Inorganic Growth – Page 44 – The 451 Take on Tech M&A

The retail industry is learning the costly lesson that clicking an online shopping cart button has relatively little in common with pushing a shopping cart down a store aisle. The deals that retailers have struck to bridge the physical and digital worlds just haven’t been ringing the cash registers. The latest example: Nordstrom wrote off more than half of its $350m acquisition of Trunk Club.

It wasn’t supposed to be this way. The ‘bricks and clicks’ pairings made sense, at least in the pitchbook. Retailers needed to be more represented in places where their customers were actually shopping. (The National Retail Federation recently forecast that a record 56% of shoppers plan to buy online this upcoming holiday season, tying for the top spot among all customer destinations.)

In addition to the need to go digital, buyers were also lulled into a false sense of confidence by oversimplifying the fundamental premise of these proposed deals: Acquire a complementary Web-based storefront, with all of the accompanying technology and talent, and then just slap that in front of the massive back end that the big retailer has already built.

These theoretical transactions seemed a perfect fit, taking care of the specific challenges each vendor felt in its particular model. For the e-tailer, creating supply chains and delivery centers would likely cost tens if not hundreds of millions of dollars of capital expenditure, which is rarely a high-returning use of risk capital such as VC. (Not to mention those venture dollars, in general, are getting harder to pull in.) For retailers, they would get the digital smarts around marketing and selling on the Web, without having to painstakingly repurpose existing resources or slowly hire scarce digital talent.

And yet, that has turned out to be a spurious strategy. Online retailing isn’t any more of an extension of traditional retailing than online media is an extension of traditional media. With Nordstrom’s tacit admission that its M&A push into the ether hasn’t generated the expected returns, we wonder about a significantly larger bet – roughly 10 times the size of Nordstrom’s purchase of Trunk Club – that Wal-Mart has placed on Jet.com.

The retailing giant’s pickup of Jet.com last August stands as the largest e-commerce transaction of the past 15 years and the biggest sale of a VC-backed startup in two and a half years. However, the early returns on that blockbuster pairing don’t appear promising. In a survey by 451 Research’s Voice of the Connected User Landscape in mid-September, just after Wal-Mart closed the deal, more people projected they’d be spending less at Jet.com than spending more at the website through the end of the year.

Source: 451 Research’s Voice of the Connected User Landscape

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Where is the tech M&A market heading?

November 16, 2016 Brenon Daly

Contact: Brenon Daly

With an astonishing $450bn of deal value announced so far this year, 2016 has already hit the second-highest annual spending level for tech M&A since the internet bubble burst in 2000. And while this year probably won’t eclipse last year’s record, we would note that 2016 activity is coming against a backdrop of political and economic change that’s almost unprecedented in developed countries. Acquirers are continuing to buy, despite the uncertainty introduced by events such as Brexit or even the recent election cycle in the US.

But will the current M&A boom continue? Is 2017 going to see just a continuation of the strong deal flow? Or will the uncertainty give buyers pause as they head into next year?

To get a sense of where the tech M&A market is heading, join 451 Research and Morrison & Foerster next Tuesday at 1pm EST for a webinar on what senior M&A executives and advisers are forecasting for the market in 2017 and beyond. (To register, click here.) Topics we’ll cover in the complimentary hour-long webinar include:

Recent activity and trends in the tech M&A market.
What bankers, corporate execs and others expect to see in tech M&A next year – and beyond.
What impact the divisive US presidential election will have on dealmaking.
How significant are the expected regulatory changes in the wake of the just-completed election cycle?
On the all-important question of valuation, what do tech buyers forecast they will have to pay for startups in the coming months?

We hope you can join 451 Research and Morrison & Foerster next Tuesday as we make sense of what’s driving tech M&A activity right now and how that will play out next year and beyond. To register, click here.

xAd nabs WeatherBug amid improving forecast for consumer data

November 16, 2016 Scott Denne

Contact: Scott Denne

All of the venture money that poured into the early days of ad tech ensured that software wouldn’t be a differentiator – any given sub-segment of that market is home to at least half a dozen competitors, often many more. Instead, the market will be won or lost based on a more precious commodity than software developers and data scientists: access to more and better consumer data. With this in mind, xAd has acquired Earth Networks’ consumer app business, WeatherBug. In particular, the target’s mobile app offers an incentive for users to enable always-on location tracking, leading to more valuable consumer data.

