Category: investment banking

The buyout barons get busy on Wall Street

Brenon Daly

Contact: Brenon Daly

Cash-rich buyout firms are still shopping on Wall Street, undeterred by recent record levels hit in US equity markets. The dramatically increased buying power of private equity (PE) shops has resulted in an unprecedented number of significant tech vendors erased from US exchanges so far this year. Already in just eight months of 2016, PE firms have announced nine take-privates valued at more than $500m, up from an average of about five transactions per year in the past half-decade, according to 451 Research’s M&A KnowledgeBase.

Part of the reason why PE shops are buying big companies is that they have amassed billions of dollars of capital, so they don’t have to sweat when writing the equity check. Further, credit is once again flowing relatively freely to help support these large deals. With money in hand, buyout firms are ready to do business. To get a sense of that, consider Vista Equity Partners’ $1.8bn acquisition of Marketo in May. According to the proxy filed with the SEC in connection with the transaction, Vista announced the purchase just one month after first informally floating the idea of buying the marketing automation specialist.

Of course, it also helps that buyout shops are willing to pay up to do their deals. In the case of Marketo, for instance, Vista is paying 7.9x trailing sales for company, which was growing at about 30%. Vista paid a comparable multiple in its similarly sized reach for Cvent in April. Meanwhile, the buyout pair of Silver Lake Partners and Thoma Bravo paid a full turn more last October for SolarWinds, a roughly $500m business that sold for $4.5bn. The valuation of the network management software provider looks equally as rich when we consider that it sold for 28x EBITDA, by our calculation.

On average, in the nine large take-privates so far in 2016, PE firms have paid an average of 4.4x trailing sales, according to the M&A KnowledgeBase. That, too, is the richest valuation we have recorded for PE shops, slightly ahead of the average of 4.1x trailing sales in 2015 but about twice the prevailing multiple in the previous three years. For more context: The recent take-privates are valued about half again as richly as the LBOs done during the previous buyout boom of 2006-07, when the average tech vendor went private for slightly less than 3x trailing sales, according to the M&A KnowledgeBase.

KB recent take-privates

The comeback kids of the tech IPO market

Brenon Daly

Contact: Brenon Daly

If there’s going to be a recovery in the tech IPO market, information security (infosec) looks like it will lead the way. According to 451 Research’s recently launched M&A KnowledgeBase Premium, one-quarter of the 72 startups that we think are of a size and mind to go public in the near future come from the infosec industry. The ‘shadow IPO’ pipeline is one of the key features of the new premium version of 451 Research’s industry-leading M&A KnowledgeBase.

The premium version of our M&A KnowledgeBase features a full financial profile of the candidates, as well as 451 Research’s qualitative assessment of each company’s technology and its competitive positioning in the market. For instance, the profile of Veracode includes our proprietary estimates of the application security startup’s bookings for both 2015 and 2016, plus our analysis of its expansion into the new growth market of mobile apps. Altogether, KnowledgeBase Premium has a shortlist of 18 infosec vendors that could be eyeing an upcoming IPO, including Carbon Black, LogRhythm and ForeScout.

Although the IPO market has been mired in a slump recently, with just three enterprise-focused offerings so far this year, many private companies have matured to the point where their business models are comparable to their publicly traded brethren. Further, many are putting up growth rates that leave Nasdaq and NYSE firms in the dust. That’s particularly true in the infosec space, where a recent survey of 881 IT budget-holders by 451 Research’s Voice of the Enterprise found that 46% of respondents had more to spend on security in the coming quarter, compared with the start of the year. That was 10 times the percentage who indicated that their infosec budgets were shrinking.

Of course, merely having a business that’s ready to go public doesn’t necessarily mean that the company needs to file an S1. Most of the infosec companies have plenty of cash in their treasuries, with the 18 pre-IPO vendors having raised about $2bn in venture backing. (KnowledgeBase Premium not only tracks fundings, but in some cases it also notes the valuation of the funding.) Additionally, many of the publicly traded infosec names – including both of the sector’s most recent debutants, Rapid7 and SecureWorks – haven’t necessarily found bullish investors on Wall Street.

