Who better to pick this year’s top deal than the folks who actually do the deals? One question in 451 Research’s annual survey of corporate acquirers, which is only open for two more days, is which tech print in 2019 stood out to them the most. The top vote-getter receives our coveted GoldenTombstone award.
This year’s top tech transaction is just one of several questions that we have asked each year in all of our surveys of tech M&A professionals since 2007. Other areas that the quick and painless 451 Research Tech Corporate Development Outlook Survey explore include activity forecast, valuation expectations and even their take on the other exit, IPOs. For corporate acquirers interested in taking part in our annual survey, simply click here.
In addition to asking how full their pipelines are, we also ask bankers what is filling them up. In terms of specific markets, is it deals in application software, Internet or other specific markets that has bankers dreading 80-hour workweeks in the coming year? Or is it cross-sector trends such as cloud or IoT that will be keeping them busy? (Bankers have certainly been onto something recently with their pick of thebustlingmachine learning market.)
Whatever the case and whatever the pace, 451 Research wants to hear from managing directors and partner-level advisers about the coming year. We ask senior tech investment bankers to give us five minutes of their time for their outlook on tech M&A. In return, we’ll send along full survey results as well as anonymized commentary from fellow bankers about what they’re seeing in the market. (Collectively, survey respondents touch several hundred tech transactions each year across the entire IT landscape, so our survey offers a comprehensive view.)
To participate in 451 Research’s 15th Annual Technology Investment Banking Survey, simply click here.
Of all companies, Xerox should know not to make a bad copy. And yet, as the maker of printers and copiers escalates its pursuit of a much-larger rival, it is in danger of repeating the mistake another tech giant made when it, too, tried to pull in a chunk of the once-formidable Hewlett-Packard. That buyer still hasn’t recovered from that deal, more than three years later.
In terms of M&A strategy, the thinking behind Xerox’s bid for HP Inc is solid: wring out financial efficiencies by combining large businesses in markets that have little – if any – growth. Where the effort breaks down is that Xerox has the strategy a little backwards. It is a fraction of the size of the company it is trying to roll up. (Xerox sells less stuff in an entire year than HP Inc sells in a single quarter.)
And then there’s the small matter of how Xerox, which has an all-in enterprise value of just $13bn, plans to pull off its proposed $33bn purchase. (For a sense of scale of the transaction, 451 Research‘s M&A KnowledgeBase only lists 13 tech and telecom deals announced since 2002 with an equity value of more than $30bn.)
Xerox, which already has more than $4bn of net debt on its books, says it has the financing of the proposed pairing covered. Terms call for Xerox to hand over about $25bn in cash for HP, with the remaining nearly one-quarter of the price covered by its shares. For its part, HP Inc isn’t buying Xerox’s offer, either in terms of valuation or even feasibility.
But even assuming Xerox can not only raise but also then service several billion dollars of freshly incurred debt to pick up its larger rival, it’s worth wondering why the company would want to stretch itself financially for a significantly larger business that is significantly less profitable. Both gross margins and operating margins at HP Inc are about half the level of Xerox.
Verint Systems occupies a prime portion of the customer experience software market with an aging portfolio. Now it’s splitting off a smaller, low-growth part of its business in a deal that could give it more currency for acquisitions as the call-center software vendor updates its software suite to meet the changing needs – and rising budgets – of customer service groups.
With an investment from Apax Partners, Verint plans to separate its customer experience software business and its cyber-intelligence unit into two publicly traded companies. Apax will invest $400m across two tranches for a minority stake in the customer experience division. The buyout shop already knows part of the business – it was a previous owner of ForeSee Results (through its ownership of Answers.com). ForeSee, a customer survey specialist that Verint bought in 2018, is a key part of Verint‘s Unified VoC product.
But voice of the customer (VoC) is only a modest, if faster growing, part of Verint’s customer experience business today. Even after the split, Verint will be an on-premises call-center software company that’s growing in the high-single digits. There’s an opportunity to accelerate that growth given the market it plays in.
