How to get your tech M&A playbook for 2017

Brenon Daly

451 Research’s annual look back on the year that was and look ahead to the year that’s coming in technology M&A has been moved in front of our paywall. (Click here to access the report.) The broad-market overview highlights many of the trends that drove acquisition spending to a surprisingly strong $500bn in 2016, and predicts how those will play out in 2017. The 5,500-word introductory report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – opens our full M&A Outlook, an 80+-page analysis of M&A drivers and predictions on M&A and IPO trends and activity in specific sectors of the IT market.

The full report, which serves as an ‘M&A playbook’ for many of the tech industry’s main acquirers, offers an in-depth forecast of trends that will likely shape dealmaking in eight segments of enterprise information technology, including information security, mobility and software. The full M&A Outlook report will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and M&A KnowledgeBase Premium, and will be available for purchase for 451 Research clients and others that don’t subscribe to our premium KnowledgeBase products. 451 Research will publish our full M&A Outlook – including the Introduction, which is available now, and the eight individual sector reports – in early February.

PE-backed StorageCraft crafts another deal

Brenon Daly

Contact: Steven Hill Brenon Daly

In the year since TA Associates picked up StorageCraft Technology, the data-protection vendor has been working to build out a broader vision for metadata-rich data protection and management. Its latest move adds scale-out NAS appliance vendor Exablox, already an existing partner. Terms weren’t disclosed. The purchase of Exablox is StorageCraft’s second acquisition since being bought by private equity firm TA Associates, and comes five months after it snagged data analytics startup Gillware Online Backup.

This deal further extends an existing partnership between Exablox’s object-based core technology and StorageCraft, which has focused its recent strategy on metadata-based, long-term data management and protection. Both companies stressed that Exablox appliances will continue to be marketed for both primary storage and secondary storage applications, as opposed to a dedicated backup appliance only. The pairing has potential benefits for both companies, in particular adding StorageCraft’s ShadowProtect data protection and Gillware-based data intelligence enhancements to the Exablox platform.

From our perspective, the transaction reflects an increasing awareness of the importance of metadata as part of a larger vision for long-term data protection and management across the industry. Data growth is a given, and these vendors recognize that the next generation of storage requires greater intelligence about the data itself. Buying Exablox should allow StorageCraft to add closely integrated, on-premises storage offerings as an extension of its existing cloud, SaaS, storage analytics, data-protection and DR/BC portfolio. With the scarcity of funding available for storage and infrastructure companies, we expect more vendors to use deals such as StorageCraft’s reach for Exablox to expand their technology and market opportunity.

ServiceNow adds some smarts to the platform with DxContinuum

Brenon Daly

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

Now available: 451 Research’s 2017 M&A Outlook

Brenon Daly

Contact: Brenon Daly

Each year, 451 Research looks ahead to the coming year in M&A, highlighting the trends that will shape deal flow and the markets that are expected to see much of the activity. The report, which serves as an ‘M&A playbook’ for 2017, is now available to 451 Research subscribers.

Topics covered in the latest edition of the M&A Outlook include:

  • Besides the ‘usual suspects,’ which other tech acquirers stepped up their shopping in 2016 and are likely to accelerate that pace this year? If companies including Dell, Twitter and Dropbox aren’t buying any longer, where is the demand going to come from?
  • Specifically, which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security and mobility lead the forecast, but what about emerging cross-sector themes such as the Internet of Things and big data?
  • What’s shifted in the exit environment for VC-backed companies to open the way for some of the startups to realize ‘unicorn’ prices in the real world? And will 2017 (finally) see a rebound in the tech IPO market?
  • With president-elect Donald Trump set to officially take over as CEO of the US next week, why are corporate acquirers expecting a ‘Trump rally’ in the tech M&A market? What about buyers coming from China, who spent more acquiring US tech firms in 2016 than the previous five years combined?

The 5,500-word report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – thoroughly and insightfully covers last year’s activity as well as this year’s forecast. Get your copy of the M&A Outlook now.

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

Machine learning and the M&A machine

Brenon Daly

Contact: Brenon Daly

Coming off a 60% increase in the number of machine-learning-related transactions last year, the trend of adding ‘smarts’ to technology looks likely to drive even more deals in 2017. Senior investment bankers picked machine learning as the top M&A theme for the coming year in last month’s 451 Research Tech Banking Outlook Survey, with more than eight out of 10 respondents (82%) predicting an uptick in activity. That outlook for machine learning outpaced the view in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

One of the reasons why machine learning (and the related – but broader – theme of artificial intelligence) is expected to figure into so many transactions is that the technology is broadly applicable. Basically, any company that is looking to make its products more efficient – which, in turn, makes the users of those products more efficient – could be viewed as a potential acquirer of machine-learning technology. (To be clear, our view of machine learning is that the technology is a subset of artificial intelligence, focused on using algorithms that learn and improve without being explicitly programmed to do so. For a more in-depth look at the AI/ML market, see our recent sector overview led by my colleague Nick Patience.)

