For some tech companies, it’s a matter of stumbling to the sidelines

Brenon Daly

Contact: Brenon Daly

We noted earlier this week that IT budgets are tightening, meaning growth could get harder to find as the year rolls along. Sluggish expansion and diminished outlooks have already hit some of the tech industry’s major names. And while they search uncertainly for a way to bump up their top lines, they aren’t necessarily looking to M&A. We’ve already seen a few key companies, particularly those accustomed to growing at a rapid clip, step out of the market.

  • Apple is shrinking after a decade and a half of uninterrupted growth that was the envy of the tech industry. In the previous three years, when it was growing revenue at an average of a mid-teens rate, the company printed about an acquisition every month, according to 451 Research’s M&A KnowledgeBase. Yet it hasn’t been nearly that active as revenue declined. Earlier this week, Apple bought an early-stage analytics provider – its first deal since January.
  • Former highflier FireEye has dramatically come back to earth. The security specialist now expects to earn just $100m in additional revenue in 2016, which is half the $200m in new revenue it posted in 2015. That means FireEye would generate mid-teens growth this year, just one-third the level it grew last year. FireEye hasn’t announced a deal in the past six months.
  • Like FireEye, Twitter is growing at only one-third the rate it was last year. (In its second quarter, Twitter increased revenue just 20%, compared with 61% in Q2 2015.) According to the M&A KnowledgeBase, Twitter has done 19 acquisitions since its IPO in November 2013. However, just one of those transactions has come in the past year, as the company has struggled with attracting new users and selling more ads to that decelerating audience.

As marquee tech firms find their growth slowing or even reversing, they are more likely to hunker down. The first order of business for a company that’s stumbling is to understand where it tripped up and what it needs to do to regain its stride. (As they say, growth masks a lot of problems.) Acquisitions – potentially expensive and often irrecoverably distracting – don’t really fit strategically when a vendor is doing layoffs (FireEye) or looking to sublease some of its headquarters (Twitter). If more of the tech industry does indeed feel the pinch of tightening IT budgets, the recent surge in M&A could slow substantially for the rest of the year.

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

Despite summer heat, some chill in the air on Wall Street

Brenon Daly

Contact: Brenon Daly

Just as this summer’s stock market rally is the only reason the major US equity indexes are in the green this year, the M&A surge since June is solely responsible for elevating 2016 above a sort of middling year for tech dealmaking. The recent activity in both markets has been fairly astounding. The Nasdaq has soared 8% just since the start of July. Meanwhile, tech acquirers announced deals worth $91bn last month – the third-highest monthly total since the end of the recession in 2009.

For both stock traders and dealmakers, the second half of 2016 has started with a sprint. But will the two markets, which are correlated, be able to sustain the pace? Or will the shared worries around global stability and economic growth slow them?

Focusing just on Wall Street, confidence there is waning, if only slightly. In the latest survey of investors by our ChangeWave Research service, nearly half (44%) of respondents indicated that they were ‘less certain’ about the direction of the US stock market now than they were three months ago. Although that is down from the levels reported during the bear market at the start of 2016, we would note that the pessimistic assessment in July – with more than three times as many respondents saying they were ‘less confident’ than said they were ‘more confident’ – came during the biggest stock market rally of the year.

Meanwhile, that lack of confidence is also being felt by a number of tech vendors, with recent growth forecasts being pulled in or even reversed. And even though some companies have sounded more cautious in their outlook during the ongoing Q2 earnings season, actually hitting those diminished expectations could prove more challenging than expected. Consider this: 22% of ChangeWave survey respondents said their IT budget in the second half of 2016 would be lower than the first half, compared with 17% who said they expect to have more to spend.

CW july 2016 Wall Street

Walmart fuels e-commerce strategy with $3.3bn Jet.com buy

Scott Denne

Contact: Scott Denne

Walmart prints the largest-ever e-commerce deal with its $3.3bn purchase of Jet.com. The acquisition helps Walmart fill specific gaps in its business and, more broadly, highlights the growing role of M&A among consumer-facing businesses that need to change their strategies to connect with a more connected population.

The world’s biggest retailer has struggled to achieve growth in recent years. Last year’s sales were down a hair and in the two previous years it posted just 2% growth, amid rising expenses. Part of its strategy to change that trend is to invest in e-commerce. However, e-commerce in the US was a negligible contributor to its growth last quarter and internationally, where Walmart is scaling up its e-commerce operations, it’s had trouble doing so. Founded in 2014, Jet has a team that knows how to scale up quickly – the business is already approaching $1bn in annual goods sold.

