What do Sophos and Symantec have in common?

by Brenon Daly

In its sixth acquisition of a publicly traded information security vendor in just the past decade, Thoma Bravo says it will pay $3.8bn for endpoint security specialist Sophos. The deal represents a massive bet by the buyout shop on the infosec market, with the bill for Sophos equaling the combined spending of the firm’s two next-largest take-privates. It also has some distinct echoes of the blockbuster Symantec split announced just two months ago.

Both Sophos and Symantec date back to the 1980s. As stalwarts in the first generation of antivirus providers, both companies have nonetheless struggled to match the innovation of fresher, nimbler startups. As a consequence, the two middle-aged vendors have largely been spectators as hundreds of billions of dollars of value has flown predominantly to the industry’s newer entrants.

That’s not entirely fair to Sophos, which has more than doubled its value on the London Stock Exchange since its mid-2015 IPO. (But it is very much the case at Big Yellow, with shares having flatlined over the past half-decade.) Still, the roughly $2bn in market value Sophos created on the LSE is a tiny fraction of the value that has been ascribed to the unicorn-heavy infosec sector since the middle of the decade. (Granted, much of that is ‘paper value’ for startups that exists only in the minds of venture capitalists.)

With the pace of disruption and displacement accelerating in the infosec space, it’s perhaps not surprising that both Symantec and now Sophos find themselves owned by financially minded acquirers in transactions that feature similarly reasonable valuations. Thoma is valuing Sophos at $3.8bn, or about 4.2 times the $895m the company recorded in sales in its fiscal year that ended in March. That multiple lines up very closely with the 4.5x that Broadcom is paying for Symantec’s enterprise security business.

On their own, the two deals almost set a record for annual M&A spending in the infosec market, according to 451 Researchs M&A KnowledgeBase. Combined with this year’s other big prints in the sector – including VMware’s $2.1bn consolidation of Carbon Black and Insight Venture Partners’ recap of Recorded Future – 2019 has set a new high-water mark for annual deal value in our database. With still two and a half months of the year remaining, 2019 has already seen an unprecedented $21.6bn worth of infosec transactions, 40% higher than the previous record.

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PE pads the payroll in HCM

by Brenon Daly

As an industry, private equity often sparks an uneasy relationship with employees at the companies it acquires. But buyout shops nonetheless have a large – and rapidly growing – relationship with firms that make software to manage employees. In a twist on typical M&A activity, more than half of the acquisitions of human capital management (HCM) vendors have a financial sponsor behind them, according to 451 Researchs M&A KnowledgeBase.

HCM is one of the only major segments of the IT landscape where financial buyers print more deals each year than the longtime tech M&A market makers, strategic acquirers. Buyout shops have accounted for fully 59% of the HR-related tech deals we have captured in the M&A KnowledgeBase so far this year. Collectively, PE firms have announced more acquisitions in this market already this year than any year in history.

More broadly, PE’s participation in the HR tech market is more than 20 percentage points higher than the roughly one-third share that PE holds across all tech M&A. And the level has been rising sharply. Our data shows that PE firms accounted for just one in four HCM transactions, or less than half their current level, at the start of the decade. The surge in buyout activity is the chief reason why overall HR-related M&A activity is tracking to a record number of deals in 2019.

So how has PE been able to sprint so far ahead in HCM? As is pretty much always the case in a market-related question, both sides of the supply/demand equation shape the answer. For starters, there are a heap of companies selling HR-related technology. Our HR Technology Market Map published earlier this year lists over 200 vendors across seven distinct HCM categories. In terms of potential targets, a sizable-yet-fragmented market invites consolidation.

When we shift to the demand side, we see that current activity has been shaped by vastly different takes on the strategy of consolidation at the two buying groups in the tech M&A market. For financial sponsors, consolidation has meant purchasing a decent-sized HCM platform and then adding to it. For example, both Insight Venture Partners’ Bullhorn and Vista Equity Partners’ iCIMS have announced small bolt-on acquisitions just since last summer. That has kept a steady flow of deals coming into the PE portfolios.

