Blocking a buy

Stephanie Turner

by Brenon Daly

It’s never easy to make sense of Washington DC. And yet, the decisions made in the nation’s capital can dramatically shape the flow of business, often determining what can get bought and sold, along with who can do the buying and selling. That’s true for both products as well as the companies behind the products.

Consider the recent decision by the Federal Trade Commission (FTC) to block Edgewell’s proposed $1.3bn cash-and-stock purchase of online razor vendor Harry’s. The pairing of the old-line shaving giant, which sells its Schick and Edge offerings through traditional retail outlets, and Harry’s direct-to-consumer (D2C) product didn’t appear problematic when it was announced last May. After all, rival consumer package goods titan Unilever had closed a similar acquisition of Dollar Shave Club in mid-2016 in short order and without any hoopla.

The FTC’s move has huge implications for both this particular transaction and far beyond it. For Edgewell, the company has said it now expects to face litigation by Harry’s due to the broken deal, likely further increasing the cost of the once-planned, now-punted expansion. Further, as noted in S&P’s Capital IQ transcript of Edgewell’s most recent quarterly earnings report, the company is licking its wounds from the FTC decision, adding that it was ‘out of the market for big, transformational (acquisitions).’

The unanimous FTC decision surprised most M&A market observers. Buying a D2C startup as a way to expand a company’s distribution routes or decrease reliance on troubled traditional retail outlets has been a time-tested acquisition strategy. 451 Research‘s M&A KnowledgeBase lists more than 300 transactions that feature the term ‘direct to consumer,’ including deals by such household names as luggage maker Samsonite, cosmetic supplier Cody’s, mattress maker Serta and retailing titan Walmart, among others.

Further, most dealmakers told us they didn’t expect Washington DC to have much of an impact on their work in 2020. In the 451 Research Corporate Development Outlook last December, just one in five survey respondents indicated that they thought ‘antitrust concerns’ or broader regulatory review would lower the number of tech deals in the coming year. The overwhelming majority (79%) thought transactions such as Edgewell-Harry’s would move along as they pretty much always had.

Figure 1: Tech M&A activity
Source: 451 Research’s Tech Corporate Development Outlook

A coming-out party in app marketing

Stephanie Turner

by Scott Denne, Keith Dawson

Although mobile apps have become an inveterate part of people’s lives, the software used to promote those apps hasn’t found much of a home within customer experience (CX) software stacks. Excepting those few companies whose apps are their business, most customers of large marketing clouds haven’t invested in app marketing. But there are signs that’s changing and with it, a larger universe of buyers could begin hunting for mobile app marketing targets.

Upland Software’s recent acquisition of Localytics marks one of the first instances where a broad CX software vendor has reached for a mobile app marketing provider. Localytics built its business providing app analytics and in-app content personalization, landing customers in traditional industries such as retail, telecom and media. The company generates $20m in revenue and was valued at 3.4x that amount in its sale – above the typical multiple for personalization specialists, a group of sellers that’s had trouble fetching above 3x multiples, as we noted in our recent coverage of Salesforce‘s purchase of Evergage.

Still, it took Localytics about a decade to achieve the size it did, as most businesses in traditional markets have yet to invest heavily in mobile app marketing tools. The idea that all of the CX components (sales tech, martech, servicetech) are being pulled by consumers toward mobility has been conventional wisdom for several years. Companies, though, are just beginning to implement the kinds of planning and technology deployment that will cement mobility at the center of their strategies. The acquisition of Localytics may be a sign that the broader CX vendors view mobility as a potential differentiator and short-term revenue opportunity.

According to 451 Research‘s M&A KnowledgeBase, almost all previous purchases of mobile app marketing firms have been done by buyers from the same category. That’s not to say others haven’t grown a substantial business in app marketing. Companies like Applovin, IronSource and Appsflyer all generate annual net revenue in the nine figures, but have done so with a focus on mobile gaming – a trend we discussed in a recent report.

