Despite favorable winds, few tech startups set sail to Wall Street

Brenon Daly

Contact: Brenon Daly

Calm seas and favorable winds usually encourage ships to launch onto the open ocean, but that hasn’t been the case for tech startups. The number of enterprise-focused companies that have set sail to Wall Street this year is once again mired in the single digits. That’s a disappointment given the abundant IPO-ready tech vendors and a bullish investor base that has pushed the broader US equity market to record levels in 2016.

By our count, just eight enterprise tech firms have made it public on the two major US exchanges so far this year, matching the total from 2015. The flatlining IPO total comes as US equity markets this year have vastly outperformed last year, while overall volatility has remained relatively muted. The lackluster tone for 2016 started early, with not a single tech company making it public in Q1. That marked the first quarterly shutout for tech IPOs since the end of the recent recession.

After a mini-bear market on Wall Street in the first quarter, both the Dow Jones Industrial Average and the S&P 500 moved into the green and haven’t slipped back since. (The Nasdaq took another quarter to get above water, but has been solidly positive since last summer on its way to posting what looks set to be a gain of just under 10% this year.) These advances have come as market uncertainty – as measured by the CBOE Volatility Index, or VIX – has stayed at historically low levels, spiking only in short-term reaction to the unexpected outcomes of June’s Brexit vote and the US presidential election in November.

Against this relatively welcoming backdrop, tech startups nonetheless passed on going public, and instead opted for M&A. We saw that this year from companies that had formally revealed their IPO plans (Blue Coat and Optiv were both acquired out of registration) as well as vendors that we had assumed were at some stage of IPO preparation (ServiceMax and Jasper Technologies).

As to where that leaves the IPO market for 2017, we’re currently surveying senior investment bankers and, separately, corporate development executives to get their outlook for new offerings next year. If you would like to participate in our annual survey, please email us and we will send you the correct survey for your thoughts on the IPO market as well as the M&A outlook for the coming year.

2016 enterprise tech IPOs*

Company Date of offering
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016
Nutanix September 30, 2016
Everbridge October 10, 2016
BlackLine Systems October 28, 2016
Quantenna Communications October 28, 2016

Source: 451 Research’s M&A KnowledgeBase *Includes Nasdaq and NYSE listings only

A few unicorns make it in the real world

Brenon Daly

Contact: Brenon Daly

After two years of existing mostly on paper, unicorns have finally started making it into the real world. And in no small part, it’s thanks to companies that do the vast majority of their business in the real world. This year has seen a record number of seven sales of VC-backed companies for $1bn or more, according to 451 Research’s M&A KnowledgeBase. That’s as many ‘unicorn’ exits as the two previous years combined.

The increase in the number of ‘three-comma exits’ is largely due to the broader trend of digital transformation, as companies that used to only do business in the brick-and-mortar realm acquire their way online. For instance, last summer, e-tailer Jet.com sold to Walmart for $3.3bn, representing the largest sale of a VC-backed vendor in two and a half years. Additionally, consumer products giant Unilever, which traces its roots back to the 1890s and generates some $56bn in revenue, paid $1bn for four-year-old online retail site Dollar Shave Club.

Non-tech acquirers buying their way into tech were also visible in the next band of transactions, just below the fabled unicorn status. The list of the shoppers so far in 2016 that have paid $500-999m for VC-backed startups includes names that wouldn’t typically find themselves on a tech M&A hit list, notably Ritchie Bros. Auctioneers and General Motors. Altogether, nine venture portfolio companies have signed off on deals valued at $500-999m in 2016, which essentially matched the average of the previous two years, according to the M&A KnowledgeBase.

To the relief of VCs, this trend is likely to continue as old-line industrial and manufacturing vendors as well as retailers use M&A to find new avenues of growth. Many of these would-be buyers are also enjoying some of the highest stock prices they’ve ever had, which is boosting their confidence to do big-ticket acquisitions in untested markets. It’s unlikely there will ever be a stampede of unicorns into the physical world. But in the coming years, a few of the venture industry’s highest-valued startups will undoubtedly continue to make their way to acquirers that they probably wouldn’t have ever imagined when they first launched their startup.

