Category: Private Equity

With sharp elbows and deep pockets, PE gets busy

Brenon Daly

Contact:  Brenon Daly

With sharp elbows and deep pockets, private equity (PE) shops have announced more deals so far this year than the opening quarter to any year since the end of the recent recession. Already in 2017, 451 Research’s M&A KnowledgeBase has tallied 165 transactions by PE firms and their portfolio companies, a 15% jump from the previous record in Q1 2016. More broadly, buyout shops are currently about twice as busy as they were just a half-decade ago. Cash-rich financial acquirers represent the only significant group that’s accelerating activity in an otherwise slowing tech M&A market.

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing shops have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital Group and TA Associates have already announced as many deals in 2017 as each of the firms would typically print in an entire year.

Of course, merely having record amounts of money doesn’t necessarily mean that firms will do more shopping. After all, that hasn’t been seen among corporate acquirers, which stand as the main rivals to PE shops. Tech companies that trade on the NYSE and Nasdaq have never had fatter treasuries than they do now, but the number of acquisitions they announced in 2016 dropped 11% compared with 2015, according to the M&A KnowledgeBase. In contrast, PE firms registered almost exactly the inverse, with the number of transactions increasing 13% in 2016 from 2015.

As financial acquirers step up their activity and strategic buyers step back, the once-yawning gap between the rival buying groups is narrowing. In the years immediately after the recent recession, tech companies listed on US exchanges regularly put up twice as many prints as PE firms. However, for full-year 2016 and so far in 2017, M&A volume for corporate acquirers is only about 30% higher than their financial rivals, according to the M&A KnowledgeBase.

A shift in strategies clips tech M&A valuations

Brenon Daly

Contact: Brenon Daly 

The speculative fever that helped spike tech M&A valuations at the start of 2017 has quickly been doused. After a mini-boom in high-multiple deals in January, last month came up virtually empty on richly valued exits as buyers stopped rolling the dice on acquiring startups and, instead, fell back on more old-school acquisition strategies. As a result, the broad-market price-to-sales multiple dropped a full turn from January to February, according to 451 Research’s M&A KnowledgeBase.

In the opening month of the year, tech acquirers appeared ready to write big checks for the startups they wanted. Cisco, Atlassian and Castlight Health all paid double-digit multiples for VC-backed companies in January, compared with just one buyer in February. Last month, Palo Alto Networks paid $105m for LightCyber, which works out to, barely, a 10x multiple of trailing sales, according to reports. Meanwhile, Cisco and Castlight both paid valuations closer to 20x sales and Atlassian – in its largest-ever purchase – spent $425m for Trello, a collaboration app that had only been available for a little more than two years and generated scant revenue.

Partly boosted by those handsomely valued startup exits, the average tech vendor sold for 5x trailing sales in January, according to the M&A KnowledgeBase. But in February, that broad-market valuation dropped to just 4x trailing sales. Last month’s multiple was dragged down by more conservative deal structures, such as divestitures (ARRIS Group buying the castoff Ruckus Wireless business for just 1.3x sales) and consolidation (private equity-backed Saba Software gobbling up publicly traded Halogen Software for just 2.4x sales).

If nothing else, the mixed picture for valuations so far in 2017 matches the expectation of senior bankers we surveyed last December about the coming year. In the 451 Research Tech Banking Outlook Survey, respondents were basically as likely to anticipate M&A pricing ticking up (32%) as sliding down (30%) in 2017. That’s the most-balanced forecast response ever recorded. In virtually all of our previous 11 surveys, one view – either squarely bullish or decidedly bearish – has dominated.

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

After a two-year surge, a two-month slump in tech M&A

Brenon Daly

Contact: Brenon Daly 

The tech M&A market is still struggling to get going in 2017. For the second straight month, spending on tech acquisitions around the globe totaled just half the average monthly level from last year. According to 451 Research’s M&A KnowledgeBase, tech acquirers announced just $19bn worth of transactions in the just-completed month of February, almost exactly matching the low spending level of January. Put together, the opening months of this year represent the weakest back-to-back monthly spending totals since 2013.

Similarly, the number of announced deals in February slumped to its lowest monthly level in more than three years. The 238 transactions tallied for February in the M&A KnowledgeBase represents a 30% slide from January deal volume and a 25% year-over-year decline from the average activity levels in February 2016 and February 2015.

