As candidates brawl, some spending plans get knocked down

Brenon Daly

Contact: Brenon Daly

Regardless of the outcome of tonight’s inaugural US presidential debate, this year’s election process has already turned off voters. The prospect of casting a ballot for either of the two mainstream presidential candidates – who are both currently viewed ‘unfavorably’ by a majority of US voters – in an increasingly rancorous campaign is casting a cloud that expands far beyond Washington DC. The electoral disenchantment is also likely to hurt business.

That’s one conclusion of a new survey from 451 Research’s ChangeWave service, which last week asked more than 1,900 consumers what impact the ongoing US presidential election will have on their shopping plans for the next three months. The vast majority of respondents (71%) said the Trump vs. Clinton circus would have no impact on their discretionary spending through the end of the year. However, if we look at the minority-but-still-sizable remaining portion (29%), those respondents overwhelmingly indicated they are putting away their checkbooks. In fact, the number of consumers who forecast they would be decreasing their discretionary purchases (22%) was 11 times higher than those who said they would be increasing their purchases (2%).

We mention the ChangeWave finding because it may (and here we emphasize the word ‘may’) help explain some of the slowdown in recent tech M&A activity. Obviously, some qualifications are needed any time we extrapolate results from a consumer-based survey to the corporate world. To be clear, ChangeWave polled consumers only about their plans for individual discretionary purchases, and did not specifically address corporate M&A. Nor did it focus on tech. However, given that companies are just a collection of people who tend to bring their perceptions with them to the office, and acquisitions can sometimes be viewed as a discretionary purchase, we would make the case that ChangeWave’s finding has relevance to the tech M&A community.

Regardless of whether the presidential election is actually knocking deals off the table, something is slowing down activity. In the first half of 2016, tech acquirers announced an average of 350 transactions each month, according to 451 Research’s M&A KnowledgeBase. Both July and August came in below that level. In fact, last month’s total of just 297 tech deals, representing a 14% decline from the monthly average in the first half of 2016, was the first time since March 2014 that M&A volume failed to top 300. And while September won’t wrap up until the end of this week, this month is tracking even weaker than last month. (We are on pace for about 270 announced transactions for September.) In other words, as we get closer to election day, M&A activity is dropping off.

cw-presidential-election-impact

A public/private split in Apptio’s IPO

Brenon Daly

Contact: Brenon Daly

Apptio soared onto Wall Street in its debut, pricing its offering above the expected range and then jumping almost 50% in early Nasdaq trading. The IT spend management vendor raised $96m in its IPO, and nosed up toward the elevated status of a unicorn. However, in a clear sign of the frothiness of the late-stage funding market a few years ago, Apptio shares are currently trading only slightly above the price the institutional backers paid in the company’s last private-market round in May 2013.

That’s not to take anything away from Apptio, which created some $850m of market value in its offering. (Our math: Apptio has roughly 37 million shares outstanding, on an undiluted basis, and they were changing hands at about $23 each in midday trading under the ticker APTI.) That works out to a solid 5.4 times 2016 revenue, which we project at about $157m. (Last year and so far in the first half of 2016, Apptio has increased sales in the low-20% range. That growth rate, while still respectable, is about half the rate it had been growing. We suspect that deceleration, combined with uninterrupted red ink at the company, help explain why Wall Street didn’t receive Apptio more bullishly.)

In midday trading, Apptio’s share price was only slightly above the $22.69 per share that it sold shares to so-called ‘crossover investors’ Janus Capital Group and T. Rowe Price, among other investors, in its series E financing, according to the vendor’s prospectus. A relatively recent phenomenon, crossover investing has seen a number of deep-pocketed mutual funds shift some of their investment dollars to private companies in an effort to build an early position in a business they hope will come public and trade up from there.

However, given the glacial pace of tech IPOs in recent years as well as the overall deflation of the hype around unicorns, that strategy hasn’t proved particularly lucrative. In fact, many of the price adjustments that mutual funds have made on the private company holding have been markdowns.

