Trump’s death blow to a deal

Brenon Daly

Contact: Brenon Daly

Respondents to the previous edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster have once again delivered the wisdom of the crowds. When asked last spring about the outlook for US-China tech deal flow, respondents overwhelmingly predicted that President Trump’s policies would crimp M&A activity between the world’s two largest economies. Specifically, two-thirds (65%) of the 157 respondents from across the tech M&A landscape forecast a decline in purchases of US tech companies by Chinese buyers. That was more than four times the level (14%) that anticipated an increase.

In line with that April forecast, Trump has blocked the proposed $1.3bn acquisition of Lattice Semiconductor by a Beijing-based fund, citing national security concerns. Regulatory approval of the planned purchase by Canyon Bridge Capital Partners, which was announced last November, had been viewed as virtually impossible after The Committee on Foreign Investment in the US indicated that it would not sign off on the transaction. Trump delivered the death blow to the deal on Wednesday.

Trump’s move represents a rare bit of White House intercession in an acquisition. But it isn’t necessarily out of character for Trump, who has singled out China for some of his sharpest criticism as he has pursued a self-described ‘America First’ policy. Again, respondents to the M&A Leaders’ Survey last spring accurately predicted that Trump’s singularly unfriendly views toward China would disproportionately impact US-Sino deal flow. In the survey, fully one out of five respondents (20%) forecast that Chinese buyers of US tech companies, such as Lattice Semi, would ‘substantially’ cut their activity due to the Trump administration, compared with just 3% who said they expected overall cross-border M&A to drop off ‘substantially’ in the current regime.

451 Research and Morrison & Foerster are currently in market with the latest edition of the M&A Leaders’ Survey, and would appreciate your views on where the tech M&A market is and where it’s heading. In addition to broad market questions, we also revisit questions around Trump’s impact on cross-border M&A as well the specific outlook for China-based buyers. We would appreciate your time and thoughts. To participate, simply click here.

A private equity play in the public market

Brenon Daly

Contact: Brenon Daly

In a roundabout way, private equity’s influence on the technology landscape has also spilled over to Wall Street. So far this year, one of the highest-returning tech stocks is Upland Software, a software vendor that has borrowed a page directly out of the buyout playbook. Shares of Upland – a rollup that has done a half-dozen acquisitions since the start of last year – have soared an astounding 150% already in 2017.

Investors haven’t always been bullish on Upland. Following the Austin, Texas-based company’s small-cap IPO in late 2014, shares broke issue and spent all of 2015 and 2016 in the single digits. For the past four months, however, shares have changed hands above $20 each.

Upland’s rise on Wall Street this year essentially parallels the recent rise of financial acquirers in the broader tech market – 2017 marks the first year in history that PE firms will announce more tech transactions than US public companies. As recently as 2014, companies listed on the Nasdaq and NYSE announced twice as many tech deals as their rival PE shops. (For more on the stunning reversal between the two buying groups, which has swung billions of dollars on spending between them, see part 1 and part 2 of our special report on PE and tech M&A.)

Although Upland is clearly a strategic acquirer in both its origins and its strategy, it is probably more accurately viewed as a publicly traded PE-style consolidator. The company has its roots in ESW Capital, a longtime software buyer known for its platforms such as Versata, GFI and, most recently, Jive Software. Upland was formed in 2012 and, according to 451 Research’s M&A KnowledgeBase, has inked 15 acquisitions to support its three main businesses: project management, workflow automation and digital engagement.

Selling into those relatively well-established IT markets means that Upland, which is on pace to put up about $100m in revenue in 2017, bumps into some of the largest software providers, notably Microsoft and Oracle. To help it compete with those giants, Upland has gone after small companies, with purchase sizes ranging from $6-26m.

However, the company has given itself much more currency to go out shopping. Early this summer – with its stock riding high – it raised $43m in a secondary sale, along with setting up a $200m credit facility. Given Upland’s focus on quickly integrating its targets, it’s unlikely that it would look to consolidate a sprawling software vendor. But it certainly has the financial means to maintain or even accelerate its rollup of small pieces of the very fragmented enterprise software market.

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

Container craze could spark monitoring M&A 

Scott Denne

Contact: Nancy Gohring

Even though it’s early still for the use of containers and microservices, we’ve seen a handful of startups enter the market with technology designed specifically for the monitoring needs of those environments. Established vendors also are developing techniques for this segment, yet adoption of these technologies is moving fast enough that broader application monitoring companies may decide to buy a specialist to speed time to market.

