Category: investment banking

What’s missing in the tech M&A market?

Brenon Daly

Contact: Brenon Daly

When big acquirers step out of a market, they can leave behind a big hole. In the case of the current tech M&A market, it’s a multibillion-dollar hole. We noted in our full report on the just-closed second quarter that the value of tech and telecom acquisitions dropped 30% from Q1 to Q2, hitting a four-year low for quarterly spending of just $55bn in the April-June period, according to 451 Research’s M&A KnowledgeBase. The main reason for the recent slump in spending is the disappearance of many of the tech industry’s biggest buyers.

At the start of this year, many well-known acquirers — the ones that often serve as bellwethers for the tech industry — were actively inking significant deals. Intel, Cisco and Hewlett Packard Enterprise all announced acquisitions valued at more than $1bn in Q1. Since then, however, most of the busiest tech giants have shifted their M&A machines into neutral. In their place, two groups of buyers have emerged: old-line telcos and private equity (PE) firms.

Yet these newly assertive acquirers haven’t come close to closing the gap, in terms of M&A spending, left by the missing corporate shoppers. (That’s not for lack of effort among the financial buyers. PE firms announced a record level of tech transactions in Q2, eclipsing the number of deals done by US-listed corporate acquirers for the first time in history, according to the M&A KnowledgeBase. Our Q2 report has more details on activity and forecasts for the buyout shops.)

As one indication of what went missing when big-name corporate acquirers took an early summer hiatus from big-dollar deals, consider this: Only one of the five largest transactions announced in the first half of 2017 printed in Q2. That shift in strategy and spending by corporate buyers dramatically crimped deal flow at the top end of the tech M&A market. According to the M&A KnowledgeBase, the average value of the 20 largest tech transactions announced in the first three months of 2017 stood at $2.9bn. That’s 70% higher than the average of $1.7bn for the 20 largest deals announced in the just-completed Q2.

Sizzle turns to fizzle in tech M&A, as Q2 spending slumps

Brenon Daly

Contact: Brenon Daly

After two consecutive years of surging tech M&A, we now have two consecutive quarters of slumping tech M&A. This year opened with Q1 spending on tech deals totaling only slightly more than half the average quarterly level of the recent two-year record run. Spending in Q2 dropped even further, leaving the value of tech deals announced around the globe for the April-June period at its lowest quarterly level in four years, according to 451 Research’s M&A KnowledgeBase.

Altogether, acquirers announced $56bn worth of global tech and telco transactions in Q2, according to 451 Research’s M&A KnowledgeBase. That represents a decline of 29% from the $79bn in Q1 2017, with all three of the past months suffering through a pronounced summer slowdown. (Our M&A KnowledgeBase shows every single month of Q2 came in below the average monthly spending in Q1.)

One of the main reasons for the drop from Q1 to Q2 is the recent disappearance of the big enterprise vendors doing big deals. In the first three months of the year, Intel, Cisco Systems and Hewlett Packard Enterprise all announced acquisitions valued at more than $1bn. However, since then, tech bellwethers have been replaced primarily by telco operators and private equity firms. (PE shops merit their own mention, as they printed more tech deals in Q2 than any quarter in history. However, in keeping with the current trend in the overall tech M&A market, their acquisitions were smaller than they have been. For instance, the number of PE-led deals with an equity value of more than $1bn dropped from nine in Q2 2016 to just five in Q2 2017.)

At the midpoint of 2017, this year is tracking to roughly $280bn worth of tech transactions. That would represent the lowest annual total in four years, and a dramatic slowdown from the roughly $500bn spent in 2016 and $600bn in 2015. We will have a full report on Q2 tech M&A activity for 451 Research subscribers next week, after an extended holiday weekend.

For PE, secondaries become primary

Brenon Daly

Contact: Brenon Daly

In many ways, the tech buyout barons have themselves to thank for the record run of private equity (PE) activity so far in 2017. The number of so-called ‘secondary transactions,’ in which financial acquirers sell their portfolio companies to fellow financial buyers, has increased for three consecutive years, according to 451 Research’s M&A KnowledgeBase. The pace of PE-to-PE deals has accelerated even more this year, with an unprecedented 64 secondary transactions already in 2017 — more than twice the average number in the comparable period over the past half-decade.