But as the Twilio offering and its subsequent aftermarket trading has shown, a company with a strong growth story can almost always find buyers, regardless of what’s happening in the overall market. With that in mind, we’ll watch for more of the 72 names on our M&A KnowledgeBase Premium IPO shortlist – particularly those in the bustling infosec arena – to move from the pipeline to Wall Street in the coming quarters.

IPO pipeline by sector

Source: 451 Research’s M&A KnowledgeBase Premium

Is Apigee set to be an acquiree?

Brenon Daly

Contact: Brenon Daly

After a dual-track process ended in an IPO in April 2015, Apigee is understood to be trying once again to sell itself. Several market sources have indicated that the API management vendor has retained Morgan Stanley to run the process. According to our understanding, a handful of large software infrastructure vendors are considering a bid for Apigee, which would likely trade for roughly $500-600m.

Apigee has had a tough run as a public company. In its 16 months on the Nasdaq, it has never traded above its IPO price of $17 per share. (Morgan Stanley led Apigee’s IPO.) During the broad market meltdown in February, Apigee stock touched $5. Although shares have nearly tripled in value in the half-year since then, the company is still underwater from its debut.

One reason for Wall Street’s bearishness is that Apigee is viewed as a ‘sub-scale’ software provider. It likely finished its most recent fiscal year, which ended at the end of July, with less than $100m in revenue. (For comparison, that is less than privately held MuleSoft, which is a sometimes rival to Apigee with its broader integration portfolio.) Further, Apigee is running in the red, losing about $10m in each of the past four quarters on a GAAP basis.

Possible bidders for Apigee, which currently has a market cap of $435m, include big software firms such as existing partners SAP and Pivotal, as well as CA Technologies. According to our understanding, CA was a serious suitor for Apigee before the IPO. That would have been on top of the existing API management CA obtained with its purchase of Layer 7 in April 2013.

Further, CA bought agile software development tools supplier Rally Software last year in a $480m transaction that lines up fairly closely – both strategically and financially – with a possible pickup of Apigee. Both play a part in the broader software lifecycle management market, and both found Wall Street to be a fairly inhospitable neighborhood. Rally garnered 5.5x trailing revenue in its sale to CA. However, Apigee is growing faster (roughly 30%, compared with about 20% at Rally) so would likely get a bit of a premium. Apigee currently trades at about $435m, or 4.7x trailing sales.

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

For some tech companies, it’s a matter of stumbling to the sidelines

Brenon Daly

Contact: Brenon Daly

We noted earlier this week that IT budgets are tightening, meaning growth could get harder to find as the year rolls along. Sluggish expansion and diminished outlooks have already hit some of the tech industry’s major names. And while they search uncertainly for a way to bump up their top lines, they aren’t necessarily looking to M&A. We’ve already seen a few key companies, particularly those accustomed to growing at a rapid clip, step out of the market.

  • Apple is shrinking after a decade and a half of uninterrupted growth that was the envy of the tech industry. In the previous three years, when it was growing revenue at an average of a mid-teens rate, the company printed about an acquisition every month, according to 451 Research’s M&A KnowledgeBase. Yet it hasn’t been nearly that active as revenue declined. Earlier this week, Apple bought an early-stage analytics provider – its first deal since January.
  • Former highflier FireEye has dramatically come back to earth. The security specialist now expects to earn just $100m in additional revenue in 2016, which is half the $200m in new revenue it posted in 2015. That means FireEye would generate mid-teens growth this year, just one-third the level it grew last year. FireEye hasn’t announced a deal in the past six months.
  • Like FireEye, Twitter is growing at only one-third the rate it was last year. (In its second quarter, Twitter increased revenue just 20%, compared with 61% in Q2 2015.) According to the M&A KnowledgeBase, Twitter has done 19 acquisitions since its IPO in November 2013. However, just one of those transactions has come in the past year, as the company has struggled with attracting new users and selling more ads to that decelerating audience.

