Category: investment banking

Big tech deals come at big prices

Brenon Daly

Contact: Brenon Daly

This year is proving to be a very rich vintage for tech M&A. At the top end of the market, acquirers are paying higher multiples than they’ve paid in any year since the end of the recession. Consider the rather mature semiconductor industry, where, historically, acquisition activity has been characterized by low-multiple consolidation. That hasn’t been the case so far in 2016, where chip deals have accounted for three of the four largest transactions. Rather than dragging down the broad-market valuation, they are actually boosting it substantially.

The chip industry’s platinum valuation was once again on display in Qualcomm’s $39.2bn purchase of NXP, the latest – and largest – blockbuster transaction in the semiconductor industry. In addition to Qualcomm-NXP, there have been two other semiconductor deals valued at more than $10bn. The average multiple in those big-ticket transactions stands at an astounding 11.9x trailing sales. That’s more than twice the average multiple of 5.4x trailing sales for the three chip deals valued at more than $10bn last year, according to 451 Research’s M&A KnowledgeBase.

And while chip companies have been spending freely, other big buyers are also paying up. Microsoft’s $26.2bn play for LinkedIn values the online professional network at more than 8x trailing sales. Oracle, which itself trades at a little more than 4x trailing sales, has offered to buy NetSuite in a transaction that values the SaaS vendor at more than 10x trailing sales. (Although it’s not certain that the deal will actually go through due to disgruntled shareholders.)

More than any other recent year, the driver for those large-scale transactions in 2016 has been growth, whether it’s innovating existing products through M&A (Microsoft-LinkedIn), obtaining a presence in the nascent but expanding market of mobility and the Internet of Things (semiconductor deals), or acquiring a faster-growing delivery model for software (Oracle-NetSuite). Overall, the 50-largest tech acquisitions so far this year have gone off at 4.7x trailing sales, according to the M&A KnowledgeBase. That’s the highest level since the recent recession and a full turn higher than the 3.6x trailing sales recorded in 2015.

2012-to-2016-kb-avg-valuation-multiple

Survey: Back to normal for tech M&A

Brenon Daly

Contact: Brenon Daly

After two straight forecasts of substantial deterioration in the tech M&A market, the outlook for activity has picked back up, according to the latest edition of the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. Nearly half of the respondents (47%) indicated they would be increasing their activity in 2017 compared to 2016. On the other hand, 20% of respondents said they would be slowing down on acquisitions next year, with the remaining one-third (33%) forecasting no change in their rate.

Broadly, the latest top-level results of the M&A Leaders’ Survey represent a more ‘normalized’ forecast for activity, following the most bearish outlook we’ve ever recorded. In our previous survey last April, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number indicating they would be cutting back on their shopping. For comparison, in the just-completed survey, more than twice as many respondents said they would be accelerating acquisition activity than said they would be slowing down.

The shift in sentiment comes as tech M&A spending accelerated dramatically through the summer, with the value of transactions announced in Q3 hitting the third-highest quarterly level since the end of the recent recession, according to 451 Research’s M&A KnowledgeBase.

Now in its tenth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster drew responses from 150 senior M&A professional on a variety of topics, including forecasts for types and structure of transactions, as well as the impact of recent events on their deal-making plans. Some of the highlights:

  • Private equity buyers are expected to play an increasingly significant role in the market. Nearly half of survey respondents (45%) forecast buyout shops would spend more in 2017 than they have in 2016, compared to just one-quarter (28%) who forecast lower spending.
  • Respondents indicated the White House clash between Donald Trump and Hillary Clinton is slowing deal flow far more than any disruption caused by the UK effectively severing economic and political ties with the European Union, following June’s Brexit vote.
  • Concerns about potential liability due to cybersecurity (think Verizon-Yahoo) are making buyers take a much closer look at the companies they plan to acquire.
  • Buoyed by a handful of strong recent tech offerings, the IPO market is expected to accelerate even more next year, according to a majority of survey respondents.

Respondents to the M&A Leaders’ Survey will get aggregate results, as well as selected comments and insight, emailed to them tomorrow. 451 Research subscribers should look for a full report on the survey later this week.

mofo-ma-forecast-oct-2016

A summer surge puts Q3 tech M&A back on record pace

Brenon Daly

Contact: Brenon Daly

For at least one quarter, it was as if we never turned the calendar on the record-breaking pace of tech M&A we saw in 2016. Dealmakers around the globe spent $153bn on 910 tech, media and telecom (TMT) transactions announced from July to September. That ranks the just-completed Q3 as the third-highest quarterly total since the end of the recession, according to 451 Research’s M&A KnowledgeBase. In fact, the rather unexpectedly strong M&A spending in Q3 exactly matched the average quarterly tally from 2015, when deal value hit its highest annual level since the internet bubble burst.

