In latest infosec consolidation, Avast + AVG = AV(G)ast

by Brenon Daly

Reversing the flow of typical consolidation moves, privately held Avast Software said it will pay $1.3bn to remove fellow antivirus (AV) vendor AVG Technologies from the NYSE. In addition to flipping the script on the conventional roles of buyer and seller, there’s also a fair amount of irony in the announced pairing of the companies, which share similar roots and vintage. After all, the acquisition comes four years after Avast scrapped its plans to be a public company, a decision that was partly due to AVG’s lackluster performance immediately following its own IPO in early 2012.

Terms call for private equity-backed Avast, which has secured about $1.7bn from a lending syndicate, to pay $25 for each share of AVG. Although that represents a 33% premium over the previous closing price, it is actually lower than AVG shares were trading on their own at this time last year.

Both companies, which have been in business for more than a quarter-century, have struggled to adjust their portfolios to match recent changes in the threat landscape. Specifically, they have been somewhat caught out by the ineffectiveness of their historic desktop-based AV offerings, as well as the emerging threats posed by mobile devices. Over the past two years, Avast and AVG have used M&A to help move into the post-AV world, including doing four acquisitions to bolster their mobile security portfolios.

However, the overall transition of the business has been slow. AVG, for instance, said revenue in the first quarter expanded just 5% and indicated that sales in the just-ended Q2 actually declined slightly. AVG’s sluggish recent performance goes some distance toward explaining its rather muted valuation. Avast is paying $1.3bn, or slightly more than 3x the $433m in trailing sales put up by AVG. That’s just half the average multiple of 6.4x trailing sales in the 10 other information security transactions valued at $1bn or more, according to 451 Research’s M&A KnowledgeBase.

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Brexit breaks Q2’s tech M&A rebound

Contact: Brenon Daly

For the first two months of the just-completed second quarter, tech dealmakers went about their business at the same sedate pace they had all year. Then came the June boom. Spending on tech, media and telecom (TMT) acquisitions in the final month of Q2 tripled from the average level in the five previous months, with June alone featuring six of the seven largest TMT deals announced in all of Q2, according to 451 Research’s M&A KnowledgeBase. The late flurry of big-ticket transactions helped elevate M&A spending from the middling level it had sunk to in 2016 after last year’s record run.

If Q2 ended with a bang for M&A, the same could certainly be said about geopolitics. In what is widely considered the largest reshaping – and the sharpest reversal – in Europe since World War II, the UK narrowly voted in late June to end its European Union membership. The so-called ‘Brexit’ decision immediately sparked a wave of selling on equity exchanges around the world that incinerated trillions of dollars of market value.

As the political instability and economic uncertainty sparked by the unprecedented vote by members of the world’s fifth-largest economy rippled around the world, shell-shocked dealmakers stepped out of the market. In the final week of June – a period that covers the results of the UK vote and the immediate aftermath – the number of deals dropped by fully one-quarter compared with the weekly average of the first three weeks of the month. More dramatically, transactions announced in the post-Brexit week accounted for only 4% of the total spending in June. (Obviously, these are very short-term reactions to the historic event. See our analysis of the potential longer-term impact of Brexit on the tech economy, including employee movement, taxes and tariffs, privacy, and capital markets.)

Yet even as June ended with a whimper, the robust activity before Brexit boosted overall Q2 spending to $107bn, about 50% higher than the $73bn recorded in Q1, according to the M&A KnowledgeBase. (However, for some perspective on just how far M&A spending has fallen from last year’s historic levels, spending in the just-completed Q2 stands at just half the level of Q2 2015.) Still, the flurry of sizable deals in the first three weeks of June lifts the total value of year-to-date transactions to about $180bn, putting 2016 on track for the third-highest-spending year since the end of the recession.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2016 1,008 $107bn
Q1 2016 1,031 $73bn
Q4 2015 1,052 $184bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

The tech M&A ‘Brexit’

Contact: Brenon Daly

As the United Kingdom gets set to vote in a historic referendum on its membership in the European Union, we would note that a ‘Brexit’ has already been happening when it comes to tech M&A. The island’s trade relations with the 27 other EU countries are just a fraction of its domestic deals and its acquisition activity with its former colony, the US. It turns out that not many tech transactions flow across the Channel.

