Webinar: Tech M&A Outlook 2019

by Brenon Daly

For a look ahead at what’s coming in the tech M&A market in 2019, join 451 Research on Tuesday, February 12 at 9:00am PST for a special webinar on what we expect to drive deals in the year ahead. (To register for the free, one-hour webinar, simply click here). Specifically, we’ll be looking at how busy tech’s big-name buyers are expected to be in 2019, along with the current trends that are shaping the VC and PE markets.

During the webinar, we’ll draw on our just-published Tech M&A Outlook 2019. The 125-page report features not only the overall trends that are expected to shape dealmaking in a half-dozen key enterprise IT markets – including software, security and the Internet of Things – but also which specific companies are likely to figure into those transactions. The Tech M&A Outlook is available to all subscribers of 451 Research’s M&A KnowledgeBase: next Tuesday’s webinar is open to everyone.

Hellman & Friedman’s Ultimate HR deal

by Scott Denne

Hellman & Friedman’s $11bn acquisition of Ultimate Software provides the ultimate case study in rising valuations for human resources (HR) software vendors. The deal marks the largest HR software purchase and fixes an 11x trailing revenue multiple on the target, a multiple that’s increasingly becoming common for such companies as private equity (PE) money floods that corner of the software market.

According to 451 Research’s M&A KnowledgeBase, each of the three previous years have witnessed more than double the typical number of HR software transactions sporting a multiple at or above 5x TTM revenue. Strategic acquirers have been more willing to pay up – Ultimate itself paid 8.8x last summer in its $300m pickup of PeopleDoc, its sixth and largest acquisition.

But most of the recent, strong valuations have come from PE shops. Today’s deal provides one data point, as do Thoma Bravo’s purchase of PEC Safety and Marlin Equity Partners’ reach for Virgin Pulse. HR software has long been a PE favorite – but it’s also attracting the interest of buyout firms that are less experienced in software as many of these businesses have a strong services component. Last year, 49% of such targets were bought by PE shops, compared with just 25% at the start of the decade. (For context, our data shows that roughly one-third of all software providers were acquired by PE firms last year.)

Hellman & Friedman, which is leading the syndicate that’s buying Ultimate Software, is neither new to software or HR. It acquired Kronos, a maker of HR software mainly used by organizations with hourly employees, back in 2007, paying 3x. That’s not to say prevailing prices have tripled or quadrupled in the time between those two transactions by the tech-focused PE shop. For one, Kronos began its transition to SaaS only a few years ago, whereas Ultimate’s revenue is overwhelmingly SaaS.

The market has changed in that time as well. When Hellman & Friedman bought Kronos, HR software – like many categories of business applications – functioned as a record-keeping and workflow tool. While that’s still true today, we find that more companies are turning to HR software and the data it contains for strategic insights. According to 451 Research’s Voice of the Enterprise: Data & Analytics, 28% of businesses run analytics on their employee behavior data, roughly the same number that analyze IT infrastructure data.

451 Research’s Tech M&A Summit

by Brenon Daly

451 Research is looking forward to hosting many of you at tonight’s sold-out Tech M&A Summit in downtown San Francisco. It’s shaping up to be a terrific event, with a lot to cover: the near-record spending on acquisitions in 2018 that – at least early on – appears to be carrying over into this year.

At tonight’s Tech M&A Summit, we’ll look at some of the M&A drivers for the broad market, as well as focus more closely on the expected activity in a couple of key markets, including machine learning, cloud and information security. For that, we’ll be drawing on our just-published Tech M&A Outlook 2019, a comprehensive forecast of what our analysts see happening in the markets that they cover. In the 125-page report, our analysts not only identify trends that are expected to shape M&A activity but also note how the companies they cover might figure into that.

Finally, we’ll have some views from some of the tech industry’s most-active dealmakers and advisers during this evening’s panel. Joining on the ‘practitioner’s hour’ are representatives from Morrison & Foerster, KeyBanc Capital Markets, VMware and Software AG. (Collectively, our panelists’ firms put up 50 announced transactions in 2018, according to 451 Research’s M&A KnowledgeBase.) Tonight’s Tech M&A Summit promises to be a lively and informative event, with maybe even a little fun sprinkled in as we talk shop. We look forward to seeing you there. #451TechMASummit

Financial firms clear a path for emerging tech

by Michael Hill

As they look toward IT to solve business problems, financial firms and the software developers that cater to them are expanding their acquisitions of emerging technology companies. While overall fintech deal volume subsided slightly in 2018, the number of blockchain and machine learning transactions by those buyers rose sharply.

