Inorganic Growth

Although 2018 is closing in on the record year of 2015 for overall tech M&A spending, it’s taken a much different route to arrive at the same heights. Both years total more than a half-trillion dollars in announced deal value, which puts them above all other years since the internet bubble burst in 2000.

And while it’s true that both years are characterized by big spending, only 2015 stands as the year of the big spender. Two of the three largest tech transactions announced this century are 2015 vintage. Taken together, 2015’s two blockbusters (Dell-EMC, Charter Communications-Time Warner Cable) contributed a staggering $120bn, or 21%, of that year’s total announced deal value of $575bn, according to 451 Research’s M&A KnowledgeBase.

In contrast, this year’s largest print only slots in seventh place on the list of biggest acquisitions since 2000. When that deal (Comcast-Sky) is combined with the second-largest transaction (IBM-Red Hat), spending totals just $72bn, fully 40% lower than the total value of the 2015 pair. Or look at it this way: Only one out of every eight dollars of this year’s spending has come from the two massive deals, compared with one out of every five dollars in 2015.

What 2018 has lacked in heights, however, it has made up for in volume. Lots and lots (and lots) of single-digit-billion dollar deals all piled up together. Already this year, the M&A KnowledgeBase lists 96 tech transactions valued at $1-$10bn, up from 75 similarly sized deals in 2015.

Granted, most of this year’s steady flow of billion-dollar prints came from many of the names – both strategic and financial – that we would expect to be putting up big deals. But probably more significant for 2019 and beyond is the fact that this year saw some new entrants to the ‘billion-dollar club.’

Workday and Twilio had never even announced a $100m+ transaction before inking a $1.6bn and $1.7bn acquisition, respectively, in 2018. BlackBerry more than tripled the size of its largest purchase, paying $1.4bn for endpoint security startup Cylance in November. With new acquirers flashing big bankrolls and showing off confidence, the buying pool at the top end of the tech M&A market just got a little deeper.

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

There’s no faster-growing segment of the relatively mature enterprise software market right now than machine learning (ML). Join 451 Research on Wednesday morning for a special webinar on the collection of technologies that help companies get smarter about their operations, customers and partners. The webinar will cover not only how ML works, but also what it’s worth.

Whether it’s using ML to vault ahead of rivals or to explore bountiful new markets, ML can truly alter the fortunes of a business. And yet, even with the near-universal relevance of ML (who doesn’t want smarter software?), the technology is only starting to find its way into companies.

In a recent survey of 550 IT decision-makers, Nick Patience, 451 Research’s head of software research, found that just 17% said they have deployed ML technology. Further, most of those use cases were rather narrowly defined.

At the same time, however, our survey of tech buyers and users showed they are planning to be much more expansive and aggressive with ML. Looking ahead, roughly half of the respondents expect to have ML technology up and running by mid-2019, up from just one in six right now. The soaring forecast for ML implementations is unprecedented in the relatively mature software industry.

That same sort of pattern is playing out in acquisitions in this market, as suppliers look to pick up ML technology at an ever-increasing pace. Already this year, buyers have announced more ML deals than any year in history, according to 451 Research’s M&A KnowledgeBase. At the current rate, the M&A KnowledgeBase will record roughly 140 ML-related prints for the full-year 2018, twice the number from just two years ago and more than three times the number in 2015.

To get smart on machine learning and get even smarter on doing ML deals, 451 Research will be hosting a special hour-long webinar on Wednesday, December 12 at 11:00 ET. We will be looking at both the technological underpinnings of this rapidly emerging technology trend, as well as how suppliers are using M&A to respond to this unprecedented demand. Join us later this week to learn more about the most-transformative enterprise technology trend in the market right now.

Amid the growing perception that technology is disrupting a wide range of industries, it’s worth noting that the software business itself is one of those industries. And perhaps no company is responding to that shift as dramatically as IBM. With a record acquisition recently announced, Big Blue has now made a record divestiture, shedding several software assets in a $1.8bn sale to HCL Technologies.

Throughout its history, IBM has frequently turned to a combination of acquisitions and divestitures to reorient its business. Those earlier sales, however, were almost entirely in services and hardware, while this deal marks its largest software divestment to date. In today’s transaction, Big Blue is selling software units that specialize in security (Appscan and BigFix), marketing (Unica, Commerce and Portal) and collaboration (Domino, Notes and Connections). All received scant attention from IBM in recent years and none reside in the areas that the company considers to be its strategic priorities, such as artificial intelligence (AI), blockchain and cloud computing.

