For tech M&A, above-market deals are running behind

Brenon Daly

Contact: Brenon Daly 

If spending on tech M&A was sporadic in the opening quarter of 2017, the valuations paid in those deals largely held to typical patterns. There were a handful of transactions sporting enviable double-digit multiples, along with a whole backlog of deals that printed in the low single digits. Between those bands, however, there was one range that generally features a host of transactions but has been relatively quiet so far this year: slightly above-market valuations.

Specifically, the January-March quarter recorded just three deals that valued target companies at 6-8x trailing sales, according to 451 Research’s M&A KnowledgeBase. That’s fewer than any quarter in 2016, and just slightly more than half the average number of similarly valued transactions each quarter last year. Given the generally lumpy nature of M&A, we obviously don’t want to make too much out of pricing trends in any single quarter. But it is important to note the falloff in activity because this valuation range often stands as a fairly accurate barometer for the health of the overall M&A market.

Yet this segment gets ignored, with more attention paid to splashy, headline-grabbing deals such as Cisco lavishing $3.7bn on AppDynamics, a company that barely cracked $200m in revenue last year. For a variety of reasons, however, we wouldn’t hold out this transaction as representative of the nearly 1,000 deals tallied last quarter in the M&A KnowledgeBase. (Cisco, which is trading at its highest level since the internet bubble, had to outbid Wall Street for AppDynamics, at a time when ‘dual tracking’ still isn’t much of a threat. As if to indicate that, indeed, those were rather singular influences on the deal, consider the fact that AppDynamics garnered the highest price for any VC-backed startup in three years.)

Instead, we would look below those one-off transactions. More relevant to most tech acquirers are deals where they have to stretch, but not contort, on pricing. These transactions – carrying, again, a 6-8x multiple and generally falling in the midmarket in terms of size – tend to serve more usefully as comparable deals for the corporate and financial acquirers that do the overwhelming majority of tech M&A. Here we’re talking about recent transactions such as Akamai reaching for SOASTA, or Hewlett Packard Enterprise further bulking up its storage portfolio with SimpliVity. Both of those deals fall into the 6-8x sales range (according to our understanding) and represent decidedly midmarket bets by big-name buyers. In other words, just the sort of transaction that’s vital to the broader tech M&A market, but generally gets overlooked – particularly so far this year.

After a slow start for tech M&A, business picks up late in Q1 

Brenon Daly

Contact: Brenon Daly 

After record spending in the tech M&A market in 2015 and 2016, dealmakers took a little while to get going this year. The value of tech transactions in both January and February slumped to the lowest consecutive monthly totals since 2013, according to 451 Research’s M&A KnowledgeBase. The two-year surge seemingly led to a two-month slump, as buyers digested their acquisitions. By the final month of the first quarter, however, acquirers were back in business, spending as much in March as they did in the two previous months combined.

Altogether, as tallied by the M&A KnowledgeBase, worldwide spending on tech and telecom deals in the first three months of 2017 hit $77bn, essentially flat with the opening quarter last year. However, the value of transactions announced in each of the subsequent quarters in 2016 accelerated dramatically from last year’s sluggish start, with average quarterly spending for Q2-Q4 coming in nearly twice the level of Q1.

Matching last year’s acceleration in spending may be a challenge for the rest of 2017, as buyers are on pace to do substantially fewer deals this year. That’s true for both broad tech M&A as well as the top end of the market. The first quarter’s deal volume of 910 represents a decline of roughly 12% compared with the January-March period in the previous two years. More significantly, tech acquirers announced fewer transactions valued at more than $1bn in the just-completed quarter than in any other quarter in more than three years.

An earthbound IPO for Cloudera

Brenon Daly

Contact: Brenon Daly 

Looking to extend the current bull run for enterprise software IPOs, Cloudera has taken the wraps off its prospectus and put itself on track to hit Wall Street in about a month. Assuming the debut follows that schedule, the heavily funded Hadoop vendor would be the third infrastructure software provider to come public in six weeks, following MuleSoft and Alteryx. Unlike the debuts of those two other software firms, however, Cloudera’s IPO will almost certainly be a down round.

