Barrage of blockbusters pushes tech M&A spending to post-Bubble high

Brenon Daly

Contact: Brenon Daly

Fittingly for a year that has seen an unprecedented number of blockbuster transactions, Dell’s $63.1bn reach for EMC pushed 2015 into record territory for recent spending on tech, media and telecom (TMT) transactions. According to 451 Research’s M&A KnowledgeBase, acquirers around the globe have spent $475bn on TMT deals so far this year. That handily tops the previous full-year total of $420bn from 2007, which had marked the highest level of spending since the Internet bubble burst in 2000.

Overall, 2015 has seen two of the three largest TMT transactions recorded in the KnowledgeBase over the past 15 years. In addition to Dell’s planned purchase of EMC, this year also featured Charter Communications’ $56.7bn acquisition of Time Warner Cable in May. Other big prints in 2015 include Avago’s $37bn pickup of Broadcom in May (the semiconductor industry’s largest-ever consolidation) and $17bn deals from both Intel and Nokia.

So far in 2015 we’ve tallied 63 transactions valued at more than $1bn in the KnowledgeBase. That exactly matches the number of billion-dollar deals during the same period in the previous record year of 2007. However, there’s a lot more money attached to this year’s transactions. The median price for each of the big prints in 2015 is $2.5bn, compared with just $2bn for each deal in 2007. Skewed by these blockbuster TMT transactions, M&A spending is now tracking to about $600bn for the full year. That would shatter 2007’s previous record for spending by a full 40%.

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Dell looks to become ‘indelible’ IT vendor with EMC

Brenon Daly

Contact: Brenon Daly Simon Robinson

Announcing the largest tech deal since the Internet bubble burst, Dell plans to pay approximately $63.1bn for EMC. The debt-laden combination would create a sprawling IT giant with multibillion-dollar businesses in many of the primary enterprise technology markets, including storage, information security, IT services, servers and PCs. (For context, the combined Dell-EMC entity would be larger than Hewlett-Packard Enterprise (post-split), NetApp, Juniper Networks and Symantec combined.) Dell’s bold transformational transaction is not coming cheap, however. The company is valuing EMC significantly more richly than it valued itself when it went private two and a half years ago.

Further, Dell’s relatively pricey bulking up comes at a time when a number of rival enterprise IT vendors are slimming down. More to the point, several of these competitors are unwinding earlier blockbuster acquisitions they made in hopes of staying more relevant in a shifting IT market. The arrival of the public cloud has siphoned off billions of dollars that once flowed unimpeded to Dell, EMC and other first-generation technology firms. However, IT customers increasingly lack the appetite to buy, install and manage dozens of ‘piece parts’ and mold them into a cohesive whole. As a result, we can look at the combination of Dell and EMC as essential if the traditional IT model is to survive the onslaught from public cloud providers, most notably Amazon Web Services.

Though Dell has been on a path to build a ‘better together’ story for almost a decade, it clearly hasn’t been enough. In its effort to buy its way out of the commodity PC business, the company stitched together a patchwork of properties. However, the resulting ‘big picture’ has still not materialized. Dell has lacked a core focus point, as well as the heft and scale in any one market to dominate. Further, it has so far not sufficiently penetrated the large enterprise segment, or moved beyond its two longtime key verticals of healthcare and the public sector. Against this backdrop, it’s easy to see the attraction of EMC, which brings large enterprise credibility in storage, perhaps the industry’s most focused and effective sales operation and, in VMware, still one of the most strategic entities on the market.

EMC’s attractiveness also shows through in the valuation that Dell is paying, if not when viewed against the broader tech M&A market than certainly when put against Dell’s own worth. According to terms, Dell is paying 2.5x trailing sales and 11.5x trailing EBITDA for EMC. For comparison, in orchestrating the take-private of his namesake company, Michael Dell and his consortium paid just one-quarter the price-to-sales multiple of EMC and half the cash-flow multiple. Dell’s LBO, which stands as the third-largest private equity tech transaction in history, valued the company at just 0.5x trailing sales and 5.2x trailing EBITDA.

Look for a full report on the proposed Dell-EMC pairing later today on our website and in tomorrow’s 451 Market Insight.

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In the red-hot SaaS SI market, which is the next shop looking to sell?

