Small software buys big, but…

Brenon Daly

Contact: Brenon Daly

The little brothers of the software industry have stepped in front of their bigger brothers in the M&A market. Medium-sized public software companies have been inking uncharacteristically large acquisitions this year, even as the well-known vendors have been fairly reserved. And while these midmarket software firms have been big spenders recently, the deals are often missing a zero or even two compared with prices the industry bellwethers have paid in years past for some of their purchases. That has helped knock overall software M&A spending to its lowest level in four years, according to 451 Research’s M&A KnowledgeBase.

As an example of the shift in buyers, consider Oracle. The software giant has averaged at least one transaction valued at more than $1bn each year over the past decade, according to the M&A KnowledgeBase. Yet this year, it hasn’t gotten anywhere close to doing a 10-digit deal, and, in fact, hasn’t announced any acquisitions since April. On the other side, several software companies that have only a fraction of the size and resources of Oracle have thrown around a lot more money on recent transactions than they ever have before. A few prints captured over the past few months in the M&A KnowledgeBase clearly show the trend of M&A inflation among the midmarket software buyers:

-At $275m in cash and stock, Guidewire Software’s reach for Cyence in October is $100m more than the SaaS provider has ever spent on any other transaction.
-Both of the largest purchases by security software vendor Proofpoint have come in the past month. Its $60m pickup of Weblife.io in late November and $110m acquisition of Cloudmark in early November compare with an average price tag of just $20m on its previous 12 deals done as a public company from 2013-16.
-Doubling the highest amount it has ever paid in a transaction, serial acquirer CallidusCloud spent $26m for Learning Seat earlier this month.
-In a pair of deals announced earlier this year, RealPage dropped more than a quarter-billion dollars on both of its targets, after not spending more than $100m on any of its previous two dozen acquisitions.
-Upland Software announced in mid-November the purchase of Qvidian for $50m, which is twice as much as the software consolidator has spent on any of its other nine acquisitions since coming public in November 2014.

These deals by midmarket software vendors (as well as other similarly sized buyers) go some distance toward making up for the missing big names. Yet they won’t fully cover the shortfall this year. Partially due to this change in acquirers, spending on software M&A in 2017 is tracking roughly one-third lower than it has been over the previous three years, according to the M&A KnowledgeBase.

Connected home is key to Sigma Designs’ valuation 

Scott Denne

Contact:Scott Denne

The addition of products for emerging Internet of Things (IoT) markets has spurred higher valuations on many semiconductor deals amid a record amount of consolidation in the space over the past three years. Silicon Labs’ acquisition of Sigma Designs highlights how much higher those products are valued amid larger semiconductor portfolios. The terms of the $282m transaction revolve explicitly around the seller’s home automation hardware.

According to 451 Research’s M&A KnowledgeBase, the median valuation for a semiconductor vendor has hovered a bit below 2x trailing revenue for most of the past decade, although it surged to 2.9x amid a profusion of IoT-related purchases. Indeed, many chip deals with an IoT element have traded well above the standard valuation. Consider Qualcomm’s pending $39bn pickup of NXP Semiconductors (5.5x), SoftBank’s $32bn reach for ARM (20.9x) and Intel’s $15bn acquisition of Mobileye at an unheard of 41x trailing revenue.

The $282m price tag for Sigma Designs ostensibly values the company at about 1.5x trailing revenue, but only if certain conditions are met – the seller must have at least $40m in cash on its balance sheet and it must shutter or sell its Smart TV components business within a week. (That business accounts for the majority of its revenue, but isn’t related to IoT and is heading downhill, having lost 61% of its quarterly revenue since this time a year ago.)

If those conditions aren’t met, Silicon Labs will buy Sigma Designs’ home automation components business, Z-Wave, for $240m. In other words, Silicon Labs wants to buy Z-Wave for about 5-6x trailing revenue and doesn’t value the other business lines at all. There’s a logic to that premium valuation. The market for home automation is advancing with plenty of open space. According to a third-quarter survey by 451 Research’s VoCUL, 69.9% of consumers still don’t own any internet-connected home devices, although that’s down from 74.4% at the start of the year.

