Tech’s impact on M&A happening outside the tech market 

Contact: Scott Denne

The internet’s borders are expanding into retail, broadcasting, automotive and other legacy verticals as power over that network consolidates around a handful of companies. Such a revolution should spark a conflagration of tech M&A, but it hasn’t. Acquisitions of consumer tech companies hit a three-year low, and the biggest prints driven by those changes, including Disney’s $52.4bn purchase of Twenty-First Century Fox assets earlier this week, are happening outside of tech.

Consumer tech M&A has shed a streak of three consecutive record-breaking years for the simple reason that there are few tech targets large enough to help retailers, publishers, telecom companies and broadcasters fend off Amazon, Apple, Facebook, Google and Netflix. According to 451 Research’s M&A KnowledgeBase, consumer-facing internet and mobile companies have together fetched just $27bn this year, less than half the total acquisition value of any of the last three years and a dramatic fall from the $84bn spent on such companies in 2016.

Among the group of tech companies listed above, only Google has inked a $1bn-plus tech acquisition in the last three years, showing that they aren’t spending on M&A to safeguard their coveted posts. Although outside tech, Amazon spent $13.7bn on Whole Foods, for a brick-and-mortar presence for its burgeoning grocery business. Similarly, companies from legacy markets aren’t spending heavily on consumer tech companies because there are few assets that could have an immediate impact in their fight against the tech giants. Some are buying on technical infrastructure to launch new products, as Disney did with its $1.5bn BAMTech acquisition. In retail, Target and Williams-Sonoma have made similar tech infrastructure moves this month, with their respective buys of Shipt ($550m) and Outward ($112m). Additionally, we’ve seen a wave of AI acquisitions among automakers.

Yet, there isn’t a sizeable contender in most consumer tech markets. There isn’t a consumer-tech company that could give a broadcaster scale that approaches Netflix or transform a retailer into a credible threat to Amazon. That’s not to say a lack of attractive tech companies drove Disney to its purchase of Fox or provided the rationale for AT&T’s $85bn bid for Time Warner.

In making the acquisition, Disney gets more of what it knows best and gains scale in what is becoming the battleground for the next round of video distribution – original content. (Although not a tech target, and therefore not included in 451 Research’s M&A KnowledgeBase, it’s worth noting that as part of the deal, Disney becomes the majority owner of Hulu, a Netflix and Amazon streaming competitor.) Content is increasingly becoming the catalyst for the streaming subscriptions that threaten traditional broadcasting and cable. In a third-quarter survey by 451 Research’s VoCUL, 28.4% of Netflix subscribers told us ‘original content’ is what they most frequently consume on the service. That’s a jump of almost seven percentage points from the same survey at the start of 2017.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Connected home is key to Sigma Designs’ valuation 

Contact:Scott Denne

The addition of products for emerging Internet of Things (IoT) markets has spurred higher valuations on many semiconductor deals amid a record amount of consolidation in the space over the past three years. Silicon Labs’ acquisition of Sigma Designs highlights how much higher those products are valued amid larger semiconductor portfolios. The terms of the $282m transaction revolve explicitly around the seller’s home automation hardware.

According to 451 Research’s M&A KnowledgeBase, the median valuation for a semiconductor vendor has hovered a bit below 2x trailing revenue for most of the past decade, although it surged to 2.9x amid a profusion of IoT-related purchases. Indeed, many chip deals with an IoT element have traded well above the standard valuation. Consider Qualcomm’s pending $39bn pickup of NXP Semiconductors (5.5x), SoftBank’s $32bn reach for ARM (20.9x) and Intel’s $15bn acquisition of Mobileye at an unheard of 41x trailing revenue.

The $282m price tag for Sigma Designs ostensibly values the company at about 1.5x trailing revenue, but only if certain conditions are met – the seller must have at least $40m in cash on its balance sheet and it must shutter or sell its Smart TV components business within a week. (That business accounts for the majority of its revenue, but isn’t related to IoT and is heading downhill, having lost 61% of its quarterly revenue since this time a year ago.)

