by Scott Denne
Amid a wave of consolidation, payment providers are commanding a premium. Long-standing companies in that market are fending off a laundry list of changes, driving larger deals and a willingness to pay up. In less than a week, two acquisitions have printed with revenue multiples that are more than a full turn above where a typical payments vendor trades.
The expansion of digital wallets and P2P payment networks, advancements in integrating payments into software, mobile point-of-sale apps, and the continuing march of digital commerce (and mobile commerce within that) are all reshaping the payments industry. For example, global digital commerce is expected to crest above $6 trillion by 2022, more than double last year’s total, according to 451 Research’s Global Digital Commerce Forecast. Many players in the industry are combining to cope.
With today’s announcement that Global Payments will use $21.2bn of its stock to buy TSYS, there has now been $82bn in purchases of payment providers this year. Put another way, $4 of every $10 spent on a tech target this year has gone to a payments company, according to 451 Research‘s M&A KnowledgeBase. While this year’s total is a high point, the trend has been building for some time. Each of the two previous years also saw more than $10bn spent on payment targets, something that’s only happened in one other year since 2008.
To get its hands on its rival TSYS, Global Payments valued the business at 6.1x trailing revenue, well above the median 4x for payment companies across the entire decade, according to the M&A KnowledgeBase. Nuvei paid a similar multiple when it handed over $890m for SafeCharge last week to move into European markets. Those transactions helped propel the median multiple for payment deals up to 5.7x for 2019, according to our data. As the number of potential targets with scale shrinks, payments are looking pricey.
by Scott Denne
The retail industry has adopted machine learning at a faster rate than other verticals, which has led to an uptick of M&A. Home improvement retailer Lowe’s is the latest to make a deal with the purchase of Boomerang Commerce’s retail analytics technology assets. Although this transaction extends that trend, the acquirer departs from its peers in buying machine learning for applications beyond customer engagement.
Like many industries, retail has not yet moved past the early stages of adopting machine learning, although it’s further up the curve. According to 451 Research’s Voice of the Enterprise: Artificial Intelligence & Machine Learning, Adoption and Use Cases, 49% of companies in retail are running, at a minimum, a machine learning proof of concept, compared with just 40% across all verticals. Retailers and the tech firms that sell to them have acquired nine machine learning providers since the start of the year, just one fewer than all of last year, according to 451 Research’s M&A KnowledgeBase.
Acquisitions of technologies and products that aim to improve customer experience through new offerings, recommendations or analytics have accounted for nearly all of that deal flow this year. McDonald’s, for example, nabbed Dynamic Yield for personalization technology, while Walmart picked up Aspectiva to make product recommendations from customer reviews.
Those rationales align with retailer priorities in our machine learning survey, where 45% of retailers said ‘customer engagement’ was among their current use cases for machine learning. And although the rationale for Lowe’s purchase – pricing optimization and demand prediction – hasn’t driven as many transactions, it’s not far behind in the survey, as 37% highlighted that application.
by Brenon Daly
Even as other VC-backed unicorns have stumbled recently in ‘down round’ IPOs, Fastly more than doubled its private-market valuation as it came public Friday. The CDN startup priced its offering at the top end of the expected range and then surged some 50% in aftermarket trading.
Fastly’s strong debut continued the recent bull run of enterprise tech IPOs, a sharp contrast to several high-profile consumer tech offerings that have sunk underwater. It also sets up a rather rich valuation for the company compared with its primary rival, which went public two decades ago.
With its newly issued shares changing hands on the NYSE at about $24 each, Fastly is valued at more than $2bn. That’s a significant step up in value from its final venture funding, which came last summer. Although a bit deep in the alphabet, the series F round had Fastly’s investors paying slightly more than $10 per share.
