PayPal wants to be a buddy to the underbanked

Contact: Scott Denne

PayPal continues to push into the market for the underbanked with its $233m acquisition of TIO Networks. The target provides bill payment services and kiosks utilized by North Americans without access to traditional banking and builds off of PayPal’s $1bn purchase last year of Xoom, which also targeted underbanked populations.

Unlike Xoom, which focuses on international remittance, TIO (formerly known as Info Touch Technologies) mostly serves the US market and was founded to provide bill-pay services (that’s a more recent offering for Xoom). The market for consumers without access to traditional banking may have been too risky for many financial services firms, although as money and payments are increasingly digital, opportunities to serve that sector are expanding.

In addition to enabling PayPal to stretch into another corner of the payments ecosystem, TIO has a modest online bill-pay business that could get a bump under PayPal’s ownership. The deal also gives PayPal a small boost in its dollar-based revenue – the company’s earnings have taken some lumps recently from the strengthening dollar as almost half of its revenue and even more of its profits are derived from overseas markets. By contrast, the majority of TIO’s $57m in trailing revenue was generated in the US.

The transaction values TIO at 3.9x TTM revenue. That’s higher than what PayPal fetches and a turn lower than what it paid for Xoom. That’s likely a function of margin – Xoom was putting up 65% gross margins at the time of its sale, while TIO posted 45% last quarter.

Raymond James & Associates advised TIO on its sale, while Perella Weinberg Partners banked PayPal.

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No more caution flags with autonomous vehicle M&A

Contact: Mark Fontecchio, mark.fontecchio@451research.com

Autonomous vehicle (AV) targets are in the driver’s seat again, this time with Ford Motor’s majority acquisition of software firm Argo AI through a five-year, $1bn investment. The finish line for Ford is 2021, when it aims to roll out a fully autonomous vehicle. To get there, Ford plans to combine its existing self-driving tech with Argo’s artificial intelligence (AI) and robotics software.

Before 2016, Ford had only made one tech purchase in the previous decade, for software to connect smartphones with in-car entertainment. Then last year – a year when tech vendors including Google and Uber were already testing self-driving cars on the roads of Pittsburgh and elsewhere – Ford awoke, buying computer vision and machine-learning software firm SAIPS. That deal followed similar moves by its peers in 2016, as Toyota nabbed Jaybridge Robotics and General Motors paid $581m for self-driving navigation systems provider Cruise Automation.

Auto manufacturers are far from the only companies – or even the only non-tech companies – inking transactions in this space. We are also seeing activity from automotive parts suppliers like Continental AG and Delphi, both of which made an AV acquisition in the past two years, as well as tech vendors such as Google, Uber, Intel, HARMAN and TomTom, the last of which purchased a company in the sector called Autonomos just last month. According to 451 Research’s M&A KnowledgeBase, there have been 20 acquisitions of AV tech since the start of last year, compared with just six in the four years before that.

We highlight AI and machine learning in our 2017 Tech M&A Outlook for application software, as we predict that companies will buy technology and expertise in this area. Subscribers to 451 Research’s Market Insight Service can also access our report on M&A trends and predictions in AI and machine learning.

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

Divestitures hit record levels

Contact: Scott Denne

Buyers seeking growth sent tech M&A surging to near-record levels last year. Many sellers were of a similar mindset as enterprise technology companies shed lagging units with an eye on expanding the topline of their core businesses. That trend pushed divestitures to record levels in 2016. According to 451 Research’s M&A KnowledgeBase, divestitures by public companies hit $70bn, capping off five consecutive years of growth in the category.

Sales of Hewlett Packard Enterprise business units (software and IT services) captured the top two spots for the year as it divested those shrinking assets to focus on expanding its IT infrastructure business. HPE wasn’t alone. EMC sold its content software business to OpenText, which itself bought a pair of software assets from HP Inc. Strategics weren’t the only buyers – private equity (PE) firms played a considerable role in bolstering the amount of divestitures.

PE shops enabled Intel to shed its unfortunate McAfee purchase, helped HPE sell another, smaller subsidiary and assisted SunGard in divesting its government and education business in the wake of its own sale to FIS. Those deals and others drove PE spending on public company divestitures past $16bn, a 59% jump from the previous record set a year earlier. Much like overall PE spending last year, firms were more willing to ink large transactions when buying struggling business units. There were five such PE acquisitions valued at or above $500m, surpassing the previous record of three.