Three years ago, when Cloudera’s quarterly revenue was less than half its current level, Intel acquired 22% of the company at a valuation of $4.1bn. Since then, both the company and other equity holders agreed that ‘quadra-unicorn’ valuation got a little ahead of itself and have priced Cloudera shares below Intel’s level of just less than $31 each. (In contrast, MuleSoft has more than doubled its final private market valuation on Wall Street.) Cloudera – along with its nine underwriters, led by Morgan Stanley, J.P. Morgan Securities and Allen & Co – should set the inaugural public market price for shares in about a month.

Because Wall Street likes to use a ‘known’ to help assign value to an ‘unknown,’ investors will look at Cloudera’s future trading valuation relative to the current trading valuation of fellow Hadoop provider Hortonworks. However, that comparison won’t particularly help Cloudera get any closer to its previous platinum valuation. Hortonworks currently has a market capitalization of just $650m, or 3.5x its 2016 revenue and 2.7x its forecast revenue for 2017.

The two Hadoop-focused companies actually line up fairly closely with one another, financially. Cloudera and Hortonworks hemorrhage money, largely because of huge outlays on sales and marketing. (Both firms spend roughly twice as much on sales and marketing as they do on R&D.) Cloudera is nearly one-third bigger than Hortonworks, recording $261m in sales in its most recent fiscal year compared with $184m for Hortonworks. Both are growing at about 50%.

Within that revenue, both Cloudera and Hortonworks wrap a not-insignificant amount of professional services around their product, which weighs on their margins and, consequently, their valuations. Both are consciously shifting their revenue mix. Cloudera is further along in moving toward a ‘product’ company, with professional services accounting for 23% of revenue in its latest fiscal year compared with 32% for Hortonworks. That progress is also reflected in the fact that Cloudera’s gross margins are several percentage points higher than those at Hortonworks, although both are still low compared with pure software providers. (For instance, MuleSoft, which also has a professional services component, has gross margins in the mid-70% range, about seven percentage points higher than Cloudera.)

With its larger size and more-efficient model, Cloudera will undoubtedly command a premium to Hortonworks. (That will come as a relief to Cloudera because if Wall Street simply valued the company at the same multiple of trailing sales it gives Hortonworks, Cloudera wouldn’t even be a unicorn.) We’re pretty sure Cloudera will come to market with a ‘three-comma’ valuation, but it won’t be near the $4bn valuation Intel slapped on it. Perhaps Cloudera can grow into that one day, but it certainly won’t start out there.

Accenture buys Genfour for robotic process automation 

Scott Denne

Contact:  William Fellows 

Accenture is looking to stay ahead of a sudden surge of robotic process automation (RPA) offerings from consultants, outsourcers and software vendors. The company has acquired Genfour, a Wales-based RPA services provider, to tackle the most immediate opportunity for machine learning in IT services.

Many IT services providers were quick to jump on the artificial intelligence (AI) bandwagon and most have scaled that back a bit, recognizing that low-level process automation is a more immediate opportunity than large transformative AI projects. RPA typically involves using software to replace repetitive human tasks like processing forms or entering data. As we’ve discussed in other reports, although digital transformation projects get much of the attention from IT services firms, narrower automation projects are a much easier sell and more urgent for those services companies that have historically relied on overseas labor arbitrage to drive their businesses.

Founded in 2012 with a focus on the finance and utilities sectors, Genfour is one of a handful of RPA specialists. Others include services shop AutomateWork, software vendor Blue Prism, RPAi, Lateetud and Symphony Ventures. The need for RPA products has begun to trickle into M&A moves. It was part of the rationale behind CSC’s $720m acquisition of Xchanging 18 months ago, and business process management software provider Pegasystems spent $52.3m last April to purchase OpenSpan for its RPA capabilities.

Genfour marks Accenture’s third machine-learning acquisition in the past 12 months. Accenture is an outlier in that respect. Aside from IBM, most other IT services companies haven’t expanded their machine-learning offerings through M&A. Yet, with the push toward automation and an expected overall increase in machine-learning deal flow, we could see more consolidation. In 451 Research’s Tech Banking Outlook Survey, a full 82% of respondents projected an increase in deal flow in that category in 2017.

