What to look for in tech M&A in 2018

Contact: Brenon Daly

As we look back on 2017 and ahead to 2018, 451 Research has published its annual forecast for tech M&A, highlighting the trends that we expect to shape deal flow and the markets that we think will see much of the activity. The 2018 Tech M&A Outlook – Introduction serves as an overview of the broad M&A market, setting the stage for the upcoming publication of our comprehensive report that features analysis and predictions for eight specific IT markets on what deals are likely in 2018.

The full report, which we think of as an ‘M&A playbook’ for the enterprise IT market, has insightful forecasts for activity in application software, information security, mobility and other key sectors. The 80-plus-page 2018 Tech M&A Outlook report will be published at the end of January. It will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and Premium products, and will be available for purchase for 451 Research clients and others that don’t subscribe to our M&A KnowledgeBase products. (If you’re interested in purchasing the full 80-plus-page report, contact your account manager or click here.)

In the meantime, our introduction provides insights on some of the overall dealmaking trends that are also likely to shape activity and valuations in sector-specific transactions. Key highlights in our overview of the broader M&A market include:

  • After tech M&A spending in both 2015 and 2016 topped a half-trillion dollars, what happened that knocked the value of deals in 2017 down to just $325bn?
  • Many of the tech industry’s biggest buyers printed only half as many deals as they have in recent years. Is that the new pace of M&A at these serial acquirers, or will they rev up again in 2018?
  • The pending tax overhaul will likely add billions of dollars to the treasuries at major tech vendors. Why don’t we think that will necessarily lead to more M&A? If they don’t spend it on deals, what are tech companies going to do with the windfall?
  • Which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security tops the forecast once again, but what about emerging cross-sector themes such as machine learning and the Internet of Things?
  • How did private equity (PE) move from operating on the fringes of the tech industry to become the buyer of record? PE firms accounted for an unprecedented one out of every four tech transactions last year. Why do we think their share of the market will only increase?
  • VC portfolios are stuffed, as the number of exits in 2017 slumped to its lowest level since the recession. What challenges loom for startups and the broader entrepreneurial community without the return of billions of dollars from those investments?
  • For startups, will venture capital be flowing freely in 2018? Or will the polarized VC market (fewer rounds, but bigger rounds) continue this year?
  • Despite nearly ideal stock market conditions, why don’t we expect much acceleration in the tech IPO market in 2018? What needs to happen – to both supply and demand – for the number of new offerings to take off?

For answers to these questions – as well as other factors that will influence dealmaking in 2018 – see our just-published 2018 Tech M&A Outlook – Introduction.

And the Golden Tombstone goes to…

Contact: Brenon Daly

If you have a hard time thinking of a truly blockbuster tech deal last year, you’re not alone. Even people who buy companies for a living struggled to single out any 2017 transaction.

As we do every year, we asked in our 451 Research Corporate Development Outlook Survey for dealmakers to look at the handiwork of their peers around the tech industry and select what they thought was the most significant transaction of the year. Survey respondents work at tech companies of all varieties, but regardless of their industry, the majority of their picks each year usually settle on one or two high-profile deals.

That wasn’t at all the case for our most recent survey. For starters, the pool of 2017 nominees was unprecedentedly broad and shallow. Corporate buyers put forward a record 12 separate transactions for the deal of the year.

From that long list, however, we don’t actually have a winner. Or rather, we have three winners. For the first time in more than a decade of giving out our Golden Tombstone award, we have a tie. Fittingly enough for the diffuse deals that characterized last year, we have a tie between three transactions: Intel’s $15.3bn reach for Mobileye, Cisco outbidding the public market for AppDynamics and Broadcom’s unsolicited bid for Qualcomm. We’re still working on cutting the Golden Tombstone into three pieces so each of the winners can have their own chunk of M&A immortality.

To detractors, Trump is a buffoon; to dealmakers, he’s a boon

Contact: Brenon Daly

Despite all the ‘fire and fury’ around President Donald Trump, when it comes to tech deals, the president is good for business. At least that’s the view of a majority of buyers at some of the largest and most-active companies in the market.

By a more than two-to-one margin, respondents to the 451 Research Tech Corporate Development Outlook Survey said the Trump White House will help spur M&A in 2018. Specifically, 59% said the current administration will ‘stimulate’ dealmaking this year, compared with just 23% saying it will ‘inhibit’ dealmaking.