On the other hand, many of the would-be strategic acquirers have themselves been consolidated into larger ERP providers. Notably, enterprise software giants SAP and Oracle each have inked a pair of multibillion-dollar HCM transactions. Unlike the platform acquisitions that PE firms tend to do, however, these large-scale deals by corporate buyers tend not to have much follow-on M&A. Often, when a stand-alone industry vendor gets absorbed into a sprawling portfolio, the drive to do deals in that particular market gets diluted.

Consider the relative M&A pace at SuccessFactors, which has been mostly quiet since SAP acquired it in late 2011. That purchase effectively took a deep-pocketed buyer that had been actively shopping out of the market. In the two years leading up to its exit, SuccessFactors had announced a half-dozen acquisitions totaling about $500m of spending, according to the M&A KnowledgeBase.

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Tech M&A gets personal

by Scott Denne

 

Amid a streak of acquisitions of personalization technology vendors, Kibo stands out as the most active buyer, having now inked its second such deal of the year and third in the past three years. The Vista Equity portfolio company has reached for Monetate to add content personalization and testing to its e-commerce software suite. The move comes as Kibo and other buyers look to layer machine learning into their products as businesses turn to that technology for automating customer engagement.

Our surveys indicate that there’s growing interest in personalization technology, helping several vendors, including Monetate, build businesses north of $20m in annual revenue and leading to more exit opportunities. According to 451 Researchs M&A KnowledgeBase, four personalization specialists have been bought this year, compared with just two in 2018. Yet most of the companies that have found an exit have come up against tough multiples as higher churn rates and costs of delivering services have hampered growth.

Starting with order management and other e-commerce software from the simultaneous purchases of MarketLive and Shopatron in 2015, Vista has built a marketing, commerce and payments software business through multiple transactions. Although terms of its Monetate buy weren’t disclosed, Vista hasn’t paid generous multiples in assembling Kibo. (Subscribers to the M&A KnowledgeBase can see our estimates of those deals here.) Also, few personalization tech providers have fetched more than 4x trailing revenue, our data shows. (McDonalds pickup of Dynamic Yield is the notable exception.)

Still, that these companies are able to find exits speaks to the emerging demand for such capabilities. Our surveys show that improving customer engagement is driving much of the interest in machine learning. In our Voice of the Enterprise: AI & Machine Learning survey, nearly half (43%) of respondents told us that ‘improved customer engagement’ was a significant realized or anticipated benefit of machine learning.

Figure 1:

The market realities of IPOs

by Brenon Daly

Even without looking at a calendar, investors can figure out that it’s been exactly a half-year since this year’s initial initial public offerings from enterprise-focused tech vendors. How do they know? The 180-day, post-IPO lockup period for both Tufin Software and PagerDuty just expired.

In both cases, that means more shares of the two companies are available for trading. And in both cases, that means more shares of the two companies are available for trading right at a time when the companies are having trouble finding buyers for the shares already available for trading. As a pricing mechanism, Wall Street is dispassionately relentless.

Consider PagerDuty. The IT operations software provider marked its half-birthday in an inauspicious manner: shares bottomed out Monday at their lowest-ever price since the IPO. Following the early-April offering, the stock enjoyed a general lift from the $38 offer price in its first two months on the NYSE. Yet, for the past four months, PagerDuty has traded lower almost uninterruptedly. Its market value has been slashed from a peak of more than $4bn to just under $2bn now.

It’s a similar – if sharper – story at the much smaller Tufin. Shares of the firewall management specialist have almost been cut in half just in the past two months. The decline has left Tufin valued at only slightly more than $500m – a fraction of the market cap of any recent IPO from the traditionally richly valued information security market.

The point isn’t to celebrate the bearish reception these two debutants have had. (Despite its growing popularity in tech circles, schadenfreude is still a petty emotion.) Instead, it’s to remind startups that going public strips away some of the protections and conveniences of being safely tucked in a venture portfolio. Suddenly making shares available to the great mass of Wall Street investors is a far more out-of-control ownership structure for a business than a few chummy VCs holding most of the stock.

Startups still in venture portfolios don’t have to worry about the sudden and severe valuation revisions that can happen on Wall Street. Rather than having their worth determined in every single trading session, privately held startups can go a year or even longer without having their equity repriced in a new funding round or some other event. And even then, those private-market valuations may not be particularly relevant once the companies come up for bidding in the broader, more liquid public marketplace. Just look at the huge ‘down round’ that WeWork was facing in its now-aborted IPO.