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

Extreme’s not horsing around, buys Brocade’s datacenter networking assets 

Scott Denne

Contact: Jim Duffy 

As it stalks one horse, acquisition-hungry Extreme Networks has saddled up another. The suddenly feisty enterprise networking vendor has picked up Brocade’s datacenter business – another piece of Brocade that acquirer Broadcom is not interested in owning. Extreme is benefiting from that lack of interest, paying just a fraction of the asset’s annual revenue.

Even for a bargain shopper like Extreme, the deal comes at a steep discount. According to 451 Research’s M&A KnowledgeBase, Extreme has made just five acquisitions in the past 15 years. Three of them have come in the past seven months. The company recently bought Avaya’s networking business ($100m) and Zebra Technologies’ WLAN unit ($55m). In both transactions, it valued the target at about 0.5x revenue, the same multiple it paid in its 2013 purchase of Enterasys.

Extreme will pay $35m upfront and $20m in deferred payments for Brocade’s VDX, MLX and SLX routing and switching assets, plus its analytics software. Although revenue from the Brocade assets have declined amid the uncertainty over who might ultimately own them, the unit is expected to add $230m to Extreme’s top line in its next fiscal year. This deal, combined with its weeks-old stalking-horse bid for Avaya’s assets, could push its annual revenue beyond $1bn and make Extreme the third-largest wired and wireless enterprise networking equipment provider behind Cisco and HPE.

The divestiture comes as Broadcom is looking to close its acquisition of Brocade’s Fibre Channel business, while shedding the target’s networking equipment assets – Brocade’s Ruckus Wireless WLAN unit was snagged by ARRIS a few weeks ago. Today’s transaction is contingent upon the close of Broadcom’s purchase of Brocade, which is expected in July. Finalization of Extreme’s buy is expected 60 days after that. In addition to the cash consideration, Broadcom is already Extreme’s largest supplier and the acquirer says it will increase its current $100m annual spending with Broadcom.

Customer overlap was minimal, as Brocade’s datacenter business was targeting large enterprise core datacenters with more than 2,000 physical servers, while Extreme was concentrating on the campus edge (WLAN and access switching, and fewer than 2,000 servers). The two have joint customers, for example, that use Brocade in the datacenter and Extreme at the WLAN edge. Nonetheless, Extreme says it will obtain 6,000 customers using Brocade’s VDX, MLX and new SLX routers and switches.

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

Mastercard makes an antifraud deal of its own 

Scott Denne

Contact: Jordan McKee 

After December reaches by Visa and American Express for card-not-present (CNP) antifraud providers, Mastercard makes its move in this space. With the purchase of NuData Security, it gains digital identity and behavioral biometrics capabilities that will play an important role as EMV and growing transaction volumes continue to push fraud into digital channels.

A recent study of 500 US merchants by 451 Research underscored the severity of this problem, showing that 60% of respondents are experiencing an increase in fraudulent activity in their digital commerce channels compared with this time last year. This problem will only be exacerbated as the Internet of Things (IoT) spreads commerce into myriad new connected devices, increasing chargeback and data breach risks for merchants.

Given its scale and complexity, IoT presents a security threat an order of magnitude greater than anything the payments industry has previously experienced. Payment networks and their partners are increasingly being required to operate in foreign environments that differ greatly from traditional CNP channels, such as web browsers. The spread of commerce to new connected endpoints will require new technology, talent and security approaches to ensure that the integrity of the card issuance ecosystem remains intact.

While Mastercard has positioned its pickup of NuData as an IoT antifraud play – and could conceivably extend NuData’s technology into various IoT settings over time – we see near-term applicability to traditional CNP antifraud use cases. In particular, its work around digital identity and biometrics will help extend Mastercard’s security efforts from the network to the device, helping to combat the wave of fraud currently occurring in mobile and e-commerce. Terms of the deal weren’t disclosed. NuData had about 70 employees.

