Xactly exits

Brenon Daly

Contact: Brenon Daly

Two years after coming public, Xactly is headed private in a $564m buyout by Vista Equity Partners. The deal values shares of the sales compensation management vendor at nearly their highest-ever level, roughly twice the price at which Xactly sold them during its IPO. According to terms, Vista will pay $15.65 for each share of Xactly.

Xactly’s exit from Wall Street comes after a decidedly mixed run as a small-cap company. For the first year after its IPO, the stock struggled to gain much attention from investors. Shares lingered around their offer price, underperforming the market and, more notably, lagging the performance of direct rival Callidus Software. However, in the past year, as Xactly has posted solid mid-20% revenue growth, it gained some favor back on Wall Street. In the end, Vista is paying slightly more than 5x trailing sales for Xactly.

The valuation Vista is paying for Xactly offers an illuminating contrast to Callidus, which has pursued a much different strategy than Xactly. Although both companies got their start offering software to help businesses manage sales incentives, the much-older and much-larger Callidus has used a series of small acquisitions to expand into other areas of enterprise software, notably applications for various aspects of human resources and marketing automation. According to 451 Research’s M&A KnowledgeBase, Callidus has done seven small purchases since the start of 2014. For its part, Xactly has only bought one company in its history, the 2009 consolidation of rival Centive that essentially kept it in its existing market.

Although Xactly is getting a solid valuation in the proposed take-private, it’s worth noting that Callidus – at least partly due to its steady use of M&A – enjoys a premium to its younger rival with a narrower product portfolio. Even without any acquisition premium, Callidus trades at about 7x trailing sales. Callidus is roughly twice as big as Xactly, but has a market value that’s three times larger.

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Will the ‘Appian way’ lead more startups to Wall Street?

Brenon Daly

Contact: Brenon Daly

With Appian’s debut on the Nasdaq earlier this week, the tech IPO market has hit an early summer vacation. Right now, there are no tech companies on file, at least not publicly. So with no offerings (officially) to look ahead to, it’s worth taking a look back on what we’ve already seen from recent new listings.

The first impression is that there aren’t very many of them. By our count, just five enterprise tech vendors have made it public so far this year. Further, the pace for the remainder of 2017 isn’t expected to accelerate. Respondents to a recent survey from 451 Research and law firm Morrison & Foerster predicted just 15 tech IPOs this year. (451 Research subscribers can see our full report on the current IPO market, as well as a few of the firms that we think could be in Wall Street’s ‘class of 2017.’)

But to even hit that number of IPOs, we might suggest that Wall Street look to more companies like Appian rather than the other four tech vendors that also made it public this year. (See our full report on Appian’s offering.) What we mean by that is Appian is far more representative of the broader startup universe than high-profile unicorns such as Okta, Alteryx, MuleSoft or Cloudera. Certainly, more startups can relate to Appian’s capital structure than any of the other recent debutants. Appian raised just $48m as a private company, compared with $163m for Alteryx, $220m for Okta, $259m for MuleSoft and more than $1bn for Cloudera. In fact, all four of the unicorn IPOs raised more in a single round of private-market funding than Appian did in total VC funding.

Not having done an IPO-sized funding in the private market meant that Appian could come public with a more modest raise. (It took in just $75m, compared with this year’s previous IPOs that raised, on average, $190m for the four unicorns.) And, probably most importantly, the Appian offering showed that these types of IPOs can work, both for issuers and investors. (Appian created about $900m of market value, and saw its shares finish the first day of trading up about 25%.) So when it comes to IPOs for the second half of this year, the ‘Appian way’ could help a lot more startups make it to Wall Street.

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

The dried-up startup exit

Brenon Daly

Contact: Brenon Daly

The quintessential Silicon Valley deal is drying up. Sales of VC-backed tech startups, which once provided a steady flow of money to entrepreneurs and their backers, are down sharply so far this year, compared with recent years. And while the impact of the narrowing of that exit will be primarily felt along Sand Hill Road, the cause of the slump traces back to Wall Street.

