Mastercard makes an antifraud deal of its own 

Contact: Jordan McKee 

After December reaches by Visa and American Express for card-not-present (CNP) antifraud providers, Mastercard makes its move in this space. With the purchase of NuData Security, it gains digital identity and behavioral biometrics capabilities that will play an important role as EMV and growing transaction volumes continue to push fraud into digital channels.

A recent study of 500 US merchants by 451 Research underscored the severity of this problem, showing that 60% of respondents are experiencing an increase in fraudulent activity in their digital commerce channels compared with this time last year. This problem will only be exacerbated as the Internet of Things (IoT) spreads commerce into myriad new connected devices, increasing chargeback and data breach risks for merchants.

Given its scale and complexity, IoT presents a security threat an order of magnitude greater than anything the payments industry has previously experienced. Payment networks and their partners are increasingly being required to operate in foreign environments that differ greatly from traditional CNP channels, such as web browsers. The spread of commerce to new connected endpoints will require new technology, talent and security approaches to ensure that the integrity of the card issuance ecosystem remains intact.

While Mastercard has positioned its pickup of NuData as an IoT antifraud play – and could conceivably extend NuData’s technology into various IoT settings over time – we see near-term applicability to traditional CNP antifraud use cases. In particular, its work around digital identity and biometrics will help extend Mastercard’s security efforts from the network to the device, helping to combat the wave of fraud currently occurring in mobile and e-commerce. Terms of the deal weren’t disclosed. NuData had about 70 employees.

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

For tech IPO market, it’s variety not volume

Contact: Brenon Daly 

This time last year, the only sound coming from the tech IPO market was crickets chirping. Not a single company made it public in Q1 2016, the first quarterly shutout since the end of the recent recession. So far this year, there’s a lot more going on, even if the recent activity lags what we might have expected after a prolonged listless period for new listings.

What the current IPO market lacks in depth, however, it more than makes up for in variety. Just since 2017 opened, we’ve seen a number of ‘outlier’ events, including a multibillion-dollar dual-track exit, a unicorn rewarded on Wall Street, the largest consumer Internet offering in three years, and even a company use the circuitous route of a blank-check deal to go public. You know it’s a strange time for IPOs when a company that had been planning to go public on the Nasdaq but opted for a sale instead goes ahead and rings Nasdaq’s opening bell when that deal closes, as AppDynamics did.

There are other indicators of just how hard the tech IPO market is to read right now, including:
-AppDynamics scrapping its planned offering after Cisco swept in with a too-rich-to-pass-up $3.7bn offer in January, days before the software vendor was set to debut on Wall Street. As rich as AppDynamics’ sale was, however, the deal looked like a discount when fellow infrastructure software provider MuleSoft did hit the market almost two months later. MuleSoft’s trading valuation nearly matches AppDynamics’ terminal value, which included a premium.
-Both of the enterprise-focused tech firms that have gone public so far this year (MuleSoft and Alteryx) raised more money from private market investors than they did from Wall Street.
-And what to say about the IPO of Snap, which lost more money in 2016 than it took in as revenue? A five-year-old company that starts its prospectus by talking about ‘eyeballs,’ and then doesn’t give investors any say about how the business should be run in any case? A media company that went public just as it was experiencing its slowest audience growth? Despite all of those questionable metrics, Snap created more than twice the market value of all enterprise tech IPOs last year.

With Okta set to debut next week and several Hadoop vendors reportedly close to revealing their paperwork, the tech IPO market has enough to keep it going for the next few weeks. However, that doesn’t necessarily mean that Wall Street will be as welcoming as it has been. The US equity indexes are about 25% higher than they were during the bear market that mauled investors in the opening months of 2016. Yet all of the indexes have recently reversed, and are in the red for the past month. Meanwhile, 451 Research surveys of investors have shown a steady erosion of confidence in the stock market, which could give them pause before buying shares in any of the unknown and unproven tech startups looking to go public.

Alteryx makes it two software IPOs in two weeks

Contact: Brenon Daly 

Data analytics vendor Alteryx has made its way to Wall Street, the second enterprise software provider to go public in as many weeks. The IPO, which raised $126m for the company, comes on the heels of a more-ebullient offering from MuleSoft. Together, the two oversubscribed IPOs indicate that the market for new offerings has rebounded from this time last year, when not a single a tech company made it public until late April.

