What might have been (and what may still be) for Symantec

by Brenon Daly

If not for a last-minute snag in talks to sell itself, Symantec would be headed to this week’s Black Hat not as the single-largest vendor in the information security (infosec) market, but as a subsidiary. Negotiations with chip giant Broadcom reportedly broke down over price (what else?), meaning Big Yellow will be unattached and unchaperoned as the hacker’s ball opens in the desert. We wonder, though, how many more industry confabs will Symantec be attending in its current standing?

A public company for 30 years, Symantec generates almost $5bn of sales each year. Part of the difficulty for Symantec right now is embedded in those two facts about the company. Symantec isn’t moving any closer to the $5bn. In fact, in its most-recent fiscal year it actually slipped further away, as Big Yellow got a little smaller in 2018. Declining revenue doesn’t do much for Wall Street investors.

That’s particularly true in infosec, where budgets across the board are fat and getting fatter. A stunning 87% of IT professionals told 451 Research’s Voice of the Enterprise (VotE): Information Security, Budgets & Outlook 2019 that their companies will have more money to spend on security this year than they did last year. On average, respondents to our VotE survey said their security budgets are up 22%, an enviable bump compared with GDP-like growth rates for overall IT budgets.

And yet, Symantec hasn’t been able to enjoy much of the bountiful budgets. That led to the abrupt departure of the company’s chief executive earlier this year, with an interim CEO still leading the industry giant. Symantec’s new chief, who cut his teeth in the semiconductor industry, has a reputation as a straight-talking operator, and he serves a board of directors that tips far more toward finance than technology. Fully half of Symantec’s 12 board members, including virtually all of the directors added in the previous three years, are out-and-out financial professionals.

Given the composition of Symantec’s board and executives, reports of a sale to a financially focused operator such as Broadcom shouldn’t have surprised anyone. (At least not after the chipmaker-turned-enterprise-software-provider shelled out $19bn for CA Technologies, a diversified software vendor that nonetheless shares a similar financial profile and vintage as Symantec.) Although Broadcom wasn’t able to consolidate the infosec giant, the reported negotiations did give a useful glimpse into the most likely outcome for Symantec: a full sale to a financial firm.

The company currently garners an enterprise value of about $16bn, or roughly 3.3 trailing sales. Even with an acquisition premium, Symantec’s LBO valuation would likely be slightly below the prevailing multiple of 4.1x trailing sales in take-privates announced so far this year on US exchanges, according to 451 Researchs M&A KnowledgeBase. Looking specifically at the infosec market, our data shows buyout firm Thoma Bravo has paid 4-5.5x trailing sales in its three purchases of publicly traded security companies in the past three years.

Source: 451 Research’s Voice of the Enterprise: Macroeconomic outlook – Business Trends Q2 2019

Blackstone bags big exit in tightening market

by Scott Denne

In selling Refinitiv to London Stock Exchange (LSE) Group for $14.1bn in stock, Blackstone Group has managed the largest-ever sale of a PE-backed tech company. The deal comes amid an overall decline in PE exits, particularly among the largest assets. Although the shifting PE exit environment isn’t a dramatic swing, it’s notable given the rise in PE acquisitions in recent years.

The transaction values Refinitiv, a financial markets data provider, at $27bn when factoring in its debt. That’s nearly $4bn less than where the company was valued when Blackstone and two co-investors spun it off of Thomson Reuters last year, paying $17bn for 55% of the business. That’s not to say Blackstone is losing money on the deal – it put in $3bn of its own cash and will get more than that in LSE equity. Moreover, it won’t begin selling any of those shares for at least two years after the close, so its ultimate exit is still a ways off.

Still, in announcing such an exit, Blackstone’s an outlier. According to 451 Research’s M&A KnowledgeBase, PE firms have sold 156 tech vendors since the start of the year, approximately the same rate of exits as 2017, but 22% lower than 2018 – a record year for PE exits. The decline is more significant among larger deals. Our data shows that buyout shops have divested just nine companies (including Refinitiv) for $1bn or more this year, on pace for the fewest such exits since 2014.