Although industries such as media, retail and telecom haven’t spent heavily on mobile app marketing, our surveys suggest those investments are ramping up. According to 451 Research‘s Voice of the Enterprise: Customer Experience & Commerce, 42% of all businesses plan to interact with customers via a branded app in the next two years (48% say they already do). In that same survey, more than one in three (35%) said mobile marketing software would be among their organization’s highest marketing technology investments in the next 12 months. As customers invest, we anticipate more marketing software vendors to follow Upland in acquiring mobile app marketing capabilities.

BMO Capital Markets advised Localytics on its sale. Cowen & Co. advised the buyer.

Figure 1:

Source: 451 Research’s Voice of the Enterprise: Customer Experience & Commerce

Infosec inflation: Slowing sales, rising prices

Stephanie Turner

by Brenon Daly

Even in a slump, it pays to be an information security (infosec) vendor. The latest company to realize the advantage of doing business in this red-hot market is Forescout Technologies, which is heading private in a $1.9bn deal with a pair of buyout shops. The network access control provider is set to exit Wall Street with a rather rich sendoff, given the mediocre numbers it has put up recently.

Despite a few brief slips, Forescout held itself together for most of last year. Through the first three quarters of 2019, shares soared some 45%. But all of those gains were wiped out overnight in early October as the company whiffed on its sales and losses widened.

According to S&P Capital IQ, revenue growth in 2019 was less than half the 30%+ rate it had been in recent years. Further, the tepid performance is expected to continue, with Capital IQ reporting that the consensus forecast calls for just 12% sales growth at Forescout in 2020.

Yet the vendor’s slowdown barely shows up in the valuation being paid by Advent International and Crosspoint Capital Partners. By our math, the buyout duo is paying 5.5x trailing sales for Forescout. That’s significantly richer than the average valuation of 3.8x trailing sales for all take-privates recorded over the past year in 451 Research‘s M&A KnowledgeBase. Our numbers show that Forescout is valued fully two turns higher than both LogMeIn and Cision in their recent leveraged buyouts (LBOs).

Even in the infosec market – where premium valuations are the prevailing prices – Forescout’s looks heady. For comparison, the 5.5x trailing sales multiple for Forescout exactly matches the multiple paid in the industry’s most recent significant take-private, Thoma Bravo‘s $3.8bn LBO of Sophos last October.

That’s the same valuation, even though Sophos has a much more attractive financial model, particularly to cash-flow-focused operators. Sophos put up roughly the same growth rate as Forescout heading into their LBOs, but brings in almost twice as much revenue. Probably more important for the new private equity owners, Sophos throws off several hundred million dollars of cash flow each year, while Forescout is still burning cash.

Payments keep printing

Stephanie Turner

by Scott Denne, Jordan McKee

Businesses are rethinking the role of payments in their growth strategies, a shift that’s pushing payment providers to print larger deals to meet their customers’ changing requirements. As we recently noted, 2019 saw a surge of big-ticket payment transactions that propped up the deal value total in last year’s tech M&A market. That trend hasn’t slowed this year, as the space has already witnessed two $5bn-plus acquisitions in the past month.

In mid-January, Visa printed its largest-ever tech transaction with the $5.3bn purchase of Plaid, a supplier of payment APIs that should enable Visa to move beyond credit card processing. At the start of February, Worldline reached for Ingenico to add a range of new payment services, leveraging the target’s roots as a point-of-sale (POS) vendor. In addition to being Worldline’s largest deal, it valued the Ingenico at 2.9x trailing revenue, nearly double the 1.6x median for POS providers over the past four years, according to 451 Research‘s M&A KnowledgeBase.

Aside from topping the previous high-water marks of their respective acquirers, those transactions (and many of the previous ones in the space) have a shared rationale: Both were done to expand the buyers’ offerings across multiple payment channels, something that has become imperative as payments move beyond the finance and treasury departments. As we noted in 451 Research‘s 2020 Trends in Customer Experience & Commerce, several notable companies have made such a change. Bookings.com, for instance, moved its payments team within its product group, while Spotify placed its payments unit within its growth-focused business division.