Alteryx priced its shares at $14 each, and then edged higher to $15.50 on the NYSE during afternoon trading. With roughly 58 million (non-diluted) shares outstanding, the company is valued at about $900m. While MuleSoft more than doubled its private market valuation when it hit Wall Street, Alteryx’s IPO pricing is only slightly above the level it last sold shares to private investors in September 2015.

Although Alteryx debuted at a more modest valuation compared with MuleSoft, it did secure a double-digit multiple, albeit barely. Wall Street is valuing Alteryx, which recorded $86m in revenue last year, at 10 times trailing sales. That compares with about 16x for MuleSoft in its debut. The reason for the discrepancy? MuleSoft is more than twice as big and growing faster, increasing 2016 revenue by 71% compared with the 59% year-over-year growth for Alteryx. (Whether the comparison between the two vendors is fair or not, it is perhaps inevitable given the timing of their IPOs.)

In terms of future growth, Alteryx does face some challenges, as we have noted. Currently, the company focuses primarily on transforming and cleansing data and analyzing it using a combination of internally developed algorithms and functions based on the R open source computing statistical computing environment. Its own visualization and discovery capabilities are rather limited. Alteryx partners with Tableau, Qlik and Microsoft (Power BI) for this technology.

However, this partnership strategy could inhibit the company’s future expansion because visualization and data discovery are useful for attracting less-technical end users, which it will need to do to increase the number of users of its technology. Right now, Alteryx’s users are largely data analysts even though the company markets itself as a self-service data analytics vendor for technical and nontechnical end users.

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

With sharp elbows and deep pockets, PE gets busy

Contact:  Brenon Daly

With sharp elbows and deep pockets, private equity (PE) shops have announced more deals so far this year than the opening quarter to any year since the end of the recent recession. Already in 2017, 451 Research’s M&A KnowledgeBase has tallied 165 transactions by PE firms and their portfolio companies, a 15% jump from the previous record in Q1 2016. More broadly, buyout shops are currently about twice as busy as they were just a half-decade ago. Cash-rich financial acquirers represent the only significant group that’s accelerating activity in an otherwise slowing tech M&A market.

The dramatic surge in PE activity is primarily due to the ever-deepening pool of financial buyers. In the history of the industry, there have never been more tech-focused buyout shops that have had access to more capital, collectively, than right now. New firms have popped up while existing shops have put even more money to work in the tech industry, which is becoming even more ‘target rich’ as it ages. For instance, both Clearlake Capital Group and TA Associates have already announced as many deals in 2017 as each of the firms would typically print in an entire year.

Of course, merely having record amounts of money doesn’t necessarily mean that firms will do more shopping. After all, that hasn’t been seen among corporate acquirers, which stand as the main rivals to PE shops. Tech companies that trade on the NYSE and Nasdaq have never had fatter treasuries than they do now, but the number of acquisitions they announced in 2016 dropped 11% compared with 2015, according to the M&A KnowledgeBase. In contrast, PE firms registered almost exactly the inverse, with the number of transactions increasing 13% in 2016 from 2015.

As financial acquirers step up their activity and strategic buyers step back, the once-yawning gap between the rival buying groups is narrowing. In the years immediately after the recent recession, tech companies listed on US exchanges regularly put up twice as many prints as PE firms. However, for full-year 2016 and so far in 2017, M&A volume for corporate acquirers is only about 30% higher than their financial rivals, according to the M&A KnowledgeBase.

Adobe’s search for markets beyond the web 

Contact: Scott Denne 

Adobe is extending its ambitions beyond the website. Having thrived in the first iteration of digital marketing, the vendor is turning its attention to the next one – where software has a role in all of a business’ customer interactions, not just those coming in through the homepage. It needs a wider set of software to capture that larger market opportunity and fend off old adversaries in web marketing, as well as new ones in segments such as mobile marketing, e-commerce software and customer service that are eyeing the same prize.

