Category: IPO

Now available: 451 Research’s 2016 M&A Outlook

Brenon Daly

Contact: Brenon Daly

Every year in our M&A Outlook, 451 Research looks ahead and highlights a number of the most significant trends that are expected to shape acquisition activity and valuations for key IT sectors in the coming year. All of the transaction data comes from 451 Research’s M&A KnowledgeBase , while the outlook and predictions for acquisition activity within the specific sectors come from extensive research and forecasts from the more than 100 analysts at 451 Research – who, collectively, will write about 4,500 reports this year on the strategy, innovation and financial events at the companies they cover. The 80-page report, which is our version of an M&A playbook, is now available for download.

In addition to highlighting many of the major trends in their sectors, 451 Research’s analysts also put specific names to the strategy by speculating on deals that could get printed this year. (Altogether, our 2016 M&A Outlook maps nearly 250 potential target candidates to broader themes, including 50 specific parings. Two of the companies we highlighted as attractive acquisition candidates have already been snapped up since we finished writing our forecasts.) In the same vein, our analysts also put forth almost 50 companies that we think are of a size and mind to go public in 2016, even as the IPO market remains a rather inhospitable place.

Similar to overall 451 Research coverage, the 2016 M&A Outlook covers activity from the datacenter all the way out to the device, not only offering insight on the technology developments in each of those sectors, but also bringing a financial consideration to the transactions. The 2016 M&A Outlook report opens with an overview of the tech M&A market, including activity of both corporate and financial acquirers, the valuations they are paying (and expect to pay) as well as what broad forces are likely to shape deals in the coming year. Following that, we feature specific reports from seven sectors: software; systems and storage; information security; enterprise mobility (including the Internet of Things); hosting and managed services; networking; and DCT and eco-efficient IT. Download the full 2016 M&A Outlook.MAO 2016 cover

For now, VC is still flowing — but what happens when it doesn’t?

Brenon Daly

Contact: Brenon Daly

For the most part, the venture capital industry seems like it hasn’t changed the calendar and still thinks it’s the ‘up and to the right’ year of 2015. Firms are still writing checks for amounts that, until a few years ago, only came from public market – rather than private market – investors. (Datadog raising almost $100m earlier this week, for instance.) And, even though there have been only a smattering of successful $1bn VC-backed exits in recent years, firms are still bidding up funding rounds for startups, and continuing to create ‘unicorns.’ (Anaplan crossed that threshold in a round announced earlier this week.)

That is unlikely to continue in 2016, at least according to a majority of tech investment bankers, many of whom have worked on private and public fundraising. In our survey last month, more than half of the tech investment bankers forecast that venture funding will get tighter in 2016 than it was last year. That stands as the most bearish outlook since the recession, coming in twice the level of bankers that said VC dollars will be less available in our previous survey.

If indeed venture firms start keeping their money in their own bank accounts – rather than investing it in entrepreneurs – that could well put startups under pressure, resulting in slower growth rates and lower valuations for those that survive tighter times as well as dramatic flameouts for those that don’t. Not to be too ominous, but recall how business contracted in 2008-2009 when debt – which, like equity, is oxygen for many companies – was no longer widely and easily available.

Of course, quite a few VCs recognized how the broad economic recession during the credit crisis could weigh on the tech industry. (Sequoia Capital posted its famous ‘RIP: Good Times’ slides in October 2008 as a cautionary forecast for its portfolio companies.) Similarly, a few VCs have recently sounded off that valuations have gotten ahead of themselves and that startups need to watch their spending more closely.

But for the most part, that message of fiscal responsibility has only started to get through to executives and their backers. Most money-burning startups continue to run their businesses as if there’s an inexhaustible supply of money. Triple headcount in a year? Sure, if a company can find enough warm bodies. Spend three times more on sales and marketing than the revenue that effort brings in? No reason not to as long as companies are valued on growth. But at some point this year, startups will almost certainly have to make different decisions than they’ve made up to now.

