The end of Omniture’s overture

by Scott Denne

This past weekend marked 10 years since Adobe’s $1.8bn purchase of Omniture, the deal that arguably started the race among enterprise software vendors to build out customer experience software portfolios. Although that transaction marked the beginning, its decennial looks like the beginning of the end. While we tracked a record haul for customer experience software M&A in 2018, those companies are becoming increasingly harder to sell.

According to 451 Researchs M&A KnowledgeBase, buyers spent $29.6bn in 2018 on vendors developing software for advertising, marketing, customer service, e-commerce and other forms of customer engagement. So far this year, just $8.3bn has been spent on such targets, on pace for the lowest annual total since 2015. Moreover, we’ve seen just five companies in this space sell for $200m or more, while each of the six previous full years have seen at least 10 deals of that size.

And the multiples on those acquisitions have fallen dramatically, our data shows. Last year almost every vendor in the category selling for that amount blew past the 5.2x trailing revenue that Omniture commanded. This year, however, such transactions fetched a median valuation of 2.3x, which is at least a full turn lower than the median valuation of similar deals in any single year over the past decade. This year, Dynamic Yield and TrendKite nabbed north of 8x in their respective sales to McDonald’s and Cision, while none of the other $200m cohort printed above 2.5x.

There’s little doubt that Adobe has seen success with its Omniture buy. The company expects to grow its Digital Experience business, the unit that houses Omniture (now Adobe Analytics) and several other related targets, by 23% to $3bn in the soon-to-close fiscal year. But other early, marquee investments in this sector weren’t as successful and there may not be as many deep-pocketed buyers as there once were. Both IBM and Teradata, for example, shed their marketing software units. Meanwhile Oracle, which still ranks as the most prolific acquirer in the segment, only printed one deal last year and none in almost 18 months.

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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.

Microsoft jumps into retail media

by Scott Denne

The sudden surge of Amazon’s advertising business has sparked acquisitions of software companies that help retailers become publishers. Microsoft is the latest entrant with the purchase of PromoteIQ, a maker of software that enables retailers to run product ads. As audience monetization becomes a feature of more e-commerce businesses, more deals could come.

For Microsoft, the pickup of PromoteIQ (formerly known as Spotfront) has overlap with its search advertising business. Product ads, often delivered alongside e-commerce search results, are essentially an evolution of paid search advertising. The target’s software provides retailers with workflows and controls to manage their sponsored product listings.

Amazon, more than any other company, has realized the potential for retailers to monetize their apps and websites through sponsored products. As we noted in a recent report, the online retail giant’s advertising business has tripled in less than two years to about $10bn in annual revenue. Despite that growth, the category is nascent enough that there’s not yet a widely accepted name for it. PromoteIQ refers to it as ‘vendor marketing,’ while Criteo and Triad, two of its larger rivals, call it ‘retail media.’

Given the early stages of the market, there are few sizeable players remaining for would-be buyers. Several midsized firms such as Adzerk, Crealytics, Koddi, Playwire and SYNQY offer retail media products. Another vendor, OwnerIQ, enables retailers to monetize purchase intent data gleaned from shoppers on their sites. As Amazon’s advertising revenue continues to balloon, targets in this space could get a look from acquirers in search (Google, Pinterest), e-commerce software (BigCommerce, Shopify) and retail-focused advertising (Quotient, Valassis).

No hard turns for application software market

by Scott Denne

Both strategic acquirers and sponsors have increased their purchases of application software vendors as the market for those targets accelerates beyond last year’s record. As those buyers stayed active, the largest deals grew larger and multiples continued to climb. Rising valuations for growth companies in the public markets – both new offeringsand already-public businesses – have pushed up pricing for software targets and could help propel deal sizes through the rest of the year.

According to 451 Research’s M&A KnowledgeBase, 632 application software providers have been acquired for a combined value of $59.2bn, on pace to top last year’s record haul in both value and volume. In our analysis of last year’s activity (published as part of 451 Research’s Tech M&A Outlook 2019), we noted that 2018 marked the first year that acquisitions of application software vendors crossed 1,100 as both strategic buyers and private equity firms accelerated their purchases.

The same trend has driven this year’s market as well. Both categories of acquirers are up from last year’s pace. Yet the number of big-ticket transactions is down a bit. While 29 application software providers sold for $1bn or more in 2018, only nine have done so this year. But those that have crossed the 10-figure mark have done so in a big way. Since the bursting of the dot-com bubble, only four such targets have sold for more than $10bn and two of them (Tableau Software and Ultimate Software) did so this year.

To be clear, the relative decline in the number of big-ticket acquisitions hasn’t pulled down the total deal value. If the current pace of deal value were to hold through the end of the year, it would finish more than one-quarter higher than last year, which smashed the previous record by nearly 50%. Put another way, at the midpoint of 2019, the total value of application software transactions is higher than all but two full years, our data shows.

