Category: Private Equity

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

Rackspace pivots to private

Brenon Daly

Bruised by a fight in the clouds, Rackspace has opted to go private in $4.3bn leveraged buyout (LBO) with Apollo Global Management. The company, which has been public for eight years, is in the midst of a transition from its original plan to sell basic cloud infrastructure, where it couldn’t compete with Amazon Web Services, to taking a more services-led approach. Terms of the take-private reflect the fact that although Rackspace has made great strides in overhauling its business, much work remains.

Leon Black’s buyout shop will pay $32 for each share of Rackspace, which is exactly the price the stock was trading at a year ago. Further, it is less than half the level that shares changed hands at back in early 2013. Of course, at that time, Rackspace was growing at a high-teens clip, which is twice the 8% pace the company has grown so far this year.

In terms of valuation, Rackspace is going private at just half the prevailing market multiple for large LBOs so far in 2016. According to 451 Research’s M&A KnowledgeBase, the previous nine take-privates on US exchanges valued at more than $500m have gone off at 4.4x sales. (See our full report on the record number – as well as valuations – of take-privates in 2016.) In comparison, Rackspace is valued at just slightly more than 2x trailing sales: $4.3bn on $2bn of revenue, with roughly the same amount of cash as debt.

More relevant to Rackspace as it moves into a private equity (PE) portfolio is that even as the company (perhaps belatedly) transitions to a new model – one that includes offering services on top of AWS, Azure and other cloud infrastructure providers that Rackspace once competed against – is that it generates a ton of cash. Sure, growth may be slowing, but Rackspace has still thrown off some $674m of EBITDA over the past year.

The company’s 33% EBITDA margin is even more remarkable when we consider that Rackspace, which has more than 6,000 employees, is relatively well-regarded by its customers for its ‘fanatical’ support of its offerings. While we could imagine that focus on customer service as competitive differentiator might set up some tension under PE ownership (people are expensive and tend not to scale very well), Rackspace has the advantage of having built that into a profitable business. In short, Rackspace is just the sort of business that should fit comfortably in a PE portfolio.

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

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

BeyondTrust on the block?

Brenon Daly

Contact: Brenon Daly

Less than two years after acquiring BeyondTrust, Veritas Capital is looking to sell the privilege identity management vendor, several market sources have indicated. We understand that the private equity firm has retained UBS to run a narrow process, with the expectation that BeyondTrust would fetch at least twice the price the buyout shop paid in its September 2014 purchase. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimated terms of that deal by clicking here.)

BeyondTrust is expected to generate about $100m in sales this year and throw off roughly $40m of cash, according to our understanding. Recent transactions involving similar-sized identity and access management (IAM) vendors have gone off at about 6x sales. That’s roughly the multiple we estimate Vista Equity Partners paid for Ping Identity in early June, as well as the estimated valuation Thoma Bravo paid for IAM vendor SailPoint two years ago. (Subscribers to 451 Research’s M&A KnowledgeBase can view our estimated terms of the Ping deal and the SailPoint transaction.)

One reason acquirers have paid above-market valuations for identity-related providers is that cloud technology is predicated on knowing who users are and what they should have access to. That’s been reflected in infosec budgets. In the latest survey of IT security professionals by 451 Research’s Voice of the Enterprise, identity management ranked in the top quartile for security projects in the coming year.

VotE InfoSec priorities Q1 2016

Source: 451 Research’s Voice of the Enterprise: Information Security, Q1 2016

In latest infosec consolidation, Avast + AVG = AV(G)ast

Brenon Daly

by Brenon Daly

Reversing the flow of typical consolidation moves, privately held Avast Software said it will pay $1.3bn to remove fellow antivirus (AV) vendor AVG Technologies from the NYSE. In addition to flipping the script on the conventional roles of buyer and seller, there’s also a fair amount of irony in the announced pairing of the companies, which share similar roots and vintage. After all, the acquisition comes four years after Avast scrapped its plans to be a public company, a decision that was partly due to AVG’s lackluster performance immediately following its own IPO in early 2012.

Terms call for private equity-backed Avast, which has secured about $1.7bn from a lending syndicate, to pay $25 for each share of AVG. Although that represents a 33% premium over the previous closing price, it is actually lower than AVG shares were trading on their own at this time last year.

Both companies, which have been in business for more than a quarter-century, have struggled to adjust their portfolios to match recent changes in the threat landscape. Specifically, they have been somewhat caught out by the ineffectiveness of their historic desktop-based AV offerings, as well as the emerging threats posed by mobile devices. Over the past two years, Avast and AVG have used M&A to help move into the post-AV world, including doing four acquisitions to bolster their mobile security portfolios.

However, the overall transition of the business has been slow. AVG, for instance, said revenue in the first quarter expanded just 5% and indicated that sales in the just-ended Q2 actually declined slightly. AVG’s sluggish recent performance goes some distance toward explaining its rather muted valuation. Avast is paying $1.3bn, or slightly more than 3x the $433m in trailing sales put up by AVG. That’s just half the average multiple of 6.4x trailing sales in the 10 other information security transactions valued at $1bn or more, according to 451 Research’s M&A KnowledgeBase.

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

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

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

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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

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Dell’s discounted divestiture

Brenon Daly

Contact: Brenon Daly

Continuing its efforts to slim down before it gets massively bigger, Dell has announced plans to divest its software business to a buyout group led by Francisco Partners. The sale essentially unwinds Dell’s previous acquisitions of Quest Software and SonicWALL, which cost the company some $3.5bn. Although terms weren’t revealed, we understand that Dell will pocket $2.2bn from the deal.

The discount divestiture of the Dell Software Group (DSG), which generated some $1.3bn in trailing sales, comes less than three months after the company likewise sold its IT services unit, Perot Systems, for less than it originally paid. Dell’s portfolio pruning serves two purposes as it prepares to close its pending $63.1bn purchase of EMC. Divesting the software unit will not only raise some much-needed cash for Dell to cover the largest-ever tech acquisition, but will also clear out some software offerings that would overlap with the assets it is set to pick up from EMC/VMware, notably in the identity and IT management markets. EMC shareholders are set to vote on the sale to Dell next month, with the close of the transaction expected shortly after that. Similarly, Dell expects to complete the DSG divestiture in the late summer or fall.

Deferring to VMware as the software specialist for the combined entity makes financial sense for Dell. By and large, Dell’s software business has been a lackluster performer, unable to grow and running at single-digit operating margins. In comparison, VMware continues to increase its revenue (although at a lower rate than it once had) and operates twice as profitably as Dell’s software unit. And then there’s the matter of scale: VMware alone is five times as large as DSG.

Dell was a relative latecomer to M&A, only really starting to buy companies in 2007. While Dell was on the sidelines, for instance, EMC picked up more than 40 businesses, including RSA and, of course, VMware. Further, we would argue that if EMC hadn’t made the acquisitions it did during the early 2000s, Dell probably wouldn’t have bought the company. It certainly wouldn’t have had to pay anywhere close to the $63.1bn that it is set to hand over for EMC if the target hadn’t used M&A to expand beyond its core storage products.

DSG will be purchased by Francisco Partners, with participation from Elliott Management, a hedge fund better known for pushing businesses to sell than it is for buying them. (Indeed, Elliott took a small stake in EMC and then agitated for a sale of that company.) Francisco says this is its largest-ever deal. The DSG transaction comes as buyout shops are becoming increasingly busy with big prints. Including DSG, private equity buyers have now announced 14 acquisitions valued at more than $1bn since last June, according to 451 Research’s M&A KnowledgeBase.

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