The divestitures announced last month (by PE firms or otherwise) don’t indicate that the record levels of such deals will continue – there was $1.6bn worth of public company divestitures in January. However, there’s still a willing pool of buyers, should more tech businesses look to unload underperforming and non-core assets. The 451 Research Tech Banking Outlook Survey anticipates abnormally high levels of PE activity coming in 2017. In that December survey, 54% of bankers said the value of their PE pipelines has increased, beating out the number (51%) who said their overall pipelines grew – the first time in that survey when more respondents anticipated growth in PE deals than in overall M&A.

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

451 Research M&A Outlook webinar

Contact: Brenon Daly

After a slow start in January, what does the rest of the year hold for tech M&A? Will 2017 rebound like 2016, which had a similarly slow opening month only to surge later in the year to finish with the second-highest annual spending total since the internet bubble burst? Or will this year settle back down to more typical post-recession levels, which would mean a decline of about 50% in spending from 2016’s total?

Join 451 Research tomorrow for an hour-long webinar as we look at the recent activity and forecasts from both corporate and financial acquirers, the valuations they are paying (and expect to pay) as well as what broad forces are likely to shape deals in the coming year. Additionally, we’ll look at specific themes that are likely to play out in key sectors of the IT market, including software, security and mobility. The webinar starts at 10:00am PST on Tuesday, February 7, and you can register here.

Snap pictures a massive valuation in upcoming IPO

Contact: Scott Denne

Snap, the company behind the social networking app Snapchat, has taken the next step toward one of the most highly anticipated IPOs by disclosing its prospectus. The documents show astonishing revenue growth and a strong hold on a coveted demographic that will have some investors believing it could become the next major online media company. No less astonishing are Snap’s valuation expectations. Based on the price of its last private funding, the company carries a valuation of about $25bn, roughly 62 times trailing revenue. For comparison, Facebook trades at 12x, Alphabet (Google) at 5x and Twitter at 4x.

There’s no doubt that Snap has built an incredible media business. It has 158 million daily users, 68 million of them in North America. A majority of those users are 18-34 years old, a widely sought after demographic by advertisers and one that’s increasingly difficult to reach through television ads. That’s a big part of the reason why Snap’s revenue has grown sharply – it only began to post sales in 2015.

Snap generated about $2 per user in North America last quarter. Facebook generates about $24, so it’s not unprecedented for Snap to grow this number by 10x. And it will have to do so, as there’s not much space left for Snap within that demographic. There are about 110 million people in North America that fall into that age group and Snap’s daily users in North America grew by less than 5% last quarter. (Sales from international audiences at both social networks are a fraction of those from North America.)

To keep users and advertisers engaged, the company points to its history of generating new products and features. While it’s been successful in doing that to this point, it’s challenging to keep that momentum going on a platform that’s designed to entertain. The Snap team seems to have an eye for design and entertainment, but the offering documents cast doubt on its judgement in other parts of the business.

Nearly all of the company’s infrastructure runs on Google’s cloud and Snap signed a deal last month that commits it to spending $400m per year for the next five years on Google infrastructure. Snap’s ambition is to carve out a large share of the digital advertising market, and it’s hard to justify running its critical infrastructure with its largest rival.

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

Lots of tech deals, but few dollars, to start 2017

Contact: Brenon Daly

After slumping sharply in the two months following the unexpected results of the US election, the number of tech acquisitions picked back up in January. M&A spending, however, didn’t follow suit. In the just-completed month, tech buyers around the globe announced 330 deals, with the aggregate value of those transactions totaling just $18bn, according to 451 Research’s M&A KnowledgeBase. January spending represents the lowest monthly level in two years, and just half the average monthly amount in 2016.

At the top end of the market, the M&A KnowledgeBase tallied just five deals valued at more than $1bn. That’s down from last year’s average of eight big-ticket transactions each month. Further, with one notable exception, the ‘three-comma deals’ so far this year have all gone off at below-market multiples. For instance, Keysight Technologies is paying just 3.2 times trailing sales for application testing vendor Ixia, which had been posting declining revenue. Clearlake Capital Group is paying an even lower multiple for LANDESK, owned by fellow buyout firm Thoma Bravo, according to our understanding.

