Big tech deals come at big prices

Brenon Daly

Contact: Brenon Daly

This year is proving to be a very rich vintage for tech M&A. At the top end of the market, acquirers are paying higher multiples than they’ve paid in any year since the end of the recession. Consider the rather mature semiconductor industry, where, historically, acquisition activity has been characterized by low-multiple consolidation. That hasn’t been the case so far in 2016, where chip deals have accounted for three of the four largest transactions. Rather than dragging down the broad-market valuation, they are actually boosting it substantially.

The chip industry’s platinum valuation was once again on display in Qualcomm’s $39.2bn purchase of NXP, the latest – and largest – blockbuster transaction in the semiconductor industry. In addition to Qualcomm-NXP, there have been two other semiconductor deals valued at more than $10bn. The average multiple in those big-ticket transactions stands at an astounding 11.9x trailing sales. That’s more than twice the average multiple of 5.4x trailing sales for the three chip deals valued at more than $10bn last year, according to 451 Research’s M&A KnowledgeBase.

And while chip companies have been spending freely, other big buyers are also paying up. Microsoft’s $26.2bn play for LinkedIn values the online professional network at more than 8x trailing sales. Oracle, which itself trades at a little more than 4x trailing sales, has offered to buy NetSuite in a transaction that values the SaaS vendor at more than 10x trailing sales. (Although it’s not certain that the deal will actually go through due to disgruntled shareholders.)

More than any other recent year, the driver for those large-scale transactions in 2016 has been growth, whether it’s innovating existing products through M&A (Microsoft-LinkedIn), obtaining a presence in the nascent but expanding market of mobility and the Internet of Things (semiconductor deals), or acquiring a faster-growing delivery model for software (Oracle-NetSuite). Overall, the 50-largest tech acquisitions so far this year have gone off at 4.7x trailing sales, according to the M&A KnowledgeBase. That’s the highest level since the recent recession and a full turn higher than the 3.6x trailing sales recorded in 2015.

2012-to-2016-kb-avg-valuation-multiple

Qualcomm buys NXP in biggest chip deal ever

Mark Fontecchio

Contact: Mark Fontecchio, John Abbott

All the chips get pushed to the middle as Qualcomm agrees to acquire NXP Semiconductors for $39.2bn. The massive deal is the largest ever in semiconductors, and the second-biggest non-telco tech transaction in the past decade, according to 451 Research’s M&A KnowledgeBase. It is also magnitudes larger than Qualcomm’s previous high-water mark, the $3.6bn purchase of Atheros in 2011.

Qualcomm and NXP’s combined portfolio looks unusually synergistic. The buyer is dominant in smartphones and wireless networking, while the target has leading positions in automotive (self-driving cars and in-car entertainment) and the Internet of Things (including mobile payments, security and sensors). Those are two major market segments where Qualcomm can apply its long-standing mobile expertise. A side benefit is that the addition of NXP will increase the number of components Qualcomm can sell to its existing smartphone customers. The recently introduced Snapdragon Neural Processing Engine and Zeroth Machine Intelligence Platform may also help extend NXP’s existing autonomous car activities. NXP has its own manufacturing fabs, while Qualcomm is mostly fabless, but there’s plenty of room for flexibility between the two models due to the range of devices in the catalog.

Today’s deal marks the fifth $15bn+ chip purchase since the start of 2015. NXP is valued at 5.5x trailing revenue. That’s well past the 2.5x median multiple on billion-dollar chip transactions in the past five years and right in the middle of the pack of the recent $15bn+ deals (see chart below).

According to the KnowledgeBase, semiconductor M&A since 2015 has seen four quarters of relatively modest activity ($28bn total) bookended by four quarters – two at the start of 2015, and two at the end of this year – of massive value totaling more than $165bn. The scale of recent consolidation in the semiconductor industry has been astounding. The nearly $90bn in M&A spending we saw last year was more than the previous four years combined. And now, remarkably, value in 2016 has already crested $100bn with two months to go.

15bn-chip-deals

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AT&T pays $85.4bn for Time Warner amid strong demand for original content

Scott Denne

Contact: Scott Denne

Original content plays a starring role in telecom’s future as AT&T shells out $85.4bn for Time Warner. Facing competitive pressures in its core wireless business – revenue was down year over year in that segment last quarter – AT&T plans to leverage Time Warner (owner of HBO, Warner Brothers Studios and Turner Networks, among other properties) to provide original content for the latest online content distribution properties, such as its forthcoming streaming service, DIRECTV Now.

The availability of commercial-free, on-demand content initially drew eyeballs to streaming services such as Netflix, Hulu and Amazon Prime. As troubling as that was for TV and Internet service providers to watch, it was just a remake of the distribution of content – a business where they’re comfortable. Increasingly, though, as surveys by 451 Research’s VoCUL show, original content is the draw. In our most recent survey in June, the number of Netflix subscribers that cited original content as an important factor in their subscription rose seven points from December to 34% – the same percentage of subscribers to Time Warner’s HBO streaming service also cited original content. (Only Showtime had a higher percentage, with 36%).