But the institutional investors would counter that the short-term valuation of their portfolio matters less than the ultimate return. For the most part, we’ve seen conservative pricing of tech IPOs in 2016. (Twilio, for instance, has more than doubled since its IPO three months ago.) Apptio probably doesn’t have the growth rate to be as explosive in the aftermarket as Twilio, but it can still build value. That’s what investors – regardless of when they bought in – are banking on.

Recent enterprise tech IPOs*

Company Date of offering
Pure Storage October 7, 2015
Mimecast November 20, 2015
Atlassian December 10, 2015
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016

*Includes Nasdaq and NYSE listings only

The Trade Desk trades up

Scott Denne

Contact: Scott Denne

The first successful ad-tech IPO in two years made a strong debut on Wall Street today. But don’t expect the floodgates to open for ad-tech offerings anytime soon. The Trade Desk priced at $18 per share and began trading at $28 for a market cap north of $1bn, or 7.2x trailing revenue. Within ad-tech, there aren’t many companies that offer investors the scale, growth and potential sustainability to draw such interest.

Trade Desk deployed a different sales strategy than most of its media-buying software peers. Vendors in that space were forced to choose between scaling up quickly through short-term, low-margin deals with ad agencies or fighting those agencies for direct business with marketers. Trade Desk positioned itself as a software provider to agencies only, and therefore not a threat to its own customers. Its positioning and product led revenue to grow 2.5x last year to $114m. Through the first half of this year, it’s running at $149m trailing revenue. It’s not the largest of its peers, but does have the highest growth at that scale.

Trade Desk’s debut is good news for AppNexus, which has been working toward an IPO of its own for the past year or so. However, most ad-tech vendors with the kind of growth that Trade Desk generates are simply too small to consider a public offering. And those that have the size don’t have the growth.

Today’s offering is reminiscent of Rocket Fuel’s 2013 IPO. That company also went public on the strength of scorching growth derived from sales to the agencies. Rocket Fuel currently trades down 95% from its debut. One of its problems was that it was winning high-margin sales from agencies. Once it went public and those margins became known, its customers began to demand that it take lower margins, which hindered its growth. While that’s a risk for Trade Desk, it’s far less pronounced.

Rocket Fuel was keeping about 55% of the media spending running through its platform, while Trade Desk keeps 21%. Trade Desk targets a different part of the agency business. As its name suggests, Trade Desk sells to agency trading desks – sophisticated digital media buying operations – many of which have a contractual relationship with the company. At the time of its IPO, Rocket Fuel was catering to agency buyers on a one-time basis and before most agencies’ holding companies sought to consolidate digital spending via their trade desks.

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

Google and other tech giants understand the value of natural-language technology

Scott Denne

Contact: Scott Denne

Virtual assistants, bots and conversational software interfaces are sending the world’s largest tech companies hunting for natural-language-processing (NLP) technologies and expertise. Google is the latest to make a kill with its acquisition of API.AI, which provides developers with access to NLP capabilities. With the purchase, Google could benefit from API.AI’s developer network, giving the search giant access to a significant number of bots, applications and devices already using speech recognition and NLP technologies.

However, multiple redundancies are the most striking feature of this deal – Google already offers developer tools for NLP and speech recognition, as well as its own conversational assistant in its recently launched Allo messaging app and its Google Home smart speaker. Those redundancies highlight the demand for NLP expertise as the acquisition of API.AI will expand Google’s team of experts working on conversational interfaces.

Google’s move comes just three months after Microsoft’s pickup of API.AI rival Wand Labs as the enterprise giant seeks to transform the functionality of its products with NLP, machine learning and data. IBM, Facebook, Google and Amazon have all inked previous NLP transactions and we anticipate continued interest in other independent NLP platform providers such as Recast.AI, init.ai and msg.ai, as well as bot-building platform specialists that include an NLP component. Both categories of vendors bring expertise and cater to developers, which is an important element to growing out diverse sets of training data to tune NLP algorithms.