Brenon Daly

 

Contact: Brenon Daly

With IBM picking up Meteorix, we hear there’s another Workday-focused SI currently on the market. CPSG, a Dallas-based shop, is slightly bigger than Meteorix, as well as much more profitable, according to our understanding. And it’s seeking a much richer valuation on its exit.

CPSG posted $25m in revenue in 2014, and the company is reportedly forecasting $35-40m for full-year 2015. Unlike other software implementation firms, however, CPSG throws off a fair amount of cash. It should generate more than $10m of EBITDA this year.

The growth and cash flow at CPSG have the company and its advisers at Robert W. Baird & Co. looking for a top-dollar exit. Current second-round bids are coming in at roughly $140m. (For comparison, subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for the valuation IBM paid for Meteorix.)

Assuming CPSG does print, it would be the latest in a string of SaaS application implementation vendors to sell. Just in the past two months, we have seen three significant SIs snapped up by major service providers in a shopping spree that totals more than $600m. Moreover, these buyers are paying 2-3x their own valuations in their acquisitions, reflecting just how desperate they are to bulk up their practices in the fast-growing SaaS space.

Recent SaaS-focused SI M&A

Date announced Acquirer Target Description Deal value
August 11, 2015 CSC Fruition Partners ServiceNow SI See 451 Research estimate
September 15, 2015 Accenture Cloud Sherpas Salesforce, ServiceNow SI Not disclosed
September 28, 2015 IBM Meteorix Workday SI See 451 Research estimate

Source: 451 Research’s M&A KnowledgeBase

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IBM’s object lesson

Scott Denne

Contact: Scott Denne

IBM snags object storage specialist Cleversafe for a foothold in an increasingly important niche in enterprise storage. Despite its age and size – founded in 2004 and with 210 employees – the target was still a relatively early company. As we recently noted, Cleversafe had taken the long view of the object storage opportunity – that it would take 100 engineers at least five years and more than $100m in funding, which it raised, to have a viable product. In that time, the vendor rewrote its core stack twice and deployments were just starting to take off.

Object storage itself isn’t new, but the opportunity is gaining traction with the growth of cloud computing. As more businesses and people look to store large, infrequently accessed files such as videos, pictures and backups, object storage provides a better alternative to SAN and NAS systems and is becoming a key component of cloud storage services. And it’s worth noting that it’s IBM’s cloud group, not its storage unit, that is leading today’s deal.

Prior to this transaction, IBM seemed on the fence about the opportunities in object storage. Now that it’s taken out one of the pioneers of next-generation object storage, it will set off speculation that others will follow suit. Last year Red Hat shelled out $175m for Inktank and earlier this year Hitachi Data Systems paid $264m for Amplidata. And there are still plenty of potential targets left, including Cloudian, DataDirect Networks, SwiftStack and Scality, which recently partnered with Dell.

We’ll have a more detailed report on this acquisition in a forthcoming 451 Market Insight.

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As black swans darken summer sky, Q3 tech M&A gets grounded

Brenon Daly

Contact: Brenon Daly

Tech acquirers’ confidence eroded unmistakably in mid-August as equity markets around the world got routed, with some indexes tumbling hundreds of points in a single session. As the economic outlook dimmed around the globe, valuations for buyers and their holdings dropped as well. If the stock market uncertainty didn’t knock buyers out of the tech M&A market entirely, it at least caused them to scale back their acquisitions. Just seven of Q3’s largest 20 deals came after the mid-August turmoil, according to 451 Research’s M&A KnowledgeBase. Spending in the back half of the quarter fell 20% compared with the first half.

Slowed by the mid-quarter bear market, spending on tech, telecom and media (TMT) transactions across the globe in the July-September period totaled $81bn. Although that amount is a fairly representative quarterly total for 2013-14, it represents a dramatic slowdown from earlier this year. Q3 spending stands at less than half the level of M&A spending in Q2 and one-third lower than Q1, which kicked off 2015’s record run. On a comparative basis, the value of acquisitions in both Q1 and Q2 surged about 50% from the same quarters in 2014, while spending in the just-completed Q3 declined 21% compared with Q3 2014.