The acquirer enables advertisers to target ads based on their location. That includes targeting ads to consumers near a particular location, targeting consumers who have been to a certain location in the past, and targeting audience segments based on their movement patterns. This kind of data is likely to supplant the value in tracking only online behavior. After all, what’s a better indicator of behaviors and preferences: where consumers spend time in real life or where they waste time online?

Vendors building these applications face a notable hurdle in obtaining differentiated data. Most of them draw location data from the information provided in bid requests on mobile ad exchanges. That data for any consumer only comes when they open an app that tries to fill an empty ad impression. And there’s a lot of poor-quality data flowing through that ecosystem. Many publishers have realized that adding any latitude and longitude digits to a bid request raises the value, so an outsized amount of location data places consumers at the geographical center of the US or at Amazon Web Services datacenters.

To get around that, xAd and its fellow location-targeting companies such as PlaceIQ and NinthDecimal have increasingly turned to partnerships with mobile app developers that can provide consumer locations with a greater degree of accuracy and on a more frequent basis. And apps like WeatherBug’s, which give consumers an incentive to enable always-on location tracking, are even more valuable. In addition to drawing frequent, reliable and unique consumer location data from WeatherBug’s 20 million monthly users, the deal also gets xAd a license to the weather data from the target’s former parent company.

The appetite for more and better data isn’t limited to ad tech. As predictive analytics and artificial intelligence become a meaningful differentiator of enterprise software, more of those vendors will have to seek out data to feed those capabilities. Today’s transaction is an example of that, as are larger ones such as Microsoft’s acquisition of LinkedIn, IBM’s purchase of The Weather Company’s technology business and Salesforce’s pickup of Krux.

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

Samsung accelerates into car market with $8bn HARMAN buy

November 14, 2016 Scott Denne

Contact:Scott Denne

Samsung makes its largest tech acquisition on record with the purchase of Harman International Industries (HARMAN). Samsung made the $8bn gambit to jumpstart its push into the automotive market as that industry is poised to transform around advances in sensor technology, connectivity and artificial intelligence.

Ever the cautious buyer, Samsung hadn’t paid more than $350m for any tech acquisition in at least 14 years, according to 451 Research’s M&A KnowledgeBase, although it has picked up the pace of dealmaking recently. HARMAN marks the fifth transaction of the year for the Korean electronics conglomerate, making 2016 its most active year ever.

In picking up HARMAN, Samsung obtains a company that generated 65% of its $7bn in trailing revenue from sales to the automotive industry, a market where Samsung has little experience. HARMAN’s roots are in audio equipment and that business still accounts for one-third of its revenue. However, a plurality of its sales today – 44% – comes from its connected car segment, which was cobbled together through several purchases over the past four years with a particular emphasis on providing software capabilities for connected cars.

According to our surveys, more than one-third of consumers are interested in having wireless connectivity built into their cars to enable applications such as richer dashboards, music streaming and emergency services. That burgeoning demand has manifested itself in recent M&A activity.

Acquisitions of software, systems and component companies with a substantial play in the automotive vertical made a massive jump last year, driven by a combination of car-related chip deals, as well as pickups of GPS, mapping and other software vendors that cater to the sector. Although down from last year’s record amount, the $10.7bn of such transactions this year is well above the norm.

J.P. Morgan Securities and Lazard Freres & Co advised HARMAN on its sale. Evercore Partners banked Samsung.

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

In Trump, a tech M&A watchdog with more bite

November 9, 2016 Brenon Daly

Contact: Brenon Daly

Regardless of how you voted – and whether today you’re mischievously grinning and flipping the finger at Washington DC or hastily planning a move to Canada – there are still deals to be done. There might not be as many of them, as has certainly been the case in the run-up to the election, with monthly transaction volume dropping about 10% since last summer. But tech companies are still going to want to consolidate rivals, buy their way into promising adjacent markets and roll the dice on unproven startups as they look to M&A to drive growth.

That said, some of those strategies – particularly those that involve foreign acquirers of US assets – may well get more scrutiny in the new Trump regime than they would have during a Clinton presidency. That would be our contention anyway, based on the protectionist sentiment that Trump espoused during his campaign. In particular, he has singled out China for some of his sharpest criticism. Trump has said he plans to bring a case, both in the US and at the World Trade Organization, against ‘unfair subsidiary behavior’ by the world’s most-populous country. If we look at how that contentious view could impact tech M&A, we can certainly make the case that Chinese buyers probably won’t be shopping as freely in the US in the coming years.