So far this year, just 235 VC-backed tech companies have sold, according to 451 Research’s M&A KnowledgeBase. That paltry level represents the fewest startups sold in the first five and a half months of any year since 2010, even as the overall tech M&A market has broadened and increased the current number of total tech transactions by nearly 15% since the start of the current decade. Year to date, M&A volume for VC-backed vendors is running 13% lower than the average number of deals over the past five years, according to the M&A KnowledgeBase.

The sharp decline in exits comes as the ranks of the startups are swelling, with thousands of businesses receiving venture investment each year. So if the slowdown isn’t coming from the supply side, that leaves only the demand side. And indeed, we can narrow the cause of the recent slump to one particular set of startup buyers: US public companies.

For the first half of the current decade, according to the M&A KnowledgeBase, NYSE- and Nasdaq-listed vendors accounted for more than 40% of the purchases of VC-backed companies. In some years, that approached nearly half of the transactions. So far this year, the tech industry’s big fish have gobbled up the minnows in only slightly more than one-third of the deals. If the classic startup-sells-to-tech-giant transaction isn’t playing out as often as it once did, that’s primarily because many of the tech industry’s one-time biggest buyers have themselves been bought.

Some behemoths have been consolidated by fellow behemoths, with the net effect that the combined entity – perhaps still struggling with integrating a business that does hundreds of millions of dollars, or even billions of dollars, of revenue – doesn’t have the capacity to do anywhere near as many deals as the two stand-alone companies did. Consider the relative M&A rates for Dell and EMC on both sides of that blockbuster pairing. In other cases, tech giants have gone private, with buyout shops that tend to focus on financially optimizing existing businesses, rather than trying to bump up revenue growth through potentially costly acquisitions of shiny new startups. For instance, BMC has done only three purchases since its leveraged buyout four years ago, down from an average of four acquisitions in each of the three years leading up to its take-private.

Source: 451 Research’s M&A KnowledgeBase

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Enterprise mobile’s moment passes 

Scott Denne

Contact:Scott Denne

The surge of smartphones over the past decade delivered a shock to businesses, changing everything from how they manage employees to how they engage with customers. Such sudden transformation leads to confusion, and confusion often leads to big acquisitions at salacious multiples. It appears that mobile enterprise technology vendors are no longer benefiting from that disorientation as deals dwindle and buyers look for tuck-ins and consolidation plays rather than strategic gambles.

Case in point: VMware’s purchase of Apteligent earlier this week. In the startup’s early days, it appeared to be defining a new category of mobile application performance monitoring. Instead, it’s folding into VMware’s workforce management tools at a price that’s likely short of the $50m that venture capitalists plunked into it.

Or take Tangoe. At just $305m, the sale of the device management firm leads the pack of enterprise mobile tech deals in 2017. It sold to Marlin Equity Partners for 1.6x trailing revenue and about one-quarter of its market cap at its zenith. Last year’s largest mobile enterprise transactions – a pair of telematics providers picked up by Verizon and Microsoft’s reach for app developer tools specialist Xamarin – all went off at above-market multiples.

The pace of deals – not just the type – is also shaping up differently from last year. Acquirers spent $6.4bn on enterprise mobility vendors in 2016, according to 451 Research’s M&A KnowledgeBase. This year, just $510m has been spent on 42 transactions, on track for less than half of last year’s volume. Investors are matching the drooping appetites of acquirers. By our reckoning, there has been just $112m of fresh venture capital poured into these businesses. That’s about the same rate as last year, when these companies drew about one-quarter the amount of funding that they did in 2013 and 2014.