Viewed more expansively, the Q3 slowdown might have pushed back the date when spending in 2015 on TMT transactions sets a new post-bubble record, but the record will nonetheless fall this year. (Indeed, if this summer had simply continued the average monthly M&A spending we had seen in the first half of the year, 2015 would have already topped the recent record of $420bn set in the prelapsarian year of 2007.) As it stands, dealmakers have spent $407bn on TMT acquisitions so far this year, just a few big prints shy of the highest level of spending since 2000, according to 451 Research’s M&A KnowledgeBase.

See our full report on both M&A and IPO activity in Q3, as well as a look ahead to activity through the rest of 2015.

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Recent quarterly deal flow

Period Deal volume Deal value
Q3 2015 1,115 $81bn
Q2 2015 1,056 $205bn
Q1 2015 1,032 $120bn
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

Barracuda bite off bigger chunk of MSP market with Intronis

Brenon Daly

Contact: Dave Simpson Brenon Daly

In its largest acquisition to date, Barracuda Networks nabs Boston-based Intronis for $65m in cash, primarily to improve its position in the MSP space. Intronis, a hybrid cloud backup/recovery vendor with 100 employees, is not well-known as about 75% of its MSP customers white-label its services. But it has almost 2,000 MSP partners, compared with only 200 MSP partners (and 5,000 VARS) for Barracuda alone.

Barracuda has averaged about a deal per year over the past decade, most recently focusing its M&A on its storage business. However, the company has noted some recent weakness in the overall storage space, which is a smaller portion of Barracuda’s overall sales than its security business. Although Barracuda was already in the upper echelon of hybrid-cloud backup/recovery vendors, the Intronis buy should strengthen its position versus key competitors in the storage arena. Also, there is little overlap between the two vendors’ channel partners. Only 37 of Intronis’ top 200 partners are also Barracuda partners, and 90% of Intronis’ partners are not Barracuda partners.

We have for some time been predicting – even advocating – consolidation in the crowded market for online (cloud-based) backup and recovery. Barracuda’s purchase of Intronis is the first shoe to drop, and we anticipate further consolidation in this sector over the next year.

The deal is expected to close by the end of this calendar year. Needham & Company advised Intronis on its sale. Click here for a full report on this transaction.

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ShopKeep orders up a helping of inorganic growth with restaurant PoS system Ambur

Scott Denne

Contact: Jordan McKee

ShopKeep has acquired Ambur, a restaurant-focused tablet point-of-sale (PoS) vendor. The addition is intended to expand ShopKeep’s capabilities in the full-service restaurant vertical, helping it target larger, multi-location prospects. One of the target’s founders, Ansar Khan, has already joined ShopKeep in a business development capacity, though Ambur will remain a separate entity for now. The deal comes little more than six months after ShopKeep bought payment processor Payment Revolution.

Ambur’s PoS software offers a variety of front-of-house and back-of-house functionality. On the front end, it supports features such as order management, item modifiers, delivery/takeout, table layout and reservations. Management-focused tools include reporting, user groups and permissions, item inventory, payroll and employee summaries. Ambur is payment processor-agnostic, and stores data locally on the device with a Dropbox backup.

ShopKeep has turned its focus to inorganic growth in 2015 as it scales toward an IPO-able size. Its pickups of Payment Revolution and Ambur, while dissimilar, are designed to broaden its addressable market and revenue prospects. The reach for Ambur is particularly strategic in this regard given the latent opportunities for tablet PoS in the table-service restaurant sector. As midsized restaurants grow increasingly dissatisfied with their legacy back-office systems, this vertical will become the next battleground for tablet PoS providers. ShopKeep is wise to move in this direction, as its current-generation software is not suitable for larger restaurants that demand a more focused service.

We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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After a time on NYSE, Solera is back in private hands

Brenon Daly

Contact: Brenon Daly

In a sort of private equity (PE) ‘homecoming,’ auto insurance software provider Solera Holdings plans to sell itself for $3.7bn in cash to buyout firm Vista Equity Partners. The net price for Solera, which has been a debt-fueled acquirer since its founding a decade ago, is pegged at $6.5bn by Vista.

Although it has been listed on the NYSE since 2007, Solera has PE-backed carve-out roots. The company has had a sometimes-contentious relationship with Wall Street. Investors have taken issue with how much Solera’s executives have paid themselves, in addition to a slumping stock price that had nearly been cut in half from its early 2014 highs to recent lows.

