Garmin races toward higher margins with cycling deal

Contact:  Scott Denne

Up against a stagnant market for fitness trackers, Garmin reaches for Alphamantis Technologies, a maker of specialty products for cyclists. Today’s acquisition isn’t likely a sizeable one, as the target only has a few employees. Yet it highlights Garmin’s strategy of weathering a decline in one market through expansion into another, particularly specialized products with higher margins. Other companies with too much exposure to the wearables market – particularly Fitbit – would do well to get in Garmin’s slipstream.

Best known for its automotive navigation devices, Garmin has long sold GPS products into a variety of categories – fitness, aviation and outdoor recreation. Its revenue rose a modest 2% to $639m in the first quarter from a year earlier, despite a steep drop in automotive products, which still account for one-quarter of its business, and a modest decline in fitness trackers, which it blamed on a maturing market for basic wearables.

Our own data also shows that maturation. According to 451 Research’s most recent VoCUL survey, just 7.4% of people planned to buy a fitness tracker in the next 90 days – a response rate that hasn’t changed meaningfully in two years. More telling, the largest maker of wearables, Fitbit, shed 40% from its top line in the first quarter.

In response, Fitbit is turning to the smartwatch market, having inked two deals in that space since December. Our surveys show that market to be almost as flat as fitness trackers. More importantly, it’s a broad market that’s flooded with entrants from the legacy watch sector and the cell phone segment (including the world’s largest maker of consumer electronics).

Garmin’s purchase of Alphamantis brings it technology for tracking cycling performance data. A niche market to be sure, and in that sense, it’s similar to last year’s pickup of DeLorme, a maker of satellite radio products for hikers, boaters and pilots traveling to remote locations. Those niche markets, while lacking the scale of smartwatches, lead to higher margins. Garmin’s fitness business posted 56% gross margins last quarter – Fitbit didn’t crack 40% despite being twice the size.

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

Crown Castle pays big for small cells

Contact: Mark Fontecchio

Crown Castle International shells out $7.1bn for fellow cell tower company Lightower Fiber Networks in the latest and largest of a flurry of acquisitions by the buyer to expand its small-cell coverage in the US. The purchases, made at above-market multiples, come as Crown Castle builds out infrastructure to support mobile operators dealing with surging data traffic.

With Lightower, Crown Castle obtains a larger network of cell towers, small-cell nodes and fiber deployments concentrated in the Northeast. Crown Castle has now spent $10.7bn on M&A in three years to build its small-cell network in the Northeast, southern California, Florida and Texas through acquisitions such as FiberNet ($1.5bn) and Sunesys ($1bn).

In the process, Crown Castle has spent more on M&A since 2014 than it had in the entire preceding decade and paid rich multiples along the way. According to 451 Research’s M&A KnowledgeBase, purchases of tower and fiber targets since 2014 carried a median valuation of 3x trailing revenue. Today’s pickup of Lightower values the target at about 9x, in the same neighborhood as Crown Castle’s other small-cell deals.

Why the premium? As we discussed in a December report, mobile networks face escalating demand as consumers increase video consumption and enterprises deploy mobile cloud apps. To keep up with that data demand, operators are increasingly turning to small-cell deployments.

Morgan Stanley advised Crown Castle on the transaction, while Citigroup Global Markets and Evercore Partners banked the seller.

Private equity gets bigger wrench for bolt-on deals

Contact: Scott Denne

As buyout shops expand their role in tech M&A, a growing share of private equity spending is coming from bolt-on acquisitions by portfolio companies rather than stand-alone purchases. The sales of Sandvine and Rocket Fuel – both announced this week – show that PE firms are more willing to make sizeable additions to their portfolio companies.

Bolt-on deals have long been part of the private equity playbook. Every year since 2009, acquisitions by portfolio companies (often funded by their PE owners) have accounted for half of PE tech deal flow. This year, PE firms have kept that pace and bolstered the ratio of spending on such transactions. According to 451 Research’s M&A KnowledgeBase, PE-backed companies spent $12.5bn on purchases so far this year – that’s more than one-quarter of PE spending, a mark they’ve never previously hit.

In the acquisition of Sandvine, a previous bid by Vector Capital was bested by a $441m offer from Francisco Partners on Monday to combine the company with Procera Networks, a Sandvine competitor. Francisco paid just $240m to buy Procera in 2015. Today’s pickup of Rocket Fuel by Vector’s Sizmek has a similar dynamic. Vector proposes to pay $23m more for Rocket Fuel than the $122m it spent on Sizmek. (In yet another potential similarity between these deals, Wall Street is betting that Vector’s offer will again be beaten as Rocket Fuel trades at $0.10 per share above the bid.)