If that is indeed the case, the slowdown would end a dramatic acceleration in deal flow this year. Already in 2016, Chinese buyers have spent more money on US tech vendors than in the previous five years combined, according to 451 Research’s M&A KnowledgeBase. In terms of deal volume, they’ve done almost as many transactions in the first 10 months of 2016 as they did, collectively, over the past two years. This year’s shopping spree has included a number of well-known names, which is also likely to draw the attention of a populist president such as Trump. Chinese buyers have recently picked up Ingram Micro, which swings nearly $50bn worth of tech gear and services each year, 25-year-old printer maker Lexmark and even a majority stake in the gay dating app Grindr.

Regulatory review has always been a consideration in any significant tech deal. We would guess that with Trump’s election, he will probably look to strengthen the Committee on Foreign Investment in the United States (CFIUS). At least in tech transactions, that intra-agency committee hasn’t been as active as it was a decade ago. (Somewhat dramatically, we termed CFIUS an ‘angel of death’ after it blocked the proposed sale of 3Com in 2008 due to the participation of Chinese networking giant Huawei Technologies.) In Trump’s new regime, that watchdog will almost certainly have more bite.

It’s win or go home for Oracle and its bid for NetSuite

November 4, 2016 Brenon Daly

Contact: Brenon Daly

Just like this year’s World Series, there’s a dramatic win-or-go-home contest playing out in the tech M&A market. The showdown pits the ever-acquisitive Oracle against one of Wall Street’s biggest investors. The stakes? The fate of the largest SaaS acquisition ever proposed.

At midnight tonight, Oracle’s massive $9.5bn bid for NetSuite will effectively expire. In the original offer three months ago, Oracle said it will pay $109 for each of the nearly 87 million (fully diluted) shares of NetSuite, valuing the subscription-based ERP vendor at $9.5bn. That wasn’t enough for NetSuite’s second-largest shareholder, T. Rowe Price. Instead, the institutional investor suggested that Oracle pay $133 for each NetSuite share, adding $2bn to the (hypothetical) price tag.

Oracle has declined to top its own bid. Nor will it adjust the other major variable in negotiations: time. (Oracle has already extended the deal’s deadline once, and says it won’t do it again.) In an unusually public display of brinkmanship in M&A, Oracle has said it will walk away from its $9.5bn bid if enough shareholders don’t sign off on its ‘best and final offer.’ As things stand, shareholder support is far below the required level, largely because of T. Rowe’s opposition.

Does T. Rowe have a case that Oracle is shortchanging NetSuite shareholders with a discount bid? Or is the investment firm greedily hoping to fatten its return on NetSuite by baiting Oracle to spend more money? If we look at the proposed valuation for NetSuite, it’s hardly a low-ball offer. On the basis of enterprise value, Oracle’s current bid values NetSuite at 11.1x trailing sales. That’s solidly ahead of the average M&A multiple of 10.3x trailing sales for other large-scale horizontal SaaS providers, according to 451 Research’s M&A KnowledgeBase. (For the record, T. Rowe’s proposed valuation of $11.6bn for NetSuite roughly equates to 13.7x trailing sales – a full turn higher than any other major SaaS transaction.)

With the two sides appearing unwilling to budge, NetSuite will likely return to its status as a stand-alone software firm. If that is indeed the case, NetSuite will probably have to get used to that status. The roughly 40% stake of NetSuite held by Oracle chairman Larry Ellison serves as a powerful deterrent to any other would-be bidder, which was one of the points T. Rowe raised in its rejection of the deal. Assuming 18-year-old NetSuite stands once again on its own, the first order of business will be to pick up growth again. (Although there’s still the small matter of a $300m termination fee in the transaction.) In its Q3, NetSuite reported that revenue increased just 26%, down from 30% in the first half of the year and 33% for the full-year 2015.

