Another ‘down round’ IPO?

Contact: Brenon Daly

Another unicorn is set to gallop onto Wall Street, as MongoDB has put in its IPO paperwork. The open source NoSQL database provider plans to raise $100m in the offering, on top of the $311m it drew in from private-market investors over the past decade. As has been the case in other recent tech offerings, however, some of those later investors in MongoDB may well find that the IPO represents a ‘down round’ of funding.

Any discount for MongoDB likely won’t be as steep as the discount Wall Street put on the previous data platform provider to come public, Cloudera. Investors currently value the Hadoop pioneer at $2.2bn, slightly more than half its peak valuation as a private company. For its part, MongoDB, which last sold stock at $16.72, has more than 100 million shares outstanding, giving it a valuation of roughly $1.7bn.

While not directly comparable, Cloudera and MongoDB do share some traits that lend themselves to comparison. Both companies have their roots in open source software, and wrap some services around their licenses. (That said, MongoDB has gross margins more in line with a true software vendor than Cloudera. So far this year, it has been running at 71% gross margins, compared with just 46% for Cloudera.) Further, both companies are growing at about 50%, even though Cloudera is more than twice the size of MongoDB.

Assuming Wall Street looks at Cloudera for some direction on valuing MongoDB, shares of the NoSQL database provider appear set to hit the public market marked down from the private market. Cloudera is valued at slightly more than six times its projected revenue of $360m for the current fiscal year. Putting that multiple on the projected revenue of roughly $150m for MongoDB in its current fiscal year would pencil out to a market cap of about $920m. Given its cleaner business model and less red ink, MongoDB probably deserves a premium to Cloudera. While MongoDB certainly may top the $1bn valuation on its debut, reclaiming the previous peak price seems a bit out of reach.

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

Google’s smartphone redial 

Contact:Scott Denne

For a first marriage, it’s common to overlook a spouse’s flaws, harbor unrealistic fantasies about life together and spend unjustifiable sums on the wedding. A second marriage tends to be a more measured affair, with a conservative price tag and thoughtful evaluation of how the pairing fits into one’s broader life goals. The same applies to Google’s second purchase of a mobile phone company, as the search giant is paying $1.1bn for certain assets of HTC almost three years after unwinding its tie-up with Motorola Mobility.

While today’s deal marks a big commitment, it’s well short of the $12.5bn it spent for Motorola six years ago. Its reach for HTC differs from that earlier one – most of which it unwound in a 2014 divestiture to Lenovo – in more ways than price. With Motorola, Google envisioned itself becoming a marquee manufacturer of smartphones. This time, Google is making a more tactical move in the mobile market.

Google is obtaining the HTC team (and a license to related patents) that it used to build its Pixel phone, a collaboration that’s showing early signs of paying off. According to 451 Research’s VoCUL surveys, less than 1% of consumers with a smartphone own one made by Google, although the number planning to buy a Google phone sits near 3%. Even with those gains, Google’s phone business remains a long distance from matching Apple or Samsung.

But catching up to those companies, at least in hardware sales, isn’t likely the goal. Those same 451 surveys show that Google’s mobile OS, Android, has a larger market share than Apple’s iOS and more consumers prefer Android for future purchases. In that sense, the HTC pickup isn’t so much a break from its Motorola deal, but a continuation of the gains made from it.

Leading up to its acquisition by Google, Motorola’s sales were in a tailspin that continued after the transaction. Yet Google was able to build a broad ecosystem for Android during that time. That’s what it has in mind in nabbing the HTC team. Google is focusing its own hardware efforts on building high-end devices not mainly to sell devices but to showcase what’s possible with Android, making it easier for other hardware providers to develop functionality they’ll need in the competition against Apple, ensuring that Google’s software (and its cash-cow search engine) retains a place in the mobile market.

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

Retailers go shopping online 

Contact: Scott Denne

It’s been a tough year for retail. More than a dozen retailers – the latest being Toys R Us – have filed for bankruptcy, while others – JC Penney and Macy’s, for example – have grappled with lower-than-expected sales and store closings. As they face the acute threat from online sellers, Amazon in particular, they have adjusted their acquisition strategies to be more ambitious in scale, yet narrower in scope.

