In tech M&A, PE takes prominence

Brenon Daly

Contact: Brenon Daly

For the first time in tech M&A, financial acquirers are doing more deals than publicly traded strategic buyers. That’s a sharp reversal from years past, when private equity (PE) firms represented only bit players in the market, operating well outside the focus areas of US-listed acquirers. Even as recently as three years ago, US publicly traded companies were announcing more than twice as many transactions as PE shops.

So far in 2017, financial buyers (both through stand-alone purchases and deals done by their portfolio companies) have announced 511 tech transactions, slightly ahead of the 506 deals announced by tech vendors on the Nasdaq and NYSE, according to 451 Research’s M&A KnowledgeBase. Even more telling is the current trajectory of the two groups. PE firms, which have increased the number of acquisitions every single year for the past half-decade, are on pace to smash the full-year record of 680 PE transactions announced last year. Meanwhile, US-listed acquirers are almost certain to see a second consecutive decline in M&A activity, with the full-year 2017 number tracking to almost 20% below the totals of 2014 and 2015.

The dramatic shift in the tech industry’s buyers of record has been brought about by changes in both acquiring groups. PE shops have never held more capital than they currently hold, which means they need to find markets where they can put that to work. (The tech industry, which is aging but still growing, offers bountiful shopping opportunities.) Cash-rich buyout firms, which are built to transact, have simply taken the playbook they have used on their shopping trips through other markets such as manufacturing and retail, among others, and applied it to the technology industry.

In contrast to the ever-increasing number of PE shops and their ever-increasing buying power, the number of tech companies on the Nasdaq and NYSE has been dropping for years. (Indeed, the overall number of US traded companies has been declining for years, with some estimates putting the current count of listings at just half the number it was 20 years ago.) For instance, some 38 tech vendors have already been erased from the two US stock exchanges so far in 2017, according to the M&A KnowledgeBase.

Yet even those companies that still trade on the exchanges aren’t doing deals at the same rate they once did. In years past, some of the big-cap buyers — the ones that used to set the tone in the tech M&A market — would announce a deal every month or so. Now, public companies have slowed their pace, and PE firms have simply sprinted around them in the market.

Consider this tally, drawn from the M&A KnowledgeBase, of activity last month by the two respective groups. On the lengthy list of tech giants that didn’t put up a single print at all in July: Oracle, Microsoft, IBM, Hewlett Packard Enterprise, Salesforce and SAP. Meanwhile, financial acquirers went on a shopping spree. H.I.G. Capital, Francisco Partners, Clearlake Capital and Thoma Bravo (among other PE shops) all inked at least two prints last month.

PE shops make the market for tech M&A in July

Brenon Daly

Contact: Brenon Daly

Spending on tech deals in July hit its second-highest monthly total so far this year, driven by the widespread dealmaking of private equity (PE) firms. Buyout shops figured into eight of last month’s 10 largest acquisitions, either as a seller or a buyer. The big-dollar prints by financial acquirers in July continue the recent surge of unprecedented activity by PE firms, which have largely displaced corporate buyers as the ‘market makers’ for tech M&A.

Overall, the value of tech transactions announced around the globe in July hit $28.9bn, roughly one-quarter more than the average month in the first half of the year, according to 451 Research’s M&A KnowledgeBase. Our research shows that PE firms accounted for some 40 cents of every dollar spent on tech deals last month — two to three times higher than the market share financial buyers held in recent years. Further, unlike the previous PE boom in the middle of the past decade that was dominated by single blockbuster transactions, the current record activity is coming from virtually all deal types.

Just in July, we saw financial acquirers announce transactions ranging from multibillion-dollar take-privates (the KKR-backed purchase of WebMD) to ‘synergy-based’ midmarket consolidation (Francisco Partners’ Procera Networks won a bidding war with another buyout shop to land Sandvine) to early-stage technology tuck-ins (Vista Equity Partners’ TIBCO scooping up one-year-old nanoscale.io). Overall, according to the M&A KnowledgeBase, PE firms announced a staggering 77 deals last month. That brought the year-to-date total to 511 PE transactions in the first seven months of 2017 — setting this year on pace to smash the full-year record of 680 PE deals recorded last year.

More broadly, last month featured a fair amount of old-line M&A, whether it was buyout firms trading companies among themselves (Syncsort) or mature tech industries consolidating (Mitel Networks reaching for ShoreTel or serial acquirer OpenText picking up Guidance Software, for instance). Those drivers put pressure on valuations paid at the top end of the market last month. According to the M&A KnowledgeBase, acquirers in July’s 15 largest deals paid just 2.4x trailing sales. Not one of last month’s 15 blockbusters got a double-digit valuation, although subscription-based ERP software startup Intacct came very close. For comparison, fully five of the 15 largest transactions in the first six months of 2017 went off at double-digit valuations.