It’s tempting to think that higher spending and the benefit of potential cost synergies would lead PE shops to pay higher multiples. That hasn’t been the case. Francisco values Sandvine at 3.7x trailing revenue compared with 1.8x in its acquisition of Procera, but in the case of Rocket Fuel, Vector will pay just 0.3x, less than the 0.5x it spent on Sizmek. Overall, the median multiple on purchases by PE portfolio companies sits at 2.2x in the past 24 months, compared with 2.6x for stand-alone PE acquisitions.


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Doors shutting for VC exits

Contact: Scott Denne

Venture capitalists haven’t faced an exit environment as challenging as they’ve seen this year since the start of the decade. Through the first half, VCs are on pace to sell the fewest number of portfolio companies in seven years. Yet at the high end of the market, the exits have never been bigger, driving the total value to a near-record level. Only five venture-backed companies have ever sold for $3bn or more and two of those deals – AppDynamics and Chewy – printed this year.

The dollar value of sales of venture-backed companies sits abnormally high at $16.2bn through the first half of the year. According to 451 Research’s M&A KnowledgeBase, that’s the highest value of VC exits in the first half of any year since 2002, with the exception of 2014. Yet the number of sales from VC portfolios sits at 285, the slowest start to the year since 2010.

The deceleration continued through the end of the second half as only 33 venture-backed companies were sold in June, the least of any month in the past eight years. And the decline in volume (as well as the abnormally high value of exits that came with it) extended across both enterprise- and consumer-tech startups – although in the latter category the decline marks a continuation of a four-year streak that became more pronounced as the most frequent acquirers of consumer tech stepped back from the market.

Google, the most active buyer of venture-backed startups over the previous four years, inked just three such deals this year (of five total transactions). Facebook hasn’t done a single one, while Yahoo sat on the sidelines for the 18 months leading up to its just-closed sale to Verizon. Apple and Amazon have been in the market, although neither has printed a deal for more than $250m since 2015. Subscribers to 451 Research’s Market Insight Service can access a detailed look at first-half venture exits.

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

Tech IPOs need to take the summer off

Contact: Brenon Daly

In the tech IPO market, as with most trends, it’s better to be early than late. That’s not always the case, of course, but typically the first few startups that emerge from a prolonged pause for new offerings do so with a ‘bankable’ story for Wall Street. It’s as if they are going public out of desire, rather than necessity. By the end of the cycle, however, the motivations for IPOs don’t often reflect that same confidence, a fact that investors tend to sniff out and discount accordingly.

As we ease into a summer break for new issues, it’s worth noting that we have certainly seen that cycle in the IPO market so far this year. By and large, the handful of enterprise-focused startups that have been first to (public) market in 2017 have raised more capital, created more market value and rewarded shareholders more than the companies that have followed. MuleSoft, Alteryx and Okta all emerged onto Wall Street with solid offerings in the spring, representing the first enterprise tech IPOs following last November’s US election. (New offerings had been on hold as investors assessed the impact of the unexpected election results on their existing portfolio of companies before placing more speculative bets on IPOs.)

On the other side, the companies that have emerged from the pipeline more recently haven’t found Wall Street to be such a welcoming place. The most recent tech offerings — storage startup Tintri and online meal delivery vendor Blue Apron — both cut the pricing of their IPOs, but even that hasn’t been enough. (The discount for Tintri was particularly sharp, leaving the company, which had raised $260m in the private market, with just $60m in proceeds from public-market investors. Built on some $320m in total funding, Tintri currently has a market value of slightly more than $200m.)

The valuation declines for both companies have continued uninterrupted on the stock market, leaving Blue Apron and Tintri underwater from their IPO prices, never mind the much higher valuations they received as private entities. In contrast, MuleSoft and Okta are both roughly twice as valuable as they were when they last received funding as private companies. For the tech IPO market to get back on track in the second half of 2017, it might be well-served to take the summer off and look to restart in the fall, rather than dragging out the current cycle.

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

Despite the jumpstart, the tech IPO market still sputtering

Contact: Brenon Daly

Though undoubtedly well-intentioned, the Jumpstart Our Business Startups (JOBS) Act has nonetheless turned out to be a bit of a misnomer. When it was originally signed into law in April 2012, the JOBS Act was heralded as a way to remove some of the perceived obstacles that kept young companies from pursuing an IPO. Over the past half-decade, however, the law has come up way short in jumpstarting the tech IPO market.

Undeterred by that, the authors of the JOBS Act have expanded the law, opening the way for all companies — rather than just the ones that met the original ’emerging growth’ criteria — to go public while limiting the amount of information they disclose. The change goes into effect today.

