Category: Private Equity

The where and how of tech M&A in 2017

Brenon Daly

Contact: Brenon Daly

After a surprisingly strong year for tech M&A spending in 2016, it’s natural to look ahead to this year and wonder how – and where – dealmaking will play out. To get a sense of that, we asked the primary players in the market for their specific forecasts on acquisition activity, valuations and even IPOs. 451 Research subscribers can see the full report on our tenth-annual 451 Research Tech Corporate Development Outlook Survey, as well as our twelfth-annual 451 Research Tech Banking Outlook Survey.

In addition to both survey groups offering their broad forecasts for tech M&A, we also asked specific questions about topics that will undoubtedly shape the market in the coming year. A quick highlight from each of the surveys:

  • A plurality of corporate acquirers are anticipating a ‘Trump rally’ in the tech M&A market in 2017. Half of the respondents (49%) expect the political and economic changes from the president-elect’s policies to ‘stimulate’ M&A activity – three times the percentage (16%) that said the policies will ‘inhibit’ dealmaking in the coming year.
  • Tech bankers expect even more M&A spending on enterprise security in the coming year. They also picked that as the top sector for 2016, and they were on to something: Spending on enterprise security soared to a record $16.7bn, more than the two previous years combined, according to 451 Research’s M&A KnowledgeBase.

Again, to see our full report on the M&A outlook from many of the most-active corporate acquirers, click here; and to see our full report on the views and predictions from senior tech investment bankers, click here.

A half-trillion-dollar year for tech M&A

Brenon Daly

Contact: Brenon Daly

Even after a record tech M&A run in 2015, dealmakers still had ambitious shopping plans for 2016. Across the globe, tech acquirers announced $500bn worth of transactions in the just-completed year, ranking 2016 as the second-highest annual total for spending since the internet bubble burst in 2000, according to 451 Research’s M&A KnowledgeBase. The unexpectedly strong spending last year came as the number of deals valued at $1bn or more soared to a new record, thanks in no small part to unconventional buyers ready to write big checks.

Although overall M&A spending dropped just 15% year over year in 2016, the year started much slower. In the opening months, the value of announced transactions was running at only half of 2015’s average monthly level. Only a summer surge pulled last year above a middling performance. In the back half of 2016, companies shrugged off the political shakeups in the European Union and the US and inked big deals. Nearly two-thirds (63%) of last year’s total announced M&A spending came in the final six months of the year, according to the M&A KnowledgeBase.

Even with the decline in the aggregate value of tech transactions in 2016, spending has still increased for three of the past four years. That surge, which has seen the annual amount of money spent on acquisitions more than double over the period, has expanded the pool of tech buyers beyond the ‘usual suspects’ of big-name corporate acquirers. For example, private equity firms announced more transactions in 2016 than any year in history, with spending soaring to its highest level since before the recent recession, when ‘club deals’ were all the rage. Also, Asian-based tech companies accounted for 16 of the 98 transactions valued at $1bn or more, an unprecedented share of the top end of the M&A market for the traditionally conservative shoppers.

As to where that leaves tech M&A for 2017, we’ll have some predictions about that from the main participants in the market later this week. In mid-December, 451 Research surveyed – separately – both corporate development executives and senior investment bankers to get a sense of their plans and pipeline for the coming year. One high-level finding: for the first year in the decade of surveying both groups, the forecasts didn’t exactly line up with one another. Uncharacteristically, bankers sounded a bearish tone for 2017, while corporate executives plan to ramp up their shopping. Look for full reports on the outlook and reasoning from both groups later this week.

 

PE: The only growth market in tech M&A right now

Brenon Daly

Contact: Brenon Daly

The buyout barons are busier than ever. Already this year, private equity (PE) shops have announced more tech transactions than any year in history. The unprecedented flurry of deals comes as more financial acquirers are buying their way into the ever-maturing tech industry, with newly hatched fledgling funds joining well-established multibillion-dollar outfits. This ever-increasing pack of PE players is vastly outpacing their corporate rivals when it comes to putting up deals.

