Even as summer heated up, tech dealmaking cooled down in August

Brenon Daly

Contact: Brenon Daly Kenji Yonemoto

After surging at the start of summer, tech M&A activity in August settled back to a more representative level. Acquirers around the globe announced 281 tech, media and telecom transactions valued at $30.5bn in the just-completed month, according to 451 Research’s M&A KnowledgeBase. The spending basically matches the August levels of the two previous years. However, it is just one-third the amount dealmakers spent in July and half of June’s spending.

The main reason why spending last month didn’t drop further than it did – August still ranked as the third-highest monthly total in 2016 – is primarily due to an unprecedented wave of private equity (PE) activity. Last month, buyout shops accounted for roughly half of all tech M&A spending, which is about three times their typical level. Overall, PE shops were buyers in five of the 10 largest transactions, including both of August’s biggest prints, according to the M&A KnowledgeBase.

While M&A spending held up last month, the same can’t be said for deal volume. The number of prints announced in August sank below 300 for the first time in two and a half years, according to the M&A KnowledgeBase. Deal volume dropped to just 281 transactions, down 18% from the monthly average in 2016. (Relatedly or not, stock trading volume last month also slid to some of the lowest levels in recent memory.)

With eight months of 2016 now complete, tech M&A spending has already cracked $300bn, putting it ahead of five of the seven full-year totals since the recent recession ended. Assuming the rest of the year continues at the same rate it has shown since January, 2016 would see some $450bn worth of deal flow. However, we suspect that the pace of spending in the remaining four months of the year could slow if several looming macro factors (an increasingly rancorous US election cycle, a long-considered interest rate hike, the continued deceleration of most of the world’s large economies) introduce more uncertainty into the picture.Jan-Aug MA totals

Genesys boosts August PE totals with Interactive buy

Scott Denne

Contact: Scott Denne

Genesys’ $1.4bn purchase of fellow contact-center software vendor Interactive Intelligence wraps up a busy August for private equity (PE). This month, PE firms and the companies they own, like Genesys, have racked up $14.5bn in deal value – almost half of August’s total tech M&A, according to 451 Research’s M&A KnowledgeBase.

Today’s transaction values Interactive at 3.3x trailing revenue. That’s a bit lower than the 4x multiple in both NICE’s acquisition of Interactive’s SaaS rival inContact earlier this summer and Genesys’ own $3.8bn post-money valuation on a minority investment from Hellman & Friedman last month. (That deal left a majority stake in the hands of Genesys’ earlier owners, Permira and Technology Crossover Ventures.) Interactive’s 14% revenue growth, compared with inContact’s 25%, accounts for much of the difference.

Genesys has recently set its sights on expanding beyond call-center software into broader customer experience applications to increase its single-digit annual growth. Yet today’s move is more of a consolidation play. It does, however, bring Genesys an asset whose SaaS business is growing – that product grew its revenue 43% year over year to $31m last quarter, accounting for about one-third of Interactive’s sales. Genesys also obtains a team that can help it target smaller customers – Interactive’s average revenue per customer is less than half of what Genesys takes in.

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Ritchie Bros. scoops up IronPlanet amid increased activity from non-tech buyers

Scott Denne

Contact: Scott Denne

Ritchie Bros. Auctioneers’ $759m reach for heavy-equipment commerce site IronPlanet marks the latest technology deal by a non-tech acquirer. Today’s acquisition helps demolish previous records of non-tech buyers in the tech market. According to 451 Research’s M&A KnowledgeBase, such shoppers have spent $33.7bn since the start of the year, more than $4bn over any other full year since 2006.

Not only are non-tech acquirers paying more, the strategy behind their transactions is changing. With the acquisition of IronPlanet, Ritchie hopes to bring in new customers with different preferences for buying and selling heavy equipment. IronPlanet offers a mix of white-label websites for dealers, different auction formats and additional partnerships that Ritchie doesn’t have today. What it isn’t obtaining is an online presence. More than half of Ritchie’s auction proceeds already come through online sales.