Competition cools appetite for new offerings

Scott Denne

Contact: Scott Denne

Competition, not cash flow, has become a leading indicator of a successful IPO. Wall Street rallied behind Redfin’s mission to take on the staid real estate market but was far less enthusiastic about this year’s other consumer tech IPOs – Snap and Blue Apron – as both vendors pursue markets where the largest tech companies already tread.

Redfin seeks to grab share in the real estate brokerage market by developing technology that it claims enables it to find customers and deliver services at a lower cost. In that way it’s similar to Blue Apron, which brings a tech-driven business model to the sedate grocery market. After more than a decade in market, Redfin posted $285m in trailing revenue, up 42% from a year earlier. Blue Apron is three times the size of Redfin and has been around for one-third the time. Yet when the two comparable firms began trading shares publicly, they went in opposite directions.

Redfin priced its shares at $15 before it began trading on Friday and closed the day up 45% from there. It added another 15% in early trading on Monday and was flirting with $25 for a market cap that’s just shy of $2bn. Blue Apron cut its initial price range as Amazon struck a deal to acquire Whole Foods and move further into Blue Apron’s grocery market. Shares priced at the bottom of its revised range and have been sinking since, with some help from a trademark filing by Amazon that suggests that it’s launching a competing meal delivery service.

To be clear, competition isn’t the only difference. Blue Apron faces questions about the ability of its business to generate a profit. Both companies lose money, but the ratio of revenue to losses has shrunk at Redfin and gone the other way at Blue Apron. Snap provides another example of the challenges of going public under the shadow of a larger adversary. While Snap faces a tough road to reaching 200 million monthly users, Facebook’s Instagram has roared past 250 million, fueled in part by selective borrowing of Snap’s features, helping send the upstart social media company’s shares down by half since its first day of trading.

The contrast between Redfin’s successful offering and the struggles of Blue Apron and Snap highlights the towering impact that the largest tech vendors have on the ability of younger businesses to raise capital and generate liquidity. And while risks posed by larger competitors aren’t new, the scale and scope of their impact will increase as a few tech firms expand their resources and spread into more consumer markets.

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

No more high-rolling in infosec M&A

Brenon Daly

Contact: Brenon Daly

Casinos, which are always looking to have patrons spend more money, are notorious for making exits difficult to find. For that reason, the Mandalay Bay was the perfect setting for this week’s trade show for the information security industry, Black Hat. Why do we say that? Infosec companies — at least the big ones — are having difficulty in finding exits, too.

Not to overstretch the metaphor of the host city for Black Hat, but the infosec industry has stepped away from the high-roller tables. So far this year, just one infosec company (Okta) has made it public, while those that have headed toward the other exit haven’t enjoyed particularly rich sales. This year’s small bets are reversing the recent record run for M&A spending on infosec transactions.

Spending on overall infosec acquisitions in the first seven months of the year has put 2017 on pace for the lowest annual total in a half-decade, according to 451 Research’s M&A KnowledgeBase. This year’s paltry total of just $2.3bn in aggregate deal value means that 2017 will snap three consecutive years of increasing infosec M&A spending. Our M&A KnowledgeBase shows that in 2016, infosec buyers spent $15bn, more than any other year in history, while 2015 also came in as another strong year in 2015 with $10bn in transaction value.

To put the current dealmaking decline into perspective, consider this: The largest infosec print so far in 2017 wouldn’t even make the list of the 10 biggest infosec transactions of 2015-16. And while this year’s largest acquisition – CA’s $614m purchase of Veracode – represents a decent exit, it’s fair to say more was certainly expected from the application vulnerability startup. (Veracode had filed its IPO paperwork several months before the sale on the quiet, according to our understanding.) Similarly, this year’s second-largest VC exit saw TeleSign agree to a sale that valued it lower than its valuation in its previous funding round.

The reason why so few sizable infosec startups are looking to exit is mostly because they don’t have to exit. Thanks to ever-increasing CISO spending, venture capitalists are back writing big checks to subsidize infosec startups. And when we say ‘big checks,’ we mean the size that used to come in IPOs or the rounds that got announced during the 2014-15 boom in late-stage investing, when single rounds of $100m were announced from across the startup landscape. While those growth rounds were relatively plentiful across the IT scene two or three years ago, infosec is the only industry where the big checks are once again rolling in. In just the past three months, a half-dozen infosec startups have each raised rounds of about $100m.

Advertisers continue to fly from Twitter

Scott Denne

Contact: Scott Denne

Earnings calls this week from Google, Facebook and Twitter highlight how far the latter has fallen behind those two giants. While advertisers flocked to Google and Facebook, they fled from Twitter. Although its results were dismal, the onetime contender for Facebook’s social media crown seems to have correctly identified its differentiator and is building – slowly – a strategy to capitalize on that.