So far this year, PE buyers have announced a record 283 acquisitions, an increase of 11% from 2015 and 21% from 2014, according to 451 Research’s M&A KnowledgeBase. (We would also note that the deal flow covers virtually every strategy – carve-outs, bolt-ons, take-privates, secondaries – available to these firms.) If we assume the pace of buyout activity holds through December, PE shops will put up more than 300 prints in 2016, a 20% increase from last year. (For the record, M&A spending by buyout firms this year has set a post-recession record.)

As PE shops step up their activity, corporate acquirers are slowing down. Overall, the number of tech transactions is likely to decline about 10% this year, compared with 2015. (That’s assuming the pace in December continues at the rate of the preceding 11 months.) The drop-off in 2016 will be even sharper among US publicly traded buyers, which represent the most visible segment of the ‘corporate acquirers.’ Currently, tech vendors listed on the Nasdaq and NYSE are on pace to announce just 900 purchases in 2016, down from about 1,040 deals in each of the two previous years, according to the M&A KnowledgeBase.

Although PE is essentially the sole ‘growth market’ in tech M&A right now, it still represents only a small portion of the activity. In 2016, financial acquirers account for only one of every 12 transactions. Still, that’s a higher share of the market than either of the two previous years – and that looks likely to increase further in 2017. Even from the recent record level of activity, nearly half of respondents (45%) to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster last October predicted that buyout shops would spend more in 2017 than they have in 2016, compared with just one-quarter (28%) who forecast lower spending.

PE activity

Period Deal volume Deal value Percentage of overall tech M&A spending
YTD 2016 283 $69bn 15%
2015 253 $58bn 9%
2014 234 $42bn 10%
2013 201 $62bn 25%
2012 169 $28bn 15%
2011 212 $33bn 14%
2010 147 $29bn 15%
2009 103 $13bn 9%
2008 107 $17bn 5%
2007 159 $122bn 29%

Source: The 451 M&A KnowledgeBase

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

Big Yellow and big buyouts push infosec M&A spending to record

Brenon Daly

Contact: Brenon Daly

What happens at the top end of a market usually goes some distance toward setting the overall tone in that particular market. At least that’s one way to view M&A in the information security sector, which has surged to a record level of spending led by transactions involving the two largest vendors. Up until recently, both Symantec and McAfee had been largely out of the market as the companies worked through earlier strategy bets that didn’t pay off.

So far this year, infosec shoppers have spent $14.3bn on deals, according to 451 Research’s M&A KnowledgeBase. That tops the previous record of $13.5bn in 2010. However, a look inside the deal flow indicates that the previous record was much more concentrated: the single-largest transaction in 2010 (Intel’s $7.7bn purchase of McAfee) accounted for more than half of that year’s overall deal value, while the single-largest transaction in 2016 (Symantec’s $4.7bn pickup of Blue Coat Systems) accounts for just one-third of this year’s spending.

Intel’s partial unwind of its experiment with McAfee is contributing to this year’s record. But more dramatically, it’s the reversal at Symantec that has boosted overall spending in the infosec space. After shying away from significant acquisitions in recent years, Big Yellow has now inked its two largest security deals in just the past the past five months. For perspective, the combined $7bn Symantec has shelled out since last summer for Blue Coat and LifeLock is more than it has spent, collectively, on its 25 other infosec purchases since 2002, according to the M&A KnowledgeBase.

In addition to large corporate buyers, big financial acquirers have also been contributing to this year’s record spending. Both TPG Capital’s carve-out of McAfee and PE-backed AVAST’s consolidation of AVG were valued in the billions of dollars. For comparison, the previous record year of 2010 didn’t feature any billion-dollar PE transactions.

infosec-updated-ma-totals

For tech M&A, it’s an ‘October surprise’

Brenon Daly

Contact: Brenon Daly

Once again, there was a gigantic ‘October surprise’ in the tech M&A market. In the just-finished month, Qualcomm put together a blockbuster $39.2bn play for NXP Semiconductors, accounting for nearly half of all spending on last month’s tech deals. A year ago, Dell’s mammoth $63.1bn purchase of EMC dominated October 2015 spending. Together, those October prints are the two largest non-telecom tech acquisitions of the past decade and a half, according to 451 Research’s M&A KnowledgeBase.

