MuleSoft carries a hefty valuation

Contact: Scott Denne

A pinnacle acquisition of an IT infrastructure vendor shows just how much Salesforce is betting on the digital transformation trend. In shelling out $6.6bn for MuleSoft, Salesforce is spending twice what it did on its previous largest purchase in an effort to push its business from a developer of enterprise apps to the go-to technology provider for organizations in the cloud era – a position occupied by IBM, Microsoft, Oracle and SAP in the fast-fading client-server age.

The deal not only sets a new high for Salesforce, it stands well apart from other transactions in the infrastructure management corner of the tech M&A market. Salesforce will pay $6.6bn (20% of it coming in stock) for MuleSoft, making it the fourth-largest infrastructure software acquisition, according to 451 Research’s M&A KnowledgeBase. The sales of HPE’s software business ($8.8bn), BEA Systems ($8.5bn) and BMC Software ($6.9bn) fetched similar prices, although the multiples couldn’t be further apart.

Salesforce’s purchase values MuleSoft at 22x trailing revenue, the highest ever for a $1bn deal in its category. Moreover, compared with those three larger transactions, MuleSoft, with $296m in trailing revenue, is the only one to post less than $1bn in revenue. The next-highest valuation on a $1bn-plus infrastructure software deal came with Cisco’s $3.7bn AppDynamics buy, nearly five turns lower than today’s pairing.

In most of its acquisitions since the start of the current decade, Salesforce has angled to build off its CRM roots and into the broader category of customer engagement – acquiring new apps to sell to marketing, sales and service teams. Selling apps to the line of business differs from selling apps to IT. The marketing team, for example, gives little consideration to what software the sales team uses.

The combination of apps with MuleSoft’s integration software, which can load those apps with data from legacy IT systems and other SaaS products, should strengthen Salesforce’s ability to sell a strategic package of software for digital transformation initiatives, where IT innovation is driven by business strategy. As idealistic as that sounds, a real change is underway. According to 451 Research’s Digital Transformation Leaders and Laggards report, 53% of surveyed companies are either considering or planning their digital transformation strategy.

Salesforce also sets up a strong challenge to its competitors with this move. In owning MuleSoft, Salesforce now has an asset that can lift data from on-premises database, CRM and ERP systems to essentially reside in SaaS applications, potentially converting older systems into commodity repositories, rather than cornerstones of the IT stack.

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Retail’s plodding path

Contact:  Scott Denne

It’s hard to find an industry that’s more threatened by emerging technology than retail. In addition to dangers from Amazon and a bevy of younger online retailers, stores are forced to adjust to changes in consumer behavior that impact everything from marketing to inventory management and logistics. Despite all that, the exit environment for startups selling retail technologies is narrowing as retailers and consumer goods companies generally show less inclination to invest in new technology than other industries.

There are exceptions. Take L’Oreal’s recent purchase of augmented reality vendor ModiFace. In reaching for the virtual makeover vendor with 70 engineers specializing in augmented reality and machine learning, L’Oreal hopes to expand new channels for customer engagement – a path it started down in 2014 with the launch of its augmented reality mobile app, Makeup Genius. Still, our surveys of retail technologists, along with acquisition data from 451 Research’s M&A KnowledgeBase, suggest that L’Oreal will be an outlier.

Retailers and related consumer products providers are less likely to be planning to adopt augmented or virtual reality technology in the next 24 months. In 451 Research’s VoCUL: Corporate Mobility and Digital Transformation survey, 24% of retail respondents told us their organization planned to use such technologies, compared with 29% of other respondents. Retail indexed lower in most other categories of emerging technologies as well, including artificial intelligence, where 35% of retail respondents planned to adopt, compared with 47% across all other verticals.

The reticence to invest in newer technologies translates into a decline in dealmaking. According to the M&A KnowledgeBase, acquisitions of retail technology firms – anything from e-commerce businesses to supply-chain software firms that specialize in serving retailers – declined 30% in 2017, with just 232 transactions.

After a few years of expanding, valuations among this group are coming down a bit. For the first time since 2012, we didn’t track a single multiple at or above 8x trailing revenue in 2017 for businesses with more than $2m in annual revenue. The decline in the highest multiples comes as overall deal value for the category rose to $18bn, from $16.8bn a year earlier, as buyers – both retailers and the tech vendors that service them – sought out more mature businesses at higher prices, but lower multiples, than startups dabbling in the latest technology.

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Nordstrom’s new line

Contact: Scott Denne

Retailers’ M&A strategies are moving on from the front to the back of the house. A pair of deals from Nordstrom – BevyUp and MessageYes – exemplify the trend of retailers shifting away from customer-facing businesses, such as mobile apps and e-commerce sites, in favor of supporting technologies with an aim toward changing how customers interact with brick-and-mortar businesses.