Our data show that customer service is drawing an outsized share of budgets and attention as businesses contend with rising customer expectations across more communications channels. The days of calling the company to complain seem quaint as customers turn to chat, email and social media. According to a recent survey from 451 Research‘s Voice of the Enterprise: Customer Experience& Commerce, 54% of organizations said they’re increasing their investments in customer service software in the next 12 months. And 25% of them said the customer service group has primary responsibility for the customer experience.
Although it’s been pushing past call-center products via M&A for the past couple of years, Verint has mostly done so with modest-sized acquisitions in the $25-75m range, according to 451 Research‘s M&A KnowledgeBase. As a stand-alone customer experience provider, it could well have a higher stock price, giving it currency for larger deals – Wall Street sent Verint’s shares up 15% on news of the split. The vendor also has 25% EBITDA margins, so it should continue to generate cash for purchases.
Social media management should be a priority for Verint after the split. Owning a broad suite of tools for managing and monitoring engagements on social media would bring it into an area it’s already familiar with – tracking and managing customer interactions – and give it a software portfolio beyond customer service as its clients, according to our surveys, are seeing their mandates extend from customer service into customer experience.
Figure 1: Departments with primary responsibilityfor customer experience
Dragged down by the uneven performance of its two main products, learning management software maker Instructure is headed toward a period of corporate rehabilitation behind closed doors. The company says it will be going private in a proposed $2bn LBO by Thoma Bravo, wrapping up a three-year stint on the NYSE. Under ownership of the buyout firm’s sharp-penciled operators, we expect Instructure’s portfolio to be thinned in short order.
Although the stock nearly tripled from its IPO price, the ed-tech vendor has been increasingly dogged by questions about its product lineup. For the first few years after its founding in 2008, Instructure had success in selling software to schools to manage their education programs. However, its effort to replicate the uptake that its Canvas offering had in schools with a product targeting learning in the workplace has foundered since its early-2015 launch.
The corporate learning management offering, Bridge, has been a bit of an albatross. Instructure acknowledged that in its recent quarterly report, adding that it had begun separating the underperforming Bridge division from the still-healthy Canvas unit. (Instructure doesn’t break out the respective financials of the two product lines.)
Based on early indications, that separation will likely be accelerated once the sale to Thoma Bravo closes, which is expected in Q1 2020. Consider this: In the release announcing the acquisition of the whole company, Thoma Bravo only references – and indeed, praises – Instructure’s Canvas offering. The Bridge product, which almost certainly burns cash, is conspicuously absent.
Since Instructure had publicly disclosed last month that it was reviewing ‘strategic alternatives’ for the company, the sale isn’t surprising. (Certainly, Wall Street had been betting that Instructure would get a deal done. Investors, including several activist hedge funds, had pushed Instructure shares to an all-time high in anticipation of a transaction. Turns out they got a bit ahead of themselves, as Thoma’s bid represents a slight ‘take under’ relative to the stock’s previous closing price.)
Still, this is not some bargain buyout. At roughly $2bn, Thoma Bravo is paying about 8x TTM sales of $245m at Instructure. According to 451 Research‘s M&A KnowledgeBase, that’s the highest multiple for any tech vendor erased from US stock exchanges in 10 months.
For most technology, security is somewhat of an afterthought. That’s particularly true for emerging enterprise technology, where shiny new gadgets and slick new software dazzle us with promise. Under the spell of early adoption, we focus on all of the great things the technology makes possible for us and our businesses. And then we get hacked.
Or something else happens to take off a bit of the luster of the new products. Reality intrudes on dream technology. Belatedly, we find that we just might need to put a lock on some of the doors opened by the new products. That’s one way to think about the recent record surge in acquisitions done to secure all of the ‘things’ that businesses are offering to make their current products more valuable or expand into more valuable markets.
The term ‘IoT security’ has popped up an unprecedented number of times so far this year in 451 Research‘s M&A Knowledgebase. In fact, deal volume in this rapidly emerging field is set to triple in 2019, compared with both 2018 and 2017. And to underscore the seriousness of the challenge around shoring up all of those IoT implementations, big buyers are doing these deals. Cisco Systems, Check Point Software and Palo Alto Networks have all put up IoT security prints so far this year, according to our data.
