Category: investment banking

The tech M&A ‘Brexit’

Brenon Daly

Contact: Brenon Daly

As the United Kingdom gets set to vote in a historic referendum on its membership in the European Union, we would note that a ‘Brexit’ has already been happening when it comes to tech M&A. The island’s trade relations with the 27 other EU countries are just a fraction of its domestic deals and its acquisition activity with its former colony, the US. It turns out that not many tech transactions flow across the Channel.

Over the past half-decade, just 164 UK-based tech companies have sold to companies based in fellow EU countries, according to 451 Research’s M&A KnowledgeBase. Proceeds from the EU shoppers have totaled only $7bn, with most of that ($4.9bn, or 70%) coming in a single transaction (France’s Schneider Electric picked up London-based Invensys in mid-2013). After that blockbuster, the size of UK-EU transactions drops swiftly, with just one other print valued at more than $300m.

Those paltry totals stand in sharp contrast to the UK’s transatlantic dealings. Some 597 British tech companies have been picked up by US-based buyers, with total spending hitting $57bn, according to 451 Research’s M&A KnowledgeBase. For perspective, that’s more than the $53bn that UK tech companies have paid for fellow UK tech companies in the same period.

Of course, the US and the UK share a primary language and a ‘special relationship’ – in the Churchill sense – that doesn’t extend to other EU countries. And the US has the world’s largest economy, along with the most-acquisitive tech companies, many of which have mountains of cash from European operations that they can’t bring back to the US without taking a significant tax hit. But still, when we compare US-UK and EU-UK acquisition activity, we can’t help but notice the union ties just don’t bind.

Acquisitions of UK-based tech companies since Jan. 1, 2011

Headquarters of acquiring company Deal volume Deal value
European Union 164 $7bn
United States 597 $57bn
United Kingdom 891 $53bn

Source: 451 Research’s M&A KnowledgeBase

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

Pricing out an alternate reality for Salesforce-LinkedIn

Brenon Daly

Contact: Brenon Daly

An enterprise software giant trumpets its acquisition of an online site that has collected millions of profiles of business professionals that it plans to use to make its applications ‘smarter’ and its users more productive. We’re talking about Microsoft’s blockbuster purchase of LinkedIn this week, right? Actually, we’re not.

Instead, we’re going back about a half-dozen years – and shaving several zeros off the price tag – to look at Salesforce’s $142m pickup of Jigsaw Data in April 2010. Jigsaw, which built a sort of business directory from crowdsourced information, isn’t exactly comparable to LinkedIn because it mostly lacked LinkedIn’s networking component and because the ultimate source of information for the profiles differed at the two sites. However, the rationale for the two deals lines up almost identically, and the division that Salesforce created on the back of the Jigsaw buy (Data.com) runs under the tagline that could be lifted directly from LinkedIn: ‘The right business connection is just a click away.’

We were thinking back on Jigsaw’s acquisition – which, at the time, stood as the largest transaction by Salesforce – as reports emerged that the SaaS giant had been bidding for LinkedIn, but ultimately came up short against Microsoft. Our first reaction: Of course Benioff & Co. had been in the frame. After all, the two high-profile companies have been increasingly going after each other, with Salesforce adding a social network function (The Corner) to the directory business at Data.com and LinkedIn launching its CRM product (Sales Navigator). And, not to be cynical, even if it didn’t want to buy LinkedIn outright, why wouldn’t Salesforce use the due-diligence process to gain a little competitive intelligence about its rival?

As we thought more about Salesforce’s M&A, we started penciling out an alternate scenario from the spring of 2010, one in which the company passed on Jigsaw and instead went right to the top, acquiring LinkedIn. To be clear, this requires us to make a fair number of assumptions as we revise history with a rather broad brush. Further, our ‘what might have been’ look glosses over huge potential snags, such as the fact that Salesforce only had $1.7bn in cash at the time, and leaves out the whole issue of integrating LinkedIn.

Nonetheless, with all of those disclaimers about our bit of blue-sky thinking, here’s the bottom line on the hypothetical Salesforce-LinkedIn pairing at the turn of the decade: It probably could have gotten done at one-third the cost that Microsoft says it will pay. To put a number on it, we calculate that Salesforce could have spent roughly $9bn for LinkedIn back in 2010, rather than the $26bn that Microsoft is handing over.