The buyer it found is as remarkable as the record price it fetched in the sale of Refinitiv. LSE hasn’t spent more than $1bn on a tech purchase since 2007. And more broadly, strategic acquirers have only bought six $1bn PE portfolio companies this year. In 2018, they provided 20 of the 31 PE exits valued above $1bn.

The slowdown in exits comes as sponsors have expanded their pace of $1bn-plus acquisitions of tech companies. According to the M&A KnowledgeBase, PE firms have inked at least 25 10-figure tech transactions in each of the past three full years, whereas they would typically print 10-15 such deals in each of the years from 2010 to 2016. Blackstone, due to a lockup agreement as part of today’s announcement, will have to wait at least five years before fully exiting its position. But if current exit trends hold, many of its peers could be awaiting 10-figure exits for just as long and with far less certainty.

Dynatrace’s dynamic debut

by Brenon Daly

Dynatrace’s IPO represents the third major transition in recent years for the application performance management (APM) company. Like the other two, today’s shift has proved wildly lucrative. Dynatrace created more than $7bn in market value as it moved from private equity to public trading.

Although not unprecedented, Dynatrace’s partial swapping out of financial sponsor Thoma Bravo for Wall Street investors is still somewhat unusual. (Post-offering, the PE firm still owns about 70% of Dynatrace.) By our count, just three of the two dozen enterprise-focused technology vendors, including Dynatrace, that have gone public in the US since the start of 2018 have come from PE portfolios. Dynatrace raised roughly $570m in its offering, some of which will go toward paying down its nearly $1bn in debt, which, again, stands in contrast to the typical VC-fueled growth for most tech IPO candidates.

In many ways, the partial change in ownership for 14-year-old Dynatrace is the culmination of the other two changes, the first being a technology overhaul followed by a shift in business model. As we noted in our full report on the IPO, Dynatrace revamped its product a half-decade ago, integrating all of its monitoring into a single platform. (It no longer sells its legacy product, which it refers to as ‘classic,’ except to existing customers.)

As part of the transition to a platform, Dynatrace also changed how it sold its product, as well as how it accounted for those sales. Gone were licenses, in favor of subscriptions. And while the company has undeniably made progress in its transition to a new, more valuable business model, it has also been undeniably aided in its efforts by a rather expansive definition of ‘subscription’ revenue.

Accounting purists might have a hard time signing off on Dynatrace’s practice of including term and perpetual licenses, as well as maintenance and support revenue, all as subscription revenue. Basically, the company lumps all sales of its non-classic product – regardless of whether it is true SaaS or license-based – into the subscription line on its income statement.

Our quibbles about accounting are rather minor, and certainly didn’t stand in the way of professional investors, who have long since given up on GAAP, from rushing to buy newly issued shares of Dynatrace. The stock surged 60% shortly after its debut on the NYSE. With roughly 286 million (undiluted) shares outstanding, Dynatrace began life as a public company with a value of $7.4bn. That’s one-third more than the current value of APM rival New Relic, which has been public since Dynatrace first started its product transition some five years ago.

Big deals are no big deal for July

by Brenon Daly

Even a surge in big-ticket transactions in several mature segments of the tech market couldn’t boost overall July M&A totals. Spending on tech deals around the globe this month slumped to just $33bn, down about 20% from the monthly average in the first half of the year, according to 451 Research’s M&A KnowledgeBase.

This month’s decline comes despite acquirers announcing 10 separate tech transactions valued at over $1bn. That’s a notable acceleration from the first six months of 2019, when a total of just 40 billion-dollar deals were announced. Our data shows that July marks the first month to hit a double-digit number of $1bn+ acquisitions since last October.