Jet’s differentiator is its ability to lower prices through a better understanding of shipping and fulfillment costs. That also aligns with a notable Walmart priority: the company plans to invest heavily in reducing its prices over the next few years to recapture what was once its edge in the offline retail market. Jet’s team may have limited ability to help Walmart on pricing its in-store goods; however, the target has the knowledge to enable Walmart to more effectively battle Amazon in terms of price.

Today’s transaction highlights the degree to which offline brands have embraced online technologies as an important avenue to engage with customers, rather than a secondary distribution channel. Until last year, large tech acquisitions by retail and consumer goods vendors were a rarity. No longer. Unilever’s entry into the shaving market via its pickup of Dollar Shave Club, recent deals by Nordstrom and Bed Bath & Beyond, and a string of mobile app purchases by athletic apparel giants Under Armour and adidas show that digital transformation isn’t limited to the IT department.

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

Salesforce: Try before you buy

Brenon Daly

Contact: Brenon Daly

When it comes to M&A, Salesforce likes to go with what it already knows. More than virtually any other tech firm, the SaaS giant tends to acquire startups that it has already invested in. Overall, according to 451 Research’s M&A KnowledgeBase, Salesforce’s venture arm has handed almost one of every five deals to the company. Just this week, it snapped up collaboration vendor Quip – the eighth startup backed by Salesforce Ventures that Salesforce has purchased.

For perspective, that’s twice as many companies as SAP Ventures (or Sapphire Ventures, as it has been known for almost two years) has backed that have gone to SAP. (We would note that the parallel between SAP/Sapphire Ventures and Salesforce Ventures doesn’t exactly hold up because the venture group formally separated from the German behemoth in January 2011.) Still, to underscore SAP/Sapphire Ventures’ nondenominational approach to investments, we would note that archrival Oracle has acquired as many SAP/Sapphire Ventures portfolio companies as the group’s former parent, SAP, according to the M&A KnowledgeBase.

Salesforce’s continued combing through its 150-company venture portfolio comes at a time of uncertainty and a bit of anxiety about the broader corporate venture industry. It isn’t so much directed at the well-established, long-term corporate investors such as Salesforce Ventures, Intel Capital, Qualcomm Ventures or Google’s investment units. Instead, it’s the arrivistes, or businesses that have hurriedly set up investment wings of their own over the past two or three years as overall VC investment surged to its highest level since 2000. (They seem to have been infected with the very common Silicon Valley malady: Fear of Missing Out.) It’s hard not to see a bit a froth in the corporate VC market when Slurpee seller 7-Eleven launches its own investment division, 7-Ventures.

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

BeyondTrust on the block?

Brenon Daly

Contact: Brenon Daly

Less than two years after acquiring BeyondTrust, Veritas Capital is looking to sell the privilege identity management vendor, several market sources have indicated. We understand that the private equity firm has retained UBS to run a narrow process, with the expectation that BeyondTrust would fetch at least twice the price the buyout shop paid in its September 2014 purchase. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimated terms of that deal by clicking here.)

BeyondTrust is expected to generate about $100m in sales this year and throw off roughly $40m of cash, according to our understanding. Recent transactions involving similar-sized identity and access management (IAM) vendors have gone off at about 6x sales. That’s roughly the multiple we estimate Vista Equity Partners paid for Ping Identity in early June, as well as the estimated valuation Thoma Bravo paid for IAM vendor SailPoint two years ago. (Subscribers to 451 Research’s M&A KnowledgeBase can view our estimated terms of the Ping deal and the SailPoint transaction.)

One reason acquirers have paid above-market valuations for identity-related providers is that cloud technology is predicated on knowing who users are and what they should have access to. That’s been reflected in infosec budgets. In the latest survey of IT security professionals by 451 Research’s Voice of the Enterprise, identity management ranked in the top quartile for security projects in the coming year.

VotE InfoSec priorities Q1 2016

Source: 451 Research’s Voice of the Enterprise: Information Security, Q1 2016

July fireworks in tech M&A

Brenon Daly

Contact: Brenon Daly

The largest-ever SaaS deal, a trio of billion-dollar blockbuster chip transactions and big-spending buyout shops all helped push tech M&A spending in July to its highest monthly total since last fall. Across the globe, acquirers spent $91bn on tech deals in the just-completed month, including a dozen transactions valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. That’s about twice as many ‘three-comma’ deals as we would typically see in even a banner year for tech M&A.

And, until this summer, no one would have characterized 2016 as a banner year. The relatively paltry amount spent on transactions announced in the first five months of the year had put 2016 on track for less than half last year’s amount. However, spending surged in June to $67bn, roughly triple the average from the previous five months, and then soared another $24bn higher in July.