According to 451 Research’s M&A KnowledgeBase, spending on tech M&A by retailers spiked this year and last, with each cresting above $4bn in spending, whereas each of the four years prior to that, total spending fell safely below $1bn. (Two deals – Walmart’s $3.3bn purchase of Jet.com and PetSmart’s $3.4bn reach for Chewy – account for most of that boost, yet even excluding those transactions, spending by retailers in 2016 and 2017 sits slightly higher than normal.)

Aside from the increase in spending, retailers have executed a shift in M&A strategy. Where they had once been inclined to pick up companies outside their core competency, buying websites, logistics or gaming companies, they’re now more likely to snag their online counterparts, as Signet Jewelers recently did – amid declining in-store sales – with its $328m acquisition of R2Net. As their customers have done more of their shopping online, retailers have done the same. This year and last, retailers printed more deals for e-commerce vendors than all other categories combined, a contrast to their earlier buying habits.

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

Trump’s death blow to a deal

Contact: Brenon Daly

Respondents to the previous edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster have once again delivered the wisdom of the crowds. When asked last spring about the outlook for US-China tech deal flow, respondents overwhelmingly predicted that President Trump’s policies would crimp M&A activity between the world’s two largest economies. Specifically, two-thirds (65%) of the 157 respondents from across the tech M&A landscape forecast a decline in purchases of US tech companies by Chinese buyers. That was more than four times the level (14%) that anticipated an increase.

In line with that April forecast, Trump has blocked the proposed $1.3bn acquisition of Lattice Semiconductor by a Beijing-based fund, citing national security concerns. Regulatory approval of the planned purchase by Canyon Bridge Capital Partners, which was announced last November, had been viewed as virtually impossible after The Committee on Foreign Investment in the US indicated that it would not sign off on the transaction. Trump delivered the death blow to the deal on Wednesday.

Trump’s move represents a rare bit of White House intercession in an acquisition. But it isn’t necessarily out of character for Trump, who has singled out China for some of his sharpest criticism as he has pursued a self-described ‘America First’ policy. Again, respondents to the M&A Leaders’ Survey last spring accurately predicted that Trump’s singularly unfriendly views toward China would disproportionately impact US-Sino deal flow. In the survey, fully one out of five respondents (20%) forecast that Chinese buyers of US tech companies, such as Lattice Semi, would ‘substantially’ cut their activity due to the Trump administration, compared with just 3% who said they expected overall cross-border M&A to drop off ‘substantially’ in the current regime.

451 Research and Morrison & Foerster are currently in market with the latest edition of the M&A Leaders’ Survey, and would appreciate your views on where the tech M&A market is and where it’s heading. In addition to broad market questions, we also revisit questions around Trump’s impact on cross-border M&A as well the specific outlook for China-based buyers. We would appreciate your time and thoughts. To participate, simply click here.

A private equity play in the public market

Contact: Brenon Daly

In a roundabout way, private equity’s influence on the technology landscape has also spilled over to Wall Street. So far this year, one of the highest-returning tech stocks is Upland Software, a software vendor that has borrowed a page directly out of the buyout playbook. Shares of Upland – a rollup that has done a half-dozen acquisitions since the start of last year – have soared an astounding 150% already in 2017.

Investors haven’t always been bullish on Upland. Following the Austin, Texas-based company’s small-cap IPO in late 2014, shares broke issue and spent all of 2015 and 2016 in the single digits. For the past four months, however, shares have changed hands above $20 each.

Upland’s rise on Wall Street this year essentially parallels the recent rise of financial acquirers in the broader tech market – 2017 marks the first year in history that PE firms will announce more tech transactions than US public companies. As recently as 2014, companies listed on the Nasdaq and NYSE announced twice as many tech deals as their rival PE shops. (For more on the stunning reversal between the two buying groups, which has swung billions of dollars on spending between them, see part 1 and part 2 of our special report on PE and tech M&A.)

