GitHub shows Microsoft’s preference for platforms remains fully developed

Contact: Scott Denne

In paying $7.5bn to own the preeminent repository of open source software code, Microsoft is inviting us to see how much its ideology around free software has changed. After all, the company’s previous CEO called Linux a ‘cancer’ and spent much of the previous decade threatening – and in one instance pursuing – litigation. And although Microsoft’s view of open source software has evolved, the acquisition of GitHub shows that its obsessions have not.

Microsoft has long been a builder and buyer of technology platforms. Although ‘platforms’ is an overused word in tech circles, in this case we mean the software or infrastructure upon which something of value can be built by outside parties. One could argue whether its largest purchase, LinkedIn ($26.2bn), fits such a definition. However, Windows and Azure undoubtedly do, as does Mojang, the developer behind Minecraft that it bought for $2.5bn in late 2014.

As a site that hosts 28 million software developers, the code they write and a marketplace for developer tools, GitHub certainly qualifies. Moreover, it matches another longtime Microsoft pillar: catering to developers. According to 451 Research’s M&A KnowledgeBase, Microsoft has printed 12 developer-related acquisitions in the past three years, although its history as a maker of developer tools extends well before that.

Philosophical alignment makes for copacetic press releases, but doesn’t motivate any company to hand out $7.5bn of its stock. In owning GitHub, Microsoft plans tighter integrations between the site’s workflow tools and its own Visual Studio development environment. And Microsoft should be able to get its other offerings – particularly Azure – in front of a new audience of developers.

Although the buyer plans to continue to enable GitHub customers to write code into any cloud offering, its own Azure is in need of a larger developer audience. Despite Microsoft’s roots as a developer-focused company – its first product in 1975 was a BASIC interpreter – its IaaS offering has fallen behind others in maintaining that group’s loyalty. According to 451 Research’s Voice of the Enterprise: Hosting and Cloud Managed Services, only 9.4% of Azure customers use the service’s development tools, compared with 12% of AWS customers.

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PayPal launches into commerce software by reaching for Jetlore

Contact:  Scott Denne, Jordan McKee

With the acquisition of Jetlore, PayPal joins a multiplying cluster of payments companies moving into commerce software. Owning such assets brings these buyers one step up in the sales process and is a natural way to leverage their consumer data. Not to mention, software has higher margins than payments. But perhaps more importantly, it lands them in one of the more dynamic corners of the software market.

In Jetlore, PayPal gets commerce personalization software that applies machine learning to customer data to automate the layout for email, landing pages and product listings for large retailers. By catering to the digital side of the largest retailers, the acquisition stands in contrast to PayPal’s previous purchase, the $2.2bn pickup of iZettle, which was meant to expand into brick-and-mortar sales at SMBs. (Although terms of its Jetlore buy weren’t disclosed, the price paid for the lightly funded target likely contrasts with iZettle’s haul as much as the respective rationales.)

The acquirer took a small step into commerce software late last year with the launch of PayPal Marketing Solutions, which provides merchants with data and analysis about the consumers on their sites that use PayPal. That unit will now be home to the Jetlore team, where PayPal’s shopper data could potentially be used to help train Jetlore’s algorithms.

More importantly, as retailers adjust to mushrooming digital (and mobile) shoppers and search for ways to fend off Amazon’s growing dominance, commerce software is drawing an outsized share of tech budgets. In 451 Research’s VoCUL, Corporate Mobility and Digital Transformation survey, digital commerce and the closely related web-experience management were two of the three most commonly cited categories when respondents were asked about which applications their organization would deploy or upgrade in the next 12 months.

PayPal rival Square recently inked a deal for Weebly that covers both of those categories. Moreover, Vista Equity Partners’ acquisition of payments provider Fiverun, which it merged with commerce software vendors MarketLive and Shopatron, also highlights the opportunity to mix payments with commerce software. Yet, as payments companies take a natural step up the funnel with commerce, marketing software firms are taking a similar step down the funnel with commerce (see Adobe’s recent acquisition of Magento).

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Magento: a new shade for Adobe

Contact: Scott Denne, Sheryl Kingstone

Adobe’s $1.7bn acquisition of Magento Commerce brings the buyer into new territory. Not only does it extend the enterprise software vendor’s customer engagement suite beyond marketing, but Adobe is also paying a price that’s well beyond its norm.

