Low and slow is the tempo

Mark Fontecchio

by Brenon Daly

With most tech vendors having completed the song and dance of financial reports for last year, it’s becoming inescapably clear that a lot more changed than just the calendar when 2018 rolled into 2019. Business boomed last year, but it’s more of a whimper so far this year. That shift is having an impact on the tech M&A market, where acquirers are switching from playing offense to shoring up their defense.

Through the first three quarters of 2018, corporate confidence soared as cash flowed. Double-digit revenue increases, coupled with 20%+ expansion on the bottom line, pushed broad-market equity prices to record levels last summer. In contrast, looking ahead to this summer, earnings at most companies will likely flatline or even shrink slightly. Being stuck in place or falling behind doesn’t inspire businesses to place big, bold bets.

Overall, 451 Research’s M&A KnowledgeBase shows spending on tech deals around the globe has ticked down by more than 10% so far this year compared with the same time last year. But the change in sentiment – and the resulting strategy – comes through even more clearly when we look at the headline prints for 2018 and 2019.

Last year, when seemingly no deal was off the table, the largest tech transaction saw IBM roll the dice on Red Hat. If not a bet-the-company deal, the $33.4bn purchase is at least a make-or-break transaction for the current leadership and its (expensively acquired) reorientation of its cloud business, which it is banking on to spur growth after a protracted slide in revenue at Big Blue.

So far this year, however, acquisition ambitions are a little more muted. This year’s biggest deal, which is one-third smaller than the 2018 blockbuster, is a tried-and-true bit of industry consolidation: Fiserv’s $22bn pickup of First Data. Underscoring 2019’s conservative approach to dealmaking, we would note that Fiserv paid 4x trailing sales in its transaction, while IBM paid 10x trailing sales.

Of course, as Q4 2018 showed, markets can change in an instant. Companies that are riding high one day can drop hard and fast. And while no one is really talking about a recession in 2019, no one is talking about a continuation of last year’s record expansion, either. As business slows, the highly correlated M&A market is likely to follow suit.

Customer feedback becomes a monkey business

Mark Fontecchio

by Scott Denne

As it pursues an audacious revenue goal, SurveyMonkey has inked its first acquisition in almost three years, spending $80m for Usabilla, a developer of voice-of-the-customer (VoC) software. Although SurveyMonkey debuted on Wall Street last year sporting 6% annual growth, the company plans to triple its topline in the next three years. It’s targeting a promising market, but faces an expanding roster of larger competitors.

Amsterdam-based Usabilla enables organizations to analyze customer feedback captured on their websites, apps and emails via its embedded scripts. The offering expands SurveyMonkey’s survey-based VoC software – an expansion it needs as it aims to land enterprise-wide licenses. SurveyMonkey’s revenue from such licenses rose 80% last year and made up 12% of its overall sales.

That initial success in selling enterprise licenses prompted the company to forecast a tripling of revenue in the next three years, which would bring it to about $750m annually. Last year, SurveyMonkey grew 16%. By marching into the enterprise, it will need to fend off competitors it didn’t encounter in its first two decades as a survey platform for teams and individuals.

Most notably, SAP nabbed SurveyMonkey’s main competitor, Qualtrics, in an $8bn deal last year. At the same time, call-center software vendors NICE and Verint Systems have expanded their VoC offerings through acquisition. According to 451 Research’s M&A KnowledgeBase, the latter bought ForeSee Results in December, a transaction that built off its 2016 purchase of OpinionLab. The former picked up net-promoter-score provider Satmetrix in 2017.

Those deals follow software budgets. In 451 Research’s VoCUL: Corporate Software report, 40% of software buyers told us that ‘customer feedback/voice-of-the-customer’ was among the reasons for using customer experience software, ranking higher than the more established category of ‘marketing automation.’

Lyft gets IPO in gear

Mark Fontecchio

by Scott Denne

Heading toward an IPO, Lyft remains miles from profitability, and it may not be able to count on the burst of growth that drove its initial rise to get it there. In its first act, the ride-hailing service, along with its rival, Uber, disrupted an existing market (taxis). In its second act, it’s looking to build a new market by turning its network to bikes and scooters. Despite the long road to profitability, Lyft, which recently filed its S-1, could still see a warm welcome on the street.

