No ‘Trump slump’ seen for tech M&A

Contact: Brenon Daly

As President Donald Trump approaches the end of his ceremonially important first 100 days in office, his approval rating has slumped to an unprecedented low. In fact, for the first time in modern politics, more people say they disapprove of Trump’s early moves as president than say they approve of them. However, there is one community that continues to support Trump, or at least say he’s been good for business: dealmakers.

Four out of 10 (41%) respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster indicated that President Trump’s economic policies have stimulated dealmaking, almost twice the 22% that said his policies have slowed M&A. The results from the latest survey show a substantial reversal from our previous survey last October, which came amid an acrimonious battle with Hillary Clinton for the White House. At that time, nearly one-third (31%) said the election battle had slowed acquisition activity, compared with just 6% that said deals had sped up.

However, any boost that Trump and his policies might give to M&A won’t extend globally, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster. Quite the opposite, in fact. Nearly half of respondents (47%) said Trump and his trade policies will slow cross-border acquisition activity, nearly twice the 26% that said the policies of President Trump – who campaigned on an ‘America First’ platform – will accelerate international dealmaking. We would highlight the fact that the bearish forecast for cross-border M&A is almost exactly the inverse of the positive influence Trump is expected to have on overall tech dealmaking, according to our survey respondents.

Survey sees tech M&A heading up and to the right

Contact:  Brenon Daly 

Despite a slow start to 2017, tech M&A activity is expected to accelerate over the course of the year, according to the prevailing view in the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster. (See full report.) Slightly more than half of the respondents (52%) forecast that deal flow will top last year’s level, more than three times the 15% of respondents who indicated that year-over-year activity would decline in 2017. The projection in our just-completed survey represents the most-bullish outlook in two years.

If the sentiment does come through in increased activity for the rest of the year, it would also mark a dramatic reversal from the start of 2017. In the first quarter, tech acquirers announced 12% fewer transactions than they did in Q1 2016 or Q1 2015, according to 451 Research’s M&A KnowledgeBase. Of course, 2017 comes after the two highest years of tech M&A spending since the internet bubble burst. Collectively, acquirers in 2015 and 2016 announced deals valued at more than $1 trillion, according to the M&A KnowledgeBase.

451 Research subscribers can view the full report on the most-recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster, which includes the outlook for overall activity and valuations in the tech M&A market, as well as highlights specific trends and drivers for deals in 2017 and beyond.

451 Research survey shows IT budgets are fat again

Contact: Brenon Daly

With the Q1 earnings parade just starting this week, Wall Street will be listening for whatever financial guidance it can get from companies about the current quarter as well as the rest of the year. For tech vendors, there should be a strongly bullish tone in those comments. The reason? Their customers are ready to spend again.

In a just-completed survey by 451 Research’s Voice of the Connected User Landscape (VoCUL), respondents indicated that their IT budgets for Q2 are the strongest they have been in six years. Specifically, our survey of more than 1,400 professionals involved in IT spending decisions showed that one in five (21%) plan to spend more in Q2 than they did in the opening quarter of 2017. That was half again as high as the 14% that said their current budgets have shrunk. In terms of where respondents said they have the most to spend, information security and enterprise applications topped the sector rankings, as they have for the four previous VoCUL quarterly surveys.

Taken together, the Q2 outlook marks only the third time in the past half-decade that the percentage of respondents with more money for IT spending has eclipsed those who said they had less money to put to work. And it appears that the momentum will extend beyond the current quarter, according to a separate question in the VoCUL survey. As they looked ahead to the second half of 2017, more respondents indicated bigger IT budgets than smaller budgets, compared with the first half of the year.

Of course, much of that fulsome forecast has already been priced into the stock prices of many of the tech companies that hope to satisfy the increasing demand voiced by the respondents to VoCUL’s quarterly surveys. So far this year, for instance, the Nasdaq 100 Technology Sector Index is up about 13% – three times the returns of broad-market indexes such as the Dow Jones Industrial Average and the S&P 500 Index.

Paying for performance: Dentsu picks up its M&A pace 

Contact: Scott Denne 

Dentsu hasn’t been very active in acquiring digital marketing shops until recently. Now, as it sees an opening with marketers looking to change how they compensate their agency partners, it is moving fast to take advantage. The company announced today the purchase of India-based SVG Media Group, the latest in a string of deals it has made to expand its performance advertising capabilities.

