Category: Private Equity

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

Big Yellow tries on a Blue Coat

Brenon Daly

Contact: Brenon Daly

Announcing the second-largest information security transaction in history, Symantec says it will pay $4.7bn in cash for Blue Coat Systems. The single purchase eclipses the amount Big Yellow has spent, collectively, on all of its two dozen information security acquisitions over the past decade and a half, according to 451 Research’s M&A KnowledgeBase. Strategically, the proposed pairing is essentially a large-scale combination of Symantec’s endpoint security with Blue Coat’s Web defense, an M&A trend that has mostly featured deals valued in the tens of millions of dollars, rather than billions of dollars.

The transaction will further boost Symantec’s standing as the largest independent security vendor. On a GAAP basis, the combined company would have sales of about $4.2bn. (For perspective, that’s twice the size of McAfee at the time of its sale to Intel in 2010.) Blue Coat recorded GAAP revenue of $599m in its latest fiscal year. However, because of accounting regulations, that figure excludes a fair amount of deferred revenue. In its IPO paperwork, Blue Coat offered a non-GAAP ‘adjusted revenue’ figure that included the written-off deferred revenue totaling $775m in its latest fiscal year. By either measure, Blue Coat would bump up the combined company’s top line by about 20%.

For Symantec, however, bigger has not necessarily proven to be better. Big Yellow only recently cleaved off its Veritas division, unwinding a decade-long effort to pair security with storage that ultimately failed to produce returns. Yet even on the other side of the tumultuous separation, revenue at Symantec shrank in its previous fiscal year by 9%, with the company forecasting that the contraction would continue in the current fiscal year. The instability has also played out in the corner office, with Symantec having run through three CEOs in the past four years. (Note: Symantec currently doesn’t have a permanent chief executive, although as part of the agreement, current Blue Coat CEO Greg Clark will take the top job at the combined company after the deal closes, which is expected by September. In that way, there’s also a bit of an ‘acq-hire’ aspect to the multibillion-dollar pairing.)

The move marks a rare case of a dual-tracking, with Symantec buying Blue Coat less than two weeks after the company revealed its IPO paperwork. And, as we look at Blue Coat’s valuation, we can’t help but think that Big Yellow had to outbid Wall Street to get this transaction done. Think about it this way: a little more than a year ago, current owner Bain Capital was able to purchase Blue Coat for $2.4bn – just half the price Symantec is paying. (Of course, last spring Symantec probably wasn’t in a position to do a major deal, as it was focused on the Veritas divestiture.)

At $4.7bn, Blue Coat is valued at 7.8x its trailing GAAP revenue of $600m. (Even if we view the transaction on the adjusted revenue of $775m, Symantec is paying 6x non-GAAP revenue. Continuing on those unorthodox financial measures, we would add that the acquisition values Blue Coat at slightly more than 20x trailing adjusted EBITDA.) Overall, those valuations are only slightly above the average of just under 7x trailing sales for information security deals valued at more than $1bn over the past 14 years, according to 451 Research’s M&A KnowledgeBase.

Largest information security transactions, 2002-16

Date announced Acquirer Target Deal value Deal valuation*
August 19, 2010 Intel McAfee $7.7bn 3.4x
June 12, 2016 Symantec Blue Coat Systems $4.7bn 7.8x
Feb 9, 2004 Juniper Networks Netscreen Technologies $4bn 14.3x
July 23, 2013 Cisco Systems Sourcefire $2.7bn 10.7x
March 10, 2015 Bain Capital Blue Coat Systems $2.4bn 3.8x

Source: 451 Research’s M&A KnowledgeBase *Price-to-trailing-sales multiple

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

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.

Thoma Bravo Qliks ‘buy’ on $3bn analytics deal

Mark Fontecchio

Contact: Mark Fontecchio

Qlik, widely discussed as a potential target, has gone private, selling to private equity (PE) firm Thoma Bravo. The price tag is $3bn, making it the largest analytics acquisition we’ve seen and the biggest in BI since a trio of firms were taken off the market nearly a decade ago.