A discount didn’t apply to last month’s largest transaction, Cisco’s reach for AppDynamics. The networking giant, which has been busily buying software vendors, paid an astounding 17.4x trailing sales for the application performance monitoring provider. (The $3.7bn deal marks the largest sale of a VC-backed company in three years.) Part of that rich valuation can be attributed to the fact that Cisco had to outbid the public market for AppDynamics, which was just a day away from setting the price of its planned IPO when Cisco announced the acquisition. Still, AppDynamics’ valuation is the highest multiple ever paid for a software firm with more than $50m in revenue, according to the M&A KnowledgeBase.

January’s deal volume, on the other hand, reversed two months of sharp declines to close 2016. The number of tech transactions in both November and December dropped to three-year lows, according to the M&A KnowledgeBase. Buyers last month included ServiceNow, Amazon Web Services and Oracle. Meanwhile, companies that double-dipped in the M&A market to start 2017 included Microsoft, Hewlett Packard Enterprise and the recently public Everbridge.

Recent tech M&A activity, monthly

Period Deal volume Deal value
January 2017 330 $18bn
December 2016 268 $39.5bn
November 2016 284 $39.6bn
October 2016 334 $83.2bn
September 2016 312 $30.1bn
August 2016 306 $31.5bn
July 2016 345 $94.1bn
June 2016 384 $67bn
May 2016 329 $23.8bn
April 2016 349 $20.7bn
March 2016 343 $23.9bn
February 2016 323 $28.3bn
January 2016 384 $21bn

Source: 451 Research’s M&A KnowledgeBase

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The tech IPO window: open but unused

Contact: Brenon Daly

With AppDynamics stepping into Cisco’s ever-expanding software portfolio rather than continuing its march toward Wall Street, tech startups have once again been shut out of the public markets in the opening month of a year. Last January also didn’t see a single enterprise tech IPO, starting a drought that lasted until late April. Q1 2016 was the first quarter since the recent recession not to have a tech company come to market – and the current quarter is in danger of repeating that, despite some of the most-welcoming conditions on Wall Street.

Unlike this year, last year’s Q1 shutout was sparked by a double-digit percentage slide in US equity indexes in the opening six weeks of 2016. The Dow Jones Industrial Average, which is currently above the symbolically significant 20,000 level, bottomed out below 15,600 last February. (From trough to top, that represents almost a 30% gain in the Dow, adding more than a trillion dollars of market value.) Last winter’s bear market was even worse for highly valued tech names, which is what most of the tech IPO candidates aspire to be.

With investors selling their existing tech holdings, it was hard to find buyers for any new tech listings. In the imbalanced market at the start of last year, the financially prudent decision for startups tracking to an IPO was simply to wait until summer, when tech came back in favor among investors. By our count, seven of the nine enterprise-focused tech vendors that went public in 2016 debuted in the second half of the year. The debuts were actually even more concentrated than that, as two-thirds of tech IPOs last year came in just the six-week period leading up to the US elections in early November. Not a single tech provider has gone public in the three months since the election.

Part of the scarcity is due to seasonality. (Companies tend to prefer to finish Q4, which is almost inevitably their biggest quarter, and then go to market with full-year financials and a valuation that’s based on the coming year’s projected sales.) And yet, while IPO-minded startups have been focused on closing business and getting their financial paperwork in order, companies already public have been enjoying an extended, and somewhat unexpected, ‘Trump rally’ on Wall Street.

Indexes have posted a roughly 10% surge since the election, as investors bet that having a businessman as US president – who’s working with a Republican-controlled Congress – will be able to stimulate more economic growth. Perhaps more important to the relatively fragile IPO market, the instability and uncertainty from broader political and economic events has receded sharply. (For instance, the CBOE’s Volatility Index is currently just half the level it was during the run-up to the election.) The shift in sentiment is even more dramatic in our own surveys of individual investors.

In the two monthly surveys by 451 Research’s Voice of the Connected User Landscape (VoCUL) since Trump was elected, more than four out of 10 investors have said they are ‘more confident’ about the direction of the stock market now than they were 90 days earlier. That’s roughly twice the percentage that said they were ‘less confident’. Those are the most-encouraging assessments of Wall Street in a 451 Research survey since the end of the recession. And yet in the most bullish of recent bull markets, not a single tech startup has made it public in 2017.

The IPO window may be as open right now as it’s been in years, but investors would never know it. With two months remaining in the first quarter – and current stock market indexes more than 20% higher than they were in Q1 2016 – the net result for new enterprise tech offerings from last Q1 and the current quarter could well be the same: an IPO shutout.

