It’s all business on Wall Street

by Scott Denne

Amid a short burst of high-profile tech IPOs, enterprise offerings are soaring, while consumer-focused companies are getting a less-bullish reception. In their public debuts, both Zoom Video and Pinterest priced above their range and traded up from there. The former, a video-conferencing specialist, reaped a hefty valuation increase in its debut. The social networking vendor, however, stayed just above its last private funding.

To be sure, Pinterest hardly received a bearish reception. It began trading at about $24 per share, for a 25% bump, bringing it slightly up from the price of its series H round in 2017. Currently, Pinterest is valued at $13bn, or nearly 16x trailing sales. Zoom, by comparison, jumped 75% from its IPO price when it entered the Nasdaq, garnering a $16.2bn market cap, or 60x trailing sales.

The discrepancy between enterprise- and consumer-tech offerings isn’t limited to these two. Last month, Lyft made a lackluster debut – its shares now trade 20% below its initial price. A few days later, PagerDuty, an IT ops provider, jumped 60% when it hit the public markets. The comparative reliability of enterprise-tech stocks accounts for some of the discrepancy.

As we noted in our coverage of PagerDuty’s IPO, many of last year’s enterprise IPOs still trade at or near 20x revenue. And many of the past consumer unicorns have faltered – Snap’s shares have fallen more than half from its 2017 IPO and Blue Apron is practically a penny stock. Perhaps more importantly, the recent enterprise debutants left room in their cap table for a first-day bump, while consumer companies extracted all they could from private investors, at the highest price they could, before turning to the public markets. Zoom raised $160m on the way to its IPO, while Pinterest took in almost 10x that amount.

 

When England sneezes, Europe catches a cold

by Brenon Daly

As Europe fractures politically, it is slowing economically. The International Monetary Fund (IMF) recently forecast that Europe would post the lowest growth of any major region of the globe in 2019. The IMF clipped its outlook for economic expansion across the EU to an anemic 1.3%, which is just half its forecast for US growth.

The slowdown across the Continent is starting to hit M&A. Tech deals by Western Europe-based acquirers in Q1 2019 slumped to its lowest quarterly level in two years, according to 451 Research’s M&A KnowledgeBase. More tellingly, the ‘market share’ held by European buyers is starting to erode.

In both 2017 and 2018, the M&A KnowledgeBase shows European buyers accounted for one in four tech acquisitions and 16% of overall M&A spending. So far this year, both of those measures are running three percentage points lower (22% of deals and just 13% of spending).

Much of the fall-off in M&A can be traced back to the UK, which has always been Europe’s biggest buyer of technology companies. With Brexit still unresolved, dealmakers there remain uncertain. Based on Q1 activity, UK-based acquirers are on pace in 2019 to announce the fewest tech transactions since 2013. When it comes to dealmaking, if England sneezes, Europe catches a cold.

Publicis nabs Epsilon for $4.4bn

by Scott Denne

Faced with a receding topline, Publicis once again turns to a blockbuster acquisition to bring it back to growth. The ad-agency holding company has printed its largest tech deal to date with the $4.4bn purchase of marketing services firm Epsilon. While the move increases Publicis’ ability to offer data-driven marketing services, the buyer’s outlook on the transaction appears overly optimistic, as was the case in its previous $1bn-plus tech acquisition.

With its (now) second-largest tech deal, the $3.7bn pickup of Sapient in late 2014, the France-based advertising giant sought to make itself into ‘the leader at the convergence of communications, marketing, commerce and technology.’ Two years later, it wrote down $1.5bn of that purchase price. In the roughly four years since the Sapient buy closed, Publicis’ stock price has lost 30% of its value, while its 2018 net revenue dropped by almost 4%.

And like that earlier transaction, Publicis offered up an ambitious outlook for Epsilon. The acquirer expects the asset to deliver 5-10% annual growth. But as part of Alliance Data Systems, Epsilon hit the low end of that range just twice in the past five years and hasn’t reached the high end of that range since 2013. Last year, its topline shrank by 4%. Publicis claims that Epsilon’s 2018 results were caused by anomalies, such as retail bankruptcies. But that excuse gets at why the projected benefits of this deal may not materialize. Both Publicis and Epsilon serve traditional brand categories, including automotive, CPG and retail, so it’s not getting exposure to any new growth markets.