Somewhat surprisingly, the nearly six out of 10 respondents who forecast a ‘Trump bump’ in the tech M&A market is 10 percentage points higher than our previous survey. The increase over the past year in Trump’s standing among dealmakers stands in sharp contrast to the president’s overall popularity, which has dropped to record lows over that same time. Since Trump took over as CEO of America, the percentage of people who disapprove of the president has steadily risen from 41% to 55%, according to Nate Silver’s FiveThirtyEight, which calculates the figure based on a weighted blend of numerous polls.

Even with the divergent views about the White House, corporate acquirers mostly told us the overall economic picture isn’t really snagging deals these days. See the full 451 Research Tech Corporate Development Outlook Survey for more insights from many of the main buyers in the tech M&A market.

 

Tech companies have long, long shopping lists

Contact: Brenon Daly

Despite a lackluster year for tech M&A in 2017, corporate acquirers overwhelmingly forecast that their companies will be looking to shop again this year. More than six out of 10 (62%) respondents to the annual 451 Research Tech Corporate Development Outlook Survey indicated that their firms would be more active with acquisitions in 2018. That was the most-bullish outlook since the end of the recent recession, coming in more than three times higher than the 18% of corporate buyers who expect their companies to step out of the market. (To see the full 451 Research report, click here.)

The company-specific outlook, which came from major acquirers across the tech landscape, is far more buoyant than their view of the broader M&A market, however. Looking ahead at the overall dealmaking environment for corporate buyers, only slightly more than four out of 10 respondents (43%) said it would be more favorable in 2018 than it was in 2017. On the other side, fully one-quarter (25%) predicted that general tech M&A conditions would deteriorate this year.

Although the broad-market outlook – with slightly more than four out of 10 respondents projecting an improved M&A environment in the coming year – ticked higher from last year’s survey, it is still lower than the two surveys before that, when tech acquisition activity did indeed hit multiyear highs. In those two previous 451 Research Tech Corporate Development Outlook Surveys, slightly more than half of the respondents forecast a favorable environment for their fellow strategic buyers. In both 2015 and 2016, spending on tech deals topped $500bn for the first time since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase.

To see what else corporate acquirers told us about their financial rivals (PE firms), valuations and even what President Donald Trump is doing to the business of M&A, click here.
 

Every reason to shop, yet tech companies still empty-handed

Contact: Brenon Daly

As tech companies said goodbye to 2017, most of them did so with fond memories of the past year. Public companies nearly all saw steady gains on Wall Street, with more than a few hitting record highs. Record amounts of venture money flowed to startups, while more-established companies looked ahead to their already-stuffed treasuries getting even fuller when the benefits of the recently passed tax program kick in. And probably most importantly, customers are saying they are ready to spend on tech like they haven’t been since the recent recession.

In a November 2017 survey by 451 Research’s Voice of the Connected User Landscape, fully 50% of the 872 respondents said their company is giving a ‘green light’ for IT spending. That was the highest reading since 2007, and 13 basis points higher than the average survey response for the month of November for the previous five years. During that 2012-16 period, in fact, respondents unanimously said their companies were more likely to cut their IT spending than increase it.

All in all, the end of last year was a good time for publicly traded tech companies to do business. And they did, except in one crucial area: M&A. Tech acquirers announced one-quarter fewer deals in Q4 2017 compared with the final quarter of the previous three years, according to 451 Research’s M&A KnowledgeBase. Meanwhile, spending on tech and telco acquisitions in the October-December period slumped to the lowest quarterly level since Q2 2013.

Historically, there has been a relatively tight correlation between overall IT budgets, company valuations and M&A activity. To some degree, activity in all three of those markets is determined by a single shared characteristic (confidence), so it follows that there would be some interdependence in the trio. And yet, as we step from 2017 to 2018, that connection appears to be breaking down. Tech companies are enjoying record levels of confidence from customers and investors, yet are rather timid when it comes to shopping.

Mainstays missing in the tech M&A market

Contact: Brenon Daly

A number of the mainstay acquirers that had helped boost the tech M&A market to recent record levels stepped out of the market in 2017, clipping spending on deals by more than one-third compared with 2016 and 2015. The value of tech and telco acquisitions around the globe in the just-completed year slumped to $325bn, after topping a half-trillion dollars in each of the two previous years, according to 451 Research’s M&A KnowledgeBase. Last year’s M&A spending ranks as the lowest in four years.