Certainly, machine learning appears to be an almost foundational technology when we consider the broad pool of buyers. Just in the past year, acquirers as diverse as Ford Motor, Salesforce, Intel and GE Digital have all announced machine-learning-related transactions, according to the M&A KnowledgeBase. Those deals have been part of a surge of M&A that saw buyers announce as many machine-learning-themed purchases in 2016 as they did from 2002-14, according to the M&A KnowledgeBase.

Atlassian inks its biggest buy with $425m collaboration software deal

Scott Denne

Contact: Scott Denne

Atlassian has stormed into the New Year with its largest acquisition to date – the $425m pickup of collaboration software maker Trello. With this deal, Atlassian has printed at least a dozen purchases yet, until now, spent little money to do so. And though today’s transaction is an outlier for the project management software vendor, it continues the uptick in collaboration software M&A that we saw in 2016.

The Australia-based acquirer will pay $360m in cash for Trello, the remainder of the price tag being restricted stock and options. Compare that with the approximately $30m it shelled out across its previous four acquisitions. Atlassian is spending that kind of cash because Trello should give it another bridge to move its own collaboration products beyond the software developer market – the target’s task management software was built for a general business audience and boasts 19 million free and paying users.

A notable reason why Atlassian hasn’t spent significant sums prior to this deal is because few companies fit with its business model – it doesn’t have any sales staff. That limits the pool of potential targets because buying any enterprise software vendor with a sales team (and most of those commanding a nine-figure price have one) would be a risky integration process.

Having now spent a significant sum on office software, Atlassian joins others that have pushed acquisitions of collaboration and project management tools to a near record as mobile devices, remote workforces and SaaS delivery models conspire to change how work gets done. According to 451 Research’s M&A KnowledgeBase, buyers spent $3.7bn on purchases in this segment in 2016. That’s more than twice the spending of any year since 2007, when a single transaction – Cisco’s $3.2bn reach for WebEx – accounted for nearly all of the deal value. By contrast, no acquisition in 2016 crossed the $1bn mark.

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

The where and how of tech M&A in 2017

Brenon Daly

Contact: Brenon Daly

After a surprisingly strong year for tech M&A spending in 2016, it’s natural to look ahead to this year and wonder how – and where – dealmaking will play out. To get a sense of that, we asked the primary players in the market for their specific forecasts on acquisition activity, valuations and even IPOs. 451 Research subscribers can see the full report on our tenth-annual 451 Research Tech Corporate Development Outlook Survey, as well as our twelfth-annual 451 Research Tech Banking Outlook Survey.

In addition to both survey groups offering their broad forecasts for tech M&A, we also asked specific questions about topics that will undoubtedly shape the market in the coming year. A quick highlight from each of the surveys:

  • A plurality of corporate acquirers are anticipating a ‘Trump rally’ in the tech M&A market in 2017. Half of the respondents (49%) expect the political and economic changes from the president-elect’s policies to ‘stimulate’ M&A activity – three times the percentage (16%) that said the policies will ‘inhibit’ dealmaking in the coming year.
  • Tech bankers expect even more M&A spending on enterprise security in the coming year. They also picked that as the top sector for 2016, and they were on to something: Spending on enterprise security soared to a record $16.7bn, more than the two previous years combined, according to 451 Research’s M&A KnowledgeBase.

Again, to see our full report on the M&A outlook from many of the most-active corporate acquirers, click here; and to see our full report on the views and predictions from senior tech investment bankers, click here.

A half-trillion-dollar year for tech M&A

Brenon Daly

Contact: Brenon Daly

Even after a record tech M&A run in 2015, dealmakers still had ambitious shopping plans for 2016. Across the globe, tech acquirers announced $500bn worth of transactions in the just-completed year, ranking 2016 as the second-highest annual total for spending since the internet bubble burst in 2000, according to 451 Research’s M&A KnowledgeBase. The unexpectedly strong spending last year came as the number of deals valued at $1bn or more soared to a new record, thanks in no small part to unconventional buyers ready to write big checks.

Although overall M&A spending dropped just 15% year over year in 2016, the year started much slower. In the opening months, the value of announced transactions was running at only half of 2015’s average monthly level. Only a summer surge pulled last year above a middling performance. In the back half of 2016, companies shrugged off the political shakeups in the European Union and the US and inked big deals. Nearly two-thirds (63%) of last year’s total announced M&A spending came in the final six months of the year, according to the M&A KnowledgeBase.

Even with the decline in the aggregate value of tech transactions in 2016, spending has still increased for three of the past four years. That surge, which has seen the annual amount of money spent on acquisitions more than double over the period, has expanded the pool of tech buyers beyond the ‘usual suspects’ of big-name corporate acquirers. For example, private equity firms announced more transactions in 2016 than any year in history, with spending soaring to its highest level since before the recent recession, when ‘club deals’ were all the rage. Also, Asian-based tech companies accounted for 16 of the 98 transactions valued at $1bn or more, an unprecedented share of the top end of the M&A market for the traditionally conservative shoppers.