This summer’s surge brings the total spent by TMT acquirers around the globe so far in 2016 to $336bn, putting 2016 already ahead of the full-year totals for six of the past eight years. Looking ahead, if we assume the pace of spending from January-September continues in Q4, full-year 2016 deal value would hit some $440bn – the second-highest annual total since 2002, according to the M&A KnowledgeBase.

Spending in the summer quarter was dominated by a parade of blockbuster transactions. Overall, last quarter saw four of the five largest deals of the year announced. Significant Q3 transactions include:

  • Continuing its big-ticket expansion into technology growth markets, SoftBank paid $32.4bn for ARM Holdings. The deal stands as the second-largest semiconductor transaction in history, trailing only Avago’s $37bn purchase of Broadcom last year.
  • Intel ended its experiment of baking security directly into its silicon by divesting a majority stake of its McAfee division. The move values McAfee at just $4.2bn, meaning the business has lost about 40% of its value under Intel’s six-year ownership. For comparison, during that same period, Symantec’s market value has almost doubled.
  • Hewlett Packard Enterprise unwound a series of earlier software acquisitions that were supposed to drive its next leg of growth, taking a pretty big discount in the process. The portfolio, which was accumulated over a decade by its predecessor company, cost HPE more than $20bn to acquire, but was spun off to Micro Focus in a transaction valued at $8.8bn.
  • Oracle paid $9.3bn, or 11x trailing sales, for NetSuite, making the largest purchase of a subscription software vendor ever. NetSuite’s valuation was roughly twice the level that Oracle has paid for the license-based software providers it has bought over the years.
  • In the biggest sale of a VC-backed company in two and a half years, Walmart paid $3.3bn for e-commerce startup Jet.com.

Our full report on the blockbuster Q3 tech M&A activity will be available to 451 Research subscribers later today.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2016 910 $153bn
Q2 2016 1,043 $110bn
Q1 2016 1,039 $73bn
Q4 2015 1,063 $185bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn

Source: 451 Research’s M&A KnowledgeBase

Tech M&A this summer is a really big deal

Brenon Daly

Contact: Brenon Daly Kenji Yonemoto

It’s been a blockbuster summer for blockbuster deals. Since July, tech acquirers have announced more transactions valued at $1bn+ than any quarter since the recent recession. 451 Research’s M&A KnowledgeBase has tallied a record 33 ‘three-comma deals’ here in Q3, significantly above the average of roughly 20 transactions per quarter over the past two years. Overall, big-ticket purchases, which had a median value of $2.2bn, account for a staggering $130bn of the roughly $150bn in total spending on tech M&A this quarter.

The billion-dollar prints this summer came from across the IT landscape, according to the M&A KnowledgeBase, with three semiconductor deals valued at more than $1bn, the largest SaaS transaction in history and the biggest exit for a VC-backed startup in two and a half years. Another source that has (rather unexpectedly) contributed to deal flow at the top end of the market recently has been divestitures. Fully one-quarter of the $1bn+ deals in Q3 involved the sale of divisions of larger companies, such as Hewlett Packard Enterprise shedding its software unit and Intel divesting a majority stake of McAfee. (Several of the billion-dollar transactions announced in Q3, such as the HP Software and McAfee deals, effectively involve unwinding previous billion-dollar acquisitions.)

451 Research will publish a full report on M&A activity in Q3 early next week. But the headline for the quarter is certainly the record number of big prints, which helped push spending to the third-highest quarterly total since the end of the recession, according to the M&A KnowledgeBase.

1bn-deal-quarterly

Source: 451 Research’s M&A KnowledgeBase

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

As candidates brawl, some spending plans get knocked down

Brenon Daly

Contact: Brenon Daly

Regardless of the outcome of tonight’s inaugural US presidential debate, this year’s election process has already turned off voters. The prospect of casting a ballot for either of the two mainstream presidential candidates – who are both currently viewed ‘unfavorably’ by a majority of US voters – in an increasingly rancorous campaign is casting a cloud that expands far beyond Washington DC. The electoral disenchantment is also likely to hurt business.