Acquisitions of VC-backed startups*

Year Number of transactions valued at $500-999m Number of transactions valued at $1bn or greater
YTD 2016 9 7
2015 9 1
2014 8 6
2013 7 2
2012 7 4
2011 7 1

Source: 451 Research’s M&A KnowledgeBase *Includes estimated and disclosed deal values

Debt, SaaS boost number of big-ticket software deals

Scott Denne

contact: Scott Denne

The combination of relatively receptive debt markets and a craving for SaaS vendors has pushed large-cap software M&A to a new high in 2016. According to 451 Research’s M&A KnowledgeBase, there have been 14 software acquisitions valued at $1bn or more, four more than last year and two more than the previous record. Among this year’s big prints, six were SaaS targets, compared with just one for all of last year.

NetSuite’s sale to Oracle tops the list of this year’s software deals at $9.5bn. Oracle’s need to expand its cloud suite into new lines of business and, relatedly, its push into midmarket enterprises drove that transaction. (The purchase by the serial acquirer stands as the second-largest in its history.) Meanwhile, rival Salesforce printed its largest deal with the $2.8bn reach for e-commerce SaaS firm Demandware as it continues to use M&A to extend its cloud beyond its core CRM offering. These two prints, both valuing their targets at 11x, led to a rise in multiples on large software transactions.

We recorded six $1bn-plus software deals that topped the 5x trailing revenue mark this year, triple last year’s total for above-market multiples, according to the M&A Knowledgebase. The median price-to-sales multiple rose to 4.8x in 2016, up from 3.6x in 2015, a year when Permira’s $5.3bn take-private of aging Informatica was the biggest software print. That acquisition was representative of a typical private equity (PE) transaction last year. In 2016, buyout shops dramatically changed their strategies, a key reason for the overall record number of significant software deals.

Like enterprise software’s most celebrated names, PE firms also had an appetite for SaaS – almost one out of three $1bn software transactions this year involved a PE shop buying a SaaS vendor. More striking was their willingness to pay premium multiples for growth companies, some of which didn’t even put up any cash flow. For instance, Vista Equity Partners paid 8x to take both Cvent ($1.7bn) and Marketo ($1.8bn) off the public markets, while EQT paid 6.8x and 5.2x, respectively, for Press Ganey Associates ($2.2bn) and Sitecore ($1.1bn).

Like the PE firms, debt played a part in helping enterprise software giants ink this year’s largest software deals. Oracle sold $14bn in bonds weeks before announcing the NetSuite buy and Salesforce took out a $500m loan to help pay for Demandware. The rising cost of debt in the final months of 2016 could well indicate a lighter year for big-ticket software transactions going into 2017.

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

For tech M&A, the big hits just keep coming

Brenon Daly

Contact: Brenon Daly

Even though the overall number of tech deals is tracking to a roughly 10% decline this year compared with last year, the top end of the market is busier than ever. So far in 2016, acquirers have announced a record 90 transactions valued at more than $1bn, up from the previous record of 85 in 2015, according to 451 Research’s M&A KnowledgeBase. This year’s surge has been driven by the emergence of unconventional buyers, as well as conventional acquirers using novel strategies.

For instance, China-based buyers have announced 10 deals so far in 2016 valued at over $1bn, more than twice the average number over the previous three years. This year marks the first time China-based companies have cracked the double-digit-percentage market share for big prints.

More dramatically, private equity (PE) acquirers more than doubled the number of big-ticket tech deals they have done this year to a record 24 transactions. That means these deep-pocketed shoppers now account for one of every four ‘three-comma deals,’ according to the M&A KnowledgeBase. In one indication of how active this group has become, consider the fact that five separate buyout shops have announced more than one deal valued at $1bn+ since the start of 2016: TPG Capital, Vista Equity Partners, KKR, Apollo Global Management and Thoma Bravo.

In some ways, PE deals have become so popular that their strategic rivals have borrowed the playbook. A number of corporate divestitures – which in years past, would have likely landed in a PE portfolio before being cleaned and then sold to a strategic acquirer – went directly to corporate buyers. For instance, OpenText reached into EMC to pull out Documentum, while the services wings of both Dell and Hewlett Packard Enterprise were consolidated by IT services giants.

Corporate buyers have also been more creative recently in structuring transactions, which is something that PE firms have done more regularly. Micro Focus employed an unusual structure to assume control of HPE’s software business, which tripled the size of the British software vendor. Similarly, LogMeIn used a Reverse Morris Trust to dramatically scale up its business as it combined with Citrix’s GoTo division. Another corporate acquirer, Broadcom, went ahead with its $5.5bn purchase of Brocade Communications even though it knows it’s going to have to divest a huge chunk of that business.