Twitter’s top line dropped 5% to $574m in the second quarter, a decline that would have been more dramatic without a rise in its data-licensing business. An 8% slide in its revenue from advertisers mixed with a 12% jump in daily active users points to the shrinking price of Twitter’s ad impressions. Facebook, by comparison, experienced a 25% boost in its revenue per user on its way to a 45% increase in revenue in Q2.

In an attempt to get sales growing once again, Twitter’s management has focused on the appetite of its audience for real-time information and embraced video partnerships in verticals with a similar focus – music, sports and news. Yet its drooping ad rates attest to the slow burn of such efforts: declining ad rates amid an environment of rising prices for digital video inventory.

To raise its ad sales, Twitter could pursue a media rollup in verticals that match its strengths. The $4bn it has in the bank, along with a stock that still trades near 5x TTM revenue, gives it the flexibility to pursue a series of modest-sized targets as well as larger digital media properties. For example, music video site VEVO would complement its existing streaming partnership with Live Nation and get Twitter one of the most trafficked video sites on the internet.

Twitter’s platform will never have the scale and reach of Facebook, whose monthly audience is six times larger and increasing at a higher rate. But it can expand its reach into the audiences it has by leveraging its real-time strength and extending them off its platform. As a social media company, Twitter’s a runt. But as a digital media company its open, conversational platform gives it a way to engage audiences in ways that aren’t available to other digital media firms.

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

Internet Brands pays healthy premium for WebMD in otherwise ailing internet M&A market

Scott Denne

Contact: Scott Denne

Private equity firms seem to be the only ones browsing for big consumer internet deals these days. Today’s acquisition of WebMD by Internet Brands marks the third billion-dollar purchase of a consumer internet company this year. The acquirers in those other deals, like KKR-owned Internet Brands, are also backed by PE firms.

Internet Brands’ $2.8bn acquisition of WebMD fits in the strategy, although not scope, of its past acquisitions. Since its days as Carsdirect, the company has rolled up 63 internet businesses across automotive, fashion and healthcare. Although the deal sizes of those were largely undisclosed, sites like dentalplans.com and racingjunk.com didn’t have the scale or notoriety of WebMD, and were certainly smaller deals – even Internet Brands itself was reported to have traded to KKR at just over $1bn in 2014.

In landing its biggest prize, Internet Brands paid a healthy valuation. At $66.50 per share, the deal prices the target company’s stock at a record level for the current iteration of WebMD (since its founding in the heyday of the dot-com bubble, WebMD has been through a couple of reorganizations, but has been trading on the Nasdaq since 2005). The acquisition values it at 3.9x trailing revenue, two turns above what Everyday Health – a competing health site that’s about one-third the size – took in its sale to j2 in 2016.

And while WebMD fetched a premium compared with its closest competitor, when compared with the broader market, it falls just shy of the 4.3x median multiple for similarly sized consumer internet deals across the last decade. As private equity firms account for an outsized amount of the consumer internet M&A market, premium valuations become harder to find. According to 451 Research’s M&A KnowledgeBase, $2 of every $3 spent on M&A in this category this year has involved a PE firm or PE-backed buyer, yet none of the $1bn-plus consumer internet deals this year – Bankrate, Chewy and WebMD – printed above 4x.

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

Ingenico moves past POS with $1.7bn Bambora buy

Scott Denne

Contact: Jordan McKee, Scott Denne

Ingenico scoops up yet another European payments service provider to fuel its evolution beyond a point-of-sale (POS) terminal supplier. Today’s $1.7bn pickup of Nordic mobile payments vendor Bambora marks its third acquisition of 2017, the payment giant’s busiest year of dealmaking to date.

Its two previous deals of the year brought it international expansion – into Ukraine and India. Yet where Ingenico has spent the most money has been growth beyond its core POS business into services and other payment channels. Prior to todays’ transaction, its $1.1bn purchase of e-commerce payments company GlobalCollect in 2014 had been its largest acquisition. It also spent $485m for transaction-processing services firm Ogone a year earlier. Since that deal, Ingenico has inked eight acquisitions, according to 451 Research’s M&A KnowledgeBase.

With the bulk of its revenue indexed to brick-and-mortar commerce – and more specifically, hardware sales – Ingenico realizes that it must craft a digital strategy that will ensure its relevance as more transactions flow into card-not-present channels. By reaching for omni-channel capabilities, Ingenico expands the role it can play within its retailer client base while embedding itself further in their commerce options.

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

Garmin races toward higher margins with cycling deal

Scott Denne

Contact:  Scott Denne

Up against a stagnant market for fitness trackers, Garmin reaches for Alphamantis Technologies, a maker of specialty products for cyclists. Today’s acquisition isn’t likely a sizeable one, as the target only has a few employees. Yet it highlights Garmin’s strategy of weathering a decline in one market through expansion into another, particularly specialized products with higher margins. Other companies with too much exposure to the wearables market – particularly Fitbit – would do well to get in Garmin’s slipstream.