That’s one conclusion of a new survey from 451 Research’s ChangeWave service, which last week asked more than 1,900 consumers what impact the ongoing US presidential election will have on their shopping plans for the next three months. The vast majority of respondents (71%) said the Trump vs. Clinton circus would have no impact on their discretionary spending through the end of the year. However, if we look at the minority-but-still-sizable remaining portion (29%), those respondents overwhelmingly indicated they are putting away their checkbooks. In fact, the number of consumers who forecast they would be decreasing their discretionary purchases (22%) was 11 times higher than those who said they would be increasing their purchases (2%).

We mention the ChangeWave finding because it may (and here we emphasize the word ‘may’) help explain some of the slowdown in recent tech M&A activity. Obviously, some qualifications are needed any time we extrapolate results from a consumer-based survey to the corporate world. To be clear, ChangeWave polled consumers only about their plans for individual discretionary purchases, and did not specifically address corporate M&A. Nor did it focus on tech. However, given that companies are just a collection of people who tend to bring their perceptions with them to the office, and acquisitions can sometimes be viewed as a discretionary purchase, we would make the case that ChangeWave’s finding has relevance to the tech M&A community.

Regardless of whether the presidential election is actually knocking deals off the table, something is slowing down activity. In the first half of 2016, tech acquirers announced an average of 350 transactions each month, according to 451 Research’s M&A KnowledgeBase. Both July and August came in below that level. In fact, last month’s total of just 297 tech deals, representing a 14% decline from the monthly average in the first half of 2016, was the first time since March 2014 that M&A volume failed to top 300. And while September won’t wrap up until the end of this week, this month is tracking even weaker than last month. (We are on pace for about 270 announced transactions for September.) In other words, as we get closer to election day, M&A activity is dropping off.

cw-presidential-election-impact

A public/private split in Apptio’s IPO

Brenon Daly

Contact: Brenon Daly

Apptio soared onto Wall Street in its debut, pricing its offering above the expected range and then jumping almost 50% in early Nasdaq trading. The IT spend management vendor raised $96m in its IPO, and nosed up toward the elevated status of a unicorn. However, in a clear sign of the frothiness of the late-stage funding market a few years ago, Apptio shares are currently trading only slightly above the price the institutional backers paid in the company’s last private-market round in May 2013.

That’s not to take anything away from Apptio, which created some $850m of market value in its offering. (Our math: Apptio has roughly 37 million shares outstanding, on an undiluted basis, and they were changing hands at about $23 each in midday trading under the ticker APTI.) That works out to a solid 5.4 times 2016 revenue, which we project at about $157m. (Last year and so far in the first half of 2016, Apptio has increased sales in the low-20% range. That growth rate, while still respectable, is about half the rate it had been growing. We suspect that deceleration, combined with uninterrupted red ink at the company, help explain why Wall Street didn’t receive Apptio more bullishly.)

In midday trading, Apptio’s share price was only slightly above the $22.69 per share that it sold shares to so-called ‘crossover investors’ Janus Capital Group and T. Rowe Price, among other investors, in its series E financing, according to the vendor’s prospectus. A relatively recent phenomenon, crossover investing has seen a number of deep-pocketed mutual funds shift some of their investment dollars to private companies in an effort to build an early position in a business they hope will come public and trade up from there.

However, given the glacial pace of tech IPOs in recent years as well as the overall deflation of the hype around unicorns, that strategy hasn’t proved particularly lucrative. In fact, many of the price adjustments that mutual funds have made on the private company holding have been markdowns.

But the institutional investors would counter that the short-term valuation of their portfolio matters less than the ultimate return. For the most part, we’ve seen conservative pricing of tech IPOs in 2016. (Twilio, for instance, has more than doubled since its IPO three months ago.) Apptio probably doesn’t have the growth rate to be as explosive in the aftermarket as Twilio, but it can still build value. That’s what investors – regardless of when they bought in – are banking on.

Recent enterprise tech IPOs*

Company Date of offering
Pure Storage October 7, 2015
Mimecast November 20, 2015
Atlassian December 10, 2015
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016

*Includes Nasdaq and NYSE listings only

A tarnished Golden Tombstone

Brenon Daly

Contact: Brenon Daly

In each of the past nine years, 451 Research has surveyed more than 100 corporate development executives to find out which deal announced during that year stood out to them as the most significant transaction. The peer-selected prize, which we call the Golden Tombstone, has gone to companies across the tech landscape. Still, many of those blockbuster transactions haven’t generated the expected returns. The Golden Tombstone, it turns out, can tarnish over time.

