A record run to the cloud

by Brenon Daly

Just as customers often find that they need help in getting to the cloud, companies supplying some of the underlying cloud technology often need a boost to get there, too. Historically, that has meant the odd shopping trip for a key bit of technology. Now, however, there’s a new urgency to that shopping, as cloud edges toward being the most-popular place for companies to run their business.

As a result, acquisition activity this year in the cloud-enabling technologies market has already shattered the previous annual record, according to 451 Researchs M&A KnowledgeBase. Our data indicates that 2019 is on pace for more than twice the second-highest annual total of deals.

The unprecedented deal flow in the rapidly emerging sector has been driven by a number of well-capitalized buyers that are anxious to stay commercially relevant to customers amid the tectonic IT shifts. This is important because the move from on-premises to off-premises will literally swing billions of dollars in IT spending, with a follow-on impact on billions of dollars in market capitalization.

Consider Splunk, a highly valued, 16-year-old vendor that itself has been progressing along a transition to a cloud delivery model for several years. Never a big buyer, Splunk has nonetheless notched two acquisitions in just the past month, including its largest-ever purchase, to help extend its core monitoring capabilities to the cloud.

In addition to making sure workloads run smoothly in the cloud, making sure they run securely has also been a major driver of recent cloud-enabling technology deals. VMware, McAfee and Palo Alto Networks have all announced cloud security transactions in the past few months. Concerns about security perennially top the list of reasons IT professionals tell us why they have reservations about moving to the cloud.

But overall, concerns about cloud are dwindling. A survey earlier this year by 451 Research of more than 500 IT buyers and users found that a slight majority (55%) of them said the primary venue right now for workload execution is ‘on-premises,’ with the remaining 45% identifying ‘off-premises’ as the main location. Two years from now, however, some flavor of cloud or hosted offering will be the primary home for two-thirds of the workloads, according to our Voice of the Enterprise: Cloud, Hosting and Managed Service survey.

For more on these trends and how companies are positioning themselves – both organically and inorganically – to take advantage of them, be sure to join us at our annual Hosting & Cloud Transformation Summit (HCTS) next week. Now in its 15th edition, 451 Research’s HCTS not only focuses on the technology impact of cloud and the broader digital transformation of business, but also brings a financial perspective to how those trends are playing out for both suppliers and customers.

Figure 1: Cloud M&A

Cloudflare’s scorching debut

by Scott Denne

The enthusiasm for enterprise technology IPOs continues unabated as Cloudflare rips past its private company valuation in its first day of trading. The network services provider priced above its range and jumped up from there when it opened on the NYSE, benefiting from a continued demand for new offerings.

Wall Street saw a few rough patches over the month between the time Cloudflare unveiled its IPO paperwork and the first day of trading – the S&P 500 dropped 2% on two separate days. Yet the overall direction has been in its favor, with that index having risen nearly 3% over the past four weeks and Cloudflare’s competitor Fastly, which had been one of the worst-performing enterprise IPOs of the year, rising more than 90% during that period, leaving today’s offering with a higher comp.

As we noted in our coverage of Cloudflares IPO filing, it needed to garner a 12x trailing revenue multiple to move past the price of its series D round. About an hour into trading, it could boast a 23x multiple. That takes Cloudflare well past Fastly, which trades at 16x, highlighting the public market’s penchant for growth. Cloudflare, the larger of the two, expanded its topline 48% year over year in its most recently reported quarter, compared with Fastly’s 34%.

Figure 1

Stocking up on an M&A currency

by Brenon Daly

Paper may be pricy these days, but it still has value as an M&A currency. So far this year, US public companies have been using their own shares at a near-record rate to pay for the tech deals they are doing.

451 Research‘s M&A KnowledgeBase shows that buyers have already announced transactions valued at more than $110bn this year that include at least some equity consideration. That puts full-year 2019 on track for the second-highest annual total since 2000. As paper has become more popular, it has figured into a broader spectrum of deals, most notably those transactions where the buyer is spending an unprecedented amount:

After doing only tiny tuck-ins, Shopify spent $450m earlier this week on robotics startup 6 River Systems. Shopify covered $180m, or 40%, of the cost with its own shares, which are up an astronomical 140% so far this year.

Splunk tripled the size of its largest-ever purchase with last month’s $1.1bn acquisition of SignalFx. Some $400m of the total consideration is coming as Splunk shares.