That same dynamic – the desire to reach a new set of customers via a technology acquisition – was also a driver of deals earlier this summer. Walmart’s $3.3bn purchase of Jet.com and Unilever’s $1bn pickup of Dollar Shave Club were both targeted at opening new market segments to those companies. Compare that with earlier non-tech transactions in the retail space, such as Nordstrom’s acquisition of HauteLook ($180m) in 2011 and Walgreen’s purchase of Drugstore.com ($429m) that same year. Both of those deals aimed to provide a new channel of services for customers already served by those retailers. Non-tech acquirers are moving from defense to offense, and spending more in the process.

Source: 451 Research’s M&A KnowledgeBase

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In its IPO, will Apptio suffer the curse of the crossover?

Brenon Daly

Contact: Brenon Daly

In what’s shaping up to be a bit of a test case for late-stage financings, a rather richly valued Apptio plans to go public. The company, which sells software that helps clients manage their IT spending, has revealed paperwork for an IPO with a placeholder amount of $75m. However, as Apptio makes its way to Wall Street, one of its existing backers on Wall Street has already trimmed the value of the company.

Institutional investor T. Rowe Price led Apptio’s $50m series D round in March 2012. At the end of 2015, the mutual fund had reduced the value of its investment by 24% compared with the previous year, according to the prospectus of the fund that holds Apptio equity. T. Rowe also marked down by a similar amount its holding of Apptio shares from a financing a year later. Fellow mutual fund Janus led the $45 series E in May 2013, Apptio’s last private round. According to Apptio’s prospectus, the company sold shares to Janus and other investors in that round at $22.69 per share.

Of course, valuations rise and fall every day on Wall Street. And startups that have drawn big money from mutual funds only to see their shares get marked down after the purchase often say the downgrades are mere ‘accounting’ moves made by people who don’t really understand Silicon Valley finance. However, in the case of Apptio, some of the discount may be warranted because it is currently growing only half as fast as it was when it raised its big slugs of capital from the so-called crossover investors.

In the first two quarters of 2016, Apptio has increased revenue a solid-but-not-spectacular 22%. That’s the same pace as its full-year 2015, but just half the rate of 2014. At the same time as Apptio’s growth has slowed, losses have mounted. It lost $41m in 2015, up from $33m in 2014. Although losses have eased so far this year, Apptio still very much runs in the red.

Part of the reason for the deep losses is that Apptio’s software is a rather heavy implementation, which can take several months to set up. For its software to be useful, clients need to have an IT budget that runs in the hundreds of millions of dollars, and some customization of the software is typically required. (Roughly 20% of the vendor’s revenue comes from professional services.)

Although Apptio has collected an enviable roster of clients, it counts just 325 total customers. As a point of reference, that’s roughly the same number of customers that Workday had when it went public in 2012. Further, the two companies were roughly the same size, recording about $130m in revenue in the fiscal year leading up to their mid-summer filings. However, at the time of their IPOs, they were on very different trajectories: Workday was doubling revenue, compared with 22% growth for Apptio. Obviously, for growth-focused Wall Street, that is almost certain to result in very different valuations for the companies. Workday hit the market at an astonishing 40x trailing sales, while Apptio would probably count itself fortunate to garner a double-digit valuation.

Enterprise tech IPOs* over the past 12 months

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

*Includes Nasdaq and NYSE listings only

Rackspace pivots to private

Brenon Daly

Bruised by a fight in the clouds, Rackspace has opted to go private in $4.3bn leveraged buyout (LBO) with Apollo Global Management. The company, which has been public for eight years, is in the midst of a transition from its original plan to sell basic cloud infrastructure, where it couldn’t compete with Amazon Web Services, to taking a more services-led approach. Terms of the take-private reflect the fact that although Rackspace has made great strides in overhauling its business, much work remains.

Leon Black’s buyout shop will pay $32 for each share of Rackspace, which is exactly the price the stock was trading at a year ago. Further, it is less than half the level that shares changed hands at back in early 2013. Of course, at that time, Rackspace was growing at a high-teens clip, which is twice the 8% pace the company has grown so far this year.