It was that latter trend that sparked the recent $33.4bn purchase of Red Hat, setting an all-time record for the largest software deal. Having lost to Amazon and Microsoft in the first phase of the shift toward cloud computing, IBM sees another opportunity as the market shifts to hybrid- and multi-cloud environments. Today’s divestitures did nothing to aid the company in pursuit of that market.

Others have taken a similar tack, sensing that changes are coming to their sectors. In 451 Research’s VoTE: Digital Pulse survey, 47% of respondents among B2B software and IT tech vendors told us that digital technology would be highly disruptive to their organization’s market. Nuance Communications, for example, recently shed its document imaging business in a $400m sale as it focuses its resources on a raft of new challengers in the AI and voice recognition space. According to 451 Research’s M&A KnowledgeBase, public companies around the globe have divested a collective $6.5bn in software assets so far this year, the second-highest annual total in the current decade.

Talk about the wisdom of the crowds. In a pair of 451 Research surveys last December, the tech M&A community accurately forecast this year’s stunning resurgence in dealmaking. In separate surveys last year, both corporate development executives and senior investment bankers predicted that 2018 would be a banner year for tech M&A, reversing two consecutive annual declines.

Strategic buyers gave their strongest outlook to any survey since the recession, while an above-average number of advisers indicated last year that they expected an uptick in acquisition activity this year. Tellingly, the bullishness from both groups has come through in actual deal flow, with this year on track for the highest level of annual spending since the dot-com collapse. (451 Research subscribers can see our full report on last year’s survey of corporate acquirers and bankers.)

Having presciently predicted activity in 2018, what do the main buyers in the tech M&A market and their advisers see coming in 2019?

To get the forecast, 451 Research is currently surveying both groups. If you work in a M&A capacity at a company or are a seasoned investment banker (VP and above), we would like to hear from you. The surveys are quick and painless, taking just 5-10 minutes. There’s even a fun question or two in both of the surveys. (If you haven’t received an emailed link for the survey, please contact me.)

In return, we’ll send all respondents an advanced look at the key findings of the survey, so they’ll know exactly where the market is heading next year. Again, to take part, simply email me and I’ll get you the correct survey. Thank you for offering your take on tech M&A in 2019.

Not everyone is loving the record pace of tech M&A this year. In a novel survey, 451 Research’s Voice of the Enterprise (VotE) recently asked more than 1,000 IT users for their take on the seemingly ceaseless stream of acquisitions that has unalterably reshaped the tech landscape. Their verdict: they are hesitant about doing business with those companies after the deal closes.

Specifically, four out of 10 respondents to our VotE: Digital Pulse, Vendor Evaluations survey said they had concerns that one of their key vendors would get snapped up within the next year. That’s a legitimate concern when we consider that this year, we’ve already seen over 100 major tech vendors acquired for more than $1bn, according to 451 Research’s M&A KnowledgeBase. Further, survey respondents told us that most transactions break down because of product, not pricing.

Disruptions and distractions caused by the acquisition were – by far – the main reason for the dour assessment given to deals. Roughly one-third of respondents who had concerns about M&A cited those two reasons, which was twice as high as any of the other concerns. In contrast, just one out of 10 (11%) cited ‘price increase’ as a reason for the concern. (Note to all the would-be trust-busters in Washington DC: you can relax your scrutiny of tech transactions just a little bit.)

The VotE survey is important because it draws responses from IT users, or as we like to call them, ‘customers.’ In many cases, the VotE respondents are the very people who have supplied the growth that made the acquired company attractive to the buyer in the first place.

Further, it is these customers – not the acquirer or its phalanx of paid supporters of the deal – that will ultimately determine the returns on the thousands of tech transactions done each year. (Our VotE survey captures their ‘vote’ on M&A, if you will.) And yet, a significant number of them are saying that, post-close, it may not be business as usual with their suppliers. That’s a decision that could potentially swing hundreds of millions of dollars in IT spending to different vendors.

Of course, a skeptical take doesn’t necessarily doom a deal. But the bearish outlook from customers does stack the odds a bit higher against buyers getting the hoped-for returns from the acquisitions they are inking. The sentiment in our survey stops short of saying ‘buyer beware’ – instead, it’s more ‘buyer be aware.’