Salesforce used its own shares to cover the full price of its record $15bn pickup of Tableau Software in June. Our data indicates that in its next three largest acquisitions, Salesforce used all-cash structures in two of them, with only a minority portion of stock (20% of total consideration) in the third deal.

Taking hundreds of millions (or even billions) of dollars in payment in stock represents a pretty big gamble by targets and their backers this deep in the current decade-long bull market on Wall Street. Plenty of current signs – from an inverted yield curve to a slump in manufacturing output to an ongoing trade war between the two largest economies on the planet – point to a slowdown.

Already, companies are starting to feel the pinch. A just-published survey by 451 Researchs Voice of the Consumer: Macroeconomic Outlook showed that fewer than one in five respondents said their organization was ahead of its sales plan for Q2. That was the lowest level of outperformance in three years. If sales momentum does indeed stall and companies take down their numbers, stock prices will invariably follow suit. That could leave selling companies holding a bunch of shares that aren’t worth nearly as much as they once were.

Shopify and other new buyers check out VC portfolios

by Scott Denne

Shopify has printed its first major acquisition, spending $450m in cash and stock for 6 River Systems. While the e-commerce technology vendor has inked a handful of tuck-ins, it hadn’t yet bought anything close to this size. In doing so, it joins a streak of new names to deliver significant VC exits this year. Although sales of startups are likely to fall below last year’s record haul, the emergence of new buyers has helped push exits for 2019 above a typical year.

According to 451 Researchs M&A KnowledgeBase, 60% of venture-backed companies, including 6 River, that sold for $250m or more this year were bought by firms that had never paid that much for a startup. Some of this year’s buyers, including Shopify, Etsy and Uber, are youngish, growing businesses and former tech startups themselves Others are companies from more traditional industries that are new to acquiring tech providers, such as H&R Block with its reach for Wave Financial or McDonald’s, which bought Dynamic Yield in March.

Several others that have printed $250m-plus deals for venture-funded vendors this year only inked their first such purchase in 2018, including Blackstone Group, Palo Alto Networks and Splunk. The latter company printed its first $1bn-plus acquisition just last month, when it scooped up venture-funded SignalFx. Meanwhile, Palo Alto Networks has paid more than $1bn across four startup acquisitions in 2019.

In 2018, new buyers accounted for just 40% of $250m-plus startup transactions. Still, there were far more $250m-plus VC exits last year – 63 compared with 24 so far in 2019. Although the number of significant exits and the total deal value of VC exits are down from last year, that’s hardly an alarming sign for the venture community. In 2018, venture-backed companies brought in a post-dot-com record $86bn via tech M&A. This year, they’re on track to bring in $34bn, higher than all but two years in the current decade (not to mention it’s coming alongside a booming IPO market), and the $9.5bn coming from new acquirers has played an outsized role in venture liquidity this year.

Figure 1

Shaking off the dog days of summer

by Brenon Daly

Even deep in the dog days of summer, tech dealmakers stayed busy. This month, they’ve put up the second-highest monthly total of billion-dollar deals in 2019, helping to boost overall spending on tech acquisitions in August to unseasonable heights for the late-summer month. The $48bn tallied in 451 Researchs M&A KnowledgeBase for the current month stands as a record level for any August since the recession a decade ago. Deal volume in August also hit its highest level of any month so far this year.

Looking more closely at the top end of the M&A market, this month’s parade of big prints has included virtually all the strategies available for doing deals valued in the billions of dollars: low-multiple buyouts by private equity players; consolidations in both mature and emerging markets; and growth-oriented expansion by the well-known and well-capitalized ‘usual suspects’ of tech M&A. Among the transactions that have stood out this month:

In the largest-ever information security (infosec) acquisition, Broadcom said it will pay $10.7bn for the enterprise security business of Symantec. Our M&A KnowledgeBase shows that single deal just about equals the value of all infosec transactions in a typical year, although annual totals do tend to bounce around a bit.

VMware also did its part to add a large chunk of change to this year’s already-record level of infosec M&A spending. The infrastructure technology giant handed over $2.1bn for endpoint security vendor Carbon Black, its first billion-dollar deal in more than a half-decade.

Nearly tripling the size of its largest purchase, Splunk announced its $1.1bn purchase of SignalFX. The acquisition comes as a pair of the targets rivals in the infrastructure monitoring market have headed to Wall Street in highly valued IPOs.