According to 451 Research’s M&A KnowledgeBase, Dentsu has acquired 29 companies since the start of 2016. That’s the same number of tech businesses it bought in the previous 13 years combined. A combination of rising ad fraud and displeasure at opaque agency billing practices, mixed with the growing ability to link media spending to specific outcomes, has marketers rethinking how they pay ad agencies. They are placing more emphasis on performance-based pricing models, a notable departure from the historic practice of paying agencies a percentage of advertising budgets.

SVG Media fits into this role, as it sells pay-for-performance media services and ad networks. Earlier this month, SVG reached for conversion optimizer Leapfrog Online and customer analytics firm DIVISADERO, a bolt-on to the $920m it spent last year to snag CRM agency Merkle.

Although Dentsu may be an extreme case, it is part of an overall rise in acquisitions of digital agencies. Last year saw a record 164 digital agencies acquired. The pace so far this year is a bit below that, but well ahead of any other year. The drive for performance-focused digital marketing accounts for a substantial chunk of that upswing, although there are other factors such as the lack of mobile specialists and the movement of ad spending toward digital channels. Dentsu and other ad agencies aren’t the only buyers here. Consulting firms like Accenture and IBM have been inking acquisitions to capitalize on the same weakness.

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

VMware nabs Wavefront as infrastructure M&A hits new frequency 

Contact: Scott Denne  and Kenji Yonemoto

Responding to the need for new monitoring and management tools to match the growing adoption of infrastructure technologies such as containers and cloud, VMware has reached for Wavefront. The deal embodies the craving for the latest technologies in infrastructure management M&A through the start of the year.

That craving stands in stark contrast to last year, when divestitures and aging assets led to a record $15.3bn spent on infrastructure management targets, according to 451 Research’s M&A KnowledgeBase. Less than four months into the year, buyers have already shelled out $5.6bn, skewing toward younger and growing businesses fetching higher multiples.

While VMware hasn’t disclosed terms of the transaction, it’s likely paying a premium valuation as Wavefront, an early-stage company with about 50 customers, landed a $52m series B less than six months ago. The acquisitions of AppDynamics ($3.7bn) and SOASTA ($200m) – which like today’s deal, were done to improve the buyers’ ability to cope with new types of application deployments – have helped drive up multiples. The median multiple for the category stands at 4.2x trailing revenue this year, compared with 3.4x in 2016.

The pressure to pay up for these technologies could continue. Our surveys show that new forms of application deployment are rising among enterprises. In 451 Research’s most recent Voice of the Enterprise report, 48% of respondents expected their spending on cloud to increase by more than 11% in 2017 and similar surveys have shown a growing shift toward using containers and microservices in production, not just testing and development, environments.

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

E-commerce’s discounted disruptors

Contact: Brenon Daly 

For the second time in as many weeks, a would-be digital disruptor of the commerce world has been snapped up on the cheap by an analogue antecedent. After the closing bell on Monday, sprawling marketing giant Harland Clarke Holdings, the owner of a number of advertising flyers that clutter postal boxes and newspapers, said it would pay $630m for online coupon site RetailMeNot. The amount is just one-quarter the price Wall Street had put on the company three years ago.

The markdown on RetailMeNot comes just days after Samsonite gobbled up eBags, a dot-com survivor that nonetheless sold for a paltry multiple. The $105m acquisition is supposed to help the world’s largest maker of luggage sell directly to consumers. Samonsite, which traces its roots back more than a century, certainly didn’t overpay for that digital know-how. Its purchase values eBags at just 0.7x trailing sales.

While a bit richer, RetailMeNot is still only valued at 2.25x trailing sales and 2x forecast sales in the bid from Harland Clarke. And that’s for a sizable company that’s growing in the low-teens range (eBags is about half the size of RetailMeNot but is growing at twice that rate). The valuations paid by the old-world acquirers of both of these online retail startups were clearly shaped more by the staid retail world than the supercharged multiples generally paid for online assets. It’s a reminder, once again, that disruption – that clichéd goal of much of Silicon Valley – doesn’t necessarily generate value. Sometimes trying to knock a market on its head just gives everyone involved a headache.