Time extends Viant into mobile apps with Adelphic purchase

Contact: Scott Denne
Time Inc has scooped up Adelphic, which provides a platform for buying ad inventory in mobile apps, as the storied media company hedges its bets to make up for its declining print revenue. The acquirer plans to add Adelphic to its Viant division, which it bought last year to build out a targeted digital advertising business.
With Adelphic, Viant adds software that will enable it to push its vision of people-based ad targeting into mobile apps. Adelphic is one of the strongest pure mobile app platforms but operates in a challenging market. Despite the overall growth of mobile advertising and mobile audiences, few mobile advertising vendors have been able to scale well. Much of the revenue in the space has gone to Facebook and a handful of mobile ad networks.
Those advertisers seeking a self-serve platform like Adelphic have often turned to one of the cross-channel media-buying platforms. That cohort tends to be strong in web (both mobile and desktop). With today’s acquisition, Time will be able to offer reach into mobile apps, not just web, for their mobile campaigns. However, Time will face technical challenges in expanding its people-based targeting vision into mobile apps, where ads are targeted based on device IDs, not cookies.
Terms of the deal weren’t disclosed. We estimate that Adelphic finished the year with $13m in net revenue and would expect it to fetch no more than 3x that amount, given the challenges in the mobile sector and that StrikeAd, a peer, got just 1x trailing revenue in its sale to Sizmek last year. Time has been eager to extend into several new segments, although it hasn’t been eager to pay a premium – it picked up Viant largely by assuming the target’s outstanding debt (see our estimate of that transaction here).
In addition to building out a digital advertising offering that extends beyond its core properties, Time is pursuing several other opportunities to expand its revenue. It has invested in a studio to help advertisers develop content and it recently bought Bizrate, a survey and consumer analytics firm, as it enters the affinity marketing space.
LUMA Partners and Oppenheimer & Co advised Adelphic on its sale.
For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

How to get your tech M&A playbook for 2017

451 Research’s annual look back on the year that was and look ahead to the year that’s coming in technology M&A has been moved in front of our paywall. (Click here to access the report.) The broad-market overview highlights many of the trends that drove acquisition spending to a surprisingly strong $500bn in 2016, and predicts how those will play out in 2017. The 5,500-word introductory report – which includes nearly 20 graphics, many of them drawing on 451 Research’s M&A KnowledgeBase – opens our full M&A Outlook, an 80+-page analysis of M&A drivers and predictions on M&A and IPO trends and activity in specific sectors of the IT market.

The full report, which serves as an ‘M&A playbook’ for many of the tech industry’s main acquirers, offers an in-depth forecast of trends that will likely shape dealmaking in eight segments of enterprise information technology, including information security, mobility and software. The full M&A Outlook report will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and M&A KnowledgeBase Premium, and will be available for purchase for 451 Research clients and others that don’t subscribe to our premium KnowledgeBase products. 451 Research will publish our full M&A Outlook – including the Introduction, which is available now, and the eight individual sector reports – in early February.

PE-backed StorageCraft crafts another deal

Contact: Steven Hill Brenon Daly

In the year since TA Associates picked up StorageCraft Technology, the data-protection vendor has been working to build out a broader vision for metadata-rich data protection and management. Its latest move adds scale-out NAS appliance vendor Exablox, already an existing partner. Terms weren’t disclosed. The purchase of Exablox is StorageCraft’s second acquisition since being bought by private equity firm TA Associates, and comes five months after it snagged data analytics startup Gillware Online Backup.

This deal further extends an existing partnership between Exablox’s object-based core technology and StorageCraft, which has focused its recent strategy on metadata-based, long-term data management and protection. Both companies stressed that Exablox appliances will continue to be marketed for both primary storage and secondary storage applications, as opposed to a dedicated backup appliance only. The pairing has potential benefits for both companies, in particular adding StorageCraft’s ShadowProtect data protection and Gillware-based data intelligence enhancements to the Exablox platform.

From our perspective, the transaction reflects an increasing awareness of the importance of metadata as part of a larger vision for long-term data protection and management across the industry. Data growth is a given, and these vendors recognize that the next generation of storage requires greater intelligence about the data itself. Buying Exablox should allow StorageCraft to add closely integrated, on-premises storage offerings as an extension of its existing cloud, SaaS, storage analytics, data-protection and DR/BC portfolio. With the scarcity of funding available for storage and infrastructure companies, we expect more vendors to use deals such as StorageCraft’s reach for Exablox to expand their technology and market opportunity.