Select multibillion-dollar SaaS deals

Date announced	Acquirer	Target	Deal value	Price/trailing sales multiple
July 28, 2016	Oracle	NetSuite	$9.3bn	11.1x
September 18, 2014	SAP	Concur	$8.3bn	12.4x
May 22, 2012	SAP	Ariba	$4.5bn	8.6x
December 3, 2011	SAP	SuccessFactors	$3.6bn	11.7x
June 1, 2016	Salesforce	Demandware	$2.8bn	11x
June 4, 2013	Salesforce	ExactTarget	$2.5bn	7.6x

Source: 451 Research’s M&A KnowledgeBase

Life in the public eye

November 3, 2016 Brenon Daly

Contact: Brenon Daly

Just as we’ve hit the home stretch for the current US election cycle, we’ve also entered crunch time for the otherwise sluggish tech IPO market. Any company that still plans to debut in 2017 will need to sprint to beat the holidays, which tend to stall offerings ahead of the turn of the calendar. Whether any startups actually make it to Wall Street depends at least in part on the events in Washington DC. (We have already noted that a recent survey from 451 Research’s ChangeWave service showed the Clinton vs. Trump circus has slowed consumers’ discretionary spending plans.)

In that way, political elections and tech offerings are somewhat intertwined. Further, there are some distinct similarities between the two events. Both involve candidates going out and seeing how popular they are with the public. Both also involve time-consuming and expensive journeys that wind toward a goal of serving the public at some level. And finally, both can bring long, rewarding stays in the public eye – alternatively, they can result in embarrassingly revealing and disconcertingly short stays. It all depends on how they serve their constituencies, whether voters or investors.

Not wishing to drag out the metaphor any longer – and certainly not wishing to spend any more attention on this dismal and depressing election cycle – we’ll shift our focus solely to the tech IPO market. We’ve already seen a half-dozen enterprise tech vendors make it public this year, and while one or two startups may add to that total, most are likely to look to join the ‘Class of 2017.’ Heading into next year, the outlook for tech IPOs appears strong. Slightly more than half of the respondents to the most recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster predicted an increase in the number of tech offerings from now through next spring. That was the survey’s most bullish forecast for IPOs in two years.

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

Broadcom goes wide in $5.5bn Brocade buy

November 2, 2016 Scott Denne

Contact: Scott Denne

Broadcom continues its strategy of buying a sustainable portfolio of semiconductors with the $5.5bn acquisition of Brocade. The target’s fiber-channel storage networking chips drew Broadcom’s interest, yet those chips account for very little of the value. Broadcom plans to recoup the difference when it sells Brocade’s IP networking business after the deal closes.

The company formerly known as Avago has run this play before. Shortly after the purchase of Broadcom last year (the transaction that gave the company its current name and much of its bulk), it divested bits of that vendor, including its Internet of Things (IoT) connectivity line. Broadcom’s strategy is to buy products that have long-term stability. IoT chips that are chasing an early-stage opportunity that’s possibly lucrative and certainly capital-intensive don’t fit. It also shed parts of LSI following its pickup of that firm at the end of 2013.

Yet today’s all-cash acquisition brings Broadcom into new – and risky – territory. In previous divestitures, it was selling semiconductor and component businesses that it wasn’t comfortable owning. The Brocade IP networking business is hardware and software. And in today’s deal, it’s not looking to unwind a secondary asset. IP networking is a major component of the target’s business.

Consider this: Broadcom shaved $1.1bn from the $6.6bn price tag on LSI by shedding two semiconductor business lines. Of the $5.5bn ($5.9bn in enterprise value) that it’s paying for Brocade, it’s presumably seeking a sale to bring back more than half of that given that the IP products unit accounts for about half of the revenue and all of the growth. That could prove to be challenging, given that Ruckus Wireless, a Wi-Fi provider that generates about one-third of Brocade’s IP sales, was on the market less than seven months ago and the top bidder in that process, Brocade, is no longer in the acquirer pool. And if Broadcom can’t find a buyer at a satisfactory price, it will be forced to retain a business that competes with many of its OEM customers.

Broadcom’s reach for Brocade values the target at 2.6x trailing revenue. According to 451 Research’s M&A KnowledgeBase, that’s the median multiple across all of its acquisitions over the past four years. On the other hand, storage networking specialists usually sell at or below 1x, making this deal look a bit pricier. Broadcom would have to divest the IP networking division for $3bn or more to get the effective multiple on today’s transaction into that range.

Evercore Partners advised Brocade on its sale. We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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For tech M&A, it’s an ‘October surprise’

November 1, 2016 Brenon Daly

Contact: Brenon Daly

Once again, there was a gigantic ‘October surprise’ in the tech M&A market. In the just-finished month, Qualcomm put together a blockbuster $39.2bn play for NXP Semiconductors, accounting for nearly half of all spending on last month’s tech deals. A year ago, Dell’s mammoth $63.1bn purchase of EMC dominated October 2015 spending. Together, those October prints are the two largest non-telecom tech acquisitions of the past decade and a half, according to 451 Research’s M&A KnowledgeBase.

