VCs aren’t buying what VCs are selling

Brenon Daly

Contact: Brenon Daly

VCs aren’t buying what other VCs are selling, slamming shut a once-reliable exit door for startups. The recent shift in M&A has left the number of VC-to-VC acquisitions down about 40% so far this year compared with the previous three years, according to 451 Research’s M&A KnowledgeBase. The current weekly pace of two sales of VC-backed companies to other VC-backed companies would put this year’s total at about 105, representing the lowest full-year number of exits since the start of the decade.

There are several reasons for the decline in intra-industry deals, depending on the stature of the acquiring startup. In the rarified land of unicorns, there is a prevailing focus for VC portfolio companies on operational improvements, rather than inorganic expansion. Unlimited spending – whether it’s on KIND bars or Y Combinator graduates – has fallen out of fashion.

For instance, the M&A KnowledgeBase lists 24 acquisitions for Dropbox, which has raised more than $2bn in debt and equity. However, not one of those purchases has come in the past two years. It’s a bit different for Uber, which has its own ‘operational improvements’ to make. That besieged startup hasn’t done any deals in 2017, after doing two in each of the two previous years, according to the M&A KnowledgeBase.

Beneath that top tier of once-active, big-name startups is a fatter slice of VC-backed companies that have also cut their shopping, but for a different reason. In many cases, the startups simply don’t have the money for M&A because they haven’t been able to raise any new funding. This year is on pace to feature the fewest number of startups receiving venture investment since 2012, according to trade group National Venture Capital Association.

Cisco seeking software 

Scott Denne

Contact:  Scott Denne

While both Cisco Systems and Hewlett Packard Enterprise face declining hardware businesses, the two companies have responded with opposing M&A strategies. With yesterday’s announcement that it will pay $1.7bn to acquire BroadSoft, Cisco sets up 2017 for a once-a-decade amount of M&A spending. But it’s not just a burst of activity that sets it apart from its rival. The networking giant has steadily sought software vendors as it looks to get its top line back to growth.

With its latest announcement, Cisco has now spent $6.5bn on acquisitions since the start of the year. According to 451 Research’s M&A KnowledgeBase, that’s more than it spent in the first 10 months of the year in any of the previous 15 years, except 2009. It’s reached for software assets in all eight of its deals this year, starting with the $3.7bn pickup of application performance monitor AppDynamics in January.

Over the past 12 months, Cisco’s top line dropped by 3% led by lower switch sales, while HPE’s sales through the first three quarters are down 7% year over year due to a slump in servers. HPE has responded by bolting on more hardware – its two largest transactions this year were for storage providers SimpliVity and Nimble Storage – shying away from software following the disastrous $11.7bn Autonomy buy in 2011, one of several deals it unwound last year across two multibillion-dollar divestitures.

While Cisco has made some large software purchases, it has spread those bets across multiple acquisitions and business units. So it’s not burdened with the legacy of a single software transaction that drags down the company’s results. Although it has often taken chances in its software deals – it paid 17x trailing revenue to enter a new market when it bought AppDynamics – its latest purchase, BroadSoft, brings it into familiar territory by obtaining an asset that sells primarily to internet service providers, a market Cisco has long sold to.

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

SailPoint sets sail for land of unicorns

Brenon Daly

Contact: Brenon Daly

In what would be one of the few private equity-backed tech companies to go public, SailPoint Technologies has put in its paperwork for a $100m IPO. The identity and access management (IAM) vendor, which has been owned by buyout shop Thoma Bravo for three years, should debut on Wall Street with a valuation north of $1bn. That is, unless SailPoint gets caught up in the current M&A wave that has seen a number of big buyers pick up identity-related security firms.

SailPoint reported $75m in revenue for the first half of 2017, an increase of 32% over the same period last year. Assuming that pace holds, the Austin, Texas-based company would finish this year with about $175m in sales. Depending on the product, SailPoint sells both licenses and subscriptions to its software. Subscriptions to its cloud-based offering, IdentityNow, are outpacing on-premises software sales, and currently account for some 42% of total revenue. License sales generate 34% of overall revenue, with the remaining 24% coming from services.