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

TITUS goes from bootstrapped to buyout with Blackstone

Brenon Daly

Contact: Brenon Daly

Private equity (PE) firm Blackstone Group has picked up a majority stake in TITUS, marking an unconventional bootstrapped-to-buyout exit for the 12-year-old data classification startup. Terms weren’t revealed. With the acquisition, PE shops have now purchased more cybersecurity vendors in 2017 than any year in history, according to 451 Research’s M&A KnowledgeBase (see graphic below).

The transaction comes two years after Microsoft made a similar data security move, reaching for Israel-based startup Secure Islands. (Although the price of that deal wasn’t disclosed, subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms.) However, Secure Islands was a much smaller company than TITUS, both in terms of revenue and technology. Secure Islands focused primarily on extending security for Microsoft technology, specifically Office 365 and SharePoint, while TITUS has a broader technology platform. Also, according to our understanding, profitable TITUS generates more than four times the sales that Secure Islands did at the time it was acquired.

For Blackstone (in this case, through its Tactical Opportunities team), the purchase of TITUS represents a return to the information security (infosec) market, with a platform that lends itself to additional bolt-on acquisitions. (The firm used the buy-and-build strategy with infosec reseller/service provider Optiv before selling it to Kohlberg Kravis Roberts a year ago.) Once TITUS is in the portfolio, which should come before the end of the year, Blackstone could help cover the costs of buying into markets where TITUS currently partners. Specifically, markets such as data-loss prevention and archiving would be logical adjacent sectors for Blackstone-backed TITUS to look to shop in.

Cybersecurity turns into a busy bazaar

Brenon Daly

Contact: Brenon Daly

The holiday shopping season kicked off last week, and for one tech sector, it was a particularly bountiful time for picking up some companies. Information security (infosec) acquirers announced an unprecedented seven transactions during the week that started on Cyber Monday. The pace represented a dramatic acceleration from the year-to-date average of just two deals announced each week.

With last week’s flurry, the number of infosec acquisitions in 2017 has already eclipsed last year’s total, even as overall tech M&A volume this year is heading for a mid-teens percentage drop from last year, according to 451 Research’s M&A KnowledgeBase. (This year already ranks as the second-busiest year for infosec, with deal volume tracking to roughly 50% higher than the start of the decade.) Probably more important than the sheer number of transactions was who was doing the dealing:

-McAfee announced its first purchase since throwing off the shackles of full ownership of Intel last year. By all accounts, McAfee’s step back into the M&A realm with cloud security startup Skyhigh Networks came at a sky-high price.
-An infrequent acquirer, Trend Micro reached for a small application security startup based in Montreal, IMMUNIO. It is only the third acquisition the Japan-based company has done since 2011.
-Thoma Bravo continued this year’s record level of infosec M&A by private equity (PE) firms, taking Barracuda Networks private for $1.6bn. The M&A KnowledgeBase indicates that 2017 is on pace for more PE purchases in this market than any year in history, likely to come in about quadruple the number of sponsor-backed infosec deals in 2012.

Expanding the timeframe beyond just last week, we see a number of other trends this year that have contributed to strong infosec deal volume in 2017, which should continue in 2018. For starters, the industry’s largest stand-alone vendor has stepped back into the market in a big way. Symantec has inked five transactions so far in 2017, more than it has done, collectively, in the previous half-decade. Meanwhile, other infosec providers have either reemerged as buyers (Juniper acquiring Cyphort after a four-year infosec M&A hiatus) or started their own acquisition program (Qualys has announced two deals in the past four months, after printing just one transaction since the company’s founding in 1999).