Okta’s growth-story IPO finds an audience on Wall Street

Contact: Brenon Daly 

The unicorn parade on Wall Street continued Friday as security vendor Okta nearly doubled its private market valuation in its debut on the Nasdaq. The subscription-based identity and access management provider initially sold shares at $17 each, but investors bid them to about $24 in midday trading. With the surge, Okta is valued at some $2.4bn. (See our full preview of the offering.)

Okta becomes the third enterprise IT startup to come public so far this year, and it extends the strong performance of these new issues. It also joins the two previous IPOs – MuleSoft and Alteryx – in sporting a rather stretched valuation. Based on a market cap of $2.4bn, Okta is trading at about 15x trailing sales.

Granted, Okta’s sales are growing quickly, having nearly quadrupled in just the past two fiscal years to $160m. Still, the company is commanding quite a premium compared with fellow secure identity specialist CyberArk, which also just happens to be the last information security startup to create more than $1bn of value in its IPO. (To be clear, CyberArk, which went public in 2014, also sells identity-related products in the form of privileged identity management, but doesn’t really compete with Okta.)

Wall Street currently values CyberArk at about 8.2x trailing sales, or just slightly more than half the level that investors are handing to the freshly public Okta. Bulls would argue that Okta merits the premium given that it is growing twice as fast as CyberArk. But others might counter with a question about what that growth is costing each of the companies. Okta lost a mountainous $83m on its way to generating $160m in sales last year. In contrast, CyberArk, which has run in the black for the past four years, netted $28m from its 2016 revenue of $217m.

If nothing else, the valuation discrepancy underscores that growth is still the key metric for investors. Okta’s IPO is simply supply meeting demand, same as it ever was on Wall Street. Indeed, CyberArk has also experienced that. Shares of the company reached an all-time high – nearly 50% higher than current levels, roughly Okta’s current valuation – in 2015, when revenue was increasing north of 50%, compared with the mid-30% level now.

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

For tech M&A, above-market deals are running behind

Contact: Brenon Daly 

If spending on tech M&A was sporadic in the opening quarter of 2017, the valuations paid in those deals largely held to typical patterns. There were a handful of transactions sporting enviable double-digit multiples, along with a whole backlog of deals that printed in the low single digits. Between those bands, however, there was one range that generally features a host of transactions but has been relatively quiet so far this year: slightly above-market valuations.

Specifically, the January-March quarter recorded just three deals that valued target companies at 6-8x trailing sales, according to 451 Research’s M&A KnowledgeBase. That’s fewer than any quarter in 2016, and just slightly more than half the average number of similarly valued transactions each quarter last year. Given the generally lumpy nature of M&A, we obviously don’t want to make too much out of pricing trends in any single quarter. But it is important to note the falloff in activity because this valuation range often stands as a fairly accurate barometer for the health of the overall M&A market.

Yet this segment gets ignored, with more attention paid to splashy, headline-grabbing deals such as Cisco lavishing $3.7bn on AppDynamics, a company that barely cracked $200m in revenue last year. For a variety of reasons, however, we wouldn’t hold out this transaction as representative of the nearly 1,000 deals tallied last quarter in the M&A KnowledgeBase. (Cisco, which is trading at its highest level since the internet bubble, had to outbid Wall Street for AppDynamics, at a time when ‘dual tracking’ still isn’t much of a threat. As if to indicate that, indeed, those were rather singular influences on the deal, consider the fact that AppDynamics garnered the highest price for any VC-backed startup in three years.)

Instead, we would look below those one-off transactions. More relevant to most tech acquirers are deals where they have to stretch, but not contort, on pricing. These transactions – carrying, again, a 6-8x multiple and generally falling in the midmarket in terms of size – tend to serve more usefully as comparable deals for the corporate and financial acquirers that do the overwhelming majority of tech M&A. Here we’re talking about recent transactions such as Akamai reaching for SOASTA, or Hewlett Packard Enterprise further bulking up its storage portfolio with SimpliVity. Both of those deals fall into the 6-8x sales range (according to our understanding) and represent decidedly midmarket bets by big-name buyers. In other words, just the sort of transaction that’s vital to the broader tech M&A market, but generally gets overlooked – particularly so far this year.