The fact that secondaries have become primary for PE shops represents a fairly noteworthy change in both the buyout shops and their backers, the big-money limited partners (LPs) of the funds. In years past, LPs have frowned on the practice because, in some cases, they might be investors in both the PE funds that are doing the buying as well as the ones doing the selling, which doesn’t really reduce their risk in that particular holding — nor do they truly exit that investment. The practice has been criticized by some for being little more than buyout shops trading paper among themselves.

For that reason and others, our M&A KnowledgeBase indicates that the number of PE-to-PE deals in the first half of the years from 2002-10, when the tech PE industry was relatively immature, averaged only in the mid-single digits. In others words, PE shops are currently doing 10 times more secondary transactions than they did in the first decade of the millennium. Recent tech deals that have seen financial buyers on both sides include Insight Venture Partners’ sale of SmartBear Software to Francisco Partners after a decade of ownership, TA Associates’ sale of Idera to HGGC, and Summit Partners’ sale of most of Continuum Managed Services to Thoma Bravo.

These types of transactions appear likely to remain the exit of choice for PE shops, as both the number of funds and the dollars available to them continue to surge to new highs. The increasing buying power of buyout firms stands in contrast to the diminished exits provided elsewhere for portfolio holdings. The tech IPO market has never provided much liquidity to PE shops. (For instance, neither Thoma Bravo nor Vista Equity Partners has seen any of their tech holdings make it public.) Meanwhile, corporate acquirers — the chief rival to financial buyers — have dialed back their overall M&A programs, and in some cases have found themselves outbid or outsprinted in PE-owned deals by ultra-aggressive buyout shops.

Hard times for software M&A

Brenon Daly

Contact: Brenon Daly

Software M&A has fallen on hard times. Spending on application software deals has dipped to its lowest level in recent years, with the value of purchases so far in 2017 dropping to less than half the amount in the comparable period of each of the past three years, according to 451 Research’s M&A KnowledgeBase. The reason? The bellwethers aren’t buying big.

Salesforce has only done one small acquisition so far this year, after a 2016 shopping spree that saw it ink 12 deals at a cost of $3.2bn, according to an SEC filing. Similarly, Oracle’s largest print in 2017 is less than one-tenth the size of last year’s $9.5bn consolidation of NetSuite, which stands as the largest-ever SaaS transaction. (Subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms of Oracle’s big print this year, its reach for advertising analytics startup Moat.) SAP has been entirely out of the market in 2017.

Since large vendors are also typically large acquirers, their absence has left application software a dramatically diminished sector of the overall tech M&A market. Application software accounts for just $7.7bn of the $132bn in announced deal value so far in 2017, according to the M&A KnowledgeBase. On an absolute basis, that’s the lowest level for the opening half of any year since the recent recession.

More tellingly, however, application software’s ‘market share’ has fallen to only about a nickel of every dollar that tech acquirers across the globe have handed out so far this year. Our M&A KnowledgeBase indicates that the 6% of total tech M&A spending in 2017 for application software is just half its share over the previous five years.

Trust-busting in the Trump era

Brenon Daly

Contact: Brenon Daly

Despite President Trump often positioning himself as ‘dealmaker in chief,’ his administration just cast a chill over M&A. The Federal Trade Commission has said that it plans to block the proposed combination of DraftKings and FanDuel, the two largest websites for betting on fantasy sports. The deal was announced last November, just two weeks after the election of Trump supposedly signaled a more business-friendly climate in Washington DC.

That expectation has helped drive Wall Street to record highs, with the broad-market US indexes all surging about 20% since the vote. The confidence in the stock market was initially expected to extend to the M&A market, which has historically been closely correlated with Wall Street. In April, for instance, a plurality of respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster said Trump’s economic policies have stimulated dealmaking. The 41% who reported a ‘Trump bump’ to M&A was almost twice the level that said the president’s policies have slowed acquisition activity.

And yet, regulators are moving to spike a combination of two startups that just might represent the only way for either of them to survive. It sounds a bit dramatic, but then, the landscape is littered with startups that have spent their way out of business. Even raising $1bn in venture backing — as DraftKings and FanDuel combined to do — doesn’t guarantee survival. Not when startups with low-margin transactional business models spend money hand over fist on advertising against each other in what is a barely differentiated service.