That’s not to say Publicis didn’t learn anything from its last foray into 10-figure tech M&A. It’s paying a more conservative price for today’s acquisition, valuing the target at 2x trailing revenue, compared with 2.5x for Sapient. The former, according to 451 Research’s M&A KnowledgeBase, matches the median multiple across all Publicis tech transactions. And in terms of EBITDA, Epsilon fetched just 10x, half of what Publicis was willing to hand over for Sapient.

Big or small, Wall Street likes them all

by Brenon Daly

On the same day the NYSE gave a warm welcome to a pair of enterprise tech vendors that are both running right around a level that, historically, would be the absolute minimum for a company to go public, investors also got their first official glimpse at the financials of a consumer tech behemoth that’s 10 times the size of the debutants. When the tech IPO market can cover that broad a spread, it truly is open for business.

Start with those companies that have already seen through their offering. The relatively slight build of both PagerDuty and Tufin Software Technologies didn’t really hurt them as they stepped onto the NYSE on Thursday. That’s particularly true for PagerDuty, a subscription-based IT incident-response software provider that put up just $118m in sales last year. Tufin, which recorded just $85m in sales in 2018, is about a year behind PagerDuty, assuming it holds its roughly 30% growth rate.

Nonetheless, PagerDuty priced its offering above the expected range and soared more than 50% on its debut. As we noted in our report on the offering, investors are valuing the company at some $2.8bn, or more than 20 times last year’s sales. Having already secured its standing as a unicorn in the private market, PagerDuty is now approaching ‘tricorn’ status in the public market.

Tufin debuted at a far more muted valuation, but still created more than $600m of market value. With 34.2 million shares outstanding (on a non-diluted basis), Tufin is trading at more than 7x 2018 revenue. As we outlined in our preview of the offering, Tufin’s valuation probably has less to do with how much revenue it generates than how it generates that revenue: back-end-loaded sales in a license/maintenance model.

But both those realized offerings on Thursday were very quickly and unceremoniously overshadowed by the anticipated debut of Uber. The ride-hailing company’s planned IPO, which will be brought to market by a herd of 29 underwriters, makes the offerings of Tufin and PagerDuty seem like a series B funding. Across the board, Uber’s financials – funding, revenue, losses – are orders of magnitude larger than either of the enterprise-focused IPOs. And yet, for all the variety of the companies and their offerings, each of them can find investors ready to throw more capital their way. The bulls are running right now.

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PagerDuty calls on an exuberant IPO market

by Scott Denne

Following a nearly six-month lull, the market for enterprise IPOs has picked up where it left off – handing out gushing valuations to high-growth SaaS companies. PagerDuty became the newest beneficiary, pricing above its range and moving well beyond that as the stock began trading. The multiple commanded by the IT operations software vendor sets the stage for another notable year for enterprise IPOs.

In its public debut today, PagerDuty’s share price jumped to $38, about 60% from where it priced its offering ($24). That surge leaves the company with a $2.8bn market cap, valuing it at 23.5x trailing revenue. It also gives PagerDuty a more favorable multiple than many of its peers. For example, the debutant trades within a turn of Elastic, a 2017 vintage IPO that’s double the size of PagerDuty – it posted $241m trailing revenue to PagerDuty’s $118m – and growing at a faster pace (70% vs. 50% year over year last quarter).

PagerDuty isn’t the only enterprise company feeling Wall Street’s good graces. Video-conferencing provider Zoom set a price range earlier this week implying a valuation of $7.7bn (about 28x revenue) on its forthcoming IPO. And infosec vendor Tufin saw a 30% bump in its debut today (we’ll cover that company in this space tomorrow). There’s little doubt that after a dip in equity prices last year Wall Street has, once again, become a welcoming place for enterprise startups – several of last year’s other IPOs trade at multiples in the 20x neighborhood.

The S&P 500 has risen 15% since the start of the year and the latest consumer confidence survey from 451 Research’s VoCUL shows faith in the US stock market coming back to the same levels as last autumn. Should new offerings continue to garner healthy valuations, this year’s IPO pipeline could fill up to compete with last year’s record of 15 enterprise technology debuts, despite the first quarter passing without one.