Projected change in availability of VC funding for startups

Year More available The same Less available
December 2015 for 2016 7% 36% 57%
December 2014 for 2015 36% 40% 24%

Source: 451 Research Tech Investment Banker Survey

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A record year for tech M&A, and so much more

Brenon Daly

Contact: Brenon Daly

Sure, the number of deals and spending on them in 2015 blew away anything we’ve seen since we were surfing the Web on Netscape browsers, but there was a whole lot more going on inside last year’s activity. 451 Research subscribers can get our full report on what happened last year and what’s likely to play out this year. Looking inside the record deal flow we recorded in 451 Research’s M&A KnowledgeBase, for instance, we saw a number of highlights from 2015:

  • Acquirers have never announced more tech, media and telecom (TMT) transactions valued in the billions of dollars than they did in 2015, including two of the three largest pure tech transactions in history.
  • Last year saw an unexpectedly large number of tech giants either sit out the record M&A activity altogether (Symantec, the former JDS Uniphase) or significantly dial back their acquisition programs (SAP, Oracle, Yahoo, Intuit).
  • The value of divestitures by US-listed tech companies hit a new record, coming in at twice the average annual amount over the past half-decade.
  • Private equity firms announced the most acquisitions ever for the industry, more than doubling the number of deals they did during the recent recession.
  • Even as interest rates ticked higher, buyout shops paid unprecedentedly rich multiples at the top end of the market in their purchases.
  • Despite the record number of startups valued at $1bn or more, just one VC-backed company recorded a 10-digit exit in 2015, down from an average of four exits each year over the previous three years.

Our report not only highlights these trends, but also maps them to the views from the main participants in the tech M&A community to give a sense of what will shape acquisitions in the coming year. See the full report.

Valuations of significant* tech transactions

Year Enterprise value-to-sales ratio
2015 3.6x
2014 4.4x
2013 3.3x
2012 2.9x
2011 3.2x
2010 3.4x
2009 2.6x
2008 2.4x
2007 3.8x

Source: The 451 M&A KnowledgeBase *Average multiple in 50 largest acquisitions, by equity value, in each year.

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Nutanix sets stage for IPO

Scott Denne

Contact: Scott Denne

Hyperconvergence pioneer Nutanix preps its Wall Street debut with massive revenue growth and equally outsized spending, which is the typical profile for most of the recent IT infrastructure vendors looking to go public. The company’s revenue rose 90% to $241m in its most recent fiscal year (ending July 2015) off the back of a 4x rise in sales a year earlier. The company, which has been selling converged server and storage hardware and software since 2011, has spent generously to achieve that growth. Nutanix posted a $126m loss in fiscal 2015 – up 50% – driven mainly by $162m spent on sales and marketing in the past fiscal year.

Still, Nutanix can at least partly justify the heavy sales and marketing spending as its attempt to satisfy strong demand that potential customers have clearly indicated in recent surveys by 451 Research’s Voice of the Enterprise. In our most recent survey (Q3 2015), 40% of converged infrastructure buyers anticipated their spending to increase in the next 90 days, compared with the 9% who expected to trim spending. Further, that growth is coming as demand weakens for traditional enterprise hardware. In the same survey, only 17% of buyers of standard servers projected spending to increase, while 31% forecast a decrease.

The planned offering from Nutanix comes after a particularly dismal year for tech IPOs, both in terms of the number of offerings and their aftermarket performance. Last year saw just eight enterprise IT startups debut, and half of them were underwater at year-end. Among the ‘Class of 2015,’ Pure Storage is probably the closest comp to Nutanix. The two infrastructure vendors are roughly the same size but have tradeoffs in their respective financial profiles. Pure is growing dramatically faster, while Nutanix loses less money. Still, Wall Street’s muted enthusiasm for Pure does indicate some challenges for Nutanix in increasing its valuation ahead of the $2bn it garnered as a private company in mid-2014.

On the NYSE, Pure is valued slightly below the $3bn it received in its final round of private funding – even though it has more than quadrupled its quarterly revenue level in the 18 months between those events. Pure currently trades at about 6.7x trailing revenue. If Nutanix were to garner that multiple on the $283m in trailing sales it has posted, it would be valued at roughly $1.9bn. Like Pure, that would represent a slight discount to its earlier market value as a private company.

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

Atlassian debut pushes past private valuation

Scott Denne

Contact: Scott Denne

Atlassian debuts on Wall Street with a first-day pop and strong valuation. A 30% jump from its IPO price makes the SaaS vendor one of the few venture-backed companies to go public this year at a premium to its private-market valuation. Atlassian boasts a market cap of $5.6bn in current trading, compared with a $3.5bn valuation in a private round last year.