The enterprise value – 4.2x Qlik’s trailing revenue – comes in below the 4.7x median for all $1bn+ BI deals in the past decade, according to 451 Research’s M&A KnowledgeBase. The difference in this case is the buyer. All other $1bn+ BI transactions were done by strategic, not financial, acquirers. Thoma Bravo and other PE shops typically don’t offer valuations as rich as strategic buyers. It’s also worth noting that this is the second-highest multiple Thoma Bravo has paid on a $1bn+ purchase – the largest was 9.1x for SolarWinds last year, a deal it did in concert with Silver Lake Partners.

In many ways, Qlik is in a stronger position as a private company than it was operating as public one. Its strategy of crafting an analytics platform to cater to the dual and often conflicting needs of IT and business users is a solid one. But it needs further execution. Fulfilling it without the quarterly scrutiny that goes with being publicly traded should provide Qlik with the chance to win back some of the momentum it has lost, as the core market in which it has operated has been swamped by competitors.

Goldman Sachs advised Thoma Bravo on the transaction, while Morgan Stanley banked Qlik.

Four biggest BI acquisitions

Date Acquirer Target Deal value
October 7, 2007 SAP Business Objects $6.8bn
November 12, 2007 IBM Cognos $5bn
March 1, 2007 Oracle Hyperion $3.3bn
June 2, 2016 Thoma Bravo Qlik $3bn

Source: 451 Research’s M&A KnowledgeBase

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

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

Survey: After years of big plans and big buys, tech acquirers signal a slowdown

Brenon Daly

After pushing M&A spending to a 15-year high last year, a record number of tech acquirers have indicated that they will be stepping out of the market in 2016. For the first time in the four-year history of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number saying they would be cutting back on their shopping. That’s a significant deterioration in M&A sentiment compared with past surveys, which, on average, have seen more than four times as many respondents project an increase than a decrease.

In our late-April survey, fully one-third (33%) of respondents said they would be slowing their acquisition activity over the next six months, compared with just 38% who reported that they would be accelerating their M&A program. Taken together, the responses mark the most bearish tone ever from our respondents, who represent many of the most well-known buyers in the tech industry as well as their advisers. In our previous surveys, the average forecast has been overwhelming bullish, with more than half of respondents (55%) anticipating an acceleration in activity and only 13% saying the opposite. (Subscribers to 451 Research can see our full analysis of the M&A Leaders’ Survey.)

 

2016 MA outlook

Tech buyout shops play small ball

Brenon Daly

Contact: Brenon Daly

The pinched debt market so far this year has buyout shops scaling back their purchases, but doing more of them. Already this year, private equity (PE) acquirers have announced 68 transactions, with several larger firms such as The Carlyle Group and Vista Equity Partners having already put up two or three prints. The pace of PE activity is almost 20% higher than the start of the two previous years, according to 451 Research’s M&A KnowledgeBase.

However, spending on those deals has dropped dramatically, with the value of PE transactions so far in 2016 just half the average of the two previous years. Buyout shops have announced deals valued at $5.3bn since January 1, down from $9.7bn in the same period last year and $11.6bn during the same period in 2014, according to the M&A KnowledgeBase. To get a sense of how far the size has fallen, consider this: the biggest transaction so far this year would rank as only the sixth-largest PE deal printed during the same period of 2014 and 2015.

Fittingly, the biggest PE purchase so far this year is a divestiture (Airbus’ sale of its defense electronic business to KKR). Hewlett Packard Enterprise, CA Technologies and Intuit have also all sold divisions to buyout firms. The other notable driver of activity has been secondary transactions, where PE firms sell portfolio companies to other PE shops. Examples of these buyout-to-buyout deals in 2016 include Infogix and Sovos Compliance.

Taken together, the strategies that buyout firms have used so far this year are much more conservative than what we saw in the two previous years. (For instance, exactly a year ago, Informatica went private in a PE-backed transaction for $5.3bn, which valued the slow-growing data integration software provider at about 5x trailing sales and 25x EBITDA.) In many ways, this year’s activity simply reflects PE firms picking up smaller and less expensive targets, effectively doing deals with ‘walking around money’ rather than depending on lenders. But as those lenders (slowly) return to the market this year, we may well see buyout shops start to bag bigger targets once again.

PE-backed M&A

Period Deal volume Deal value
January 1 – April 7, 2016 68 $5.3bn
January 1 – April 7, 2015 53 $9.7bn
January 1 – April 7, 2014 61 $11.6bn

Source: 451 Research’s M&A KnowledgeBase

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

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