While the two companies decide whether to fight the FTC ruling, some startup executives and their backers may need to reconsider their potential exits. For the most part, regulators during the Obama administration didn’t trouble themselves with the rare bits of consolidation in Silicon Valley. (The two largest VC-backed sites for freelance work — oDesk and Elance — got together in 2013 without any review from Washington.) Based on the DraftKings-FanDuel decision, however, dealmakers might need to plan on more trust-busting in the Trump era. For instance, the far-fetched talk about a pairing between Uber and Lyft should now be considered dead before it ever gets born.

The one and only exit for infosec’s unicorns

Brenon Daly

Contact: Brenon Daly

In just the past month, four different information security (infosec) startups have all pulled in single rounds of funding that typically would have only been available from an IPO. In addition to filling company coffers, however, the roughly $100m slug of capital raised by each of the quartet — CrowdStrike, Tanium, Netskope and Illumio — may also influence company strategy, at least when it comes time to seek an exit. Rather than pursue a sale of the business, which is the most likely outcome for any startup, these infosec unicorns will likely eye the door that leads to Wall Street.

In other words, when it comes to the two exit options available to these security startups, they should be modeling themselves more on Okta than on AppDynamics. The reason? Of the 17 sales of VC-backed vendors valued at more than $1bn since January 1, 2014, not a single startup has come from the infosec market, according to 451 Research’s M&A KnowledgeBase. Mandiant came close to a 10-digit exit in its early 2014 sale to FireEye, but the announced value of that deal stands at $989m. (Of course, FireEye paid for the vast majority of that in stock, which lost half of its value within four months of the transaction and has never regained its early-2014 level.)

Infosec is conspicuous by its absence among the big-ticket purchases of venture-backed companies. Virtually every other major tech sector has realized some unicorn exit, including mobility (WhatsApp, AirWatch), e-commerce (Jet.com), storage (Cleversafe), the Internet of Things (Jasper Technologies) and cloud (Virtustream). The largest sale of a VC-backed infosec firm over the past three and a half years, according to the M&A KnowledgeBase, is Trustwave’s $810m sale to Singtel in April 2015. (Although Trustwave did raise venture money, notably from FTV Capital, it hardly fits the classic definition of a startup. Instead, it is more accurately viewed as a rollup, having consolidated 16 other businesses since its founding in 1995.)

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

Onapsis on the block?

Brenon Daly

Contact: Brenon Daly

Enterprise application security startup Onapsis quietly kicked off a sale process about a month ago, according to our understanding. Several sources have indicated that Onapsis, which focuses on hardening security for SAP implementations, has hired UBS to gauge interest among buyers. And while there undoubtedly will be acquisition interest in the startup, Onapsis may ultimately prove to be a bit of a tough sell. The reason? The most obvious buyers for the company don’t typically pay the type of valuations that Onapsis is thought to be asking.

In many cases, the heavy-duty SAP systems that Onapsis helps secure were implemented by one of the big consulting shops. So at least theoretically, it’s not a big leap to imagine one of these consultancies buying Onapsis and offering its platform, exclusively, to help safeguard these mission-critical systems and the data they generate. (Indeed, Onapsis already has partnerships with many of the big consulting firms, including KPMG, PWC, Accenture and others.) While that strategy may be sound, M&A always comes down to pricing. And that’s why we would think it’s probably more likely than not that eight-year-old Onapsis remains independent.

According to our understanding, Onapsis is looking to sell for roughly $200m, which would be twice the valuation of its September 2015 funding. The rumored ask works out to about 8x bookings in 2016 and 4.5x forecast bookings for this year. For a fast-growing SaaS startup, those aren’t particularly exorbitant multiples. Yet they may well price out any consulting shops, which have typically either picked up small pieces of specific infosec technology or just gobbled up security consultants. Any reach for Onapsis would require a consulting firm to pay a significantly richer price than the ‘tool’ or ‘body’ deals they have historically done.

A muted May for tech M&A

Brenon Daly

Contact: Brenon Daly

The summer slowdown has arrived early in the tech M&A market. Overall, tech acquirers announced relatively few transactions in the just-completed month of May, and many of the deals that did get done went off at a discount. According to 451 Research’s M&A KnowledgeBase, the value of announced tech deals around the globe in May hit just $25bn, as a raft of low-multiple transactions kept a lid on total spending. Additionally, the number of tech transactions in May remained below levels of recent years.