The company posted $145m in sales in 2018 and is likely to bump that up to roughly $200m this year, assuming it holds its current high-30% growth rate. That means Wall Street is valuing it at a mid-teens price-to-sales multiple, on a trailing basis. Or another way to look at it: on a relative basis, Fastly is worth three times more than CDN industry stalwart Akamai, which trades at almost 5x trailing sales.
by Scott Denne
As budgets for customer relationship management (CRM) software hit a four-year high, private equity firms (PE) are pouring into the space, picking up new platforms and inking bolt-on deals. The number of acquisitions by sponsors is heading toward a record as customers spend more in the face of complex customer experience challenges, our data shows.
Across sales, marketing and customer service, businesses are grappling with finicky customers. In 451 Research’s VoCUL: Digital Transformation survey, 75% of respondents said they are dealing with rising expectations among customers in recent years and 78% said their customer experience processes have increased in complexity. As a result, they’re spending more on software. In a separate survey last summer, 15% of respondents said they would increase their spending on CRM software – the highest reading since August 2014.
Last year, PE shops and their portfolio companies bought a record 45 customer experience and CRM software vendors, spanning subcategories such as marketing automation, contact center and social media analytics. According to 451 Research’s M&A KnowledgeBase, those buyers are set to surpass that level with 24 so far in 2019. Many of the transactions are aimed at addressing a larger market through bolt-on deals. SugarCRM, for example, printed its second acquisition of the year with today’s purchase of marketing automation specialist SalesFusion. Prior to its sale to Accel-KKR last year, SugarCRM hadn’t bought a company since 2016, our records show. In another deal this week, Insight Venture Partners’ Campaign Monitor printed its third transaction of the year with the acquisition of Vuture.
by Brenon Daly
After a brief but unprofitable dalliance with a popular consumer tech name, Wall Street is getting back to business. CDN startup Fastly is set to debut later this week, while business communications provider Slack and endpoint security specialist CrowdStrike have lined up expected offerings next month. All of those IPOs – which are built on more durable businesses than ride-sharing, for instance – should help put Uber‘s underwater offering in the rearview mirror.
Wall Street tends to run on a ‘what have you done for me lately?’ business. Uber’s offering didn’t do much for investors, except cost money to those who bought shares at the open. Of course, a week is a ridiculously short period to judge a company that will likely be public for years. But for now, with Uber shares still in the red, investors will shift their attention to where they can make money.
In IPOs, it’s been the offerings from tech vendors that sell to other companies that have generated returns. PagerDutystock is currently changing hands at twice where it priced its offering last month. Zoom Video Communications has also seen its shares double from their offer price, on a much larger scale. The firm has created an astonishing $19bn in market value.
Of the trio of enterprise-focused tech startups that are slated to come public soon, not one of them has figured out how to make money. But their losses are a fraction of the $3-4bn operating loss that Uber has posted in each of the past three years. When it comes to enterprise tech IPOs, companies don’t have to be profitable to be profitable bets for investors.
by Michael Hill
Europe is leading the agricultural technology revolution as IoT and other emerging technologies transform large-scale agricultural operations into connected farms. A combination of European farm subsidies and European IoT deployments is boosting acquisitions of European agricultural technology (agtech) companies.
According to 451 Research‘s M&A KnowledgeBase, a record $4.8bn was spent on agricultural technology deals in 2018 – more than the previous five years combined. Of that record spend, $4.6bn went to Europe-based targets, which are currently on pace to exceed 2018 in terms of deal volume.
While a genuine showstopper of an agtech deal has yet to emerge this year, Merck’s $2.4bn reach for Antelliq, a French provider of livestock tracking software, certainly fit that description last year. As in that deal, the emergence of IoT is partly driving the trend (that deal was 2018’s largest acquisition of an IoT company). According to 451 Research‘s Voice of the Enterprise: IoT, businesses are expanding their IoT investments in EMEA. Our recent survey shows 21% of respondents are planning to deploy projects there, up four percentage points from the year before.