Today Adobe opens Summit, its annual marketing conference, with the theme of building customer experiences. It’s roughly the same theme as last year’s show, with the subtle shift that much of the content has a more instructional bent, whereas last year Adobe was more intent on convincing marketers that customer experience matters in the first place. In the intervening time, there’s been a correspondingly subtle shift in the company’s M&A strategy. Its most recent acquisition wasn’t just a bolt-on to sell into its existing sales channel like past deals. It was an attempt to open up a new path to market for its products.

Adobe entered digital marketing almost eight years ago with the $1.8bn purchase of website analytics company Omniture and followed that, according to 451 Research’s M&A KnowledgeBase, with $2bn worth of M&A that took its capabilities beyond the website, but always with an eye toward adding products that it could upsell to web-oriented digital marketers. In the last quarter, its marketing unit grew 26% year over year to $477m in revenue.

Its latest acquisition, TubeMogul, stands out not so much for its size ($540m) as for the fact that its video media-buying software is built for brand managers and TV media planners – a group with far different priorities than digital marketers, and access to larger budgets. The deal, along with Adobe’s messaging, show that it’s ready to start exploring purchases that will enable it to sell to marketers that don’t have a website-first bent and to other customer-facing parts of a business.

Increasing its appeal to mobile app developers and app-centric marketers would be a logical next step from Adobe’s roots in web marketing. Both mParticle and TUNE would serve as a cornerstone acquisition in that space – the latter for its breadth of mobile analytics and marketing tools, the former for its customer data platform that plugs into most mobile app tools. Adobe may also look to add to its e-commerce capabilities by reaching for a larger social media management product or even expanding into customer service software. Whatever its next move, Adobe seems intent on doing more these days than refreshing its website-based marketing business.

MuleSoft gets a thoroughbred valuation in its IPO

Contact: Brenon Daly 

After a four-month shutout, the enterprise tech IPO market is back open for business. Infrastructure software vendor MuleSoft surged onto the NYSE, more than doubling its private market valuation. It sold 13 million shares at an above-range $17 each, and the stock promptly soared to $24.50 in late-Friday-afternoon trading. That puts the fast-growing company’s market valuation at slightly more than $3bn, twice the $1.5bn value that venture investors put on it.

MuleSoft’s debut valuation puts it in rarified air. Based on an initial market cap of $3.1bn, investors are valuing the company at a stunning 16.5x its trailing sales of $190m. That multiple is twice the level of fellow data-integration specialist Talend, which went public last July. Talend currently trades at a market cap of about $875m, or 8.3x its trailing sales of $106m. The valuation discrepancy indicates that investors are once again putting a premium on growth: MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing nearly twice as fast. (See our full report on the offering as well as MuleSoft’s ‘hybrid integration’ strategy – what it is and where it might take the company in the future.)

The IPO netted MuleSoft $221m, or $206m after fees. That’s undoubtedly a handy amount, but we would note that it is still less than the $260m it raised, collectively, from private market investors. (Somewhat unusually, there are three corporate investors on the company’s cap table.) All of those MuleSoft backers are substantially above water on their investment following the IPO. That bullish debut is likely to draw more high-flying startups to Wall Street after a discouraging 2016, when only two enterprise tech unicorns went public. This year will likely match that number next month, when Okta debuts. The identity management startup revealed its IPO paperwork earlier this week, putting it on track for a mid-April debut.

 

With Okta, infosec no longer conspicuously absent from the IPO market

Contact: Brenon Daly 

Even as several other fast-growing enterprise IT sectors have all seen unicorns gallop onto Wall Street, richly valued information security (infosec) startups have stayed off the IPO track. The sector hasn’t seen a $1bn company created on a US exchange in more than two-and-a-half years. Infosec has been conspicuous by its absence from the tech IPO market, especially considering that no other single segment of the IT market has as many viable public company candidates. Fully one-quarter of the startups in the ‘shadow IPO’ pipeline maintained by 451 Research’s M&A KnowledgeBase Premium come from the infosec space. (See related report.)

At long last, one of the infosec unicorns is (finally) ready to step onto the public market: cloud-based identity management startup Okta has publicly revealed its paperwork for a $100m offering that should price next month. The company, which raised nearly $230m in venture backing, had already achieved a $1bn+ valuation in the private market – and will head north from there in the public market.