As to where that leaves tech M&A for 2017, we’ll have some predictions about that from the main participants in the market later this week. In mid-December, 451 Research surveyed – separately – both corporate development executives and senior investment bankers to get a sense of their plans and pipeline for the coming year. One high-level finding: for the first year in the decade of surveying both groups, the forecasts didn’t exactly line up with one another. Uncharacteristically, bankers sounded a bearish tone for 2017, while corporate executives plan to ramp up their shopping. Look for full reports on the outlook and reasoning from both groups later this week.

 

Late-cycle tech M&A late in the year

Brenon Daly

Contact: Brenon Daly

As 2016 winds down, the deals so far this month are looking a little tired as well. At the top end of the market, December’s prints have been dominated by classic late-cycle M&A, with well-established buyers such as telcos and private equity (PE) firms consolidating a number of mature sectors. Since the start of the month, tech and telecom acquirers have spent $35.1bn on 204 transactions around the world, according to 451 Research’s M&A KnowledgeBase.

Nearly half of this month’s total spending has come in a single deal: 21st Century Fox’s reach for British entertainment communications provider Sky. (It paid $14.8bn for the 61% stake of Sky that it didn’t already own.) In many ways, that old-line consolidation set the tone for dealmaking this month, which was characterized by conservative strategies and valuations. Other similar large transactions in December have included Equinix’s $3.6bn pickup of 29 datacenters from Verizon, Golden Gate Capital’s $1.8bn take-private of Neustar and Blackstone Group’s sale of Optiv Security to fellow PE shop KKR.

The valuation of these acquisitions underscores the fact that December dealmaking has featured more ‘value’ than ‘growth’ strategies. All five of this month’s biggest deals have gone off at less than 4.4 times trailing sales, which is the average multiple for the 50 largest transactions announced overall in 2016, according to the M&A KnowledgeBase. On average, buyers in December have paid 3.3x trailing sales, a full turn lower than they did in the previous months of the year.

2016 tech M&A activity, monthly

Period Deal volume Deal value
December 1-22 2016 204 $35.1bn
November 2016 272 $38.2bn
October 2016 323 $82bn
September 2016 298 $30bn
August 2016 304 $31.2bn
July 2016 339 $93.9bn
June 2016 383 $67bn
May 2016 328 $22.4bn
April 2016 348 $20.7bn
March 2016 339 $23.9bn
February 2016 322 $28.3bn
January 2016 383 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Divestitures push infrastructure M&A to a new high

Scott Denne

Contact: Scott Denne

Shuffling ownership, rather than a reach for strategic technologies, drove acquisitions of infrastructure management technologies to new highs in 2016. As we head into next year, we expect the rising spending on cloud – both SaaS and IaaS – to ignite dealmaking, while take-privates and divestitures decline.

Total M&A spending on infrastructure management jumped 57% to $15.2bn, with the volume of transactions rising to 152 from 146 as we near the end of 2016. Big-ticket acquisitions led to the increased spending in infrastructure software. The same is true of many other categories of tech that had a record 2016 – software applications, internet and semiconductors, for example. Unlike those sectors, aging assets with reliable cash flows, rather than growth opportunities at high valuations, characterized dealmaking in infrastructure management.

The two largest transactions in this space – Hewlett Packard Enterprise’s $8.8bn sale of its software business to Micro Focus and Francisco Partners’ purchase of Dell’s software unit (which we estimate had a multibillion-dollar price tag) – were both divestitures that were scooped up for their ability to generate cash, not growth. While there could continue to be some profit-driven consolidation, private equity looks to be less of an influential player in this category as debt became more expensive in the waning months of 2016 and many of the largest firms have already executed sizeable take-privates in this category in recent years.

Amid an overall slowdown in IPOs, just one infrastructure management vendor, Apptio, debuted on one of the major US exchanges. Despite (and partially because of) that slow volume, there’s an appetite for growth that could be an outlet for infrastructure startups in 2017. With just 25% in annual growth in its most recent quarter, Apptio currently fetches 5x trailing revenue on the public markets.

What’s likely to lead to the next wave of M&A in 2017 is the growing dependence of businesses on SaaS and IaaS. According to 451 Research’s most recent Voice of the Enterprise survey, the share of respondents who said their companies use SaaS increased from 54% in 2015 to 63% this year, while those using IaaS were up from 33% to 39% – private cloud usage, on the other hand, declined in the same survey.

Those trends could push incumbents toward new technologies, or provide an opportunity for growth businesses to increase their footprint in infrastructure. However, few – if any – targets that specialize in cloud are likely to command the multibillion-dollar price tags that the software units of HPE and Dell scored.

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