Transitioning to more subscription sales will undoubtedly boost SailPoint’s valuation. (Wall Street tends to appreciate the predictability that comes with multiyear subscriptions. In the case of IdentityNow, SailPoint indicated in its prospectus that the standard contract lasts three years.) That’s not to suggest that SailPoint will get the same platinum valuation as a pure SaaS provider such as Okta. That cloud-based IAM vendor, which went public in April, currently commands a $2.75bn market cap, or 11x this year’s sales. Of course, Okta is larger than SailPoint and growing at twice the pace.

Instead, we would look to some of the recent M&A pricing in the active IAM market to inform SailPoint’s valuation. For example, we understand that SecureAuth traded at more than 6x revenue in its sale in September to buyout firm K1 Investment Management. Ping Identity – which, like SailPoint, was in transition from license sales to subscriptions – also sold for about 6x sales last year. SailPoint is substantially larger than either of these fellow IAM firms, and is growing solidly. That should garner it a premium. But even using a conservative valuation multiple of 6x sales gets SailPoint into the land of the unicorns.

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

An autumn chill on Wall Street

Brenon Daly

Contact: Brenon Daly

This time of year has always been a bit unnerving for investors, and for good reason. Late October has seen some of the most dramatic declines on Wall Street, including the granddaddy of them all, the Great Crash of 1929. Additionally, earlier this week marked the 30th anniversary of Black Monday, when the Dow Jones Industrial Average dropped an almost-unimaginable 23% in a single session. To put that into today’s money, that would equal the Dow dropping more than 5,000 points in one day.

Of course, both of those crashes came before the multibillion-dollar tech market had found its current standing. Nonetheless, even in the nascent industry, there were impacts. For instance, Microsoft, which had only come public a year and a half earlier, got caught in the market’s vicious downdraft in October 1987. Microsoft shares spent the next two years trying to get back to their pre-crash level.

But these days, the equity market in general – and tech stocks specifically – appears to only trade higher. Microsoft shares, which changed hands for less than $1 back in 1987 (on a split-adjusted basis), are currently at an all-time high. Investors value the Redmond, Washington-based company at $600bn, having added more than $100bn to its market cap since the start of the year. Shares of Apple have tacked on 40% so far in 2017. Facebook has posted even more of a gain.

The recent run has left the stock market expensive, with the price-to-earnings multiple for the S&P 500 Index approaching 20, a historically high level. That has made investors increasingly nervous, at least according to 451 Research surveys. Virtually every month so far in 2017, the number of respondents to 451 Research’s Voice of the Connected User Landscape (VoCUL) that tell us they are ‘less confident’ in Wall Street has ticked higher. The latest VoCUL survey shows more than twice as many bears as bulls when it comes to confidence in the stock market.

 

MongoDB maintains in its IPO

Brenon Daly

Contact: Brenon Daly

Despite a well-received IPO, MongoDB’s valuation basically flatlined from the private market to the public market. The open source NoSQL database provider priced shares at $24 each and jumped in mid-Thursday trading to about $30. The 25% pop on the Nasdaq basically brought MongoDB shares back to the price where the company sold them to crossover investors in late 2014.

MongoDB has slightly more than 50 million shares outstanding, on an undiluted basis. With investors paying about $30 for shares in the company’s public debut, that gives MongoDB a market cap of more than $1.5bn. It raised $192m in the public offering, on top of the $300m it raised as a private company.

That means Wall Street is valuing MongoDB, which will put up about $150m in the current fiscal year, at 10x current revenue. That’s a rather rich premium compared with the most-recent big-data IPO, Cloudera. The Hadoop pioneer, which went public six months ago, currently trades at about 6x current revenue. For more on MongoDB’s IPO, 451 Research subscribers can see our full report, including our sizing of the NoSQL database market, as well as an in-depth look at the evolution of the 10-year-old company’s technology and its competitors.