With the unusually strong August spending, the value of tech deals around the world announced so far this year totals $337bn, according to our M&A KnowledgeBase. Assuming the current pace holds for the rest of 2019, full-year spending would slightly top $500bn. That would rank 2019 as the third-highest total for any year since the internet bubble burst almost 20 years ago.

Figure 1: Tech M&A activity

High on low-code

by Scott Denne

The value of acquisitions in the low-code application development software market is rising. With Temenos’ $559m purchase of Kony, we’ve now recorded more deals and higher total value in this corner of the software market than all of 2018.

In reaching for Kony, Temenos, a developer of banking software, gets both a generic low-code tool and a portfolio of prebuilt digital banking applications. Although few low-code acquisitions we’ve tracked are vertically specific, applications developed with these tools often replace vertical-specific applications. That has helped bring private-equity investors, which have demonstrated an affinity for vertical software companies, into the space. Sponsors have printed three of the last five low-code vendor purchases.

Since these tools are often the foundation for multiple applications within an enterprise, they tend to have low churn rates – something that appeals to both strategic acquirers and sponsors. Kony, for example, has about a 5% attrition rate. So far this year, $1.7bn have been spent across four acquisitions in this market, according to 451 Researchs M&A KnowledgeBase. That’s up from $1.3bn in three deals in 2018.

Part of the reason for the rise is that buyers are reaching for larger targets. Kony projects its topline will grow to $120m in 2020. QuickbaseNintex and Mendix were all nearing or above $100m in their recent sales. (Subscribers to 451 Research’s M&A KnowledgeBase can access our estimates of those transactions by clicking on the links in the company names.)

Acquisitions of low-code app development vendors (includes disclosed and estimated deal values)

Middling exits in sales analytics

by Scott Denne

Companies developing predictive analytics for sales teams have done a poor job of predicting their own exit opportunities. In this corner of the sales-software market, several companies have exited, although most appear to be ‘acqui-hires,’ including the most recent deal, Anaplan’s acquisition of Mintigo.

Although Anaplan didn’t disclose the terms of its first acquisition as a public company, we expect the total came in below the $50m that Mintigo raised from investors. Anaplan only disclosed the acquisition during its earnings call, emphasizing that the purchase was done to land the target’s 50 employees, not for its B2B sales software. That would be a familiar outcome for the half dozen or so companies that launched earlier this decade to develop predictive analytics for B2B sales.

In 2015, LinkedIn acquired Fliptop to bolster the development team around its Sales Navigator product; a year later, eBay picked up the team that developed the now-defunct SalesPredict product; and in 2017 ESW Capital, a bargain-hunting PE firm, scooped up Infer. The exception, so far, is Lattice Engines, a growing business that sold to Dunn & Bradstreet at a respectable multiple (subscribers to 451 Researchs M&A KnowledgeBase can access our estimate of that deal here).

For the remaining vendors in the space, the exit potential looks a bit brighter. Most have evolved, if not outright pivoted, beyond stand-alone sales analytics. Everstring relaunched a little over a year ago as a provider of business data, 6Sense is expanding into a marketing suite on top of its intent data, and Leadspace is moving into sales analytics from its foundation of sales data management. Topline growth at these companies could compel business data providers or enterprise software companies to make more strategic acquisitions of sales analytics than we’ve seen so far.

Enterprise IPOs: $75bn and counting

by Brenon Daly

In the tech IPO market, selling to businesses is proving to be a good for business. Enterprise-focused companies have already created some $75bn of market value so far this year. And at least another $10bn is likely to get heaped on to the pile, as two startups selling into valuable segments of the IT market get set to hit Wall Street. Ping Identity and Datadog both filed their IPO paperwork late last week.

The market for B2B offerings is so strong that companies and their underwriters are working through the traditional summer holiday period. Why are the current batch of IPOs getting fast-tracked? One contributing factor is rising volatility and uncertainty on Wall Street.

A recent survey by 451 Researchs Voice of the Connected User Landscape (VoCUL) showed investors are increasingly worried about Wall Street. One-quarter of the respondents to last month’s VoCUL survey said they are more pessimistic about the current direction of the US equity markets than they were 90 days ago. The number of bearish respondents topped the 20% of respondents, who said they are more confident in the outlook.

Despite the gloomy forecast, Cloudflare put in its prospectus in mid-August, which was followed by two other startups throwing in late last week to join the ranks of the publicly traded tech companies.