In BevyUp and MessageYes, Nordstrom obtains a pair of tools that it hopes will help it improve customer engagement with an app for in-store salespeople (BevyUp) and mobile commerce technology (MessageYes). Although Nordstrom will barely pick up 50 employees between the two transactions, yesterday’s announcement is noteworthy because it marks Nordstrom’s first tech acquisitions in three and a half years and comes as much of management’s time is focused on a contentious take-private proposal from the company’s founding family.

Moreover, Nordstrom is not alone in seeking internal capabilities to lead it to a flexible business model and new methods of engagement. Walmart and Target each inked deals last year (Shipt and Grand Junction, respectively) to build out their delivery capabilities, while Bed Bath & Beyond and Williams-Sonoma reached for virtual interior decorating capabilities with their respective purchases of Decorist and Outward. At Nordstrom itself, its last two tech transactions were for customer-facing properties – online retailer HauteLook and online personal shopping service Trunk Club. That’s different than the supporting technologies it nabbed today.

Amid declining sales and an existential threat from Amazon, retailers and consumer-goods vendors are turning toward tech to drive customer loyalty. According to 451 Research’s VoCUL: Corporate Mobility and Digital Transformation survey, 44% of respondents in those categories said that ‘improving customer experience’ would be among the top drivers of their software investments heading into 2018.

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Conga drums up more sales software M&A

Contact: Sheryl Kingstone, Scott Denne

Continuing a streak of consolidation in sales software, Conga, a document and contract management provider, has acquired Octiv. Sales software has seen a spurt of M&A as sales organizations seek technology platforms with more uses – in this case, the digitization of the entire sales cycle.

On the surface, both companies have similar capabilities. Octiv, formerly known as TinderBox, focuses on the upstream aspects of managing content and workflow automation for sales processes such as proposals and quotes, whereas Conga, an Insight Venture Partners portfolio company, concentrates on intelligent automation once the quote or proposal has been agreed upon. Octiv also brings capabilities to measure engagement throughout the sales process. This deal is both a consolidation of the market for customers and a technology enhancement.

As we previously suggested, the shift to engaging, from merely transactional, sales interactions would spur M&A as sales software vendors seek to expand beyond systems of record and into systems of engagement. According to 451 Research’s M&A KnowledgeBase, many of the early returns on such transactions – including Marketo’s acquisition of ToutApp and Corel’s purchase of ClearSlide – have traded below the amount of venture funding they brought in. (Terms of Octiv’s sale weren’t disclosed so the return on the $20m it raised isn’t clear.)

Despite some modest returns, deals are increasing as the market for more advanced sales software capabilities begins to heat up. In a custom study by 451 Research, 90% of sales managers told us they have some form of investment in sales technology, although most of those are likely nothing more than legacy CRM or sales force automation, neither of which has the functionality to enable sales teams to optimize around the expanding flow of digital signals that are available to inform the sales process, as we outlined in our Sales Technology Platforms Market Map.

Sales organizations are coming to that same conclusion. According to a survey by 451 Research’s Voice of the Connected User Landscape, sales analytics and intelligence, engagement, and content are the most sought-after capabilities, outpacing legacy capabilities like pipeline management and lead generation. More importantly, that survey shows that sales teams are shifting toward advanced intelligent automation across a broader range of processes with the goal of eliminating manual processes. As they do so, more functionality will be consolidated by platforms such as Conga with intelligence at the core of their sales software.

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CommerceHub in sellers’ market

Contact: Scott Denne

A pair of private equity (PE) firms has taken CommerceHub off the public markets in a $1.1bn acquisition. The deal carries a scorching multiple that punctuates the value of e-commerce software as retailers struggle to make digital engagement a centerpiece of their business.

GTCR and Sycamore Partners’ joint purchase of CommerceHub values the firm at 10x trailing revenue, or 32x EBITDA – atypical multiples for an e-commerce software provider with the target’s growth. With that valuation, CommerceHub finds itself in the same neighborhood as Demandware and hybris, which each fetched about 11x revenue in their respective sales to Salesforce and SAP.

Yet CommerceHub’s revenue expanded by just 11% last year, compared with Demandware and hybris, which both posted topline growth in the 50% neighborhood leading up to their exits. Ariba offers a more accurate, if aging, comp for CommerceHub – both vendors provide back-end commerce services, such as integration between retailers and suppliers, whereas Demandware and hybris build customer-facing software. CommerceHub is fetching a multiple that’s a full turn above Ariba’s 2012 sale, despite the latter company having double the growth rate and being triple the size of the former.

In part, today’s multiple reflects higher prices being paid by buyout shops as their investments in tech M&A rise. According to 451 Research’s M&A KnowledgeBase, the median multiple paid by a PE acquirer last year rose to 3x, up from 2.5x a year earlier. Moreover, that median has hovered above 2.5x every year since 2014. In the preceding decade, it never once hit that level, and in only three years did the median reach 2x.