The offering feeds Wall Street’s nearly insatiable appetite for growth, with Atlassian boosting revenue 50% to $353m in the year leading up to its IPO. More importantly, the Australia-based collaboration software provider appeals to investors with more discriminating tastes. Atlassian has been in business since 2002 and spent the vast majority of that time as a bootstrapped company. Accordingly, it’s posted a profit in each of the past 10 years as it spends less than 20% of revenue on sales and marketing. Altogether, Atlassian is certainly not the typical fare that’s served up by venture capitalists.

While Atlassian’s profitable growth was a factor in today’s valuation, the lesson isn’t that Wall Street demands black ink from companies before they will buy. (Unprofitable SaaS vendors Workday and ServiceNow both trade at similar multiples to Atlassian.) Instead, when it comes to IPOs, public market investors are seeking the ‘next big thing’ rather than a speculative roll of the dice. Atlassian has more than doubled revenue over the past two years to a level where it is generating more quarterly revenue ($101m in the quarter ended in September) than some other recent IPO candidates post in an entire year.

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

Managing valuation isn’t just for Square(s)

Scott Denne

Contact: Scott Denne

By mismanaging valuation expectations, Square’s management risks turning what would otherwise be an immense success into a spectacle. Its IPO priced well below the valuations it garnered as a private company, which should lead to plenty of schadenfreude aimed at Square and fellow ‘unicorns’ that let valuations get ahead of reality.

That being said, it’s important to note that Square has accomplished something amazing. The company has shown that design and innovation can challenge even the most stodgy and mature markets – point-of-sale systems, in this case. In the span of five years it grew revenue from nothing to $1bn annually – uncommon growth by any measure. And from a financial and strategy standpoint, the company appears well positioned for continued – if slower – growth as it scales.

Unfortunately for Square, having gotten ahead of itself on valuation creates substantial problems. The company priced below its initial range of $9-11 per share and though it’s up above $13.50 in early trading, its market cap sits at $4.4bn compared with $6bn in a private funding a year ago. Recruiting and retaining executives will now become more difficult. And Square has introduced a narrative of hubris, failure and miscalculation into what had been an unadulterated success story.

Ideally, an IPO should be nothing more than a capital-raising event. In reality, it’s a major milestone that, for good reason, is often compared with a wedding – it should only be about the marriage, though in reality more money is spent on ensuring that the guests have the right perception of the marriage. Guests at Square’s wedding today just found out that the bride (management) and groom (public markets) have a fundamentally different view about where this marriage is heading.

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

InfoSec startups wonder: why bother with Wall Street?

Brenon Daly

Contact: Brenon Daly

Why bother with Wall Street? An increasing number of tech startups – particularly those in the red-hot information security market – are saying ‘thanks, but no thanks’ to going public, and instead raising IPO-like rounds from private investors. So rather than an IPO for security startups being an ‘initial public offering,’ it stands for ‘inflated private offering.’

This trend toward big checks reached new heights this week with a $250m round raised by Tenable Network Security from Insight Venture Partners and Accel Partners. Yes, that’s right: a quarter-billion dollars in a single investment, with no SEC headaches, no public financial disclosure and very few stops on an abbreviated roadshow. If that kind of relatively hassle-free money is sloshing around the security landscape, why wouldn’t a company divert some of it to its own treasury?

And to be clear, that kind of money is available in infosec. So far this year, at least eight security startups have announced single rounds of funding that in years past would have only been available from Wall Street. In addition to this week’s whopper from Tenable, we also saw Illumio raise $100m in April, Zscaler raise $100m in early August, CloudFlare raise $110m in late September, Tanium raise $120m in early September, CrowdStrike raise $100m in mid-July and Okta and Netskope both raise $75m in early September.

Against this flurry of private-market fundings, we’ve seen just one infosec provider go public on US exchanges in 2015. In many ways, Rapid7’s decision to go ahead with its $100m IPO in June is almost endearingly recherché. But the out-of-step decision to go public also comes at a financial cost to Rapid7. Because of an inversion in conventional financing, the liquidity of Rapid7 shares and the transparency actually get discounted when compared with private-market fundings. Rapid7 isn’t even a unicorn, unlike the majority of still-private infosec startups that raised as much – if not more – than it did.