After a slow start for tech M&A, business picks up late in Q1 

Contact: Brenon Daly 

After record spending in the tech M&A market in 2015 and 2016, dealmakers took a little while to get going this year. The value of tech transactions in both January and February slumped to the lowest consecutive monthly totals since 2013, according to 451 Research’s M&A KnowledgeBase. The two-year surge seemingly led to a two-month slump, as buyers digested their acquisitions. By the final month of the first quarter, however, acquirers were back in business, spending as much in March as they did in the two previous months combined.

Altogether, as tallied by the M&A KnowledgeBase, worldwide spending on tech and telecom deals in the first three months of 2017 hit $77bn, essentially flat with the opening quarter last year. However, the value of transactions announced in each of the subsequent quarters in 2016 accelerated dramatically from last year’s sluggish start, with average quarterly spending for Q2-Q4 coming in nearly twice the level of Q1.

Matching last year’s acceleration in spending may be a challenge for the rest of 2017, as buyers are on pace to do substantially fewer deals this year. That’s true for both broad tech M&A as well as the top end of the market. The first quarter’s deal volume of 910 represents a decline of roughly 12% compared with the January-March period in the previous two years. More significantly, tech acquirers announced fewer transactions valued at more than $1bn in the just-completed quarter than in any other quarter in more than three years.

An earthbound IPO for Cloudera

Contact: Brenon Daly 

Looking to extend the current bull run for enterprise software IPOs, Cloudera has taken the wraps off its prospectus and put itself on track to hit Wall Street in about a month. Assuming the debut follows that schedule, the heavily funded Hadoop vendor would be the third infrastructure software provider to come public in six weeks, following MuleSoft and Alteryx. Unlike the debuts of those two other software firms, however, Cloudera’s IPO will almost certainly be a down round.

Three years ago, when Cloudera’s quarterly revenue was less than half its current level, Intel acquired 22% of the company at a valuation of $4.1bn. Since then, both the company and other equity holders agreed that ‘quadra-unicorn’ valuation got a little ahead of itself and have priced Cloudera shares below Intel’s level of just less than $31 each. (In contrast, MuleSoft has more than doubled its final private market valuation on Wall Street.) Cloudera – along with its nine underwriters, led by Morgan Stanley, J.P. Morgan Securities and Allen & Co – should set the inaugural public market price for shares in about a month.

Because Wall Street likes to use a ‘known’ to help assign value to an ‘unknown,’ investors will look at Cloudera’s future trading valuation relative to the current trading valuation of fellow Hadoop provider Hortonworks. However, that comparison won’t particularly help Cloudera get any closer to its previous platinum valuation. Hortonworks currently has a market capitalization of just $650m, or 3.5x its 2016 revenue and 2.7x its forecast revenue for 2017.

The two Hadoop-focused companies actually line up fairly closely with one another, financially. Cloudera and Hortonworks hemorrhage money, largely because of huge outlays on sales and marketing. (Both firms spend roughly twice as much on sales and marketing as they do on R&D.) Cloudera is nearly one-third bigger than Hortonworks, recording $261m in sales in its most recent fiscal year compared with $184m for Hortonworks. Both are growing at about 50%.

Within that revenue, both Cloudera and Hortonworks wrap a not-insignificant amount of professional services around their product, which weighs on their margins and, consequently, their valuations. Both are consciously shifting their revenue mix. Cloudera is further along in moving toward a ‘product’ company, with professional services accounting for 23% of revenue in its latest fiscal year compared with 32% for Hortonworks. That progress is also reflected in the fact that Cloudera’s gross margins are several percentage points higher than those at Hortonworks, although both are still low compared with pure software providers. (For instance, MuleSoft, which also has a professional services component, has gross margins in the mid-70% range, about seven percentage points higher than Cloudera.)

With its larger size and more-efficient model, Cloudera will undoubtedly command a premium to Hortonworks. (That will come as a relief to Cloudera because if Wall Street simply valued the company at the same multiple of trailing sales it gives Hortonworks, Cloudera wouldn’t even be a unicorn.) We’re pretty sure Cloudera will come to market with a ‘three-comma’ valuation, but it won’t be near the $4bn valuation Intel slapped on it. Perhaps Cloudera can grow into that one day, but it certainly won’t start out there.