Hosted services M&A value craters, yet activity still healthy

Mark Fontecchio

Contact: Mark Fontecchio

The value of hosted services M&A crashed to Earth in Q1, despite an uptick in deal volume. Following a boom of six consecutive quarters with more than $1bn in deal value, last quarter saw less than $300m in transactions, the lowest total in four years. The downward movement in hosted services reflects the broader tech M&A sector, which saw a slowdown as credit markets tightened and stocks gained volatility. In addition to that, there just aren’t many large-scale pairings left to be had. The US hosting market underwent a strong period of consolidation over the past few years, and Europe’s not far behind it.

Asset acquisitions, such as one-time datacenter deals, accounted for one-third of the activity in hosted services in the quarter as large providers made modest purchases to meet demand and enter new markets. Regional expansion transactions included serial acquirer Carter Validus buying two facilities in Georgia and Texas, and Zayo Group scooping up a 36,000-operational-square-foot datacenter in Dallas. These acquisitions fit one of the three major trends we anticipated for hosted services M&A in 2016: that datacenter operators would continue to grow regionally through M&A. To boot, the biggest hosted services transaction was the $130m leaseback agreement between CyrusOne and CME Group for an 80,000-operational-square-foot facility in Aurora, Illinois.

Meanwhile, service providers didn’t spend much to move up the value chain into managed services and similar segments. Instead, they opted to stay within their wheelhouse – nearly 43% of hosted services deals last quarter were colocation acquisitions, nearly double the portion from a year earlier. We expect those types of transactions to pick up the rest of the year alongside continued geographic datacenter consolidation. Overall hosted services M&A will also likely accelerate, as the first quarter is historically the year’s slowest in both volume and value.

Hosted services M&A by quarter Q1-2014 to Q1-2016

That giant sucking sound on Wall Street

Brenon Daly

Contact: Brenon Daly

After a hard freeze last winter, there are signs of new growth on Wall Street this spring, with a pair of tech startups reportedly soon set to join the ranks of US public companies. After more than three months of silence, both SecureWorks and Nutanix have recently updated their IPO paperwork and have indicated that their offerings are back on track. In a more receptive market, the two companies would already be public by now. (Assuming that Nutanix does indeed debut, for instance, it will have been on file with the SEC more than twice as long as Pure Storage, which went public last fall.)

The offerings would also come after a quarter in which startups were shut out of the public market. Not a single tech vendor went public in Q1, the first time that has happened since the recession years. (451 Research subscribers: See our full report on Q1 activity, including the IPO shutout and the implications on the tech M&A market.)

Yet, even if SecureWorks and Nutanix do manage to join the public market, the new arrivals will do little to offset the number of tech companies leaving the public ranks. Already this year, we’ve seen 16 firms erased from the Nasdaq and NYSE exchanges, according to 451 Research’s M&A KnowledgeBase. (To be clear, we are including only full acquisitions, and excluding divestitures.) The departures have ranged from household names (Ingram Micro, ADT) to somewhat faded businesses (LoJack, LeapFrog). Altogether, the announced transactions for public companies have siphoned off nearly $32bn of value from the two main US exchanges.

The net outflow of tech firms from the US exchanges is, of course, nothing new. (In 2015, according to the M&A KnowledgeBase, 79 tech companies got erased.) But it stands out all the more this year as – thus far – there haven’t been any offsetting offerings. And even as SecureWorks, Nutanix and others work their way toward a listing, other vendors are looking like they could very well get pushed off of Wall Street. Both Citrix and Qlik have drawn interest from a hedge fund with a record of pushing businesses to sell.