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

Synchronoss’ planned ‘pivot’ turns into a face-plant

Brenon Daly

Contact: Brenon Daly

With its attempt at a pivot having turned into face-plant, Synchronoss will unwind its massive, bet-the-company acquisition of Intralinks by divesting the collaboration software vendor to private equity (PE) firm Siris Capital Group. The buyout shop will pay about $1bn for Intralinks, which Synchronoss acquired last December for $821m.

It was a pairing that faced skepticism from the very start, because the business models and client base for the two companies had virtually nothing in common. The combination also ladled a hefty amount of debt onto Synchronoss, which then compounded problems around servicing that debt by having to restate its financials due to accounting errors. Shares of Synchronoss have lost two-thirds of their value since the acquisition announcement.

As Synchronoss stock cratered, Siris Capital began buying equity, ultimately becoming the company’s largest shareholder. Siris used that position to agitate during the company’s review of ‘strategic alternatives’ announced in early July. Not unexpectedly for the beleaguered company, the process proved fitful. Siris Capital initially offered to acquire all of Synchronoss but then pulled its bid as the company, which was advised by Goldman Sachs & Co and PJT Partners, continued to look for another buyer.

Instead of an outright acquisition of Synchronoss, Siris will carve out the Intralinks division and add that to its portfolio. The transaction is expected to close in mid-November. Further, the buyout firm will invest $185m into the remaining Synchronoss business, which will continue trading on the Nasdaq.

With the divestiture, 17-year-old Synchronoss effectively abandons its attempt to become a broad provider of enterprise software, and retreats back to servicing its long-standing client base of communications and media companies. The move is a reminder that software can be hard. Just ask Dell Technologies and Lexmark. Both of those tech companies also retreated from their M&A-driven effort to become software vendors, divesting their software portfolio to PE shops in billion-dollar deals over the past year.

Startups stuck in a billion-dollar backlog

Brenon Daly

Contact: Brenon Daly

Startups are increasingly stuck. The well-worn path to riches – selling to an established tech giant – isn’t providing nearly as many exits as it once did. In fact, based on 451 Research calculations, 2017 will see roughly 100 fewer exits for VC-backed companies than any year over the past half-decade. This current crimp in startup deal flow, which is costing billions of dollars in VC distributions, could have implications well beyond Silicon Valley.

First, the numbers. So far this year, 451 Research’s M&A KnowledgeBase reports just 439 VC-backed companies have been acquired, putting full-year 2017 on pace for roughly 570 exits. That’s 16% fewer deals than the average number of VC exits realized from 2012-16, and the lowest number of prints since the recession year of 2009, when startups were mostly focused on survival rather than a sale.

The reason for the current slowdown in the prototypical startup-sells-to-brand-name-buyer transaction that has generated hundreds of billions of dollars in investment returns over the years is that the buyers aren’t buying. (We would note that’s only the case for the bellwether tech vendors, the so-called strategic acquirers. Rival financial buyers – both through direct investment and acquisitions made by their portfolio companies – have never purchased more VC-backed firms in history than they have in 2017, even as the overall number of venture exits declines. Private equity now accounts for 17% of all VC-backed exits, twice the percentage the buying group held at the start of the decade, according to the M&A KnowledgeBase.)

Parked in VC portfolios, startups can, of course, build their businesses, along with the accompanying value. What they can’t do as long as they are still owned by venture investors is realize that value, at least not tangibly or completely. That takes either a sale of the company outright or an IPO. (Wall Street hasn’t provided many exits at all for VC-backed companies since 2000, and isn’t ever likely to be a primary destination for startups.)

And although we’re talking about small companies, there’s already been a pretty big impact. Even if we take a conservative average exit price of $50m for startups, multiplying that across the 100 exits that won’t happen this year means a staggering $5bn won’t get distributed in 2017 that would have in previous years. Without capital once again flowing from corporate acquirers back to startups and VCs, the entire ecosystem runs the risk of stagnation.

Survey: Steady as she goes for tech M&A

Brenon Daly

Contact: Brenon Daly

Undeterred by the recent slowdown in M&A activity, tech acquirers have largely left their bullish forecast for dealmaking unchanged. For the third consecutive time, essentially half of the respondents to the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster indicated that they expected an acceleration in acquisition activity.