Billion-dollar transactions

Period Number of deals worth $1bn+
YTD 2016 90
2015 85
2014 76
2013 49
2012 43
2011 52
2010 44
2009 32
2008 31
2007 77
2006 70
2005 70
2004 28

Source: The 451 M&A KnowledgeBase

PE: The only growth market in tech M&A right now

Brenon Daly

Contact: Brenon Daly

The buyout barons are busier than ever. Already this year, private equity (PE) shops have announced more tech transactions than any year in history. The unprecedented flurry of deals comes as more financial acquirers are buying their way into the ever-maturing tech industry, with newly hatched fledgling funds joining well-established multibillion-dollar outfits. This ever-increasing pack of PE players is vastly outpacing their corporate rivals when it comes to putting up deals.

So far this year, PE buyers have announced a record 283 acquisitions, an increase of 11% from 2015 and 21% from 2014, according to 451 Research’s M&A KnowledgeBase. (We would also note that the deal flow covers virtually every strategy – carve-outs, bolt-ons, take-privates, secondaries – available to these firms.) If we assume the pace of buyout activity holds through December, PE shops will put up more than 300 prints in 2016, a 20% increase from last year. (For the record, M&A spending by buyout firms this year has set a post-recession record.)

As PE shops step up their activity, corporate acquirers are slowing down. Overall, the number of tech transactions is likely to decline about 10% this year, compared with 2015. (That’s assuming the pace in December continues at the rate of the preceding 11 months.) The drop-off in 2016 will be even sharper among US publicly traded buyers, which represent the most visible segment of the ‘corporate acquirers.’ Currently, tech vendors listed on the Nasdaq and NYSE are on pace to announce just 900 purchases in 2016, down from about 1,040 deals in each of the two previous years, according to the M&A KnowledgeBase.

Although PE is essentially the sole ‘growth market’ in tech M&A right now, it still represents only a small portion of the activity. In 2016, financial acquirers account for only one of every 12 transactions. Still, that’s a higher share of the market than either of the two previous years – and that looks likely to increase further in 2017. Even from the recent record level of activity, nearly half of respondents (45%) to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster last October predicted that buyout shops would spend more in 2017 than they have in 2016, compared with just one-quarter (28%) who forecast lower spending.

PE activity

Period Deal volume Deal value Percentage of overall tech M&A spending
YTD 2016 283 $69bn 15%
2015 253 $58bn 9%
2014 234 $42bn 10%
2013 201 $62bn 25%
2012 169 $28bn 15%
2011 212 $33bn 14%
2010 147 $29bn 15%
2009 103 $13bn 9%
2008 107 $17bn 5%
2007 159 $122bn 29%

Source: The 451 M&A KnowledgeBase

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

Synchronoss: Can middle-aged companies pivot, too?

Brenon Daly

Contact: Brenon Daly

Announcing the most significant overhaul of its 16-year-old company, Synchronoss has shed a large portion of its legacy telecom business and made an $821m acquisition of collaboration software provider Intralinks in an effort to evolve more fully into an enterprise software vendor. Synchronoss began its enterprise push last year, using smaller purchases to add identity management and enterprise mobility management technology to its portfolio. However, sales to businesses currently generate only a small slice of its overall revenue. With the divestiture and the addition of Intralinks, roughly 40% of the company’s total sales will come from enterprises.

Reflecting the importance of its new focus on enterprises, Synchronoss said the combined entity would be led by current Intralinks CEO Ron Hovsepian, reversing the typical post-acquisition leadership arrangement. Additionally, Synchronoss noted that Intralinks brings a direct sales force of more than 150 sales reps to the effort. However, Intralinks had only been increasing its revenue at a high-single-digit percentage rate so far in 2016. The transaction is expected to close late in the first quarter of 2017.

Synchronoss’ divestiture of a majority portion of its carrier activation business figures into the company’s pivot, as well. The sale of 70% of the unit for $146m to existing partner Sequential Technology reduces the legacy carrier-focused portion of revenue, as well as eases customer-concentration concerns for Synchronoss. The company is still trying to sell the remaining 30% of its activation unit, a process it indicated could take 12-18 months.