Projected number of tech IPOs

Period Average forecast
December 2015 for 2016 19
December 2014 for 2015 33
December 2013 for 2014 29
December 2012 for 2013 20
December 2011 for 2012 25
December 2010 for 2011 25
December 2009 for 2010 22
December 2008 for 2009 7
December 2007 for 2008 25

Source: 451 Research Tech Corporate Development Outlook Survey

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Accenture tries its hand in Japan with IMJ buy

Scott Denne

Contact: Scott Denne

Accenture reaches into Asia with the acquisition of a majority stake in digital agency IMJ, the latest in a series of deals as it builds out a digital marketing and advertising practice to cut away at the market share of the world’s largest ad agency holding companies. The target, which provides campaign strategy, design and analytics services to marketers and has 600 employees, will bring Accenture Interactive into the Japanese market.

The acquirer’s Accenture Interactive digital marketing and e-commerce services arm generates about $2bn in annual revenue and is the fastest-growing unit in its digital practice group, which itself posted 35% growth in the most recent fiscal year. Much of that rise has come via M&A – Accenture has now nabbed nine firms to boost Interactive since 2013, the year it formalized its marketing practice.

It’s not alone. Many other consultants and IT services shops are buying into marketing tech and services at an increasing rate. Alongside today’s announcement from Accenture, software development and design specialist Persistent Systems bought GENWI, a maker of software to push content out to mobile apps. And at the start of the year, IBM snagged an ad agency and two digital marketing firms. Deloitte, Cognizant and Epsilon, among others, have also gotten in on the act.

As we detail in a recent report, the growing amount of data and devices along with an increased desire for integrated customer experiences are giving IT services firms an opening to sell to marketing departments, as the challenges of CMOs begin to resemble those of CIOs. The hurdle for Accenture – and many of its peers – has been the dearth of creative and design talent, which is being mostly resolved through M&A.

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For tech IPOs in Q1, it’s a startup shutout

Brenon Daly

Contact: Brenon Daly

Call it a startup shutout. Not a single tech company went public in the just-completed first quarter, marking the first time since the recent recession that we haven’t seen a tech IPO in a quarter. The lack of tech offerings so far this year stands out even more when we consider the dozens of startups in recent years that have indicated – either directly or indirectly – that they are of a size and mind to go public.

Consider the plight of one of the two tech vendors that recently revealed its IPO paperwork, Nutanix. The fast-growing provider of hyperconverged infrastructure officially filed its IPO prospectus, which was supported by no fewer than a dozen underwriting banks, in late December and fully planned to debut in Q1. And yet, despite all of the time, effort and expense in putting together the paperwork to go public, Nutanix remains private. The company hasn’t even updated its original filing from three months ago. (For comparison, SecureWorks filed its paperwork shortly before Nutanix and rather belatedly amended its filing in March, and is expected to launch its offering in April.)

Meanwhile, the other exit available to startups – an outright sale – isn’t looking like the richly rewarding process it once was. Sure, Jasper Technologies enjoyed a 10-digit exit to Cisco in early February. But we would point out that no other VC-backed tech startup has sold for more than $400m so far this year. Rather than Jasper’s exit, we might highlight a pair of other transactions involving IPO wannabes as far more representative of the current environment.

Take the case of Yodle. The digital marketing firm had been on file to go public since 2014, but hadn’t updated its original filing. Instead of dusting off its prospectus, it accepted a relatively low bid of $342m, or 1.6x sales, from hosting provider Web.com in February. Or even consider the sale of iSIGHT Partners to FireEye in February for $200m upfront plus an addition $75m earnout. According to our understanding, the $200m upfront is only slightly more than the company’s valuation in its funding a year ago. Around the time of the funding, iSIGHT had been indicating that it planned to debut either in 2016 or 2017.

451 Research subscribers can view our analysis of the recent IPO and M&A activity and our outlook for the rest of 2016 in our Q1 report, which will be on our website later today and in tomorrow’s 451 Market Insight.