Meanwhile, 77% of businesses say the payments segment has become a highly strategic area. While this change is likely to spur further consolidation, it could also push payment vendors toward acquisitions in related areas such as customer loyalty, customer data management and content management.

Figure 1: Payments M&A

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

Webinar: 2020 Tech M&A Outlook

Stephanie Turner

by Brenon Daly

Tech M&A has started a bit sluggishly in 2020, but what about the rest of the year? Are tech buyers going to continue sitting on their hands, or will they be reaching for their checkbooks as the year moves along? And if they do go shopping, where will they be looking?

For answers to all of those questions and more, join 451 Research tomorrow (February 5) at 1:00pm EST for a special webinar, 2020 Tech M&A Outlook. (Register here.) During the hour-long webinar we will look at the broad-market trends shaping overall deal flow, as well as a special focus on two of the areas that we expect to see a surge in acquisition activity in the coming year:

Over the past decade, machine learning (ML) has been the fastest-growing theme in all of tech M&A: 451‘s Research M&A KnowledgeBase shows that deal volume has been clipping higher at a CAGR of north of 50% over that period. As ML matures in the coming years, how will that affect acquisition activity?

Similarly, information security (infosec) has seen a dramatic uptick in dealmaking, with the annual number of prints in the sector running 50% higher in the back half of the past decade than during the opening half. That growth culminated in 2019 hitting a record for both the number and spending on infosec acquisitions. Where does the infosec M&A market go from here, and what sectors are going to see the most activity?

Again, tomorrow’s 2020 Tech M&A Outlook webinar will get you everything you need to know about what’s coming in the year ahead. We hope you can join 451 Research for our annual look at the multibillion-dollar tech M&A market.

Tech buyers step down

Stephanie Turner

by Brenon Daly

After spending on tech acquisitions in 2019 slumped about 20% from the previous year, 2020 is starting even weaker. Dealmakers around the world handed out just $28bn on tech and telecom transactions in January, according to 451 Research‘s M&A KnowledgeBase. Spending in the just-closed month represents the softest open for tech M&A in three years.

Furthermore, January 2020 has seen acquirers move lower in almost a step-function fashion compared with recent years. (Granted, a single month is an almost absurdly short time period in which to draw any conclusions.) Nonetheless, our data shows 2020 is starting at roughly $10bn lower than the average monthly spending in 2019, which was roughly $10bn lower than the average monthly spending in 2018.

In our 2020 Tech M&A Outlook: Introduction, we offer some reasons for the likely ‘lower highs and lower lows’ for the overall market in the coming year. One of our key rationales: The tech M&A industry is on the cusp of a generational transition. The old-guard acquirers that had shaped the market for decades are simply not doing deals at the same pace they once did.

For instance, in our M&A Outlook report, we note that activity in 2019 from typical M&A market-makers such as IBM, SAP, Microsoft and Oracle dropped to its lowest aggregate level in a decade and a half. Our data shows that last year the quartet, collectively, announced just one-third as many acquisitions as they did at their peak. Again, with the disclaimer that one month doesn’t make a year, we would note that not one of those four major acquirers have put up a print so far in 2020.

Instead of the ‘usual suspects’ at the top end of our M&A KnowledgeBase, new buyers – those that have only recently begun shopping in tech – did last month’s most significant deals. The largest strategic acquisition came from Visa, which plunked down $5.3bn for Plaid. Meanwhile, financial buyer Insight Partners double-dipped last month, spending $5bn for storage veteran Veeam and $1.1bn for IoT security startup Armis.

Figure 1:
Source: 451 Research’s M&A KnowledgeBase

Food delivery companies gobble up more than market share

Stephanie Turner

by Michael Hill

Hungry for more than geographic expansion, food delivery companies are driving up deal spending as they look beyond the usual targets for acquisitions. While buyers remain busy consolidating a fragmented market, they are making additional bets on the technology behind those services and other offerings that could expand their addressable market.