As marquee tech firms find their growth slowing or even reversing, they are more likely to hunker down. The first order of business for a company that’s stumbling is to understand where it tripped up and what it needs to do to regain its stride. (As they say, growth masks a lot of problems.) Acquisitions – potentially expensive and often irrecoverably distracting – don’t really fit strategically when a vendor is doing layoffs (FireEye) or looking to sublease some of its headquarters (Twitter). If more of the tech industry does indeed feel the pinch of tightening IT budgets, the recent surge in M&A could slow substantially for the rest of the year.

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

Despite summer heat, some chill in the air on Wall Street

Brenon Daly

Contact: Brenon Daly

Just as this summer’s stock market rally is the only reason the major US equity indexes are in the green this year, the M&A surge since June is solely responsible for elevating 2016 above a sort of middling year for tech dealmaking. The recent activity in both markets has been fairly astounding. The Nasdaq has soared 8% just since the start of July. Meanwhile, tech acquirers announced deals worth $91bn last month – the third-highest monthly total since the end of the recession in 2009.

For both stock traders and dealmakers, the second half of 2016 has started with a sprint. But will the two markets, which are correlated, be able to sustain the pace? Or will the shared worries around global stability and economic growth slow them?

Focusing just on Wall Street, confidence there is waning, if only slightly. In the latest survey of investors by our ChangeWave Research service, nearly half (44%) of respondents indicated that they were ‘less certain’ about the direction of the US stock market now than they were three months ago. Although that is down from the levels reported during the bear market at the start of 2016, we would note that the pessimistic assessment in July – with more than three times as many respondents saying they were ‘less confident’ than said they were ‘more confident’ – came during the biggest stock market rally of the year.

Meanwhile, that lack of confidence is also being felt by a number of tech vendors, with recent growth forecasts being pulled in or even reversed. And even though some companies have sounded more cautious in their outlook during the ongoing Q2 earnings season, actually hitting those diminished expectations could prove more challenging than expected. Consider this: 22% of ChangeWave survey respondents said their IT budget in the second half of 2016 would be lower than the first half, compared with 17% who said they expect to have more to spend.

CW july 2016 Wall Street

July fireworks in tech M&A

Brenon Daly

Contact: Brenon Daly

The largest-ever SaaS deal, a trio of billion-dollar blockbuster chip transactions and big-spending buyout shops all helped push tech M&A spending in July to its highest monthly total since last fall. Across the globe, acquirers spent $91bn on tech deals in the just-completed month, including a dozen transactions valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. That’s about twice as many ‘three-comma’ deals as we would typically see in even a banner year for tech M&A.

And, until this summer, no one would have characterized 2016 as a banner year. The relatively paltry amount spent on transactions announced in the first five months of the year had put 2016 on track for less than half last year’s amount. However, spending surged in June to $67bn, roughly triple the average from the previous five months, and then soared another $24bn higher in July.

July’s M&A fireworks came in a number of tech markets:

  • SoftBank’s unexpected $32.4bn purchase of ARM Holdings stands as the second-largest semiconductor deal in history, trailing only Avago’s $37bn reach for Broadcom last year.
  • Oracle paid $9.3bn, or 11x trailing sales, for NetSuite, making it the largest acquisition of a subscription software vendor ever.
  • Verizon announced its biggest non-telecom transaction, spending $4.8bn for most of the (faded) Internet properties of Yahoo.
  • Relative newcomer Siris Capital bought videoconference equipment maker Polycom for $2bn, which is more than the buyout shop had spent on its previous four deals combined.

The summer surge in M&A comes as US equity markets also moved higher, with some indexes hitting record levels. (The Nasdaq, for instance, soared 7% in July.) Overall, this summer’s dramatic acceleration in M&A spending has put 2016 back on track for a strong year. With seven months now complete, the value of acquisitions announced so far this year tops $272bn – already putting 2016 ahead of the full-year totals for five of the seven years since the recent recession ended.