According to 451 Research’s M&A KnowledgeBase, the number of fintech blockchain deals increased sixfold in 2018, to 19 transactions. Those same acquirers also expanded their appetite for machine learning, printing eight purchases of machine learning targets, from just three a year earlier. The high multiples – including two deals that went north of 20x trailing revenue – and volume of tuck-ins and ‘acq-hires’ attest to the early stage of those technologies. Still, the rationale behind such transactions shows that these technologies, at least in financial services, are entering the mainstream.

Take Ernst & Young, which in July purchased the assets of cryptocurrency accounting software developer Elevated Consciousness. That deal suggests that at least one of the big four accounting firms views cryptocurrencies as an asset class that’s viable enough that it needs to help its clients assess the risk and tax implications of such investments. Elsewhere, TD Bank’s January reach for predictive analytics specialist Layer 6 was driven by its recognition of machine learning’s potential to improve customer experience.

As our surveys demonstrate, financial services rely on IT to meet business goals more so than other industries. In 451 Research’s recent Voice of the Enterprise: Digital Pulse, 56% of financial services executives have business-focused IT goals, compared with 48% for the entire study, while blockchain and machine learning were among the top four technologies anticipated to have the most transformational impact on business operations by 2020.

 

Talking AI

by Scott Denne

The number of conversational artificial intelligence (AI) deals surged last year and looks bound for a boost in 2019. Buyers are drawn to the emerging opportunity to add voice and text capabilities into both their products and customer service channels as multiple 451 Research surveys show an increasing amount of value placed on such offerings.

By our reckoning, the number of acquisitions driven by the target’s conversational AI or chatbot technology increased by four times over in 2018. According to 451 Research’s M&A KnowledgeBase, last year saw 28 such deals, up from seven a year earlier and just two in 2016. We tracked two such transactions this week alone – Qlik’s reach for Crunch Data to enable conversational queries in its business intelligence software and Yodlee’s purchase of Abe AI to enable banks to interface with Amazon’s Alexa and other conversational ecosystems.

According to 451 Research’s VoCUL: Corporate Software survey, 17% of software buyers said that chatbots and virtual assistants were among the technologies that could improve customer experiences, up from 15% in the same survey six months earlier. Correspondingly, software and service providers are increasing their investments in those technologies. In our Voice of the Service Provider survey, 48% said they are increasing their budgets for AI/machine learning (ML), with much of that going toward virtual assistants and other customer service functions.

All of that will continue to flow into dealmaking. In 451 Research’s recent Tech Banking Outlook Survey, respondents predicted that the broader category of AI and ML would be the top driver of M&A in 2019. Yet, despite the exploding volume of conversational AI deals, most are modest-sized acquisitions and likely to stay small as conversational AI most often becomes a product feature, rather than a stand-alone offering.

2019 Tech M&A Outlook: Introduction

by Brenon Daly

Each January, we look back on deal flow over the previous year and look ahead at what we expect in the coming year. Our Tech M&A Outlook: Introduction provides a broad overview of acquisition activity in the tech market and the trends that shaped – and will shape – the multibillion-dollar tech M&A market. A few of the insights from the report include:

Both strategic and financial acquirers printed a record number of billion-dollar deals in 2018, with their combined pace topping two big-ticket transactions announced every week last year, according to 451 Research’s M&A KnowledgeBase. Microsoft, Salesforce, SAP, Adobe and IBM all inked billion-dollar acquisitions last year, after not one of the tech giants announced a blockbuster print in 2017.

With its broad applicability for buyers across the tech landscape, machine learning (ML) cemented its standing as the fastest-growing trend in the tech M&A market. The number of deals has increased roughly 50% every year since the start of the decade, our data shows. And no slowdown is expected in 2019, since bankers told us they have more ML transactions in their pipelines than anything else.

VC has turned into an industry characterized by ‘fewer, but bigger.’ That’s true in funding as well as exits. The M&A KnowledgeBase tallied the sale of just 603 startups in 2018, the second-fewest exits in the past half-decade. Proceeds from those deals, however, smashed all records. Last year’s total of $83bn in announced or estimated deal value almost eclipsed the total for the three previous years combined.

Additionally, we look at the prevailing trends in M&A pricing; the unprecedented activity of private equity that’s reshaping the tech landscape; and what the outlook is for the other exit, IPOs.

The overview serves as an introduction to our full, 100-page report that covers the outlook for M&A activity in six key enterprise IT markets, including application software, IoT and cloud. The full report, which will be available next week, is included in all subscriptions to 451 Research’s M&A KnowledgeBase, and is also available for purchase.

Viacom orbits around online video and ad targeting with Pluto TV purchase

by Mark Fontecchio, Scott Denne

With the $340m pickup of Pluto TV, Viacom broadcasts its desire to provide more online video and gain insights about the viewers who watch it. The target offers an ad-supported streaming service with more than 100 channels and claims over 12 million monthly active users. That media content and viewership data could help Viacom as it pushes into streaming video in search of higher ad rates through granular audience targeting.

