Category: Private Equity

Tech M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

With the world economy shuddering and global equity market sliding, 2016 is starting out in rough shape. That’s also crimping deal flow so far this year, with January spending on tech acquisitions just half the average monthly level from last year. To get a sense of what’s happening now in the M&A market and what we expect for the rest of the year, join us on Wednesday, February 3 at 1:00pm EST (10am PST) for our annual Tech M&A Outlook webinar. You can register here.

The hour-long webinar will start with a look back at the record-breaking year of 2015 to highlight some of the trends that helped push tech M&A spending to its highest level since the Internet bubble burst. What had buyers spending freely last year – including 83 transactions valued at more than $1bn – and what has happened to that confidence so far this year? That lack of confidence has also kept any startups from coming public so far in 2016, the first time that has happened since the credit crisis. What does the rest of the year look like for tech IPOs, and which companies might look to debut despite the inhospitable market?

Join the Tech M&A Outlook webinar for views from some of 451 Research’s 100+ analysts and what they expect to be driving deals in key sectors, including the Internet of Things, mobility and security. Register here.

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

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

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

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.

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

Even after record year, tech bankers say pipeline isn’t a problem for 2016

Brenon Daly

Contact: Brenon Daly

After working through a year that saw tech M&A spending soar to its highest level in a decade and a half, tech investment bankers say their pipelines are still relatively full for 2016. More than seven out of 10 respondents (72%) indicated that the total value of as-yet unclosed transactions is higher now than it was this time last year, according to the annual 451 Research Tech Banking Outlook Survey. This year’s bullish forecast is five times higher than the 14% that said their pipelines are drier than they were a year ago.

Although bankers’ assessment of their pipeline for this year ticked a bit lower from our previous survey, it is still the third-strongest response we’ve tallied since the recent recession. It is even more noteworthy when we consider that half of the bankers (51%) said in a separate question that we are at or near the end of the current M&A cycle. That was 10 times higher than the 5% who said the cycle is either just beginning or close to the beginning.

On the more important question about valuations (as opposed to activity), bankers are unprecedentedly bearish for this year. Nearly two-thirds of respondents to our survey (64%) indicated that they see deal pricing coming down in 2016, compared with just 14% that anticipate valuations ticking higher. That’s almost a direct reversal of typical valuation outlook over the past half-decade given by M&A advisers.

451 Research subscribers can click here to view the rest of the results of our annual survey of senior tech investment bankers and their forecast on how busy they expect to be – including buyouts and IPOs – and what tech sectors will see the most activity in 2016.

Change in dollar value of tech mandates

Year Increase Stay the same Decrease
December 2015 for 2016 72% 14% 14%
December 2014 for 2015 77% 17% 6%
December 2013 for 2014 65% 19% 16%
December 2012 for 2013 58% 21% 21%
December 2011 for 2012 67% 21% 12%
December 2010 for 2011 83% 10% 7%
December 2009 for 2010 68% 12% 20%
December 2008 for 2009 26% 22% 52%

Source: 451 Research Tech Banking Outlook Survey

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

Tech’s corporate acquirers pull back on M&A plans

Brenon Daly

Contact: Brenon Daly

After a record run for tech M&A spending in 2015, an unprecedented number of the main buyers in the market expect to cut back on their shopping in the coming year, according to our annual survey of corporate development executives. Respondents gave their most bearish forecast for acquisition plans in the nine years of the 451 Research Tech Corporate Development Outlook Survey. Fewer than one-third (31%) of respondents said their firms would be increasing activity in the coming year, a full 20 percentage points lower than the average level over the previous eight surveys.

For the first time in survey history, virtually the same number of corporate development executives forecast that their firms would be scaling back their M&A programs (28%) as said they would be increasing acquisition activity (31%) in the coming year. In previous surveys, the percentage of respondents projecting an increase has vastly outweighed those anticipating a decrease, ranging from roughly two to 10 times as many as respondents.

If the bearish sentiment does come through in the activity, 2016 would snap three consecutive years of higher M&A spending, culminating in a record of nearly $600bn worth of announced tech, media and telecom (TMT) acquisitions in 2015, according to 451 Research’s M&A KnowledgeBase.

451 Research subscribers can see our full report on the outlook from corporate development executives regarding M&A valuations, private equity activity and just how many – or rather, how few – startups will go public in 2016.

Projected change in M&A activity

Year Increase Stay the same Decrease
December 2015 for 2016 31% 41% 28%
December 2014 for 2015 58% 36% 6%
December 2013 for 2014 45% 42% 13%
December 2012 for 2013 38% 42% 20%
December 2011 for 2012 56% 30% 14%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: 451 Research Tech Corporate Development Outlook Survey

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

One company’s trash is another company’s treasure

Brenon Daly

Contact: Brenon Daly

Corporate divestitures aren’t necessarily the castoffs they used to be. Increasingly, divisions that have outlived their usefulness inside large companies are getting shipped directly to other companies, bypassing the once-obligatory stop in a private equity (PE) portfolio. This trend of ‘strategic to strategic’ divestitures has been driven by dramatic changes in tech companies and their strategies – on both sides of the transactions.