Our back-of-the envelope math is, admittedly, based on relatively selective metrics. But here are the basics: At the time of the Jigsaw deal (April 2010), fast-growing LinkedIn had about $200m in sales and 150 million total members. If we apply the roughly $60 per member that Microsoft paid for LinkedIn ($26bn/433 million members = $60/member), then LinkedIn’s 150 million members would have been valued at $9bn. (Incidentally, that valuation exactly matches LinkedIn’s closing-day market cap on its IPO a year later, in May 2011.)

On the other hand, if we use a revenue multiple, the hypothetical valuation of a much-smaller LinkedIn drops significantly. Microsoft paid about 8x trailing sales, which would give the 2010-vintage LinkedIn, with its $200m in sales, a valuation of just $1.6bn. (We would add that other valuation metrics using net income or EBITDA don’t make much sense because LinkedIn was basically breaking even at the time, throwing off only a few tens of millions of dollars in cash.)

However, LinkedIn would certainly have commanded a double-digit price-to-sales multiple because it was doubling revenue every year at the time. (LinkedIn finished 2010 with $243m in revenue and 2011 with over $500m in sales, while Salesforce was increasing revenue only about 20%, although it was north of $1bn at the time.) By any metric, LinkedIn would have garnered a platinum bid from Salesforce in our hypothetical pairing, as surely as it got one from Microsoft. But on an absolute basis, the CRM giant would have gotten a bargain compared to Microsoft.

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

PE shops: filling in the middle

Brenon Daly

Contact: Brenon Daly

After buying both small small and big companies, private equity (PE) firms have recently been filling in the middle, too. Since the start of May, buyout shops have been averaging a rapid-fire pace of one midmarket transaction every week, according to disclosed and estimated prices in 451 Research’s M&A KnowledgeBase. Further, the five recent deals, which collectively total $3bn in spending, span a wide range of PE transactions: take-privates, secondaries and cleaning out VC investors.

The activity in the midmarket, which we loosely define as deals valued at $200m-800m, comes amid a thawing in the credit market. As debt has become cheaper and more readily available, buyout shops have accelerated their big-ticket purchases. (All five of this year’s largest PE transactions have been announced in just the past two months. In many cases, these financial buyers have outbid strategic acquirers, a reversal of typical M&A roles.)

Now, the PE deal flow appears to be moving to involve targets valued in the hundreds of millions of dollars, not just 10-digit acquisitions. In recent weeks, we’ve seen Vista Equity Partners, Clearlake Capital Group and Accel-KKR all announce midmarket transactions. (Accel-KKR is particularly noteworthy because its $509m leveraged buyout of SciQuest marks the firm’s first take-private since the recession.)

One reason the financial buyers have lowered their sights is that they have been paying smaller multiples for smaller companies. With the exception of Vista’s purchase of Ping Identity, all of the midmarket deals have gone off at lower valuations than the significant billion-dollar transactions. For instance, buyout shops paid an uncharacteristically rich 8x trailing sales to acquire both Cvent and Marketo in recent weeks.

The surge in PE shopping at the top end of the market coupled with the more recent midmarket uptick has already put buyout spending in 2016 ahead of the January-June levels in any post-recession year except 2013. (That year’s total was skewed by the massive $25bn LBO of Dell.) Already in 2016, PE firms have announced 125 deals totaling $19.7bn in spending. That eclipses the half-year activity in 2015 and 2014, even though overall tech M&A spending this year is only about half the level of the two previous years.

Select recent midmarket PE transactions

Date Acquirer Target Deal value
June 1, 2016 Vista Equity Partners Ping Identity See 451 Research estimate
May 31, 2016 Accel-KKR SciQuest $509m
May 12, 2016 Clearlake Capital Group Vision Solutions See 451 Research estimate
May 31, 2016 Platinum Equity Electro Rent $323m

451 Research’s M&A KnowledgeBase

The software buyout boom

Brenon Daly

Contact: Brenon Daly

After playing small ball for the first few months of the year, buyout shops have begun taking bigger swings in the M&A market. That’s nowhere more evident than in the bustling enterprise software sector, where private equity (PE) firms have displaced their strategic rivals as the main buyers at the top end of the market.