Projected ‘competition’ from IPOs for target companies

Year More competition About the same Less competition
December 2015 for 2016 13% 36% 51%
December 2014 for 2015 26% 46% 28%
December 2013 for 2014 46% 34% 20%
December 2012 for 2013 15% 38% 47%
December 2011 for 2012 33% 42% 25%

Source: 451 Research Tech Corporate Development Outlook Survey

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Tech M&A begins its slide from the peak

Brenon Daly

Contact: Brenon Daly

After hitting a high-water mark last year, tech M&A activity has started 2016 by receding to a more normal level. Total spending on tech, media and telecom (TMT) deals across the globe in the just-completed first quarter hit $72bn, according to 451 Research’s M&A KnowledgeBase. That is only slightly more than half the average quarterly level in 2015’s record run but is roughly in line with the quarterly average from the two years leading up to the boom. Meanwhile, deal flow continued strong, with the number of January-March transactions topping 1,000 for the seventh consecutive quarter.

However, in keeping with the sense that the M&A market has moved into its post-peak phase, there have been a lot of low-multiple deals since the start of the year. One extreme example: Ingram Micro. The tech distribution giant – which, admittedly, runs at a distressingly low 1% operating margin – will put up more than $40bn of sales, but sold for just $6bn to a Chinese conglomerate in mid-February. Elsewhere, massive divestitures by both Dell and Lockheed Martin each went off at about 1x revenue.

Even viewed more broadly, valuations are getting squeezed. According to the M&A KnowledgeBase, the average multiple for the 10 largest transactions so far this year came in at just 2.3x trailing sales, which is at least a full turn lower than the average multiple at the top end of the market in any of the previous three years. In the 20 largest deals announced so far in 2016, just one has commanded a valuation greater than 8x trailing sales. Incidentally, that transaction (Cisco’s $1.2bn reach for Internet of Things platform provider Jasper) also stands as the largest VC-backed exit in Q1 by a large margin. The second-largest price paid recently for a portfolio company was just $400m.

Obviously, some of the pressure in the M&A market simply reflects the pressure in the equity market, which suffered through a short but sharp decline at the start of the year. (In the first six weeks of 2016, the Nasdaq plummeted almost 15%, with indexes from other exchanges around the world recording double-digit percentage declines during that period as well.) That bear market – along with one of the tightest credit markets, particularly for high-yield debt, in recent memory – has had more than a few dealmakers scrambling to recast prices and restructure terms to get acquisitions closed. Although most of the indexes recovered at least some or all of the early 2016 losses, the whipsawing stock market has nonetheless complicated pricing acquisitions, which could slow the rate of M&A in the coming months as well as put further pressure on valuations.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2016 1,020 $72bn
Q4 2015 1,052 $184bn
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
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

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CenturyLink grows managed security services practice with netAura buy

Mark Fontecchio

Contact: Mark Fontecchio

CenturyLink acquires IT security services firm netAura as it gears up a managed security services (MSS) practice. In a forthcoming report, we write that CenturyLink has launched an updated MSS suite, which has been a popular portfolio addition for many multi-tenant datacenter and managed service providers in the past year. The target also brings experienced security personnel at a time of a shortage in skilled security workers. Finally, the move bolsters CenturyLink’s managed services platform as its legacy telecom services decline.

CenturyLink has steadily climbed the services stack since 2011, in part through acquisitions such as Savvis, database-as-a-service vendor Orchestrate and cloud management provider Tier 3. Others are doing the same. ViaWest acquiring AppliedTrust and Level 3 buying Black Lotus are just two recent examples of M&A activity in this sector. The deals particularly make sense in security, where staffing issues abound. According to 451 Research’s Voice of the Enterprise survey of 786 IT decision-makers in Q4 2015, staffing information security was one of the top pain points, ahead of options like firewall/edge network security and mobile device security. In today’s transaction, all 15 of netAura’s employees will move to CenturyLink.

We expect interest and activity to continue in this space through the rest of the year. Dell’s cybersecurity unit SecureWorks filed for an IPO in December, a move we predicted last May. Potential M&A candidates that could conceivably become targets in similar deals might include Red Canary, which is focused on advanced endpoint defense, and Encode, a UK-based security analytics firm with a managed service offering.