All that’s not to say nothing but a flood of PE money drove up CommerceHub’s price. Digital commerce technology is evolving into a core element of customer engagement and retailers need timely, accurate product information, which CommerceHub facilitates, to integrate into their customer-facing marketing and commerce software systems. According to 451 Research’s VoCUL Quarterly Advisory Report: Digital Transformation Leaders and Laggards, digital commerce and web experience management are the two most common areas of investment for enterprises, as 27% of enterprises told us they plan to deploy or upgrade those technologies in late 2017 and early 2018.

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Spotify sounds out the street

Contact: Scott Denne

Despite Wall Street’s demonstrated distaste for pricey consumer tech offerings, Spotify intends to go public in the riskiest possible way. The streaming music service has unveiled its registration documents to begin trading its shares directly on the NYSE, bypassing an initial public offering. Spotify posts growth that makes it the envy of many consumer internet businesses, yet its low-margin business model limits its ability to staunch its losses.

The Sweden-based company’s top line jumped 39% last year to €4.1bn ($5bn), although its net loss more than doubled to €1.2bn. Renegotiating of its licensing agreements improved Spotify’s gross margin in 2017, but it still sits at just 21%. Given that it’s facing off against deep-pocketed tech vendors, including Apple and Amazon, it will be challenging for Spotify to negotiate lower rates and as it stands, the company has already had to lower the price of its service to bolster user growth.

Matching its private market valuation will be tough. New consumer tech debuts haven’t received a warm welcome on Wall Street. Snap trades just ahead of its IPO price a year after its debut, while Blue Apron has been decimated amid customer declines. Eschewing a traditional IPO to set a price could make its stock more volatile than it has been in the private markets – in private trades this year, Spotify’s market cap has swung between $15.9bn and $23.5bn.

It’s tough to find a perfect comp that aligns with Spotify. In some ways, it looks like Netflix. Both provide streaming entertainment and post enviable growth. Netflix, however, offers exclusive content to its subscribers, whereas Spotify has largely the same music that its competitors do. Moreover, Netflix, which is twice the size, has a higher gross margin and generated more than $500m in profit last year. Those differences will make it difficult for Spotify to fetch anything close to the 11x trailing revenue where Netflix trades. Still, its growth rate and low churn will likely keep it well above the 0.8x where Pandora trades. When Spotify enters the NYSE, we anticipate that it will be priced on the low end of its private market valuation, around 3x trailing revenue.

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Ratcheting up bolt-ons

Contact: Scott Denne

In another sign that the private-equity playbook is changing, financial sponsors are moving faster than before to add to their newest holdings. While PE firms typically have taken several quarters to allow a new asset to settle in before making bolt-on acquisitions, they’re abandoning that waiting period as they put a record amount of cash to work in the tech M&A market.

According to 451 Research’s M&A KnowledgeBase, of the 10 largest companies taken off a major US exchange by a PE firm in the last 12 months, three have already announced a bolt-on deal – all of which have come less than a month after the close of the buyer’s take-private. For comparison, among the 10 largest US take-privates in 2016, three also did a bolt-on, yet none within six months of the platform acquisition.

In the most recent example, Bazaarvoice picked up speech-recognition company AddStructure just three weeks after Marlin Equity closed its February take-private of Bazaarvoice. West Corp also waited less than a month after its take-private closed to make its first acquisition, and has announced two more since that November 2017 deal. Xactly didn’t wait a full two weeks before its first follow-on under Vista Equity’s ownership. Barracuda Networks hasn’t yet completed a deal under Thoma Bravo’s purview, which officially began two weeks ago, although it did get one done in the 10 weeks between the take-private announcement and the close.

The rush for bolt-on deals shows that competition for targets from PE firms is increasing on all fronts. As we noted in our 2018 Tech M&A Outlook report, acquisitions by PE firms and their portfolio companies matched those by NYSE- and Nasdaq-traded strategic acquirers for the first time in 2017. As the rush for bolt-ons shows, competition won’t be limited to the big platform deals. Strategics will have to move faster to win smaller, additive deals.

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Snap’s ad prices lack pop 

contact:Scott Denne

Snap’s revenue soared past Wall Street’s estimates as it flooded its app with ads, sending the social media aspirant’s shares past the IPO price for the first time since July. In bidding its stock up by 40%, investors are sticking the company with a fat multiple – 28x trailing revenue – and a $23bn market cap. Yet relying on new ad inventory creates a potential pitfall as it will now need rising ad prices to support future growth if it hopes to sustain that valuation.