Although fewer software vendors have sold for north of $1bn, those that have are fetching higher prices. According to the M&A KnowledgeBase, the median multiple for those deals this year stands at 8.1x trailing revenue, nearly a full turn above last year’s total. That rise comes amid a 22% year-to-date increase in the Nasdaq index and a welcoming environment for new tech listings, including software companies like Slack and Zoom Video, which commanded 62x and 41x multiples at the midpoint of the year, following their recent public market debuts. Such a compelling alternative exit could continue to boost acquisition prices.

Software buyers surge

by Scott Denne

In 2018, it seemed that anyone who could buy a software company did. The reemergence of software M&A’s regular strategic acquirers, along with a continuing surge in private equity (PE) deals and a jolt from young public software companies, pushed the market for application software acquisitions well past its 2016 record.

According to 451 Research’s M&A KnowledgeBase, acquirers picked up 1,191 application software companies worth a combined $90.5bn. This marks the first time we’ve recorded more than 1,100 software companies sold in a single year, and represents a 42% increase over the previous record (from 2016) for total value of acquisitions in the category.

While there were certainly outstanding deals – SAP’s $8bn purchase of Qualtrics being the largest – it was the volume of acquirers willing to make big purchases that drove the year’s total to its heights. Since the end of the dot-com bubble, there have only been two years that have had more than 10 application software deals to print at or above $1bn, and never more than 14. This year, buyers announced 28 of them.

SAP bookended the year with a pair of such transactions: the $2.4bn acquisition of Callidus Cloud and the $8bn purchase of Qualtrics in November. Prior to that, you have to go all the way back to SAP’s 2014 acquisition of Concur for its last 10-figure deal. It wasn’t the only one of its peers to return to market in a big way this year. Adobe printed two $1bn application software deals (Magento and Marketo) – its first since 2009. At the same time, Cloudera, Twilio and Workday all printed their first-ever 10-figure deals.

Vertical software targets – companies building software for specific markets, such as construction, pharmaceuticals, education and government – took an outsized share ($30.4bn) of the annual total. Those targets continued to be a private-equity favorite, while attracting interest from companies outside the software industry. Roche, the pharma giant, opened the year with a $1.9bn purchase of electronic health records company Flatiron Health, while industrial conglomerate 3M closed the year with a $1bn acquisition of clinical documentation software developer M*Modal.

Even amid the return of the old strategics and the emergence of new cohorts of software buyers, PE continued to influence the software M&A market. More than one in three (37%) application software acquisitions was made by either a PE firm or a PE portfolio company, up from 33% in 2017 – the highest level up to that point. Still, the reemergence of strategic acquirers helped push up prices on those deals. The median multiple paid by a PE firm for a software company last year came in at 4.1x trailing revenue, clocking in above 4x for the first time on record.

Across the software market, rising multiples spurred the growth in deal value. Buyers paid a median 7.6x trailing revenue across $1bn-plus deals in the category last year, compared with each of the four preceding years, where median multiples on such deals fluctuated between 3.9x and 4.8x.

A bullish bet in a bearish market

by Brenon Daly

The recent rout of technology stocks didn’t actually provide much of a discount in Big Blue’s big bet on Red Hat. In the largest-ever software acquisition, IBM is valuing the open source software provider at its highest price since its dot-com-era IPO. Essentially, Big Blue had to make up Red Hat’s recent stock decline with a very generous premium. (Subscribers to 451 Research can look for our full analysis of the transaction and its implications on our website later today.)

Ahead of the announcement, shares of Red Hat had shed about one-quarter of their value just since mid-September. The stock bottomed out last week at about $117, its lowest level in a year. Under terms, IBM is paying $190 for each Red Hat share, which works out to a premium of more than 60% from the prior close. That’s about twice as rich as the typical premium in a significant software acquisition.

However, looking at the terminal value of a company relative to the market value of a company doesn’t make too much sense unless we also factor in the state of the overall market. Stock prices change every day, particularly for high-beta stocks like Red Hat. It just so happens that in recent sessions on Wall Street, virtually all of the changes have been marked in red.

In the case of Red Hat, it was riding high last summer, with shares peaking at about $177. At that level, IBM is paying a scant 7% premium on Red Hat’s market value. (That fact hasn’t been lost on plaintiff lawyers, who have already revved up their strike-suit machine to target this deal.)

Rather than comparing how IBM is valuing the company to how public market investors value the company, it’s more useful to look at how IBM is valuing Red Hat’s actual business. And by that measure, this is a pricey pairing.

IBM, which trades at less than 2x trailing sales, is valuing Red Hat at more than 10x trailing sales. That’s substantially higher than the average multiple of 6.6x trailing sales for the 10 largest software acquisitions recorded in 451 Research’s M&A KnowledgeBase.