On its own, the Qualcomm-NXP pairing slightly exceeded an entire month’s worth of tech spending in 2016. When added to the other 304 transactions announced in October, the total for spending on tech deals across the globe hit $82bn. Also boosting last month’s total was CenturyLink’s $24bn reach for Level 3 Communications. (Including the assumption of debt, the enterprise value of that transaction swells to $34bn.) Altogether, October spending ranks as the second-highest monthly total of 2016, according to the M&A KnowledgeBase.

Outside of those two big prints, which accounted for slightly more than three-quarters of all announced deal value last month, dealmaking was a bit slower than usual at the top end of the market. In our M&A KnowledgeBase, we tallied just six transactions valued at more than $1bn last month, down from a monthly average of eight ‘three-comma deals’ through the first three quarters of the year. Overall deal flow was also a little slower than usual, with the number of announced transactions in October down almost 15% compared with the monthly average in the first half of 2016 and down almost 20% compared with the same month of the two previous years.

With two months of 2016 still remaining, this year has already topped full-year spending for every year except the post-internet bubble record level of 2015. While this year likely won’t challenge last year in terms of deal volume or the value of those transactions, it is outpacing 2015 in another key M&A consideration: valuations. Looking at the largest multiples paid in deals valued at $10bn or more over the past two years, four of the five transactions have printed in 2016, according to the M&A KnowledgeBase.

2016 tech M&A activity, monthly

Period Deal volume Deal value
October 2016 305 $81.8bn
September 2016 290 $29.8bn
August 2016 299 $30.9bn
July 2016 329 $93.7bn
June 2016 375 $66.7bn
May 2016 324 $23bn
April 2016 344 $19.6bn
March 2016 337 $23.9bn
February 2016 322 $28.3bn
January 2016 380 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

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

Survey: Back to normal for tech M&A

Brenon Daly

Contact: Brenon Daly

After two straight forecasts of substantial deterioration in the tech M&A market, the outlook for activity has picked back up, according to the latest edition of the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. Nearly half of the respondents (47%) indicated they would be increasing their activity in 2017 compared to 2016. On the other hand, 20% of respondents said they would be slowing down on acquisitions next year, with the remaining one-third (33%) forecasting no change in their rate.

Broadly, the latest top-level results of the M&A Leaders’ Survey represent a more ‘normalized’ forecast for activity, following the most bearish outlook we’ve ever recorded. In our previous survey last April, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number indicating they would be cutting back on their shopping. For comparison, in the just-completed survey, more than twice as many respondents said they would be accelerating acquisition activity than said they would be slowing down.

The shift in sentiment comes as tech M&A spending accelerated dramatically through the summer, with the value of transactions announced in Q3 hitting the third-highest quarterly level since the end of the recent recession, according to 451 Research’s M&A KnowledgeBase.

Now in its tenth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster drew responses from 150 senior M&A professional on a variety of topics, including forecasts for types and structure of transactions, as well as the impact of recent events on their deal-making plans. Some of the highlights:

  • Private equity buyers are expected to play an increasingly significant role in the market. Nearly half of survey respondents (45%) forecast buyout shops would spend more in 2017 than they have in 2016, compared to just one-quarter (28%) who forecast lower spending.
  • Respondents indicated the White House clash between Donald Trump and Hillary Clinton is slowing deal flow far more than any disruption caused by the UK effectively severing economic and political ties with the European Union, following June’s Brexit vote.
  • Concerns about potential liability due to cybersecurity (think Verizon-Yahoo) are making buyers take a much closer look at the companies they plan to acquire.
  • Buoyed by a handful of strong recent tech offerings, the IPO market is expected to accelerate even more next year, according to a majority of survey respondents.