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The sharp rise and slight fall of PE

by Brenon Daly

Unlike their corporate rivals, financial acquirers get paid to do deals. They raise money – typically hundreds of millions of dollars, but now edging into the billions – and then turn around and spend it on companies. That’s their ‘value proposition’ and private equity (PE) has used it to do a good bit of business in the tech industry since they first turned their attention there.

Over the past 15 years or so, PE has enjoyed almost uninterrupted growth in tech: more firms, more capital, more deals, with prices that have more zeros. The collective rise of buyout firms has in some ways eclipsed the standing of corporate acquirers, who had served as the sole buyer in the tech M&A market for decades.

In a watershed moment that symbolizes this transfer of market power, financial buyers actually announced more tech acquisitions in 2017 than their publicly traded rivals, according to data from 451 Researchs M&A KnowledgeBase. The gulf then widened in 2018. It was a stunning change in fortunes, because even as recently as 2012, our numbers show that the long-time leaders, corporate acquirers, had put up twice as many prints as the unheralded buyout shops.

All of that recent aggressive growth makes this year’s change in fortunes for PE firms all the more stunning. As we noted in our just-published Q3 report on tech M&A, financial acquirers – a buying group that had only really known increases – are set to record a down year on a couple of key measures:

After six consecutive years of increased deal flow, buyout shops are on pace to announce roughly 5% fewer acquisitions in 2019 than they did in 2018, according to the M&A KnowledgeBase. During this recent period of unprecedented portfolio expansion, PE firms tripled their share of the tech M&A market, accounting for one of every three announced transactions.

The decline at the top end of the market is even more pronounced. Our data indicates that the number of PE deals valued in the billions of dollars this year is likely to be one-third lower than last year. Based on annualized year-to-date activity, buyout shops in 2019 will put up their fewest billion-dollar deals in four years, even as the firms, collectively, probably hold twice as much uninvested capital now as then.

That isn’t to say financial acquirers are fleeing the tech sector. Even with a projected mid-single-digit percentage drop in overall deal volume this year, 2019 will still see the second-highest number of PE-backed tech transactions in history. And the fact that not so many of those deals this year will be measured in the billions of dollars probably has more to do with the recent tightness in the leverage loan market than with buyout shops themselves.

Still, this year’s reversal – however slight – is having an impact on the broader tech M&A market. The slowing activity has already trimmed billions of dollars off this year’s total acquisition spending and lowered overall activity by dozens of deals. The once-voracious buyout shops may well find that they need to adapt their ‘value prop’ for tech M&A to reflect a new reality of a flat-to-down market rather than an up-and-to-the-right one, as it’s been almost since inception.

Figure 1:

Oracle stretches back into marketing with CrowdTwist

by Scott Denne

Oracle has printed its first customer experience software deal in two-and-a-half years with the purchase of CrowdTwist, a developer of loyalty software. Although it hadn’t inked any acquisitions in this category in quite some time, it’s been building out Unity, a single source of customer data to connect the many marketing, sales, service and retail applications it has already bought. But Oracle can’t have a customer data platform without customer data, and that’s where CrowdTwist comes in.

The target brings Oracle software that enables companies to design and manage loyalty programs with more flexibility than the traditional points-for-purchase programs. CrowdTwist specializes in serving brands and retailers that have had anonymous relationships with their customers. By joining a loyalty or rewards program, customers share information about themselves, enabling marketers to personalize messages, promotions and content, in addition to rewarding desired behaviors of their best customers.

Oracle is not alone in sensing an opportunity to serve as a single source of truth for customer data – Adobe and Salesforce announced similar offerings in the spring, not to mention the three dozen or so startups that have adopted the ‘customer data platform’ moniker. A first-quarter survey from 451 Research’s Voice of the Enterprise: Customer Experience & Commerce sheds light on why: one in four companies plans to devote budget to ‘data platforms to gather customer intelligence’ in the next 12 months.

Figure 1:

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.

Figure 1:

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.