PayPal adds marketplace payments with $400m reach for Hyperwallet

Mark Fontecchio

By Jordan McKee

PayPal has shelled out $400m for Hyperwallet to improve its ability to serve the wide variety of marketplace businesses – from Expedia to Uber to Amazon – that have emerged in recent years. Marketplaces are growing rapidly and have more advanced payment needs than the average e-commerce business given their global nature and multiple stakeholders that are part of the transaction. PayPal has existing capabilities in marketplace payments, in part through its $800m acquisition of Braintree in 2013, but lacked a holistic platform and advanced capabilities. The gap it created allowed numerous marketplace payment specialists to emerge and scale, including Stripe, Adyen and YapStone.

Hyperwallet, which was founded in 2000 and has roughly 200 employees, has favorable margins on international payments with strong growth. Most importantly, the target brings PayPal a robust payout platform that can disburse funds in various ways to marketplace participants in upwards of 200 countries. Coupled with PayPal’s 218 million active consumer accounts, this should create the basis for a unique and highly efficient disbursement offering. Hyperwallet should complement PayPal’s Braintree business unit, with Hyperwallet CEO Brent Warrington reporting to Braintree head Juan Benitez when the deal closes, expected in Q4.

At its May investor day, PayPal’s CFO emphasized the importance of inorganic growth for the company’s long-term strategy, laying out plans to tap its strong balance sheet and spend $1-3bn annually on deals over the next few years. PayPal has a favorable position in the market but is facing mounting competitive pressure, especially on the merchant side of its business, which has been hit hardest by some of the above-mentioned entrants. In recent years, PayPal’s merchant capabilities have begun to lag market leaders, creating obvious gaps in its platform. With purchases in the past 30 days of iZettle for $2.2bn (SMB brick and mortar payments), Jetlore (commerce software) and now Hyperwallet (marketplace payouts), the company has wisely chosen to focus its M&A budget on merchants in an effort to deepen and diversify its value proposition.

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MIPS takes Wave to the edge

Mark Fontecchio

By John Abbott, Scott Denne

Eyeing a move from training to endpoints, Wave Computing has acquired MIPS Tech, a pioneer in the development of RISC processors. The target, recently spun off of Imagination Technologies, provides the buyer, a designer of artificial intelligence (AI) semiconductors, the chance to sell its wares more broadly as organizations look to run AI algorithms directly on the endpoint.

Founded in 2010, Wave is one of multiple startups producing accelerators for AI workloads, and one of a smaller select group (along with Cambrian Systems, Cerebras Systems, Graphcore and Horizon Robotics) that have already raised over $100m in venture funding. Wave emerged from stealth in 2016 and made its compute appliance for training neural networks available to early-access customers in 2017. In March, Wave said it would be using the MIPS core as the integrated CPU within its next-generation Dataflow Processing Unit.

We noted in a previous report that MIPS would likely prove a valuable asset for AI applications. It’s been in business since the 1980s and has a significant embedded systems user base and a range of extensible cores. Once owned by SGI, MIPS ended up as part of UK-based GPU maker Imagination Technologies, but when Imagination was sold to China-based investor Canyon Bridge Capital Partners, US-based MIPS had to be divested separately to Tallwood Venture Capital for $65m. Tallwood is also an investor in Wave.

It’s likely that the power-efficient MIPS cores will be useful for the development of inference processors within edge devices, giving Wave an end-to-end story beyond its initial training focus, increasing its potential total addressable market significantly. MIPS will continue to be run as an independent unit, and will continue licensing its cores to third parties. 451 Research’s recent VotE: Internet of Things report shows that many companies are already making advanced calculations right on the endpoint – 40% of respondents claimed to run data analysis, cognitive computing or AI at the network edge or perimeter.

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Dealmakers immune to ‘World Cup flu’

Mark Fontecchio

By Brenon Daly

With the World Cup kicking off today, economists are once again totting up the billions of dollars in worker productivity they estimate gets lost to viewing the quadrennial soccer tournament. We’ll leave the broader macroeconomic calculations, which have increasingly come into question in recent years, to those with bigger spreadsheets than us. How they come up with the precise cost of watching Messi and Ronaldo do their thing on the field would appear to be driven more by spongy anecdote than hard data.

As a counter to the forecasts of distraction and idleness during the World Cup, we would note that in our world of tech M&A, it turns out people can actually strike deals while watching players strike a soccer ball. In fact, our numbers for the previous event indicate that tech acquisition activity actually accelerated a little during the month-long period where employees supposedly tuned out their work and tuned into the largest sporting event. Dealmakers appear to be immune to the ‘World Cup flu.’ Looking back to the previous World Cup, which ran from mid-June 2014 to mid-July 2014, acquirers announced 340 tech transactions valued at $36bn, according to 451 Research’s M&A KnowledgeBase. That four-week total was slightly ahead of the average monthly level during 2014 of 332 deals worth $33bn. Nor did deal flow dry up immediately after that year’s World Cup. The M&A KnowledgeBase shows an unusual level of consistency of monthly activity from June to September of 2014, with monthly spending ranging within a tight band of $31-37bn.