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

For tech IPO market, it’s variety not volume

Brenon Daly

Contact: Brenon Daly 

This time last year, the only sound coming from the tech IPO market was crickets chirping. Not a single company made it public in Q1 2016, the first quarterly shutout since the end of the recent recession. So far this year, there’s a lot more going on, even if the recent activity lags what we might have expected after a prolonged listless period for new listings.

What the current IPO market lacks in depth, however, it more than makes up for in variety. Just since 2017 opened, we’ve seen a number of ‘outlier’ events, including a multibillion-dollar dual-track exit, a unicorn rewarded on Wall Street, the largest consumer Internet offering in three years, and even a company use the circuitous route of a blank-check deal to go public. You know it’s a strange time for IPOs when a company that had been planning to go public on the Nasdaq but opted for a sale instead goes ahead and rings Nasdaq’s opening bell when that deal closes, as AppDynamics did.

There are other indicators of just how hard the tech IPO market is to read right now, including:
-AppDynamics scrapping its planned offering after Cisco swept in with a too-rich-to-pass-up $3.7bn offer in January, days before the software vendor was set to debut on Wall Street. As rich as AppDynamics’ sale was, however, the deal looked like a discount when fellow infrastructure software provider MuleSoft did hit the market almost two months later. MuleSoft’s trading valuation nearly matches AppDynamics’ terminal value, which included a premium.
-Both of the enterprise-focused tech firms that have gone public so far this year (MuleSoft and Alteryx) raised more money from private market investors than they did from Wall Street.
-And what to say about the IPO of Snap, which lost more money in 2016 than it took in as revenue? A five-year-old company that starts its prospectus by talking about ‘eyeballs,’ and then doesn’t give investors any say about how the business should be run in any case? A media company that went public just as it was experiencing its slowest audience growth? Despite all of those questionable metrics, Snap created more than twice the market value of all enterprise tech IPOs last year.

With Okta set to debut next week and several Hadoop vendors reportedly close to revealing their paperwork, the tech IPO market has enough to keep it going for the next few weeks. However, that doesn’t necessarily mean that Wall Street will be as welcoming as it has been. The US equity indexes are about 25% higher than they were during the bear market that mauled investors in the opening months of 2016. Yet all of the indexes have recently reversed, and are in the red for the past month. Meanwhile, 451 Research surveys of investors have shown a steady erosion of confidence in the stock market, which could give them pause before buying shares in any of the unknown and unproven tech startups looking to go public.

Alteryx makes it two software IPOs in two weeks

Brenon Daly

Contact: Brenon Daly 

Data analytics vendor Alteryx has made its way to Wall Street, the second enterprise software provider to go public in as many weeks. The IPO, which raised $126m for the company, comes on the heels of a more-ebullient offering from MuleSoft. Together, the two oversubscribed IPOs indicate that the market for new offerings has rebounded from this time last year, when not a single a tech company made it public until late April.

Alteryx priced its shares at $14 each, and then edged higher to $15.50 on the NYSE during afternoon trading. With roughly 58 million (non-diluted) shares outstanding, the company is valued at about $900m. While MuleSoft more than doubled its private market valuation when it hit Wall Street, Alteryx’s IPO pricing is only slightly above the level it last sold shares to private investors in September 2015.

Although Alteryx debuted at a more modest valuation compared with MuleSoft, it did secure a double-digit multiple, albeit barely. Wall Street is valuing Alteryx, which recorded $86m in revenue last year, at 10 times trailing sales. That compares with about 16x for MuleSoft in its debut. The reason for the discrepancy? MuleSoft is more than twice as big and growing faster, increasing 2016 revenue by 71% compared with the 59% year-over-year growth for Alteryx. (Whether the comparison between the two vendors is fair or not, it is perhaps inevitable given the timing of their IPOs.)

In terms of future growth, Alteryx does face some challenges, as we have noted. Currently, the company focuses primarily on transforming and cleansing data and analyzing it using a combination of internally developed algorithms and functions based on the R open source computing statistical computing environment. Its own visualization and discovery capabilities are rather limited. Alteryx partners with Tableau, Qlik and Microsoft (Power BI) for this technology.