​​​​​​​ CallidusCloud’s pocket-sized pickups 

Scott Denne

Contact: Scott Denne

CallidusCloud shells out $26m for Learning Seat, the most it’s ever paid in a single deal. That it’s hitting a new record on such a modest purchase shows that CallidusCloud, which embarked on a steady diet of snack-sized M&A at the start of the decade, has stayed disciplined in its acquisition strategy. Today’s transaction also illuminates a modest increase in appetite – both in deal value and volume – as the sales software vendor has reaped results from previous buys.

The company has now printed four deals this year, its busiest since 2011, when it inked five. But that year CallidusCloud was just setting out on its current M&A strategy of making tuck-ins and low-priced extensions to its core sales performance management software offerings. According to 451 Research’s M&A KnowledgeBase, the company bought only three businesses before 2011. Now, its strategy has proven results and its purchases are more ambitious, if still small. In 2011, only two of its transactions crested $5m – this year, all of them did.

Today’s acquisition adds content for CallidusCloud’s sales training products, a unit established by the $3m pickup of Litmos in 2011. Last quarter, Litmos (and associated training offerings) was its second-largest contributor to revenue. As that division’s contribution has grown, so has its position in the company’s M&A efforts – four of its last seven deals (including today’s) bolstered its training business.

CallidusCloud began its M&A adventure in 2010 amid crumbling revenue. Last year, it put up 16% growth, its SaaS sales jumped 25% and its stock rose about 7x. Of course, that’s not all due to the addition of learning management content and software. The company has enhanced its ability to sell multiple products across sales performance, enablement and execution. Last quarter, nearly half of its bookings came via multiproduct deals, compared with just 20% four years ago.

That’s a heartening development for many of the sales-enablement startups struggling to find an exit. CallidusCloud is among the most frequent acquirers of such companies and the exit environment for those firms, as we detailed in a previous report, reflects CallidusCloud’s own proclivities. With few exceptions, exits for sales-enablement startups have been sparse and small.

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

November tech M&A slumps to pre-boom levels

Brenon Daly

Contact: Brenon Daly

Dealmaking in 2017 is going out with a whimper. Acquirers in November spent just $15.7bn on tech transactions across the globe, the lowest monthly total in three years, according to 451 Research’s M&A KnowledgeBase. The sluggish November activity comes after a similarly anemic October, with both months coming in only about half of the average monthly spending for the first nine months of 2017. Also, the number of deals announced in the just-completed month slumped to its lowest level of the year.

Even as November featured a decidedly lackluster level of overall M&A activity, a few transactions stood out, including:
-After entirely sitting out the wave of semiconductor consolidation in recent years, Marvell Technology Group shelled out $6bn in cash and stock for Cavium. The deal stands as the largest tech transaction in November, topping the collective spending on the next four biggest acquisitions last month.
-The information security industry saw its largest take-private, as buyout firm Thoma Bravo paid $1.6bn for Barracuda Networks in a late-November deal. A single-digit grower that throws off $10-20m in free cash flow each quarter, Barracuda has long been considered a candidate to go private as it works through a transition from on-premises products to cloud-based offerings.
-Richly valued startup Dropbox stepped back into the M&A market in November for the first time since July 2015, purchasing online publisher Verst. From 2012-15, the unicorn (or more accurately ‘decacorn’) had inked 23 acquisitions, according to the M&A KnowledgeBase.

The recent tail-off in acquisition spending has left the value of announced tech transactions so far this year at just $302bn, according to the M&A KnowledgeBase. With one month of 2017 remaining, this year is all but certain to come in with the lowest annual M&A spending since 2013. This year is tracking to a 34% decline in deal value compared with 2016 and an even-sharper 45% drop from 2015.

Ad breaks 

Scott Denne

Contact:Scott Denne

A four-year streak of expanding ad-tech M&A is set to end as strategic acquirers and foreign investors give way to price-sensitive buyers. There are several reasons why the streak is heading toward its conclusion, and today’s acquisition of Taykey highlights one such reason: despite the potential for programmatic advertising to reshape the advertising ecosystem, the complexity and variety of tools have outpaced advertisers’ ability or desire to deploy them.