Looking further back to the 2010 event hosted by South Africa, the World Cup didn’t have any discernable impact on tech M&A, despite the annoying sounds of the vuvuzela echoing around the globe. The June and July monthly totals almost exactly matched both the average number of tech deals and spending during that year, according to the M&A KnowledgeBase. The following month of August registered the highest monthly acquisition spending level of the entire year. So if any dealmakers are among the estimated 3.4 billion people who plan to cast at least one eye on the World Cup over the next few weeks, they can know that in years past, it’s been business as usual while the games go on.

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Growth’s rich rewards

Mark Fontecchio

By Brenon Daly

With public market investors handing out sky-high valuations for software vendors that are coming public, the debutants are under a fair amount of pressure to start strong on Wall Street. So far in their inaugural reports as public companies, the class of 2018 has delivered. All four enterprise software providers – which are growing, on average, nearly 50% – have kept their businesses humming along as they have stepped onto the NYSE and Nasdaq.

In other words, the newly public software companies (Dropbox, Zuora, Smartsheet and DocuSign) are keeping their end of the bargain they struck with investors during their IPO to post growth that’s well above the market average. In return, Wall Street is continuing to value them at a level that’s well above the market average. Valuations for the quartet range from roughly 10-22 times trailing sales, averaging almost 18x. That’s a richer valuation than virtually any of the existing SaaS kingpins, and three or four times the public market valuations for conventional software vendors.

That run of outsized rewards for above-market growth for enterprise software IPOs appears all but certain to end when Domo comes public in a few weeks. The reason? Domo is decelerating. In its most-recent quarter (ending in April), the BI startup reported 32% growth, down from the high-40% range for both the year-ago quarter as well as the full fiscal year. The slowdown at Domo means the company is now growing at only about half the rate of the two other similarly sized enterprise software providers that have come public in 2018, Smartsheet and Zuora.

Of course, Domo faces a more existential concern than how much revenue it adds each quarter. As we noted in our full report on the planned IPO, the company has spent itself into a hole and needs the money from the offering to get out of it. At current rates, Domo has only enough cash in the bank to keep the business going for two quarters. Wall Street knows that and will price it into offering. Unlike this year’s other software debutants, Domo – with its slowing growth and dwindling treasury – will get discounted when it comes to market.

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GitHub shows Microsoft’s preference for platforms remains fully developed

Scott Denne

Contact: Scott Denne

In paying $7.5bn to own the preeminent repository of open source software code, Microsoft is inviting us to see how much its ideology around free software has changed. After all, the company’s previous CEO called Linux a ‘cancer’ and spent much of the previous decade threatening – and in one instance pursuing – litigation. And although Microsoft’s view of open source software has evolved, the acquisition of GitHub shows that its obsessions have not.

Microsoft has long been a builder and buyer of technology platforms. Although ‘platforms’ is an overused word in tech circles, in this case we mean the software or infrastructure upon which something of value can be built by outside parties. One could argue whether its largest purchase, LinkedIn ($26.2bn), fits such a definition. However, Windows and Azure undoubtedly do, as does Mojang, the developer behind Minecraft that it bought for $2.5bn in late 2014.

As a site that hosts 28 million software developers, the code they write and a marketplace for developer tools, GitHub certainly qualifies. Moreover, it matches another longtime Microsoft pillar: catering to developers. According to 451 Research’s M&A KnowledgeBase, Microsoft has printed 12 developer-related acquisitions in the past three years, although its history as a maker of developer tools extends well before that.

Philosophical alignment makes for copacetic press releases, but doesn’t motivate any company to hand out $7.5bn of its stock. In owning GitHub, Microsoft plans tighter integrations between the site’s workflow tools and its own Visual Studio development environment. And Microsoft should be able to get its other offerings – particularly Azure – in front of a new audience of developers.

Although the buyer plans to continue to enable GitHub customers to write code into any cloud offering, its own Azure is in need of a larger developer audience. Despite Microsoft’s roots as a developer-focused company – its first product in 1975 was a BASIC interpreter – its IaaS offering has fallen behind others in maintaining that group’s loyalty. According to 451 Research’s Voice of the Enterprise: Hosting and Cloud Managed Services, only 9.4% of Azure customers use the service’s development tools, compared with 12% of AWS customers.