Over the past half-decade, just 164 UK-based tech companies have sold to companies based in fellow EU countries, according to 451 Research’s M&A KnowledgeBase. Proceeds from the EU shoppers have totaled only $7bn, with most of that ($4.9bn, or 70%) coming in a single transaction (France’s Schneider Electric picked up London-based Invensys in mid-2013). After that blockbuster, the size of UK-EU transactions drops swiftly, with just one other print valued at more than $300m.

Those paltry totals stand in sharp contrast to the UK’s transatlantic dealings. Some 597 British tech companies have been picked up by US-based buyers, with total spending hitting $57bn, according to 451 Research’s M&A KnowledgeBase. For perspective, that’s more than the $53bn that UK tech companies have paid for fellow UK tech companies in the same period.

Of course, the US and the UK share a primary language and a ‘special relationship’ – in the Churchill sense – that doesn’t extend to other EU countries. And the US has the world’s largest economy, along with the most-acquisitive tech companies, many of which have mountains of cash from European operations that they can’t bring back to the US without taking a significant tax hit. But still, when we compare US-UK and EU-UK acquisition activity, we can’t help but notice the union ties just don’t bind.

Acquisitions of UK-based tech companies since Jan. 1, 2011

Headquarters of acquiring company Deal volume Deal value
European Union 164 $7bn
United States 597 $57bn
United Kingdom 891 $53bn

Source: 451 Research’s M&A KnowledgeBase

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Black swans roil tech M&A market

Contact: Brenon Daly

During the six-year bull run on Wall Street, corporate treasuries have been as flush with cash as executive offices have been flush with confidence. Put those two factors together and we have the makings of an M&A boom like the one that has put spending on tech acquisitions so far this year already twice as high as it was in the recession years.

Remove either of the crucial components of cash and confidence, however, and deals don’t get done. It’s hard to go shopping when your head is spinning with volatility and your guts are clenched in uncertainty. That hesitancy comes through clearly when we look at the prints for August.

In the first two weeks of the month, it was business as usual. Private equity shops and corporate buyers around the globe announced 172 tech, media and telecom (TMT) transactions with an aggregate value of $21.6bn, according to 451 Research’s M&A KnowledgeBase. In the two weeks that followed, as black swans flew above the equity markets around the world, dealmakers announced just 145 acquisitions worth $4.6bn. As uncertainty erased trillions of dollars of stock market capitalization over the past two weeks, spending on M&A plunged almost 80%.

Heavily skewed to the first half of the month, August spending totaled $26.2bn, which is roughly half the average amount for the previous seven months of 2015. Yet even with the mini-recession in tech M&A since mid-August, spending on 2015 deals overall is still tracking to its highest level since 2000. Through eight months of the year, dealmakers have announced transactions valued at about $375bn, roughly $45bn short of the $420bn recorded in 2007.

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

Wall Street confidence July 2015

 

 

 

Datacenter consolidation hits a record pace as Europe gets more international

Contact: Mark Fontecchio

Global datacenter consolidation in 2015 is on a tear, and the reason varies by continent. European MTDC suppliers on the hunt for regional diversity are printing an unprecedented increase in the number and value of deals, while North American providers are outpacing overall M&A volume as they move up the stack to offer more managed services.

Through the first seven months of this year, there have been 11% more tech deals compared with 2014, yet colocation and hosting transactions are up 49%, according to 451 Research’s M&A KnowledgeBase. Western Europe alone is up 67% in datacenter deal volume. Datacenter consolidation is clearly outpacing the rest of the field.

Western European datacenter deal value has skyrocketed more than the rest. Last year, 4% of all datacenter M&A value went to Western European targets; this year, it’s half. Equinix buying UK-based TelecityGroup accounts for most of that – the $3.6bn price is the largest datacenter transaction in the KnowledgeBase. As we have previously noted, one of the key reasons for all of the consolidation activity in Europe is because customers in traditional markets are seeking reach into locations where new builds are difficult. The highly fragmented European market still has many regional providers with significant pull in their locales. They are now being subject to M&A conversations as bigger players look to enter territories without building new facilities.