According to 451 Research’s M&A KnowledgeBase, PE shops have been the acquirers in four of five enterprise software transactions announced so far this year valued at more than $1bn. (The big-ticket shopping list: the $3bn take-private of Qlik, the $1.8bn take-private of Marketo and the $1.7bn take-private of Cvent, as well as the $1.1bn purchase of Sitecore.) Set against this recent string of 10-digit deals by financial buyers, the only corporate acquirer to ink a similarly sized transaction is Salesforce with its $2.8bn reach for Demandware.

The fact that buyout barons are leading the current software shopping spree is a direct reversal of recent years. At this point last year, for instance, there were four software deals valued at more than $1bn, with corporate acquirers announcing three of them, according to the M&A KnowledgeBase. More broadly, PE firms typically account for only about 10-20% of overall M&A spending in any given year. So far this year in the software sector, however, PE shops have accounted for just less than half of announced spending.

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

No longer a faded garment, Blue Coat to hit the public market

Brenon Daly

Contact: Brenon Daly

More than four years after going private, Blue Coat is set to make a return to the public market. But the company that put in its IPO paperwork is very different from the one that beat a hasty retreat from Wall Street. The resurrected Blue Coat is cleaner, more stable and throws off more cash. And, most dramatically, it’s growing at a healthy mid-teens percentage rate, while the old version was shrinking. The reboot of Blue Coat, which has been accomplished under private equity (PE) ownership, will pay dividends as it makes its debut.

The original Blue Coat, which was founded 20 years ago, was a bit of a faded garment when its initial PE owner, Thoma Bravo, got its hands on it. As noted, revenue was declining as the company stumbled from its network performance origins into Web security, while not doing either particularly well. (451 Research surveys of customers at the time of Blue Coat’s leveraged buyout showed that respondents had a largely unfavorable view of the company, with many indicating they planned to cut their spending with it.) That corporate uncertainty was compounded by churn in the corner office, as three CEOs came and went in just the 18 months leading up to Blue Coat’s LBO.

The company is now squarely focused on network security, while also spending liberally to step into securing the cloud. This growth is crucial because the cloud has effectively expanded the perimeter of a network, and many legacy network-based security products – from some of Blue Coat’s contemporaries – have proven ineffective at addressing cloud and mobile use cases. That helps explain why the company has rung up a $400m bill for SaaS security, acquiring both Perspecsys and Elastica last year.

Blue Coat has taken these strategic steps while roughly tripling cash-flow generation and increasing revenue by about two-thirds. Some caveats, however, are needed when comparing the current financial performance at the company with its earlier numbers. In its prospectus, Blue Coat has put forward several non-GAAP measures as key metrics, including ‘adjusted revenue’ and ‘adjusted EBITDA.’ Although 451 Research relies on GAAP figures, there are compelling reasons – notably the deferred revenue write-downs, which are essentially an accounting exercise – that make it understandable why the company favors those nonstandard measures. With those disclaimers, Blue Coat reports adjusted revenue of $775m and adjusted EBITDA of $223m for its most recent fiscal year, which ended in April. Regardless of the measure, however, it’s fair to say that the new Blue Coat is a whole lot bigger and throws off more cash than it ever has before.

After much of the initial cleanup at Blue Coat was done under Thoma Bravo, the buyout shop sold the company to current owner Bain Capital last March. (As an aside, we would note that Thoma Bravo – despite having one of the biggest buyout portfolios in the tech industry – still hasn’t taken a portfolio company public.) Bain Capital paid $2.4bn, and looks certain to see its blue-hued portfolio company hit the market at north of $3bn.

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

For tech M&A, it’s more of the same in May

Brenon Daly

Contact: Brenon Daly

Tech M&A spending appears to be settling into a new normal. In the just-completed month of May, total spending on tech, media and telecom transactions across the globe came in at $21.2bn, according to 451 Research’s M&A KnowledgeBase. That marks the fifth straight month that spending has totaled about $20bn, a level of consistency rarely seen in the generally lumpy tech M&A market. For comparison, in the January-May period in each of the past three years, the highest monthly spending has been at least twice the lowest monthly spending.