Although Upland is clearly a strategic acquirer in both its origins and its strategy, it is probably more accurately viewed as a publicly traded PE-style consolidator. The company has its roots in ESW Capital, a longtime software buyer known for its platforms such as Versata, GFI and, most recently, Jive Software. Upland was formed in 2012 and, according to 451 Research’s M&A KnowledgeBase, has inked 15 acquisitions to support its three main businesses: project management, workflow automation and digital engagement.

Selling into those relatively well-established IT markets means that Upland, which is on pace to put up about $100m in revenue in 2017, bumps into some of the largest software providers, notably Microsoft and Oracle. To help it compete with those giants, Upland has gone after small companies, with purchase sizes ranging from $6-26m.

However, the company has given itself much more currency to go out shopping. Early this summer – with its stock riding high – it raised $43m in a secondary sale, along with setting up a $200m credit facility. Given Upland’s focus on quickly integrating its targets, it’s unlikely that it would look to consolidate a sprawling software vendor. But it certainly has the financial means to maintain or even accelerate its rollup of small pieces of the very fragmented enterprise software market.

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

Container craze could spark monitoring M&A 

Contact: Nancy Gohring

Even though it’s early still for the use of containers and microservices, we’ve seen a handful of startups enter the market with technology designed specifically for the monitoring needs of those environments. Established vendors also are developing techniques for this segment, yet adoption of these technologies is moving fast enough that broader application monitoring companies may decide to buy a specialist to speed time to market.

In our 2016 Voice of the Enterprise (VotE): Cloud Transformation, Budgets and Outlook survey, 26.7% of respondents said they were either in broad or initial implementations of containers in production environments. A further 11.3% said they were using containers in test and development environments, 21.4% said they were employing containers in trials, and 40.7% said they were evaluating containers.

Emerging vendors such as Sysdig, Outlyer and Instana are developing new approaches that aim to solve the particular challenges of monitoring applications built using containers and microservices, especially the challenges that emerge in dynamic environments. Most of these startups are quite small, with relatively few customers, indicating that they still have work to do to prove their worth. However, we believe both legacy and newer-breed providers looking to quickly add capabilities around this fast-growing use case could benefit from a pairing with one of the new entrants, allowing them to start serving users now.

Legacy vendors specifically, which have been eclipsed in recent years by more modern players, may have the most to gain from such an acquisition. Subscribers to 451 Research’s Market Insight Service can access a detailed report that analyzes the potential acquisitions of application monitoring companies built for container environments.

Webinar: PE activity and outlook

Forget Oracle, IBM, or any of the other big-name, publicly traded acquirers that – until now – have always set the tone in the tech M&A market. If a tech deal printed in 2017, the buyer is more likely to be a private equity firm than any of the well-known serial acquirers on the US stock market. This is the first time in the history of the multibillion-dollar tech M&A market that financial acquirers have been busier than these strategic acquirers.

To understand how the ever-growing influence of buyout shops is reshaping both M&A and the tech industry, join 451 Research for an hour-long webinar on Thursday, September 7, 2017, starting at 1:00pm ET. Registration is available here: https://www.brighttalk.com/webcast/10363/274289.

Roku’s next episode will stream on smart TV 

Contact: Scott Denne

Roku has withstood an onslaught of competition from the world’s largest tech companies, yet it faces challenges on a new front as it readies its initial public offering. The maker of appliances for streaming video devices was able to flourish as Apple, Amazon and Google entered its market, but now faces a threat from smart TVs.

Amid a bevy of streaming alternatives, Roku expanded its topline by 25% in 2016 to $399m. According to 451 Research’s Voice of the Connected User Landscape survey, Roku leads the market for streaming media devices – 41% of respondents that own such a device use one from the company. It also sits ahead of the competition in daily usage and customer satisfaction rankings.

Most of Roku’s revenue comes through sales of its hardware ($294m in 2016), although most of the growth and profit margin comes via its advertising, licensing and revenue-sharing activities, which (at one-third the size) generated nearly twice the gross profit as the hardware segment. While Roku remains in the red, losses have decreased through the first half of the year, and modest increases in marketing spend – atypical of a venture-backed IPO – have fueled its gains.