On its own, the Qualcomm-NXP pairing slightly exceeded an entire month’s worth of tech spending in 2016. When added to the other 304 transactions announced in October, the total for spending on tech deals across the globe hit $82bn. Also boosting last month’s total was CenturyLink’s $24bn reach for Level 3 Communications. (Including the assumption of debt, the enterprise value of that transaction swells to $34bn.) Altogether, October spending ranks as the second-highest monthly total of 2016, according to the M&A KnowledgeBase.

Outside of those two big prints, which accounted for slightly more than three-quarters of all announced deal value last month, dealmaking was a bit slower than usual at the top end of the market. In our M&A KnowledgeBase, we tallied just six transactions valued at more than $1bn last month, down from a monthly average of eight ‘three-comma deals’ through the first three quarters of the year. Overall deal flow was also a little slower than usual, with the number of announced transactions in October down almost 15% compared with the monthly average in the first half of 2016 and down almost 20% compared with the same month of the two previous years.

With two months of 2016 still remaining, this year has already topped full-year spending for every year except the post-internet bubble record level of 2015. While this year likely won’t challenge last year in terms of deal volume or the value of those transactions, it is outpacing 2015 in another key M&A consideration: valuations. Looking at the largest multiples paid in deals valued at $10bn or more over the past two years, four of the five transactions have printed in 2016, according to the M&A KnowledgeBase.

2016 tech M&A activity, monthly

Period	Deal volume	Deal value
October 2016	305	$81.8bn
September 2016	290	$29.8bn
August 2016	299	$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

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CenturyLink connects with Level 3 in 2016’s largest telecom deal

November 1, 2016 Mark Fontecchio

Contact: Mark Fontecchio

CenturyLink makes a move to the other side of the deal table, shelling out $24bn for Level 3 Communications in an attempt to expand its portfolio of business services as the datacenter market awaits an announcement on the fate of the company’s colocation business. Today’s transaction marks a big bump in telco M&A spending for the year. The acquisition is 2016’s largest telecom consolidation play by a factor of 10, although it would be less than half the biggest in either 2015 or 2014.

The purchase is uncharacteristically sizable for CenturyLink, which had a market cap of about $16bn before the announcement. The company had only paid beyond $10bn once before, when it bought Qwest Communications in 2010. Its next-largest purchase, the $5.8bn reach for EMBARQ in 2008, was a similar pickup of a consumer-focused telco. Most of CenturyLink’s recent investments have aimed to bolster its business services. Yet the only time it’s spent more than $1bn on such an effort was the $2.5bn acquisition of Savvis in 2011, some of which could be undone when it finishes exploring ‘strategic alternatives’ for its shrinking colocation unit – a process that it says will still wrap up this quarter.

CenturyLink will pay 60% of the cost of Level 3 in stock and the rest in cash. That dilution helped push the company’s stock price down 12% following the deal announcement. Including debt, the purchase values the target at $34bn, or 4.1x trailing revenue. That’s the second-highest multiple among the nine $10bn+ telco deals in the past half-decade, according to 451 Research’s M&A KnowledgeBase. The healthy valuation is certainly not due to recent growth, as Level 3’s revenue is flat.

What CenturyLink does obtain is an international footprint (20% of Level 3’s revenue is generated outside the US), an extensive fiber network and expanded revenue from businesses. Inclusion of Level 3’s revenue bumps CenturyLink’s enterprise sales to 75% from 64%. This acquisition is being driven as much by financial considerations as strategic ones. CenturyLink will inherit $10bn of net operating losses and gain an estimated $975m in cost reductions when the transaction closes, which is expected in the second half of next year.

The deal is the third-largest telco consolidation play in the past eight years, behind Charter Communications buying Time Warner Cable and AT&T nabbing DIRECTV. It significantly expands what had previously been a lean year for telecom M&A, with this single transaction nearly doubling the total amount that telcos have spent on acquisitions in 2016, to about $50bn. Compare that with 2014 and 2015, during which telcos spent an average of $150bn on purchases, according to the M&A KnowledgeBase.

Bank of America Merrill Lynch and Morgan Stanley advised and Evercore Partners provided a fairness opinion to CenturyLink on the deal, while Citigroup Global Markets advised and Lazard provided a fairness opinion to Level 3.