July’s M&A fireworks came in a number of tech markets:

  • SoftBank’s unexpected $32.4bn purchase of ARM Holdings stands as the second-largest semiconductor deal in history, trailing only Avago’s $37bn reach for Broadcom last year.
  • Oracle paid $9.3bn, or 11x trailing sales, for NetSuite, making it the largest acquisition of a subscription software vendor ever.
  • Verizon announced its biggest non-telecom transaction, spending $4.8bn for most of the (faded) Internet properties of Yahoo.
  • Relative newcomer Siris Capital bought videoconference equipment maker Polycom for $2bn, which is more than the buyout shop had spent on its previous four deals combined.

The summer surge in M&A comes as US equity markets also moved higher, with some indexes hitting record levels. (The Nasdaq, for instance, soared 7% in July.) Overall, this summer’s dramatic acceleration in M&A spending has put 2016 back on track for a strong year. With seven months now complete, the value of acquisitions announced so far this year tops $272bn – already putting 2016 ahead of the full-year totals for five of the seven years since the recent recession ended.

Jan to July MA totals

Massive SaaS: Oracle pays up for NetSuite

Brenon Daly

by Brenon Daly

Announcing the largest-ever SaaS transaction, Oracle says it will pay $9.3bn in cash for cloud ERP vendor NetSuite. The deal, which is expected to close before year-end, involves the ever-acquisitive Oracle snapping up the roughly 54% of NetSuite not already owned by Oracle founder and executive chairman Larry Ellison.

Terms call for Oracle to pay $109 for each share of NetSuite. Oracle’s bid represents a premium of nearly 60% over NetSuite’s closing price 30 days ago, before rumors swirled about this pairing. Although the premium is about twice as rich as typical enterprise software transactions, NetSuite is still valued just a smidge below its highest-ever stock price, which it hit in early 2014.

NetSuite is the latest SaaS firm that Oracle has gobbled up as the 29-year-old company increasingly stakes its future on cloud software. After initially ignoring – and even dismissing – the disruptive trend of subscription-based software, Oracle, which still sold more than $7bn worth of software licenses in its just-completed fiscal year, went on a SaaS shopping spree. In addition to NetSuite (ERP), Oracle’s other recent SaaS deals valued at $1bn or more include: Taleo (HR software), Responsys (marketing software), RightNow (CRM) and Datalogix (marketing data).

At an equity value of $9.3bn, NetSuite is valued at 11x its trailing 12-month revenue of $846m. That matches the average multiple paid by rival SAP in its multibillion-dollar SaaS acquisitions, as well as the valuation Salesforce put on e-commerce provider Demandware in June.

Further, to underscore the value that can accrue through the subscription model, it’s worth noting that NetSuite’s double-digit multiple is basically twice the multiple that Oracle has paid for the license-based software vendors it has acquired. (Of course, some of the discrepancy can be attributed to NetSuite’s enviable 30% growth rate, even as the 18-year-old company hits a $1bn run rate.)

Specifically, consider Oracle’s purchase more than a decade ago of PeopleSoft, which would stand as a representative ERP transaction for the ‘Software 1.0’ era while NetSuite serves as a ‘Software 2.0’ deal. Although Oracle paid $1bn more for PeopleSoft than NetSuite, PeopleSoft generated three times more revenue than NetSuite. Put another way, if we applied PeopleSoft’s valuation of 4x trailing sales to NetSuite, Oracle would have had to pay only $3.4bn – rather than $9.3bn – to take it home.

SaaS multiples

LogMeIn goes to GoTo

Brenon Daly

by Brenon Daly

Eight months after Citrix announced plans to spin off its GoTo business, the company has significantly bulked up the unit with the consolidation of rival online communications and support provider LogMeIn. The deal, which is structured as a tax-advantaged merger that values LogMeIn at $1.8bn, would increase GoTo’s revenue by about 50% to $1bn. It is expected to close early next year.

Terms of the Reverse Morris Trust transaction call for Citrix to own slightly more than half of the combined entity, holding 50.1% of the company with LogMeIn retaining the remaining 49.9%. Ownership notwithstanding, LogMeIn will have an outsized role in charting the future course of the $1bn SaaS giant.

Both the current CEO and CFO at LogMeIn will hold those respective roles at the combined firm, which will take LogMeIn’s current headquarters as its own. Further, LogMeIn will have five directors on the company’s board, with four coming from Citrix. We would attribute that weighting to the fact that LogMeIn has significantly outgrown the larger GoTo unit. In the just-completed second quarter, for instance, LogMeIn increased revenue about 28%, roughly twice the rate at GoTo.