The primary reason for the drop in 2017 is that tech giants – the companies that had set the tone in the overall M&A market over the past decade – didn’t shop like they once did. For instance, Oracle and SAP have, collectively, announced 16 acquisitions valued at more than $1bn since 2010, according to our M&A KnowledgeBase. However, only one of those deals printed last year. (More broadly, Oracle took an uncharacteristically long eight-month hiatus from deal-making in 2017. The prolonged absence of corporate acquirers such as Oracle was one of the primary contributors to last year’s overall M&A volume slumping to a four-year low, according to our count.)

Also weighing a bit on 2017’s totals is that free-spending Chinese buyers, who had turned tech into a favorite shopping ground, all but disappeared from the top end of the market last year. Our M&A KnowledgeBase lists just one $1bn-plus acquisition by a China-based buyer in 2017, down from nine transactions in 2016 and seven in 2015. Currency restrictions imposed by China’s authorities in early 2017 drastically reduced the ability of Chinese companies to put money to work outside their country. Also, the simmering trade fight and sparring over currency policy between Beijing and Washington DC slowed M&A between the world’s two largest economies.

On the other hand, last year saw the full emergence of a new, powerful – and largely underappreciated – force in the tech M&A market: private equity (PE). As corporate acquirers retreated, financial acquirers accelerated. PE firms announced a record 876 transactions last year, more than twice the number they did just a half-decade ago, according to 451 Research’s M&A KnowledgeBase. Deal volume, which has increased for five consecutive years, jumped nearly 25% in 2017 from 2016, even as the number of overall tech acquisitions posted a mid-teens decline year on year.

For PE, $20bn deals are so 2007

Contact: Brenon Daly

Looking to put its mountainous cash holdings to work, private equity (PE) has become a velocity play. Deal-hungry financial acquirers have scaled back the size of the checks they write, but have compensated for that by writing a lot more checks.

This year, for instance, buyout shops have put up twice as many $1bn+ tech transactions as they did during the pre-credit crisis peak, but only half as many big ones. As PE firms lower their sights, their current overall M&A spending is coming up well short of the amount they threw around in the previous generation.

To understand this shift in price preference, it’s useful to compare PE dealmaking at the top end of the market in 2017, which will see an overall record number of sponsor-backed transactions, with the previous high-water year for PE spending in 2007. This year, 451 Research’s M&A KnowledgeBase has recorded 24 acquisitions by PE firms valued at $1bn or more, with total spending on those deals of $69bn. In contrast, 2007 saw fewer than half that number of billion-dollar transactions (11 vs. 24), but spending on those big-ticket deals was one-quarter higher ($85bn vs. $69bn).

A decade ago, buyout shops were looking to bag elephants. The prices of the two largest transactions in 2007 were both a full $10bn higher than this year’s biggest PE print, according to the M&A KnowledgeBase. (And for the record, this year’s sole buyout blockbuster – the late-September PE-led $17.9bn purchase of Toshiba’s flash memory business – looks more like the consortium deals we saw last decade than the PE transactions we’ve seen recently.)

For the most part, however, those blockbuster deals from last decade, with their 11-digit price tags, haven’t delivered the hoped-for returns. PE firms are now hoping that by going small, they can get a bigger bang.

Small software buys big, but…

Contact: Brenon Daly

The little brothers of the software industry have stepped in front of their bigger brothers in the M&A market. Medium-sized public software companies have been inking uncharacteristically large acquisitions this year, even as the well-known vendors have been fairly reserved. And while these midmarket software firms have been big spenders recently, the deals are often missing a zero or even two compared with prices the industry bellwethers have paid in years past for some of their purchases. That has helped knock overall software M&A spending to its lowest level in four years, according to 451 Research’s M&A KnowledgeBase.

As an example of the shift in buyers, consider Oracle. The software giant has averaged at least one transaction valued at more than $1bn each year over the past decade, according to the M&A KnowledgeBase. Yet this year, it hasn’t gotten anywhere close to doing a 10-digit deal, and, in fact, hasn’t announced any acquisitions since April. On the other side, several software companies that have only a fraction of the size and resources of Oracle have thrown around a lot more money on recent transactions than they ever have before. A few prints captured over the past few months in the M&A KnowledgeBase clearly show the trend of M&A inflation among the midmarket software buyers:

-At $275m in cash and stock, Guidewire Software’s reach for Cyence in October is $100m more than the SaaS provider has ever spent on any other transaction.
-Both of the largest purchases by security software vendor Proofpoint have come in the past month. Its $60m pickup of Weblife.io in late November and $110m acquisition of Cloudmark in early November compare with an average price tag of just $20m on its previous 12 deals done as a public company from 2013-16.
-Doubling the highest amount it has ever paid in a transaction, serial acquirer CallidusCloud spent $26m for Learning Seat earlier this month.
-In a pair of deals announced earlier this year, RealPage dropped more than a quarter-billion dollars on both of its targets, after not spending more than $100m on any of its previous two dozen acquisitions.
-Upland Software announced in mid-November the purchase of Qvidian for $50m, which is twice as much as the software consolidator has spent on any of its other nine acquisitions since coming public in November 2014.