Differentiated content comes with a substantial price tag. AT&T will spend $85.4bn in cash and stock (split evenly) to acquire Time Warner. After bolting on Time Warner’s existing debt, the target has an enterprise value of $106bn, or 3.8x trailing revenue. That’s almost a turn higher than the valuation of Walt Disney, a company with growth in the high-single digits (compared with Time Warner’s slight declines this year). AT&T has taken out a $40bn bridge loan to fund the transaction, which it expects to close next year. When it does, AT&T expects to continue to operate the acquired business as a separate unit with the same management team.

For Time Warner, the deal provides a way out of a challenging time for high-end content producers. When quality content was pricey to create and distribute, Time Warner and a handful of others could claim a monopoly on consumer attention. That’s no longer the case. Coupled with that, trends in advertising are beginning to favor entities that can provide targeted audiences – something AT&T plans to pursue with this move. For now, advertisers still look toward networks to reach large-scale audiences. But Time Warner and others, which have no direct links to their audiences, are at risk of being disintermediated by content distributors and service providers. In that respect, it makes sense for Time Warner to make a hedge against this trend by linking up with AT&T. It also helps explain why Time Warner management had little interest in a slightly smaller bid from 21st Century Fox in 2014.

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Wipro snags Appirio for SaaS scale

Scott Denne

Contact: Scott Denne

Wipro makes the latest and largest bid to bring SaaS expertise to its systems integration business with the $500m acquisition of Appirio. Accenture, CSC and IBM have all inked recent nine-digit deals for similar companies. None of their targets were quite as large as Appirio, which was cresting $200m in annual revenue at the time of its exit.

In terms of valuation, Appirio’s multiple occupies the lower part of the narrow band of valuations on comparable transactions. Bluewolf fetched 2.7x in its sale to IBM last March. Cloud Sherpas got the same from Accenture in September 2015. Fruition Partners came in at 2.4x when it was purchased by CSC in August 2015.

With Appirio, Wipro gets the last independent SaaS vendor with significant scale. Appirio’s size was likely a draw for Wipro, which will need to do more M&A as it stretches for an ambitious revenue target. When Abidali Neemuchwala took the helm in February, the company promised to get its revenue to $15bn by 2020. Wipro finished its most recent fiscal year with $7.7bn, up 9% from the previous year.

It will need about 18% growth per year to hit its target and has already been uncharacteristically aggressive in pursuit of that. In February, the company paid $460m for HealthPlan Services and with Appirio it has now inked two $400m+ deals in a single year. Prior to 2016, Wipro had only spent more than $100m on two transactions in the entire previous decade.

M&A isn’t the only ingredient in its drive to hit $15bn. The company has reorganized about a half dozen themes where it can find growth above and beyond the core IT infrastructure services market. One of those themes is a focus on digital design and customer experience consulting. In that respect, Appirio and Wipro are aligned. Consulting generates just roughly 5% of Wipro’s business – Appirio itself has spent the past year adding digital design capabilities.

William Blair & Company advised Appirio on its sale (as well as Bluewolf and Fruition on their exits).

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Survey: Back to normal for tech M&A

Brenon Daly

Contact: Brenon Daly

After two straight forecasts of substantial deterioration in the tech M&A market, the outlook for activity has picked back up, according to the latest edition of the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. Nearly half of the respondents (47%) indicated they would be increasing their activity in 2017 compared to 2016. On the other hand, 20% of respondents said they would be slowing down on acquisitions next year, with the remaining one-third (33%) forecasting no change in their rate.

Broadly, the latest top-level results of the M&A Leaders’ Survey represent a more ‘normalized’ forecast for activity, following the most bearish outlook we’ve ever recorded. In our previous survey last April, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number indicating they would be cutting back on their shopping. For comparison, in the just-completed survey, more than twice as many respondents said they would be accelerating acquisition activity than said they would be slowing down.

The shift in sentiment comes as tech M&A spending accelerated dramatically through the summer, with the value of transactions announced in Q3 hitting the third-highest quarterly level since the end of the recent recession, according to 451 Research’s M&A KnowledgeBase.

Now in its tenth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster drew responses from 150 senior M&A professional on a variety of topics, including forecasts for types and structure of transactions, as well as the impact of recent events on their deal-making plans. Some of the highlights:

  • Private equity buyers are expected to play an increasingly significant role in the market. Nearly half of survey respondents (45%) forecast buyout shops would spend more in 2017 than they have in 2016, compared to just one-quarter (28%) who forecast lower spending.
  • Respondents indicated the White House clash between Donald Trump and Hillary Clinton is slowing deal flow far more than any disruption caused by the UK effectively severing economic and political ties with the European Union, following June’s Brexit vote.
  • Concerns about potential liability due to cybersecurity (think Verizon-Yahoo) are making buyers take a much closer look at the companies they plan to acquire.
  • Buoyed by a handful of strong recent tech offerings, the IPO market is expected to accelerate even more next year, according to a majority of survey respondents.