However, we can only imagine that the expanded JOBS Act will have as negligible impact on the tech IPO market as the original law had. That’s generally the case when bureaucrats introduce regulation to solve a market-based problem, and that goes double for when regulators focus on the wrong problem in the market. To be clear, the lingering problems in the tech IPO market are due to a breakdown of the fundamental components of any market: supply and demand. (See our recent full report on the tech IPO market.)

Crucially, the JOBS Act only really addresses the ‘supply’ portion of the equation by, ostensibly, making it easier for companies to go public. But once companies make it to the NYSE or Nasdaq, they soon discover the real problem: Wall Street doesn’t particularly want them. Sure, tech vendors such as MuleSoft and Okta have both put up strong offerings so far in 2017. But we would argue that startups that can raise a quarter-billion dollars from private-market investors hardly need help raising capital through a public offering. (Indeed, both Okta and MuleSoft raised more as private companies than they did in their upwardly revised public offerings.)

Without increased demand from investors for newly issued equity from the hundreds of tech startups that have the financial profile to go public, the tech IPO market will continue to sputter. Paperwork from Washington DC won’t change that.

What’s missing in the tech M&A market?

Contact: Brenon Daly

When big acquirers step out of a market, they can leave behind a big hole. In the case of the current tech M&A market, it’s a multibillion-dollar hole. We noted in our full report on the just-closed second quarter that the value of tech and telecom acquisitions dropped 30% from Q1 to Q2, hitting a four-year low for quarterly spending of just $55bn in the April-June period, according to 451 Research’s M&A KnowledgeBase. The main reason for the recent slump in spending is the disappearance of many of the tech industry’s biggest buyers.

At the start of this year, many well-known acquirers — the ones that often serve as bellwethers for the tech industry — were actively inking significant deals. Intel, Cisco and Hewlett Packard Enterprise all announced acquisitions valued at more than $1bn in Q1. Since then, however, most of the busiest tech giants have shifted their M&A machines into neutral. In their place, two groups of buyers have emerged: old-line telcos and private equity (PE) firms.

Yet these newly assertive acquirers haven’t come close to closing the gap, in terms of M&A spending, left by the missing corporate shoppers. (That’s not for lack of effort among the financial buyers. PE firms announced a record level of tech transactions in Q2, eclipsing the number of deals done by US-listed corporate acquirers for the first time in history, according to the M&A KnowledgeBase. Our Q2 report has more details on activity and forecasts for the buyout shops.)

As one indication of what went missing when big-name corporate acquirers took an early summer hiatus from big-dollar deals, consider this: Only one of the five largest transactions announced in the first half of 2017 printed in Q2. That shift in strategy and spending by corporate buyers dramatically crimped deal flow at the top end of the tech M&A market. According to the M&A KnowledgeBase, the average value of the 20 largest tech transactions announced in the first three months of 2017 stood at $2.9bn. That’s 70% higher than the average of $1.7bn for the 20 largest deals announced in the just-completed Q2.

Ivanti keeps rolling along, adds RES Software

Contact: John Abbott, Brenon Daly

The rollup continues at Ivanti, the PE-backed company that itself is a bit of a rollup, created from the combination of LANDESK and HEAT Software in January. In its second acquisition under its new name, the Clearlake Capital portfolio company reached for user workspace management and IT automation firm RES Software. Although terms weren’t disclosed, subscribers to 451 Research’s M&A KnowledgeBase can see our deal record and proprietary estimate of the price and valuation in this transaction.

For years, RES fought it out in the virtual desktop management space with direct rival AppSense, while LANDESK, once part of Intel, tried to hold its ground in traditional desktop management. In 2010, Thoma Bravo stepped in to buy LANDESK from its then-owner Emerson Electric for $230m, supplementing it with a handful of smaller firms and topping it off with AppSense in March 2016. (While larger than RES, AppSense garnered basically the same multiple as RES in its sale to LANDESK. 451 Research M&A KnowledgeBase also has estimates for the AppSense sale.)

In January, Clearlake stepped in to buy LANDESK, a transaction that we understand valued the company at $1.15bn. The PE firm combined it with its own portfolio company, HEAT Software — itself a combination of FrontRange and Lumension — and eventually gave the cobbled-together infrastructure software giant its new name, Ivanti.

The rechristened company offers products in four main areas: client management, endpoint security, IT service and support software, and enterprise mobility management. Overall, it employs roughly 1,300. RES, with roughly 250 employees, adds complementary software tools. The startup is strongest in user workspace management and automation tools, but also has an enterprise app store, file sharing and synchronization, IT service management desk, and (most recently) endpoint security. RES also brings more of a European focus – the company was founded in Holland in 1999 and maintains a fairly strong business in the Benelux region.

