Sensitive ‘barbarians’?

Contact: Brenon Daly

Although private equity (PE) is often portrayed as heartless and hardened dealmakers, it turns out the group is actually quite sensitive. We don’t necessarily mean emotionally sensitive but rather economically sensitive. This hyperactive group of acquirers is far more attuned to interest rates, credit availability and other economic factors than rival corporate buyers. What happens outside buyout firms goes a long way toward shaping what goes on inside.

We’re seeing that right now in the tech M&A market. The just-enacted sweeping overhaul to the US tax code has changed some of the key calculations that buyout shops have to make before they can put their unprecedented pile of cash to work in tech deals. Under the new tax regime, PE firms are facing higher costs and potentially longer holding periods – both of which would weigh on returns. (Buyout shops are getting hit with numerous changes, the most significant of which is that they are now only able to deduct a portion of the interest payments for the debt they use to acquire companies.)

The tax changes, which were negotiated and passed in the final few months of last year, knocked PE almost completely out of the market during that time. Through the first three quarters of 2017, buyout shops were clipping along at an average of about $10bn in spending each month, according to 451 Research’s M&A KnowledgeBase. However, spending plummeted to just $7bn for the entire fourth quarter. The aggregate value of deals in December – the month when the new tax code was approved – didn’t even reach a half-billion dollars, the lowest monthly total since early 2014.

Of course, this is only the most-recent case of macroeconomic conditions shaping PE activity. A far more vivid example of that came a decade ago, when the mortgage crisis effectively killed the first wave of tech buyouts. As we noted last summer on that unhappy anniversary, the last four crisis-shadowed months of 2007 accounted for just $7bn of the then-record $106bn in PE spending that year. The PE industry took until 2015 to reclaim the level of spending it put up in 2007, according to the M&A KnowledgeBase.

No one is suggesting the changes from the tax code will be anywhere as severe as the disappearance of credit, which is what we saw in the recession a decade ago. This time it’s more of a recalibration than a retreat.

No longer dour in Davos

Contact: Brenon Daly

As the World Economic Forum opens its doors today, we expect even more backslapping and bonhomie than usual among the business leaders, politicians and other TED-types that flock to the annual gathering in Davos, Switzerland. What’s got them all so excited? Well, unlike recent years at the conference, there are some pretty favorable winds blowing across the globe these days.

Stock markets around the world are at all-time highs, economic growth is accelerating and even fractious political rifts have been mended (at least temporarily) so governments can get on with the business of business. (Germany appears to be finally on track to forming a governing coalition, after last September’s election left the economic powerhouse of Europe without a government for the first time since World War II. On a smaller scale, US President Donald Trump jetted over to the Swiss mountains after Congress resolved for the moment a stalemate that had shut down the government of the world’s largest economy for a few days.) Not for nothing is the theme to this year’s gathering: ‘Creating a Shared Future in a Fractured World.’

Of course, it’s a lot easier to get along when everyone is making money. And right now, people are making money because of the world economy rather than despite it, as has been the case for the most part since the end of the recession. In past years at Davos, economic growth and confidence had been elusive, or at least not evenly distributed. This year, in both the formal presentations and the hallway chatter, there’s a bullishness that’s been missing recently.

As an indication that business around the world is picking up, consider that one in six respondents to a recent 451 Research Voice of the Connected User Landscape said their companies are bumping up Q1 sales projections because of the global economy. That’s twice as many businesspeople as said the macro-economy is putting a crimp in their sales pipeline. For comparison, around the time of Davos last year, slightly more respondents to our survey said the world economy was dampening their sales outlook than boosting it.

And the Golden Tombstone goes to…

Contact: Brenon Daly

If you have a hard time thinking of a truly blockbuster tech deal last year, you’re not alone. Even people who buy companies for a living struggled to single out any 2017 transaction.

As we do every year, we asked in our 451 Research Corporate Development Outlook Survey for dealmakers to look at the handiwork of their peers around the tech industry and select what they thought was the most significant transaction of the year. Survey respondents work at tech companies of all varieties, but regardless of their industry, the majority of their picks each year usually settle on one or two high-profile deals.