If those conditions aren’t met, Silicon Labs will buy Sigma Designs’ home automation components business, Z-Wave, for $240m. In other words, Silicon Labs wants to buy Z-Wave for about 5-6x trailing revenue and doesn’t value the other business lines at all. There’s a logic to that premium valuation. The market for home automation is advancing with plenty of open space. According to a third-quarter survey by 451 Research’s VoCUL, 69.9% of consumers still don’t own any internet-connected home devices, although that’s down from 74.4% at the start of the year.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

​​​​​​​ CallidusCloud’s pocket-sized pickups 

Contact: Scott Denne

CallidusCloud shells out $26m for Learning Seat, the most it’s ever paid in a single deal. That it’s hitting a new record on such a modest purchase shows that CallidusCloud, which embarked on a steady diet of snack-sized M&A at the start of the decade, has stayed disciplined in its acquisition strategy. Today’s transaction also illuminates a modest increase in appetite – both in deal value and volume – as the sales software vendor has reaped results from previous buys.

The company has now printed four deals this year, its busiest since 2011, when it inked five. But that year CallidusCloud was just setting out on its current M&A strategy of making tuck-ins and low-priced extensions to its core sales performance management software offerings. According to 451 Research’s M&A KnowledgeBase, the company bought only three businesses before 2011. Now, its strategy has proven results and its purchases are more ambitious, if still small. In 2011, only two of its transactions crested $5m – this year, all of them did.

Today’s acquisition adds content for CallidusCloud’s sales training products, a unit established by the $3m pickup of Litmos in 2011. Last quarter, Litmos (and associated training offerings) was its second-largest contributor to revenue. As that division’s contribution has grown, so has its position in the company’s M&A efforts – four of its last seven deals (including today’s) bolstered its training business.

CallidusCloud began its M&A adventure in 2010 amid crumbling revenue. Last year, it put up 16% growth, its SaaS sales jumped 25% and its stock rose about 7x. Of course, that’s not all due to the addition of learning management content and software. The company has enhanced its ability to sell multiple products across sales performance, enablement and execution. Last quarter, nearly half of its bookings came via multiproduct deals, compared with just 20% four years ago.

That’s a heartening development for many of the sales-enablement startups struggling to find an exit. CallidusCloud is among the most frequent acquirers of such companies and the exit environment for those firms, as we detailed in a previous report, reflects CallidusCloud’s own proclivities. With few exceptions, exits for sales-enablement startups have been sparse and small.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Ad breaks 

Contact:Scott Denne

A four-year streak of expanding ad-tech M&A is set to end as strategic acquirers and foreign investors give way to price-sensitive buyers. There are several reasons why the streak is heading toward its conclusion, and today’s acquisition of Taykey highlights one such reason: despite the potential for programmatic advertising to reshape the advertising ecosystem, the complexity and variety of tools have outpaced advertisers’ ability or desire to deploy them.

Starting with 2013, the annual value of ad-tech dealmaking has jumped each year. According to 451 Research’s M&A KnowledgeBase, there was $2.3bn in ad-tech M&A spending last year, although just $1.8bn in 2017 with only a month to go. High-priced deals are notably lacking from this year’s total. While 2016 saw three companies exit at north of $500m, there’s only been one such transaction this year – Oracle’s purchase of Moat, one of only two targets that fetched more than 4x trailing revenue.

Last year, deals by enterprise software vendors (Adobe and Salesforce) along with overseas companies (China’s Beijing Miteno and Norway’s Telenor) spurred a 16% increase in spending on ad-tech targets, despite a drop in volume to just 66 transactions. This year, the volume continues to decline – just 56 companies have been bought so far – as those categories of buyers have grown quiet. Enterprise software providers have cooled their overall M&A spending after a pair of record years, while activity from foreign acquirers for any kind of US-based target has cooled, particularly the China-based buyers that took an interest in ad-tech in 2016.

Even if terms of Innovid’s pickup of Taykey were disclosed, the deal wouldn’t move the annual ad-tech M&A total. All signs point to a tuck-in: Innovid plans to shutter Taykey’s media and data businesses and fold the contextual analysis technology into its video ad server. Even those types of transactions will struggle to get done. There are few ad-tech firms like Innovid with stable, expanding revenue, and even fewer with access to capital to ink acquisitions – venture capitalists in the US have largely abandoned the space, and the public markets are even less welcoming.

