Telco buys and sells

by Scott Denne

M&A activity among telcos is surging as phone, internet and wireless service providers increase both their buying and selling amid a general, though not complete, movement back toward their core markets after a streak of investments in ancillary tech sectors. Just this month alone, three carriers have unwound deals and scaled back their venture units. Still, acquisitions by carriers have hit their highest level since 2015.

According to 451 Research’s M&A KnowledgeBase, telcos have spent a collective $96bn on tech M&A this year, nearly four times the total spending among those acquirers in all of 2017. At the same time, publicly traded telcos have sold assets worth a combined $19.5bn, or twice the amount they sold in 2016 and 2017 combined.

Telstra is among the most recent sellers as it shed its $270m bet on Ooyala, a video streaming software vendor, in a sale to the company’s management. Alongside that transaction, it announced a restructuring of its venture arm, a move that reflects the recent decision by Rogers Communications to do the same. Telstra’s decision is part of a broader restructuring plan to cut costs and focus on customer service to return to growth (the Australia-based carrier’s topline declined 5% in each of the past two quarters).

Similarly, Sprint decided to divest its Pinsight Media unit in a sale to ad network InMobi. Like Telstra, Sprint is doubling down on telecom services – although in Sprint’s case, that’s taking the form of a $26.5bn sale to T-Mobile, a carrier that’s shown little appetite for moving beyond communications services. But that’s not to say that all carriers are sticking to the markets they know best.

Most notably, AT&T, following its massive $85bn pickup of Time Warner, has increased its acquisitions in digital media, ad-tech and even network security – its purchases of AppNexus and AlienVault account for more than half of the $3.6bn that telcos have spent this year on ancillary technologies. Given the recent failures of its competitors, not to mention the many abandoned forays into datacenters earlier in the decade, it’s tempting to take a dim view of bets in media and advertising.

Still, AT&T, as well as Comcast and Verizon – which made similar, earlier acquisitions in media and advertising – haven’t been the best stewards of their core businesses. There’s scant evidence to suggest that focusing strictly on their legacy business would be without its own risks. Multiple surveys by 451 Research’s VoCUL show consistently low levels of customer satisfaction among phone and TV service providers. For example, mobile services from Sprint and Verizon have trended down over the decade while AT&T has demonstrated little growth, with just 24% of customers saying they’re satisfied with the current service (only T-Mobile has posted long-term gains on that front).

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Harris’ acquisition of L3 puts 2018 on pace for a record

by Mark Fontecchio

Harris’ $15.6bn purchase of fellow defense contractor L3 Technologies brings the total deal value within striking distance of 2015’s record haul and above any other full-year total since the dot-com bubble. While an industry consolidation play from Harris may have gotten this year to that mark, this transaction looks more like the acquisitions that pushed 2015 to a record than those that are putting 2018 in contention for a new one.

In handing out $15.6bn of its stock for L3, Harris seeks increased scale to compete with still-larger defense players that include Lockheed Martin, Northrup Grumman and Raytheon. This type of large consolidation play is not without precedent for Harris – in 2015, it spent $4.8bn for Exelis, a deal that valued the target at 1.5x trailing revenue, in line with its acquisition today.

According to 451 Research’s M&A KnowledgeBase, the total value of 2018’s tech M&A market stands at $457bn, currently on pace to surpass 2015’s record haul of $577bn. Back then, consolidation among legacy telcos or aging hardware giants bolstered the annual total – that was the year Dell inked its $63bn purchase of EMC and Charter paid $57bn for Time Warner Cable.

This year’s largest deals are distinctly different. Although there’s still plenty of consolidation, including Comcast’s $39bn reach for Sky and T-Mobile’s planned tie-up with Sprint, there’s more diversity of acquirers and buying strategies beyond industry consolidation. For example, there are two venture-backed targets (GitHub and Flipkart) among the top 10, as well as two private equity purchases – not to mention Broadcom’s head-scratching $18.9bn pickup of CA, a transaction that left Wall Street puzzled.

And as more money goes into new strategies beyond consolidation, the largest deals have fetched higher multiples. According to the M&A KnowledgeBase, in the 10 largest acquisitions this year, targets fetched a median 4x trailing revenue, compared with less than 3x among 2015’s biggest.

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Blood on Wall Street

by Brenon Daly

It wasn’t quite blood on the streets. But the deep red that has colored Wall Street in recent trading sessions did kill the IPO dreams of at least a few companies. Not so with Anaplan. The corporate performance management vendor priced its offering at the top end of its range, and then saw its newly minted shares tack on another one-quarter in value as they debuted on the NYSE on Friday.