In our 2016 Voice of the Enterprise (VotE): Cloud Transformation, Budgets and Outlook survey, 26.7% of respondents said they were either in broad or initial implementations of containers in production environments. A further 11.3% said they were using containers in test and development environments, 21.4% said they were employing containers in trials, and 40.7% said they were evaluating containers.

Emerging vendors such as Sysdig, Outlyer and Instana are developing new approaches that aim to solve the particular challenges of monitoring applications built using containers and microservices, especially the challenges that emerge in dynamic environments. Most of these startups are quite small, with relatively few customers, indicating that they still have work to do to prove their worth. However, we believe both legacy and newer-breed providers looking to quickly add capabilities around this fast-growing use case could benefit from a pairing with one of the new entrants, allowing them to start serving users now.

Legacy vendors specifically, which have been eclipsed in recent years by more modern players, may have the most to gain from such an acquisition. Subscribers to 451 Research’s Market Insight Service can access a detailed report that analyzes the potential acquisitions of application monitoring companies built for container environments.

Webinar: PE activity and outlook

Brenon Daly

Forget Oracle, IBM, or any of the other big-name, publicly traded acquirers that – until now – have always set the tone in the tech M&A market. If a tech deal printed in 2017, the buyer is more likely to be a private equity firm than any of the well-known serial acquirers on the US stock market. This is the first time in the history of the multibillion-dollar tech M&A market that financial acquirers have been busier than these strategic acquirers.

To understand how the ever-growing influence of buyout shops is reshaping both M&A and the tech industry, join 451 Research for an hour-long webinar on Thursday, September 7, 2017, starting at 1:00pm ET. Registration is available here: https://www.brighttalk.com/webcast/10363/274289.

Roku’s next episode will stream on smart TV 

Scott Denne

Contact: Scott Denne

Roku has withstood an onslaught of competition from the world’s largest tech companies, yet it faces challenges on a new front as it readies its initial public offering. The maker of appliances for streaming video devices was able to flourish as Apple, Amazon and Google entered its market, but now faces a threat from smart TVs.

Amid a bevy of streaming alternatives, Roku expanded its topline by 25% in 2016 to $399m. According to 451 Research’s Voice of the Connected User Landscape survey, Roku leads the market for streaming media devices – 41% of respondents that own such a device use one from the company. It also sits ahead of the competition in daily usage and customer satisfaction rankings.

Most of Roku’s revenue comes through sales of its hardware ($294m in 2016), although most of the growth and profit margin comes via its advertising, licensing and revenue-sharing activities, which (at one-third the size) generated nearly twice the gross profit as the hardware segment. While Roku remains in the red, losses have decreased through the first half of the year, and modest increases in marketing spend – atypical of a venture-backed IPO – have fueled its gains.

Roku’s IPO heads to Wall Street as the market for streaming video accelerates. More than 21% of people in that same 451 Research survey said that they pay for three or more streaming services – double the number from two years earlier. Yet, much of that content is being consumed on smart TVs, which obviate the need for separate streaming devices, like Roku’s, and whose use ticked up by one-quarter over the last year, per our survey.

The company has begun to license its Roku OS software to TV makers, and needs to do so to continue to scale its audience reach – the lifeblood of the most profitable part of the business. While Roku showed that it can last through a heated battle with the biggest in tech, the company’s next phase will call for a subtler mix of partnership and competition with and against TV manufacturers.

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

One and done for tech M&A in August

Brenon Daly

Contact: Brenon Daly

For tech M&A in August, there was one big print and then everything else. The blockbuster transaction, which saw Vantiv pay $10.4bn for UK-based rival payments processor WorldPay Group, accounted for almost half of the $22.7bn spent on tech deals around the globe this month, according to 451 Research’s M&A KnowledgeBase.

After the massive fintech consolidation, however, the value of transactions declined sharply. No other deal announced in August figures into the M&A KnowledgeBase’s list of the 25 largest transactions announced in the first eight months of 2017.

The slowdown at the top end of the tech M&A market pushed this month’s spending level to the lowest total for the month of August since 2013. More recently, the value of deals in August came in slightly below the average monthly spending so far this year.