In part because of the prolonged slide in its shares, Solera said in August that it was exploring ‘strategic alternatives.’ Vista is offering $55.85 for each Solera share, with the deal expected to close by early 2016. Shares of Solera have ranged from $70 at the start of 2014 to $36 at the start of August.

With an enterprise value of more than $6bn, the Solera take-private would be the second-largest PE transaction of 2015. However, the proposed transaction stands as the largest LBO of a vertical market software vendor, according to 451 Research’s M&A KnowledgeBase . Typically, PE shops buy software ‘platform’ companies that serve large numbers of customers across a variety of sectors. In recent years, horizontal software companies, such as Compuware, Informatica, BMC Software, TIBCO and others, have landed in PE portfolios.

The planned take-private of Solera continues a recent surge in PE spending. So far this year, buyout shops have announced transactions valued at $37.3bn, according to 451 Research’s M&A KnowledgeBase. That’s up about two-thirds from the same period in 2014, and twice the spending over the same time in 2012. It only trails the January-September level in 2013, which was skewed by the $25bn LBO of Dell.

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GoDaddy scoops up Apptix’s hosted Exchange customers

Scott Denne

Contact: Liam Eagle Scott Denne

GoDaddy is not typically in the business of obtaining subscribers via M&A. Its deals (10 in the past 24 months) tend to focus on picking up technology or market specialization. The fact that GoDaddy is willing to shell out for Apptix’s hosted Exchange business speaks to the company’s confidence in the lifetime value of these users. Reselling Office 365 has been a major driver of new business since GoDaddy began offering it in January 2014. As an upsell from domain registration (GoDaddy’s largest business), hosted email might be a more frictionless sale than even Web presence.

GoDaddy will pay $23m for the asset and will inherit approximately 60 employees. Following the close, the acquired customers will be migrated to Office 365 through GoDaddy. Apptix posted about $15m in annual revenue from its hosted Exchange business. In addition to the upfront consideration, GoDaddy is on the hook for an earnout that could be as high as $16m if every customer migrates to GoDaddy. A more likely scenario, according to the seller, is that it will get paid 50% of the earnout.

Apptix’s desire to part with its multi-tenant Exchange hosting users speaks to the challenge of positioning a mass-market hosted Exchange product in a world where Office 365 (hosted by Microsoft) is a simple alternative. Almost across the board, service providers focused on Exchange hosting have been narrowing their focus on specialized situations, such as hybrid, private and custom engagements for which Office 365 might not be a fit.

Pacific Crest Securities advised Apptix on its sale.

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Where does the tech M&A market go from here?

Brenon Daly

Contact: Brenon Daly

In both August 2015 and August 2011, concerns about slowing global economies knocked stock markets around the world into a tailspin, while also ratcheting up volatility. Intuitively, we would assume that both conditions, which introduce more variance and uncertainty, would make it more difficult to do deals. But is that actually the case? And if so, what can the whipsawing markets from four years ago tell us about how M&A activity might play out for the rest of 2015?

To get a sense, we split 2011 into a ‘pre-turmoil’ period of January through August, and then a ‘post-turmoil’ period of September through December (which is roughly the same four-month block that remains in 2015). When we ran the numbers in 451 Research’s M&A KnowledgeBase, we got a pretty clear picture of acquisition activity in the two periods of 2011: the M&A market never got back on track after the summer upheaval.

Through the first eight months of 2011, dealmakers averaged $22.3bn in spending on tech, media and telecom (TMT) transactions each month. For the remaining four months of 2011, average spending dropped about 40% to just $13.6bn per month. Further, it wasn’t just a case of where a deal or two in the front half of the year skewed the total. Instead, it was pretty even spending on significant transactions. There were eight separate acquisitions announced in the first eight months of 2011 valued at more than $4bn, while not a single deal that size hit the tape in the last four months of the year.

We have noted how the black swans have already befouled the M&A market in the short term. (Spending on TMT transactions dropped a staggering 80% in the second half of August, according to the KnowledgeBase.) If past is precedent, the rest of 2015 won’t be as bad as that, but it also won’t be anywhere near as good as it has been. A 40% decline – like we saw at the close of 2011 – would mean each of the remaining months would come in at roughly $30bn in average monthly spending, compared with the monthly average since the start of 2015 of nearly $50bn.

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