May also marked another month of consistency in terms of deal value being concentrated at the top end of the market. Last month, the three largest transactions accounted for half of the total spending, according to the M&A Knowledgebase. That has been true for every month so far in 2016 except February. May’s big-ticket deals included CSC’s purchase of Hewlett Packard Enterprise’s services arm, which stands as the largest divestiture of 2016; Bell Canada’s consolidation of Manitoba Telecom Services; and Vista Equity Partners’ buyout of Marketo, the second-largest take-private of 2016.

Assuming the relatively uniform monthly spending holds for the remaining seven months of 2016, the full-year value of tech deals would come in at about $275bn. That would be less than half of the amount spent in 2015, which represented a 15-year high in M&A, and basically match the level of 2013.

Deal flow in 2016

Month Deal volume Deal value
May 305 $21.2bn
April 335 $19.6bn
March 334 $23.3bn
February 319 $29.2bn
January 378 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Earnouts are on the outs

Brenon Daly

by Brenon Daly

At its most basic, an acquisition is just the end result of strategy and structure. The first part of the equation (strategy) tends to command most of the attention, while the structure of a transaction often gets dismissed as mere ‘paperwork.’ It’s a bit like a wedding. Most of us don’t celebrate the signing of a marriage certificate – a document that, like an acquisition agreement, is legally binding. No, the reason we get together to sappily toast the couple and awkwardly dance to ‘Brick House’ is to celebrate the idea of two people joyfully spending their lives together. In both marriage and M&A, the grand vision for the union is more emotionally satisfying than the nuts and bolts of the agreement.

Yet, terms matter. They not only shape specific deals and the ultimate return on those transactions, but also provide useful indicators about the broader market. Consider the case of earnouts, which are additional payments an acquirer makes if a target company hits certain milestones. Typically, as any dealmaker can tell you, earnouts are used to bridge valuation differences.

So, what to make of the fact that earnouts have fallen dramatically out of favor? According to 451 Research’s M&A KnowledgeBase, so far this year dealmakers have included the provision just half as often as the same period in each of the two previous years. Earnouts haven’t been used this sparingly since the recession year of 2009.

One possible reason for the sharp decline is that buyers no longer feel the need to stretch on valuation. That certainly came through in the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, where a record two-thirds of acquirers and their advisers predicted that private company acquisition valuations would be coming down for the remainder of 2016. And the fact that buyers no longer feel they need to include as many financial kickers as they once did to purchase the companies they want suggests that they have the upper hand in negotiations right now.

KB_earnouts

What do the ‘latent take-unders’ on Wall Street mean for startups?

Brenon Daly

by Brenon Daly

Either the acquirers of big tech companies on US exchanges are getting steals right now or Wall Street got duped last year. We say that because a majority of the public companies that have been acquired so far this year have signed off on deals – including takeover premiums – that value them at lower prices than they achieved on their own in 2015.

To put some numbers on the trend of latent ‘take-unders,’ we looked at the 13 tech vendors in 2016 that got erased from the NYSE or Nasdaq in deals valued at $500m or more, according to 451 Research’s M&A KnowledgeBase. In eight of the 13 transactions, companies sold for prices below their 52-week highs, with just five coming in above those levels. (We would note that while US equity indexes have whipped around a bit, they are basically flat over the past year.) Among the vendors that have tacitly agreed they are worth less now are TiVo, Polycom, Lexmark and Cvent.

Because of liquidity, public market valuations adjust far more quickly and visibly than private market valuations. We tend not to hear much about the ‘down-round’ sale of a startup. And yet, those discounted deals are coming, according to the recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster. A record two-thirds of the dealmakers (64%) we surveyed said private companies were likely to get sold for less during the remaining months of 2016 than they would have in the same period last year.

Startup valuation outlook

For tech M&A, April is another month further from the peak

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in April slumped to its lowest total in 15 months, as buyers either looked to pick up bargains or stepped out of the market altogether. The $18bn in total deal value recorded in 451 Research’s M&A KnowledgeBase for the just-completed month comes in at less than half the average monthly tally from last year’s record run, further lowering the post-peak levels we’ve already recorded so far in 2016.

