Tag: M&A

With HCTS around the corner, hosting M&A sees slowdown from record highs

Mark Fontecchio

by Mark Fontecchio

With 451 Research’s Hosting & Cloud Transformation Summit (HCTS) set to kick off next week, hosted services M&A activity has been a bit quiet in 2018, retreating from recent record highs. Massive multitenant datacenter (MTDC) consolidation in previous years has cut the number of sizable targets available for purchase, drastically reducing M&A spending. However, as enterprises increasingly migrate IT workloads off-premises, hosting providers are offering more managed hosting and cloud services, and inking deals to help them do it.

According to 451 Research’s M&A KnowledgeBase, hosted services acquisitions total $8.1bn in spending so far this year. That pace would put 2018’s year-end total at about $11.5bn, well below outsized spending in 2016 and 2017. That said, the flow of hosting deals has been notoriously lumpy. For example, 2016 saw nearly half of its record spending of $15.6bn come in Q4.

Could that happen again this year? While unlikely, it’s possible. The two largest strategic acquirers, Equinix and Digital Realty Trust, spent an average of $6bn on acquisitions in each of the past three years. In 2018, however, they’ve spent just a fraction of that, the only transaction being Equinix’s $781m purchase of Infomart Dallas. Equinix, with nearly $1bn in cash, is the more feasible of the two to ink a blockbuster deal in Q4, as Digital Realty is likely still working on integrating its largest-ever acquisition, the $6bn purchase of DuPont Fabros in mid-2017.

As for financial buyers, private equity firms have taken much-larger positions in hosted services recently, with five $1bn+ transactions since 2016, which is more than they inked in all of the previous decade. While the $3.8bn in spending by buyout firms so far this year exceeds all of 2017, it is still about half the record $7.6bn in 2016. One potential large target is a group of hundreds of datacenters – mostly in North America and Europe – that CenturyLink obtained in its 2016 pickup of Level 3, which could be sold together or possibly split up. There was also an activist investor pushing QTS Realty Trust to sell earlier this year following accusations of mismanagement, although that sentiment has died down a bit.

Meanwhile, most hosted services M&A this year has happened outside of strictly colocation. Of the three $1bn+ deals, two were for services other than – or in addition to – MTDC. They were Siris Capital’s $2bn purchase of Web.com (web hosting) and GTT Communications’ $2.3bn acquisition of Interoute (fiber and cloud networking). Other $100m+ transactions in cloud and managed services this year include Orange buying Basefarm and Internap reaching for SingleHop. There have even been hosting providers acquiring cloud migration and integration vendors, which we wrote about last month. Examples there include Rackspace buying Salesforce integrator RelationEdge, as well as Green House Data purchasing Microsoft integrator Infront Consulting.

For those attending HCTS, be sure to join 451 Research and ING for an opening breakfast on Tuesday morning to discuss the overall tech M&A market, which is currently running at near-record rates. That will be followed by a more focused session on Tuesday afternoon on consolidation trends in the datacenter and managed service market. We look forward to seeing many of you there.

HR software in demand

Mark Fontecchio

by Scott Denne

A tight job market is opening exit opportunities for HR software companies. The record-low unemployment rate – it recently dipped below 4% for the first time in more than a decade – has increased interest in owning software developers that help businesses find, retain and train increasingly scarce employees, pushing such acquisitions to a remarkable level.

In the latest example, Cornerstone OnDemand has reached for Workpop, a provider of software for hiring hourly and seasonal workers, as part of the buyer’s revamp of its recruiting suite. As we noted at the time of that company’s last acquisition – back in 2014 – Cornerstone OnDemand hasn’t been much of a buyer, although in making a purchase now, it’s joining a parade of dealmakers scooping up HR software targets.

According to 451 Research’s M&A KnowledgeBase, acquirers have hooked 70 HR software targets, more than any other full year in this decade. Still, in terms of deal value, 2018 isn’t likely to be a record. The year’s total stands at $2.35bn, while two earlier years (2012 and 2014) saw more than $5bn in HR software transactions.

