Motorola spies an opening in the US security market 

Scott Denne

Contact: Scott Denne

Increasing levels of distrust of China helped depress last year’s global tech M&A market from the record levels of 2016 and 2015. But, as Motorola’s $939m acquisition of Avigilon shows, some firms see the growing breach between the world’s two largest economies as an opportunity to get into new markets that otherwise might not have made for compelling M&A.

In purchasing Avigilon, Motorola Solutions senses an opportunity to enter the market for video surveillance cameras at a time when China-based companies, which have a substantial market share in video cameras and other commodity electronics, are at risk of losing ground in the US. That’s a defensible prediction.

Not only has the US government clamped down on proposed acquisitions by China-based vendors, having stopped the purchases of MoneyGram and Lattice Semiconductor in the past six months, the administration has taken a harder line on trade, placing recent tariffs on washing machines and solar panels built in China. In video surveillance in particular, the US Army removed China-built surveillance cameras from a Missouri military base, fearing that the devices could be accessed by the Chinese government. Similar fears could well become a factor in acquisitions by other branches of the federal, local and state governments – all major buyers of such gear.

In Motorola’s move, there are signs that it sees an opening in the market that didn’t previously exist. For one, this marks its largest purchase since late 2015. And the deal carries a valuation that’s not typically seen among security surveillance providers. In its acquisition, Motorola will pay 2.6x trailing sales. According to 451 Research’s M&A KnowledgeBase, purchases of surveillance and monitoring vendors have traded at a median 1x since the start of 2015.

The potential for limited competition from Chinese firms isn’t the only rationale for a higher valuation for Avigilon. The company also sells a software platform for video analytics that adds value to otherwise commodity products and could be integrated with Motorola’s existing video surveillance business, which today is limited to body cameras.

The value of China acquisitions of US companies declined 90% last year to $1.1bn. A newfound sensitivity at The Committee on Foreign Investment in the United States and capital controls at home are likely to keep that number depressed for the foreseeable future. But US-based vendors could make up some of the loss, particularly in areas like physical security, biometrics and networking, where China-built products are at a distinct disadvantage in US markets.

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

Avaya’s M&A future looks cloudy 

Scott Denne

Contact:Scott Denne, Keith Dawson

Barely a month after emerging from Chapter 11, Avaya has returned to the M&A market with the purchase of Spoken Communications in what could be the first of several acquisitions as the company aims to transition its business into a cloud-delivery model. A recently restructured debt load gives Avaya an extra $300m in annual cash flow to put toward M&A, product development and other strategic initiatives to reverse a years-long decline in revenue.

Spoken doesn’t get Avaya into a lot of new product categories. Most of the call-center software that the target sells, Avaya already offers in some form, including interactive voice response and automated call distribution. Instead, Spoken brings a cloud-deployment model with lower costs and the potential for embedded intelligence. The deal, Avaya’s first since mid-2015, follows the creation of a dedicated cloud business unit last month.

With Spoken, it has a meaningful product to place into that unit and a platform for further acquisitions that could include forays into fraud detection and conversational artificial intelligence (i.e., chat bots). The deal helps shore up its contact-center business – the more stable portion of Avaya. Revenue in Avaya’s contact-center business – $1.2bn last fiscal year – has been basically flat for the past three years. Unified communications, on the other hand, has been eviscerated, having dropped by almost one-third over the past three years.

We’d expect Avaya to seek a similar cloud platform purchase for that unified communications business, as it’s in danger of continuing a rapid descent as organizations shift their internal communications to SaaS and other cloud models. According to 451 Research’s Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects, 76% of email and collaborative workloads will reside in the cloud by 2019, up from 55% last year.

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

Sensitive ‘barbarians’?

Brenon Daly

Contact: Brenon Daly

Although private equity (PE) is often portrayed as heartless and hardened dealmakers, it turns out the group is actually quite sensitive. We don’t necessarily mean emotionally sensitive but rather economically sensitive. This hyperactive group of acquirers is far more attuned to interest rates, credit availability and other economic factors than rival corporate buyers. What happens outside buyout firms goes a long way toward shaping what goes on inside.

We’re seeing that right now in the tech M&A market. The just-enacted sweeping overhaul to the US tax code has changed some of the key calculations that buyout shops have to make before they can put their unprecedented pile of cash to work in tech deals. Under the new tax regime, PE firms are facing higher costs and potentially longer holding periods – both of which would weigh on returns. (Buyout shops are getting hit with numerous changes, the most significant of which is that they are now only able to deduct a portion of the interest payments for the debt they use to acquire companies.)