Wall Street will undoubtedly find a lot to like in Okta’s prospectus. The company is doubling revenue each year, with virtually all of its sales coming from subscriptions. (Professional services accounts for roughly 10% of total revenue, a lower percentage than most of the big-name SaaS vendors.) Subscription revenue gives a certain predictability to a company’s top line, especially when coupled with the ability to consistently expand those subscriptions. Okta notes in its prospectus that its customer retention rate, on a dollar basis, is slightly more than 120%, an enviable rate for any subscription-based startup. Put it altogether and revenue at Okta for the fiscal year that ended in January is likely to be in the neighborhood of $160m, up from $86 in the previous fiscal year and just $41m in the fiscal year before that.

Having quadrupled revenue in just two years, Okta’s red ink isn’t likely to worry many investors. Through its first three fiscal quarters (ended October 31, 2016), Okta lost $65m, up from $55m in the same period the previous fiscal year. As is often the case with SaaS providers, Okta’s losses stem primarily from heavy spending on sales and marketing. Early on, Okta was spending slightly more than $1 on sales and marketing to bring in $1 of subscription revenue. It has since slowed the spending, with the result that in its latest quarter it spent $32m on sales and marketing to bring in $38m in subscriptions. (For comparison, Box – one of the more egregious spenders – shelled out $47m on sales and marketing to generate exactly the same subscription revenue as Okta ($39m) in its most recent quarter when it originally filed to go public in 2014.)

Okta’s IPO would represent the first new $1bn valuation for an infosec vendor on the NYSE or Nasdaq since CyberArk’s offering in September 2014. Sophos went public (rather quietly) in 2015 on the London Stock Exchange, and the two domestic infosec IPOs since then (Rapid7 and SecureWorks) both currently trade underwater from their offering. In contrast to the recent infosec shutout, startups from several other IT sectors have all been able to enhance their $1bn private-market valuation on Wall Street, including Nutanix, Atlassian, Twilio and Pure Storage. That list will get a little longer as MuleSoft is set to debut at more than a $2bn market cap, up from $1.5bn in its final round as a private company.

M&A drives Intel’s future 

Contact:  Scott Denne 

Intel missed the last big shift in computing. Now it’s spending aggressively to make sure that it doesn’t miss the next one. The storied chip company is using $15.3bn of its $20bn in cash to acquire Mobileye, a maker of semiconductors for assisted and autonomous driving applications. The price puts an unheard of valuation on its latest target – a valuation that suggests that Intel is still smarting from missing out on the mobile phone market. Mobileye is the latest in a line of acquisitions that show that Intel is no longer willing to bet on R&D alone to carve out its place in emerging markets like artificial intelligence (AI) and the Internet of Things (IoT).
The multiple that Intel is paying for Mobileye smashes the previous record for an acquisition of a similarly sized tech company. The purchase values the target at 41x trailing sales ($14.7bn in enterprise value on $358m in 2016 sales). According to 451 Research’s M&A Knowledgebase, that’s the highest multiple ever paid for a tech business with more than $100m in annual sales. Prior to this deal, Sirius Satellite Radio held the record from the 21.5x it paid for XM Satellite Radio 10 years ago.

Despite the valuation, Mobileye isn’t Intel’s largest acquisition. That was Altera, which it picked up in 2015 for $16.7bn to help it secure its spot in cloud datacenters and push into industrial IoT. Intel isn’t relying on a few big strategic transactions to enter emerging tech markets. In the 21 months that separate its Altera and Mobileye acquisitions, Intel purchased 11 other companies, mostly startups, including a maker of aerial drones, a pair of computer-vision vendors, and Nervana, a pre-revenue developer of AI chips (click here to see 451 Research’s estimate for that deal).

Compare that activity with 2005-2009, when Intel was plodding its way into mobile phones and never inked more than three acquisitions per year. That doesn’t mean that its attempt at the mobile phone market wasn’t costly. Between 2012 and 2014 (the last time it broke out its mobile business), Intel’s mobile unit put up a combined operating loss of $9bn and made a negligible boost to the overall topline. Intel abandoned that market as part of a restructuring midway through 2016.

Raymond James & Associates advised Mobileye on its sale, while Citigroup Global Markets and Rothschild Group banked the buyer.