Jan to July MA totals

Still early days for IoT security

Brenon Daly

Contact: Christian Renaud Brenon Daly

The Internet of Things (IoT) market is transitioning from early (over) hype to production deployments, causing problems with operational security. This has raised the visibility of an increasing number of IoT startups, ranging from legacy operational technology (OT) security vendors that have been ‘IoT washed’ to IT security providers and pure plays. In a just-published report, we profile 11 startups looking to take advantage of the growing interest in IoT security. (Collectively, these companies have received about $115m from venture investors, and we would note that they represent a small subset of all IoT security technology startups.)

In terms of exits, 451 Research’s M&A KnowledgeBase tallies just nine security-related transactions that we believe were driven entirely, or in large part, by IoT. Spending on just those rather narrowly defined IoT security deals totaled $966m, with one pairing (Belden-Tripwire) accounting for the vast majority of the total.

The fact that security isn’t spurring more IoT acquisitions isn’t all that surprising, when viewed against how M&A has played out in other emerging tech markets. Vendors tend to focus on the opportunities – rather than the threats – that come with the new, new thing. Consider the SaaS space, which essentially changes the delivery of software. Literally, thousands of SaaS applications have been acquired in recent years, whether through consolidation or expansion into adjacent areas.

However, only a handful of transactions have gone toward securing the app, despite the fact that 451 Research surveys have shown that concerns about security are the primary obstacle for SaaS adoption, just as they are for IoT deployments. (For instance, just two of the 43 acquisitions that SaaS kingpin Salesforce has done since its founding have involved security, and both have been tiny deals.) As IoT deployments broaden and become more complex, we expect security to account for more than its current 3% of deal flow. Again, to see which startups might be figuring into upcoming deal flow, see our full report on IoT security M&A.

IoT MA as % of overall

The booming buyout business in tech M&A

Brenon Daly

Contact: Brenon Daly

Amid a record pace of private equity (PE) transactions, buyout shop Apax Partners has announced not one but two billion-dollar deals already this month. The London-based firm sold both ERP vendor Epicor Software and a website for automobile classified ads, TRADER, to fellow PE shops. Thoma Bravo will pick up TRADER for $1.2bn, which marks its fifth transaction of the year, while KKR will acquire Epicor. (Terms of the Epicor acquisition weren’t released, but the software provider generated over $1bn in sales, and the rumored pricing was at least three times that amount.)

Apax’s pair of 10-digit deals brings the number of PE acquisitions valued at more than $1bn so far this year to 10, according to 451 Research’s M&A KnowledgeBase. The transactions have run the gamut of possible structures, including secondaries like TRADER and Epicor, a carve-out (Dell’s software business) and take-privates such as Qlik and Marketo. Altogether, the string of blockbuster deals by buyout firms has put PE spending so far this year higher than the comparable period in any other post-recession year except one. (We would note that 2013’s totals were skewed by a single transaction, Dell’s LBO, which accounted for nearly 60% of the spending during that period.)

More importantly, the pace of both big-ticket deals and overall transactions has accelerated dramatically in the past three months. All but one of the 10 deals valued at more than $1bn has come since April, with 85% of total disclosed YTD spending of $21.9bn coming in just the second quarter, according to the M&A KnowledgeBase. Additionally, buyout firms announced a record number of quarterly transactions in the April-June period, with 72 PE prints. See more on recent PE deals and valuations in our full report on the tech M&A activity in Q2.