Respondents to the M&A Leaders’ Survey will get aggregate results, as well as selected comments and insight, emailed to them tomorrow. 451 Research subscribers should look for a full report on the survey later this week.

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Growth amid stagnation keeps the IPO demand high

Scott Denne

Contact: Scott Denne

In what’s becoming a recurring story in the back half of 2016, another high-growth enterprise tech company has gone public with a big first-day pop and a double-digit multiple. Today it’s Coupa that’s reaping Wall Street’s generosity. The spend management software vendor debuted at $35 per share, just shy of double the offering price, and was up past $40 in early trading. Like other recent debuts, Coupa is coveted by investors because it’s been able to carve out pockets of growth in an otherwise stagnating IT market.

At the end of last month, Nutanix (valued at 10x trailing revenue) had a similar pop on its first day, backed up by 85% topline growth. Twilio now sits at 24x trailing revenue following a tripling of its stock price since its June IPO. For its part, Coupa currently sports a $1.8bn market cap and a 6x multiple on the strength of 66% revenue growth last year.

According to 451 Research’s Voice of the Connected User Landscape, 21% of respondents in an August survey anticipated their company’s IT spending would decrease in the next quarter, compared with 15% projecting an increase. A six-point distinction in a single survey isn’t particularly telling on its own. However, the long-term trend of that quarterly survey indicates a market that’s been flat for a while. Over the past six years, respondents forecasting an increase have outnumbered those expecting a decrease in only one out of every eight surveys. And the percentage expecting an increase has only topped 20% twice. Compare that with the three years leading into the last recession, when the number never dropped below 24%.

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The Krux of Salesforce’s advertising push

Scott Denne

Contact: Scott Denne

Salesforce makes a bold and belated move in advertising technology with the $680m purchase of Krux. The transaction brings Salesforce into the market for audience management platforms at a higher price and a few years behind rivals Adobe and Oracle. That’s not to say it’s too late – in Krux, Salesforce has picked up a company that’s been able to thrive as software giants poured into its market.

The acquisition of Krux caps a record amount of M&A for Salesforce. According to 451 Research’s M&A KnowledgeBase, one-third of the company’s purchases have been announced since the start of 2015. Deals during that same period, including Krux, account for almost half of Salesforce’s total disclosed and estimated M&A spending.

Its recent moves have printed at aggressive multiples. In its largest, the $2.8bn reach for Demandware, Salesforce paid 11x trailing revenue for an established and growing e-commerce platform. In nabbing smaller companies, such as configure-price-quote vendor SteelBrick and predictive analytics startup BeyondCore, Salesforce paid upward of 20x. The acquisition of Krux likely came in above 10x, but shy of 20x as it’s a more mature business than those latter two. While steep, there’s justification in that price.

For one, Krux was able to grow from serving mostly publishers to mostly marketers. The company also did that at a time when most of its peers were reformatting their strategies to avoid Adobe and Oracle – Krux, in contrast, was expanding by going head to head. Second, most of its competitors had already been acquired, leaving Salesforce with few options in this category – and the players that had sold went for 6x and up. As the advertising market begins a transition from valuing reach toward valuing individuals, audience management platforms are becoming the link between a company’s first-party data and its advertising.

Krux isn’t Salesforce’s first foray into advertising – it already sells a social media ad platform and has partnered with Krux and other ad-tech providers to enable Salesforce Marketing Cloud customers to use their marketing audiences for paid media campaigns. Still, the deal goes beyond its previous ambitions in the space. Krux is built to be the repository of advertising data for sophisticated advertisers and some of the world’s largest media buyers. Salesforce’s prior efforts in this niche revolved around enabling email marketers to spread into new channels.

Look for a full report on this transaction in tomorrow’s 451 Market Insight.

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A summer surge puts Q3 tech M&A back on record pace

Brenon Daly

Contact: Brenon Daly

For at least one quarter, it was as if we never turned the calendar on the record-breaking pace of tech M&A we saw in 2016. Dealmakers around the globe spent $153bn on 910 tech, media and telecom (TMT) transactions announced from July to September. That ranks the just-completed Q3 as the third-highest quarterly total since the end of the recession, according to 451 Research’s M&A KnowledgeBase. In fact, the rather unexpectedly strong M&A spending in Q3 exactly matched the average quarterly tally from 2015, when deal value hit its highest annual level since the internet bubble burst.