Yet all of this M&A activity may be too little, too late. Even with this dramatic acceleration in the number of IoT security deals, our data shows this crucial component for all of those implementations still accounts for only a lowly single-digit percentage of all IoT dealmaking. In other words, vendors are still overwhelmingly focused on shopping for IoT technology that they can add to their portfolios rather than making sure their IoT technology is secure.
Those priorities, however, are not necessarily serving customers. In fact, customers who plan to boost their IoT spending in the coming year told us that they plan to spend more on shoring up the IoT technology than anything they can necessarily do with the new technology they plan to buy. Almost half (46%) of respondents to 451 Research’s Voice of the Enterprise: Internet of Things, Budgets and Outlook 2019 indicated ‘improved security’ is the single biggest driver for their increase in overall IoT spending.
Figure 1: Drivers of increasing IoT spending in 2019
Tech M&A spending rebounded in November after two decidedly weak months. Last month’s pickup put this year back on track to record slightly less than a half-trillion dollars’ worth of tech and telecom transactions for full-year 2019. However, that strength assumes the buying can broaden in the final month of what’s proving to be a softening period for recent tech dealmaking.
Across the globe, acquirers handed out $48bn in the just-closed month on tech deals, according to 451 Research‘s M&A KnowledgeBase. Our data indicates the value of transactions announced in November topped the combined total from both September and October. Yet, in one indication of the concentration of M&A activity in November, we would note that the M&A KnowledgeBase actually lists fewer $1bn+ prints in November than October, even as overall spending surged 70%, month over month.
More than half of November’s spending came in a single deal: Charles Schwab‘s $26.2bn purchase of rival TD Ameritrade. (The blockbuster consolidation meets our definition as a ‘tech’ transaction, albeit clearly as a fin-tech deal.) After that, however, both the number and – more significantly – valuation of acquisitions last month dropped off sharply.
In the second-largest tech transaction in November, buyout shop Apollo Global Management took Tech Data private for a pittance of its revenue. Granted, IT distributors like Tech Data operate on low margins with little protection for their business model. But even with that disclaimer, it’s striking that a company generating more than $35bn in sales fetched a terminal value of just $5.6bn. Similarly, Alphabet paid just 1.2x trailing sales for Fitbit in last month’s fifth-largest deal.
It wasn’t all cleanouts and closeouts, however. Lightly funded e-commerce browser plug-in Honey got a $4bn payday from PayPal, the kind of exit that keeps the VC dream alive. But far more often in November, deals got done at a mid- to low-single-digit multiple. In fact, the M&A KnowledgeBase shows November transactions going off at a median of just 1.8x trailing sales, a full turn lower than the average for deals announced from January to October.
With 11 months now in the books, tech acquirers have been averaging about $40bn in monthly M&A spending. (That’s down from an average of nearly $50bn per month in last year’s record run.) That decline can be traced back to buyers, particularly financial acquirers, stepping out of the market just since summer.
Our data shows the value of tech transactions in the back half of 2019 is on pace to be roughly 25% lower than the first half of the year. As we look ahead to the final weeks of the year, we expect a continuation of the trend of soft landings in the market – with fewer big-ticket deals and lower overall valuations – that we’ve seen recently. For tech M&A, this year will be a clear drop from last year.
Fittingly enough, Palo Alto Networks took it to record levels. The next-generation information security kingpin has done more acquisitions than any other company in the sector this year, by our tally. And with its latest purchase – the $150m reach for Aporeto – the overall infosec M&A volume in 2019 has now matched the highest annual total in history.
According to 451 Research‘s M&A KnowledgeBase, Palo Alto’s purchase of micro-segmentation security startup Aporeto stands as the vendor’s fifth transaction in 2019. (451 Research subscribers can look for our full report on that acquisition later today on our site, including the prevailing valuation the company is paying.) No other buyer in the sector comes close to that cadence of more than one deal every quarter this year.
