Battered by Brexit

by Brenon Daly

Despite EU and UK leaders agreeing to terms on the country’s departure from the larger political and economic body, there’s still no actual Brexit. A weekend vote on the accord now looms large in the British Parliament, with early forecasts indicating the hard-won deal will likely struggle to get final approval. Parliament rejected a similar agreement earlier this year.

Regardless of whether the ‘ayes’ or the ‘nays’ carry the vote about the EU bloc, Brexit has already notably diminished the UK’s standing in another large marketplace: tech M&A. British buyers as well as British sellers in 2019 are on pace to announce their fewest tech deals in a half-decade, according to 451 Researchs M&A KnowledgeBase. The slowdown there is being felt much more broadly, since our data shows the UK has perennially ranked as the second-busiest M&A market in the world.

Deal volume – both on the buy- and sell-side – is on track this year to drop about one-quarter from the recent highs they hit. Incidentally, our M&A KnowledgeBase indicates that tech M&A in the UK peaked in 2015 – the year before the Brexit vote. Since the contentious vote in mid-2016 and the still-unresolved results, the number of British tech prints has dropped every year.

Somewhat unexpectedly, however, recent M&A spending has clipped along at exceptional levels. Based on annualized totals for year-to-date activity from our M&A KnowledgeBase, British buyers will spend a record amount on tech acquisitions in 2019, while spending on acquired UK-based tech companies is on pace for its second-highest annual level.

For dealmakers, Brexit has essentially meant fewer bets but much bigger bets. As an example, consider this week’s take-private of British endpoint security vendor Sophos. To erase Sophos from its home on the London Stock Exchange, Thoma Bravo is paying $3.8bn. To put that price into context, the Sophos take-private is more than the combined price of the buyout firm’s two next-largest information security LBOs.

As the sale of Sophos also shows, deals can still be struck in times of uncertainty, but extra work is required. More than three years since the original decision, Brexit has left open vexingly large questions for businesses, such as taxation rates, employee permits and supply chains. All of those have a direct impact on a company’s valuation, which is the key consideration in all acquisitions. Fittingly enough for the contentious three-year Brexit process, the British Parliament’s vote this weekend may only add to the volatility.

A change of seasons in tech M&A

Rising global uncertainty coupled with slowing economic growth combined to knock Q3 spending on tech acquisitions to the lowest quarterly level in nearly two years. Buyers around the world announced tech purchases valued at just $96bn from July to September, according to 451 Researchs M&A KnowledgeBase. (451 Research subscribers can look for our full report on Q3 M&A activity on our site later today.)

The late-summer slowdown, where Q3 spending declined 25% from this year’s two previous quarters, has effectively removed 2019 from the top rank of tech M&A. Our data indicates that full-year 2019 is now on track to fall more than $100bn lower than recent strong spending years. That drops this year from an exceptional one to merely above-average.

To put some numbers on that, the third-quarter slump snapped the unexpectedly strong start to 2019 and, more symbolically, it likely ended this year’s march to top a half-trillion dollars of acquisition spending. Dealmakers had been very much on track for that significant $500bn+ threshold through the first half of this year. But now, with the change of seasons, it looks increasingly out of reach. Again, we’ll have a full report on Q3 M&A activity – including the quarter’s top prints, recent trends in private equity dealmaking and how the broader macroeconomic economy is shaping tech acquisitions – on our site later today.

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Run this search in the M&A KnowledgeBase to see more detail.

Venture’s Vista

With Vista Equity Partners’ acquisition of a majority stake in Acquia, private equity (PE) firms are now on pace to deliver as many exits to VC funds as the previous record year. It’s appropriate (although maybe not surprising) to see a deal by Vista pushing PE purchases of startups toward a record streak – it has bought more of them than any of its peers.

According to 451 Researchs M&A KnowledgeBase, Acquia marks Vista’s 55th acquisition of a venture-funded company since the start of this decade. Only Cisco, Google and Microsoft have picked up more startups during the same time. And this year, Vista has been far more prolific, having printed nine such transactions, compared with six each from 2019’s next-most-prolific buyers of startups (Microsoft and VMware).