Starting with 2013, the annual value of ad-tech dealmaking has jumped each year. According to 451 Research’s M&A KnowledgeBase, there was $2.3bn in ad-tech M&A spending last year, although just $1.8bn in 2017 with only a month to go. High-priced deals are notably lacking from this year’s total. While 2016 saw three companies exit at north of $500m, there’s only been one such transaction this year – Oracle’s purchase of Moat, one of only two targets that fetched more than 4x trailing revenue.

Last year, deals by enterprise software vendors (Adobe and Salesforce) along with overseas companies (China’s Beijing Miteno and Norway’s Telenor) spurred a 16% increase in spending on ad-tech targets, despite a drop in volume to just 66 transactions. This year, the volume continues to decline – just 56 companies have been bought so far – as those categories of buyers have grown quiet. Enterprise software providers have cooled their overall M&A spending after a pair of record years, while activity from foreign acquirers for any kind of US-based target has cooled, particularly the China-based buyers that took an interest in ad-tech in 2016.

Even if terms of Innovid’s pickup of Taykey were disclosed, the deal wouldn’t move the annual ad-tech M&A total. All signs point to a tuck-in: Innovid plans to shutter Taykey’s media and data businesses and fold the contextual analysis technology into its video ad server. Even those types of transactions will struggle to get done. There are few ad-tech firms like Innovid with stable, expanding revenue, and even fewer with access to capital to ink acquisitions – venture capitalists in the US have largely abandoned the space, and the public markets are even less welcoming.

Why have investors and acquirers retreated from ad-tech? Those that wanted to make a bet here already have. And, although the industry is undergoing a significant change as media consumption becomes ubiquitously digital, advertisers must pass through a gauntlet of challenges and opportunities to capitalize on that shift, entailing dozens of vendors ranging from what kind of audience data to use, who to partner with on measurement, how to gain visibility on the media supply chain, and how to scrutinize providers making vague promises on the power of artificial intelligence, blockchain and other technology themes that haven’t been part of the advertisers’ expertise.

All those choices mean there are a lot of Taykeys out there struggling to build a lasting business with advertisers across segments of ad-tech, including mobile location, identity resolution, cross-device matching, antifraud, brand safety, media buying and ad exchanges, to name a few. And there aren’t many Innovids with the appetite to buy them.

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

Bull market bypasses tech IPOs

Brenon Daly

Contact: Brenon Daly

Although there’s still a month remaining in 2017, most startups thinking about an IPO – even those already on file ‘confidentially’ – have already turned the calendar to 2018. The would-be debutants want to have results from the seasonally strong Q4 to boast about during their roadshow with investors, as well as toss around a bigger ‘this year’ sales figure to hang their valuation on. There’s no compelling reason to rush out an offering right now.

That’s true even though the tech IPO market has been pretty active recently. By our count, a half-dozen enterprise-focused tech vendors have come public in just the past two months. (To be clear, that tally includes only tech providers that sell to businesses, and leaves out recent consumer tech companies such as Stich Fix and CarGurus.) The total of six enterprise tech IPOs since October is already higher than the full Q4 2016 total of four offerings.

While there has been an uptick in IPO activity, shares of the newly public companies haven’t necessarily been ticking higher, at least not dramatically so. There hasn’t been a breakout offering. Based on the first trades of their freshly printed shares, not one of the recent debutants has returned more than 20%. Half of the companies are trading lower now than when they debuted. Meanwhile, investors who aren’t interested in these new issues can’t seem to get enough of stocks that have been around a while, bidding the broad market indexes to record high after record high this year. The much-desired IPO ‘pop’ has gone a little flat here at the end of 2017, which might have some startups slowing their march to Wall Street in early 2018.