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

Spotify looks to machine learning as competitors raise the volume

Contact: Scott Denne 

Spotify hopes that machine learning will be its encore. Two years ago, the company seemed to be pulling away from its pint-sized competitors with its then-novel on-demand music-streaming service. Now Apple and Amazon have gotten into this space, where they can leverage their large audiences and deep pockets.
Spotify has neither of those advantages. Instead, the company hopes that better data will enable it to compete with the internet’s largest vendors. On the one hand, trying to beat the likes of Amazon and Google through better data seems laughable. But music is a different beast. The data that’s easy to collect doesn’t tell you much. The data that’s hard to get provides more value.

Take the problem of music recommendation and discovery. Analyzing the relationships among simple data – artist, track and category – leads to results that are obvious and uninteresting. Telling a fan of Led Zeppelin that they might also like Aerosmith, while likely true, is of no value as such a person is likely familiar with both bands. Using that same data to make ‘long-tail’ recommendations scales up the chances of inaccurate results as it forces recommendations of less-popular music.

Although the music itself is becoming a commodity, Spotify is looking to draw non-commodity data from it. Take this week’s acquisition of Sonalytic. The London-based startup is developing tech that identifies songs from short clips and musical stems, even when masked by changes in pitch, tempo and so on. Similarly, its 2014 purchase of The Echo Nest brought it technology that combined digital processing of music with natural-language-processing algorithms. By understanding the music, not the metadata, Spotify is positioned to make better recommendations, beyond identifying what’s already popular.

Similarly, a more nuanced picture of audiences could help Spotify attract artists to its platform – not just as a place to host their catalogue, but also for the analytics tools it provides. Those tools could entice artists to encourage sharing and listening of their music on Spotify and open avenues to grow its business beyond a simple subscription app into other parts of the music industry, such as promotion.

Spotify needs these efforts to bear fruit soon as its competitors are gaining ground fast. According to 451 Research’s VoCUL surveys, the company’s paid app is making only modest subscriber gains – 7% of people surveyed in December said they intended to use the paid service over the next 90 days, up from 5% a year earlier (its free service hovered at about 17% in recent surveys). Meanwhile, Apple Music went to 12% from 7% in a year and Amazon Prime Music is consistently above 20% in those surveys.

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

A shift in strategies clips tech M&A valuations

Contact: Brenon Daly 

The speculative fever that helped spike tech M&A valuations at the start of 2017 has quickly been doused. After a mini-boom in high-multiple deals in January, last month came up virtually empty on richly valued exits as buyers stopped rolling the dice on acquiring startups and, instead, fell back on more old-school acquisition strategies. As a result, the broad-market price-to-sales multiple dropped a full turn from January to February, according to 451 Research’s M&A KnowledgeBase.

In the opening month of the year, tech acquirers appeared ready to write big checks for the startups they wanted. Cisco, Atlassian and Castlight Health all paid double-digit multiples for VC-backed companies in January, compared with just one buyer in February. Last month, Palo Alto Networks paid $105m for LightCyber, which works out to, barely, a 10x multiple of trailing sales, according to reports. Meanwhile, Cisco and Castlight both paid valuations closer to 20x sales and Atlassian – in its largest-ever purchase – spent $425m for Trello, a collaboration app that had only been available for a little more than two years and generated scant revenue.

Partly boosted by those handsomely valued startup exits, the average tech vendor sold for 5x trailing sales in January, according to the M&A KnowledgeBase. But in February, that broad-market valuation dropped to just 4x trailing sales. Last month’s multiple was dragged down by more conservative deal structures, such as divestitures (ARRIS Group buying the castoff Ruckus Wireless business for just 1.3x sales) and consolidation (private equity-backed Saba Software gobbling up publicly traded Halogen Software for just 2.4x sales).

If nothing else, the mixed picture for valuations so far in 2017 matches the expectation of senior bankers we surveyed last December about the coming year. In the 451 Research Tech Banking Outlook Survey, respondents were basically as likely to anticipate M&A pricing ticking up (32%) as sliding down (30%) in 2017. That’s the most-balanced forecast response ever recorded. In virtually all of our previous 11 surveys, one view – either squarely bullish or decidedly bearish – has dominated.

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