The decline is due primarily to several of the well-known corporate acquirers either slowing their M&A machines or unplugging them altogether so far this year. For instance, neither SAP nor Intel have put up a 2017 print. Meanwhile, IBM has announced just one small transaction this year, down from a head-spinning pace of seven acquisitions in the first two months of 2016.

On the other hand, private equity (PE) firms have continued their record-setting pace. Buyout shops, which represent the sole ‘growth market’ in tech M&A right now, announced 23 deals in February – almost as many as they did in February 2015 and February 2016 combined. Three separate PE firms (Blackstone Group, H.I.G. Capital and The Riverside Company) announced at least two transactions last month.

The lackluster start to 2017 comes after tech M&A hit its two strongest years of the past decade and a half. (Tech acquirers dropped more than $1.1 trillion on deals over the 2015-16 spree, according to the M&A KnowledgeBase.) That recent record activity appears to have siphoned off some of the acquisitions in 2017. Senior tech investment bankers surveyed by 451 Research last December gave their weakest forecast for M&A spending in 2017 for any year since the recent recession.

Divestitures hit record levels

Scott Denne

Contact: Scott Denne

Buyers seeking growth sent tech M&A surging to near-record levels last year. Many sellers were of a similar mindset as enterprise technology companies shed lagging units with an eye on expanding the topline of their core businesses. That trend pushed divestitures to record levels in 2016. According to 451 Research’s M&A KnowledgeBase, divestitures by public companies hit $70bn, capping off five consecutive years of growth in the category.

Sales of Hewlett Packard Enterprise business units (software and IT services) captured the top two spots for the year as it divested those shrinking assets to focus on expanding its IT infrastructure business. HPE wasn’t alone. EMC sold its content software business to OpenText, which itself bought a pair of software assets from HP Inc. Strategics weren’t the only buyers – private equity (PE) firms played a considerable role in bolstering the amount of divestitures.

PE shops enabled Intel to shed its unfortunate McAfee purchase, helped HPE sell another, smaller subsidiary and assisted SunGard in divesting its government and education business in the wake of its own sale to FIS. Those deals and others drove PE spending on public company divestitures past $16bn, a 59% jump from the previous record set a year earlier. Much like overall PE spending last year, firms were more willing to ink large transactions when buying struggling business units. There were five such PE acquisitions valued at or above $500m, surpassing the previous record of three.

The divestitures announced last month (by PE firms or otherwise) don’t indicate that the record levels of such deals will continue – there was $1.6bn worth of public company divestitures in January. However, there’s still a willing pool of buyers, should more tech businesses look to unload underperforming and non-core assets. The 451 Research Tech Banking Outlook Survey anticipates abnormally high levels of PE activity coming in 2017. In that December survey, 54% of bankers said the value of their PE pipelines has increased, beating out the number (51%) who said their overall pipelines grew – the first time in that survey when more respondents anticipated growth in PE deals than in overall M&A.

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

451 Research M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

After a slow start in January, what does the rest of the year hold for tech M&A? Will 2017 rebound like 2016, which had a similarly slow opening month only to surge later in the year to finish with the second-highest annual spending total since the internet bubble burst? Or will this year settle back down to more typical post-recession levels, which would mean a decline of about 50% in spending from 2016’s total?

Join 451 Research tomorrow for an hour-long webinar as we look at the recent activity and forecasts from 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. Additionally, we’ll look at specific themes that are likely to play out in key sectors of the IT market, including software, security and mobility. The webinar starts at 10:00am PST on Tuesday, February 7, and you can register here.

Lots of tech deals, but few dollars, to start 2017

Brenon Daly

Contact: Brenon Daly

After slumping sharply in the two months following the unexpected results of the US election, the number of tech acquisitions picked back up in January. M&A spending, however, didn’t follow suit. In the just-completed month, tech buyers around the globe announced 330 deals, with the aggregate value of those transactions totaling just $18bn, according to 451 Research’s M&A KnowledgeBase. January spending represents the lowest monthly level in two years, and just half the average monthly amount in 2016.

At the top end of the market, the M&A KnowledgeBase tallied just five deals valued at more than $1bn. That’s down from last year’s average of eight big-ticket transactions each month. Further, with one notable exception, the ‘three-comma deals’ so far this year have all gone off at below-market multiples. For instance, Keysight Technologies is paying just 3.2 times trailing sales for application testing vendor Ixia, which had been posting declining revenue. Clearlake Capital Group is paying an even lower multiple for LANDESK, owned by fellow buyout firm Thoma Bravo, according to our understanding.