While 2012 and 2014 each had a pair of $1bn-plus deals by Oracle, IBM, SAP and Charthouse Capital, this year’s boom has benefited midmarket targets as we’ve recorded 13 acquisitions valued at $100-500m, two more than any other full year. Although the jobs picture helps juice this market, much of the increase comes through the same trends that bolster the overall software M&A market – increasing activity from private equity firms and a surge in strategic buyers. The former category has already purchased more HR software businesses this year than ever before, while corporate acquirers are heading toward record territory.

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

Zendesk focuses on sales with latest purchase

Mark Fontecchio

by Scott Denne

With its latest acquisition, Zendesk concentrates on its march toward $1bn in revenue with an asset that could help it bolster its enterprise sales. The helpdesk software provider adds sales force automation software to its suite with the purchase of FutureSimple (which does business as Base) and obtains a product that addresses the priorities of the largest businesses.

Terms of the deal weren’t disclosed, but there’s reason to believe that Base marks Zendesk’s largest acquisition yet. Zendesk had only inked three transactions before today – two that cost it about $15m each and one, BIME Analytics, that cost $45m. Base, by comparison, raised at least $52m in venture funding, according to 451 Research’s M&A KnowledgeBase, and has about 150 employees, compared with BIME’s 40.

The pickup of Base continues Zendesk’s expansion into other corners of customer engagement, beyond its roots as a helpdesk software developer. As we noted in our report on its purchase of marketing software vendor Outbound, Zendesk needs a broader suite to reach its goal of $1bn in annual revenue in 2020. It finished last year with $430m, a 38% jump from the year before, a growth rate that leaves little room for deceleration if Zendesk is to hit its target.

Although historically targeting smaller businesses, Zendesk hopes to entice more large enterprises to use its applications to get to that goal. By nabbing pipeline management, lead-scoring and other sales automation capabilities, Zendesk injects itself into a top priority for large enterprises. According to 451 Research’s most recent VoCUL: Corporate Mobility and Digital Transformation Survey, 22% of businesses with more than $1bn in annual revenue reported that sales organizations will have the highest budget for software compared with other lines of business: only IT (51%) and Zendesk’s core market of customer service (31%) ranked higher.

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

Welcome to middle age, Google

Mark Fontecchio

by Brenon Daly

Like a lot of us, Google has gotten more conservative as it has grown older. The search giant, which was born on this day 20 years ago, has dramatically slowed its once-frenetic M&A program, cutting the number of deals it announces each year to the lowest level since the recent recession. It’s almost as if Google has turned into a bit of a homebody as it hits the corporate equivalent of middle age.

So far in 2018, Google has announced just seven deals, according to 451 Research’s M&A KnowledgeBase. While Google’s pace of almost one acquisition per month leaves most other corporate acquirers in the dust, it is a dramatic slowdown from the recent rate at the company. (We would note that even as Google invests less in its inorganic growth initiatives, it continues to amply fund its organic growth initiatives. The company is currently spending $5bn per quarter on research and development.)

In terms of M&A, from 2010-2014 – when Google was, effectively, an adventurous teenager – the company averaged more than two deals each month. Our M&A KnowledgeBase shows that Google’s pace peaked in 2014 at 36 acquisitions, a head-spinning rate of three deals every month. For comparison, there are highly valued, large-cap tech companies with oodles of cash, like Google, that don’t even average three deals every year.

Of course, the recent decline in deals has more to do with strategy than chronology. In early 2015, Google appointed a former investment banker with a reputation for fiscal discipline as its CFO. It followed that up a few months later by overhauling its business and even adopting a new name, Alphabet. The impact was immediate.

As we noted about a half-year into the new era, the newly renamed Alphabet is focusing much more on ‘alpha,’ in the sense of being the top dog of internet advertising, as well as delivering ‘alpha’ to shareholders (Google stock has more than doubled since it made the changes). However, that has come at the cost of the second part of its name – the company is making far fewer M&A bets. That’s even more the case today, as Google rolls into its third decade of business.