These deals by midmarket software vendors (as well as other similarly sized buyers) go some distance toward making up for the missing big names. Yet they won’t fully cover the shortfall this year. Partially due to this change in acquirers, spending on software M&A in 2017 is tracking roughly one-third lower than it has been over the previous three years, according to the M&A KnowledgeBase.

TITUS goes from bootstrapped to buyout with Blackstone

Contact: Brenon Daly

Private equity (PE) firm Blackstone Group has picked up a majority stake in TITUS, marking an unconventional bootstrapped-to-buyout exit for the 12-year-old data classification startup. Terms weren’t revealed. With the acquisition, PE shops have now purchased more cybersecurity vendors in 2017 than any year in history, according to 451 Research’s M&A KnowledgeBase (see graphic below).

The transaction comes two years after Microsoft made a similar data security move, reaching for Israel-based startup Secure Islands. (Although the price of that deal wasn’t disclosed, subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms.) However, Secure Islands was a much smaller company than TITUS, both in terms of revenue and technology. Secure Islands focused primarily on extending security for Microsoft technology, specifically Office 365 and SharePoint, while TITUS has a broader technology platform. Also, according to our understanding, profitable TITUS generates more than four times the sales that Secure Islands did at the time it was acquired.

For Blackstone (in this case, through its Tactical Opportunities team), the purchase of TITUS represents a return to the information security (infosec) market, with a platform that lends itself to additional bolt-on acquisitions. (The firm used the buy-and-build strategy with infosec reseller/service provider Optiv before selling it to Kohlberg Kravis Roberts a year ago.) Once TITUS is in the portfolio, which should come before the end of the year, Blackstone could help cover the costs of buying into markets where TITUS currently partners. Specifically, markets such as data-loss prevention and archiving would be logical adjacent sectors for Blackstone-backed TITUS to look to shop in.

Cybersecurity turns into a busy bazaar

Contact: Brenon Daly

The holiday shopping season kicked off last week, and for one tech sector, it was a particularly bountiful time for picking up some companies. Information security (infosec) acquirers announced an unprecedented seven transactions during the week that started on Cyber Monday. The pace represented a dramatic acceleration from the year-to-date average of just two deals announced each week.

With last week’s flurry, the number of infosec acquisitions in 2017 has already eclipsed last year’s total, even as overall tech M&A volume this year is heading for a mid-teens percentage drop from last year, according to 451 Research’s M&A KnowledgeBase. (This year already ranks as the second-busiest year for infosec, with deal volume tracking to roughly 50% higher than the start of the decade.) Probably more important than the sheer number of transactions was who was doing the dealing:

-McAfee announced its first purchase since throwing off the shackles of full ownership of Intel last year. By all accounts, McAfee’s step back into the M&A realm with cloud security startup Skyhigh Networks came at a sky-high price.
-An infrequent acquirer, Trend Micro reached for a small application security startup based in Montreal, IMMUNIO. It is only the third acquisition the Japan-based company has done since 2011.
-Thoma Bravo continued this year’s record level of infosec M&A by private equity (PE) firms, taking Barracuda Networks private for $1.6bn. The M&A KnowledgeBase indicates that 2017 is on pace for more PE purchases in this market than any year in history, likely to come in about quadruple the number of sponsor-backed infosec deals in 2012.

Expanding the timeframe beyond just last week, we see a number of other trends this year that have contributed to strong infosec deal volume in 2017, which should continue in 2018. For starters, the industry’s largest stand-alone vendor has stepped back into the market in a big way. Symantec has inked five transactions so far in 2017, more than it has done, collectively, in the previous half-decade. Meanwhile, other infosec providers have either reemerged as buyers (Juniper acquiring Cyphort after a four-year infosec M&A hiatus) or started their own acquisition program (Qualys has announced two deals in the past four months, after printing just one transaction since the company’s founding in 1999).