A discount didn’t apply to last month’s largest transaction, Cisco’s reach for AppDynamics. The networking giant, which has been busily buying software vendors, paid an astounding 17.4x trailing sales for the application performance monitoring provider. (The $3.7bn deal marks the largest sale of a VC-backed company in three years.) Part of that rich valuation can be attributed to the fact that Cisco had to outbid the public market for AppDynamics, which was just a day away from setting the price of its planned IPO when Cisco announced the acquisition. Still, AppDynamics’ valuation is the highest multiple ever paid for a software firm with more than $50m in revenue, according to the M&A KnowledgeBase.

January’s deal volume, on the other hand, reversed two months of sharp declines to close 2016. The number of tech transactions in both November and December dropped to three-year lows, according to the M&A KnowledgeBase. Buyers last month included ServiceNow, Amazon Web Services and Oracle. Meanwhile, companies that double-dipped in the M&A market to start 2017 included Microsoft, Hewlett Packard Enterprise and the recently public Everbridge.

Recent tech M&A activity, monthly

Period Deal volume Deal value
January 2017 330 $18bn
December 2016 268 $39.5bn
November 2016 284 $39.6bn
October 2016 334 $83.2bn
September 2016 312 $30.1bn
August 2016 306 $31.5bn
July 2016 345 $94.1bn
June 2016 384 $67bn
May 2016 329 $23.8bn
April 2016 349 $20.7bn
March 2016 343 $23.9bn
February 2016 323 $28.3bn
January 2016 384 $21bn

Source: 451 Research’s M&A KnowledgeBase

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

The tech IPO window: open but unused

Brenon Daly

Contact: Brenon Daly

With AppDynamics stepping into Cisco’s ever-expanding software portfolio rather than continuing its march toward Wall Street, tech startups have once again been shut out of the public markets in the opening month of a year. Last January also didn’t see a single enterprise tech IPO, starting a drought that lasted until late April. Q1 2016 was the first quarter since the recent recession not to have a tech company come to market – and the current quarter is in danger of repeating that, despite some of the most-welcoming conditions on Wall Street.

Unlike this year, last year’s Q1 shutout was sparked by a double-digit percentage slide in US equity indexes in the opening six weeks of 2016. The Dow Jones Industrial Average, which is currently above the symbolically significant 20,000 level, bottomed out below 15,600 last February. (From trough to top, that represents almost a 30% gain in the Dow, adding more than a trillion dollars of market value.) Last winter’s bear market was even worse for highly valued tech names, which is what most of the tech IPO candidates aspire to be.

With investors selling their existing tech holdings, it was hard to find buyers for any new tech listings. In the imbalanced market at the start of last year, the financially prudent decision for startups tracking to an IPO was simply to wait until summer, when tech came back in favor among investors. By our count, seven of the nine enterprise-focused tech vendors that went public in 2016 debuted in the second half of the year. The debuts were actually even more concentrated than that, as two-thirds of tech IPOs last year came in just the six-week period leading up to the US elections in early November. Not a single tech provider has gone public in the three months since the election.

Part of the scarcity is due to seasonality. (Companies tend to prefer to finish Q4, which is almost inevitably their biggest quarter, and then go to market with full-year financials and a valuation that’s based on the coming year’s projected sales.) And yet, while IPO-minded startups have been focused on closing business and getting their financial paperwork in order, companies already public have been enjoying an extended, and somewhat unexpected, ‘Trump rally’ on Wall Street.

Indexes have posted a roughly 10% surge since the election, as investors bet that having a businessman as US president – who’s working with a Republican-controlled Congress – will be able to stimulate more economic growth. Perhaps more important to the relatively fragile IPO market, the instability and uncertainty from broader political and economic events has receded sharply. (For instance, the CBOE’s Volatility Index is currently just half the level it was during the run-up to the election.) The shift in sentiment is even more dramatic in our own surveys of individual investors.

In the two monthly surveys by 451 Research’s Voice of the Connected User Landscape (VoCUL) since Trump was elected, more than four out of 10 investors have said they are ‘more confident’ about the direction of the stock market now than they were 90 days earlier. That’s roughly twice the percentage that said they were ‘less confident’. Those are the most-encouraging assessments of Wall Street in a 451 Research survey since the end of the recession. And yet in the most bullish of recent bull markets, not a single tech startup has made it public in 2017.