Subscribers to 451 Research’s Market Insight Service will have access to a full report on Google’s API.AI buy later today. Meanwhile, click here to view a previous Spotlight on developer platforms for chat bots and NLP.

Notable NLP acquisitions

Date announced Acquirer Target
September 19, 2016 Google Speaktoit (dba API.AI)
June 16, 2016 Microsoft Wand Labs
March 4, 2015 IBM AlchemyAPI
January 5, 2015 Facebook Wit.ai
April 17, 2013 Amazon Evi Technologies

Source: 451 Research’s M&A KnowledgeBase

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

Infoblox sells for $1.6bn amid a slew of PE take-privates

Scott Denne

contact: Scott Denne

Billion-dollar take-privates continue to rise to record levels as Vista Equity Partners pays $1.6bn for Infoblox. Vista has ended the network management vendor’s four-year run as a public company – a run that has seen shifts toward virtualization catch up with the target. Many of Infoblox’s capabilities – e.g., DNS, DHCP and IP address management – are now included in different virtualization and cloud management products. As that has happened, Infoblox’s growth has slowed and it has become more reliant on specialty deployments, particularly for security, which now generates 16% of sales, up from 8% a year ago.

Today’s deal marks the third time this year that Vista has taken a public company off the market. The first two, Marketo and Cvent, went off at 8x trailing revenue – aggressive multiples for a private equity (PE) transaction. By comparison, Infoblox is selling for 3.7x. Marketo and Cvent were posting about 30% annual revenue growth at the time of their sales. Infoblox, on the other hand, was slightly down year over year last quarter and expects 6% or less growth over its recently begun fiscal year.

Being lower than Vista’s recent deals doesn’t mean that Infoblox isn’t commanding a strong multiple. Despite growth challenges and the fact that it puts up negative EBITDA – squinting past a restructuring charge gets it nearly in the black this year – Infoblox’s multiple comes in right at the median multiple for similar transactions.

Availability of debt has helped drive PE deals to recent highs. According to 451 Research’s M&A KnowledgeBase, there have now been 10 take-privates by PE firms valued at or above $1bn, more than any other full year in the past decade. (The total value of such transactions is higher than most years, but not breaking records as no single deal has cracked $5bn).

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

Amdocs’ engaging trio of acquisitions

Scott Denne

Contact: Sheryl Kingstone Scott Denne

Amdocs, the dominant provider of operational telecom software, stretches into customer engagement with a trio of uncharacteristic acquisitions. The telecom support systems giant must push beyond traditional operational and billing software (OSS/BSS) as the nature of customer service changes in the telecom industry.

The Israel-based company spent a combined $260m to acquire Brite:Bill, Pontis and Vindicia, enhancing its billing experience and customer engagement capabilities. Acquisitions have been a part of Amdocs’ legacy. However, three deals in a day in unusual. In fact, it’s been a decade since Amdocs inked three transactions in a single year.

It’s not just the number of new purchases that defies Amdocs’ M&A M.O. The vendor bought its way toward consolidating OSS/BSS, first pushing from BSS into OSS and then, more recently, doing deals to shore up its market share in that sector. Now Amdocs is looking to M&A for new capabilities to address the changing requirements of consumers. And there’s an urgent need to do that.

The increasing availability of digital communications and customer service has unleashed an abundance of new consumer demands. Telcos are no longer competing on price alone. Mobile, social and other digital channels are empowering customers to dictate the terms of engagement with their chosen service providers. That is forcing service providers to complement systems of record with systems of engagement that are agile and intelligent. According to our surveys, 76% of consumers prefer to use digital channels to avoid calling a customer service agent. Of those, 42% view that capability as a prerequisite for future loyalty.

Arma Partners advised Brite:Bill on its sale.

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

Coupa is latest SaaS firm to seek IPO following Apptio, The Trade Desk

Scott Denne

Contact: Scott Denne

Wall Street’s recent generosity toward software IPOs hasn’t gone unnoticed as a slew of such companies are looking to debut. Apptio and The Trade Desk recently set a range for their offerings and now Coupa has moved toward an IPO by unveiling its prospectus. The spend management vendor’s accelerating growth replicates a story that has played well lately and could enable it to top the valuation from its venture rounds.