In terms of valuation, Rackspace is going private at just half the prevailing market multiple for large LBOs so far in 2016. According to 451 Research’s M&A KnowledgeBase, the previous nine take-privates on US exchanges valued at more than $500m have gone off at 4.4x sales. (See our full report on the record number – as well as valuations – of take-privates in 2016.) In comparison, Rackspace is valued at just slightly more than 2x trailing sales: $4.3bn on $2bn of revenue, with roughly the same amount of cash as debt.

More relevant to Rackspace as it moves into a private equity (PE) portfolio is that even as the company (perhaps belatedly) transitions to a new model – one that includes offering services on top of AWS, Azure and other cloud infrastructure providers that Rackspace once competed against – is that it generates a ton of cash. Sure, growth may be slowing, but Rackspace has still thrown off some $674m of EBITDA over the past year.

The company’s 33% EBITDA margin is even more remarkable when we consider that Rackspace, which has more than 6,000 employees, is relatively well-regarded by its customers for its ‘fanatical’ support of its offerings. While we could imagine that focus on customer service as competitive differentiator might set up some tension under PE ownership (people are expensive and tend not to scale very well), Rackspace has the advantage of having built that into a profitable business. In short, Rackspace is just the sort of business that should fit comfortably in a PE portfolio.

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The buyout barons get busy on Wall Street

Brenon Daly

Contact: Brenon Daly

Cash-rich buyout firms are still shopping on Wall Street, undeterred by recent record levels hit in US equity markets. The dramatically increased buying power of private equity (PE) shops has resulted in an unprecedented number of significant tech vendors erased from US exchanges so far this year. Already in just eight months of 2016, PE firms have announced nine take-privates valued at more than $500m, up from an average of about five transactions per year in the past half-decade, according to 451 Research’s M&A KnowledgeBase.

Part of the reason why PE shops are buying big companies is that they have amassed billions of dollars of capital, so they don’t have to sweat when writing the equity check. Further, credit is once again flowing relatively freely to help support these large deals. With money in hand, buyout firms are ready to do business. To get a sense of that, consider Vista Equity Partners’ $1.8bn acquisition of Marketo in May. According to the proxy filed with the SEC in connection with the transaction, Vista announced the purchase just one month after first informally floating the idea of buying the marketing automation specialist.

Of course, it also helps that buyout shops are willing to pay up to do their deals. In the case of Marketo, for instance, Vista is paying 7.9x trailing sales for company, which was growing at about 30%. Vista paid a comparable multiple in its similarly sized reach for Cvent in April. Meanwhile, the buyout pair of Silver Lake Partners and Thoma Bravo paid a full turn more last October for SolarWinds, a roughly $500m business that sold for $4.5bn. The valuation of the network management software provider looks equally as rich when we consider that it sold for 28x EBITDA, by our calculation.

On average, in the nine large take-privates so far in 2016, PE firms have paid an average of 4.4x trailing sales, according to the M&A KnowledgeBase. That, too, is the richest valuation we have recorded for PE shops, slightly ahead of the average of 4.1x trailing sales in 2015 but about twice the prevailing multiple in the previous three years. For more context: The recent take-privates are valued about half again as richly as the LBOs done during the previous buyout boom of 2006-07, when the average tech vendor went private for slightly less than 3x trailing sales, according to the M&A KnowledgeBase.

KB recent take-privates

Trade Desk looks to trade publicly

Scott Denne

Contact: Scott Denne

The Trade Desk unveiled its prospectus Monday, showing that its agency-focused strategy may have enabled it to meet the challenge of scaling an ad-tech business. Most of Trade Desk’s peers have a complicated relationship with ad agencies and the holding companies that own them. Agencies control an outsized amount of ad spending, yet they treat most media buying platforms as a media rather than software purchase, and play ad-tech competitors off each other to see who will take the lowest margin for a campaign. This has led many media buying platform purveyors to seek to sell their wares to marketers directly, bypassing the agencies and hoping to exchange unpredictable, low-margin orders from agencies for long-term, software-like contracts.