 

Thoma Bravo goes fishing, lands a Barracuda

Brenon Daly

Contact: Brenon Daly

After four underwhelming years as a public company, Barracuda Networks will step off the NYSE in a $1.6bn take-private with Thoma Bravo. The all-cash transaction, which is expected to close within three months, is one of those rare deals that appears to fit both the buyer and the seller in equal measure. With $17bn sloshing around, private equity firm Thoma Bravo needs to put money to work and has made the information security market a favorite shopping ground, having previously taken four infosec vendors private.

For Barracuda, the proposed leveraged buyout (LBO) wraps a period of not truly finding a home on Wall Street. As a public company, Barracuda posted just one-third the return of the Nasdaq Composite over the same period. The $27.55 per share that Thoma Bravo is paying represents the highest price for Barracuda stock in two and a half years. At one point in 2015, shares of Barracuda changed hands above $40.

Part of the reason why Barracuda fell out of favor with investors is the company’s ongoing transition from an on-premises business to more of a cloud focus. The so-called ‘legacy’ revenue – much of which is tied to appliances – has been shrinking every quarter, but still represents roughly one-third of sales. Deemphasizing that business has boosted Barracuda’s operating margins, but has slowed overall revenue growth to the single digits. Going private to complete the transition to a higher-margin software business, while continuing to throw off $10-20m of free cash flow each quarter, makes sense for Barracuda.

On the other side, Thoma Bravo pays essentially a market multiple for a company that has figured out a way to turn a profit selling into the underserved SMB market. (The enterprise value of Thoma Bravo’s bid stands at $1.48bn, or 4x trailing 12-month sales at Barracuda. That roughly matches the 4.4x TTM sales/EV multiple that Thoma Bravo paid in its most recent infosec LBO, Imprivata.) Further, Thoma Bravo has some growth opportunities once it adds Barracuda to its portfolio, both in terms of products (for instance, the target’s managed security service) and markets (Barracuda still generates 70% of its revenue in the US).

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

Marvell’s belated bid to be a chip consolidator 

Scott Denne

Contact: John Abbott, Scott Denne

With its $6bn reach for Cavium, Marvell Technology Group proves that a few large targets remain as the semiconductor industry emerges from a record streak of consolidation – a streak that happened with Marvell on the sidelines. Although deal value in semiconductor M&A remains well below the record levels of 2015 and 2016, the transactions getting done are commanding higher amounts.

Cavium becomes the fourth chipmaker to be acquired for more than $1bn this year, compared with 10 in all of last year, according to 451 Research’s M&A KnowledgeBase. Yet only one of the $1bn-plus deals this year has been done for less than $5bn, whereas half of 2016’s 10-digit semi transactions fell below that threshold.

Marvell doubles its market opportunity by purchasing Cavium and enters the high-growth datacenter market. Its current portfolio spans storage controllers, networking PHYs and SOCs for enterprise switches, and Wi-Fi and Bluetooth SOCs for wireless connectivity. To that Cavium adds compute, networking, storage and security components for the datacenter, including multi-core and datacenter processors, Ethernet adapter and datacenter switches, Ethernet and fiber-channel storage connectivity, and FIPS and virtual offload security.

Benefits of scale and volume include a full portfolio that will enable cross-selling, as well as pooled R&D expenses, where there is currently a lot of duplication – moving up to 10nm and 7nm process technology is a huge burden that can now be consolidated. Diversification will also reduce Marvell’s exposure to low-growth sectors, such as hard disc drive controllers and notebooks, and Cavium’s to the dwindling fiber-channel business. The two companies are located close to each other, easing integration challenges.

The change marks a departure from Marvell’s past M&A strategy. Since the start of 2002, the most it had ever paid for any asset was $600m, with most of its deals falling well short of that mark. Moreover, this is its first acquisition since early 2012 and only the third time it has bought an entire company, rather than a business unit.

Subscribers to 451 Research’s Market Insight Service will have access to a detailed report on this transaction later today.

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