According to 451 Research‘s M&A KnowledgeBase, the total value of deals done by food delivery companies rose to nearly $13bn from just $359m two years earlier, thanks in large part to a pair of blockbuster transactions – TakeAway’s $8.3bn reach for Just Eat and Delivery Hero’s $4bn pickup of Woowa Brothers. But while those moves were motivated by geography and increased market share, other, less showy deals showcased increased buyer imagination.

Take DoorDash’s acquisition in August of Scotty Labs. The target develops remote-controlled autonomous vehicle software for businesses that DoorDash could eventually use to power its own fleet of autonomous delivery vehicles. Two months earlier, there was Indonesia-based food delivery app maker Go-Jek’s purchase of AirCTO, a Bangalore-based provider of recruitment software that uses artificial intelligence to screen prospective job candidates.

In earlier years, all deals done by delivery companies were pickups of smaller competitors. According to M&A KnowledgeBase data, in 2017, for example, all 23 of the acquisitions by food delivery companies were for fellow delivery services. In fact, 17 of those transactions were announced by BiteSquad in a single October day in the name of expanding its services to more than 30 new US metro areas.

However, 2019 wasn’t the first time these buyers stretched beyond their core market. GrubHub’s 2018 pickup of mobile payments and loyalty services provider LevelUp, for instance, as we discussed in a report on the deal, took the buyer beyond food delivery with technology that should enable it to offer more commerce software and services to restaurants just as those businesses are investing there. Indeed, as the food delivery market continues to consolidate, those who maintain a seat at the table will likely be those who have an appetite for expanding their addressable market.

Figure 1: Food delivery buyer volume and value

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

Payments pay out

Stephanie Turner

by Jordan McKee, Scott Denne

A surge of industry consolidation pushed payments M&A to a new peak last year. Although few targets remain that could fetch the $10bn-plus price tags of 2019’s giant transactions, the payments industry, and the vendors that have long dominated it, remain vulnerable to trends that emerged with the global shift toward digital commerce and the digitalization of physical commerce, so dealmaking is likely to continue to thrive in this market.

According to 451 Research’s M&A KnowledgeBase, buyers shelled out $85.7bn for 81 payments technology providers in 2019, roughly 6x the amount from 2018. To put that in perspective, for every $5 spent on tech acquisitions, $1 went toward the purchase of a payments firm, including spending on three of the year’s four largest deals – FIS’s $36bn reach for Worldpay, Fiserv’s $22bn First Data buy and Global Payments’ $21bn TSYS pickup. While there are few payments targets left that could command that kind of price, those transactions, which brought the acquirers massive scale and distribution, set the stage for further M&A.

As we highlighted in a recent report, increased deal activity has come largely in response to (and as a result of) the presence of high-profile and heavily funded venture-backed vendors in the payments space. Through the rest of this year, we expect to see payments acquisitions focused around high-growth sectors such as integrated payments, cross-border transactions and omnichannel commerce – market opportunities that are emerging as the lines blur between physical and digital commerce.

In omnichannel commerce, for example, payments are a fundamental part of enabling customer experiences that overlap online and offline shopping, such as buy online/pick up in-store and buy in-store/ship to home. Such services are enabled via a payments processor that can process multi-channel transactions. Our surveys show that there’s a substantial market opportunity here. According to 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, 48% of organizations are actively pursuing an improvement in cross-channel customer experience. This could lead to processors that have traditionally focused on e-commerce (e.g., Stripe, Paysafe, Cybersource, Adyen) seeking in-store assets, plausibly acquiring point-of-sale software providers or in-store-focused firms.