Altogether, tech acquirers across the globe have spent just less than $200bn so far this year, according to the M&A KnowledgeBase. At this point in both 2016 and 2015, spending on transactions had already topped $300bn.

With eight months now in the books, 2017 is on pace for the lowest level of M&A spending in four years. The main reason for the slumping deal value is that many of the tech industry’s most-active acquirers have largely moved to the sidelines, especially when it comes to big prints. IBM, Hewlett Packard Enterprise and Oracle all went print-less in August.

In contrast, the rivals to those strategic buyers, private equity (PE) firms, continued their shopping spree. PE shops announced 77 deals in August, an average of almost four each business day. That brings the total PE transactions announced this year to 600, a pace that puts 2017 on pace to smash last year’s record number of deals by roughly 30%. (For more on the record-setting activity of buyout shops, be sure to join 451 Research for a webinar next Thursday, September 7, at 1:00pm ET. Registration is available here.)

Western Digital takes a familiar path into new markets with a pair of deals 

Scott Denne

Contact: Scott Denne, Tim Stammers

Western Digital has printed two different deals that follow the same pattern. The disk-drive giant has acquired enterprise storage vendor Tegile Systems along with Upthere, a developer of consumer cloud storage products, continuing its recent feast-then-famine M&A pace. Those targets mark the first companies it has bought since reaching for SanDisk in a $17bn transaction at the end of 2015.

In Western Digital’s last cycle, it spent $1bn across three acquisitions in the solid-state storage sector in the third quarter of 2013, followed by a 15-month hiatus from the market. Before that string of SSD deals, but after its $4.3bn purchase of HGST in 2011, it had only bought one company – a tuck-in of backup software firm Arkeia.

Like each of the last four private companies that Western Digital purchased, both of today’s targets took minority investments from Western Digital, which led the most recent venture rounds raised by Tegile and Upthere. Both transactions also push Western Digital further upmarket. Upthere sells high-performance cloud storage services designed for pictures, extending Western Digital’s consumer storage business and, since Upthere builds its own infrastructure rather than running on AWS, it brings a technical team that could bolster the acquirer’s ability to deliver enterprise offerings for other cloud services.

With Tegile, Western Digital becomes a full systems provider – a shift that’s been many years and many deals in the making. Purchases of Virident and SanDisk brought it hardware products to sell directly to enterprises, rather than OEMs, and acquisitions of Skyera and Amplidata brought it software IP that could potentially be used to build its own storage systems. If the past is any indication, Western Digital is wise to stick to its patterns – the company’s stock is up 90% in the wake of its SanDisk buy and a year-long streak of beating Wall Street’s projections.

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

Valassis sees discounts in MaxPoint acquisition 

Scott Denne

Contact: Scott Denne

Coupon distributor Valassis Communications has taken another step in its transition to digital with the $95m acquisition of location-based ad-tech vendor MaxPoint Interactive. In addition to getting Valassis another marketing product to sell to consumer goods providers, the target’s technology could plug a substantial weakness in RetailMeNot, a digital coupon firm that Valassis’ parent company, Harland Clarke Holdings, bought in April.

The sale ends a turbulent and short run as a public company for MaxPoint, which debuted in April 2016 with a stock price that’s more than 3x what it’s getting in today’s deal, which values it at a paltry 0.6x trailing revenue.

MaxPoint enables advertisers to run national campaigns for consumer goods that target prospects at the local level, based on a mix of proximity to retail locations and digital demand signals from particular neighborhoods. As one of the world’s largest distributors of coupons, Valassis hands MaxPoint’s media services business a new avenue for growth. But the larger opportunity is in integrating the underlying technology with its recently acquired online coupon business.

RetailMeNot built a business by distributing digital coupons for retail locations. The problem it’s always had is proving to its retailers that those coupons work – did the coupons drive people to the store or did the store just give discounts to people who planned to come anyway? To operate its media business, MaxPoint developed technology that predicts demand for products within the market area for a physical retail location. RetailMeNot could deploy such demand analysis to optimize when and where it launches campaigns and use it to measure the impact.

Moreover, a partnership between the two companies could enable MaxPoint to deliver coupons to RetailMeNot that are tied to a retail location but funded by product vendors and in doing so provide both retailers and consumer products companies a way to navigate a market that’s rapidly shifting to digital with a shared marketing strategy that they’ve employed for decades.

