Category: Private Equity

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.

Private equity’s latest venture 

Scott Denne

Contact: Scott Denne

The bulging coffers of buyout funds are delivering a record amount of exits to venture capitalists, providing some measure of relief as strategic acquirers scale back dealmaking and the IPO market remains a selective venue. Yet relying on a different category of buyers could have venture investors rethinking how to value the products – startups – they sell to them.

So far this year, private equity (PE) firms have spent $4.8bn on 40 companies that have taken venture money. That nearly matches last year’s record dollar total ($5.2bn), according to 451 Research’s M&A KnowledgeBase, and is on track to pass the number of such deals in 2016.

Returns from both PE shops and strategic acquirers range from prodigious to paltry, although usually at vastly different multiples on the high end of the market. Take the two largest VC exits this year, Cisco’s $3.7bn acquisition of AppDynamics and PetSmart owner BC Partners’ purchase of Chewy for an estimated $3.4bn. Both delivered outsized returns, but Chewy went off at nearly 4x trailing revenue, which is above market for an e-commerce transaction although not in the same neighborhood as the 17.4x AppDynamics garnered.

In AppDynamics, Cisco is gambling that the application performance management vendor will mature into that lofty price. PE firms are less inclined to make such a wager. While PE shops are buying venture-backed companies – they account for a record 14% of venture exits so far this year – they’re looking for proof, not potential. Those tougher standards could start to trickle down to valuations in venture fundings as PE firms determine a larger share of the outcomes.

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

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.

The state of tech M&A in China

Brenon Daly

Contact: Brenon Daly

After six straight years of explosive growth of tech M&A, China’s great shopping spree is winding down. The combination of increasing domestic economic uncertainty and, more crucially, newly imposed currency restrictions has blunted both the drive and the means for buyers from the world’s second-largest economy to do tech deals. Based on spending so far this year, China-based acquirers are on pace in 2017 to hand over just one-quarter the amount they spent on tech acquisitions in 2016, according to 451 Research’s M&A KnowledgeBase.

Of course, last year stands as a record for the value of tech transactions by China-based buyers, with the $40bn worth of announced purchases equaling the total from the two previous years combined. In contrast, the M&A KnowledgeBase totals just $3bn worth of deals by China-based acquirers so far in 2017.

To illustrate just how tight China’s former free spenders have become, consider this: They have yet to announce a single tech transaction in 2017 valued at more than $1bn, after announcing a record 10 such big-ticket deals in 2016. Like acquisitions last year by China-based buyers in non-tech sectors, many Sino shoppers in 2016 went after high-profile targets across the tech sector, including Tencent reaching for videogame maker Supercell, as well as financial firms picking up Ingram Micro and Lexmark.

For a more in-depth look at the recent changes and the outlook for doing deals in China, be sure to join 451 Research’s webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. Tomorrow’s webinar is open to everyone, and you can register here.

Dealing with the dragon

Brenon Daly

Contact: Brenon Daly

A little more than a year after a Chinese consortium acquired slumping printer maker Lexmark, the group has sold off the company’s software business to Thoma Bravo. The enterprise software unit had basically been for sale since the Chinese buyout group, which is led by a hardware-focused firm, closed its $2.5bn take-private of Lexmark. Although terms of the sale of the software division weren’t formally released, media reports put the price at $1.5bn.

Assuming that price is more or less accurate (we haven’t been able to independently verify it), the deal would stand as the largest inbound acquisition of a Chinese technology asset, according to 451 Research’s M&A KnowledgeBase. Obviously, there have been larger transactions involving Chinese targets. But all 16 of those deals listed in our M&A KnowledgeBase have seen fellow Chinese companies as the buyer. Overall, our data indicates that slightly more than half of all China-based tech vendors sell to Chinese acquirers, although the top end of the market is unanimously weighted toward domestic transactions.

Clearly, although owned by a Chinese group, the Lexmark software division is hardly a ‘Chinese company,’ in the sense of a domestically headquartered operation that does the majority of business in its home market. Lexmark had cobbled together its software unit from roughly a dozen acquisitions of enterprise software providers based in North America and Europe. (451 Research will have a full report later today on how the acquired software business will fit into Thoma Bravo’s portfolio and what impact the deal will have on the broader business process and content management markets.)

Nonetheless, this landmark transaction comes at a difficult time in US-Sino relationships. President Donald Trump has blasted the currency and trade policies of China, although he did tone down his criticism during last month’s meeting with his counterpart, Xi Jinping. Despite the apparent thaw, the relationship between the world’s two largest economies remains chilly. That’s having an impact on M&A, which is a form of ‘international trade’ of its own. In a survey last month of 150 tech M&A professionals, more than half of the respondents (55%) predicted that US acquisitions of Chinese companies would decline because of President Trump’s trade policies. Just 7% forecast an uptick, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.

For a more in-depth look at the trends and concerns around doing deals in China, be sure to join our webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. The webinar is open to everyone, and you can register here.

 

Tech M&A goes from fitful to faltering

Brenon Daly

Contact: Brenon Daly

If tech M&A was stumbling in the first three months of the year, it face-planted in April. Spending on tech deals announced around the globe in the just-completed month slumped to just $12.9bn, the lowest monthly total since the start of 2015, according to 451 Research’s M&A KnowledgeBase. The paltry value of April’s tech transactions works out to just half the average amount spent in each of opening three months of this year.