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

A new face for Google’s enterprise cloud

Brenon Daly

During last week’s GPC NEXT 2016 conference, it became pretty clear that Google is hoping that Diane Greene can do for the enterprise cloud what Andy Rubin did for mobility. In both cases, the search giant has set about acquiring a well-known ‘face’ to give it a credible and visible presence in a market that it cannot organically move into but – at the same time – can’t afford to miss. (See our full report on the conference, where the company bolstered its Google Cloud Platform with multi-cloud management, a machine-learning engine and more scalable containers, among other announcements.)

A decade ago, Google’s acquisition of Android Inc not only brought the company a fledgling OS for mobile phones, but also included the high-profile figure of Rubin. From those early days, Rubin served as a kind of ‘rock-star engineer’ as Android soared to become the world’s most-used mobile OS. (Rubin stepped out of his role in Google’s mobile business in 2013 and left the company altogether the following year.) More recently, Google made what could be characterized as one of the tech industry’s largest-ever ‘acq-hires’ when it paid $380m in cash and stock four months ago to snag bebop, a startup headed by VMware cofounder (and Google board member) Diane Greene.

Just as Rubin served as a senior VP at Google as part of his company being acquired, Greene is serving as a senior VP at Google as part of her company being acquired. However, where the parallel breaks down between the two executives is around timing. Google bought Rubin’s company in August 2005 – a full two years before Apple introduced its iPhone. In contrast, Google purchased Greene’s company just last November – nearly a decade after Amazon launched its Amazon Web Services and had grown it to a $10bn run-rate business. (Click here to to read more about the remarkable growth of AWS.)

That’s not to say that Google, led in its efforts by a proven executive such as Greene, can’t make inroads into the enterprise cloud arena, thereby closing the gap with AWS and second-place Microsoft Azure. After all, the company wasn’t anywhere among the earliest search engines, but it overtook every single one of them as it netted billions of dollars on its way to becoming the world’s most-popular search engine.

But there are challenges in Google’s ‘people and products’ strategy, as demonstrated by Rubin’s own experience at the company after he left the Android division. A true gadget guy, Rubin moved over to head the search giant’s grandly ambitious robotics unit when it launched in 2013. It was built on a series of acquisitions, most notably the December 2013 pickup of Boston Dynamics. However, Rubin couldn’t replicate in Replicant (the name for Google’s robotics business) the success he had with Android, and left the company in 2014. Google is now reportedly in the process of selling off and repurposing the Replicant assets.

Cloud computing as a service MarkMon

Source: 451 Research’s Market Monitor

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IHS makes its mark on financial sector with $5.9bn Markit buy

Mark Fontecchio

Contact: Mark Fontecchio

IHS pays $5.9bn for Markit Group, the biggest deal in online financial information and analysis, according to 451 Research’s M&A KnowledgeBase. The acquisition increases IHS’s headcount and revenue by about 50%, giving it strong entry into online reference and analysis data in the financial sector to complement its similar offerings in the energy and automotive verticals. While the two vendors perform similar functions, their customer bases don’t overlap much, with IHS’s clients including most of the top oil and automotive companies and Markit selling to banks, hedge funds and other financial institutions.

IHS and Markit will merge to form a new entity called IHS Markit, of which IHS shareholders will own 57%. The transaction values Markit at 5.9x trailing revenue, a few ticks higher than the 5.5x multiple that Intercontinental Exchange paid for Interactive Data Corp (IDC) in a similar deal last October. IDC’s revenue had a 3.8% CAGR over the previous five years, compared with Markit’s roughly 10% CAGR over the previous four years. That said, Markit’s 4.5% revenue increase to $1.1bn last year was considerably slower than previous rates in the 10-12% range.

The move marks the third $5bn+ transaction in financial technology in the past year, and highlights fintech M&A as one of the few bright spots this quarter. While overall deal value is down about 30% to $62bn thus far in 2016, the Markit sale has lifted fintech M&A up 79% to $7.4bn. The transaction is expected to close in the second half of this year. M. Klein and Company, Goldman Sachs and Bank of America Merrill Lynch advised IHS, while J.P. Morgan Securities banked Markit.