Rather than fight ad agencies, Trade Desk embraced them by selling its software strictly to them and not to the agencies’ marketer customers. That bet has paid off. The company’s revenue increased to $114m in 2015 from $45m a year earlier. Its topline rose 83% year over year through the first six months of 2016. That growth hasn’t come at the expense of profits. The Ventura, California-based vendor eked out a tiny profit in 2014 and grew that to $15m last year. This year it’s on pace to bump that up a bit.

Selling to ad agencies is expensive. Profits remain elusive for many ad-tech firms because the sales process is never-ending, as many agencies choose to purchase media buying platforms as a one-off media expense, rather than an ongoing license or subscription. Trade Desk appears to have gained more traction in selling software contracts to agencies (389 of its agency customers have contracts in place with minimum spending levels), which has kept its marketing and sales costs down as the use among existing customers has risen.

Trade Desk allocated just 24% of its 2015 revenue toward selling its products. Other publicly traded ad-tech providers spend far greater portions of their net revenue on this activity. TubeMogul spent 41% of its revenue on sales and marketing last quarter. Rocket Fuel shelled out 55%, though far lower than the 88% it was spending at its IPO. Ad network specialists Tremor Video and YuMe were even higher at 65%.

Its ability to sell ad-tech as software, its high growth and its profitability should enable Trade Desk to fetch a superior multiple than its peers when it does begin to trade. And it will need to trade well up from those companies to get a valuation above the $600m it garnered in a private financing earlier this year. TubeMogul is the best available comp for Trade Desk. Both vendors offer a media buying platform, and both position themselves as software firms rather than services or media companies. At 57% last year, TubeMogul’s growth is less than half that of Trade Desk and the vendor has yet to turn a profit. Despite garnering one of the best multiples in ad-tech, TubeMogul trades at roughly 2x net revenue. To hit $600m, Trade Desk would need to get 4x trailing revenue.

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Media.net becomes latest Chinese ad-tech target

Scott Denne

Contact: Scott Denne

Inflated stock value on China’s exchanges and a belief in a coming currency devaluation continue to fuel a boom in overseas M&A from the People’s Republic. The latest acquirer to add to that trend is Beijing Miteno Communication Industrial Technology, which announced the purchase of Media.net, a contextual advertising technology firm, for $900m in cash. With more than four months left to go in the year, China-based buyers have crushed their previous record on foreign acquisitions three times over by spending $13.1bn, compared with $3.7bn in all of last year.

We expect such deals to continue, particularly in ad-tech, as vendors in that country widely anticipate an eventual devaluation of their currency. Whether such a devaluation will occur isn’t known, but it’s generally accepted by much of the business community in the country and that has been a factor in the sudden spurt of M&A.

China-based acquirers have been particularly aggressive in their pursuit of ad-tech companies like Media.net. These businesses play well into the arbitrage strategy that’s driving much of China’s overseas acquisitions. The buyer trades at 12.6x trailing revenue on the Shenzhen Stock Exchange – adding Media.net at a 3.5x multiple should boost that nicely. That’s a dynamic we’ve seen in several, though not all, such purchases.

Advertising technology plays well in that arbitrage strategy and those businesses have become popular targets for Chinese shoppers. On a revenue basis, valuations tend to be lower in ad-tech than other tech sectors because gross margins are lower – 15-25% gross margins are quite common. Also, a recent dearth of US acquirers for those assets has driven prices even lower. According to 451 Research’s M&A KnowledgeBase, the median historic multiple on ad-tech transactions is 2.7x TTM revenue. That has dropped to 2.2x in the past 24 months.

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The comeback kids of the tech IPO market

Brenon Daly

Contact: Brenon Daly

If there’s going to be a recovery in the tech IPO market, information security (infosec) looks like it will lead the way. According to 451 Research’s recently launched M&A KnowledgeBase Premium, one-quarter of the 72 startups that we think are of a size and mind to go public in the near future come from the infosec industry. The ‘shadow IPO’ pipeline is one of the key features of the new premium version of 451 Research’s industry-leading M&A KnowledgeBase.