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

Snapping up smarts

Mark Fontecchio

by Brenon Daly

Having gotten a little richer in its mid-March IPO, Zscaler is now looking to get a little smarter with some M&A. In its first-ever acquisition, the cloud security vendor has reached for TrustPath, a startup that Zscaler plans to use to help speed and sharpen its analysis of the billions of transactions that flow over its platform each day. Not much is known about TrustPath, which is still operating in stealth mode.

Zscaler’s inaugural print continues the trend of information security (infosec) providers emerging as some of the busiest buyers of machine learning (ML) startups, a market that itself is pretty busy. In fact, for the past two years, tech investment bankers we have surveyed have forecast ML to be the single biggest driver for M&A in each of the coming years, ahead of other notable themes such as the Internet of Things and cloud computing.

More importantly, that sentiment is coming through in the actual deal flow. According to 451 Research’s M&A KnowledgeBase, the number of overall ML transactions is on pace to top 120 deals in 2018, three times the number announced just in 2015. Infosec is playing a key role in the record number of ML transactions, with Zscaler joining Amazon Web Services, Splunk and even PayPal in the parade of recent security-focused ML acquirers.

Collectively, infosec buyers are punching well above their weight in the emerging field of ML M&A. Look at it this way: Infosec accounts for roughly 15% of total ML deals in the M&A KnowledgeBase, despite security acquisitions making up less than 5% of all tech transactions we record in any given year.

The main reason for infosec’s outsized role in the ML market is that there’s actually business to be done there. In fact, in a recent survey by 451 Research’s Voice of the Enterprise: AI & Machine Learning, Adoption, Drivers and Stakeholders 2018, infosec emerged as the second-highest rated use case for ML, trailing only ‘business analytics.’ Importantly, the rankings in our survey came from folks who actually have ML technology up and running or are nearly there. With that kind of demand from customers, it’s no wonder infosec suppliers are leading the charge in snapping up smarts.

Cloud migration acceleration

Mark Fontecchio
by Mark Fontecchio

Businesses providing migration, integration and other IT services for the three most popular IaaS players – Amazon, Microsoft and Google – are being bought at a record pace. Enterprises are migrating IT workloads off-premises at an increasing pace, and cloud migration and integration service providers must keep up. In addition to expanding internally, some cloud vendors are leaning on inorganic growth to add expertise and fill customer needs.

According to 451 Research’s M&A KnowledgeBase, purchases of service providers around those three IaaS players are being inked at a record pace, with nine already this year. That equals the volume for all of 2017 and surpasses the full annual total for any year before that. Notable deals this year include Cloudreach’s acquisition of Relus Cloud last week and Hitachi’s pickup of AWS integrator REAN Cloud, which itself bought AWS integrator 47Lining last year. For Cloudreach, acquiring Relus Cloud added expertise from a company that got its start in 2013 as a consulting services firm focused solely on AWS adoption and migration. Relus Cloud subsequently garnered a reputation as an expert in cloud data analysis products such as Amazon’s Hadoop-based Elastic MapReduce and Redshift data warehouse.

Considering the rate at which companies are migrating off-premises, we expect these types of transactions to continue. Businesses’ primary IT environments are on the move. According to a Voice of the Enterprise survey, the share of organizations employing off-premises IT infrastructure as their primary environment is set to jump to 66% by 2020 from 48% this year. And that shift is most pronounced among the largest companies. Among enterprises with at least 10,000 employees, just 11% use IaaS or PaaS as their primary environment, although 28% expect to move their environment to the cloud in two years.

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

M&A makes for strange bedfellows

Mark Fontecchio

by Brenon Daly

Talk about strange bedfellows. Serta, a private equity-backed mattress maker that depends on retail sales to stay in business, has picked up Tuft & Needle (T&N), a startup that not only bypasses traditional retail but has spent heavily on advertising to deliberately antagonize those outlets. (T&N is probably best known for running in-your-face billboards across the country that starkly state: ‘Mattress stores are greedy.’)