Last year, PE firms purchased 147 startups, 53% more than any other year, our data shows. With today’s announcement, sponsors are on pace to match that total, having bought 108 so far. In the overall tech M&A market, buyout shops are on pace to print 5% fewer deals than they did last year. The decline itself is hardly noteworthy – even if the year ended today, PE firms would have acquired more tech vendors in 2019 than they did in all but two other years.

But the growing ratio of VC-backed companies does show that the PE playbook continues to swing toward buying growth companies and adding value to them through bolt-on acquisitions. There’s every indication that Vista will run that playbook on Acquia. It’s a common strategy for Vista – of its 55 purchases of startups, 36 have been acquisitions done by its portfolio companies. Also Acquia, an open source content management software developer (subscribers to the M&A KnowledgeBase can see our estimate of Acquias revenue here), has recently become an acquirer in its own right, having inked two transactions since May.

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A suddenly healthy market for healthcare machine learning

by Michael Hill

Faster medical research, improved diagnosis and efficient patient monitoring were early and oft-touted examples of the changes that machine learning could bring. Despite that, there’s been little demand for acquisitions of machine learning vendors in the healthcare vertical. Or at least that was the case. This year, healthcare machine learning deals have suddenly accelerated as strategic buyers have begun seeking bolt-on acquisitions to keep up with customer demand.

According to 451 Researchs M&A KnowledgeBase, nearly half of all machine learning purchases in the healthcare market have printed since the start of 2019. This year has seen 15 acquisitions of machine learning companies where the acquirer or target (often both) are selling into the healthcare vertical. Prior to this year, there hadn’t been more than six such deals in a single year.

Healthcare machine learning transactions in 2019 have largely been characterized by a mix of veteran and first-time strategic buyers reaching for emerging tech targets to complement their existing offerings in line with their customers’ needs. For example, Royal Philips added Medumo’s machine learning patient monitoring software to its healthcare IT suite as a survey by 451 Research’s Voice of the Enterprise finds that ‘patient monitoring’ ranked at the top of multiple healthcare applications of machine learning, with 46% of healthcare respondents citing it as a use case for machine learning.

Nearly one of three survey respondents cited ‘clinical trials’ as an application of machine learning, which aligns with the rationales behind five of this year’s deals. And while the applications of machine learning in healthcare are coalescing, adoption remains nascent. Fewer than one of five healthcare providers claims to be using machine learning today.

Figure 1: Healthcare industry-specific machine learning use cases deployed today

Monetary policy and its discontents

by Brenon Daly

What if the US Federal Reserve cut interest rates and nobody noticed? Or, worse, what if the central bankers cut twice, and still no one noticed? That appears to be the case as the Fed trimmed its benchmark rate last week for the second time in two months. Following the latest easing, markets gyrated a bit but basically shrugged off the move.

The collective shrug comes, at least in part, because the central bankers are looking to solve a problem that doesn’t really exist. At least it’s not a problem that’s weighing heavily on US businesses. In a summer survey of roughly 1,100 North American business employees by 451 Research concerning a host of business considerations as well as overall macroeconomic outlook, interest rates and the related concern of credit availability barely merited a mention.

Specifically, respondents to our Voice of the Enterprise: Macroeconomic Outlook survey didn’t even rank interest rate worries among the top five threats to sales at their companies. Instead, labor shortages and trade wars were overwhelmingly cited as the main headwind to business right now. Three times as many survey respondents indicated that those two separate concerns are weighing more on sales right now than interest rates.

Most of the pressing problems that businesses articulated in our survey fall a bit outside the realm of domestic monetary policy. Even an area where the Fed does have influence, our survey respondents don’t necessarily see a problem there: credit is flowing freely, according to their view from summer. Just one in 20 respondents (6%) said it was harder for their company to borrow money now than it was three months ago.

Get rich or die trying

by Brenon Daly

As we saw in this week’s offering from Ping Identity, there’s virtually no middle ground for IPOs from the information security (infosec) market. More than any other tech segment, infosec prices its chosen few at astronomical heights, while relegating the rest to a far more earthbound valuation.