From a technical point of view, it’s likely RES Automation Manager will be the most valuable asset that can be cross-sold to the rest of the Ivanti customer base. Virtual desktop management is a maturing space that’s now mostly dominated by Citrix, VMware, Microsoft, AWS and Google, alongside a growing set of desktop-as-a-service providers using technology from one or more of those companies. This broad competitive pressure weighed heavily on RES’s valuation, as surely as it did in the sale of rival AppSense a little more than a year ago.

Sizzle turns to fizzle in tech M&A, as Q2 spending slumps

Contact: Brenon Daly

After two consecutive years of surging tech M&A, we now have two consecutive quarters of slumping tech M&A. This year opened with Q1 spending on tech deals totaling only slightly more than half the average quarterly level of the recent two-year record run. Spending in Q2 dropped even further, leaving the value of tech deals announced around the globe for the April-June period at its lowest quarterly level in four years, according to 451 Research’s M&A KnowledgeBase.

Altogether, acquirers announced $56bn worth of global tech and telco transactions in Q2, according to 451 Research’s M&A KnowledgeBase. That represents a decline of 29% from the $79bn in Q1 2017, with all three of the past months suffering through a pronounced summer slowdown. (Our M&A KnowledgeBase shows every single month of Q2 came in below the average monthly spending in Q1.)

One of the main reasons for the drop from Q1 to Q2 is the recent disappearance of the big enterprise vendors doing big deals. In the first three months of the year, Intel, Cisco Systems and Hewlett Packard Enterprise all announced acquisitions valued at more than $1bn. However, since then, tech bellwethers have been replaced primarily by telco operators and private equity firms. (PE shops merit their own mention, as they printed more tech deals in Q2 than any quarter in history. However, in keeping with the current trend in the overall tech M&A market, their acquisitions were smaller than they have been. For instance, the number of PE-led deals with an equity value of more than $1bn dropped from nine in Q2 2016 to just five in Q2 2017.)

At the midpoint of 2017, this year is tracking to roughly $280bn worth of tech transactions. That would represent the lowest annual total in four years, and a dramatic slowdown from the roughly $500bn spent in 2016 and $600bn in 2015. We will have a full report on Q2 tech M&A activity for 451 Research subscribers next week, after an extended holiday weekend.

For PE, secondaries become primary

Contact: Brenon Daly

In many ways, the tech buyout barons have themselves to thank for the record run of private equity (PE) activity so far in 2017. The number of so-called ‘secondary transactions,’ in which financial acquirers sell their portfolio companies to fellow financial buyers, has increased for three consecutive years, according to 451 Research’s M&A KnowledgeBase. The pace of PE-to-PE deals has accelerated even more this year, with an unprecedented 64 secondary transactions already in 2017 — more than twice the average number in the comparable period over the past half-decade.

The fact that secondaries have become primary for PE shops represents a fairly noteworthy change in both the buyout shops and their backers, the big-money limited partners (LPs) of the funds. In years past, LPs have frowned on the practice because, in some cases, they might be investors in both the PE funds that are doing the buying as well as the ones doing the selling, which doesn’t really reduce their risk in that particular holding — nor do they truly exit that investment. The practice has been criticized by some for being little more than buyout shops trading paper among themselves.

For that reason and others, our M&A KnowledgeBase indicates that the number of PE-to-PE deals in the first half of the years from 2002-10, when the tech PE industry was relatively immature, averaged only in the mid-single digits. In others words, PE shops are currently doing 10 times more secondary transactions than they did in the first decade of the millennium. Recent tech deals that have seen financial buyers on both sides include Insight Venture Partners’ sale of SmartBear Software to Francisco Partners after a decade of ownership, TA Associates’ sale of Idera to HGGC, and Summit Partners’ sale of most of Continuum Managed Services to Thoma Bravo.

These types of transactions appear likely to remain the exit of choice for PE shops, as both the number of funds and the dollars available to them continue to surge to new highs. The increasing buying power of buyout firms stands in contrast to the diminished exits provided elsewhere for portfolio holdings. The tech IPO market has never provided much liquidity to PE shops. (For instance, neither Thoma Bravo nor Vista Equity Partners has seen any of their tech holdings make it public.) Meanwhile, corporate acquirers — the chief rival to financial buyers — have dialed back their overall M&A programs, and in some cases have found themselves outbid or outsprinted in PE-owned deals by ultra-aggressive buyout shops.