Roku’s IPO heads to Wall Street as the market for streaming video accelerates. More than 21% of people in that same 451 Research survey said that they pay for three or more streaming services – double the number from two years earlier. Yet, much of that content is being consumed on smart TVs, which obviate the need for separate streaming devices, like Roku’s, and whose use ticked up by one-quarter over the last year, per our survey.

The company has begun to license its Roku OS software to TV makers, and needs to do so to continue to scale its audience reach – the lifeblood of the most profitable part of the business. While Roku showed that it can last through a heated battle with the biggest in tech, the company’s next phase will call for a subtler mix of partnership and competition with and against TV manufacturers.

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

One and done for tech M&A in August

Contact: Brenon Daly

For tech M&A in August, there was one big print and then everything else. The blockbuster transaction, which saw Vantiv pay $10.4bn for UK-based rival payments processor WorldPay Group, accounted for almost half of the $22.7bn spent on tech deals around the globe this month, according to 451 Research’s M&A KnowledgeBase.

After the massive fintech consolidation, however, the value of transactions declined sharply. No other deal announced in August figures into the M&A KnowledgeBase’s list of the 25 largest transactions announced in the first eight months of 2017.

The slowdown at the top end of the tech M&A market pushed this month’s spending level to the lowest total for the month of August since 2013. More recently, the value of deals in August came in slightly below the average monthly spending so far this year.

Altogether, tech acquirers across the globe have spent just less than $200bn so far this year, according to the M&A KnowledgeBase. At this point in both 2016 and 2015, spending on transactions had already topped $300bn.

With eight months now in the books, 2017 is on pace for the lowest level of M&A spending in four years. The main reason for the slumping deal value is that many of the tech industry’s most-active acquirers have largely moved to the sidelines, especially when it comes to big prints. IBM, Hewlett Packard Enterprise and Oracle all went print-less in August.

In contrast, the rivals to those strategic buyers, private equity (PE) firms, continued their shopping spree. PE shops announced 77 deals in August, an average of almost four each business day. That brings the total PE transactions announced this year to 600, a pace that puts 2017 on pace to smash last year’s record number of deals by roughly 30%. (For more on the record-setting activity of buyout shops, be sure to join 451 Research for a webinar next Thursday, September 7, at 1:00pm ET. Registration is available here.)

Western Digital takes a familiar path into new markets with a pair of deals 

Contact: Scott Denne, Tim Stammers

Western Digital has printed two different deals that follow the same pattern. The disk-drive giant has acquired enterprise storage vendor Tegile Systems along with Upthere, a developer of consumer cloud storage products, continuing its recent feast-then-famine M&A pace. Those targets mark the first companies it has bought since reaching for SanDisk in a $17bn transaction at the end of 2015.

In Western Digital’s last cycle, it spent $1bn across three acquisitions in the solid-state storage sector in the third quarter of 2013, followed by a 15-month hiatus from the market. Before that string of SSD deals, but after its $4.3bn purchase of HGST in 2011, it had only bought one company – a tuck-in of backup software firm Arkeia.

Like each of the last four private companies that Western Digital purchased, both of today’s targets took minority investments from Western Digital, which led the most recent venture rounds raised by Tegile and Upthere. Both transactions also push Western Digital further upmarket. Upthere sells high-performance cloud storage services designed for pictures, extending Western Digital’s consumer storage business and, since Upthere builds its own infrastructure rather than running on AWS, it brings a technical team that could bolster the acquirer’s ability to deliver enterprise offerings for other cloud services.

With Tegile, Western Digital becomes a full systems provider – a shift that’s been many years and many deals in the making. Purchases of Virident and SanDisk brought it hardware products to sell directly to enterprises, rather than OEMs, and acquisitions of Skyera and Amplidata brought it software IP that could potentially be used to build its own storage systems. If the past is any indication, Western Digital is wise to stick to its patterns – the company’s stock is up 90% in the wake of its SanDisk buy and a year-long streak of beating Wall Street’s projections.

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