Broadly speaking, on a price-to-trailing-sales multiple, infosec IPOs inevitably come to market at either a high-single-digit valuation or at greater than 20x. Nothing in between. None of those deals that price at twice the low end, but half the high end. As a result, when we survey the IPO valuation landscape, we see a very unusual distribution: cybersecurity tends to stack up in two camel-like humps rather than a conventional bell shape.

According to our analysis, Ping is the ninth debutant from the infosec market on US exchanges in the past two years. (See our full preview on Pings offering.) The identity and access management vendor created some $1.6bn in (undiluted) market value in its IPO. That works out to about 7.5x its trailing sales of $215m through midyear.

Ping’s price-to-sales valuation slots right next to the current trading multiples of other recent infosec IPOs such as Tufin Software Technologies (6x), Tenable (7x) and SailPoint Technologies (7x). (SailPoint, like Ping, came public from a private equity portfolio, after being acquired for a fraction of its current valuation.) Similarly, Carbon Black, which came public last year, is being erased from the Nasdaq by VMware in a deal that gives the endpoint security provider a terminal value of 9x trailing sales.

Further out on the histogram of trading multiples, there are the vertiginous valuations of Okta (25x), which came public in 2017, as well as last year’s entrant Zscaler (20x). Both of those are bargains compared with CrowdStrike, which listed three months ago and currently trades at twice the multiple of either of the other highfliers.

Of course, valuation is always relative. Even as some of infosec’s recent debutants look longingly up at the market caps and multiples of others in the industry, there are whole sectors of IT that would gladly take the valuation of a ‘left behind’ infosec vendor like Ping. For a great number of tech startups, even the lowliest infosec valuation would be a trade up.

Figure 1: Infosec IPO valuations

Canis lupus unicornus

by Brenon Daly

A new breed of highly valued startup with the scientific name canis lupus unicornus has been spotted for the first time on Wall Street. Investors discovered the species as Datadog came to market and secured a stunning, multibillion-dollar valuation from the first trade. Unlike some of the other unicorns that have been trotted out recently, however, Datadog actually comes with a sturdy and attractive pedigree.

As we noted in our full preview of Datadog‘s offering, the infrastructure monitoring vendor has been extremely efficient in building its business: It burned through just $120m on its way to creating a company that is running right around breakeven even as it posts roughly 80% growth. We pencil out that its sales will be in the neighborhood of $350m in 2019, up from $200m in 2018.

Public market investors backed Datadog’s fast but fiscally responsible growth, pushing shares up to $40 in initial trading from the above-range price of $27. With an (undiluted) count of about 290 million shares outstanding, the vendor is valued at nearly $12bn. That puts Datadog’s price-to-trailing-sales multiple in the mid-40s, roughly matching the valuations of this year’s other high-flying IPOs, CrowdStrike and Zoom Video Communications.

Datadog’s IPO also vaults it ahead of virtually all of the companies it bumps into in what is an already a high-priced sector:

The vendor is trading at more than three times the value of rival New Relic, which has had a stumble recently.

It is worth almost as much as Dynatrace and Elastic combined.

And it is closing in on the market cap of Splunk, which will generate more than $2bn of revenue in its current fiscal year.

Figure 1: B2B tech IPO activity

The end of Omniture’s overture

by Scott Denne

This past weekend marked 10 years since Adobe’s $1.8bn purchase of Omniture, the deal that arguably started the race among enterprise software vendors to build out customer experience software portfolios. Although that transaction marked the beginning, its decennial looks like the beginning of the end. While we tracked a record haul for customer experience software M&A in 2018, those companies are becoming increasingly harder to sell.

According to 451 Researchs M&A KnowledgeBase, buyers spent $29.6bn in 2018 on vendors developing software for advertising, marketing, customer service, e-commerce and other forms of customer engagement. So far this year, just $8.3bn has been spent on such targets, on pace for the lowest annual total since 2015. Moreover, we’ve seen just five companies in this space sell for $200m or more, while each of the six previous full years have seen at least 10 deals of that size.

And the multiples on those acquisitions have fallen dramatically, our data shows. Last year almost every vendor in the category selling for that amount blew past the 5.2x trailing revenue that Omniture commanded. This year, however, such transactions fetched a median valuation of 2.3x, which is at least a full turn lower than the median valuation of similar deals in any single year over the past decade. This year, Dynamic Yield and TrendKite nabbed north of 8x in their respective sales to McDonald’s and Cision, while none of the other $200m cohort printed above 2.5x.