Already a unicorn in the private market, 10-year-old Anaplan boosted its value substantially in the IPO. With 124 million shares outstanding (or 150 million on a fully diluted basis), the company created roughly $3bn of market value. That’s about twice the value realized by rival Adaptive Insights, which was on track for an IPO of its own but then sold to Workday instead in June.

Of course, investor sentiment has deteriorated noticeably between those two exits. Anaplan priced its offering amid a sharp and sudden stock market rout. (Just in the two trading days before Thursday evening’s final decision to come public, the Nasdaq Index plummeted almost 5%.) That broad-market mauling was enough to convince two non-tech firms to shelve their plans to join the ranks of public companies.

The current worries on Wall Street show up even when we compare Anaplan with the previous enterprise software IPO, last week’s offering by Elastic. The open source search software provider came public valued at an eye-popping price-to-sales valuation in the mid-20s. And Elastic shares have held up solidly over the past week, even as most other stocks have been roughed up. That’s particularly true for many of the dozen enterprise-focused tech vendors, including Zuora and DocuSign, that have come public so far this year.

For its part, Anaplan secured a more-sedate price-to-sales valuation in the mid-teens. (The company’s roughly $3bn market cap is 15x its trailing 12-month sales of $200m.) Still, the fact that Anaplan found plenty of buyers for its stock, as most investors were selling stocks, has to count for something.

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Apple goes back to its old ways for a new reality

by Scott Denne

Despite its massive market cap, Apple rarely makes large acquisitions. With the $300m purchase of Dialog Semiconductor’s power management assets, the company inks its largest disclosed acquisition since the $3bn pickup of headphone maker Beats back in 2014. Yet today’s deal doesn’t imply the start of a new phase for Apple’s M&A program as much as a return to its old ways.

For $300m, Apple is obtaining a license to Dialog’s power management chip technology, along with 300 employees and four facilities in Europe. (As part of the transaction, it’s spending another $300m to preorder certain other products from Dialog.) Prior to buying Beats, some of Apple’s largest purchases were for suppliers, according to 451 Research’s M&A KnowledgeBase. For example, it paid $356m for biometric sensor provider AuthenTec in 2012 and $278m for microprocessor designer P.A. Semi in early 2008.

Reaching for hardware suppliers isn’t the only way Apple’s dealmaking activity is regressing. According to the M&A KnowledgeBase, it wasn’t until 2013 that the Cupertino-based computing company printed more than six transactions in a single year, although in all but one full year since then it’s done at least 10 acquisitions (in 2016, it printed eight). This year, it’s made just five.

Still, the return to the old strategy reflects a new reality for Apple – smartphones are a fully mature market, so it’s logical for Apple to turn to acquisitions that stabilize its supply chain and expand its gross margins. The most recent smartphone survey from 451 Research’s VoCUL shows that just 9.9% of respondents plan to buy a smartphone in the next 90 days, nearing the lowest second-quarter reading on record and part of a continuing downward slope in smartphone demand.

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Preview: Tech M&A Summit

by Brenon Daly

Companies that have signed off on the certainly-trite-but-possibly-true adage that ‘data is the new oil’ have discovered that the analogy extends far beyond the original meaning of both of the raw materials powering vast and varied industries. Most users of both resources have inevitably found that data and oil become valuable only after they are refined. In the Information Economy, most of that refinement gets done through the application of machine learning (ML) technology.

In a recent Advisory Report, my colleague Nick Patience, who heads up 451 Research’s software practice, notes that ML is a broad collection of technologies that serve a broad collection of uses. Yet, even with the near-universal relevance of ML (who doesn’t want smarter software?), the technology is only starting to find its way into companies. In Nick’s inaugural survey of 550 IT decision-makers, just 17% said they have deployed ML technology, with most of those use cases rather narrowly defined.

At the same time, however, his survey of these tech buyers and users shows they are planning to be much more expansive and aggressive with ML. Looking ahead, roughly half of all of the respondents expect to have ML technology up and running by mid-2019, up from just one in six right now. The soaring forecast for ML implementations is unprecedented in the relatively mature software industry.

That demand has sparked a record rise in the number of ML acquisitions, as suppliers look to pick up technology that helps them get a sense of the ever-increasing piles of information that companies accumulate about their own operations, as well as their ever-expanding relationships with clients, suppliers and partners.