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Emerging healthcare tech acquisitions are on the rise

by Michael Hill

Acquirers are reaching for healthcare companies built around emerging IT categories at an unprecedented rate in 2019. Our data suggests that widespread adoption of the Internet of Things (IoT) and machine learning among healthcare providers could make these technologies an increasingly prominent feature of healthcare IT M&A.

Just three months in, 2019 has already seen nine emerging healthcare tech deals, matching the total from all of last year, according to 451 Research’s M&A KnowledgeBase. Targets include both early-stage startups with roots in machine learning or IoT (e.g., KiviHealth and SOMA Analytics) and more mature vendors that have refined their offerings around emerging technologies (e.g., MedecinDirect, Temptime and Lightning Bolt Solutions).

Healthcare providers have been adopting IoT and machine learning throughout their networks for some time now. Indeed, our Voice of the Enterprise: IoT, Workloads and Key Projects 2018 survey found that 73% of healthcare providers report having at least one IoT project in either production or proof-of-concept stage. That level of IoT adoption puts healthcare at the top of industry verticals, right alongside manufacturing.

We expect healthcare’s adoption of these technologies to continue to build off of that head start. In 451 Research’s report on The Medical Internet of Things, we anticipate the deployment of connected medical devices to expand to 600 million by 2025 from about 300 million in 2015. And although most IoT and machine learning acquisitions in healthcare IT have been modestly sized, that level of deployment implies a prognosis of increasing size and frequency of such transactions.

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Software valuations soar in sponsor deals

by Scott Denne

The coordinated efforts of strategic and financial acquirers took purchases of application software vendors to a new height last year. Now, it’s the efforts of the latter alone that are pushing software deals back toward a record as sponsors place hefty valuations on such companies.

According to 451 Research’s M&KnowledgeBase, $23bn of software assets have traded hands through the first quarter of the year, putting 2019 on pace to match 2018’s record haul ($93bn). As we discussed in 451 Research’s Tech M&A Outlook 2019, the reentry of strategic buyers played an equal role in driving last year’s total. This year, private equity (PE) buyers have contributed the lion’s share of investment through the first quarter, having spent more than $17bn on such transactions, our data shows.

PE shops are acquiring application software providers at a slightly higher clip, having bought 117 of them in the first quarter, compared with 108 in the same period of 2018. More importantly, those firms are paying an unprecedented premium through the start of the year. According to the M&A KnowledgeBase, software vendors selling to buyout shops are trading hands at a median 5.5x trailing revenue, a full turn higher than last year and extending a streak of soaring prices for software companies in sponsor-led deals.

That rise in software valuations largely follows the rise in public stocks (which usually corresponds with an increase in tech M&A valuations, as my colleague Brenon Daly pointed out last week). Looking at the three largest sponsor acquisitions of application software providers this year, two of the targets – Ultimate Software and Solium – sold above their all-time-high share price. The third, Ellie Mae, was a few percentage points below its peak, but still sold at roughly 50% higher than where it finished 2018. With the S&P 500 up 15% this year, prices for software deals don’t look ready to settle.

The ‘wealth effect’ in effect

by Brenon Daly

If you’re looking for direction on pricing in the tech M&A market, you might just want to cast a glance at your stock portfolio. When there’s a lot of green there, acquisition valuations tend to be ticking higher, as well. As the equity markets go, so goes the M&A market.

We saw that clearly in the just-completed first quarter, when previously beaten-down stocks surged to their strongest start to a year since 1988. Likewise, according to 451 Research’s M&A KnowledgeBase, acquirers in Q1 paid the second-highest multiples in any quarter since the end of the recession a decade ago. The valuations in the just-closed quarter only trail Q2 2018, when the US equity market was at a similarly lofty level as it is now.

First-quarter deals valued at more than $200m went off at 4.6x trailing sales, according to the M&A KnowledgeBase. That multiple is more than a full turn higher than the quarterly median since 2010, when the equity market was just one-quarter the level it is now. Even looking at the market on a relative basis, stocks are much more expensive now: The price-to-earnings ratio for the S&P 500 Index, for instance, was in the mid-teens at the start of the decade, compared with the low-20s now.

Of course, there’s long been a correlation between M&A valuations and the stock market. In some cases, there’s a direct link. For instance, when acquirers – whether fellow corporate buyers or, increasingly, financial firms – have to pay a premium on already historically high prices to pick up a publicly traded target. During Q1, First Data, Ultimate Software Group and Mellanox Technologies all got acquired at their highest-ever stock price. The M&A KnowledgeBase shows the average valuation for that trio was about 7x trailing sales.