Farm subsidies from governments are also bolstering European agriculture, making companies that serve that market more attractive targets. According to the Organisation for Economic Co-operation and Development, since 2014 subsidies for European farmers, such as the EU’s Common Agricultural Policy, have grown 8%, while subsidies for US farmers, by comparison, have declined 13%.
by Brenon Daly
The momentum that had sustained the high-rolling tech M&A market through the opening quarter of 2019 petered out in April. Spending in the just-completed month plummeted to a paltry $15.4bn, just one-third the average of the first three months of the year, according to 451 Research‘s M&A KnowledgeBase. More significantly, the total value of tech and telecom acquisitions announced in April stands as the lowest monthly total in the M&A KnowledgeBase in four years.
Last month’s slump started at the top. Buyers in April announced just four tech transactions valued at more than $1bn. That’s the fewest big-ticket prints announced in any month since the fall of 2017, and just half the number that acquirers were putting up each month in 2018. Further, the deals that did get done last month had a distinctly down-market look to them.
Rather than the expansion-minded and expensively priced purchases that acquirers inked last year, the billion-dollar deals in April came back down to earth, as cost-cutting consolidation emerged as the main driver of these large transactions. Our data shows the four companies acquired for more than $1bn last month were each relatively mature assets that all traded for less than 2.5x trailing sales.
The largest purchase announced last month demonstrates that trend very clearly. French ad agency Publicis once again turned to M&A to boost its otherwise sagging top line. It paid $4.4bn, or just 2x sales, for the 9,000-person marketing services firm Epsilon. Similarly, Siris Capital Group took 30-year-old printing company Electronics for Imagining (EFI) private at just 1.4x times last year’s revenue. EFI hadn’t really grown since 2016, a trend that was forecast to continue this year.
by Brenon Daly
Strategy doesn’t count for much in a shrinking market. Consider all the effort that tech vendors put into profiting from the emergence of the mobile phone, a wonderous device that helped move computing and communications out of the office. Whether through R&D or M&A, companies spent billions of dollars in designing, making and selling the shiny new gadgets that seemingly everyone wanted. And yet, in just over a decade, the trend has largely played out.
In a recent 451 Research survey, the number of consumers who said they planned to purchase a smartphone in the coming three months slumped to its lowest-ever reading. Just 7% of some 2,800 potential buyers surveyed by 451 Research’s Voice of the Connected User Landscape (VoCUL) indicated that they will be picking up a new device in the next 90 days. That’s about half the level of planned purchases from VoCUL’s springtime surveys at the start of the current decade.
Purchases of smartphones, like most other consumer tech products, tend to be driven by release cycles. New devices mean new buyers. And while that cyclicality still shapes the demand captured in our VoCUL surveys, the overall ranges have come down. Lower highs coupled with lower lows unequivocally point to a market in decline.
Peak to trough, the smartphone market has tumbled from just a few years ago when one in four consumers convinced themselves that they needed to buy a new device to a level now of just one in 14, according to our survey work. As demand for smartphones ebbs to a historic low, the strategies used by various tech firms to supply this once-promising market have been laid bare.
Across the board, companies don’t have a lot to show for their smartphone efforts. (Certainly nowhere near the enduring value created by the emergence of the PC industry in the previous generation.) That’s true whether the company tried to buy or build its way into the handset market. Tech giants that have successfully acquired dominant positions in other emerging tech markets stumbled with smartphones, writing off billions of dollars of their M&A spending (Microsoft) or unwinding deals altogether (Google).
Meanwhile, vendors that stayed in-house and focused on engineering must-have devices undermined their efforts by mistiming or mispricing their phones. (Amazon, the world’s most successful online retailer, couldn’t even really give away its Fire phone.) Even market leaders have resorted to building in gimmicks to spur demand that that blew up in their faces (Samsung’s Galaxy Note 7) or crumbled in their hands (Samsung’s stillborn foldable phone). No matter what they have tried, smartphone makers just haven’t been able to keep buyers coming back for more like they once did.