At $1.8bn, the deal values LogMeIn at its highest-ever level. Over the past year, LogMeIn has generated $309m in sales, meaning it is being valued at 6x trailing sales. That’s a bit shy of the average of 7.5x trailing revenue paid for SaaS vendors in transactions valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. For instance, two months ago, Vista Equity Partners paid 8x trailing sales for Marketo, a smaller but slightly faster-growing marketing automation provider that, unlike LogMeIn, runs in the red.

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

A dimming Active Power looks to sell

Mark Fontecchio

Contact: Mark Fontecchio

Active Power, which produces flywheel-based uninterruptible power systems (UPS) for datacenters, is seeking a buyer. In conjunction with a dismal Q2 earnings release, Active Power announced that its board is reviewing “strategic and financial alternatives” that could include new investors, pivoting to a different business or selling the company. However, based on its own financial performance as well as previous transactions in this niche market, any deal would be a tough sell for Active Power. It currently sports a market cap of just $9.5m, having lost about two-thirds of its value so far this year.

The stock’s slump has mirrored the company’s declining financial performance. In the first half of 2016, Active Power’s revenue has plummeted 45% year over year to just $16.4m. More alarmingly, losses more than tripled to $5.7m, leaving it with only about half as much cash as it had two years ago. While large orders for backup power systems can significantly affect short-term results, the company’s financial performance over the past year shows uninterrupted red ink and a dipping top line.

Active Power says deferred deliveries and delayed orders were cause for the decline. This is just the latest indication that flywheel-based UPS are not yet widely accepted. Despite their smaller footprint and longer lifetime, there is a combination of resistance ‎to change in the datacenter industry, a fear of shorter ride-through times compared with batteries, lower availability in the channel, and the fact that financial prudence is still rather new to datacenter operations. Further, the smaller flywheel-based UPS vendors have been at a competitive disadvantage as they have gone against giant battery UPS sellers such as Schneider Electric and Emerson Network Power.

The difficulties around selling flywheel UPS have already pushed two small companies into what appear to be distressed deals. Pentadyne’s disintegrating sales led the company to divest its manufacturing business in 2010 to Phillips Service Industries, a government contractor that was one of its customers. It was rebranded and now sells as POWERTHRU. Meanwhile, in 2014 Vycon sold to and is now a subsidiary of Calnetix, which makes generators and other power systems in and out of the datacenter.

As for who might acquire Active Power, we struggle to come up with many buyers. Private equity firms might view the company’s offering as ‘tried and failed’ and it could also be suffering from pitch fatigue as it’s been in the market for about 20 years without a breakthrough. Major industry players such as Schneider Electric’s IT division, Emerson Network Power and Eaton might have even less appetite, as Active Power’s flywheel competes head-on with battery UPS. We see two potential avenues for Active Power to pursue beyond datacenters: generator manufacturers and vendors with a focus on micro-grids.

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

Verizon strikes $4.8bn deal for Yahoo’s core biz

Scott Denne

Contact: Scott Denne

Verizon moves to augment its media business with the $4.8bn purchase of Yahoo’s central assets. The deal, which wraps up years of speculation about Yahoo’s future in the new media landscape, will see its core business and operations head to Verizon to be integrated with AOL, while its investments and other assets will stay behind in a company that will be renamed and restructured as a publicly traded, registered investment entity.

Aside from licensing revenue from some of the noncore patents that Yahoo will keep, nearly all of its $4.9bn in trailing revenue will head over to Verizon. The transaction values the target’s assets at about 1x trailing revenue, compared with the 1.6x that Verizon paid for AOL last year. The discrepancy in value reflects the depth of the comparative technology portfolios. Both vendors spent heavily on ad network businesses in the back half of the past decade and early years of this one. More recently, AOL turned its investments toward programmatic, attribution and other advanced advertising technology capabilities. Yahoo doubled down on content while its ad network technologies aged.

This move is all about scaling Verizon’s media footprint. Both Yahoo and AOL have roots in the Web portal space. And both are selling to Verizon for similar prices. But Yahoo’s media assets are substantially larger. AOL generates roughly $1bn from its owned media properties – Yahoo pulls in 3.5x that amount. Owning Yahoo’s media properties will enable Verizon to offer greater reach to advertisers and therefore land bigger deals and at better margins than the ad network revenue that made up almost half of AOL’s topline. Also, having a larger audience for its owned properties will provide AOL’s ad-tech business with more data that it can use to improve its audience targeting.

Telecom services is a saturated market with few net-new customers. Most growth comes from winning business away from competitors. With this acquisition (and AOL before it), Verizon plans to leverage its investments in mobile bandwidth and distribution – its existing mobile and TV customers – to find growth in the digital media sector. According to 451 Research’s Market Monitor, digital advertising revenue in North America will increase 12% this year to $40.6bn, compared with just 4% growth for mobile carrier services.

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