In North America, it’s different. While geo-based deals are still aplenty (e.g., CyrusOne’s $400m purchase of Cervalis ), more large transactions have focused on providers moving up the stack and offering additional managed services. Digital Realty’s reach for Telx and QTS Realty’s pickup of Carpathia Hosting are prime examples.

Biggest datacenter deals of 2015

Date announced Acquirer Target Target HQ Deal value
May 29 Equinix TelecityGroup Western Europe $3.6bn
July 14 Digital Realty Trust Telx Group North America $1.9bn
March 2 NTT Communications e-shelter Western Europe See estimate
January 14 Zayo Group Latisys North America $675m

Source: 451 Research’s M&A KnowledgeBase

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In a time of sky-high infosec valuations, Sophos goes for down-to-earth debut

Contact: Brenon Daly

The tech IPO market is so quiet these days that even those companies that do manage to go public do it understatedly. Consider the almost under-the-radar offering from Sophos, a giant in the infosec market that nonetheless raised a relatively small $125m on the London Stock Exchange (LSE) last Friday. Compared with the noisy funding events we’re accustomed to seeing in this current frothy investment environment, the Sophos IPO was almost refreshingly reserved.

Sophos has been around for 30 years, which makes it positively middle-aged relative to many flashy startups that still haven’t seen the ink dry on their business plans. Also, Sophos was born and raised in the UK, several time zones – and even more distant culturally – from the epicenter of tech hype in Silicon Valley. To illustrate, Sophos spends less than 40% of its revenue on sales and marketing, about half the level of some US-based IT firms (e.g., Apigee, Box) that have also come public in 2015.

Yet even as Sophos runs a business that’s clipping along at nearly a half-billion dollars in revenue, it raised the same amount of money that some startups one-tenth its size have landed from private investors. Another way to look at it: The $125m that Sophos raised in its IPO is also less than half the amount collected by Etsy, which is smaller than Sophos, in its April IPO.

And Sophos is raising money at a very down-to-earth valuation, compared with some of the sky-high valuations garnered by both public and private infosec vendors. Sophos started life on the LSE at a market cap of about $1.6bn, roughly 3.5x its trailing sales of $447m. That’s a sharp discount to many of the infosec providers trading on the NYSE and Nasdaq. For example, Proofpoint, Qualys, FireEye and Imperva, among others, all trade at more than 10x trailing sales.

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

A steady Sophos now set to step on public stage

Contact: Brenon Daly

After an on-again, off-again march to the public market over the past decade, Sophos finally looks set to sell shares to the public for the first time. The 30-year-old, UK-based security vendor put in its paperwork last week for a $100m IPO on the London Stock Exchange (LSE). It was actually the second time the decidedly middle-aged Sophos filed to go public, and comes five years after it flirted with an IPO before selling a majority stake to Apax Partners instead.

During the half-decade in the private equity firm’s portfolio, Sophos has been a steady acquirer, picking up a company about every year. Its most recent deal, announced earlier this week, is the first time Sophos has acquired a cloud-based vendor. Sophos paid an undisclosed amount for email security and archiving startup Reflexion. The technology is expected to be integrated into Sophos Cloud later this year.

When Sophos does hit the LSE next month, we expect it to create a few billion dollars of market value. In its most recent fiscal year, which finished last March, Sophos increased revenue 18% to $447m. For comparison, Barracuda Networks – a diversified security provider that, like Sophos, serves the SMB market – posted an identical growth rate in its most recent fiscal year. (Although Sophos is growing off a revenue base that is more than half again as large as the $277m that Barracuda put up last year.) Since it went public in November 2013, Barracuda has doubled its market value to about $2bn.

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After dating, InfoVista marries the girl from Ipanema

Contact: Brenon Daly

Announcing its third – and largest – acquisition since its take-private in 2011, InfoVista has paid an undisclosed amount for Ipanema Technologies. The deal between the two France-based companies, which had an existing technology partnership, extends InfoVista’s core network performance management to the applications that run on them. Founded in 1999, Ipanema is primarily known for its WAN optimization offering.