What the big-ticket transactions gained in volume in July, they lost in overall value. On average, the M&A KnowledgeBase indicates that buyers paid just 2.5x trailing sales in the $1bn+ deals they announced in July, down from roughly 4x trailing sales in significant transactions announced since the start of 2018. The richest valuation paid in this month’s billion-dollar purchases (Cisco handing over $2.8bn, or 6.8x trailing sales, for Acacia Communications) stands as only the tenth-highest multiple of any billion-dollar deal announced so far this year.

More broadly, the relatively slow start in July puts the current Q3 on pace for the fifth consecutive quarter of flat to lower M&A spending, according to the M&A KnowledgeBase. Still, we don’t want to overstate the decline. Based on the spending through the first seven months of the year, we are on track to record some $490bn worth of tech M&A, which would rank 2019 as the third-highest annual spending level since 2002.

Take-privates take a break

by Scott Denne

Repelled by rising stock prices, private equity (PE) firms are on pace to print the fewest take-privates of tech companies in five years. The deals that are getting done this year involve, more often than not, businesses that have fallen off their recent highs. Yet many are still commanding premium valuations.

According to 451 Researchs M&A KnowledgeBase, buyout shops have acquired 10 NYSE- or Nasdaq-traded vendors this year, setting the stage for the fewest such transactions since 2014, when they purchased just 12 (there are typically 20-25 such deals annually). The Nasdaq has risen 25% since the start of the year, although our data suggests that sponsors are reaching for targets that haven’t benefited from that by picking up companies whose share prices have fallen below their 52-week highs.

Take last week’s announcement that HGGC would purchase Monotype. The $820m transaction, at $19.85 per share, is almost 10% below the stock’s highpoint over the past year. It’s not alone. Per-share prices in seven in 10 of 2019’s take-privates landed below their 52-week high. An eighth vendor, Ultimate Software, edged out its high by less than 1% in its $11bn sale.

That’s not to say these companies are going cheap. Ultimate, for example, sold for 10x trailing revenue. And Monotype, despite the turbulence in its stock, was still able to fetch 3.4x. In fact, our data shows that the median valuation for these take-privates is running at 4.1x, its highest point in this decade. Although PE firms have increased what they’re willing to pay, stock prices might just be increasing faster.

Unspent euros

by Brenon Daly

The synchronized growth that characterized the world’s economy in recent years has broken down. Individual protectionism has replaced broad cooperation. The fallout from this shift to self-serving economic and political policies, however, is being unevenly distributed around the globe, with weak countries suffering even more.

Consider the EU, a semi-unified body that has half again as many people as the US (512 million vs. 325 million) but generates less overall economic activity than the US. With its fractious membership and ever-increasing separatist sentiment, the EU finds itself fraying more right now than at any point in its half-century history. Raucous political discord complicates the EU’s efforts toward economic expansion.

The International Monetary Fund has noticed that, recently lowering its forecast for economic expansion in the EU to a mere 1.3% in 2019, just half the comparable rate of the US. As alarming as that outlook is, it is still a ‘tops down’ view from a group of technocrats. A far more informed view comes from the actual participants in the economy, the people whose livelihood depends on successfully reading and adapting to real-world business conditions.

And the view from them, as captured in a just-published Voice of the Enterprise (VotE) survey, is fairly dour. Customers in Europe aren’t spending nearly as freely as they are elsewhere. Our latest quarterly VotE survey looked at various spending plans and macroeconomic concerns from some 1,100 respondents, most based in North America.

As you might expect, almost all of them (90%) said the company they work for does business in their home region of North America. Europe emerged as the second-most-popular region, with more than four in 10 (43%) indicating their company currently rings up sales there.

However, when it came to assessing the current business climate in the various regions, respondents to our VotE survey ranked Europe in last place. Just slightly less than half of the respondents (48%) said their customers on the Continent had a ‘green light’ to spend on new products and services. That is almost 20 percentage points lower than North America, where two-thirds (66%) said their clients have a ‘green light’ to buy.