Even beyond that, there’s a softer influence of the ‘wealth effect.’ Without going too deeply into behavioral economics, the wealth effect implies that when people – or companies, which are just collections of people, after all – feel flush, they tend to behave accordingly. Whether picking up a shiny new car or a shiny new startup, buyers that feel well-off tend to shop more – and pay up when they do.

M&A Valuations, 2016-2019
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Adobe’s M&A experience

by Scott Denne

As Adobe opens Adobe Summit – its annual digital marketing event starting today – the odds are against it using the main stage to announce a major acquisition. After all, 2018 was a record year for the marketing and media software vendor, which printed two $1bn-plus purchases, the first time it’s ever done so in a single year, our data shows. Still, Adobe may have deals left to do as competition intensifies around an expanding market.

In the first iteration of digital marketing, Adobe jumped out to an early lead, largely through its acquisition of website analytics specialist Omniture almost a decade ago. But now the fight has shifted to include new categories such as e-commerce, ad-tech and customer data platforms. That shift is reflected in the tag line for this year’s event – ‘The Digital Experience Conference,’ a change from past billings of the event as ‘The Digital Marketing Event.’ For Adobe, the change has been more than an exercise in corporate branding.

Last year, it paid $1.7bn for Magento, moving beyond marketing and into e-commerce software, and inking its first 10-figure purchase since Omniture ($1.8bn), according to 451 Research’s M&A KnowledgeBase. That transaction was largely a reaction to Salesforce’s earlier pickup of Demandware, which along with the acquisition of Krux in 2016, helped turn the buyer into a major power in customer experience software. Adobe’s other major purchase of 2018, the $4.8bn acquisition of Marketo, a B2B marketing automation provider, was clearly a foray into Salesforce’s turf. Adobe remains the larger of the two in experience software – it posted $2.4bn in sales of such software last year vs. Salesforce’s $1.9bn, although the latter business accelerated at a faster pace (37% annual growth compared with Adobe’s 27%).

Demand from marketers and other line-of-business executives underlies those deals. According to 451 Research’s VoCUL: Corporate Software report, 15% of all businesses are using or about to be using customer experience management (CEM) software. The adoption rates are even higher among organizations investing in a digital transformation project, where 100% of such respondents use CEM software.

With a newfound willingness to spend and a mandate that extends beyond marketing, we see multiple sectors where Adobe could expand its portfolio. It could look to counter SAP’s $8bn reach for customer feedback analytics vendor Qualtrics by purchasing that company’s competitor, Medallia. Such a move would align with Adobe’s ambition to be the system of record for customer data, although it would likely carry a price tag similar to Marketo. Or it could buy an ad server, which would give it additional customer data and a link between Adobe’s creative design software and its ad-tech products by providing creative management and optimization capabilities. Video specialist Innovid and Flashtalking, a rival with a broader portfolio, are the most compelling targets in this market.

Unusual beasts from the land of unicorns

by Scott Denne

Typically, venture capitalists offer public investors fast-growing companies that remain far from profitability. Occasionally they come out with an IPO candidate with massive growth and a trail of red ink to match (see our report on Lyft’s upcoming offering). Rarely do they bring to market a startup with massive growth and actual profits (or even a compelling case that it could shortly become profitable). On Friday, they took the wraps off two such unusual startups – Zoom and Pinterest.

Of the two, Zoom finished its most recent fiscal year in the black. While the video communications vendor’s topline more than doubled to $330m, it generated an $8m profit. That wasn’t an anomaly, as the company, with a $4m loss, was nearly profitable a year earlier. Pinterest, while not yet profitable, cut its net loss in half to $63m last year while sales jumped 60% to $756m. Mind you, that’s a decline in net loss, not a decline relative to its sales growth, which is typically the most a venture-backed IPO candidate can boast.

Public offerings from a pair of companies with compelling financials could generate investor interest in tech IPOs more broadly. And a welcoming IPO market could provide relief to any VCs and entrepreneurs seeking large exits in the next few months, as 10-figure outcomes via M&A have dwindled in the first quarter. According to 451 Research’s M&A KnowledgeBase, 2019 has yet to see a $1bn-plus acquisition of a VC-backed portfolio company, following a record 13 of them last year.