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PayPal launches into commerce software by reaching for Jetlore

Scott Denne

Contact:  Scott Denne, Jordan McKee

With the acquisition of Jetlore, PayPal joins a multiplying cluster of payments companies moving into commerce software. Owning such assets brings these buyers one step up in the sales process and is a natural way to leverage their consumer data. Not to mention, software has higher margins than payments. But perhaps more importantly, it lands them in one of the more dynamic corners of the software market.

In Jetlore, PayPal gets commerce personalization software that applies machine learning to customer data to automate the layout for email, landing pages and product listings for large retailers. By catering to the digital side of the largest retailers, the acquisition stands in contrast to PayPal’s previous purchase, the $2.2bn pickup of iZettle, which was meant to expand into brick-and-mortar sales at SMBs. (Although terms of its Jetlore buy weren’t disclosed, the price paid for the lightly funded target likely contrasts with iZettle’s haul as much as the respective rationales.)

The acquirer took a small step into commerce software late last year with the launch of PayPal Marketing Solutions, which provides merchants with data and analysis about the consumers on their sites that use PayPal. That unit will now be home to the Jetlore team, where PayPal’s shopper data could potentially be used to help train Jetlore’s algorithms.

More importantly, as retailers adjust to mushrooming digital (and mobile) shoppers and search for ways to fend off Amazon’s growing dominance, commerce software is drawing an outsized share of tech budgets. In 451 Research’s VoCUL, Corporate Mobility and Digital Transformation survey, digital commerce and the closely related web-experience management were two of the three most commonly cited categories when respondents were asked about which applications their organization would deploy or upgrade in the next 12 months.

PayPal rival Square recently inked a deal for Weebly that covers both of those categories. Moreover, Vista Equity Partners’ acquisition of payments provider Fiverun, which it merged with commerce software vendors MarketLive and Shopatron, also highlights the opportunity to mix payments with commerce software. Yet, as payments companies take a natural step up the funnel with commerce, marketing software firms are taking a similar step down the funnel with commerce (see Adobe’s recent acquisition of Magento).

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Magento: a new shade for Adobe

Scott Denne

Contact: Scott Denne, Sheryl Kingstone

Adobe’s $1.7bn acquisition of Magento Commerce brings the buyer into new territory. Not only does it extend the enterprise software vendor’s customer engagement suite beyond marketing, but Adobe is also paying a price that’s well beyond its norm.

The company spent the past two years repositioning its marketing software business as a ‘customer experience’ business. Yet it lacked tools to finalize the most important part of a customer experience – the purchase. The pickup of Magento changes that. In buying Magento, Adobe fills a gap where its two strengths meet. The company made its mark in creative and content, later building a weighty position in marketing and advertising software. Its customers use those capabilities to bring business to their websites. Now, by owning a commerce platform, Adobe will have an offering that covers the last mile.

With Magento, Adobe inks its largest acquisition in the nine years since it paid $1.8bn for Omniture – the nucleus of its marketing software portfolio. Despite the similar purchase price, Omniture was more than twice the size of Magento and valued at half the multiple – more in line with a typical Adobe deal. According to 451 Research’s M&A KnowledgeBase, Magento’s valuation – 11.2x trailing revenue – is six turns higher than the median valuation of an Adobe acquisition and its largest on record.

Although it’s above the norm for Adobe, it’s in line with market comps – other commerce software providers with scale have fetched similar prices. Salesforce paid 11x in its $2.8bn purchase of Demandware, while SAP paid nearly as high in its $1.3bn pickup of hybris (see 451 Research’s trailing revenue estimate for hybris here). More recently, a pair of private equity firms took CommerceHub private at 9.9x, and Shopify boasts 19x on the public market.

Digital commerce software products command a perennially high share of organizational resources, helping those vendors command premium valuations. In each of the two most recent 451 Research VoCUL: Mobility and Digital Transformation Surveys, 27% of respondents told us their company plans to deploy or upgrade digital commerce systems in the next 12 months. That number jumps to 32% in the latest survey when including only businesses in Magento’s sweet spot: $100m to $1bn in annual revenue.

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Corporates open doors for PE exits

Scott Denne

Contact: Scott Denne

After a dry spell in 2017, strategic acquirers have come pouring back into the tech M&A market, printing larger deals and paying higher prices. In doing so, they’re delivering a disproportionately high amount of exits for private equity (PE) investments.

According to 451 Research’s M&A KnowledgeBase, strategic acquirers have spent $19.6bn so far this year to buy tech assets out of PE portfolios. That’s up from $8bn through May of last year and more than the same period in any year since 2002. The volume of such deals has risen as well, yet soaring valuations play an outsized role.