Many of the transactions announced in April also indicated how acquirers have swung to ‘value’ – rather than ‘growth’ – buys amid a broad slowdown in tech, particularly among its old-line vendors. Both of last month’s largest acquisitions valued the targets, which were each founded around 1990, at just 1x trailing sales. (The paltry multiple for both Lexmark and Polycom reflects how the tech industry has left behind many of its sizable-but-shrinking pioneers.)

More broadly, four of the 10 largest deals went off at less than 2x trailing sales, according to the M&A KnowledgeBase. Also putting pressure on overall multiples were greying companies divesting businesses that they decided not to support at a time when growth is difficult to find. CA Technologies, Teradata, HP Inc and Vodafone all punted businesses last month. The only real above-market valuations among April’s big prints were awarded to more recently founded SaaS providers, with Cvent getting 8x trailing sales in its take-private and Textura garnering more than 7x revenue in its sale to Oracle.

With four months now in the books, overall spending on M&A around the globe stands at just $90bn. That puts 2016 roughly on track for a full-year total of about $270m, which would be less than half the amount in 2015 and one-third lower than 2014. That lower level certainly squares with the results of our recent survey of dealmakers, in which a record number said they would be less active in the M&A market for the rest of the year. (See the full report on the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.)

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

The SecureWorks IPO: delayed, downsized and discounted

Brenon Daly

by Brenon Daly

So much for the comeback of the tech IPO market. Although SecureWorks did manage to make it public on Friday, the managed security service provider – along with its 17 underwriting banks – had to trim both the size and price of its offering to get investors interested. In afternoon trading on the Nasdaq exchange, SecureWorks shares were changing hands around its offer price of $14, which is lower than the range it laid out earlier.

Recent enterprise tech IPOs*

Company Date of offering
Box, Inc Jan. 23, 2015
GoDaddy April 1, 2015
Apigee April 24, 2015
Xactly June 26, 2015
Rapid7 July 17, 2015
Pure Storage Oct. 7, 2015
Mimecast Nov. 20, 2015
Atlassian Dec. 10, 2015
SecureWorks April 22, 2016

*Includes Nasdaq and NYSE listings only

SecureWorks’ underwhelming debut comes as the first enterprise tech offering since Atlassian hit the market in December. In the intervening months, concerns about slowing economic growth have swept through the world’s equity markets. Here in the US, the Nasdaq Composite Index dropped 15% in the first six weeks of this year. During that bear market, tech companies prudently opted not to continue with their offerings, much as a ship captain would not choose to set sail in stormy seas.

However, by late April, as SecureWorks launched its delayed offering, the storm had mostly passed. The Nasdaq has recovered its losses from earlier in the year, and Wall Street was no longer shaky ground. An April survey of individual investors by ChangeWave (a subsidiary of 451 Research) showed a dramatic turnaround in sentiment: Only one-third of respondents to our April survey said they were ‘less confident’ in the stock market than they were three months ago. That was just half the level at the start of 2016, and the lowest reading in more than a year. On the other hand, almost one-quarter of the respondents indicated they are feeling ‘more confident’ in Wall Street, which was the most-bullish reading we’ve had in three years.

So SecureWorks wasn’t necessarily heading out into stormy weather. Yet it still had to give up a fair amount to get public, which doesn’t seem to make much sense. (And Wall Street is nothing if not rational and judicious.) Sure, the company is unprofitable. But red ink has never stopped investors from buying, even when a company counts its revenue in the tens of millions of dollars but its net losses in the hundreds of millions of dollars. (For the record, SecureWorks is nowhere near that level, having lost $72m on revenue of $340m in its most-recent fiscal year, which ended in January.)

If SecureWorks’ so-so IPO wasn’t entirely due to the broad market or the company, maybe it had something to do with the offering itself. The basics of the SecureWorks IPO could be summarized like this: An established tech company acquires a fast-growing startup, then spins off a minority stake of a class of equity that effectively gives shareholders no voice in the direction or outcome at the company. That’s virtually the same structure as the VMware IPO, which hasn’t necessarily been kind to the company’s minority shareholders.

CW wall street April 2016