The IPO window may be as open right now as it’s been in years, but investors would never know it. With two months remaining in the first quarter – and current stock market indexes more than 20% higher than they were in Q1 2016 – the net result for new enterprise tech offerings from last Q1 and the current quarter could well be the same: an IPO shutout.

How to get your tech M&A playbook for 2017

Brenon Daly

451 Research’s annual look back on the year that was and look ahead to the year that’s coming in technology M&A has been moved in front of our paywall. (Click here to access the report.) The broad-market overview highlights many of the trends that drove acquisition spending to a surprisingly strong $500bn in 2016, and predicts how those will play out in 2017. The 5,500-word introductory report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – opens our full M&A Outlook, an 80+-page analysis of M&A drivers and predictions on M&A and IPO trends and activity in specific sectors of the IT market.

The full report, which serves as an ‘M&A playbook’ for many of the tech industry’s main acquirers, offers an in-depth forecast of trends that will likely shape dealmaking in eight segments of enterprise information technology, including information security, mobility and software. The full M&A Outlook report will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and M&A KnowledgeBase Premium, and will be available for purchase for 451 Research clients and others that don’t subscribe to our premium KnowledgeBase products. 451 Research will publish our full M&A Outlook – including the Introduction, which is available now, and the eight individual sector reports – in early February.

PE-backed StorageCraft crafts another deal

Brenon Daly

Contact: Steven Hill Brenon Daly

In the year since TA Associates picked up StorageCraft Technology, the data-protection vendor has been working to build out a broader vision for metadata-rich data protection and management. Its latest move adds scale-out NAS appliance vendor Exablox, already an existing partner. Terms weren’t disclosed. The purchase of Exablox is StorageCraft’s second acquisition since being bought by private equity firm TA Associates, and comes five months after it snagged data analytics startup Gillware Online Backup.

This deal further extends an existing partnership between Exablox’s object-based core technology and StorageCraft, which has focused its recent strategy on metadata-based, long-term data management and protection. Both companies stressed that Exablox appliances will continue to be marketed for both primary storage and secondary storage applications, as opposed to a dedicated backup appliance only. The pairing has potential benefits for both companies, in particular adding StorageCraft’s ShadowProtect data protection and Gillware-based data intelligence enhancements to the Exablox platform.

From our perspective, the transaction reflects an increasing awareness of the importance of metadata as part of a larger vision for long-term data protection and management across the industry. Data growth is a given, and these vendors recognize that the next generation of storage requires greater intelligence about the data itself. Buying Exablox should allow StorageCraft to add closely integrated, on-premises storage offerings as an extension of its existing cloud, SaaS, storage analytics, data-protection and DR/BC portfolio. With the scarcity of funding available for storage and infrastructure companies, we expect more vendors to use deals such as StorageCraft’s reach for Exablox to expand their technology and market opportunity.

Now available: 451 Research’s 2017 M&A Outlook

Brenon Daly

Contact: Brenon Daly

Each year, 451 Research looks ahead to the coming year in M&A, highlighting the trends that will shape deal flow and the markets that are expected to see much of the activity. The report, which serves as an ‘M&A playbook’ for 2017, is now available to 451 Research subscribers.

Topics covered in the latest edition of the M&A Outlook include:

  • Besides the ‘usual suspects,’ which other tech acquirers stepped up their shopping in 2016 and are likely to accelerate that pace this year? If companies including Dell, Twitter and Dropbox aren’t buying any longer, where is the demand going to come from?
  • Specifically, which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security and mobility lead the forecast, but what about emerging cross-sector themes such as the Internet of Things and big data?
  • What’s shifted in the exit environment for VC-backed companies to open the way for some of the startups to realize ‘unicorn’ prices in the real world? And will 2017 (finally) see a rebound in the tech IPO market?
  • With president-elect Donald Trump set to officially take over as CEO of the US next week, why are corporate acquirers expecting a ‘Trump rally’ in the tech M&A market? What about buyers coming from China, who spent more acquiring US tech firms in 2016 than the previous five years combined?

The 5,500-word report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – thoroughly and insightfully covers last year’s activity as well as this year’s forecast. Get your copy of the M&A Outlook now.

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