We saw that yet again this week, as Intel unwound its full ownership of McAfee, which was voted the most significant transaction of 2010. With that divestiture, the number of Golden Tombstone-winning transactions that have been undone climbed to three, representing an alarming one-third of the annual prize winners. (The others: Hewlett-Packard Enterprises sold off its services business in May, reversing its 2008 acquisition of EDS; and Google unwound its 2011 purchase of Motorola Mobility three years later.) For the record, the ‘exit’ prices for all of those businesses was far less than the ‘entrance’ prices.

Not to jinx the transaction or anything, but we would nonetheless note that last year’s landslide winner was Dell’s acquisition of EMC. That transaction, which was announced last October and officially closed earlier this week, was an obvious vote for the Golden Tombstone. After all, it is the largest pure tech transaction in history. And yet, even though Dell and EMC are only (officially) beginning their corporate life together, there’s already some ominous history lining up against the deal.

Top vote-getter for ‘most significant tech transaction’

Year Deal
2015 Dell’s acquisition of EMC
2014 Facebook’s acquisition of WhatsApp
2013 IBM’s acquisition of SoftLayer
2012 VMware’s acquisition of Nicira
2011 Google’s acquisition of Motorola Mobility
2010 Intel’s acquisition of McAfee
2009 Oracle’s acquisition of Sun Microsystems
2008 Hewlett-Packard’s acquisition of EDS
2007 Citrix’s acquisition of XenSource

Source: 451 Research Tech Corporate Development Outlook Survey

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

Dell-EMC closes, but there’s still dealing to be done

Brenon Daly

Contact: Brenon Daly

Whenever a newly joined couple move in together, there are always a few items that just don’t fit as the two houses are merged into one. These things can range from minor overlapping bits (dishes that don’t quite match) to bulky odd-lot items (that rather ugly plaid couch that was hidden away in a corner of the basement). Invariably, the domestically blissed couple has to sort through their stuff to figure out what’s coming and what’s going.

As Dell and EMC officially close their union today, the process of sorting out their combined house assumes a new urgency. (See our full coverage of the transaction.) Of course, the two companies have already begun rationalizing their holdings in anticipation of coming together, most notably with Dell raising more than $5bn over the past half-year by shedding ill-fitting divisions. These divestitures have essentially involved Dell unwinding earlier acquisitions that didn’t deliver promised returns, notably Perot Systems, as well as Quest Software and SonicWALL.

We suspect the next bit of unwinding will likely come from Dell reversing EMC’s previous acquisition of Documentum. (This move has been mulled for several years, but now seems more likely as Dell takes on tens of billions of dollars of debt to pay for the largest-ever acquisition in the tech industry.) Somewhat like Veritas within Symantec, Documentum has never really fit inside EMC. It is even harder to see the strategic rationale for the content management software inside Dell, which has sold off most of its software assets. Dell is (once again) focusing on hardware, with product revenue accounting for roughly three-quarters of the combined company revenue of $74bn.

Documentum serves as the main piece of EMC’s Enterprise Content Division (ECD), a $600m unit that is a bit lost inside a $24bn company. (We would note that ECD accounts for just 2.5% of overall revenue at EMC – exactly the same portion of revenue generated at Dell by its software business, which was divested in June.) ECD would represent less than 1% of the combined company revenue, likely relegating it even further to an ‘afterthought’ sale.

That won’t help ECD, which is already slowly shrinking inside EMC. Unusually for a software company, product sales account for only about one-quarter of the division’s revenue, with the remaining three-quarters coming from maintenance and support. Still, ECD is able to put up very respectable gross margins in the mid-60% range. That financial profile, which represents a mature and somewhat sticky offering, fits well with private equity requirements. So we could see Documentum going to a buyout shop, which is where Veritas landed, as well as Dell’s own software division.

However, if Dell does manage to sell Documentum, it would likely garner only about $1bn for the business. (For the record, EMC paid $1.8bn, mostly in equity, for Documentum in 2003.) That would value ECD at roughly 1.7 times sales, which is exactly the valuation Dell got when it unwound its own software business three months ago.