The tax changes, which were negotiated and passed in the final few months of last year, knocked PE almost completely out of the market during that time. Through the first three quarters of 2017, buyout shops were clipping along at an average of about $10bn in spending each month, according to 451 Research’s M&A KnowledgeBase. However, spending plummeted to just $7bn for the entire fourth quarter. The aggregate value of deals in December – the month when the new tax code was approved – didn’t even reach a half-billion dollars, the lowest monthly total since early 2014.

Of course, this is only the most-recent case of macroeconomic conditions shaping PE activity. A far more vivid example of that came a decade ago, when the mortgage crisis effectively killed the first wave of tech buyouts. As we noted last summer on that unhappy anniversary, the last four crisis-shadowed months of 2007 accounted for just $7bn of the then-record $106bn in PE spending that year. The PE industry took until 2015 to reclaim the level of spending it put up in 2007, according to the M&A KnowledgeBase.

No one is suggesting the changes from the tax code will be anywhere as severe as the disappearance of credit, which is what we saw in the recession a decade ago. This time it’s more of a recalibration than a retreat.

GoDaddy courts mom and pop 

Scott Denne

Contact: Scott Denne

Like most tech M&A denizens, GoDaddy slowed its dealmaking in 2017. This year, it’s getting back into the market with an early, substantial purchase, spending $125m for social marketing services provider Main Street Hub. The acquisition, its second-largest to date, comes as GoDaddy must transition beyond its reliance on domains by upselling more software and services to each of its accounts.

According to 451 Research’s M&A KnowledgeBase, GoDaddy averaged four acquisitions in the four years leading up to 2017. Last year, it printed just one. In fact, it was just as often on the sell-side as it divested PlusServer, the managed hosting business it obtained as part of its 2016 Host Europe buy. Relatedly, it shuttered its cloud server business around the same time to focus on its small business market to maintain its growth.

Today’s deal aligns with that focus. Main Street Hub runs a service that helps small, local businesses build, maintain and monitor their social media presence. GoDaddy’s approach to landing small business customers is to lead with its domain name service and then attach software to that, such as its recently launched website builder GoCentral and its email service, email marketing and WordPress hosting.

Choosing a tech-enabled service or another SaaS offering gives GoDaddy’s customers the ability to manage their brand across a range of digital properties – Yelp reviews, Google listings, Facebook pages, TripAdvisor profiles, and so on. A single software tool would likely be too time-consuming or limited in scope to be of use to resource-constrained small businesses. Generating more revenue from those customers gains increasing importance for GoDaddy this year as it expects the roughly 10% annual expansion of its core domain business to decelerate.

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

No longer dour in Davos

Brenon Daly

Contact: Brenon Daly

As the World Economic Forum opens its doors today, we expect even more backslapping and bonhomie than usual among the business leaders, politicians and other TED-types that flock to the annual gathering in Davos, Switzerland. What’s got them all so excited? Well, unlike recent years at the conference, there are some pretty favorable winds blowing across the globe these days.

Stock markets around the world are at all-time highs, economic growth is accelerating and even fractious political rifts have been mended (at least temporarily) so governments can get on with the business of business. (Germany appears to be finally on track to forming a governing coalition, after last September’s election left the economic powerhouse of Europe without a government for the first time since World War II. On a smaller scale, US President Donald Trump jetted over to the Swiss mountains after Congress resolved for the moment a stalemate that had shut down the government of the world’s largest economy for a few days.) Not for nothing is the theme to this year’s gathering: ‘Creating a Shared Future in a Fractured World.’

Of course, it’s a lot easier to get along when everyone is making money. And right now, people are making money because of the world economy rather than despite it, as has been the case for the most part since the end of the recession. In past years at Davos, economic growth and confidence had been elusive, or at least not evenly distributed. This year, in both the formal presentations and the hallway chatter, there’s a bullishness that’s been missing recently.

As an indication that business around the world is picking up, consider that one in six respondents to a recent 451 Research Voice of the Connected User Landscape said their companies are bumping up Q1 sales projections because of the global economy. That’s twice as many businesspeople as said the macro-economy is putting a crimp in their sales pipeline. For comparison, around the time of Davos last year, slightly more respondents to our survey said the world economy was dampening their sales outlook than boosting it.

Software’s new characters 

Scott Denne

Contact: Scott Denne

After a record-breaking performance for the software M&A market in 2016, the original cast bowed out as the understudies took the stage. Last year witnessed both strategic and financial acquirers making grand debuts in the application software market, while the most frequent and fulsome buyers of years past largely sat on the sidelines, resting from an unusually active 2016.