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

The state of tech M&A in China

Brenon Daly

Contact: Brenon Daly

After six straight years of explosive growth of tech M&A, China’s great shopping spree is winding down. The combination of increasing domestic economic uncertainty and, more crucially, newly imposed currency restrictions has blunted both the drive and the means for buyers from the world’s second-largest economy to do tech deals. Based on spending so far this year, China-based acquirers are on pace in 2017 to hand over just one-quarter the amount they spent on tech acquisitions in 2016, according to 451 Research’s M&A KnowledgeBase.

Of course, last year stands as a record for the value of tech transactions by China-based buyers, with the $40bn worth of announced purchases equaling the total from the two previous years combined. In contrast, the M&A KnowledgeBase totals just $3bn worth of deals by China-based acquirers so far in 2017.

To illustrate just how tight China’s former free spenders have become, consider this: They have yet to announce a single tech transaction in 2017 valued at more than $1bn, after announcing a record 10 such big-ticket deals in 2016. Like acquisitions last year by China-based buyers in non-tech sectors, many Sino shoppers in 2016 went after high-profile targets across the tech sector, including Tencent reaching for videogame maker Supercell, as well as financial firms picking up Ingram Micro and Lexmark.

For a more in-depth look at the recent changes and the outlook for doing deals in China, be sure to join 451 Research’s webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. Tomorrow’s webinar is open to everyone, and you can register here.

The unicorn trend looks ready to Snap 

Scott Denne

Contact: Scott Denne A debacle of a first earnings report sent Snap shares down 20% this week, making the mobile app company the latest high-value startup whose private investors are taking a haircut. Silicon Valley spent the past few years building an unprecedented number of alpha startups. Now that they’re delivering beta exits, the funding that propelled their rise is drying up.

Snap’s last private round carried a valuation of $25bn, compared with its $21bn market cap today. Cloudera’s public debut valued it just beyond half of the $4.1bn that Intel assigned to the company in a 2014 investment. On the M&A front, storage provider SimpliVity came up shy of its $1bn-plus private valuation in a $650m sale to HPE; and Turn, an ad-tech vendor that reached near-unicorn status with a $750m valuation, sold to Singtel for $310m. All of those outcomes should be the envy of investors in LivingSocial, which literally gave itself away to daily-deals rival Groupon last fall.

That’s not to say there haven’t been any positive returns this year from heavily funded and highly valued venture-backed firms. AppDynamics’ investors came out ahead when Cisco paid $3.7bn for the company and with its $2.8bn market cap, MuleSoft has held up as a public entity, as have Okta and The Trade Desk.

Nonetheless, some of the newest and largest late-stage venture investors are scaling back as they find that the returns aren’t making up for the lack of liquidity in startup investing. T. Rowe Price, a backer of Snap and LivingSocial, has only announced one new investment in a private tech vendor this year. That’s the same number that BlackRock and Fidelity Investments, which both invested in Turn’s last round, have made so far. Investors that believe in unicorns are becoming as hard to find as the mythical beast itself.

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

Tech’s ‘usual suspects’ are back in the market for startups

Brenon Daly

Contact: Brenon Daly

After a prolonged period of restructuring and refocusing their own businesses, tech bellwethers are once again in the market for startups. Many of the industry’s biggest names are putting their record levels of cash and record-priced equity to work as they return to paying significant valuations for largely unproven companies. This year’s return of the recently rejuvenated ‘usual suspects’ of tech M&A comes after a few years when the big names were somewhat overshadowed by unconventional buyers rolling the dice on technology vendors.

For instance, the list for 451 Research’s M&A KnowledgeBase of who has printed significant acquisitions of VC-backed companies this year includes Cisco, CA Technologies and Hewlett Packard Enterprise. In 2017, there aren’t buyers like General Motors, as there was in 2016, or Delivery Hero, as there was in 2015. To generalize broadly, we might suggest that the driver in the startup M&A market has swung from fear to greed. What we mean by that is several of the 2015-16 big VC exits appear to be motivated by fear, specifically – as kids these days say – fear of missing out. The threat of being disrupted by technology appears to have driven earlier transactions such as Unilever’s $1bn purchase of Dollar Shave Club last July and old-line Ritchie Bros. Auctioneers’ $759m pickup of online platform provider IronPlanet last August.