The company finished 2018 with nearly $2.2bn in annual revenue, slightly more than double its year-earlier total and more than 5x 2016’s topline. Such growth, of course, came at a cost – it posted a $977m loss last year. Most of Lyft’s operational costs rose in tandem with revenue through 2018. While it became more disciplined with its sales and marketing spending – just a bit more than one-third of its revenue went toward sales and marketing expenses, down from more than half in 2017 – much of that goes toward incentives and refunds for drivers and riders. With Lyft still battling with Uber for both groups, it’s difficult to see that cost shrinking by much more.

Growth in its core business, while still immense, doesn’t appear to have the kind of momentum that could overcome its outstanding losses. Lyft’s expanding number of riders has decelerated. In the fourth quarter, the number of active riders using Lyft rose just 7% from the third quarter, marking the first time that sequential quarterly growth in riders dipped into the single digits. A portion of those riders (though likely a modest portion) rented bikes and scooters – a business that generated immaterial revenue for Lyft today but not immaterial costs, as the company owns those vehicles. It spent $68m on its burgeoning scooter fleet last year and another $251m to acquire bike-sharing vendor Motivate, according to 451 Research’s M&A KnowledgeBase.

Don’t expect those caution flags to keep Lyft from garnering a higher valuation in its IPO. The company last raised money over the summer with a $600m funding round that came with a $15.1bn post-money valuation. Just to match that would imply a valuation that’s 7.2x trailing revenue, a mark that should be easy to hit given Wall Street’s embrace of Silicon Valley’s most-lauded businesses. Snap, for example, still commands a 10x multiple even after losing two-thirds of its value since its debut.

Moreover, Lyft could be coming public in a welcoming environment. According to 451 Research’s VoCUL, 22% of survey respondents said they were more confident in the stock market in February than they were 90 days ago, marking the highest such reading in more than a year.

Working through the M&A backlog

Mark Fontecchio

by Brenon Daly

After surging to start 2019, tech acquirers appear to have worked through most of the backlog of deals that built up during the volatility-plagued end of last year. According to 451 Research’s M&A KnowledgeBase, January saw spending on tech and telecom transactions around the globe jump to a three-month high.

In contrast, spending in February dropped by about 25% compared with the opening month of the year. The M&A KnowledgeBase tallied $32bn worth of deals in February, essentially matching the same month last year. If it hadn’t been for financial buyers, this month’s decline would have been much sharper.

Private equity (PE) acquirers accounted for three of this month’s four largest deals, and a whopping $23bn, or more than 70% of total M&A spending in February. That’s roughly twice their typical share of spending in the tech M&A market. Corporate buyers, which had been averaging six transactions valued at more than $1bn each month last year, put up just three billion-dollar prints in February.

Half of the PE spending came in a single landmark software deal: the $11bn take-private of Ultimate Software. In the largest-ever SaaS acquisition, Hellman & Friedman led a group that valued the human resources software vendor at 10 times trailing sales. Similarly, in this month’s fourth-largest transaction, buyout shop Thoma Bravo paid $3.7bn, or 7x trailing sales, for mortgage lending SaaS provider Ellie Mae.

As to what’s coming for the rest of the year, check out 451 Research’s 2019 Tech M&A Outlook. The 125-page report highlights the trends that we expect to shape deal flow in six key enterprise IT sectors, including application software, information security, IoT and cloud. Additionally, our comprehensive report names over 250 potential target candidates and dozens of specific acquirer-target pairings, based on the research of more than 40 of our analysts.

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

Webinar: Tech M&A Outlook 2019

Mark Fontecchio

by Brenon Daly

For a look ahead at what’s coming in the tech M&A market in 2019, join 451 Research on Tuesday, February 12 at 9:00am PST for a special webinar on what we expect to drive deals in the year ahead. (To register for the free, one-hour webinar, simply click here). Specifically, we’ll be looking at how busy tech’s big-name buyers are expected to be in 2019, along with the current trends that are shaping the VC and PE markets.

During the webinar, we’ll draw on our just-published Tech M&A Outlook 2019. The 125-page report features not only the overall trends that are expected to shape dealmaking in a half-dozen key enterprise IT markets – including software, security and the Internet of Things – but also which specific companies are likely to figure into those transactions. The Tech M&A Outlook is available to all subscribers of 451 Research’s M&A KnowledgeBase: next Tuesday’s webinar is open to everyone.