Spending on application software targets fell by one-third last year to $41.1bn from 2016’s highest-ever total amid a distinct lack of big-ticket deals. In total, there were 988 acquisitions of software companies, just 30 fewer than the year before. Only eight software targets attracted prices north of $1bn, compared with 14 in 2016, with last year’s tally representing the lowest total since 2009, according to 451 Research’s M&A KnowledgeBase.

As much as the numbers, the buyers were changed from earlier years. Although Oracle finished the year with the $1.2bn acquisition of construction software vendor Aconex, its $1.8bn in software M&A spending in 2017 represented a significant decline from the $10.8bn it spent a year earlier. Others were even less active. Salesforce didn’t print a single software deal last year, after spending $4bn in 2016. At the same time, IBM only did a pair of modest tuck-ins, nothing approaching the scale of its $2.6bn purchase of Truven Health Analytics in 2016.

Half of the companies that paid more than $1bn for an application software target in 2017 hadn’t inked a single software deal in any previous year this decade. Express Scripts came back to the market with a pair of transactions, including the year’s second-largest application software acquisition (eviCore Healthcare for $3.6bn), marking its first tech deals since 2009. Some new PE buyers also entered the software M&A market, including Partners Group, which made its first software transaction by paying $1.4bn for Civica – four times more than it had spent on any tech deal.

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

What to look for in tech M&A in 2018

Brenon Daly

Contact: Brenon Daly

As we look back on 2017 and ahead to 2018, 451 Research has published its annual forecast for tech M&A, highlighting the trends that we expect to shape deal flow and the markets that we think will see much of the activity. The 2018 Tech M&A Outlook – Introduction serves as an overview of the broad M&A market, setting the stage for the upcoming publication of our comprehensive report that features analysis and predictions for eight specific IT markets on what deals are likely in 2018.

The full report, which we think of as an ‘M&A playbook’ for the enterprise IT market, has insightful forecasts for activity in application software, information security, mobility and other key sectors. The 80-plus-page 2018 Tech M&A Outlook report will be published at the end of January. It will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and Premium products, and will be available for purchase for 451 Research clients and others that don’t subscribe to our M&A KnowledgeBase products. (If you’re interested in purchasing the full 80-plus-page report, contact your account manager or click here.)

In the meantime, our introduction provides insights on some of the overall dealmaking trends that are also likely to shape activity and valuations in sector-specific transactions. Key highlights in our overview of the broader M&A market include:

  • After tech M&A spending in both 2015 and 2016 topped a half-trillion dollars, what happened that knocked the value of deals in 2017 down to just $325bn?
  • Many of the tech industry’s biggest buyers printed only half as many deals as they have in recent years. Is that the new pace of M&A at these serial acquirers, or will they rev up again in 2018?
  • The pending tax overhaul will likely add billions of dollars to the treasuries at major tech vendors. Why don’t we think that will necessarily lead to more M&A? If they don’t spend it on deals, what are tech companies going to do with the windfall?
  • Which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security tops the forecast once again, but what about emerging cross-sector themes such as machine learning and the Internet of Things?
  • How did private equity (PE) move from operating on the fringes of the tech industry to become the buyer of record? PE firms accounted for an unprecedented one out of every four tech transactions last year. Why do we think their share of the market will only increase?
  • VC portfolios are stuffed, as the number of exits in 2017 slumped to its lowest level since the recession. What challenges loom for startups and the broader entrepreneurial community without the return of billions of dollars from those investments?
  • For startups, will venture capital be flowing freely in 2018? Or will the polarized VC market (fewer rounds, but bigger rounds) continue this year?
  • Despite nearly ideal stock market conditions, why don’t we expect much acceleration in the tech IPO market in 2018? What needs to happen – to both supply and demand – for the number of new offerings to take off?

For answers to these questions – as well as other factors that will influence dealmaking in 2018 – see our just-published 2018 Tech M&A Outlook – Introduction.

Hosted services M&A sees another $15bn+ year

Mark Fontecchio

Contact: Mark Fontecchio

Hosted services M&A in 2017 had a second consecutive year of $15bn+ in spending, an unprecedented streak in the sector. While overall tech M&A spending dropped steeply, it was essentially flat in hosted services. Meanwhile, the median deal value rose as smaller and medium-sized players decided on sale or scale to survive, and as targets grew scarce, acquirers paid higher multiples.

An indicative transaction of these sector trends was also the largest of 2017 – Digital Realty Trust’s $6bn purchase of DuPont Fabros. The past three years have been rich with big-ticket deals in hosted services, but this acquisition stands out because of its outsized multiples – 14x trailing revenue and 23x EBITDA. Those are the highest-ever multiples in $1bn-plus hosted services transactions in 451 Research’s M&A KnowledgeBase, which dates back to 2002.