A portion of the funds from the divestiture, along with some cash on hand, will go toward covering a bit of the Intralinks buy. However, Synchronoss said it will have to borrow $900m to pay for most of the purchase. (Synchronoss is spending about twice as much on Intralinks as it has spent, collectively, on its previous 11 acquisitions since 2002, according to 451 Research’s M&A KnowledgeBase.) The new debt – along with the accompanying dilution of earnings to service it – unnerved some investors. Shares dropped 12% on the announcement, but are still up about 20% for the year.

Probably more of a concern on Wall Street, however, are the challenges associated with such a dramatic shift in business model – one that has a decidedly mixed record. Already this year, we have seen a number of high-profile companies backtrack on their earlier efforts to use M&A to become enterprise software vendors. Dell, Hewlett-Packard and Lexmark, among others, have all unwound or are trying to unwind billions of dollars of deals they did over the past decade to step from their original business into the enterprise software arena.

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

Tech deal flow dries up in November

Brenon Daly

Contact: Brenon Daly

Despite the lowest monthly total for tech acquisitions in three years, M&A spending in November just about kept pace with the historically high levels of 2016. Overall, acquirers spent about $38bn on tech deals around the world in the just-completed month, slightly below the average of $42bn during the previous 10 months. November spending pushed the value of transactions announced so far in 2016 to more than $450bn, the second-highest annual total since the internet bubble burst in 2000, according to 451 Research’s M&A KnowledgeBase.

Transactions that helped push the November spending level higher included:

  • Samsung placed an ambitious $8bn bet on the emerging connected car market, acquiring HARMAN. In the past decade and a half, the Korean giant hadn’t spent more than $350m on a single tech purchase.
  • Announcing its third multibillion-dollar deal in as many years, Broadcom paid $5.5bn for Brocade. As part of the deal, Broadcom is expected to divest a major portion of Brocade’s business, which could help it recoup several billion dollars.
  • Symantec followed up a $4.7bn acquisition last spring to bolster its enterprise security business with the $2.3bn purchase of LifeLock in an attempt to revive its flagging consumer security division.

But the real story of tech M&A last month is the dramatic decline in overall deal volume, where November – like the result of last month’s US presidential election – saw a dramatic split. Basically, the first half of the month roughly matched the rate of acquisition announcements from 2016, but then activity plummeted: Dealmakers announced 156 transactions from November 1-15, but just 94 acquisitions (or 38% of the monthly total) from November 16-30, according to the M&A KnowledgeBase. Of the 20 largest deals last month, fully three-quarters of them (15 transactions) came in the first two weeks.

Undeniably, deal flow was somewhat slowed by the US Thanksgiving holiday in the next-to-last week of November. But even with that holiday, there were almost an equal number of business days in the first and second halves of the month. And, keep in mind, the first half of last month also featured its own interruption to business in the form of a national election. Ahead of the presidential election, nearly one-third of respondents (31%) to the M&A Leaders Survey from 451 Research and Morrison & Foerster indicated that the US presidential election had slowed their dealmaking activity. That impact appears to already be registering in actual deal flow as transaction volume in November dropped by 25% compared with the average number of monthly prints in 2016.

2016 tech M&A activity, monthly

Period Deal volume Deal value
November 2016 250 $37.7bn
October 2016 319 $82bn
September 2016 297 $29.9bn
August 2016 300 $30.9bn
July 2016 329 $93.7bn
June 2016 375 $66.7bn
May 2016 324 $23bn
April 2016 344 $19.6bn
March 2016 337 $23.9bn
February 2016 322 $28.3bn
January 2016 380 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Big Yellow and big buyouts push infosec M&A spending to record

Brenon Daly

Contact: Brenon Daly

What happens at the top end of a market usually goes some distance toward setting the overall tone in that particular market. At least that’s one way to view M&A in the information security sector, which has surged to a record level of spending led by transactions involving the two largest vendors. Up until recently, both Symantec and McAfee had been largely out of the market as the companies worked through earlier strategy bets that didn’t pay off.

So far this year, infosec shoppers have spent $14.3bn on deals, according to 451 Research’s M&A KnowledgeBase. That tops the previous record of $13.5bn in 2010. However, a look inside the deal flow indicates that the previous record was much more concentrated: the single-largest transaction in 2010 (Intel’s $7.7bn purchase of McAfee) accounted for more than half of that year’s overall deal value, while the single-largest transaction in 2016 (Symantec’s $4.7bn pickup of Blue Coat Systems) accounts for just one-third of this year’s spending.