Already this year, buyers have announced more ML deals than any year in history, according to 451 Research’s M&A KnowledgeBase At the current rate, the M&A KnowledgeBase will record roughly 140 ML-related prints for the full-year 2018, twice the number from just two years ago.

To get smart on ML and get even smarter on doing ML deals, 451 Research will be hosting a pair of special ML-themed M&A Summits next week, with morning events held on Tuesday, October 16 in New York City and Wednesday, October 17 in Boston. To reserve your spot for the M&A Summit in New York City, simply click here, and the M&A Summit in Boston, simply click here.

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

Elastic adds spring to the fall IPO market

by Scott Denne

Investors clamored for shares of Elastic in the search software vendor’s public debut on Friday as the market for tech IPOs appears ready to bounce back after a slow summer. After pricing at $36 per share, the company’s valuation nearly doubled when trading opened at $70, giving it a market cap that’s just shy of $5bn and the kind of multiple that shows an unflagging faith in growth on Wall Street.

The developer of open source search software for IT log analysis, security analytics and other applications nearly doubled its top line in its fiscal year (ending April 30) to $160m, up from $88m a year earlier, while increasing the share of subscription revenue in its mix. That trajectory propelled the company to a 26.5x trailing revenue multiple – well beyond the $1bn valuation on its last private round, a $58m series D in mid-2016.

Few other unicorns have galloped onto the street with quite as much glamor. This year has now seen 11 enterprise tech companies enter the public markets with valuations north of $1bn, often at heated multiples, although not quite as high as Elastic’s. Zscaler came to market with a similar 26x multiple (it trades just shy of 24x now) and Smartsheet currently commands north of 20x. Longer is the list of 2018 IPOs that trade above 10x, including DocuSign, Zuora and Tenable.

The latter firm was one of just two enterprise tech providers to go public in the third quarter – a dry spell that followed an unusual burst of activity as 10 such companies debuted in the first two quarters (almost the same number that did so in all of 2017). Judging by Elastic’s offering, the dry spell had little impact on investor appetites, setting up a favorable environment for Anaplan and SolarWinds as both look to price this month.

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Exclusive: Perforce’s Perfecto purchase?

by Brenon Daly

Veteran software development vendor Perforce has only recently emerged as a slow-and-steady consolidator of the various tools and technologies that make up that fragmented market. However, since the 23-year-old company changed private equity (PE) owners earlier this year, it has gotten more aggressive on acquisitions. It has also gotten more ambitious, with the market buzzing that Perforce has just sealed its largest-ever deal.

Although the purchase has not yet been announced, we understand that Perforce has acquired Perfecto Mobile. Exact terms couldn’t be learned, but several market sources put the deal value at $150-200m. Assuming the price is in that neighborhood, Perforce would be valuing the mobile application development startup at 3-4x trailing sales.

After bootstrapping its way through its first two decades of business, Perforce sold to PE shop Summit Partners in early 2016. Summit owned Perforce for two years, with the company picking up a DevOps tool provider in each of those years, according to 451 Research’s M&A KnowledgeBase. In its inaugural acquisition, Perforce bought application lifecycle management specialist Seapine Software, and followed that up by reaching across the Atlantic Ocean for Hansoft Technologies, an Agile tool planner vendor based in Sweden.

More recently, fellow buyout firm Clearlake Capital purchased Perforce in January, in a transaction that priced the company at nearly three times higher than Summit paid, according to our understanding. (Subscribers to the M&A KnowledgeBase can see our estimates for terms for both Summit-Perforce and Clearlake-Perforce.)

In its first deal in the Clearlake portfolio, Perforce nabbed Programming Research, which added security and compliance development features to its platform. That trend has driven several similar acquisitions in the DevOps market, as has the emergence of mobile apps as a major initiative at many companies. With its focus on customer-facing mobile apps, Perfecto extends Perforce’s platform to that market. The transaction is expected to be announced next month, according to our understanding.

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A barbell lift in Q3

by Brenon Daly

At the top end of the market, tech deal flow in the just-completed Q3 resembled a barbell. Blockbuster transactions came thick and fast in both the quarter’s opening month of July and the closing month of September, but were split in August, when seemingly all of the acquirers went on vacation. 451 Research’s M&A KnowledgeBase shows both July and September put up twice as many billion-dollar-plus tech deals as the dog days of August.