Spending last month came in light largely because dealmakers didn’t buy big, announcing just three transactions valued at more than $1bn, according to the M&A KnowledgeBase. That’s less than half the monthly average of eight ‘three-comma’ deals over the past 12 months. And even the big prints that did get done in April were relatively small. Last month’s largest transaction (the $2.3bn KKR-led acquisition of Hitachi Kokusai Electric) barely squeaked into the top 10 of the biggest deals of 2017, landing at number eight on our M&A KnowledgeBase list.

Acquirers didn’t just put off big-ticket purchases in April – in many cases they didn’t buy at all. According to the M&A KnowledgeBase, deal volume in April sank to its lowest monthly level in three years. Tech shoppers announced just 258 transactions last month. April’s weak deal volume and spending put overall 2017 M&A activity well behind recent years. In fact, through the first four months of this year, both measures are lining up fairly closely with the pre-boom year of 2013.

Jive talk leads to a deal

Brenon Daly

Contact: Brenon Daly

Privately held software consolidator ESW Capital has continued its sweep through the ever-maturing business software market, paying a bargain price for faded enterprise communications vendor Jive Software. ESW, which serves as the family office of Trilogy Software founder Joe Liemandt, has notched more than 50 software acquisitions, mostly over the past decade. It typically acquires old-line software companies that, for one reason or another, find themselves out of step with their respective markets.

That’s certainly a description that could be applied to Jive, which was founded in 2001 and enjoyed a few bountiful days after its 2011 IPO, but has more recently found itself a bit of an orphan on Wall Street. It went public at $12 and shortly after the offering shares ran into the mid-$20s. However, the stock hasn’t been in the double digits for more than three years. As shares slumped, perhaps inevitably, acquisition rumors began surfacing around the company, with SAP and existing Jive partner Cisco named as potential buyers. (At that time, boutique bank Qatalyst Partners was rumored to be running the process. In the actual sale to ESW, Morgan Stanley, which led Jive’s 2011 IPO, is getting the print. On the other side, Atlas Technology Group advised ESW.)

Investors impatiently waited through several shifts in strategy at Jive, but recent moves hadn’t produced much growth at the company: Jive was a single-digit-percentage grower in both 2015 and 2016, while its customer count actually ticked slightly lower during that period. On the bottom line, Jive has always run in the red, although on the other side of last year’s restructuring, it has posted positive operating income.

Still, Jive’s struggles are reflected in ESW’s take-private offer. Terms call for the buyout firm to pay $5.25 for each of Jive’s roughly 79 million shares outstanding, for an announced equity value of $462m and an enterprise value of slightly more than $350m. Jive put up $204m in revenue, meaning it is being valued at just 1.7 times trailing sales in the deal, which is expected to close next month. That’s below any of the multiples paid by PE shops in erasing software vendors from US exchanges over the past year. According to 451 Research’s M&A KnowledgeBase, multiples paid in software take-privates since May 2016 have ranged from 2.3-7.9x trailing sales.

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

Survey sees tech M&A heading up and to the right

Brenon Daly

Contact:  Brenon Daly 

Despite a slow start to 2017, tech M&A activity is expected to accelerate over the course of the year, according to the prevailing view in the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. (See full report.) Slightly more than half of the respondents (52%) forecast that deal flow will top last year’s level, more than three times the 15% of respondents who indicated that year-over-year activity would decline in 2017. The projection in our just-completed survey represents the most-bullish outlook in two years.

If the sentiment does come through in increased activity for the rest of the year, it would also mark a dramatic reversal from the start of 2017. In the first quarter, tech acquirers announced 12% fewer transactions than they did in Q1 2016 or Q1 2015, according to 451 Research’s M&A KnowledgeBase. Of course, 2017 comes after the two highest years of tech M&A spending since the internet bubble burst. Collectively, acquirers in 2015 and 2016 announced deals valued at more than $1 trillion, according to the M&A KnowledgeBase.

451 Research subscribers can view the full report on the most-recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster, which includes the outlook for overall activity and valuations in the tech M&A market, as well as highlights specific trends and drivers for deals in 2017 and beyond.

After a slow start for tech M&A, business picks up late in Q1 

Brenon Daly

Contact: Brenon Daly 

After record spending in the tech M&A market in 2015 and 2016, dealmakers took a little while to get going this year. The value of tech transactions in both January and February slumped to the lowest consecutive monthly totals since 2013, according to 451 Research’s M&A KnowledgeBase. The two-year surge seemingly led to a two-month slump, as buyers digested their acquisitions. By the final month of the first quarter, however, acquirers were back in business, spending as much in March as they did in the two previous months combined.

Altogether, as tallied by the M&A KnowledgeBase, worldwide spending on tech and telecom deals in the first three months of 2017 hit $77bn, essentially flat with the opening quarter last year. However, the value of transactions announced in each of the subsequent quarters in 2016 accelerated dramatically from last year’s sluggish start, with average quarterly spending for Q2-Q4 coming in nearly twice the level of Q1.

Matching last year’s acceleration in spending may be a challenge for the rest of 2017, as buyers are on pace to do substantially fewer deals this year. That’s true for both broad tech M&A as well as the top end of the market. The first quarter’s deal volume of 910 represents a decline of roughly 12% compared with the January-March period in the previous two years. More significantly, tech acquirers announced fewer transactions valued at more than $1bn in the just-completed quarter than in any other quarter in more than three years.