Intel’s partial unwind of its experiment with McAfee is contributing to this year’s record. But more dramatically, it’s the reversal at Symantec that has boosted overall spending in the infosec space. After shying away from significant acquisitions in recent years, Big Yellow has now inked its two largest security deals in just the past the past five months. For perspective, the combined $7bn Symantec has shelled out since last summer for Blue Coat and LifeLock is more than it has spent, collectively, on its 25 other infosec purchases since 2002, according to the M&A KnowledgeBase.

In addition to large corporate buyers, big financial acquirers have also been contributing to this year’s record spending. Both TPG Capital’s carve-out of McAfee and PE-backed AVAST’s consolidation of AVG were valued in the billions of dollars. For comparison, the previous record year of 2010 didn’t feature any billion-dollar PE transactions.

infosec-updated-ma-totals

Symantec looks for key to consumer growth in $2.3bn LifeLock acquisition

Scott Denne

Contact: Scott Denne

Five months after a multibillion-dollar bid to retool its enterprise security business, Symantec has made a parallel play for its consumer security unit. The maker of Norton antivirus software has acquired LifeLock, an identity-protection services company, for $2.3bn. The purchase could bring Symantec’s consumer business back to growth, but it seems to pull the infosec company further into two distinct markets – a problem it struggled with in the past, and mostly solved with its divestiture of Veritas in 2015.

At $2.3bn, Symantec values LifeLock at 3.5x trailing revenue, bringing the target its highest share price ($24) since its 2012 IPO. Symantec itself trades above 4x, so picking up a company that can help its consumer security business escape from years of declines at a discount to its own valuation is a positive. Wall Street seems to agree. Following an initial negative reaction, as of midday on November 21, Symantec shares are trading up almost 5% from Friday’s close.

Revenue from Symantec’s consumer business declined double digits in each of the last two years, although the slide slowed recently, declining just 3% last quarter. LifeLock, by comparison, grew trailing revenue to $650m, up 16% from the previous year. Although LifeLock’s services, which help detect and prevent identity theft, and Symantec’s antivirus offerings are quite different products, it’s easy to see how the two would be able to upsell each other’s existing customers.

Yet the deal seems to move Symantec’s consumer products further out of the orbit of its larger enterprise security business, which it expanded earlier this year with the $4.6bn acquisition of Blue Coat Systems. Symantec’s enterprise and consumer business already operate independently – the two businesses even have separate IT infrastructure to serve each unit. The addition of tech and services aimed at protecting the individual, rather than the device or network, makes that division more pronounced. That has us wondering whether this deal could set the stage for another Symantec spinoff.

Inmar nabs Collective Bias to connect online influencers with in-store sales

Scott Denne

Contact: Scott Denne

In a bid to bring hard metrics into the world of influencer marketing, Inmar, a digital promotions and analytics vendor, has acquired Collective Bias. The deal brings together two of the most potent trends in advertising – the appetite among marketers to link spending to purchases and the growing use of long-tail content as a marketing channel.

Collective Bias operates a network of social media content creators that it can leverage for branded content creation and distribution. The company already provides marketers with engagement metrics and under Inmar’s ownership will be able to extend that to actual sales. Inmar was founded in the 1980s as a coupon processor and has since expanded into digital coupons and other retail analytics that will enable it to draw a direct line between engagement with a Collective Bias campaign and consumer purchases.

Making the link between online ads and offline sales has become a substantial driver of acquisitions. That was the rationale behind such big-ticket deals as Oracle’s purchase of Datalogix, Nielsen’s pickup of eXelate and Neustar’s reach for MarketShare Partners. And as we discussed in a recent report, that trend will likely continue. Today’s transaction demonstrates that Inmar and other players in the payments ecosystem recognize the opportunity to use their data to fill this gap.

M&A activity around influencer marketing has seen a recent spurt. Both Facebook and Google, the two largest channels for distributing this content, made tuck-ins (CrowdTangle and FameBit, respectively) to improve their capabilities in this segment. Last summer, Monotype Imaging paid $130m for Olapic, a maker of software for managing branded, user-generated content. Given that deal and the size of Collective Bias (145 employees), today’s transaction may also have reached into nine figures.

GCA advised Collective Bias on its sale.

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