That wasn’t at all the case for our most recent survey. For starters, the pool of 2017 nominees was unprecedentedly broad and shallow. Corporate buyers put forward a record 12 separate transactions for the deal of the year.

From that long list, however, we don’t actually have a winner. Or rather, we have three winners. For the first time in more than a decade of giving out our Golden Tombstone award, we have a tie. Fittingly enough for the diffuse deals that characterized last year, we have a tie between three transactions: Intel’s $15.3bn reach for Mobileye, Cisco outbidding the public market for AppDynamics and Broadcom’s unsolicited bid for Qualcomm. We’re still working on cutting the Golden Tombstone into three pieces so each of the winners can have their own chunk of M&A immortality.

To detractors, Trump is a buffoon; to dealmakers, he’s a boon

Contact: Brenon Daly

Despite all the ‘fire and fury’ around President Donald Trump, when it comes to tech deals, the president is good for business. At least that’s the view of a majority of buyers at some of the largest and most-active companies in the market.

By a more than two-to-one margin, respondents to the 451 Research Tech Corporate Development Outlook Survey said the Trump White House will help spur M&A in 2018. Specifically, 59% said the current administration will ‘stimulate’ dealmaking this year, compared with just 23% saying it will ‘inhibit’ dealmaking.

Somewhat surprisingly, the nearly six out of 10 respondents who forecast a ‘Trump bump’ in the tech M&A market is 10 percentage points higher than our previous survey. The increase over the past year in Trump’s standing among dealmakers stands in sharp contrast to the president’s overall popularity, which has dropped to record lows over that same time. Since Trump took over as CEO of America, the percentage of people who disapprove of the president has steadily risen from 41% to 55%, according to Nate Silver’s FiveThirtyEight, which calculates the figure based on a weighted blend of numerous polls.

Even with the divergent views about the White House, corporate acquirers mostly told us the overall economic picture isn’t really snagging deals these days. See the full 451 Research Tech Corporate Development Outlook Survey for more insights from many of the main buyers in the tech M&A market.

 

Tech companies have long, long shopping lists

Contact: Brenon Daly

Despite a lackluster year for tech M&A in 2017, corporate acquirers overwhelmingly forecast that their companies will be looking to shop again this year. More than six out of 10 (62%) respondents to the annual 451 Research Tech Corporate Development Outlook Survey indicated that their firms would be more active with acquisitions in 2018. That was the most-bullish outlook since the end of the recent recession, coming in more than three times higher than the 18% of corporate buyers who expect their companies to step out of the market. (To see the full 451 Research report, click here.)

The company-specific outlook, which came from major acquirers across the tech landscape, is far more buoyant than their view of the broader M&A market, however. Looking ahead at the overall dealmaking environment for corporate buyers, only slightly more than four out of 10 respondents (43%) said it would be more favorable in 2018 than it was in 2017. On the other side, fully one-quarter (25%) predicted that general tech M&A conditions would deteriorate this year.

Although the broad-market outlook – with slightly more than four out of 10 respondents projecting an improved M&A environment in the coming year – ticked higher from last year’s survey, it is still lower than the two surveys before that, when tech acquisition activity did indeed hit multiyear highs. In those two previous 451 Research Tech Corporate Development Outlook Surveys, slightly more than half of the respondents forecast a favorable environment for their fellow strategic buyers. In both 2015 and 2016, spending on tech deals topped $500bn for the first time since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase.

To see what else corporate acquirers told us about their financial rivals (PE firms), valuations and even what President Donald Trump is doing to the business of M&A, click here.
 

Every reason to shop, yet tech companies still empty-handed

Contact: Brenon Daly

As tech companies said goodbye to 2017, most of them did so with fond memories of the past year. Public companies nearly all saw steady gains on Wall Street, with more than a few hitting record highs. Record amounts of venture money flowed to startups, while more-established companies looked ahead to their already-stuffed treasuries getting even fuller when the benefits of the recently passed tax program kick in. And probably most importantly, customers are saying they are ready to spend on tech like they haven’t been since the recent recession.

In a November 2017 survey by 451 Research’s Voice of the Connected User Landscape, fully 50% of the 872 respondents said their company is giving a ‘green light’ for IT spending. That was the highest reading since 2007, and 13 basis points higher than the average survey response for the month of November for the previous five years. During that 2012-16 period, in fact, respondents unanimously said their companies were more likely to cut their IT spending than increase it.