On the ‘supply’ side, there have never been more divestitures by listed US tech companies than in 2015, according to 451 Research’s M&A KnowledgeBase. (See our full report on this year’s record level of activity.) Some tech companies – particularly those of a certain age – have sold off assets as part of a larger corporate reorganization. (For instance, Hewlett-Packard, which cleaved itself into two $50bn-revenue businesses in November, has shed five divisions this year – as many divestitures as it had done, collectively, over the previous half-decade, according to the KnowledgeBase.) In some cases, the push to divest has been sharpened by the ever-increasing agitation by activist hedge funds.

Meanwhile, on the ‘demand’ side, the fact that companies are dealing directly with other vendors on divestitures isn’t all that surprising when we consider how frequently they have been negotiating with each other on outright sales. (Consolidation, which corporate development executives told us in a survey last December would be the second-most-popular type of deal in 2015, is roughly akin to a scaled-out version of a divestiture.) Consolidation has reached an unprecedented level this year, with huge chunks of the IT landscape coming together.

Put that together, and publicly traded tech companies are increasingly finding themselves sitting across the negotiating table from other publicly traded companies. Carbonite, j2, CACI International, Raytheon, Trend Micro, Amdocs, Tangoe and others have all picked up businesses from fellow publicly traded companies in recent months, according to the KnowledgeBase.

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

November: a middling month for M&A

Brenon Daly

Contact: Brenon Daly

Although the number of tech deals in November dropped to the second-lowest monthly total so far in 2015, the aggregate value of last month’s transactions landed smack in the middle of announced M&A spending levels this year. The $39.3bn worth of spending on tech, media and telecom (TMT) acquisitions in the just-finished month is the median monthly amount for 2015, with five months coming above that amount and five below. Meanwhile, the number of prints in November came in at just 317, about 12% lower than the average rate in the previous 10 months, according to 451 Research’s M&A KnowledgeBase.

By definition, the lower-than-average M&A volume but straight-down-the-middle spending level means last month saw a fair number of big prints. Indeed, the KnowledgeBase tallied 10 transactions with an equity value of at least $1bn announced in November. (That brought the year-to-date total for billion-dollar-plus deals to 74.) However, not one of last month’s acquisitions topped $6bn. For context, in the previous 10 months, we had seen 14 transactions worth at least $6bn.

Looking within deal flow at the top end of the tech M&A market, we can see that much of it came from old-line consolidation. Five of the six largest acquisitions featured buyers reaching for targets that operate in the same market. For instance, videogame maker Activision Blizzard announced plans to pay $5.9bn for fellow videogame maker King Digital Entertainment, while the ever-maturing semiconductor industry saw a pair of 10-digit deals last month.

November’s solid spending level pushed this year’s post-Internet bubble record for M&A spending even higher. With still a month to go, the 2015 total for global TMT M&A spending has already topped $560bn, according to the KnowledgeBase. That works out to $140bn higher than the previous full-year record in 2007. Viewed another way, this year’s level has already added on a full quarter’s worth of spending from the previous record level.

Monthly M&A activity, 2015

Month Deal volume Deal value
November 317 $39bn
October 384 $113bn
September 378 $33bn
August 333 $27bn
July 435 $23bn
June 380 $35bn
May 311 $123bn
April 369 $47bn
March 340 $61bn
February 339 $49bn
January 358 $11bn

Source: 451 Research’s M&A KnowledgeBase

For tech giants, it’s ‘buy bye’ as divestitures hit record

Brenon Daly

by Brenon Daly

Tech giants are having garage sales like never before. What were once viewed as ‘strategic’ businesses at Symantec, Nokia, Intel and others have been placed out on the curb for sale at a record pace in 2015. So far this year, according to 451 Research’s M&A KnowledgeBase, tech companies that trade on US exchanges have already divested $59bn worth of assets. That’s the highest-ever amount for divestitures, and twice the average full-year total over the past decade.

The divestitures are the latest indication of the seismic changes currently sweeping the IT landscape. In some cases, the moves have simply unwound earlier acquisitions that never generated the level of returns the buyer had hoped. Accordingly, buyers-turned-sellers in those situations almost invariably take a bath on the deal, like Nokia selling its mapping business in August for $2.7bn after shelling out $8.1bn for Navteq eight years earlier.

Those ‘coming and going’ divestitures are a fairly standard part of any corporate portfolio review, taking place in virtually every economic cycle. What has elevated divestiture activity in 2015 to record levels is the unprecedented corporate overhauls of many tech giants. That has put more parts in play. For instance, eBay dumped two sideline divisions when it sold PayPal last summer.