Why have investors and acquirers retreated from ad-tech? Those that wanted to make a bet here already have. And, although the industry is undergoing a significant change as media consumption becomes ubiquitously digital, advertisers must pass through a gauntlet of challenges and opportunities to capitalize on that shift, entailing dozens of vendors ranging from what kind of audience data to use, who to partner with on measurement, how to gain visibility on the media supply chain, and how to scrutinize providers making vague promises on the power of artificial intelligence, blockchain and other technology themes that haven’t been part of the advertisers’ expertise.

All those choices mean there are a lot of Taykeys out there struggling to build a lasting business with advertisers across segments of ad-tech, including mobile location, identity resolution, cross-device matching, antifraud, brand safety, media buying and ad exchanges, to name a few. And there aren’t many Innovids with the appetite to buy them.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Marvell’s belated bid to be a chip consolidator 

Contact: John Abbott, Scott Denne

With its $6bn reach for Cavium, Marvell Technology Group proves that a few large targets remain as the semiconductor industry emerges from a record streak of consolidation – a streak that happened with Marvell on the sidelines. Although deal value in semiconductor M&A remains well below the record levels of 2015 and 2016, the transactions getting done are commanding higher amounts.

Cavium becomes the fourth chipmaker to be acquired for more than $1bn this year, compared with 10 in all of last year, according to 451 Research’s M&A KnowledgeBase. Yet only one of the $1bn-plus deals this year has been done for less than $5bn, whereas half of 2016’s 10-digit semi transactions fell below that threshold.

Marvell doubles its market opportunity by purchasing Cavium and enters the high-growth datacenter market. Its current portfolio spans storage controllers, networking PHYs and SOCs for enterprise switches, and Wi-Fi and Bluetooth SOCs for wireless connectivity. To that Cavium adds compute, networking, storage and security components for the datacenter, including multi-core and datacenter processors, Ethernet adapter and datacenter switches, Ethernet and fiber-channel storage connectivity, and FIPS and virtual offload security.

Benefits of scale and volume include a full portfolio that will enable cross-selling, as well as pooled R&D expenses, where there is currently a lot of duplication – moving up to 10nm and 7nm process technology is a huge burden that can now be consolidated. Diversification will also reduce Marvell’s exposure to low-growth sectors, such as hard disc drive controllers and notebooks, and Cavium’s to the dwindling fiber-channel business. The two companies are located close to each other, easing integration challenges.

The change marks a departure from Marvell’s past M&A strategy. Since the start of 2002, the most it had ever paid for any asset was $600m, with most of its deals falling well short of that mark. Moreover, this is its first acquisition since early 2012 and only the third time it has bought an entire company, rather than a business unit.

Subscribers to 451 Research’s Market Insight Service will have access to a detailed report on this transaction later today.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Williams-Sonoma orders augmented reality

Contact: Scott Denne

Retailers have inked a handful of deals in an effort to fend off competition from Amazon and adapt to a blossoming era of mobile-enabled shopping. Yet few buyers have reached for companies with advanced technology, instead opting to bolt on digital media, e-commerce and services businesses. Williams-Sonoma’s $112m pickup of Outward counters that trend and shows that retailers could become true tech buyers as digital commerce entails more than stitching on a website.

With its acquisition of Outward, Williams-Sonoma, a maker of upscale household wares and (through its Pottery Barn subsidiary) furniture, obtains technology that enables 3-D renderings of its inventory for use across multiple digital platforms, including a forthcoming augmented reality (AR) app that helps customers visualize furniture purchases in their own homes.

It was that mobile capability that drove Williams-Sonoma to pay $112m for a company that raised just $11.5m in venture capital. The buyer believes that more immersive capabilities on its mobile website and app have already led to sales and will continue to do so in the future. According to a study done by 451 Research’s VoCUL in the first quarter, 35% of consumers research a purchase on their smartphone at least once a week before going to a store.

For other retailers looking to follow Williams-Sonoma, there are a handful of assets remaining. Although furniture shopping is a niche application of AR, such startups have gotten their fair share of venture capital, having raised a total of $34.8m across six vendors, including Marxent, Modsy and Hutch, according to 451 Research’s M&A KnowledgeBase Premium. Today’s deal, along with Amazon’s purchase of Body Labs and Bed & Beyond’s acquisition of Decorist, could spark retailers to buy more ecommerce technologies.