All in all, the end of last year was a good time for publicly traded tech companies to do business. And they did, except in one crucial area: M&A. Tech acquirers announced one-quarter fewer deals in Q4 2017 compared with the final quarter of the previous three years, according to 451 Research’s M&A KnowledgeBase. Meanwhile, spending on tech and telco acquisitions in the October-December period slumped to the lowest quarterly level since Q2 2013.

Historically, there has been a relatively tight correlation between overall IT budgets, company valuations and M&A activity. To some degree, activity in all three of those markets is determined by a single shared characteristic (confidence), so it follows that there would be some interdependence in the trio. And yet, as we step from 2017 to 2018, that connection appears to be breaking down. Tech companies are enjoying record levels of confidence from customers and investors, yet are rather timid when it comes to shopping.

Mainstays missing in the tech M&A market

Contact: Brenon Daly

A number of the mainstay acquirers that had helped boost the tech M&A market to recent record levels stepped out of the market in 2017, clipping spending on deals by more than one-third compared with 2016 and 2015. The value of tech and telco acquisitions around the globe in the just-completed year slumped to $325bn, after topping a half-trillion dollars in each of the two previous years, according to 451 Research’s M&A KnowledgeBase. Last year’s M&A spending ranks as the lowest in four years.

The primary reason for the drop in 2017 is that tech giants – the companies that had set the tone in the overall M&A market over the past decade – didn’t shop like they once did. For instance, Oracle and SAP have, collectively, announced 16 acquisitions valued at more than $1bn since 2010, according to our M&A KnowledgeBase. However, only one of those deals printed last year. (More broadly, Oracle took an uncharacteristically long eight-month hiatus from deal-making in 2017. The prolonged absence of corporate acquirers such as Oracle was one of the primary contributors to last year’s overall M&A volume slumping to a four-year low, according to our count.)

Also weighing a bit on 2017’s totals is that free-spending Chinese buyers, who had turned tech into a favorite shopping ground, all but disappeared from the top end of the market last year. Our M&A KnowledgeBase lists just one $1bn-plus acquisition by a China-based buyer in 2017, down from nine transactions in 2016 and seven in 2015. Currency restrictions imposed by China’s authorities in early 2017 drastically reduced the ability of Chinese companies to put money to work outside their country. Also, the simmering trade fight and sparring over currency policy between Beijing and Washington DC slowed M&A between the world’s two largest economies.

On the other hand, last year saw the full emergence of a new, powerful – and largely underappreciated – force in the tech M&A market: private equity (PE). As corporate acquirers retreated, financial acquirers accelerated. PE firms announced a record 876 transactions last year, more than twice the number they did just a half-decade ago, according to 451 Research’s M&A KnowledgeBase. Deal volume, which has increased for five consecutive years, jumped nearly 25% in 2017 from 2016, even as the number of overall tech acquisitions posted a mid-teens decline year on year.

For PE, $20bn deals are so 2007

Contact: Brenon Daly

Looking to put its mountainous cash holdings to work, private equity (PE) has become a velocity play. Deal-hungry financial acquirers have scaled back the size of the checks they write, but have compensated for that by writing a lot more checks.

This year, for instance, buyout shops have put up twice as many $1bn+ tech transactions as they did during the pre-credit crisis peak, but only half as many big ones. As PE firms lower their sights, their current overall M&A spending is coming up well short of the amount they threw around in the previous generation.

To understand this shift in price preference, it’s useful to compare PE dealmaking at the top end of the market in 2017, which will see an overall record number of sponsor-backed transactions, with the previous high-water year for PE spending in 2007. This year, 451 Research’s M&A KnowledgeBase has recorded 24 acquisitions by PE firms valued at $1bn or more, with total spending on those deals of $69bn. In contrast, 2007 saw fewer than half that number of billion-dollar transactions (11 vs. 24), but spending on those big-ticket deals was one-quarter higher ($85bn vs. $69bn).