New names propel venture exits

by Scott Denne

As we noted in a recent report, the number of $1bn-plus venture exits has plummeted from last year’s high because so far, most of the tried-and-true startup acquirers are siting on the sidelines this year. Still, the total amount paid to acquire startups is tracking for an exceptionally high finish, and that’s coming as several companies print their largest acquisitions of venture-funded companies this year.

The most active acquirers of venture-backed startups have been largely inactive this year, leaving it to new buyers to write the largest checks. And although this year’s pace is behind last year’s record of $85.6bn, 2019 is on track for an exceptionally high $37.8bn.

The most frequent acquirers – Alibaba, Cisco Systems, Microsoft, SAP, among others – drove last year’s record sales of VC companies. According to 451 Research’s M&A KnowledgeBase, none of those buyers have paid nine figures for a startup this year. In fact, only one of the 10 most frequent buyers of VC companies over the last decade (Google) has printed a $100m-plus startup purchase in 2019.

This year’s largest deals, by contrast, have come from acquirers that are spending more on startups than they ever have before.

In the year’s largest exit, Uber, just ahead of its IPO, printed its first-ever 10-figure deal, paying $3.1bn for Careem, a Middle Eastern ride-share company.

Carbonite and Fortive both printed their first $500m-plus startup acquisitions.

F5 Networks did the same when it bought NGINX, its first acquisition of any kind in five years.

Palo Alto Networks has scaled up its deal-making in recent years, crossing the $500m mark for the first time with its purchase of Demisto.

Of all the organizations to pay $500m or more for a VC portfolio company this year, only Google had done so in a previous year, according to the M&A KnowledgeBase. Alphabet, Google’s parent company, is no stranger to acquiring startups – our data show it has acquired more (104) than any other buyers since the start of the decade. But its $2.6bn Looker acquisition was different than the deals it’s done previously. It’s the company’s first $1bn-plus startup purchase since 2014, and the first time it’s ever paid such an amount for an enterprise software business (venture-backed or otherwise).

Europe’s increasingly global M&A ambitions

by Brenon Daly

As economic growth slows across Western Europe, tech acquirers there are increasingly looking to do deals outside their home market. The 451 Research M&A KnowledgeBase indicates 2019 is on pace for fewest number of ‘local’ deals (with both Western European acquirers and targets) in a half-decade. Based on our data, this year will see one-third fewer Continental transactions than any of the previous three years.

The slump in shopping comes as Western Europe weathers a broad slowdown that the International Monetary Fund recently said would rank the region as the slowest-growing of all the major economic regions around the globe this year. The IMF forecast that European economic activity would increase a scant 1.3% in 2019, half the comparable rate of the US.

We have noted how that has cut the overall tech M&A activity by acquirers based in the once-bustling markets of the UK, Germany and elsewhere. Collectively, Western Europe is the second-biggest regional buyer of tech companies in the world, accounting for roughly one of every four tech acquisitions announced globally each year, according to our data.

What’s more, the decline comes through sharpest in those deals that are closest. Western European acquirers have picked up fellow Western European targets in just 29% of the tech deals they’ve announced so far this year, our M&A KnowledgeBase indicates. That’s down from the five-year average of 32%.

Granted, the shift in shopping locations isn’t huge, but it is significant. Decisions on where to buy can swing hundreds of millions of dollars into and out of a local tech scene. Further, there’s a rather ominous implication about the politically fractured and economically sluggish Western Europe.

If we make the economically rational assumption that M&A dollars get spent where they can generate the highest return, then Western European tech acquirers don’t appear to be finding anything too attractive around home. On both an absolute and relative basis, they are shopping locally less often right now than at any point in the past half-decade. Instead, the M&A strategy for Western European acquirers is taking them more and more on the road.