PE activity

Period Deal volume Deal value
January-June 2016 137 $21.9bn
January-June 2015 116 $19.5bn
January-June 2014 106 $16.3bn
January-June 2013 90 $42.6bn (includes $24.8bn Dell LBO)
January-June 2012 75 $9.9bn
January-June 2011 97 $12.5bn

Source: 451 Research’s M&A KnowledgeBase

Brexit breaks Q2’s tech M&A rebound

Brenon Daly

Contact: Brenon Daly

For the first two months of the just-completed second quarter, tech dealmakers went about their business at the same sedate pace they had all year. Then came the June boom. Spending on tech, media and telecom (TMT) acquisitions in the final month of Q2 tripled from the average level in the five previous months, with June alone featuring six of the seven largest TMT deals announced in all of Q2, according to 451 Research’s M&A KnowledgeBase. The late flurry of big-ticket transactions helped elevate M&A spending from the middling level it had sunk to in 2016 after last year’s record run.

If Q2 ended with a bang for M&A, the same could certainly be said about geopolitics. In what is widely considered the largest reshaping – and the sharpest reversal – in Europe since World War II, the UK narrowly voted in late June to end its European Union membership. The so-called ‘Brexit’ decision immediately sparked a wave of selling on equity exchanges around the world that incinerated trillions of dollars of market value.

As the political instability and economic uncertainty sparked by the unprecedented vote by members of the world’s fifth-largest economy rippled around the world, shell-shocked dealmakers stepped out of the market. In the final week of June – a period that covers the results of the UK vote and the immediate aftermath – the number of deals dropped by fully one-quarter compared with the weekly average of the first three weeks of the month. More dramatically, transactions announced in the post-Brexit week accounted for only 4% of the total spending in June. (Obviously, these are very short-term reactions to the historic event. See our analysis of the potential longer-term impact of Brexit on the tech economy, including employee movement, taxes and tariffs, privacy, and capital markets.)

Yet even as June ended with a whimper, the robust activity before Brexit boosted overall Q2 spending to $107bn, about 50% higher than the $73bn recorded in Q1, according to the M&A KnowledgeBase. (However, for some perspective on just how far M&A spending has fallen from last year’s historic levels, spending in the just-completed Q2 stands at just half the level of Q2 2015.) Still, the flurry of sizable deals in the first three weeks of June lifts the total value of year-to-date transactions to about $180bn, putting 2016 on track for the third-highest-spending year since the end of the recession.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2016 1,008 $107bn
Q1 2016 1,031 $73bn
Q4 2015 1,052 $184bn
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
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

The June boom for tech M&A

Brenon Daly

Contact: Brenon Daly

With a week still remaining in June, spending on tech M&A this month has already matched the total value of all transactions announced over the previous three months combined, according to 451 Research’s M&A KnowledgeBase. A parade of big-ticket deals, including 11 valued at more than $1bn, has pushed June spending by tech acquirers to its highest monthly level since last October.

Of course, the summer parade is headed by Microsoft’s massive $26.2bn acquisition of LinkedIn in mid-June – a single transaction that exceeds the full monthly spending in all but one month so far this year, according to the M&A KnowledgeBase. But this month’s robust activity has extended beyond just the blockbuster Microsoft-LinkedIn pairing and also includes:

  • The largest-ever online gaming deal, with Tencent paying $8.6bn for a majority stake in Supercell.
  • Thoma Bravo announcing the biggest take-private of the year, paying $3bn for Qlik.
  • Symantec inking the second-largest information security deal with its $4.7bn reach for Blue Coat Systems.
  • Salesforce paying $2.8bn – reflecting a 60% premium and double-digit valuation – for Demandware, the biggest SaaS transaction in nearly two years.

More broadly, the colossal spending month of June lifts 2016 above what had been shaping up as a middling year for M&A. (In the January-May period, spending came in less than half the level of the first five months of 2015.) Including the June bonanza boosts total year-to-date spending to about $180bn, putting it on track for the third-highest-spending year since the end of the recession.

2016 monthly tech M&A activity

Period Deal volume Deal value
June 1-24, 2016 287 $63.3bn
May 2016 317 $21.8bn
April 2016 338 $19.6bn
March 2016 335 $23.3bn
February 2016 319 $29.2bn
January 2016 378 $20.9bn

451 Research’s M&A KnowledgeBase

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