The company spent the past two years repositioning its marketing software business as a ‘customer experience’ business. Yet it lacked tools to finalize the most important part of a customer experience – the purchase. The pickup of Magento changes that. In buying Magento, Adobe fills a gap where its two strengths meet. The company made its mark in creative and content, later building a weighty position in marketing and advertising software. Its customers use those capabilities to bring business to their websites. Now, by owning a commerce platform, Adobe will have an offering that covers the last mile.

With Magento, Adobe inks its largest acquisition in the nine years since it paid $1.8bn for Omniture – the nucleus of its marketing software portfolio. Despite the similar purchase price, Omniture was more than twice the size of Magento and valued at half the multiple – more in line with a typical Adobe deal. According to 451 Research’s M&A KnowledgeBase, Magento’s valuation – 11.2x trailing revenue – is six turns higher than the median valuation of an Adobe acquisition and its largest on record.

Although it’s above the norm for Adobe, it’s in line with market comps – other commerce software providers with scale have fetched similar prices. Salesforce paid 11x in its $2.8bn purchase of Demandware, while SAP paid nearly as high in its $1.3bn pickup of hybris (see 451 Research’s trailing revenue estimate for hybris here). More recently, a pair of private equity firms took CommerceHub private at 9.9x, and Shopify boasts 19x on the public market.

Digital commerce software products command a perennially high share of organizational resources, helping those vendors command premium valuations. In each of the two most recent 451 Research VoCUL: Mobility and Digital Transformation Surveys, 27% of respondents told us their company plans to deploy or upgrade digital commerce systems in the next 12 months. That number jumps to 32% in the latest survey when including only businesses in Magento’s sweet spot: $100m to $1bn in annual revenue.

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Corporates open doors for PE exits

Contact: Scott Denne

After a dry spell in 2017, strategic acquirers have come pouring back into the tech M&A market, printing larger deals and paying higher prices. In doing so, they’re delivering a disproportionately high amount of exits for private equity (PE) investments.

According to 451 Research’s M&A KnowledgeBase, strategic acquirers have spent $19.6bn so far this year to buy tech assets out of PE portfolios. That’s up from $8bn through May of last year and more than the same period in any year since 2002. The volume of such deals has risen as well, yet soaring valuations play an outsized role.

Among the 10 largest sales of PE-backed companies to strategic acquirers this year, six have traded above 5x trailing revenue. At this point last year, only two such transactions surpassed that mark. Strategic buyers appear willing to pay more than in the past, both in terms of multiple and check size. Take Adobe’s purchase of Magento (a Permira Funds portfolio company) earlier this week. In that deal, the acquirer paid 11x trailing revenue – an organizational record and more than twice the median multiple for an Adobe purchase.

In other cases, infrequent buyers are making remarkable acquisitions. TransUnion, for example, has upped its deal-a-year pace with six purchases in the past 12 months, including the $1.4bn pickup of GTCR’s Callcredit in April – its biggest-ever acquisition. Likewise, healthcare software vendor Inovalon Holdings moved past printing the occasional tuck-in with the $1.2bn acquisition of ABILITY Network from Summit Partners in March.

The trend aligns with the predictions for the PE exit environment in the M&A Leaders’ Survey from 451 Research and Morrison & Foerster. In that April survey, respondents overwhelmingly predicted an increase in PE exits via strategic acquisitions, with eight times as many respondents predicting an increase as those anticipating a decrease. Indeed, more foresaw an uptick in strategic exits than any other avenue we asked about (secondary sales, IPOs, reverse mergers and bankruptcy).

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Surging strategics

Contact:  Scott Denne

Following a pair of down years, publicly traded strategic acquirers have come roaring back to the tech M&A market. Through the first four months of 2018, those buyers have collectively paid more for tech acquisitions than any start to the year since 2015. Our recent survey suggests that could continue through the rest of the year as newcomers print big deals and veteran acquirers outdo themselves.

According to 451 Research’s M&A KnowledgeBase, public companies spent $123bn on tech acquisitions through April, up from $73bn in the same period last year. Put another way, only 2015 and 2006 had produced more spending at this point in the year since 451 Research began tracking tech M&A in 2002. More than any other deal, T-Mobile’s $26bn reach for Sprint has propped up the total. Still, even backing out that purchase, which may well be undone by regulators, and Fujifilm’s increasingly doubtful agreement to buy a majority stake in Xerox for $6bn, the current year remains ahead.