Even infosec acquirers with well-worn M&A playbooks are putting up a fraction of the number of prints that Palo Alto has done in 2019. For instance, since the start of the current decade, Symantec and Cisco top the list in the M&A KnowledgeBase of most-active infosec acquirers. Yet both of those once-active buyers have announced just a single transaction in the sector this year. (And, of course, Big Yellow doesn’t appear likely to add to its total anytime soon, following the sale of its enterprise security division to the sharp-penciled operators at Broadcom.)
In that way, Palo Alto has now emerged as the next-gen acquirer in the infosec market, just as it emerged as a next-gen vendor in the infosec market a decade ago. It has displaced the traditional providers of exits (Symantec, Cisco) as surely as it has displaced the traditional supplier of firewalls (Check Point Software). To underscore how the firewall market has shifted, consider this: 14-year-old Palo Alto Networks sells more than $1bn worth of gear each year than 26-year-old Check Point, and is growing more than three times faster.
Pricing pressure has driven the number of megadeals to a new high. With Charles Schwab’s $26bn pickup of rival online brokerage TD Ameritrade, 2019 has witnessed four transactions valued north of $20bn – the most ever in a single year, according to 451 Research‘s M&A KnowledgeBase. While the number of similarly sized deals has been on the rise for a couple of years now, the rationales have changed as defensive consolidations have spurred all of the largest prints this year.
Charles Schwab’s all-stock acquisition of a competitor comes as it and other online brokerages engage in a price war – Charles Schwab, E*Trade, TD Ameritrade and Interactive Brokers all saw their stock prices swoon at the start of October as they announced commission-free equity trading. That’s reminiscent of the other three $20bn-plus deals this year, where payment providers all reached for rivals in a bid to expand into adjacent specialties and battle margin pressure with greater scale.
And in all four of 2019’s $20bn+ deals, the buyers are using their stock to afford a rival that’s of a similar size. In today’s transaction, Charles Schwab is handing over a 31% stake in its business to TD America shareholders. Earlier this year, Fiserv gave up 42.5% of its business to buy First Data; Global Payments shelled out a 48% stake for TSYS; and FIS handed over 47% (plus $3.5bn in cash) to Worldpay’s owners. But while massive stock swaps are rising, strategic acquirers have otherwise reduced their appetite for large prints. The M&A KnowledgeBase shows that strategics have spent $1bn or more on just 56 companies this year, 19% fewer than they had at this time last year.
Amid an unprecedented private equity (PE) shopping spree in HR technology, the next big talent management platform provider to trade may well be Saba Software. Several market sources have indicated that current owner Vector Capital has the company in market, with a possible sale in the first half of next year. According to our understanding, the ask for Saba is more than $1bn.
A potential unicorn-sized exit for Saba would mark a stunning turnaround for a business that had been brought low by an accounting scandal earlier this decade. Vector Capital took Saba private in early 2015 for $268m, allowing the company to get its books in order behind closed doors rather than doing it on the public market. (Wall Street’s cop, the US Securities and Exchange Commission, fined Saba $1.7m for its fraudulent accounting from 2007 to 2012 as well as ‘clawing back’ $2.5m in bonuses paid previously to the company’s founder, who also served as CEO at the time.)
As Saba got its internal operations shored up, it looked to expand in the fragmented HR tech market. In early 2017, the vendor reached north of the border to consolidate Ottawa-based Halogen Software for $207m, and then last October, Saba added Europe-focused Lumesse. (Subscribers to 451 Research’s M&A KnowledgeBase can see our proprietary estimate of terms in the Saba-Lumesse transaction.)
Altogether, Saba is more than twice the size it was when it was erased from the ranks of publicly traded companies. (Although Saba first listed on the Nasdaq, it had fallen to Pink Sheet purgatory after it had to restate several years of financials.) Revenue at the talent management specialist tops $300m, while the business throws off more than $100m of EBITDA, according to our understanding.
HR technology has been a favorite sector for PE firms, which tend to face less competition from strategic vendors in this market than elsewhere in IT. Several buyout shops have already purchased huge HR platforms, including Vista Equity with iCims, Insight’s Bullhorn and Hellman and Friedman with joint ownership of two separate HR tech platform providers that measure their sales in the billions of dollars. If Vector does sell Saba, the buyer will almost certainly be a fellow PE firm.