Classical economic theory holds that an imbalance such as this tends to correct over time. (The only open question is when, not if.) However, assuming we do return to a time when Wall Street is the primary – if not exclusive – source for, say, fundings of $100m or more, simply working through the existing backlog of infosec companies that have already done these big-money rounds in the private market could take several years. And, as we have seen in other markets that are temporarily distorted because of an overabundance of capital, working through that can be a painful process.

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

Webinar: What’s ahead for tech IPOs, M&A and all those unicorns?

Brenon Daly

Contact: Brenon Daly

After a record run for tech M&A, where do dealmakers see the market heading in the near term? Are they going to stay busy or catch their breath? And what do they expect to have to pay for startups in the transactions they make? What about the IPO market? And what’s going to happen to the ever-growing herd of unicorns over the next year?

For answers, join 451 Research and Morrison & Foerster on Thursday, November 12 at 10:00am PST for a webinar covering all of these topics and more. (Click here to register for the one-hour webinar.) We’ll be drawing on the findings from the latest M&A Leaders’ Survey from 451 Research and Morrison & Forester as well as highlighting trends in current market activity that have pushed spending on tech M&A to its highest level in 15 years. Already in 2015, buyers have shelled out more than a half-trillion dollars for deals they’ve announced. So the question remains: Where do we go from here?

Register now for a look at what’s behind the recent record and whether that will continue in 2016.

Unicorn outlook

Atlassian’s growth and profit likely to hold up on Wall Street

Scott Denne

Contact: Scott Denne

Atlassian brings investors an unfamiliar pairing: profitability and growth. The Australia-based maker of software for managing developer teams recently unveiled its IPO prospectus, which shows the company posted $353m in trailing 12-month revenue, up 50% from a year earlier. And that has come without the massive hit to profitability that most other software vendors have hoped investors would overlook.

The company posted a $7m profit in its last fiscal year (ending in June), driven down from $19m a year earlier by increased costs in marketing and product development. Atlassian spends far less – about 20% of revenue – toward sales than peers such as Workday and ServiceNow, which put up between one-third and half of revenue toward sales and marketing. The most recent two years marked Atlassian’s ninth and tenth consecutive years of profitability.

Atlassian appears far more stable than many of the recent crop of tech IPOs for whom the public markets seemed more like a last resort than an exit. The company consistently sees its sequential topline grow about 10% each quarter and annual revenue growth has actually accelerated a bit in the past few quarters. The stability comes from a shift toward more subscription revenue, which now generates 27% of sales, up from 19% two years ago. Licensing revenue and maintenance make up most of the remaining total, while sales from its third-party app marketplace doubled last year to $16m, contributing to the acceleration of revenue.

In a secondary stock sale last year, investors valued Atlassian at roughly $3.5bn. It should have little difficulty shooting past that mark in its debut. We’d expect the company to be valued at about $5bn, or 15x trailing revenue – the same level as Workday and ServiceNow, two larger SaaS providers with similar growth rates and no sign of profits.

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

Wrapping a ‘blue coat’ around SaaS apps

Brenon Daly

Contact: Brenon Daly

For the second time in about three months, 20-year-old infosec vendor Blue Coat has bought its way into the cloud, paying an astronomical multiple for cloud application control startup Elastica in a $280m deal. Paired with its recent purchase of Perspecsys, Blue Coat has rung up a $400m bill in building out an offering to help secure SaaS applications. That makes it the biggest buyer in this nascent market.

We view the pickups of Perspecsys and Elastica as a bit of a portfolio update and refresh ahead of what we expect to be an IPO for Blue Coat in early 2016. As one of the few large-scale infosec providers, Blue Coat has attracted acquisition interest in recent years. Before its take-private in late 2011, the company was rumored to have drawn a bid from HP. More recently, Raytheon was thought to be considering a run at Blue Coat before nabbing fellow PE-owned network security firm Websense instead. Earlier this year, Blue Coat’s original PE owner, Thoma Bravo, sold the company to Bain Capital. (Incidentally, Goldman Sachs worked Blue Coat’s LBO as well as the secondary transaction.)

Subscribers to 451 Research can see our report on this deal – including valuation, market context and integration outlook – on our website later today and in tomorrow’s 451 Market Insight.

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