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

Private equity does a number on the public markets

Brenon Daly

Contact: Brenon Daly

Private equity (PE) is doing a number on the public markets. No longer content with siphoning dozens of tech vendors off the exchanges each year, buyout shops are now moving earlier in the IPO process and targeting companies that may only be thinking about someday going public. These rapacious acquirers are not only harvesting the current crop of tech vendors on the NYSE and Nasdaq, but also snapping up the seeds for next season’s planting as well.

Consider the recent activity of the tech industry’s most-active PE shop, Vista Equity Partners. Two months ago – on the same day, as a matter of fact – the firm ended Xactly’s two-year run as a public company and snagged late-stage private company Lithium Technologies, a 16-year-old vendor that had raised some $200m in venture backing. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates of terms on the Vista Equity-Lithium deal here.) And just yesterday, Vista Equity once again went startup shopping, picking up software-testing firm Applause.

To be clear, neither Lithium nor Applause would have been considered dual-track deals. Both startups undoubtedly needed time to get themselves ready for any eventual IPO. And while it might seem like a PE portfolio provides a logical holding pen for IPO candidates, buyout shops don’t really look to the public markets for exits. As far as we can tell, Vista Equity hasn’t ever taken one of its tech vendors public. The same is true for Thoma Bravo. Instead, the exit of choice is to sell portfolio companies to other PE firms or, to a lesser degree, a strategic acquirer. (Buyout shops prefer all-cash transactions rather than the illiquid shares that come with an IPO so they can speed ahead raising their next fund.)

The PE firms’ expansive M&A strategies – directed, effectively, at both ends of the tech lifecycle on Wall Street – aren’t going to depopulate the public markets overnight. However, those reductions aren’t likely to be offset by an increase in listings through an uptick in IPOs anytime soon. That means tech investing is likely to get even more homogenized. It’s already challenging to get outperformance on Wall Street, where passive, index-driven investing dominates. With buyout shops further shrinking the list of tech investments, it’s going to be even harder for money managers to stand out. With their latest surge in activity, PE firms have made alpha more elusive on Wall Street.

To see how buyout shops are reshaping other aspects of the tech industry and the long-term implications of this trend, be sure to read 451 Research’s special two-part report on the stunning rise of PE firms. (For 451 Research subscribers, Part 1 is available here and Part 2 is available here.) Additionally, a special 451 Research webinar on the activity and outlook for buyout shops in tech M&A is open to everyone. Registration for the event on Thursday, September 7 at 1:00pm EST can be found here.

Meet the new buyer of your tech company

Brenon Daly

Contact: Brenon Daly

For all the dramatic impact that private equity (PE) firms have had in snapping up huge chunks of the tech landscape, most of Silicon Valley actually knows very little about these buyout shops. (Not for nothing is the industry called private equity.) The little that is known about them probably dates back to Barbarians at the Gate, when the firms mostly operated with a strip-and-flip strategy. That’s not really the approach these new power brokers are bringing to their current tech investments.

In the rebooted strategy for hardware and software vendors, many of the buyout shops have swung their focus from costs to growth. Sure, PE firms still prize cash flow, but in many cases they will be looking as closely at the trend line for MRR as they do EBITDA generation. It’s an approach that has helped fuel five straight years of increasing tech deals by buyout shops, rising to the point now where financial acquirers are putting up more prints than the longtime leaders of the tech M&A market, strategic buyers.

Between direct acquisitions and deals done by portfolio companies, PE firms are on pace to purchase roughly 900 tech companies in 2017, which would work out to roughly one of every four tech transactions announced this year. That’s about twice the share of the tech M&A market that buyout shops have held even as recently as two years ago. More than any other buying group, PE firms are setting the tone in the market right now.

For a closer look at the stunning rise of PE buyers in the tech market, 451 Research is publishing a special two-part report on the trend, ‘Preeminent PE: The New Masters of the Tech Universe.’ The first part of the report takes a look at how financial acquirers sprinted ahead of strategic buyers, and how the current PE boom is different from the previous PE boom before the credit crisis. The second part turns to the strategy and valuations of tech deals done by buyout shops.

Although both of these reports will only be available to 451 Research subscribers, everyone is invited to join 451 Research for a webinar on the activity and outlook for PE firms in tech M&A on Thursday, September 7 at 1:00pm EST. Registration can be found here.