This summer’s surge brings the total spent by TMT acquirers around the globe so far in 2016 to $336bn, putting 2016 already ahead of the full-year totals for six of the past eight years. Looking ahead, if we assume the pace of spending from January-September continues in Q4, full-year 2016 deal value would hit some $440bn – the second-highest annual total since 2002, according to the M&A KnowledgeBase.

Spending in the summer quarter was dominated by a parade of blockbuster transactions. Overall, last quarter saw four of the five largest deals of the year announced. Significant Q3 transactions include:

  • Continuing its big-ticket expansion into technology growth markets, SoftBank paid $32.4bn for ARM Holdings. The deal stands as the second-largest semiconductor transaction in history, trailing only Avago’s $37bn purchase of Broadcom last year.
  • Intel ended its experiment of baking security directly into its silicon by divesting a majority stake of its McAfee division. The move values McAfee at just $4.2bn, meaning the business has lost about 40% of its value under Intel’s six-year ownership. For comparison, during that same period, Symantec’s market value has almost doubled.
  • Hewlett Packard Enterprise unwound a series of earlier software acquisitions that were supposed to drive its next leg of growth, taking a pretty big discount in the process. The portfolio, which was accumulated over a decade by its predecessor company, cost HPE more than $20bn to acquire, but was spun off to Micro Focus in a transaction valued at $8.8bn.
  • Oracle paid $9.3bn, or 11x trailing sales, for NetSuite, making the largest purchase of a subscription software vendor ever. NetSuite’s valuation was roughly twice the level that Oracle has paid for the license-based software providers it has bought over the years.
  • In the biggest sale of a VC-backed company in two and a half years, Walmart paid $3.3bn for e-commerce startup Jet.com.

Our full report on the blockbuster Q3 tech M&A activity will be available to 451 Research subscribers later today.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2016 910 $153bn
Q2 2016 1,043 $110bn
Q1 2016 1,039 $73bn
Q4 2015 1,063 $185bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn

Source: 451 Research’s M&A KnowledgeBase

Tech M&A this summer is a really big deal

Brenon Daly

Contact: Brenon Daly Kenji Yonemoto

It’s been a blockbuster summer for blockbuster deals. Since July, tech acquirers have announced more transactions valued at $1bn+ than any quarter since the recent recession. 451 Research’s M&A KnowledgeBase has tallied a record 33 ‘three-comma deals’ here in Q3, significantly above the average of roughly 20 transactions per quarter over the past two years. Overall, big-ticket purchases, which had a median value of $2.2bn, account for a staggering $130bn of the roughly $150bn in total spending on tech M&A this quarter.

The billion-dollar prints this summer came from across the IT landscape, according to the M&A KnowledgeBase, with three semiconductor deals valued at more than $1bn, the largest SaaS transaction in history and the biggest exit for a VC-backed startup in two and a half years. Another source that has (rather unexpectedly) contributed to deal flow at the top end of the market recently has been divestitures. Fully one-quarter of the $1bn+ deals in Q3 involved the sale of divisions of larger companies, such as Hewlett Packard Enterprise shedding its software unit and Intel divesting a majority stake of McAfee. (Several of the billion-dollar transactions announced in Q3, such as the HP Software and McAfee deals, effectively involve unwinding previous billion-dollar acquisitions.)

451 Research will publish a full report on M&A activity in Q3 early next week. But the headline for the quarter is certainly the record number of big prints, which helped push spending to the third-highest quarterly total since the end of the recession, according to the M&A KnowledgeBase.

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Source: 451 Research’s M&A KnowledgeBase

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Motorola motors toward public-sector software and services

Mark Fontecchio

Contact: Scott Denne, Mark Fontecchio

Motorola continues to look to software and services to rescue its hardware business. The acquisition of Spillman Technologies is the latest in a string of such deals by the radio communications company, which has spent the past five years getting back to its legacy business in public safety through a spinoff and several divestitures. Those moves brought it relief from several price-sensitive commodity markets but left it in one with little growth – there aren’t a lot of new fire departments and police stations that have yet to invest in a radio system.

Acquiring Spillman Technologies, a developer of dispatch and records management software for police and fire agencies, gives Motorola a software offering to push into a sector where it’s entrenched. That’s similar to the rationale behind its two other recent software purchases: PublicEngines and Emergency CallWorks.

In addition to market maturity, weakness in foreign sales has also pushed down revenue for Motorola’s hardware products, yet its managed services business has grown. Its $1.2bn acquisition of Airwave Solutions in February drove 26% year-over-year growth in its services segment last quarter (organically, that unit grew in the low-single digits). While services still makes up less than half of its roughly $6bn topline, the combination of Motorola’s hardware and existing network management services along with Airwave’s network management business provides it a channel through which it can push new offerings and grab share in a market it already dominates. Motorola’s public-safety business is 10 times the size of Harris, its nearest competitor.

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