Ping Identity: Ping is set to come public after an unusual private equity-backed recapitalization. Vista Equitys acquisition of the federated identity provider is also likely to prove lucrative, with Ping expected to be valued at five or six times the $600m that Vista paid three years ago. (451 Research will have a full report on the company and the filing on our site later today.)

Datadog: Already a unicorn in the private market, Datadog has pulled off the difficult – but highly valuable – trick of fast growth without huge losses. The IT monitoring startup is almost doubling revenue while approaching profitability. (451 Research will also have a full report on the company and the filing on our site later today.)

These B2B companies are proving a lot more attractive to IPO investors than the B2C companies that have already hit the market or are set to debut soon. For instance, Uber, which just reported a $5bn loss for the most recent quarter, is still below its offer price.

And even more red ink is set to gush in the consumer-tech IPO pipeline, with next month’s expected offering by the company behind WeWork. The We Company is, of course, a real estate operator. But it is nonetheless trying to pass itself off as a technology company, using the word ‘technology’ almost 100 times in its recently filed prospectus. However, no matter how glowingly it describes its business (‘space as a service’) or its mission (‘elevate the world’s consciousness’), it’s hard to imagine Wall Street buying into it.

B2B IPO activity

Infosec’s valuation inflation

by Brenon Daly

Acquirers looking to go shopping in the information security (infosec) market had better bring a big bankroll. Valuations are stretched well beyond the going rates for deals in virtually any other IT sector. For instance, a solid-but-unexceptional 20% grower that commands a double-digit multiple in infosec (like Carbon Black) would almost certainly drop into the high single digits in any other industry. And even an infosec vendor that’s shrinking and faces the real possibility of being terminally disrupted (hello, Symantec) still manages to trade for an above-market valuation.

To highlight the recent valuation inflation in the infosec M&A market, consider a pair of $2bn-plus deals that are separated by just a half-decade but clearly belong to different eras nonetheless: Cisco Systems mid-2013 acquisition of SourceFire and VMware’s just-announced purchase of Carbon Black. (Subscribers to 451 Research’s Market Insight Service can see a full report on the latter transaction on our website today.)

Although the two security firms sell into different segments of the markets, both SourceFire and Carbon Black had a similar scale (revenue north of $200m) and similar exits (selling to strategic buyers for double-digit valuations in $2bn-plus deals). While all of those metrics line up very closely, a closer look at the companies shows that SourceFire, at least on paper, had a far more valuable business:

Carbon Black, which is losing $15-20m per quarter, is growing at just 20%.

SourceFire was growing at a mid-30% rate, while also turning a profit.

We highlight the valuation gulf between the two transactions because, in many ways, it exemplifies a recurring complaint we hear about the infosec market from both investors and acquirers: A dollar just doesn’t buy nearly as much right now as it once did.

Healthy exits, no matter the path

by Brenon Daly

On the heels of Dynatraces blockbuster $7bn IPO, it looked like the exit of choice for other fast-growing infrastructure monitoring startups had swung to Wall Street. Datadog and Sumo Logic are both thought to be tracking to an offering of their own. But as SignalFx showed, an outright sale can be pretty lucrative, too.

Splunk said it will hand over a cool $1.1bn in cash and stock for SignalFx as it looks to expand its core log management into infrastructure monitoring. (To put the deal into perspective, SignalFx’s exit price is more than Splunk has spent, collectively, on the 10 previous acquisitions it has announced, according to 451 Researchs M&A KnowledgeBase.) To pay for its largest-ever purchase, Splunk will spend $600m in cash and $400m in equity for SignalFx. (451 Research subscribers can look for a full report on the transaction on our site later today.)

Of course, SignalFx is much smaller than either Datadog or Sumo Logic, and probably had a few years before hitting IPO-able numbers. (Subscribers to the Premium version of our Private Company database can see our specific estimates for Datadogs recent annual revenue as well as full revenue estimates for the past half-dozen years at Sumo Logic.) So an IPO for SignalFx probably wasn’t imminently in the cards, despite the six-year-old vendor pulling in a growth-sized round from crossover investor Tiger Global Management in summer.

Instead, SignalFx took a bid that likely valued it in the neighborhood of 20x sales. Assuming that multiple is at least directionally accurate, it does line up rather closely with a deal in the market that had elements of both exits. In early 2017, Cisco Systems paid $3.7bn for AppDynamics, picking up the application performance monitor just days before it was set to price its IPO.