Best known for its automotive navigation devices, Garmin has long sold GPS products into a variety of categories – fitness, aviation and outdoor recreation. Its revenue rose a modest 2% to $639m in the first quarter from a year earlier, despite a steep drop in automotive products, which still account for one-quarter of its business, and a modest decline in fitness trackers, which it blamed on a maturing market for basic wearables.

Our own data also shows that maturation. According to 451 Research’s most recent VoCUL survey, just 7.4% of people planned to buy a fitness tracker in the next 90 days – a response rate that hasn’t changed meaningfully in two years. More telling, the largest maker of wearables, Fitbit, shed 40% from its top line in the first quarter.

In response, Fitbit is turning to the smartwatch market, having inked two deals in that space since December. Our surveys show that market to be almost as flat as fitness trackers. More importantly, it’s a broad market that’s flooded with entrants from the legacy watch sector and the cell phone segment (including the world’s largest maker of consumer electronics).

Garmin’s purchase of Alphamantis brings it technology for tracking cycling performance data. A niche market to be sure, and in that sense, it’s similar to last year’s pickup of DeLorme, a maker of satellite radio products for hikers, boaters and pilots traveling to remote locations. Those niche markets, while lacking the scale of smartwatches, lead to higher margins. Garmin’s fitness business posted 56% gross margins last quarter – Fitbit didn’t crack 40% despite being twice the size.

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

Crown Castle pays big for small cells

Mark Fontecchio

Contact: Mark Fontecchio

Crown Castle International shells out $7.1bn for fellow cell tower company Lightower Fiber Networks in the latest and largest of a flurry of acquisitions by the buyer to expand its small-cell coverage in the US. The purchases, made at above-market multiples, come as Crown Castle builds out infrastructure to support mobile operators dealing with surging data traffic.

With Lightower, Crown Castle obtains a larger network of cell towers, small-cell nodes and fiber deployments concentrated in the Northeast. Crown Castle has now spent $10.7bn on M&A in three years to build its small-cell network in the Northeast, southern California, Florida and Texas through acquisitions such as FiberNet ($1.5bn) and Sunesys ($1bn).

In the process, Crown Castle has spent more on M&A since 2014 than it had in the entire preceding decade and paid rich multiples along the way. According to 451 Research’s M&A KnowledgeBase, purchases of tower and fiber targets since 2014 carried a median valuation of 3x trailing revenue. Today’s pickup of Lightower values the target at about 9x, in the same neighborhood as Crown Castle’s other small-cell deals.

Why the premium? As we discussed in a December report, mobile networks face escalating demand as consumers increase video consumption and enterprises deploy mobile cloud apps. To keep up with that data demand, operators are increasingly turning to small-cell deployments.

Morgan Stanley advised Crown Castle on the transaction, while Citigroup Global Markets and Evercore Partners banked the seller.

Private equity gets bigger wrench for bolt-on deals

Scott Denne

Contact: Scott Denne

As buyout shops expand their role in tech M&A, a growing share of private equity spending is coming from bolt-on acquisitions by portfolio companies rather than stand-alone purchases. The sales of Sandvine and Rocket Fuel – both announced this week – show that PE firms are more willing to make sizeable additions to their portfolio companies.

Bolt-on deals have long been part of the private equity playbook. Every year since 2009, acquisitions by portfolio companies (often funded by their PE owners) have accounted for half of PE tech deal flow. This year, PE firms have kept that pace and bolstered the ratio of spending on such transactions. According to 451 Research’s M&A KnowledgeBase, PE-backed companies spent $12.5bn on purchases so far this year – that’s more than one-quarter of PE spending, a mark they’ve never previously hit.

In the acquisition of Sandvine, a previous bid by Vector Capital was bested by a $441m offer from Francisco Partners on Monday to combine the company with Procera Networks, a Sandvine competitor. Francisco paid just $240m to buy Procera in 2015. Today’s pickup of Rocket Fuel by Vector’s Sizmek has a similar dynamic. Vector proposes to pay $23m more for Rocket Fuel than the $122m it spent on Sizmek. (In yet another potential similarity between these deals, Wall Street is betting that Vector’s offer will again be beaten as Rocket Fuel trades at $0.10 per share above the bid.)

It’s tempting to think that higher spending and the benefit of potential cost synergies would lead PE shops to pay higher multiples. That hasn’t been the case. Francisco values Sandvine at 3.7x trailing revenue compared with 1.8x in its acquisition of Procera, but in the case of Rocket Fuel, Vector will pay just 0.3x, less than the 0.5x it spent on Sizmek. Overall, the median multiple on purchases by PE portfolio companies sits at 2.2x in the past 24 months, compared with 2.6x for stand-alone PE acquisitions.


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