The $13bn media giant dipped into streaming video M&A with the $17m acquisition of AwesomenessTV in July. Today’s larger deal signals Viacom’s appetite for more digital-first and digital-native content. Price isn’t the only dramatic difference between today’s transaction and that earlier buy. With Pluto TV, Viacom gets a fully backed streaming service that hosts both scheduled content and on-demand videos on a variety of channels, rather than a single channel or studio. Reaching for Pluto also gives Viacom access to millions of users, many of them younger viewers who don’t consume much traditional television. That amount of proprietary audience and viewership data can be immensely valuable, as the company recently cited increased ad rates due to improved ad targeting.

Surveys show that more people are signing up for online video services, often at the expense of traditional TV. According to 451 Research’s Voice of the Connected User Landscape, roughly one-fifth of consumers have either dropped traditional cable and satellite TV providers or have never subscribed to them in the first place. The same survey found that 57% of consumers now pay for at least one online video service.

According to 451 Research’s M&A KnowledgeBase, media firms have infrequently acquired software and internet businesses, having only printed about 20 deals in each of the past two years. Still, we anticipate that more broadcasters and studios will expand their acquisitions of video services or underlying technology as they seek ways to generate a direct link to their audiences to offset declining TV viewership and massive investments in original, niche content from Amazon and Netflix.

An unexpected exit from Sand Hill Road

by Brenon Daly

There’s a new exit off Sand Hill Road that’s proving increasingly popular for startups. Rather than following the well-worn path that leads into another venture portfolio, startups are taking an unexpected turn into private equity (PE) holdings at a record rate. For the first time in history, a VC-backed startup in 2018 was more likely to sell to a PE buyer than a fellow VC-backed company, according to 451 Research’s M&A KnowledgeBase.

Last year was a stunning reversal from when ‘inter-species deals’ were the norm. In 2015, for instance, the M&A KnowledgeBase shows almost three times as many VC-to-VC transactions as VC-to-PE transactions. But with ever-increasing amounts of cash to put to work, PE firms have started reaching into VC portfolios much more frequently and aggressively.

The M&A KnowledgeBase shows that buyout shops, which once operated on the diametrically opposite end of the corporate lifecycle from VCs, are now providing almost one out of four venture exits. They are doing this by bolting on startups’ assets to their ever-increasing number of existing portfolio companies, as well as by recapping startups, or buying out an existing syndicate of venture investors.

Altogether, PE firms have doubled the number of VC-backed deals over the past three years. That buying group has increased its startup purchases every single year since 2015, while the number of VC-to-VC transactions has fallen every single year during that period.

Those diverging fortunes have pushed buyout shops’ share of VC exits to an unprecedented 23% in 2018, up from roughly 10% at the start of the current decade, according to the M&A KnowledgeBase. So for a startup looking to sell itself in the coming year, it’s probably more likely to go to a company owned by Silver Lake rather than Greylock, or KKR rather than NEA.

Pricing pressure

by Brenon Daly

No matter where shoppers looked last year, the tech M&A market was a pricey place to be. Unprecedented valuations are one of the main reasons why overall acquisition spending basically matched the highest level since the dot-com collapse. 451 Research’s M&A KnowledgeBase recorded $573bn worth of deals in 2018, nearly equaling 2015’s record but on 20% fewer transactions.

Drawing on the M&A KnowledgeBase, we see that ‘valuation inflation’ played out in deals across the entire tech landscape:

At the top end of the market, both corporate and financial acquirers in 2018 paid multiples that were a full turn higher than either group has paid for their big prints since the recession. Our data shows that in the 50 largest transactions done by each of the buying groups, private equity shops paid 5x trailing sales while strategic acquirers paid 6.3x trailing sales.

Turning to the VC market, startups that exited last year did so at relatively rich prices. On a median basis, startups sold for 5.8x trailing sales in 2018, almost one-third richer than the 4.5x multiple recorded in the M&A KnowledgeBase since the start of the decade.

As my colleague Scott Denne recently noted, software buyers paid a median 7.6x trailing sales in the record number of $1bn-plus deals they inked last year. They had never paid more than 5x sales in any year since the recession, our data shows.

However, the astonishingly rich multiples paid in last year’s deal flow may well stand as the high-water mark. At least that’s the prevailing view of senior investment bankers we surveyed. In a December survey, a record number of respondents to the 451 Research Tech Banking Outlook Survey predicted tech transactions going off at lower M&A multiples in 2019. (See our full report on the survey.)

Fully two-thirds of senior bankers (68%) forecast discounting in deals in the coming year, more than twice the number of bears in the two previous years of surveys. Just 4% anticipate M&A pricing ticking higher in 2019.

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.