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.
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