014. Sanbolic, a 15-year-old company that brings software-defined storage into Citrix’s VDI stack, appears to be another tuck-in.

In 2012, Citrix announced $833m in acquisitions. That was its highest annual total on record, though it was hardly an outlier. Over the previous decade Citrix had been willing to invest in larger deals. Prior to that record-breaking year it had only dipped below $100m annually on three occasions – 2009, 2008 and 2004.

Citrix was growing revenue at a double-digit pace in 2012. Now that its core desktop business is maturing, growth has come down to mid-single digits in the most recent quarter, with license revenue declining at the same rate. Last year, management was open about the fact that M&A would likely be limited to tuck-ins, rather than strategic deals such as Zenprise and Bytemobile that got Citrix into ancillary markets. If Sanbolic is any indication, the company doesn’t plan to change that just yet.

Citrix M&A by year

Year Deals Deal Value
2014 4 $65m
2013 2 $11m
2012 6 $833m
2011 7 $354m
2010 4 $127m
2009 0 $0
2008 3 $27m

Source: The 451 M&A KnowledgeBase

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High ground for Hyland? Rumors swirl about billion-dollar exit

Contact: Brenon Daly

A half-dozen years after acquiring a majority stake in Hyland Software, Thoma Bravo is rumored to be looking at selling its chunk of the enterprise content management (ECM) vendor. And the deal – if there is one – won’t be cheap: the asking price for Hyland is thought to be about $1.2bn.

According to our understanding, that would value Hyland at more than 4x trailing sales and about 15x EBITDA. Those multiples are slightly richer than the current trading valuation of ECM giant Open Text. Although we should note that Open Text shares are currently trading at an all-time high, up some 50% since the beginning of the year.

The bull market for shares of rival Open Text has prompted speculation that Hyland, which is being advised by Goldman Sachs, is dual-tracking. After all, Hyland has already been down at least some of the road to the public market. The 22-year-old maker of the OnBase product put in its IPO paperwork back in May 2004, but pulled it a half-year later. (Currently, Hyland has roughly five times the revenue and number of employees it did when it put in its prospectus almost a decade ago.)

While Hyland could certainly opt for a trade-sale, an IPO might just prove more lucrative in the long run. Some software investors might pass on putting money into a license-based company, but Hyland certainly has characteristics that would nonetheless find some buyers on Wall Street. The pure-play ECM company puts up about 20% growth, primarily by focusing on specific vertical markets, most notably healthcare, higher education and financial services.

That position tends to be more defensible than broad, horizontal ECM offerings, which have come under threat from old rivals (SharePoint) as well as startups (Box). (My colleague Alan Pelz-Sharpe has noted that Hyland most often bumps into vendors that were consolidated during the previous round of ECM match-making, such as FileNet and Documentum.)

Cleveland, Ohio-based Hyland also benefits from strong customer support, and it has a reputation as a solid company with ‘Midwestern’ values, and a culture of an ‘honest day’s wage for an honest day’s work.’) The company boasts a 98% maintenance renewal rate among its nearly 12,000 customers.

Hyland’s approach stands out starkly to the approach taken by the much larger – and more mature – Open Text, which has dropped more than $2bn on a dozen deals over the past three years. It gobbled up a number of ECM vendors before expanding into adjacent markets such as business process management and data integration. Still, Open Text’s consolidation strategy hasn’t hurt it on Wall Street, which values the company at $5bn.

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Zillow takes a big bite of the Big Apple, acquires StreetEasy

Contact: Brenon Daly

Looking to expand its offering in one of the most competitive real estate markets in the US, Zillow pays $50m in cash for New York City-focused StreetEasy. The deal, which should close this month or next, will be part of the company’s Marketplace portfolio, which generates about two-thirds of total revenue at Zillow. (The remaining revenue comes from display advertising and mortgage offerings, two businesses where Zillow has also used tuck-in acquisitions.)

Founded in 2006, StreetEasy provides both rental and for-sale listings in the New York City area. The company draws nearly 1.2 million unique visitors each month. (For comparison, Zillow attracted more than 61 million users in July, up from 37 million in July 2012.) StreetEasy is the largest of Zillow’s seven acquisitions, which have all come in the past two and a half years, according to The 451 M&A KnowledgeBase.

Fitting for a company that is growing at about 60%, Zillow recently told Wall Street that it will be increasingly reinvesting in its business. In the second quarter, Zillow lowered its EBITDA projection for the rest of the year, while bumping up its revenue forecast. (It now sees about $185m in sales for 2013, compared to a market capitalization of $3bn.)

Although Zillow holds roughly $170m in cash and short-term investments, the company also announced plans to sell 2.5 million new Class A shares. (Additionally, private equity firm Technology Crossover Ventures and company insiders have registered to sell another 2.5 million shares.) At current market prices, the secondary would add some $215m to Zillow’s treasury. Zillow priced its IPO at $20 per share in mid-2011, sold additional shares last September at about $40 each, and now trades at more than $80 each.

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The value of information

Contact: Ben Kolada

In its largest-ever acquisition, IHS is paying $1.4bn for Southfield, Michigan-based automotive data and information provider R.L. Polk & Co. Consumers may know the company better as the provider of the CARFAX vehicle information product. The deal is a significant move to grow a relatively young IHS division.

While IHS Automotive was launched just two years ago, Polk was founded in 1870, nearly four decades before Henry Ford’s first Model T hit the road. The company today provides online market research and a database of VINs for the automobile industry. Its Polk division accounts for about 40% of revenue. The remainder of revenue comes from its CARFAX division, which provides an online database of vehicle history information for used car dealers and consumers.

IHS claims growth potential was the rationale for this acquisition. Although Polk’s total annual revenue has only grown in the mid- to single-digit range, its CARFAX product has recorded ‘solid’ double-digit growth annually. Meanwhile, IHS says CARFAX is only 20-30% penetrated in the US. IHS also sees particular upside in international markets, where Polk currently generates just 12% of its sales.

IHS is paying $1.4bn (90% in cash and 10% in stock) for Polk, valuing the target at 3.5x its annual revenue and approximately 14x its adjusted EBITDA. (IHS disclosed that Polk generated adjusted EBITDA in the mid-20% range.) Evercore Partners advised Polk, while M. Klein and Company advised IHS.

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In ICE-NYSE deal, a shark swallows a whale

by Brenon Daly

For all of the talk about the disruptive forces that have reshaped the tech landscape through M&A, the changes – at least at the high end of the market – have been largely incremental. Just take a look at deal flow so far this year. We’ve seen a bit of big-ticket telco consolidation as well as a pair of multibillion-dollar take-privates, the largest of which would see the current CEO play a leading role in not only the transaction itself but also the operation of the company after the close. It’s hardly dramatic stuff.

Certainly, we would argue that not one of those deals comes anywhere close to the upheaval embodied by the IntercontinentalExchange’s (ICE) planned acquisition of NYSE Euronext. The deal, which was backed by NYSE shareholders today, may well be the ultimate example of a startup gobbling up an established vendor.

For starters, the roles in the transaction are flipped from what we would expect in a typical tech deal. (Indeed, the NYSE has been a busy buyer in recent years, expanding into electronic trading platforms and consolidating old-line exchanges both in the US and abroad via M&A.) Consider the fact that ICE is barely more than a decade old while the fabled NYSE traces its roots back to 1792. And while ICE is the buyer, it is less than half the size of the NYSE, or the ‘Big Board’ as it is known on Wall Street.

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