Respondents to the M&A Leaders’ Survey will get aggregate results, as well as selected comments and insight, emailed to them tomorrow. 451 Research subscribers should look for a full report on the survey later this week.

mofo-ma-forecast-oct-2016

A summer surge puts Q3 tech M&A back on record pace

Brenon Daly

Contact: Brenon Daly

For at least one quarter, it was as if we never turned the calendar on the record-breaking pace of tech M&A we saw in 2016. Dealmakers around the globe spent $153bn on 910 tech, media and telecom (TMT) transactions announced from July to September. That ranks the just-completed Q3 as the third-highest quarterly total since the end of the recession, according to 451 Research’s M&A KnowledgeBase. In fact, the rather unexpectedly strong M&A spending in Q3 exactly matched the average quarterly tally from 2015, when deal value hit its highest annual level since the internet bubble burst.

This summer’s surge brings the total spent by TMT acquirers around the globe so far in 2016 to $336bn, putting 2016 already ahead of the full-year totals for six of the past eight years. Looking ahead, if we assume the pace of spending from January-September continues in Q4, full-year 2016 deal value would hit some $440bn – the second-highest annual total since 2002, according to the M&A KnowledgeBase.

Spending in the summer quarter was dominated by a parade of blockbuster transactions. Overall, last quarter saw four of the five largest deals of the year announced. Significant Q3 transactions include:

  • Continuing its big-ticket expansion into technology growth markets, SoftBank paid $32.4bn for ARM Holdings. The deal stands as the second-largest semiconductor transaction in history, trailing only Avago’s $37bn purchase of Broadcom last year.
  • Intel ended its experiment of baking security directly into its silicon by divesting a majority stake of its McAfee division. The move values McAfee at just $4.2bn, meaning the business has lost about 40% of its value under Intel’s six-year ownership. For comparison, during that same period, Symantec’s market value has almost doubled.
  • Hewlett Packard Enterprise unwound a series of earlier software acquisitions that were supposed to drive its next leg of growth, taking a pretty big discount in the process. The portfolio, which was accumulated over a decade by its predecessor company, cost HPE more than $20bn to acquire, but was spun off to Micro Focus in a transaction valued at $8.8bn.
  • Oracle paid $9.3bn, or 11x trailing sales, for NetSuite, making the largest purchase of a subscription software vendor ever. NetSuite’s valuation was roughly twice the level that Oracle has paid for the license-based software providers it has bought over the years.
  • In the biggest sale of a VC-backed company in two and a half years, Walmart paid $3.3bn for e-commerce startup Jet.com.

Our full report on the blockbuster Q3 tech M&A activity will be available to 451 Research subscribers later today.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2016 910 $153bn
Q2 2016 1,043 $110bn
Q1 2016 1,039 $73bn
Q4 2015 1,063 $185bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn

Source: 451 Research’s M&A KnowledgeBase

Tech M&A this summer is a really big deal

Brenon Daly

Contact: Brenon Daly Kenji Yonemoto

It’s been a blockbuster summer for blockbuster deals. Since July, tech acquirers have announced more transactions valued at $1bn+ than any quarter since the recent recession. 451 Research’s M&A KnowledgeBase has tallied a record 33 ‘three-comma deals’ here in Q3, significantly above the average of roughly 20 transactions per quarter over the past two years. Overall, big-ticket purchases, which had a median value of $2.2bn, account for a staggering $130bn of the roughly $150bn in total spending on tech M&A this quarter.

The billion-dollar prints this summer came from across the IT landscape, according to the M&A KnowledgeBase, with three semiconductor deals valued at more than $1bn, the largest SaaS transaction in history and the biggest exit for a VC-backed startup in two and a half years. Another source that has (rather unexpectedly) contributed to deal flow at the top end of the market recently has been divestitures. Fully one-quarter of the $1bn+ deals in Q3 involved the sale of divisions of larger companies, such as Hewlett Packard Enterprise shedding its software unit and Intel divesting a majority stake of McAfee. (Several of the billion-dollar transactions announced in Q3, such as the HP Software and McAfee deals, effectively involve unwinding previous billion-dollar acquisitions.)

451 Research will publish a full report on M&A activity in Q3 early next week. But the headline for the quarter is certainly the record number of big prints, which helped push spending to the third-highest quarterly total since the end of the recession, according to the M&A KnowledgeBase.