Digital Realty’s reach for DuPont Fabros was not an isolated incident, either. Three of the four highest value-to-revenue multiples in $100m+ hosted services deals happened in 2017, according to the M&A KnowledgeBase. Overall, the sector’s median EBITDA multiple of 16.1x was the highest since 2012. Three consecutive years of more than $10bn in deal value has consolidated more than 10 million square feet of operational space, according to 451 Research’s Datacenter KnowledgeBase. That has removed many big players from the market, making larger targets scarcer, and thus more valuable in 2017.

In 2018, we expect hosted services M&A to continue to be robust to account for enterprises increasingly pushing workloads to the cloud. According to a 451 Voice of the Enterprise survey last year, the percentage of IT workload spending in the cloud is expected to jump from 27% in 2016 to 46% in 2018. Managed hosting and colocation providers must scale vertically – offering more services – and geographically to suit enterprise needs for functionality and availability, respectively. Large public hosted service providers that are still on the market could fetch a premium, while thousands of smaller players could sell or merge with one another to become competitive.

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

Complexity bolsters valuations for infrastructure software 

Scott Denne

Contact: Scott Denne

Companies looking to exit the infrastructure management space broke records in 2016, although it was enthusiastic entrants that pushed up totals last year. Acquisitions of companies that provide tools to run IT infrastructure finished 2017 at a level that’s abnormally high on strong valuations.

Purchases of infrastructure management targets finished 2017 with $8.5bn in spending across 92 deals. According to 451 Research’s M&A KnowledgeBase, both are down from the record value and volume of transactions in 2016 ($14.8bn on 121 acquisitions). Despite the high-level decline, 2017 was a stronger environment for exits in the category.

More than any other buyer, Cisco set the tone for infrastructure management M&A as two of its purchases account for half of 2017’s deal value. The company opened the year with the $3.7bn acquisition of AppDynamics, valuing the would-be public company at more than 17x trailing revenue, the highest multiple ever paid for a software vendor with more than $50m in revenue. It followed that deal with the $610m pickup of SD-WAN specialist Viptela, a smaller company that it bought at an even higher multiple.

Above-average valuations weren’t limited to Cisco. Among the 10 largest transactions in the space, only one acquisition – Clearlake’s purchase of perennial target LANDESK – came in at less than 3.5x trailing 12-month revenue. A year earlier, three of the top 10 fell below that mark, including 2016’s two largest deals – the divestitures of HPE and Dell’s software units.

Those higher multiples came as hardware providers and legacy management firms sought to expand subscription revenue from products that help customers grapple with an increasingly complex IT environment. That same trend could well fuel infrastructure management M&A this year as infrastructure, software and data look to become more distributed and cloudy.

Workloads are heading to the cloud en masse, whether it takes the form of SaaS, IaaS, private clouds or any other type. According to 451 Research’s Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects 2017 survey, between 2017 and 2019 the amount of IT workloads running on the cloud is expected to increase to 60% from 45%. In that same study, 33% of respondents told us that within two years they would be sharing workloads and business functions across multiple clouds. While the underlying IT infrastructure is becoming interchangeable, the tools for managing it all are becoming indispensable.

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

And the Golden Tombstone goes to…

Brenon Daly

Contact: Brenon Daly

If you have a hard time thinking of a truly blockbuster tech deal last year, you’re not alone. Even people who buy companies for a living struggled to single out any 2017 transaction.

As we do every year, we asked in our 451 Research Corporate Development Outlook Survey for dealmakers to look at the handiwork of their peers around the tech industry and select what they thought was the most significant transaction of the year. Survey respondents work at tech companies of all varieties, but regardless of their industry, the majority of their picks each year usually settle on one or two high-profile deals.

That wasn’t at all the case for our most recent survey. For starters, the pool of 2017 nominees was unprecedentedly broad and shallow. Corporate buyers put forward a record 12 separate transactions for the deal of the year.

From that long list, however, we don’t actually have a winner. Or rather, we have three winners. For the first time in more than a decade of giving out our Golden Tombstone award, we have a tie. Fittingly enough for the diffuse deals that characterized last year, we have a tie between three transactions: Intel’s $15.3bn reach for Mobileye, Cisco outbidding the public market for AppDynamics and Broadcom’s unsolicited bid for Qualcomm. We’re still working on cutting the Golden Tombstone into three pieces so each of the winners can have their own chunk of M&A immortality.