Hellman & Friedman’s Ultimate HR deal

Mark Fontecchio

by Scott Denne

Hellman & Friedman’s $11bn acquisition of Ultimate Software provides the ultimate case study in rising valuations for human resources (HR) software vendors. The deal marks the largest HR software purchase and fixes an 11x trailing revenue multiple on the target, a multiple that’s increasingly becoming common for such companies as private equity (PE) money floods that corner of the software market.

According to 451 Research’s M&A KnowledgeBase, each of the three previous years have witnessed more than double the typical number of HR software transactions sporting a multiple at or above 5x TTM revenue. Strategic acquirers have been more willing to pay up – Ultimate itself paid 8.8x last summer in its $300m pickup of PeopleDoc, its sixth and largest acquisition.

But most of the recent, strong valuations have come from PE shops. Today’s deal provides one data point, as do Thoma Bravo’s purchase of PEC Safety and Marlin Equity Partners’ reach for Virgin Pulse. HR software has long been a PE favorite – but it’s also attracting the interest of buyout firms that are less experienced in software as many of these businesses have a strong services component. Last year, 49% of such targets were bought by PE shops, compared with just 25% at the start of the decade. (For context, our data shows that roughly one-third of all software providers were acquired by PE firms last year.)

Hellman & Friedman, which is leading the syndicate that’s buying Ultimate Software, is neither new to software or HR. It acquired Kronos, a maker of HR software mainly used by organizations with hourly employees, back in 2007, paying 3x. That’s not to say prevailing prices have tripled or quadrupled in the time between those two transactions by the tech-focused PE shop. For one, Kronos began its transition to SaaS only a few years ago, whereas Ultimate’s revenue is overwhelmingly SaaS.

The market has changed in that time as well. When Hellman & Friedman bought Kronos, HR software – like many categories of business applications – functioned as a record-keeping and workflow tool. While that’s still true today, we find that more companies are turning to HR software and the data it contains for strategic insights. According to 451 Research’s Voice of the Enterprise: Data & Analytics, 28% of businesses run analytics on their employee behavior data, roughly the same number that analyze IT infrastructure data.

451 Research’s Tech M&A Summit

Mark Fontecchio

by Brenon Daly

451 Research is looking forward to hosting many of you at tonight’s sold-out Tech M&A Summit in downtown San Francisco. It’s shaping up to be a terrific event, with a lot to cover: the near-record spending on acquisitions in 2018 that – at least early on – appears to be carrying over into this year.

At tonight’s Tech M&A Summit, we’ll look at some of the M&A drivers for the broad market, as well as focus more closely on the expected activity in a couple of key markets, including machine learning, cloud and information security. For that, we’ll be drawing on our just-published Tech M&A Outlook 2019, a comprehensive forecast of what our analysts see happening in the markets that they cover. In the 125-page report, our analysts not only identify trends that are expected to shape M&A activity but also note how the companies they cover might figure into that.

Finally, we’ll have some views from some of the tech industry’s most-active dealmakers and advisers during this evening’s panel. Joining on the ‘practitioner’s hour’ are representatives from Morrison & Foerster, KeyBanc Capital Markets, VMware and Software AG. (Collectively, our panelists’ firms put up 50 announced transactions in 2018, according to 451 Research’s M&A KnowledgeBase.) Tonight’s Tech M&A Summit promises to be a lively and informative event, with maybe even a little fun sprinkled in as we talk shop. We look forward to seeing you there. #451TechMASummit

Financial firms clear a path for emerging tech

Mark Fontecchio

by Michael Hill

As they look toward IT to solve business problems, financial firms and the software developers that cater to them are expanding their acquisitions of emerging technology companies. While overall fintech deal volume subsided slightly in 2018, the number of blockchain and machine learning transactions by those buyers rose sharply.

According to 451 Research’s M&A KnowledgeBase, the number of fintech blockchain deals increased sixfold in 2018, to 19 transactions. Those same acquirers also expanded their appetite for machine learning, printing eight purchases of machine learning targets, from just three a year earlier. The high multiples – including two deals that went north of 20x trailing revenue – and volume of tuck-ins and ‘acq-hires’ attest to the early stage of those technologies. Still, the rationale behind such transactions shows that these technologies, at least in financial services, are entering the mainstream.