At the top end of the market, deal flow was decidedly mixed in May. On the one hand, acquirers announced five transactions valued at $1bn or more in May, nearly matching the highest monthly total so far this year recorded in 451 Research’s M&A KnowledgeBase. Big prints included Apollo Global Management’s $2bn take-private of West Corporation and RCN Telecom’s consolidation of Wave Broadband for $2.4bn. However, a number of those nine- and ten-digit deals came at below-market multiples. Of the 20 largest tech deals announced in May, fully nine of them were valued at just three times trailing sales or less, according to 451 Research’s M&A KnowledgeBase

The $25bn spent in May essentially matched the average monthly level of spending for 2017. However, it is only about half the amount, on average, that tech acquirers doled out each month over the record stretch during 2015-16. With five months of 2017 already in the books, this year is tracking to just $300bn worth of tech transactions this year. That would represent the lowest annual total in four years, and a dramatic slowdown from the roughly $500bn spent in 2016 and $600bn in 2015.

Xactly exits

Brenon Daly

Contact: Brenon Daly

Two years after coming public, Xactly is headed private in a $564m buyout by Vista Equity Partners. The deal values shares of the sales compensation management vendor at nearly their highest-ever level, roughly twice the price at which Xactly sold them during its IPO. According to terms, Vista will pay $15.65 for each share of Xactly.

Xactly’s exit from Wall Street comes after a decidedly mixed run as a small-cap company. For the first year after its IPO, the stock struggled to gain much attention from investors. Shares lingered around their offer price, underperforming the market and, more notably, lagging the performance of direct rival Callidus Software. However, in the past year, as Xactly has posted solid mid-20% revenue growth, it gained some favor back on Wall Street. In the end, Vista is paying slightly more than 5x trailing sales for Xactly.

The valuation Vista is paying for Xactly offers an illuminating contrast to Callidus, which has pursued a much different strategy than Xactly. Although both companies got their start offering software to help businesses manage sales incentives, the much-older and much-larger Callidus has used a series of small acquisitions to expand into other areas of enterprise software, notably applications for various aspects of human resources and marketing automation. According to 451 Research’s M&A KnowledgeBase, Callidus has done seven small purchases since the start of 2014. For its part, Xactly has only bought one company in its history, the 2009 consolidation of rival Centive that essentially kept it in its existing market.

Although Xactly is getting a solid valuation in the proposed take-private, it’s worth noting that Callidus – at least partly due to its steady use of M&A – enjoys a premium to its younger rival with a narrower product portfolio. Even without any acquisition premium, Callidus trades at about 7x trailing sales. Callidus is roughly twice as big as Xactly, but has a market value that’s three times larger.

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

Will the ‘Appian way’ lead more startups to Wall Street?

Brenon Daly

Contact: Brenon Daly

With Appian’s debut on the Nasdaq earlier this week, the tech IPO market has hit an early summer vacation. Right now, there are no tech companies on file, at least not publicly. So with no offerings (officially) to look ahead to, it’s worth taking a look back on what we’ve already seen from recent new listings.

The first impression is that there aren’t very many of them. By our count, just five enterprise tech vendors have made it public so far this year. Further, the pace for the remainder of 2017 isn’t expected to accelerate. Respondents to a recent survey from 451 Research and law firm Morrison & Foerster predicted just 15 tech IPOs this year. (451 Research subscribers can see our full report on the current IPO market, as well as a few of the firms that we think could be in Wall Street’s ‘class of 2017.’)

But to even hit that number of IPOs, we might suggest that Wall Street look to more companies like Appian rather than the other four tech vendors that also made it public this year. (See our full report on Appian’s offering.) What we mean by that is Appian is far more representative of the broader startup universe than high-profile unicorns such as Okta, Alteryx, MuleSoft or Cloudera. Certainly, more startups can relate to Appian’s capital structure than any of the other recent debutants. Appian raised just $48m as a private company, compared with $163m for Alteryx, $220m for Okta, $259m for MuleSoft and more than $1bn for Cloudera. In fact, all four of the unicorn IPOs raised more in a single round of private-market funding than Appian did in total VC funding.

Not having done an IPO-sized funding in the private market meant that Appian could come public with a more modest raise. (It took in just $75m, compared with this year’s previous IPOs that raised, on average, $190m for the four unicorns.) And, probably most importantly, the Appian offering showed that these types of IPOs can work, both for issuers and investors. (Appian created about $900m of market value, and saw its shares finish the first day of trading up about 25%.) So when it comes to IPOs for the second half of this year, the ‘Appian way’ could help a lot more startups make it to Wall Street.

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