A decade ago, buyout shops were looking to bag elephants. The prices of the two largest transactions in 2007 were both a full $10bn higher than this year’s biggest PE print, according to the M&A KnowledgeBase. (And for the record, this year’s sole buyout blockbuster – the late-September PE-led $17.9bn purchase of Toshiba’s flash memory business – looks more like the consortium deals we saw last decade than the PE transactions we’ve seen recently.)

For the most part, however, those blockbuster deals from last decade, with their 11-digit price tags, haven’t delivered the hoped-for returns. PE firms are now hoping that by going small, they can get a bigger bang.

Cybersecurity turns into a busy bazaar

Contact: Brenon Daly

The holiday shopping season kicked off last week, and for one tech sector, it was a particularly bountiful time for picking up some companies. Information security (infosec) acquirers announced an unprecedented seven transactions during the week that started on Cyber Monday. The pace represented a dramatic acceleration from the year-to-date average of just two deals announced each week.

With last week’s flurry, the number of infosec acquisitions in 2017 has already eclipsed last year’s total, even as overall tech M&A volume this year is heading for a mid-teens percentage drop from last year, according to 451 Research’s M&A KnowledgeBase. (This year already ranks as the second-busiest year for infosec, with deal volume tracking to roughly 50% higher than the start of the decade.) Probably more important than the sheer number of transactions was who was doing the dealing:

-McAfee announced its first purchase since throwing off the shackles of full ownership of Intel last year. By all accounts, McAfee’s step back into the M&A realm with cloud security startup Skyhigh Networks came at a sky-high price.
-An infrequent acquirer, Trend Micro reached for a small application security startup based in Montreal, IMMUNIO. It is only the third acquisition the Japan-based company has done since 2011.
-Thoma Bravo continued this year’s record level of infosec M&A by private equity (PE) firms, taking Barracuda Networks private for $1.6bn. The M&A KnowledgeBase indicates that 2017 is on pace for more PE purchases in this market than any year in history, likely to come in about quadruple the number of sponsor-backed infosec deals in 2012.

Expanding the timeframe beyond just last week, we see a number of other trends this year that have contributed to strong infosec deal volume in 2017, which should continue in 2018. For starters, the industry’s largest stand-alone vendor has stepped back into the market in a big way. Symantec has inked five transactions so far in 2017, more than it has done, collectively, in the previous half-decade. Meanwhile, other infosec providers have either reemerged as buyers (Juniper acquiring Cyphort after a four-year infosec M&A hiatus) or started their own acquisition program (Qualys has announced two deals in the past four months, after printing just one transaction since the company’s founding in 1999).

November tech M&A slumps to pre-boom levels

Contact: Brenon Daly

Dealmaking in 2017 is going out with a whimper. Acquirers in November spent just $15.7bn on tech transactions across the globe, the lowest monthly total in three years, according to 451 Research’s M&A KnowledgeBase. The sluggish November activity comes after a similarly anemic October, with both months coming in only about half of the average monthly spending for the first nine months of 2017. Also, the number of deals announced in the just-completed month slumped to its lowest level of the year.

Even as November featured a decidedly lackluster level of overall M&A activity, a few transactions stood out, including:
-After entirely sitting out the wave of semiconductor consolidation in recent years, Marvell Technology Group shelled out $6bn in cash and stock for Cavium. The deal stands as the largest tech transaction in November, topping the collective spending on the next four biggest acquisitions last month.
-The information security industry saw its largest take-private, as buyout firm Thoma Bravo paid $1.6bn for Barracuda Networks in a late-November deal. A single-digit grower that throws off $10-20m in free cash flow each quarter, Barracuda has long been considered a candidate to go private as it works through a transition from on-premises products to cloud-based offerings.
-Richly valued startup Dropbox stepped back into the M&A market in November for the first time since July 2015, purchasing online publisher Verst. From 2012-15, the unicorn (or more accurately ‘decacorn’) had inked 23 acquisitions, according to the M&A KnowledgeBase.

The recent tail-off in acquisition spending has left the value of announced tech transactions so far this year at just $302bn, according to the M&A KnowledgeBase. With one month of 2017 remaining, this year is all but certain to come in with the lowest annual M&A spending since 2013. This year is tracking to a 34% decline in deal value compared with 2016 and an even-sharper 45% drop from 2015.