Even as summer heated up, tech dealmaking cooled down in August

Brenon Daly

Contact: Brenon Daly Kenji Yonemoto

After surging at the start of summer, tech M&A activity in August settled back to a more representative level. Acquirers around the globe announced 281 tech, media and telecom transactions valued at $30.5bn in the just-completed month, according to 451 Research’s M&A KnowledgeBase. The spending basically matches the August levels of the two previous years. However, it is just one-third the amount dealmakers spent in July and half of June’s spending.

The main reason why spending last month didn’t drop further than it did – August still ranked as the third-highest monthly total in 2016 – is primarily due to an unprecedented wave of private equity (PE) activity. Last month, buyout shops accounted for roughly half of all tech M&A spending, which is about three times their typical level. Overall, PE shops were buyers in five of the 10 largest transactions, including both of August’s biggest prints, according to the M&A KnowledgeBase.

While M&A spending held up last month, the same can’t be said for deal volume. The number of prints announced in August sank below 300 for the first time in two and a half years, according to the M&A KnowledgeBase. Deal volume dropped to just 281 transactions, down 18% from the monthly average in 2016. (Relatedly or not, stock trading volume last month also slid to some of the lowest levels in recent memory.)

With eight months of 2016 now complete, tech M&A spending has already cracked $300bn, putting it ahead of five of the seven full-year totals since the recent recession ended. Assuming the rest of the year continues at the same rate it has shown since January, 2016 would see some $450bn worth of deal flow. However, we suspect that the pace of spending in the remaining four months of the year could slow if several looming macro factors (an increasingly rancorous US election cycle, a long-considered interest rate hike, the continued deceleration of most of the world’s large economies) introduce more uncertainty into the picture.Jan-Aug MA totals

In its IPO, will Apptio suffer the curse of the crossover?

Brenon Daly

Contact: Brenon Daly

In what’s shaping up to be a bit of a test case for late-stage financings, a rather richly valued Apptio plans to go public. The company, which sells software that helps clients manage their IT spending, has revealed paperwork for an IPO with a placeholder amount of $75m. However, as Apptio makes its way to Wall Street, one of its existing backers on Wall Street has already trimmed the value of the company.

Institutional investor T. Rowe Price led Apptio’s $50m series D round in March 2012. At the end of 2015, the mutual fund had reduced the value of its investment by 24% compared with the previous year, according to the prospectus of the fund that holds Apptio equity. T. Rowe also marked down by a similar amount its holding of Apptio shares from a financing a year later. Fellow mutual fund Janus led the $45 series E in May 2013, Apptio’s last private round. According to Apptio’s prospectus, the company sold shares to Janus and other investors in that round at $22.69 per share.

Of course, valuations rise and fall every day on Wall Street. And startups that have drawn big money from mutual funds only to see their shares get marked down after the purchase often say the downgrades are mere ‘accounting’ moves made by people who don’t really understand Silicon Valley finance. However, in the case of Apptio, some of the discount may be warranted because it is currently growing only half as fast as it was when it raised its big slugs of capital from the so-called crossover investors.

In the first two quarters of 2016, Apptio has increased revenue a solid-but-not-spectacular 22%. That’s the same pace as its full-year 2015, but just half the rate of 2014. At the same time as Apptio’s growth has slowed, losses have mounted. It lost $41m in 2015, up from $33m in 2014. Although losses have eased so far this year, Apptio still very much runs in the red.

Part of the reason for the deep losses is that Apptio’s software is a rather heavy implementation, which can take several months to set up. For its software to be useful, clients need to have an IT budget that runs in the hundreds of millions of dollars, and some customization of the software is typically required. (Roughly 20% of the vendor’s revenue comes from professional services.)

Although Apptio has collected an enviable roster of clients, it counts just 325 total customers. As a point of reference, that’s roughly the same number of customers that Workday had when it went public in 2012. Further, the two companies were roughly the same size, recording about $130m in revenue in the fiscal year leading up to their mid-summer filings. However, at the time of their IPOs, they were on very different trajectories: Workday was doubling revenue, compared with 22% growth for Apptio. Obviously, for growth-focused Wall Street, that is almost certain to result in very different valuations for the companies. Workday hit the market at an astonishing 40x trailing sales, while Apptio would probably count itself fortunate to garner a double-digit valuation.

Enterprise tech IPOs* over the past 12 months

Company Date of offering
Pure Storage October 7, 2015
Mimecast November 20, 2015
Atlassian December 10, 2015
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016

*Includes Nasdaq and NYSE listings only