Figure 1: The importance of customer experience initiatives

Source: 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019

Mattress flop

Stephanie Turner

by Brenon Daly

Undeterred by other hobbling consumer tech unicorns, Casper Sleep is moving ahead with its Wall Street plans. The direct-to-consumer mattress seller set terms Monday for its upcoming IPO. Based on the initial pricing, Casper will be yet another ‘down-round’ IPO.

In the frothy private market, the self-described ‘pioneer of the sleep economy’ was able to convince investors that it was worth more than $1bn in its funding last March. Wall Street isn’t buying that. Casper and its eight underwriters have had to trim the company’s last-round valuation by about one-third, dropping it below rarified ‘unicorn’ status.

That price is based on the high end of the initial range, which is written in pencil by underwriters. Casper’s market debut is set for the first week of February. As it stands now, however, the company will almost certain face a discount when it lists on the NYSE, a reversal of the typical private-to-public valuation trendline.

Assuming it does trade that way, Casper will be the latest consumer tech IPO to sink underwater. As we noted in the IPO section of our recently published Tech M&A Outlook: Introduction, the high-profile trio of Pinterest, Lyft and Uber all finished 2019 (their first calendar year as public companies) valued lower than they had been in the private market. (See full report.)

Like that trio, Casper gives Wall Street investors plenty of reasons to be skeptical about its business. The money-losing company, which is somewhat known for its ‘napmobiles,’ spends more than one-third of revenue on sales and marketing. (More alarmingly, it was down to just $55m in cash at the end of September.) Given the public market’s shift away from subsidizing unproven B2C business models, once Casper does complete its IPO, it will almost certainly be looking up longingly at what it was once worth.

Figure 1:

Source: M&A Leaders Survey from 451 Research / Morrison & Foerster

Where have you gone, Joe DiMaggio?

Stephanie Turner

by Brenon Daly

In addition to wrapping up a decade, 2019 also marked the end of an era in tech M&A. The industry’s longtime buyers are no longer buying like they did when they were in their prime. It was as if the old guard, having shaped and driven tech M&A for years, stepped aside as the curtain came down on the decade. Their departure has left a billion-dollar-sized hole in the market.

We noted this transition and its implications as a key market trend in our recently published M&A Outlook: Introduction. In the report, we highlight the fact that the 451 Research‘s M&A KnowledgeBase does not have a single transaction valued at more than $1bn for stalwart acquirers Microsoft, IBM, Oracle and SAP – the first time the group hasn’t had a single member in the ‘three-coma club’ since 2003. Our data indicates that the quartet, collectively, had been averaging almost four $1bn+ deals each year for the past decade and a half. (See our full report.)

The impact of the missing mainstays goes far beyond just the rarified top end of the M&A market. Not only are Microsoft, SAP, Oracle and IBM not putting up big prints, they are barely putting up any prints at all. According to the M&A KnowledgeBase, the quartet acquired a total of only 16 companies among them in 2019. That’s just half the number of purchases the four companies have averaged annually over the previous 15 years, and less than one-third the number they did in peak years.

Further, all four buyers have substantially more cash on hand and substantially higher stock prices right now than when they had their M&A machines revving. And yet, despite the unprecedented resources to do deals, their pace plummeted last year to each company averaging a transaction every quarter, down from an average of a purchase every month in the mid-2000s.

That slowdown has literally taken billions of dollars out of the broader tech M&A market. Our numbers show a staggering $262bn in total acquisition spending for Microsoft, IBM, Oracle and SAP since 2002. (The aggregate amount – again, more than a quarter-trillion dollars – captures only announced deal values and our proprietary estimates on prices, so undoubtedly undercounts the actual outlays from the four buyers.)

Even just based on the disclosed and estimated prices, the M&A KnowledgeBase shows the median deal value, collectively, for the quartet is $200m. Using the admittedly roughly measured representative price of $200m per transaction, we can put a price on their slowdown in dealmaking. If the quartet had merely announced the number of acquisitions in 2019 that they had averaged over the previous 15 years, another $3bn would have flowed into the tech M&A market last year.

Source: 451 Research’s M&A KnowledgeBase