Last quarter, Snap’s topline expanded by 72% year over year to $286m. But to get there it grew ad impressions by almost 7x (even on a sequential basis, it picked up speed, increasing impressions at a faster rate than it had a quarter earlier). Assumptions that Snap can get advertisers to pay more for ads are baked into its valuation, although the surge in ad impressions came with a 70% drop in ad prices. Still, to Snap’s credit, its management has already inked acquisitions that could help it grapple with that problem.

To encourage advertisers to pay more for their ads, Snap will have to demonstrate that ads in its app are effective, not just available. According to 451 Research’s M&A KnowledgeBase, two of its last four purchases aimed to do just that. Its pickup of Metamarkets brought it specialized advertising analytics software, along with a wealth of data on the performance of programmatic advertising. Its earlier reach for Placed brought it tools that tie ad exposure with real-world actions. Organically, it’s addressing this issue with last November’s launch of Snap Pixel, which connects Snap ad impressions to website visits.

For future acquisitions, an ideal target would help link Snap ads with brand performance. The companies with data on retail purchases do that well, although most are either too large (Nielsen) or already acquired (Datalogix). It could veer into sentiment analysis by picking up Crimson Hexagon or one of the many, cheaper social analytics specialists. Another option would be to scoop up 4C Insights, which would bring it social analytics, TV campaign data and social ad buying software that was an early enabler of self-serve Snap ads.

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Motorola spies an opening in the US security market 

Contact: Scott Denne

Increasing levels of distrust of China helped depress last year’s global tech M&A market from the record levels of 2016 and 2015. But, as Motorola’s $939m acquisition of Avigilon shows, some firms see the growing breach between the world’s two largest economies as an opportunity to get into new markets that otherwise might not have made for compelling M&A.

In purchasing Avigilon, Motorola Solutions senses an opportunity to enter the market for video surveillance cameras at a time when China-based companies, which have a substantial market share in video cameras and other commodity electronics, are at risk of losing ground in the US. That’s a defensible prediction.

Not only has the US government clamped down on proposed acquisitions by China-based vendors, having stopped the purchases of MoneyGram and Lattice Semiconductor in the past six months, the administration has taken a harder line on trade, placing recent tariffs on washing machines and solar panels built in China. In video surveillance in particular, the US Army removed China-built surveillance cameras from a Missouri military base, fearing that the devices could be accessed by the Chinese government. Similar fears could well become a factor in acquisitions by other branches of the federal, local and state governments – all major buyers of such gear.

In Motorola’s move, there are signs that it sees an opening in the market that didn’t previously exist. For one, this marks its largest purchase since late 2015. And the deal carries a valuation that’s not typically seen among security surveillance providers. In its acquisition, Motorola will pay 2.6x trailing sales. According to 451 Research’s M&A KnowledgeBase, purchases of surveillance and monitoring vendors have traded at a median 1x since the start of 2015.

The potential for limited competition from Chinese firms isn’t the only rationale for a higher valuation for Avigilon. The company also sells a software platform for video analytics that adds value to otherwise commodity products and could be integrated with Motorola’s existing video surveillance business, which today is limited to body cameras.

The value of China acquisitions of US companies declined 90% last year to $1.1bn. A newfound sensitivity at The Committee on Foreign Investment in the United States and capital controls at home are likely to keep that number depressed for the foreseeable future. But US-based vendors could make up some of the loss, particularly in areas like physical security, biometrics and networking, where China-built products are at a distinct disadvantage in US markets.

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Avaya’s M&A future looks cloudy 

Contact:Scott Denne, Keith Dawson

Barely a month after emerging from Chapter 11, Avaya has returned to the M&A market with the purchase of Spoken Communications in what could be the first of several acquisitions as the company aims to transition its business into a cloud-delivery model. A recently restructured debt load gives Avaya an extra $300m in annual cash flow to put toward M&A, product development and other strategic initiatives to reverse a years-long decline in revenue.

Spoken doesn’t get Avaya into a lot of new product categories. Most of the call-center software that the target sells, Avaya already offers in some form, including interactive voice response and automated call distribution. Instead, Spoken brings a cloud-deployment model with lower costs and the potential for embedded intelligence. The deal, Avaya’s first since mid-2015, follows the creation of a dedicated cloud business unit last month.

With Spoken, it has a meaningful product to place into that unit and a platform for further acquisitions that could include forays into fraud detection and conversational artificial intelligence (i.e., chat bots). The deal helps shore up its contact-center business – the more stable portion of Avaya. Revenue in Avaya’s contact-center business – $1.2bn last fiscal year – has been basically flat for the past three years. Unified communications, on the other hand, has been eviscerated, having dropped by almost one-third over the past three years.

We’d expect Avaya to seek a similar cloud platform purchase for that unified communications business, as it’s in danger of continuing a rapid descent as organizations shift their internal communications to SaaS and other cloud models. According to 451 Research’s Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects, 76% of email and collaborative workloads will reside in the cloud by 2019, up from 55% last year.

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