Still, if past is precedent, retailers aren’t likely to rush into acquiring companies like Outward, which has filed for eight patents related it its imaging technology and was built by a team of Qualcomm veterans. Instead, they’re likely to continue to snag their e-commerce counterparts as they’ve done so far this year. According to the M&A KnowledgeBase, 11 of the 26 deals by brick-and-mortar stores in 2017 have been acquisitions of online retailers.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Cloudflare signals new push into mobile 

Contact: Scott Denne

Positioned near the top of one budding corner of the CDN market, Cloudflare is angling to take a share of another with the purchase of Neumob. Its latest deal, a departure from Cloudflare’s mostly infosec M&A in the past, gets the Internet performance-optimization vendor software to bolster the performance of mobile apps.

Offering a service that protects and accelerates websites has made Cloudflare into a business with more than $170m in venture capital and annual revenue in the same neighborhood (subscribers to 451 Research’s M&A KnowledgeBase Premium can access a detailed profile of the company). Its security capabilities have pushed it near the top of the fastest-growing segment of the CDN market, defending against distributed denial-of-service (DDoS) attacks.

According to 451 Research’s VotE: Information Security survey, 38% of respondents planning to implement an anti-DDoS service were considering Cloudflare, second only to Akamai, which scored less than three percentage points higher. 451 Research’s Market Monitor service projects that this portion of the CDN market will expand by 40% this year, so it’s understandable that two of Cloudflare’s three previous acquisitions would fortify its security features.

In Neumob, it’s picking up a company whose software analyzes the signal available to a mobile device and adjusts the API calls to make the most of that signal. Although terms weren’t disclosed, it’s likely a modest-sized deal given that Cloudflare plans to shut down the service and integrate the software with its own. Neumob had about 20 employees and had raised $11m in funding. While such mobile acceleration targets have drawn strategic interest, most, like Neumob, were acquired at an early stage. Last year, privately held Instart Logic purchased Kwicr and Salesforce nabbed Twin Prime, a pair of startups with similar amounts of funding as Neumob.

Still, a decade since the birth of the smartphone, mobile app acceleration remains a pressing problem. In a survey by 451 Research’s VoCUL earlier this year, 47% and 44% of businesses told us it was ‘very important’ to provide their customers with mobile apps for customer service and shopping, respectively. At the same time, consumers’ gluttonous appetite for mobile apps shows no sign of abating. In a separate VoCUL study in the second quarter, 15.6% of consumers said they had downloaded six or more apps on their smartphone in the last month, a slight increase from the same survey done a year earlier.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Salesforce’s sleepy M&A strategy 

Contact:Scott Denne

This week Salesforce opens up Dreamforce, its annual customer conference – and, as usual, it is sparing no expense to host tens of thousands of people in downtown San Francisco. The same can’t be said of its recent M&A efforts. The CRM giant’s last substantial acquisition – the $680m purchase of audience data management vendor Krux – printed as last year’s conference began. And although it’s been silent since, we’d expect Salesforce to resume the strategy it left off with when it begins buying again.

Leading up to last year’s show, Salesforce was coming toward the end of a record acquisition spree that, according to 451 Research’s M&A KnowledgeBase, spanned 12 deals and cost $4bn before the year was out. This year, like many of the partners, customers and investors Salesforce is hosting at Dreamforce, it’s got a bit more to digest than usual. So far, it has printed just two transactions and spent $20m of its cash on M&A (per its most recent quarterly report). Salesforce isn’t alone. Other major enterprise software vendors – IBM, Microsoft, Adobe and Oracle – have been uncharacteristically quiet this year.

When Salesforce and others emerge from their hiatus, they could have a slightly different take on SaaS dealmaking than in the past. In the first round of SaaS acquisitions early in this decade, buyers had the same strategy for software M&A that they deployed in the client server era. Back then, acquirers could leverage their strong connections in the IT department to funnel in more products. With SaaS transactions, the buyer is often the line of business, not IT, so those existing relationships don’t hold up as well.

Today, businesses from all corners are looking to leverage their data to help find new customers and cater to those they already have. For this reason, Salesforce’s chance to build out a sales channel is to expand its role in how businesses capture, segment and share data about their customers’ characteristics, behavior, preferences and history.