The 51% that forecast a pickup over the next year in M&A in our most-recent edition is more than twice the 19% that projected a decline. The results lined up very closely with the sentiment from both the year-ago survey as well as our previous survey in April.

More broadly, the outlook from the three recent surveys reflects an unusual bit of stability in what is an inherently lumpy business. A bit of history: Over the previous half-dozen years of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, swings of 10 or even 20 percentage points from one edition to the next haven’t been uncommon.

451 Research subscribers can click here for the full report on the views from 150 top dealmakers, including their forecasts on M&A valuations, their thoughts on where startups should be looking to exit, and how they see the pitched fight with cash-rich private equity buyers playing out.

Barely a ripple in the pool of tech M&A buyers

Brenon Daly

Contact: Brenon Daly

New companies are constantly wading into the tech buying pool. As welcome as those new entrants are, however, their arrival has barely caused a ripple in the overall tech M&A market. Unconventional buyers – including retailers looking to jumpstart online sales and consumer product vendors looking to digitally connect their wares – have come up far short in offsetting the dealmaking absence of the mainstay tech acquirers. The resulting void of several hundred transactions has left 2017 on track for the lowest overall tech M&A volume in four years, according to 451 Research’s M&A KnowledgeBase.

Already this year, the M&A KnowledgeBase lists several first tech deals from well-known names from outside the tech industry such as IKEA, Albertsons, Signet Jewelers and Whirlpool. These debutants join other non-tech giants that have recently reached for startups, including Bed Bath & Beyond, Hudsons Bay Company, Unilever and Deere & Company.

Given that digital deals by analog companies tend to be viewed as ancillary to their businesses, they will likely never have the same M&A pace of tech vendors themselves. For instance, we noted in our recent Q3 report on tech M&A that heavy machinery manufacturer Deere & Company, which bought a tiny machine-learning startup in early September, had gone about three years since its previous tech transaction. In the interim, other acquirers inked more than 11,000 tech deals, according to the M&A KnowledgeBase.

As these non-tech buyers dabble in deals, the bellwether acquirers have dramatically slowed their pace. Consider the recent activity of some of the companies that have traditionally set the tone in the tech M&A market. Salesforce has put up just one print so far this year. Serial acquirer Oracle hasn’t announced an acquisition in six months. IBM is averaging a deal every other month in 2017, just half the rate it acquired companies in both 2016 and 2015.

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

bpost’s trek through Amazon 

Scott Denne

Contact:Scott Denne

Looking for a patch of ground in a rising market, bpost picks up a declining asset as it prints its first tech deal with the $820m purchase of Radial, eBay’s former commerce services unit. The acquirer, which operates the Belgian mail service and other logistics businesses, is aiming to capitalize on the growth of e-commerce in North America. Yet its projections ignore the extent of its vulnerability to an increasingly dominant Amazon.

Radial formed with the 2016 combination of retail fulfillment services firm Innotrac and the former eBay Enterprise business, which provided fulfilment, order management and other services. The two were bought out by investor syndicates and combined in 2016 by their shared owner Sterling Partners.

Its fortunes have tracked those of its customers, many of which have filed for bankruptcy since the start of 2016, including Aeropostale, RadioShack, Toys R Us and Sports Authority. Radial’s revenue is projected to decline to about $1bn from roughly $1.25bn last year.

At 8x trailing revenue, Radial fetches the same multiple that eBay Enterprise nabbed in its 2015 sale. That’s a rich multiple considering the earlier acquisition of eBay Enterprise included e-commerce software platform Magento, which has since been spun off and likely had higher margins than the services-heavy Radial.

That multiple may turn out to be less rich than bpost’s projections that the asset can expand its top line by 6-8% annually, considering that it’s coming off a year where it lost 20% of its revenue catering to the second tier of retailers. Not only are those the retailers that are most vulnerable to Amazon’s domination of commerce, the online goliath runs a fulfillment business of its own, making Radial vulnerable on two fronts – those customers that aren’t crushed by Amazon could very well side with it.

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