Of course, this pairing of an octogenarian veteran with a ‘digital disruptor’ of a more-recent vintage isn’t the first example of established companies leaning on M&A in an attempt to stay relevant in the shifting retail landscape. Two years ago, for instance, Unilever paid $1bn for Dollar Shave Club, an e-commerce razor site that, like T&N, sold its wares directly to consumers.

The ‘unicorn’ price was built in part on the assumption that Unilever could use Dollar Shave Club’s existing business to expand its online sales for all sorts of additional grooming products made by the Anglo-Dutch giant. That hasn’t happened. (For more on why that is, see our recent report on the uneasy combination of new and old.)

The muted returns from Unilever-Dollar Shave Club and other similar offline-online transactions underscore just how difficult it is to reconcile separate – and, indeed, incompatible – business models. In this case, Serta generates an order of magnitude more revenue than T&N by relying mostly on retailers to move its mattresses.

However, that reliance can become a hindrance when one of the industry’s largest retailers hits the skids, which is what’s playing out in the mattress industry right now. (Earlier this year, it was the toy industry, which got choked up when retailer Toys R Us went bankrupt.)

So the urge to merge is certainly understandable when seen as a way for a company to have more control over the sale of its own product. (Serta already sells its mattresses on its own website.) And while the direct-to-consumer model has taken off, it hasn’t replaced brick and mortar by any means. In fact, the lines are increasingly blurring.

Rival online ‘bed in a box’ startup Casper, which has raised a whopping $240m in venture backing, counts retail giant Target among its investors. Further, the trendy website announced earlier this month that it plans to open 200 of its own retail outlets in the coming years. Presumably, Casper’s stores won’t be among the ‘greedy’ ones T&N was talking about.

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

Best Buy nabs elderly mobility vendor: earlier deals haven’t aged well

Mark Fontecchio

by Scott Denne

Best Buy has ended a prolonged dry spell with the $800m purchase of GreatCall, a maker of phones and wearables for the elderly. Like all brick-and-mortar retailers, the buyer is contending with a shifting channel as much of the path to purchase moves online. With this deal, and more broadly, Best Buy is responding by playing up its strength in customer services, which it expects to be valuable as a raft of new consumer technologies (smart home, virtual reality, etc.) come to market. Today’s transaction fits into that strategy and shows that Best Buy has learned from its past failed tech acquisitions.

The purchase marks a new high for the electronics retailer. According to 451 Research’s M&A KnowledgeBase, it had never spent more than $167m on a tech acquisition and had never valued any of its targets above 2x trailing revenue – this deal values GreatCall at roughly 2.5x. Aside from the financial metrics, the acquisition differs from Best Buy’s past tech M&A in another respect – it’s not looking to jump into an unfamiliar market.

Its previous purchases have extended the retailer into web hosting (Speakeasy) and digital music (Napster). In 2011 and 2012, around the time it was divesting Napster in a pair of sales to Rhapsody, it entered the IT managed services market with the pickup of mindSHIFT and another tuck-in to support that asset. That deal was unwound two years later in a sale to Ricoh.

This time, Best Buy isn’t stretching as far. Although it hadn’t previously bought a device maker, it’s been offering its own private-label electronics (Insignia) for over a decade. Moreover, GreatCall offers a subscription service for help with its devices, emergency dispatch and the like. Although the purpose differs, the business model resembles the subscription technical support that Best Buy is rolling out today.

While there’s probably some synergy between consumer technical support and GreatCall’s elderly audience, and the acquisition furthers Best Buy’s customer-service story, it’s not clear that the device business will do much to drive traffic to Best Buy’s stores. According to 451 Research’s VoCUL: Smartphone Leading Indicator Survey, July 2018, more than half of those purchasing a new smartphone this quarter plan to buy from the wireless provider or manufacturer – fewer than 5% plan to go to an electronics store or big-box retailer.