The premium version of our M&A KnowledgeBase features a full financial profile of the candidates, as well as 451 Research’s qualitative assessment of each company’s technology and its competitive positioning in the market. For instance, the profile of Veracode includes our proprietary estimates of the application security startup’s bookings for both 2015 and 2016, plus our analysis of its expansion into the new growth market of mobile apps. Altogether, KnowledgeBase Premium has a shortlist of 18 infosec vendors that could be eyeing an upcoming IPO, including Carbon Black, LogRhythm and ForeScout.

Although the IPO market has been mired in a slump recently, with just three enterprise-focused offerings so far this year, many private companies have matured to the point where their business models are comparable to their publicly traded brethren. Further, many are putting up growth rates that leave Nasdaq and NYSE firms in the dust. That’s particularly true in the infosec space, where a recent survey of 881 IT budget-holders by 451 Research’s Voice of the Enterprise found that 46% of respondents had more to spend on security in the coming quarter, compared with the start of the year. That was 10 times the percentage who indicated that their infosec budgets were shrinking.

Of course, merely having a business that’s ready to go public doesn’t necessarily mean that the company needs to file an S1. Most of the infosec companies have plenty of cash in their treasuries, with the 18 pre-IPO vendors having raised about $2bn in venture backing. (KnowledgeBase Premium not only tracks fundings, but in some cases it also notes the valuation of the funding.) Additionally, many of the publicly traded infosec names – including both of the sector’s most recent debutants, Rapid7 and SecureWorks – haven’t necessarily found bullish investors on Wall Street.

But as the Twilio offering and its subsequent aftermarket trading has shown, a company with a strong growth story can almost always find buyers, regardless of what’s happening in the overall market. With that in mind, we’ll watch for more of the 72 names on our M&A KnowledgeBase Premium IPO shortlist – particularly those in the bustling infosec arena – to move from the pipeline to Wall Street in the coming quarters.

IPO pipeline by sector

Source: 451 Research’s M&A KnowledgeBase Premium

Is Apigee set to be an acquiree?

Brenon Daly

Contact: Brenon Daly

After a dual-track process ended in an IPO in April 2015, Apigee is understood to be trying once again to sell itself. Several market sources have indicated that the API management vendor has retained Morgan Stanley to run the process. According to our understanding, a handful of large software infrastructure vendors are considering a bid for Apigee, which would likely trade for roughly $500-600m.

Apigee has had a tough run as a public company. In its 16 months on the Nasdaq, it has never traded above its IPO price of $17 per share. (Morgan Stanley led Apigee’s IPO.) During the broad market meltdown in February, Apigee stock touched $5. Although shares have nearly tripled in value in the half-year since then, the company is still underwater from its debut.

One reason for Wall Street’s bearishness is that Apigee is viewed as a ‘sub-scale’ software provider. It likely finished its most recent fiscal year, which ended at the end of July, with less than $100m in revenue. (For comparison, that is less than privately held MuleSoft, which is a sometimes rival to Apigee with its broader integration portfolio.) Further, Apigee is running in the red, losing about $10m in each of the past four quarters on a GAAP basis.

Possible bidders for Apigee, which currently has a market cap of $435m, include big software firms such as existing partners SAP and Pivotal, as well as CA Technologies. According to our understanding, CA was a serious suitor for Apigee before the IPO. That would have been on top of the existing API management CA obtained with its purchase of Layer 7 in April 2013.

Further, CA bought agile software development tools supplier Rally Software last year in a $480m transaction that lines up fairly closely – both strategically and financially – with a possible pickup of Apigee. Both play a part in the broader software lifecycle management market, and both found Wall Street to be a fairly inhospitable neighborhood. Rally garnered 5.5x trailing revenue in its sale to CA. However, Apigee is growing faster (roughly 30%, compared with about 20% at Rally) so would likely get a bit of a premium. Apigee currently trades at about $435m, or 4.7x trailing sales.

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