Take Ernst & Young, which in July purchased the assets of cryptocurrency accounting software developer Elevated Consciousness. That deal suggests that at least one of the big four accounting firms views cryptocurrencies as an asset class that’s viable enough that it needs to help its clients assess the risk and tax implications of such investments. Elsewhere, TD Bank’s January reach for predictive analytics specialist Layer 6 was driven by its recognition of machine learning’s potential to improve customer experience.

As our surveys demonstrate, financial services rely on IT to meet business goals more so than other industries. In 451 Research’s recent Voice of the Enterprise: Digital Pulse, 56% of financial services executives have business-focused IT goals, compared with 48% for the entire study, while blockchain and machine learning were among the top four technologies anticipated to have the most transformational impact on business operations by 2020.

 

New deals from new offerings

Mark Fontecchio

by Scott Denne

Technology vendors coming off recent IPOs were notable contributors to last year’s booming M&A market. Now Dropbox, with its IPO less than a year behind it, has inked its latest and largest deal, suggesting that such companies could play an important role in this year’s market, although the slowdown in new offerings makes that look less likely.

With the $230m acquisition of HelloSign, Dropbox has become the latest company from the 2018 vintage of business technology IPOs to ramp up its acquisitions. According to 451 Research’s M&A KnowledgeBase, Dropbox spent more on this purchase than any in its history. And while Dropbox was once a prolific acquirer of small startups, it hadn’t printed a deal since November 2017.

Likewise, DocuSign, which hadn’t ever spent more than $40m on a single transaction, paid $220m for SpringCM in a July 2018 deal that followed the buyer’s public stock debut by three months, our data shows. Another member of the 2018 class, Zscaler, inked its first-ever acquisition following its IPO in March. And firms from slightly older vintages made more impactful moves. Cloudera (2017) and Twilio (2016) printed their first $1bn-plus transactions last year. Cision, which went public via a reverse merger in 2017, has spent $350m across two deals since the start of this year.

As my colleague Brenon Daly noted in the introduction to 451 Research’s Tech M&A Outlook 2019, last year saw a record 15 IPOs from business technology vendors, although the pace slowed down in the back half of the year, when just five of those entered the public markets. A late-year decline in stock prices helped put on the brakes and a government shutdown effectively closed the market for new offerings in the opening month of 2019.

A possible recurring shutdown in three weeks could keep the SEC from processing filings from would-be public companies. But even if the US government remains functioning, the public markets may not be as hospitable for new offerings. A November survey from 451 Research’s VoCUL shows that 47% of consumers are less confident in the stock market than they were 90 days earlier. That’s up from 30% when asked the same question a year earlier.

Talking AI

Mark Fontecchio

by Scott Denne

The number of conversational artificial intelligence (AI) deals surged last year and looks bound for a boost in 2019. Buyers are drawn to the emerging opportunity to add voice and text capabilities into both their products and customer service channels as multiple 451 Research surveys show an increasing amount of value placed on such offerings.

By our reckoning, the number of acquisitions driven by the target’s conversational AI or chatbot technology increased by four times over in 2018. According to 451 Research’s M&A KnowledgeBase, last year saw 28 such deals, up from seven a year earlier and just two in 2016. We tracked two such transactions this week alone – Qlik’s reach for Crunch Data to enable conversational queries in its business intelligence software and Yodlee’s purchase of Abe AI to enable banks to interface with Amazon’s Alexa and other conversational ecosystems.

According to 451 Research’s VoCUL: Corporate Software survey, 17% of software buyers said that chatbots and virtual assistants were among the technologies that could improve customer experiences, up from 15% in the same survey six months earlier. Correspondingly, software and service providers are increasing their investments in those technologies. In our Voice of the Service Provider survey, 48% said they are increasing their budgets for AI/machine learning (ML), with much of that going toward virtual assistants and other customer service functions.

All of that will continue to flow into dealmaking. In 451 Research’s recent Tech Banking Outlook Survey, respondents predicted that the broader category of AI and ML would be the top driver of M&A in 2019. Yet, despite the exploding volume of conversational AI deals, most are modest-sized acquisitions and likely to stay small as conversational AI most often becomes a product feature, rather than a stand-alone offering.