Verizon makes latest play for OTT business with Volicon buy

Scott Denne

Contact: Scott Denne

Verizon makes it latest move to push more video content across its network with the acquisition of Volicon, a maker of video archiving and analysis software. Though smaller than its previous efforts on this front – the purchases of CDN vendor EdgeCast (see our estimate for that transaction here) and media and advertising provider AOL, the deal highlights the continuing appetite among Verizon and other media delivery and storage suppliers to take a share of the expanding market for digital video.

Volicon offers broadcasters workflow software that enables clips and content to be pushed from broadcast to digital, as well as the ability to archive content for regulatory compliance (such as FCC mandates around sound levels). The company will be tucked into Verizon Digital Media Services, which itself is now part of AOL though was founded in 2010 to help Verizon capitalize on its Fios fiber-optic network to enable broadcasters and other content providers to deliver digital services.

Video consumes substantially more bandwidth, storage and compute capacity – and therefore more revenue – than other forms of content and communications, leading other infrastructure vendors to expand into services that attract broadcasters and other video content suppliers. IBM inked a pair of deals for more than $100m each in December and January, while Amazon Web Services spent heavily on Elemental Technologies back in September. Video consumption continues to move beyond linear television and into mobile, connected TV and other digital channels, and the providers of pipes and plumbing will be watching as it does.

After a decade of dominance, what’s next for AWS?

Brenon Daly3 Comments

Contact: Brenon Daly

Even as it begins its second decade of life today, there’s an undeniable sense that Amazon Web Services (AWS) is only getting started. From a standing start in March 2006 with a single storage product, AWS has created a profitable tech behemoth that is gobbling up huge chunks of the IT landscape. (For a deeper look at how AWS has gone about upending the multibillion-dollar markets where it operates, see a recent report from my colleague Owen Rogers on how AWS handles the pricing and delivery of its vast array of services.)

On its own, AWS is easily worth more than $100bn, a remarkable bit of value creation that’s been done almost entirely organically. Amazon has almost exclusively used R&D – rather than M&A – to build AWS. For the most part, the AWS cloud offering has been developed through reallocation of existing assets and engineering instead of acquiring those things.

In terms of corporate strategy, that sets Amazon and its AWS business apart from most other tech companies, which tend to default to buying rather than building. Each year, tech vendors collectively spend hundreds of billions of dollars expanding their product portfolios and addressable market, only to struggle to put up any growth. (To take one extreme, consider IBM, which has seen annual revenue drop from roughly $100bn in 2013 to less than $80bn this year. In that same period, Big Blue has spent more than $8.6bn on 39 acquisitions, according to 451 Research’s M&A KnowledgeBase.)

The organic value creation at AWS stands out even more when compared with even the biggest and best tech deals. Consider the case of VMware. EMC’s purchase of the virtualization startup in late 2003 for $635m is rightfully cited as one of the most successful tech acquisitions in history. VMware’s market valuation of $21.2bn is currently dictated by terms of Dell’s pending pickup of VMware’s parent, EMC. (Before the transaction was announced, VMware had a market cap of about $34bn.)

Even on an unaffected basis, AWS is at least three times more valuable than VMware. And the case could certainly be made that the gap between the two companies will only widen in the future. After all, AWS is now larger than VMware and growing nearly eight times faster than VMware, which has slowed to a single-digit percentage rate. (AWS increased revenue a stunning 72% to $7.9bn in 2015.) Further, AWS has a large and growing market opening in front of it. 451 Research’s Market Monitor forecasts that the market for cloud computing ‘as a service’ – which includes PaaS, IaaS and infrastructure software as a service (ITSM, backup, archiving) – will hit $21.9bn this year and more than double to $44.2bn by 2020.

Source: 451 Research’s Market Monitor