Inevitably, the start-stop-start pattern of big prints in Q3 also shaped the overall monthly totals of announced deal value. All M&A tends be fairly lumpy, skewed by occasional large transactions. But the activity in Q3 was particularly episodic. According to the M&A KnowledgeBase, July acquisition spending hit a relatively high level of $51bn, then fell by half to $23bn in August but then rebounded sharply in September, more than tripling to $79bn. September spending represented the highest monthly total in more than two years.

Bookended by big months, Q3 kept alive this year’s streak of consecutive quarterly M&A spending increases. Dealmakers around the globe handed out $154bn on tech and telecom transactions in the July-September period, slightly more than they spent in Q2 and about one-quarter more than they spent in Q1, according to the M&A KnowledgeBase. We would note that the continued increase came even as private equity (PE) firms turned into uncharacteristic clutchfists last quarter, with both the number of PE deals and the spending dropping for the first time in 2018.

Overall, the strength of Q3 puts 2018 on track to rival the highest annual spending level since the dot-com collapse. 451 Research subscribers can see our full report on Q3 M&A activity, as well as a look ahead to the final quarter of the year, on our site on Tuesday.

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A monkey riding a bull

by Brenon Daly

Already valued at about $2bn in the private market, SurveyMonkey held that ‘double unicorn’ valuation as it debuted in the public market. The company priced its upsized offering above the expected range, and watched the freshly printed stock jump about 50% on the Nasdaq. Yet even with all that bullishness, the IPO was more about value confirmation than value accretion.

Still, the online survey provider does enjoy a rather healthy valuation. With roughly 125 million shares outstanding (on a nondiluted basis), Wall Street is valuing SurveyMonkey at about $2.25bn. That’s roughly nine times the 2018 revenue that we project for company. (Our math: So far this year, SurveyMonkey has increased revenue about 14%. Assuming that rate holds through the second half of this year, 2018 sales would come in at about $250m.)

In the IPO, the company raised $180m plus another $40m from a separate direct sale to Salesforce Ventures. That goes on top of the roughly $1bn that the company had previously raised in debt and equity. The company’s main backer, hedge fund Tiger Capital Management, still owns about one-quarter of the company. (In addition to being the largest shareholder of SurveyMonkey, Tiger is also its largest customer, according to the company’s prospectus.)

Having probably taken in all the financing it could reasonably expect to collect as a private company, SurveyMonkey might well look at today’s IPO as a necessity. (It will be using $100m of the proceeds to pay off its debt.) The fact that Wall Street investors received the dot-com survivor so warmly not only splashes a bit of liquidity in the 19-year-old company, but may have other companies of its scale and vintage also give a closer look at the public market. As everyone on Wall Street knows, you always want to sell into demand.

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Marketing deals rise, once again, on Marketo

by Scott Denne

Marketo has now twice driven marketing tech M&A to new heights. Adobe’s $4.8bn acquisition of the marketing automation vendor pushes the total value of marketing deals past its previous record, set in 2016, a year when Vista Equity Partners’ $1.8bn take-private of the same company was the largest transaction in the category. Although only a year separates those record runs, the motivations of the largest buyers in each year are far apart.

According to 451 Research’s M&A KnowledgeBase, $13.2bn worth of marketing software and services companies have been acquired this year, already well above 2016’s $8.6bn. A surge of private equity buyers paying healthy multiples propelled the latter year’s total – the second-largest marketing tech deal that year was EQT’s $1.1bn purchase of Sitecore. This year, it’s strategic buyers looking to play defense that’s driving up the total.

Take ad agency Interpublic, which spent $2.3bn for Acxiom’s marketing database services business to fend off the consulting shops and SIs that are pouring into advertising as the market goes digital. Similarly, AT&T’s $1.6bn acquisition of AppNexus makes up part of the telecom giant’s plan (along with its pickup of Time Warner) to keep from being just a pipe for Amazon, Facebook, Google and Netflix.

In Adobe’s case, reaching for Marketo seems motivated by its increasing competition with Salesforce. Adobe could have outbid Vista Equity back in 2016 for less than the roughly 12x trailing sales it’s paying today. (Vista paid 7.9x in that earlier transaction). Owning Marketo provides Adobe with a defense against Salesforce’s historical strength among B2B firms. In a similar vein, Adobe’s $1.7bn purchase of Magento in May seemed a strike at Salesforce’s earlier acquisition of Magento rival Demandware and also came at an uncharacteristic valuation (11.2x). Prior to those two most recent deals, Adobe had only once paid more than 8x for a vendor with at least $10m in revenue.

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