Broadcom can’t get there from here

Mark Fontecchio

by Brenon Daly

CA Technologies just reported what’s likely to be its next-to-last financial results as a public company, and the numbers don’t add up. We’re not referring to anything about the specific bookkeeping at CA, which has long since distanced itself from the time when the ‘CA’ was said to stand for ‘Creative Accounting,’ with ’35-day months’ and the like.

Instead, our assessment of CA’s financial performance is based on the targets that its soon-to-be owner Broadcom has set for the combined company once the largest-ever software transaction closes later this year. In fact, it looks increasingly inescapable that the only way they get there from here is to shed a bunch of CA’s businesses.

Recall that the chip giant (rather inexplicably) turned its consolidation machine to the software industry, paying $19bn for CA in mid-July. As part of that blockbuster purchase, Broadcom laid out the goal of ‘long-term adjusted EBITDA margins’ above 55% for the combined company. Of course, the phrasing gives Broadcom plenty of wiggle room. ‘Long-term’ can mean a wide range of time, while ‘adjusted EBITDA’ is basically a fictitious financial measure that excludes many of the true costs of doing business.

But even setting aside our unfashionable quibbles around accounting, Broadcom’s margin goal looks like a stretch for CA, at least in its current form. On Monday, the company reported its overall financial performance for its just-completed quarter, and it’s pretty clear there are businesses inside of CA that will appeal to Broadcom and those that may not make the cut. CA’s financial results highlight the vast financial differences between its mature, cash-rich mainframe business and the other lines of more growth-oriented software that it has picked up over the course of a roughly 30-year M&A career.

CA’s two main businesses are nearly the same size, but the mainframe division runs at a 67% operating margin – more than 4x the operating margin posted by its enterprise software division. For the company’s full fiscal year, which ended in March, the enterprise software unit put up $1.7bn in revenue but only $151m in operating income. The tiny margin in CA’s enterprise software business, which contrasts with its richly profitable mainframe division, won’t help Broadcom hit its projected EBITDA targets, no matter how many ‘adjustments’ are made. In fact, the division stands in the way.

That reality won’t be lost on Broadcom, which had collected a bullish following on Wall Street for its reputation as a sharp financial operator. Nor will the fact that most other hardware vendors (including HPE, Dell and fellow chipmaker Intel) that have acquired their way into the software industry have eventually unwound many of their purchases. CA’s enterprise software division sells software in numerous markets, including identity and access management, application development, and security and IT operations management. For Broadcom to reestablish credibility among skeptical investors and hit the targets for the combined company, it is almost certain to divest some of those CA units.

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

Infosec hits the exits

Mark Fontecchio

BY Brenon Daly

At Black Hat last year, we half-cleverly noted how information security (infosec) vendors should feel right at home in Mandalay Bay, since exits were hard to find in both the infosec industry and the casino itself. Now, as the annual security conference gets set to open this weekend, it’s a much different picture. The exit door has been thrown wide open, with an unprecedented level of both IPOs and M&A in the cybersecurity market.

Start with IPOs. At this point last year, only one cybersecurity provider had made it public (Okta). As the conference gets set to open this weekend, three infosec startups have already debuted on Wall Street this year (Zscaler, Carbon Black and Tenable). Collectively, this year’s trio of new listings has created $9bn of market value, more than 10 times the amount of venture backing they raised altogether.

More significantly, the long-expected wave of consolidation in the overpopulated infosec market is beginning to take shape. For instance, 451 Research’s M&A KnowledgeBase lists 18 infosec acquisitions in July, which matches the highest-ever monthly total for the sector. Last month’s acceleration continues the already-strong dealmaking activity posted earlier this year, putting 2018 on track for the most infosec transactions in any year in history. This year’s unprecedented rate of M&A activity is being driven by an ever-increasing number of buyers that have been attracted to the fast-growing market.

Subscribers to 451 Research can look for a full report on the exit environment for infosec companies on our site early next week.