However, this partnership strategy could inhibit the company’s future expansion because visualization and data discovery are useful for attracting less-technical end users, which it will need to do to increase the number of users of its technology. Right now, Alteryx’s users are largely data analysts even though the company markets itself as a self-service data analytics vendor for technical and nontechnical end users.

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

With sharp elbows and deep pockets, PE gets busy

Brenon Daly

Contact:  Brenon Daly

With sharp elbows and deep pockets, private equity (PE) shops have announced more deals so far this year than the opening quarter to any year since the end of the recent recession. Already in 2017, 451 Research’s M&A KnowledgeBase has tallied 165 transactions by PE firms and their portfolio companies, a 15% jump from the previous record in Q1 2016. More broadly, buyout shops are currently about twice as busy as they were just a half-decade ago. Cash-rich financial acquirers represent the only significant group that’s accelerating activity in an otherwise slowing tech M&A market.

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing shops have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital Group and TA Associates have already announced as many deals in 2017 as each of the firms would typically print in an entire year.

Of course, merely having record amounts of money doesn’t necessarily mean that firms will do more shopping. After all, that hasn’t been seen among corporate acquirers, which stand as the main rivals to PE shops. Tech companies that trade on the NYSE and Nasdaq have never had fatter treasuries than they do now, but the number of acquisitions they announced in 2016 dropped 11% compared with 2015, according to the M&A KnowledgeBase. In contrast, PE firms registered almost exactly the inverse, with the number of transactions increasing 13% in 2016 from 2015.

As financial acquirers step up their activity and strategic buyers step back, the once-yawning gap between the rival buying groups is narrowing. In the years immediately after the recent recession, tech companies listed on US exchanges regularly put up twice as many prints as PE firms. However, for full-year 2016 and so far in 2017, M&A volume for corporate acquirers is only about 30% higher than their financial rivals, according to the M&A KnowledgeBase.

Adobe’s search for markets beyond the web 

Scott Denne

Contact: Scott Denne 

Adobe is extending its ambitions beyond the website. Having thrived in the first iteration of digital marketing, the vendor is turning its attention to the next one – where software has a role in all of a business’ customer interactions, not just those coming in through the homepage. It needs a wider set of software to capture that larger market opportunity and fend off old adversaries in web marketing, as well as new ones in segments such as mobile marketing, e-commerce software and customer service that are eyeing the same prize.

Today Adobe opens Summit, its annual marketing conference, with the theme of building customer experiences. It’s roughly the same theme as last year’s show, with the subtle shift that much of the content has a more instructional bent, whereas last year Adobe was more intent on convincing marketers that customer experience matters in the first place. In the intervening time, there’s been a correspondingly subtle shift in the company’s M&A strategy. Its most recent acquisition wasn’t just a bolt-on to sell into its existing sales channel like past deals. It was an attempt to open up a new path to market for its products.

Adobe entered digital marketing almost eight years ago with the $1.8bn purchase of website analytics company Omniture and followed that, according to 451 Research’s M&A KnowledgeBase, with $2bn worth of M&A that took its capabilities beyond the website, but always with an eye toward adding products that it could upsell to web-oriented digital marketers. In the last quarter, its marketing unit grew 26% year over year to $477m in revenue.

Its latest acquisition, TubeMogul, stands out not so much for its size ($540m) as for the fact that its video media-buying software is built for brand managers and TV media planners – a group with far different priorities than digital marketers, and access to larger budgets. The deal, along with Adobe’s messaging, show that it’s ready to start exploring purchases that will enable it to sell to marketers that don’t have a website-first bent and to other customer-facing parts of a business.

Increasing its appeal to mobile app developers and app-centric marketers would be a logical next step from Adobe’s roots in web marketing. Both mParticle and TUNE would serve as a cornerstone acquisition in that space – the latter for its breadth of mobile analytics and marketing tools, the former for its customer data platform that plugs into most mobile app tools. Adobe may also look to add to its e-commerce capabilities by reaching for a larger social media management product or even expanding into customer service software. Whatever its next move, Adobe seems intent on doing more these days than refreshing its website-based marketing business.