The purchase also brings InfoVista, which does virtually all of its sales directly, Ipanema’s sales channel. Ipanema goes to market primarily through more than 50 partners, including many of the large Western European communication service providers such as Telefónica and BT. Altogether, it serves some 750 enterprise customers. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for Ipanema’s revenue here.) We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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Telecity scoops up European colo peer Interxion

Contact: Scott Denne Penny Jones Mark Fontecchio

TelecityGroup dishes out 45% of its stock to nab fellow European colocation player Interxion in a $2.2bn deal. The acquisition is the largest European multi-tenant datacenter transaction that we’ve tracked (nearly twice the size of Digital Realty’s purchase of Sentrum’s datacenter portfolio in 2012). The combined company will be better positioned to deflect some of the regional pricing pressure resulting from increased investment in the European datacenter market.

The deal values Interxion at 6.3x trailing revenue, or 15.3x EBITDA. Interxion shareholders are getting 45% of the combined company, but Interxion’s revenue and EBITDA contributions are slightly less than that percentage. We’d attribute the valuation bump to Interxion’s higher growth rate – 11%, compared with 7% for Telecity last year. Though this move is all about building a larger regional player, it’s worth noting that Interxion, through last year’s pickup of undersea cable hub SFR Netcenter, gets Telecity an outlet into other markets.

Subscribers to 451’s Market Insight Service can access a detailed report about this transaction here, as well as a strategic update on Telecity’s fourth-quarter results.

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

With buyers old and new placing big bets, tech M&A hits record in 2014

Contact: Brenon Daly

Spending on tech deals surged to a new record in 2014, driven not only by massive consolidation by old-line telco buyers, but also by the ever-increasing prices of bets placed on next-generation technology. Tech buyers across the globe announced transactions valued at $440bn last year, according to the 451 Research M&A KnowledgeBase. That topped the previous record (set in 2007) by 5% and, more dramatically, comes in at twice the average annual spending on tech deals since the credit crisis.

The nearly half-trillion dollars’ worth of deal value was, of course, dominated by telecommunications and media transactions. Last year’s two largest acquisitions (AT&T’s $48.5bn play for DIRECTV, and Comcast’s $45.2bn reach for Time Warner Cable) accounted for slightly more than 20% of the total yearly spending.

Add to that European telcos and cable outfits, which also took advantage of a highly attractive debt market, and bought up rivals at an unprecedented rate in 2014. Major buyers on the Continent included Altice, Vodafone and British Sky Broadcasting. Altogether, telco and media deals around the world accounted for roughly half of last year’s total spending.

The other half came from a series of speculative deals by emerging tech icons – emboldened by record amounts of cash and, in many cases, record prices for their stock. For instance, Facebook – which finished last year with shares trading around an all-time high – not only paid the highest price for a VC-backed startup ($19bn for WhatsApp) but also rolled the dice on a virtual reality company that barely had a prototype product (it paid $2bn in March for Oculus VR). Similarly, Google dropped $3.2bn on Nest Labs. The maker of ‘smart’ thermostats may offer Google a way into broader home-automation offerings. Or not.

More established tech stalwarts also paid up for deals last year. SAP announced the largest-ever SaaS transaction, its $8.3bn acquisition of Concur Technologies in the summer. SAP valued the travel and expense management application vendor three times more richly than SAP itself is valued. Oracle inked its largest deal in a half-decade, handing over $5.3bn for old-line hospitality software provider MICROS Systems in June.

And finally, in addition to strategic acquirers, financial buyers got back to business in 2014, announcing more than $50bn worth of transactions, according to the 451 Research M&A KnowledgeBase. Included in last year’s total are a number of headline-grabbing LBOs (TIBCO Software, Riverbed Technology, Compuware), as well as a healthy number of sponsor-driven midmarket transactions.

Global tech M&A

Year Deal volume Deal value
2014 3872 $439bn
2013 3275 $255bn
2012 3644 $186bn
2011 3794 $232bn
2010 3293 $190bn
2009 3030 $143bn
2008 3098 $326bn
2007 3654 $420bn
2006 4036 $418bn
2005 3054 $360bn
2004 2091 $219bn
2003 1514 $60bn
2002 1922 $81bn

Source: The 451 M&A KnowledgeBase

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