Among the 10 largest sales of PE-backed companies to strategic acquirers this year, six have traded above 5x trailing revenue. At this point last year, only two such transactions surpassed that mark. Strategic buyers appear willing to pay more than in the past, both in terms of multiple and check size. Take Adobe’s purchase of Magento (a Permira Funds portfolio company) earlier this week. In that deal, the acquirer paid 11x trailing revenue – an organizational record and more than twice the median multiple for an Adobe purchase.

In other cases, infrequent buyers are making remarkable acquisitions. TransUnion, for example, has upped its deal-a-year pace with six purchases in the past 12 months, including the $1.4bn pickup of GTCR’s Callcredit in April – its biggest-ever acquisition. Likewise, healthcare software vendor Inovalon Holdings moved past printing the occasional tuck-in with the $1.2bn acquisition of ABILITY Network from Summit Partners in March.

The trend aligns with the predictions for the PE exit environment in the M&A Leaders’ Survey from 451 Research and Morrison & Foerster. In that April survey, respondents overwhelmingly predicted an increase in PE exits via strategic acquisitions, with eight times as many respondents predicting an increase as those anticipating a decrease. Indeed, more foresaw an uptick in strategic exits than any other avenue we asked about (secondary sales, IPOs, reverse mergers and bankruptcy).

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Surging strategics

Scott Denne

Contact:  Scott Denne

Following a pair of down years, publicly traded strategic acquirers have come roaring back to the tech M&A market. Through the first four months of 2018, those buyers have collectively paid more for tech acquisitions than any start to the year since 2015. Our recent survey suggests that could continue through the rest of the year as newcomers print big deals and veteran acquirers outdo themselves.

According to 451 Research’s M&A KnowledgeBase, public companies spent $123bn on tech acquisitions through April, up from $73bn in the same period last year. Put another way, only 2015 and 2006 had produced more spending at this point in the year since 451 Research began tracking tech M&A in 2002. More than any other deal, T-Mobile’s $26bn reach for Sprint has propped up the total. Still, even backing out that purchase, which may well be undone by regulators, and Fujifilm’s increasingly doubtful agreement to buy a majority stake in Xerox for $6bn, the current year remains ahead.

In the April version of the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster, 58% of respondents projected an increase in strategic M&A. They also said – at a rate of six to one – that the new tax code, by lowering rates and making offshore cash available, would bolster strategic M&A. Whatever the role that tax law has played, strategics do appear to be coming back to market – and bigger than before.

T-Mobile, for example, had only acquired one other company since its reverse merger with MetroPCS in 2012. Fujifilm had only done the occasional tech deal, never approaching the $1bn mark. Looking at the buyers that round out the top five strategic transactions this year – General Dynamics, Microchip Technology and Salesforce – all had been frequent acquirers but had never before spent more than $5bn on a single deal until 2018.

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America’s first MAGA-deal

Scott Denne

Contact: Scott Denne

T-Mobile’s marketing smarts propelled the company to the number three spot among US wireless carriers. Now the company is leaning on those same skills to get its $26.5bn acquisition of Sprint through regulatory approvals. Its pitch for the deal, which has an enterprise value of $59bn, is laced with potential benefits to the US, particularly benefits that align with President Donald Trump’s rhetoric.

The FCC already threw cold water on the pairing once before under a previous administration, so getting this one past the government was always going to be a challenge regardless of who occupied the White House. While highlighting the broader benefits of a large transaction isn’t new, T-Mobile’s push is remarkable in its breadth.

In addition to the usual talk about the negligible (or positive) impact on competition and consumer prices, T-Mobile and Sprint are highlighting the potential for the combo to create jobs (particularly jobs in rural areas) and beat China and other countries in having the first nationwide 5G wireless network – it even set up a website to promote the deal at AllFor5G.com.

The press release announcing the acquisition mentions ‘job growth’ or a similar idea 12 times. Compare that with the release announcing the previous $50bn-plus US telecom pairing – Charter Communications’ 2015 takeover of Time Warner Cable – which made just one mention of jobs. In fact, according to 451 Research’s M&A KnowledgeBase, only four other $1bn-plus transactions among US publicly traded companies mentioned the potential for job growth in their press releases. And none did so more than twice.

T-Mobile has been massively successful in catering to its customers with its ‘Uncarrier’ strategy. According to a February survey by 451 Research’s VoCUL, T-Mobile’s percentage of satisfied customers (49%) has lurched beyond its competition. Whether its purchase of Sprint goes through or not may end up turning on the legal merits, not its marketing chops. Yet it clearly feels compelled to make a political case for the match – announced a day before closing arguments in a specious antitrust action against AT&T’s acquisition of Time Warner – to an administration that’s been unusually active in stopping deals.

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