This year’s resurgence of the well-known tech giants, which have both the means and the need to acquire faster-growing startups, has helped boost the number of significant VC exits in 2017 to almost as many transactions as the same period of the two previous years combined. According to the M&A KnowledgeBase, buyers so far this year have announced six deals valued at more than $500m. (That total includes transactions for which 451 Research has a proprietary estimate of the unannounced terms.) For comparison, the same period in 2016 and 2015 produced a total of just seven VC exits valued at more than a half-billion dollars.

Probably no group is happier to see renewed demand from these tried-and-true acquirers of startups than the main supplier of startups, Silicon Valley. VCs overwhelmingly rely on sales of their portfolio companies to generate returns and, thus, keep their firms in business. The acceleration in the pace of big deals for startups is helping to offset a rather lackluster IPO market, which offers the other exit for their portfolio companies. Not that many startups are taking that exit, as we detailed in our special report on the fertile, but barren, tech IPO landscape.

Zendesk nabs Outbound in small step toward big goal

Scott Denne

Contact: Keith Dawson, Scott Denne

Zendesk shouldn’t be at peace as it strives toward an aspirational growth target. The customer service software firm plans to push its annual revenue from $312m last year to $1bn by 2020. To get there it will need to change its mantra from upselling to cross-selling. Today’s acquisition of marketing software startup Outbound Solutions shows that Zendesk is doing just that.

Landing deals with tech startups ignited Zendesk’s growth – back in 2015 it noted that ‘unicorns’ accounted for 7% of its sales – and the majority of its new revenue comes from adding seats and larger contracts as those customers and others have matured. To be sure, Zendesk posts growth that would be the envy of many a SaaS vendor. Its topline soared 88% heading into its 2014 IPO and expanded by another 50% last year. For this year, it projects 32% to $421m, the midpoint of its guidance. Just maintaining that rate through the next four years would bring it a hair under its $1bn target.

Outbound won’t bring an immediate boost to sales for Zendesk – an infrequent acquirer and light spender on the deals it has made. The target appears to have just a handful of employees, limited funding and, in all likelihood, a price tag that falls at the low end of the range of Zendesk’s previous two purchases – BIME Analytics ($45m) and Zopim Technologies ($15.9m). What Outbound brings is technology that the acquirer can use to engage customer prospects whose responsibilities extend beyond the helpdesk.

Last fall, Zendesk announced a pair of new products – Explore and Connect – to angle its offerings from reactive customer support to proactive outreach and customer experience, a fertile category for the company as 38% of IT decision-makers expect customer service software to have a transformative impact on customer experience, according to a recent report from 451 Research’s Voice of the Connected User Landscape. Outbound supports the forthcoming Connect product with messaging features and supporting analytics to make those more effective.

But the path to nirvana looks crowded. Zendesk’s focus on customer support through websites and apps has kept it out of the crosshairs of large enterprise software providers and call-center technology giants. Now all of those players are looking to customer experience to break out of their niches in marketing, CRM and helpdesks. Zendesk should contemplate more ambitious moves than today’s tuck-in to build the broader software suite it will need to reach its goal.

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

Facebook needs a channel into TV-style video

Scott Denne

Contact:Scott Denne

Hidden behind a 49% jump in its topline last quarter sits a do-or-die moment for Facebook – the social media company must develop a play in long-form video or risk its dominant position in mobile media. Facebook’s main product, its newsfeed, currently provides consumers with a tool to brush away the excess moments of the day. But its competitors are building out destination sites for longer video and threatening to pull audiences on mobile devices toward a product that Facebook doesn’t have.

For now, its strong position in short-form video continues to boost the company’s revenue. Facebook’s first-quarter ad revenue jumped 51% year over year despite increasing ad load by just 32%, pointing to a rising mix of video content and pricier video ads, although the signs point toward consumers spending more time with longer video.