1bn-deal-quarterly

Source: 451 Research’s M&A KnowledgeBase

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

A tarnished Golden Tombstone

Brenon Daly

Contact: Brenon Daly

In each of the past nine years, 451 Research has surveyed more than 100 corporate development executives to find out which deal announced during that year stood out to them as the most significant transaction. The peer-selected prize, which we call the Golden Tombstone, has gone to companies across the tech landscape. Still, many of those blockbuster transactions haven’t generated the expected returns. The Golden Tombstone, it turns out, can tarnish over time.

We saw that yet again this week, as Intel unwound its full ownership of McAfee, which was voted the most significant transaction of 2010. With that divestiture, the number of Golden Tombstone-winning transactions that have been undone climbed to three, representing an alarming one-third of the annual prize winners. (The others: Hewlett-Packard Enterprises sold off its services business in May, reversing its 2008 acquisition of EDS; and Google unwound its 2011 purchase of Motorola Mobility three years later.) For the record, the ‘exit’ prices for all of those businesses was far less than the ‘entrance’ prices.

Not to jinx the transaction or anything, but we would nonetheless note that last year’s landslide winner was Dell’s acquisition of EMC. That transaction, which was announced last October and officially closed earlier this week, was an obvious vote for the Golden Tombstone. After all, it is the largest pure tech transaction in history. And yet, even though Dell and EMC are only (officially) beginning their corporate life together, there’s already some ominous history lining up against the deal.

Top vote-getter for ‘most significant tech transaction’

Year Deal
2015 Dell’s acquisition of EMC
2014 Facebook’s acquisition of WhatsApp
2013 IBM’s acquisition of SoftLayer
2012 VMware’s acquisition of Nicira
2011 Google’s acquisition of Motorola Mobility
2010 Intel’s acquisition of McAfee
2009 Oracle’s acquisition of Sun Microsystems
2008 Hewlett-Packard’s acquisition of EDS
2007 Citrix’s acquisition of XenSource

Source: 451 Research Tech Corporate Development Outlook Survey

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

Baking in security isn’t a good recipe for Intel

Brenon Daly

Contact: Brenon Daly

Intel’s multibillion-dollar experiment in bringing security in-house and baking it into its silicon is over. The chipmaker announced plans to mostly unwind its six-year-old acquisition of McAfee, which stands as the largest information security (infosec) transaction in history. However, Intel’s divestiture of a majority stake of its infosec division is being done at a substantial discount to the original purchase.

Under terms, Intel will retain a 49% stake in the infosec business, which will revert to the McAfee name, with private equity firm TPG Capital acquiring a 51% stake. The buyout shop will pay $1.1bn in cash and assume $1bn in debt. (The co-owners of McAfee plan to raise a total of $2bn in debt, with $1bn of that held by TPG and $1bn held by Intel.) Altogether, the transaction gives McAfee an enterprise value of $4.2bn, compared with an enterprise value of $7bn for McAfee in Intel’s mid-2010 puzzling purchase.

Sales at Intel’s infosec unit totaled $1.1bn in the first half of this year, according to the company. Annualizing that amount would put revenue at $2.2bn, meaning McAfee is valued at less than two times sales in its divestiture. That’s a relatively low multiple for infosec companies. In its 2010 purchase, for instance, Intel paid roughly 3.5 times sales for McAfee. Furthermore, rival Symantec currently trades at roughly the same 3.5x multiple.

Intel’s divestiture of McAfee, which had been rumored for some time, underscores the fact that infosec is an industry in transition. The move means that two of the largest and longest-standing security companies have undergone dramatic corporate overhauls since just the start of the year. Back in January, Symantec sheared off its Veritas storage business so that it could focus entirely on security. It then followed that up in summer by announcing the second-largest infosec transaction, according to 451 Research’s M&A KnowledgeBase. Symantec paid $4.65bn for Blue Coat Systems, an acquisition that, unusually, installed Blue Coat executives into the top three spots at the acquiring company.