HR software in demand

by Scott Denne

A tight job market is opening exit opportunities for HR software companies. The record-low unemployment rate – it recently dipped below 4% for the first time in more than a decade – has increased interest in owning software developers that help businesses find, retain and train increasingly scarce employees, pushing such acquisitions to a remarkable level.

In the latest example, Cornerstone OnDemand has reached for Workpop, a provider of software for hiring hourly and seasonal workers, as part of the buyer’s revamp of its recruiting suite. As we noted at the time of that company’s last acquisition – back in 2014 – Cornerstone OnDemand hasn’t been much of a buyer, although in making a purchase now, it’s joining a parade of dealmakers scooping up HR software targets.

According to 451 Research’s M&A KnowledgeBase, acquirers have hooked 70 HR software targets, more than any other full year in this decade. Still, in terms of deal value, 2018 isn’t likely to be a record. The year’s total stands at $2.35bn, while two earlier years (2012 and 2014) saw more than $5bn in HR software transactions.

While 2012 and 2014 each had a pair of $1bn-plus deals by Oracle, IBM, SAP and Charthouse Capital, this year’s boom has benefited midmarket targets as we’ve recorded 13 acquisitions valued at $100-500m, two more than any other full year. Although the jobs picture helps juice this market, much of the increase comes through the same trends that bolster the overall software M&A market – increasing activity from private equity firms and a surge in strategic buyers. The former category has already purchased more HR software businesses this year than ever before, while corporate acquirers are heading toward record territory.

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

Zendesk focuses on sales with latest purchase

by Scott Denne

With its latest acquisition, Zendesk concentrates on its march toward $1bn in revenue with an asset that could help it bolster its enterprise sales. The helpdesk software provider adds sales force automation software to its suite with the purchase of FutureSimple (which does business as Base) and obtains a product that addresses the priorities of the largest businesses.

Terms of the deal weren’t disclosed, but there’s reason to believe that Base marks Zendesk’s largest acquisition yet. Zendesk had only inked three transactions before today – two that cost it about $15m each and one, BIME Analytics, that cost $45m. Base, by comparison, raised at least $52m in venture funding, according to 451 Research’s M&A KnowledgeBase, and has about 150 employees, compared with BIME’s 40.

The pickup of Base continues Zendesk’s expansion into other corners of customer engagement, beyond its roots as a helpdesk software developer. As we noted in our report on its purchase of marketing software vendor Outbound, Zendesk needs a broader suite to reach its goal of $1bn in annual revenue in 2020. It finished last year with $430m, a 38% jump from the year before, a growth rate that leaves little room for deceleration if Zendesk is to hit its target.

Although historically targeting smaller businesses, Zendesk hopes to entice more large enterprises to use its applications to get to that goal. By nabbing pipeline management, lead-scoring and other sales automation capabilities, Zendesk injects itself into a top priority for large enterprises. According to 451 Research’s most recent VoCUL: Corporate Mobility and Digital Transformation Survey, 22% of businesses with more than $1bn in annual revenue reported that sales organizations will have the highest budget for software compared with other lines of business: only IT (51%) and Zendesk’s core market of customer service (31%) ranked higher.

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

Software’s new characters 

Contact: Scott Denne

After a record-breaking performance for the software M&A market in 2016, the original cast bowed out as the understudies took the stage. Last year witnessed both strategic and financial acquirers making grand debuts in the application software market, while the most frequent and fulsome buyers of years past largely sat on the sidelines, resting from an unusually active 2016.

Spending on application software targets fell by one-third last year to $41.1bn from 2016’s highest-ever total amid a distinct lack of big-ticket deals. In total, there were 988 acquisitions of software companies, just 30 fewer than the year before. Only eight software targets attracted prices north of $1bn, compared with 14 in 2016, with last year’s tally representing the lowest total since 2009, according to 451 Research’s M&A KnowledgeBase.

As much as the numbers, the buyers were changed from earlier years. Although Oracle finished the year with the $1.2bn acquisition of construction software vendor Aconex, its $1.8bn in software M&A spending in 2017 represented a significant decline from the $10.8bn it spent a year earlier. Others were even less active. Salesforce didn’t print a single software deal last year, after spending $4bn in 2016. At the same time, IBM only did a pair of modest tuck-ins, nothing approaching the scale of its $2.6bn purchase of Truven Health Analytics in 2016.

Half of the companies that paid more than $1bn for an application software target in 2017 hadn’t inked a single software deal in any previous year this decade. Express Scripts came back to the market with a pair of transactions, including the year’s second-largest application software acquisition (eviCore Healthcare for $3.6bn), marking its first tech deals since 2009. Some new PE buyers also entered the software M&A market, including Partners Group, which made its first software transaction by paying $1.4bn for Civica – four times more than it had spent on any tech deal.

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