There’s little doubt that Adobe has seen success with its Omniture buy. The company expects to grow its Digital Experience business, the unit that houses Omniture (now Adobe Analytics) and several other related targets, by 23% to $3bn in the soon-to-close fiscal year. But other early, marquee investments in this sector weren’t as successful and there may not be as many deep-pocketed buyers as there once were. Both IBM and Teradata, for example, shed their marketing software units. Meanwhile Oracle, which still ranks as the most prolific acquirer in the segment, only printed one deal last year and none in almost 18 months.

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A record run to the cloud

by Brenon Daly

Just as customers often find that they need help in getting to the cloud, companies supplying some of the underlying cloud technology often need a boost to get there, too. Historically, that has meant the odd shopping trip for a key bit of technology. Now, however, there’s a new urgency to that shopping, as cloud edges toward being the most-popular place for companies to run their business.

As a result, acquisition activity this year in the cloud-enabling technologies market has already shattered the previous annual record, according to 451 Researchs M&A KnowledgeBase. Our data indicates that 2019 is on pace for more than twice the second-highest annual total of deals.

The unprecedented deal flow in the rapidly emerging sector has been driven by a number of well-capitalized buyers that are anxious to stay commercially relevant to customers amid the tectonic IT shifts. This is important because the move from on-premises to off-premises will literally swing billions of dollars in IT spending, with a follow-on impact on billions of dollars in market capitalization.

Consider Splunk, a highly valued, 16-year-old vendor that itself has been progressing along a transition to a cloud delivery model for several years. Never a big buyer, Splunk has nonetheless notched two acquisitions in just the past month, including its largest-ever purchase, to help extend its core monitoring capabilities to the cloud.

In addition to making sure workloads run smoothly in the cloud, making sure they run securely has also been a major driver of recent cloud-enabling technology deals. VMware, McAfee and Palo Alto Networks have all announced cloud security transactions in the past few months. Concerns about security perennially top the list of reasons IT professionals tell us why they have reservations about moving to the cloud.

But overall, concerns about cloud are dwindling. A survey earlier this year by 451 Research of more than 500 IT buyers and users found that a slight majority (55%) of them said the primary venue right now for workload execution is ‘on-premises,’ with the remaining 45% identifying ‘off-premises’ as the main location. Two years from now, however, some flavor of cloud or hosted offering will be the primary home for two-thirds of the workloads, according to our Voice of the Enterprise: Cloud, Hosting and Managed Service survey.

For more on these trends and how companies are positioning themselves – both organically and inorganically – to take advantage of them, be sure to join us at our annual Hosting & Cloud Transformation Summit (HCTS) next week. Now in its 15th edition, 451 Research’s HCTS not only focuses on the technology impact of cloud and the broader digital transformation of business, but also brings a financial perspective to how those trends are playing out for both suppliers and customers.

Figure 1: Cloud M&A

Cloudflare’s scorching debut

by Scott Denne

The enthusiasm for enterprise technology IPOs continues unabated as Cloudflare rips past its private company valuation in its first day of trading. The network services provider priced above its range and jumped up from there when it opened on the NYSE, benefiting from a continued demand for new offerings.

Wall Street saw a few rough patches over the month between the time Cloudflare unveiled its IPO paperwork and the first day of trading – the S&P 500 dropped 2% on two separate days. Yet the overall direction has been in its favor, with that index having risen nearly 3% over the past four weeks and Cloudflare’s competitor Fastly, which had been one of the worst-performing enterprise IPOs of the year, rising more than 90% during that period, leaving today’s offering with a higher comp.

As we noted in our coverage of Cloudflares IPO filing, it needed to garner a 12x trailing revenue multiple to move past the price of its series D round. About an hour into trading, it could boast a 23x multiple. That takes Cloudflare well past Fastly, which trades at 16x, highlighting the public market’s penchant for growth. Cloudflare, the larger of the two, expanded its topline 48% year over year in its most recently reported quarter, compared with Fastly’s 34%.

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