Venture exits abound but shrink

by Scott Denne

Although unlikely to match last year’s record haul in dollar terms, the liquidity in this year’s VC exit market is more evenly distributed. Through the first half of 2019, more venture-backed companies are on pace to exit than in any year since 2016, shaking off a years-long decline in exit volume. At the same time, blockbuster deals are trending down as many of the venture community’s most reliable buyers have stayed out of the market and some of the most promising vendors opt for public listings.

According to 451 Research’s M&A KnowledgeBase, 359 venture-funded companies were acquired through the first half of 2019, a pace that’s up 15% from last year, which was the lightest year for venture exits, by volume, since 2010. So far, sales of VC-backed tech vendors fetched just $18.9bn, compared with $85.6bn in all of 2019. Although exits are set to pull in less than last year, sales of companies from venture portfolios, if the current pace holds, would generate more than all but two years in the current decade.

Even as more deals print, the typical value of those transactions holds steady from last year’s level. The median deal value of a 2019 venture exit (via M&A) stands at $100m through the first half of the year, slightly down from where it finished last year, and far higher than all other years this decade. It’s a decline in big-ticket acquisitions that’s weighing on this year’s total deal value. So far, only two venture-backed vendors have sold for more than $1bn, compared with 13 in all of last year. Put another way, if past is precedent and 2019 ends with a total of four $1bn VC company sales, there will have been as many $1bn-plus exits in 2019 as there were $5bn-plus exits a year earlier.

Still, it’s not likely that acquirers have lost interest in inking substantial purchases of VC-backed targets. After all, the rise in the stock market through this year has bolstered valuations of many would-be buyers and should make them more willing to do big prints. Instead, venture-backed startups have more exit options and are getting more expensive. The multiple Google paid in its $2.6bn pickup of Looker speaks to that (subscribers of the M&A KnowledgeBase can see that multiple here). Instead of selling, many of the most attractive targets are eyeing the public markets, where, as we discussed in a recent report, many new issuers are fetching multiples north of 40x trailing revenue.

No hard turns for application software market

by Scott Denne

Both strategic acquirers and sponsors have increased their purchases of application software vendors as the market for those targets accelerates beyond last year’s record. As those buyers stayed active, the largest deals grew larger and multiples continued to climb. Rising valuations for growth companies in the public markets – both new offeringsand already-public businesses – have pushed up pricing for software targets and could help propel deal sizes through the rest of the year.

According to 451 Research’s M&A KnowledgeBase, 632 application software providers have been acquired for a combined value of $59.2bn, on pace to top last year’s record haul in both value and volume. In our analysis of last year’s activity (published as part of 451 Research’s Tech M&A Outlook 2019), we noted that 2018 marked the first year that acquisitions of application software vendors crossed 1,100 as both strategic buyers and private equity firms accelerated their purchases.

The same trend has driven this year’s market as well. Both categories of acquirers are up from last year’s pace. Yet the number of big-ticket transactions is down a bit. While 29 application software providers sold for $1bn or more in 2018, only nine have done so this year. But those that have crossed the 10-figure mark have done so in a big way. Since the bursting of the dot-com bubble, only four such targets have sold for more than $10bn and two of them (Tableau Software and Ultimate Software) did so this year.

To be clear, the relative decline in the number of big-ticket acquisitions hasn’t pulled down the total deal value. If the current pace of deal value were to hold through the end of the year, it would finish more than one-quarter higher than last year, which smashed the previous record by nearly 50%. Put another way, at the midpoint of 2019, the total value of application software transactions is higher than all but two full years, our data shows.

Although fewer software vendors have sold for north of $1bn, those that have are fetching higher prices. According to the M&A KnowledgeBase, the median multiple for those deals this year stands at 8.1x trailing revenue, nearly a full turn above last year’s total. That rise comes amid a 22% year-to-date increase in the Nasdaq index and a welcoming environment for new tech listings, including software companies like Slack and Zoom Video, which commanded 62x and 41x multiples at the midpoint of the year, following their recent public market debuts. Such a compelling alternative exit could continue to boost acquisition prices.