Coupa offers cloud-based spend management software and an integrated (and free) portal for suppliers. The company believes that integrating supplier capabilities into the portal will help create a network effect to draw more buyers onto the software and vice versa. It still has massive sales and marketing costs, although there are signs that this strategy is beginning to work. Revenue rose 65% in 2015 to $83m and, more importantly, accelerated to 75% growth in the first half of this year. Coupa’s sales and marketing expense was 70% of its total revenue for the first half of last year, but dropped to 58% this year. Its net loss was $46m for the year.

Accelerating revenue has been a theme among SaaS IPOs. Talend, with 20% growth last year, fetches 8.5x trailing revenue on the strength of 34% and 38% year-over-year growth in the two most recent quarters. Twilio, which increased revenue 88% in 2015 from 78% the previous year, commands a 20x multiple. Coupa will be challenged to hit the heights of Twilio when it prices, although moving past Talend seems possible. Coupa and Talend have similar costs and the former’s higher growth should be enough to take it to 9x or beyond, giving it a valuation of approximately $1bn.

Consumer sentiment favors continued liberal multiples. According to 451 Research’s VoCUL survey in August, 17% of people are more confident in the US stock market than they were 90 days ago. That’s up from 14% in the same survey the previous month and just 5% from a year ago.

A tarnished Golden Tombstone

Brenon Daly

Contact: Brenon Daly

In each of the past nine years, 451 Research has surveyed more than 100 corporate development executives to find out which deal announced during that year stood out to them as the most significant transaction. The peer-selected prize, which we call the Golden Tombstone, has gone to companies across the tech landscape. Still, many of those blockbuster transactions haven’t generated the expected returns. The Golden Tombstone, it turns out, can tarnish over time.

We saw that yet again this week, as Intel unwound its full ownership of McAfee, which was voted the most significant transaction of 2010. With that divestiture, the number of Golden Tombstone-winning transactions that have been undone climbed to three, representing an alarming one-third of the annual prize winners. (The others: Hewlett-Packard Enterprises sold off its services business in May, reversing its 2008 acquisition of EDS; and Google unwound its 2011 purchase of Motorola Mobility three years later.) For the record, the ‘exit’ prices for all of those businesses was far less than the ‘entrance’ prices.

Not to jinx the transaction or anything, but we would nonetheless note that last year’s landslide winner was Dell’s acquisition of EMC. That transaction, which was announced last October and officially closed earlier this week, was an obvious vote for the Golden Tombstone. After all, it is the largest pure tech transaction in history. And yet, even though Dell and EMC are only (officially) beginning their corporate life together, there’s already some ominous history lining up against the deal.

Top vote-getter for ‘most significant tech transaction’

Year Deal
2015 Dell’s acquisition of EMC
2014 Facebook’s acquisition of WhatsApp
2013 IBM’s acquisition of SoftLayer
2012 VMware’s acquisition of Nicira
2011 Google’s acquisition of Motorola Mobility
2010 Intel’s acquisition of McAfee
2009 Oracle’s acquisition of Sun Microsystems
2008 Hewlett-Packard’s acquisition of EDS
2007 Citrix’s acquisition of XenSource

Source: 451 Research Tech Corporate Development Outlook Survey

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

Baking in security isn’t a good recipe for Intel

Brenon Daly

Contact: Brenon Daly

Intel’s multibillion-dollar experiment in bringing security in-house and baking it into its silicon is over. The chipmaker announced plans to mostly unwind its six-year-old acquisition of McAfee, which stands as the largest information security (infosec) transaction in history. However, Intel’s divestiture of a majority stake of its infosec division is being done at a substantial discount to the original purchase.