The number of people watching long-form video on mobile is rising from an already significant base. According to 451 Research’s Voice of the Connected User Landscape Q4 2016 survey, 28% of people watch TV shows on their smartphone, up slightly from six months earlier, with 25% and 9%, respectively, saying they watch movies and sports on their smartphones. Few are doing so on Facebook, as barely one out of 10 cited Facebook Live as a source of video consumption, placing it behind YouTube by a factor of six and nearly a full percentage point behind Crackle.

In all likelihood, video consumption on Facebook outpaces Crackle, yet its low ranking in our surveys highlights that few people view Facebook as a destination for video, despite the copious amount of short clips and user-generated video on its app. The fight for longer video is intensifying fast. For proof, look no further than Amazon’s recent interception of NFL streaming rights from Twitter by paying 5x last year’s price, or the $6bn Netflix plans to spend this year on original content. Such outlays are causing a flood of TV-style programming on digital that’s likely to continue to attract audiences as the quality and amount of that content expands.

For its part, Facebook is pushing its way into this market through numerous product developments aimed at consumers, publishers and advertisers, including working with TV studios to develop content, launching an app for smart TVs and rolling out new video ad formats, such as ad breaks in Facebook Live. But it’s made its task all the more difficult by eroding trust among publishers with past measurement errors.

In some ways, Facebook’s current challenge resembles the shift to mobile that it successfully navigated in the months following its 2012 IPO – consumer attention then, as now, was moving to a new medium and Facebook had to keep pace. But in that first transformation, Facebook could rely on network effects to keep consumers in place while it built out mobile products. For this transition, Facebook will have to contort itself into a destination for active content consumption from the passive one it operates today.

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

Dealing with the dragon

Brenon Daly

Contact: Brenon Daly

A little more than a year after a Chinese consortium acquired slumping printer maker Lexmark, the group has sold off the company’s software business to Thoma Bravo. The enterprise software unit had basically been for sale since the Chinese buyout group, which is led by a hardware-focused firm, closed its $2.5bn take-private of Lexmark. Although terms of the sale of the software division weren’t formally released, media reports put the price at $1.5bn.

Assuming that price is more or less accurate (we haven’t been able to independently verify it), the deal would stand as the largest inbound acquisition of a Chinese technology asset, according to 451 Research’s M&A KnowledgeBase. Obviously, there have been larger transactions involving Chinese targets. But all 16 of those deals listed in our M&A KnowledgeBase have seen fellow Chinese companies as the buyer. Overall, our data indicates that slightly more than half of all China-based tech vendors sell to Chinese acquirers, although the top end of the market is unanimously weighted toward domestic transactions.

Clearly, although owned by a Chinese group, the Lexmark software division is hardly a ‘Chinese company,’ in the sense of a domestically headquartered operation that does the majority of business in its home market. Lexmark had cobbled together its software unit from roughly a dozen acquisitions of enterprise software providers based in North America and Europe. (451 Research will have a full report later today on how the acquired software business will fit into Thoma Bravo’s portfolio and what impact the deal will have on the broader business process and content management markets.)

Nonetheless, this landmark transaction comes at a difficult time in US-Sino relationships. President Donald Trump has blasted the currency and trade policies of China, although he did tone down his criticism during last month’s meeting with his counterpart, Xi Jinping. Despite the apparent thaw, the relationship between the world’s two largest economies remains chilly. That’s having an impact on M&A, which is a form of ‘international trade’ of its own. In a survey last month of 150 tech M&A professionals, more than half of the respondents (55%) predicted that US acquisitions of Chinese companies would decline because of President Trump’s trade policies. Just 7% forecast an uptick, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.

For a more in-depth look at the trends and concerns around doing deals in China, be sure to join our webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. The webinar is open to everyone, and you can register here.