Even more dramatically, Hewlett-Packard, which cleaved itself into two $50bn-revenue companies a few weeks ago, has punted five businesses this year – as many divestitures as it had done, collectively, over the previous half-decade, according to the KnowledgeBase. Its latest move to unload TippingPoint sparked additional rumors that HP might look to shed another piece of its security portfolio, ArcSight. That business has been relatively dormant within HP since the mid-2010 acquisition, despite the steady growth in the security information and event management market.

Looking ahead, the divestiture pipeline appears even fuller for 2016. A number of vendors have already indicated that they are looking to sell off businesses, including Citrix, Intuit and Teradata. In addition to the disclosed plans, there’s speculation that Intel could unwind its McAfee unit. (Last summer, Intel ended its experiment with API management, discarding Mashery after owning it for about two years.) And then there’s a long list of assets that Dell might look to divest to help cut the cost of the tech industry’s largest deal, provided it does indeed close. We could certainly envision several ‘pearls’ in EMC’s ‘string of pearls’ being on the auction block, including RSA and Documentum. If they do sell, both the content management and security businesses would be billion-dollar divestitures.

Divestitures by US-listed tech companies

Year Deal volume Deal value
YTD 2015 141 $59bn
2014 151 $43bn
2013 172 $30bn
2012 190 $23bn
2011 123 $19bn
2010 148 $21bn
2009 214 $26bn
2008 136 $23bn
2007 138 $14bn
2006 137 $51bn
2005 144 $18bn

Source: 451 Research’s M&A KnowledgeBase

The end of a bull run in tech M&A?

Brenon Daly

Contact: Brenon Daly

After sprinting at a record rate of M&A spending in 2015, tech dealmakers and investment bankers are planning to catch their breath. In the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster, a record low percentage of respondents forecasted an uptick in their acquisition activity over the next six months, while a record high number predicted a decrease.

Overall in the latest edition of the survey, the bulls were only slightly less bullish, while the bears were dramatically more bearish. The 44% of tech acquirers projecting an acceleration in M&A is only a handful of points below the previous low-water mark, but the 24% indicating a slowdown is more than twice the average negative forecast over the previous seven surveys.

Now in its eighth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster has now registered two ‘outlier’ results – one on the upside, back in spring 2014, and in the current survey, one on the downside. Back in our April 2014 survey, a record 72% of respondents forecasted an acceleration in M&A activity. That clear indication by the main tech buyers and their advisers to get busier did indeed come through in the prints. In the six quarters since that record forecast, the average quarterly spending on tech M&A stands at $120bn, almost exactly twice the average quarterly spending in the preceding six quarters, according to 451 Research’s M&A KnowledgeBase.

In our just-completed survey, we now have a similar – though inverse – significant deviation in responses. Recall that one-quarter of respondents predicted a decline in M&A activity through next spring, which is by far the highest level we’ve ever seen. The wisdom of the crowd, which comes through in our survey results, more or less accurately anticipated the start of a bull run in tech M&A a year and a half ago. In the latest survey, the crowd’s sentiment appears to have swung in the other direction. We’ll have a full report on the latest M&A Leaders’ Survey from 451 Research and Morrison & Foerster on our website later today and in tomorrow’s 451 Market Insight.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
October 2015 44% 32% 24%
April 2015 61% 30% 9%
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Buyout barons pay up in big tech prints

Brenon Daly

Contact: Brenon Daly

Once again, the buyout barons are paying up in their big bets. The latest example of private equity (PE) largess came in the proposed SolarWinds take-private, with Silver Lake Partners and Thoma Bravo teaming up on a $4.5bn offer. That’s a fairly steep price for a company growing sales in the high teens to about $500m this year. On a cash-flow basis, SolarWinds is getting a vertigo-inducing valuation of 27x EBITDA.

While SolarWinds’ valuation is certainly richer than other significant PE deals, this year has nonetheless seen financial buyers ready to pay above-market prices. For instance, Informatica, which put up about $1bn in sales, went private earlier this year for more than $5bn. On a smaller scale, we understand that’s exactly the same valuation Thoma Bravo paid in its purchase of privately held healthcare analytics vendor MedeAnalytics.

Altogether, the PE shops involved in the 10 largest transactions in 2015 have paid an average of 3.4x trailing sales, according to 451 Research’s M&A KnowledgeBase . (To be clear, that’s based on the enterprise value of the targets.) For comparison, that’s a full turn higher than the average valuation for big PE prints over the previous three years. Of course, buyers in the previous years didn’t necessarily have to worry about an imminent raise of interest rates, which might be spurring some of the activity now.

Significant PE deal valuations, 2012-15*

Year Average enterprise value/sales ratio Select transactions
YTD 2015 3.4x SolarWinds LBO, Informatica LBO, Solera Holdings LBO
2014 2.9x TIBCO LBO, Riverbed LBO, Compuware LBO
2013 2x Dell LBO, BMC LBO, Active Network LBO
2012 2.4x Getty Images, Misys LBO, Ancestry.com LBO

Source: 451 Research’s M&A KnowledgeBase *Average enterprise value-to-sales ratio of the 10 largest transactions in each of the years