Under terms, Intel will retain a 49% stake in the infosec business, which will revert to the McAfee name, with private equity firm TPG Capital acquiring a 51% stake. The buyout shop will pay $1.1bn in cash and assume $1bn in debt. (The co-owners of McAfee plan to raise a total of $2bn in debt, with $1bn of that held by TPG and $1bn held by Intel.) Altogether, the transaction gives McAfee an enterprise value of $4.2bn, compared with an enterprise value of $7bn for McAfee in Intel’s mid-2010 puzzling purchase.

Sales at Intel’s infosec unit totaled $1.1bn in the first half of this year, according to the company. Annualizing that amount would put revenue at $2.2bn, meaning McAfee is valued at less than two times sales in its divestiture. That’s a relatively low multiple for infosec companies. In its 2010 purchase, for instance, Intel paid roughly 3.5 times sales for McAfee. Furthermore, rival Symantec currently trades at roughly the same 3.5x multiple.

Intel’s divestiture of McAfee, which had been rumored for some time, underscores the fact that infosec is an industry in transition. The move means that two of the largest and longest-standing security companies have undergone dramatic corporate overhauls since just the start of the year. Back in January, Symantec sheared off its Veritas storage business so that it could focus entirely on security. It then followed that up in summer by announcing the second-largest infosec transaction, according to 451 Research’s M&A KnowledgeBase. Symantec paid $4.65bn for Blue Coat Systems, an acquisition that, unusually, installed Blue Coat executives into the top three spots at the acquiring company.

Dell-EMC closes, but there’s still dealing to be done

Brenon Daly

Contact: Brenon Daly

Whenever a newly joined couple move in together, there are always a few items that just don’t fit as the two houses are merged into one. These things can range from minor overlapping bits (dishes that don’t quite match) to bulky odd-lot items (that rather ugly plaid couch that was hidden away in a corner of the basement). Invariably, the domestically blissed couple has to sort through their stuff to figure out what’s coming and what’s going.

As Dell and EMC officially close their union today, the process of sorting out their combined house assumes a new urgency. (See our full coverage of the transaction.) Of course, the two companies have already begun rationalizing their holdings in anticipation of coming together, most notably with Dell raising more than $5bn over the past half-year by shedding ill-fitting divisions. These divestitures have essentially involved Dell unwinding earlier acquisitions that didn’t deliver promised returns, notably Perot Systems, as well as Quest Software and SonicWALL.

We suspect the next bit of unwinding will likely come from Dell reversing EMC’s previous acquisition of Documentum. (This move has been mulled for several years, but now seems more likely as Dell takes on tens of billions of dollars of debt to pay for the largest-ever acquisition in the tech industry.) Somewhat like Veritas within Symantec, Documentum has never really fit inside EMC. It is even harder to see the strategic rationale for the content management software inside Dell, which has sold off most of its software assets. Dell is (once again) focusing on hardware, with product revenue accounting for roughly three-quarters of the combined company revenue of $74bn.

Documentum serves as the main piece of EMC’s Enterprise Content Division (ECD), a $600m unit that is a bit lost inside a $24bn company. (We would note that ECD accounts for just 2.5% of overall revenue at EMC – exactly the same portion of revenue generated at Dell by its software business, which was divested in June.) ECD would represent less than 1% of the combined company revenue, likely relegating it even further to an ‘afterthought’ sale.

That won’t help ECD, which is already slowly shrinking inside EMC. Unusually for a software company, product sales account for only about one-quarter of the division’s revenue, with the remaining three-quarters coming from maintenance and support. Still, ECD is able to put up very respectable gross margins in the mid-60% range. That financial profile, which represents a mature and somewhat sticky offering, fits well with private equity requirements. So we could see Documentum going to a buyout shop, which is where Veritas landed, as well as Dell’s own software division.

However, if Dell does manage to sell Documentum, it would likely garner only about $1bn for the business. (For the record, EMC paid $1.8bn, mostly in equity, for Documentum in 2003.) That would value ECD at roughly 1.7 times sales, which is exactly the valuation Dell got when it unwound its own software business three months ago.