In the April version of the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster, 58% of respondents projected an increase in strategic M&A. They also said – at a rate of six to one – that the new tax code, by lowering rates and making offshore cash available, would bolster strategic M&A. Whatever the role that tax law has played, strategics do appear to be coming back to market – and bigger than before.

T-Mobile, for example, had only acquired one other company since its reverse merger with MetroPCS in 2012. Fujifilm had only done the occasional tech deal, never approaching the $1bn mark. Looking at the buyers that round out the top five strategic transactions this year – General Dynamics, Microchip Technology and Salesforce – all had been frequent acquirers but had never before spent more than $5bn on a single deal until 2018.

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America’s first MAGA-deal

Contact: Scott Denne

T-Mobile’s marketing smarts propelled the company to the number three spot among US wireless carriers. Now the company is leaning on those same skills to get its $26.5bn acquisition of Sprint through regulatory approvals. Its pitch for the deal, which has an enterprise value of $59bn, is laced with potential benefits to the US, particularly benefits that align with President Donald Trump’s rhetoric.

The FCC already threw cold water on the pairing once before under a previous administration, so getting this one past the government was always going to be a challenge regardless of who occupied the White House. While highlighting the broader benefits of a large transaction isn’t new, T-Mobile’s push is remarkable in its breadth.

In addition to the usual talk about the negligible (or positive) impact on competition and consumer prices, T-Mobile and Sprint are highlighting the potential for the combo to create jobs (particularly jobs in rural areas) and beat China and other countries in having the first nationwide 5G wireless network – it even set up a website to promote the deal at AllFor5G.com.

The press release announcing the acquisition mentions ‘job growth’ or a similar idea 12 times. Compare that with the release announcing the previous $50bn-plus US telecom pairing – Charter Communications’ 2015 takeover of Time Warner Cable – which made just one mention of jobs. In fact, according to 451 Research’s M&A KnowledgeBase, only four other $1bn-plus transactions among US publicly traded companies mentioned the potential for job growth in their press releases. And none did so more than twice.

T-Mobile has been massively successful in catering to its customers with its ‘Uncarrier’ strategy. According to a February survey by 451 Research’s VoCUL, T-Mobile’s percentage of satisfied customers (49%) has lurched beyond its competition. Whether its purchase of Sprint goes through or not may end up turning on the legal merits, not its marketing chops. Yet it clearly feels compelled to make a political case for the match – announced a day before closing arguments in a specious antitrust action against AT&T’s acquisition of Time Warner – to an administration that’s been unusually active in stopping deals.

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Teradyne’s acquisitions are anodyne to industrial M&A

Contact: Scott Denne

Teradyne has announced a pair of deals at elevated valuations as developments in the Internet of Things (IoT) and artificial intelligence (AI) stoke the staid market for industrial automation technologies. The semiconductor testing vendor brought two new additions to its burgeoning robotics business: Mobile Industrial Robots (MiR) and Energid. Both fetched above-market valuations – valuations that are justified by a surge in deployments of automation tech.

Teradyne paid $148m, or 12.3x trailing revenue, for MiR and $25m, or 4.2x forward revenue, for Energid. Both transactions also include earnouts that would roughly double the ultimate price (we don’t include those in calculating the multiples). Those prices are well above the median valuation for players in the industrial automation segment. According to
451 Research’s M&A KnowledgeBase, the median multiple for targets in that space have hovered between 2.2-2.4x trailing revenue in each of the past four years.

The deals that have come in well above that mark often have an IoT or AI angle. Today’s acquisitions align with that trend – MiR makes robots that deliver parts and supplies around a factory and Energid develops motion-control software. Other industrial automation transactions that went off at high multiples include Teradyne’s 2015 purchase of Universal Robots (at 7.5x) and PTC’s pickup of Kepware (5x), a provider of software that enables legacy industrial equipment to link to IoT networks.

Those valuations – rare for the industrial automation sector – come as manufacturing facilities, warehouses and the like are increasing their budgets for automation projects. According to 451 Research’s Voice of the Enterprise: Internet of Things, Budgets and Outlook 2017 report, 39% of respondents told us their organization had deployed IoT projects for the management and automation of buildings, factories and warehouses, up from just 26% in the middle of 2016.

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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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