Salesforce has already embarked on this destination. With its pickup of Krux, it gained an asset that collects and augments data about anonymous prospects, a complement to Salesforce’s roots as a CRM firm. When Salesforce resumes buying, we expect it to hunt for additional acquisitions that would position its software as the lodestar of its customers’ data strategy.

With its legacy CRM offering, Krux and a host of artificial intelligence applications in tow, Salesforce should look to add apps that make it easier for companies to gather more intelligence about customers. One way it could go about this would be to acquire Janrain or another identity management application provider that helps businesses gather and manage data from user registrations on websites and apps. It could also consider customer loyalty application specialists such as CrowdTwist or SessionM that provide software for building out loyalty programs that entice consumers to share more of their personal data with the vendors they frequent.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Lenovo nabs another PC biz 

Contact:Scott Denne

Fujitsu spun off its PC business into a separate subsidiary almost two years ago in anticipation of a sale to Lenovo. The terms don’t appear to have improved with age. With the ¥17.9bn ($157.4m) purchase of a 51% stake in Fujitsu’s PC business, the always-thrifty Lenovo hits a new low on price.

With this deal, which will also see Development Bank of Japan take a 5% stake in the spinoff, the target fetches an enterprise value of $309m, or just a hair under 0.1x trailing revenue. In its 2004 pickup of IBM’s PC business, which until today stood as the lowest valuation for a Lenovo acquisition, the Beijing-based company paid slightly more than 0.1x. According to 451 Research’s M&A KnowledgeBase, Lenovo has never spent more than 0.6x trailing 12-month revenue.

Lenovo frequently buys unwanted business units, as it did with IBM’s PC business and Google’s Motorola Mobility a decade later. Although the rationale for those deals was North American growth, at the time of each of those transactions, Lenovo’s PC and smartphone businesses, respectively, had little footprint in the US. With Fujitsu, it obtains an asset with only limited sales outside of Japan. Instead, the ability to add scale and drive down component prices motivated today’s acquisition.

Through the first half of its fiscal year, Lenovo’s profit margin dropped by one-quarter. Lenovo must increase those margins as top-line growth isn’t available. According to 451 Research’s VoCUL service, only 7% of North American consumers planned to buy a laptop in the next six months, an all-time low. Corporate business isn’t likely to make up the difference. A separate VoCUL survey of business buyers shows anticipated purchases of desktops and laptops diving to record lows.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Under Armour’s decline continues despite aggressive M&A 

Contact:Scott Denne

As technology vendors intrude on a broad set of markets, companies from outside the tech industry are searching for assets to fend off the challenge. Under Armour was an early mover in that trend, but its continued decline this year shows that tech M&A isn’t an adequate defense.

In 2015, the athletic apparel company paid more than $500m to acquire three different health and fitness app providers – MyFitnessPal, Endomondo and Gritness. According to 451 Research’s M&A KnowledgeBase, non-tech buyers made $20.6bn in tech deals that year, an active, but not record, year that set the stage for 2016 and 2017, where companies outside of tech have spent $55.5bn and $48.1bn on tech M&A.

Under Armour said its acquisitions would enable it to find new ways to connect with customers and build brand equity. While it may have realized some of those benefits, it wasn’t enough to prevent an overall collapse of its growth rate as its wholesale channel got squeezed by retail closures and bankruptcies. The company’s third-quarter sales declined 5%, sending the stock down by one-quarter, part of a 58% retreat since the start of the year.

Its purchases haven’t helped much either. Revenue from those 2015 deals (plus a similar acquisition from 2013) generated just $65m through the first three quarters, up 5% from a year ago. That’s not to say that it shouldn’t have bought those businesses. Under Armour’s direct-to-consumer sales (roughly one-third of its revenue, encompassing its branded stores and online sales) are expanding this year and having a direct line to consumers in the form of owned-and-operated mobile apps likely played some part in that. And those apps could have a larger role in its recovery should Under Armour choose to decrease its reliance on retail partners.

It’s hard to say what the company could have done differently. Without those acquired assets, its decline may well have been steeper. And it can’t be chided for complacency, given the aggressive prices it paid – in total tech M&A it spent over $700m for assets that today, almost three years after its largest purchases, generate less than $100m in annual revenue. When it comes to retail, Under Armour’s woes suggest that tech acquisitions won’t shield a business from a transformation in consumer behavior.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.