Google’s smartphone redial 

Contact:Scott Denne

For a first marriage, it’s common to overlook a spouse’s flaws, harbor unrealistic fantasies about life together and spend unjustifiable sums on the wedding. A second marriage tends to be a more measured affair, with a conservative price tag and thoughtful evaluation of how the pairing fits into one’s broader life goals. The same applies to Google’s second purchase of a mobile phone company, as the search giant is paying $1.1bn for certain assets of HTC almost three years after unwinding its tie-up with Motorola Mobility.

While today’s deal marks a big commitment, it’s well short of the $12.5bn it spent for Motorola six years ago. Its reach for HTC differs from that earlier one – most of which it unwound in a 2014 divestiture to Lenovo – in more ways than price. With Motorola, Google envisioned itself becoming a marquee manufacturer of smartphones. This time, Google is making a more tactical move in the mobile market.

Google is obtaining the HTC team (and a license to related patents) that it used to build its Pixel phone, a collaboration that’s showing early signs of paying off. According to 451 Research’s VoCUL surveys, less than 1% of consumers with a smartphone own one made by Google, although the number planning to buy a Google phone sits near 3%. Even with those gains, Google’s phone business remains a long distance from matching Apple or Samsung.

But catching up to those companies, at least in hardware sales, isn’t likely the goal. Those same 451 surveys show that Google’s mobile OS, Android, has a larger market share than Apple’s iOS and more consumers prefer Android for future purchases. In that sense, the HTC pickup isn’t so much a break from its Motorola deal, but a continuation of the gains made from it.

Leading up to its acquisition by Google, Motorola’s sales were in a tailspin that continued after the transaction. Yet Google was able to build a broad ecosystem for Android during that time. That’s what it has in mind in nabbing the HTC team. Google is focusing its own hardware efforts on building high-end devices not mainly to sell devices but to showcase what’s possible with Android, making it easier for other hardware providers to develop functionality they’ll need in the competition against Apple, ensuring that Google’s software (and its cash-cow search engine) retains a place in the mobile market.

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

Retailers go shopping online 

Contact: Scott Denne

It’s been a tough year for retail. More than a dozen retailers – the latest being Toys R Us – have filed for bankruptcy, while others – JC Penney and Macy’s, for example – have grappled with lower-than-expected sales and store closings. As they face the acute threat from online sellers, Amazon in particular, they have adjusted their acquisition strategies to be more ambitious in scale, yet narrower in scope.

According to 451 Research’s M&A KnowledgeBase, spending on tech M&A by retailers spiked this year and last, with each cresting above $4bn in spending, whereas each of the four years prior to that, total spending fell safely below $1bn. (Two deals – Walmart’s $3.3bn purchase of Jet.com and PetSmart’s $3.4bn reach for Chewy – account for most of that boost, yet even excluding those transactions, spending by retailers in 2016 and 2017 sits slightly higher than normal.)

Aside from the increase in spending, retailers have executed a shift in M&A strategy. Where they had once been inclined to pick up companies outside their core competency, buying websites, logistics or gaming companies, they’re now more likely to snag their online counterparts, as Signet Jewelers recently did – amid declining in-store sales – with its $328m acquisition of R2Net. As their customers have done more of their shopping online, retailers have done the same. This year and last, retailers printed more deals for e-commerce vendors than all other categories combined, a contrast to their earlier buying habits.

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

Trump’s death blow to a deal

Contact: Brenon Daly

Respondents to the previous edition of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster have once again delivered the wisdom of the crowds. When asked last spring about the outlook for US-China tech deal flow, respondents overwhelmingly predicted that President Trump’s policies would crimp M&A activity between the world’s two largest economies. Specifically, two-thirds (65%) of the 157 respondents from across the tech M&A landscape forecast a decline in purchases of US tech companies by Chinese buyers. That was more than four times the level (14%) that anticipated an increase.

In line with that April forecast, Trump has blocked the proposed $1.3bn acquisition of Lattice Semiconductor by a Beijing-based fund, citing national security concerns. Regulatory approval of the planned purchase by Canyon Bridge Capital Partners, which was announced last November, had been viewed as virtually impossible after The Committee on Foreign Investment in the US indicated that it would not sign off on the transaction. Trump delivered the death blow to the deal on Wednesday.

Trump’s move represents a rare bit of White House intercession in an acquisition. But it isn’t necessarily out of character for Trump, who has singled out China for some of his sharpest criticism as he has pursued a self-described ‘America First’ policy. Again, respondents to the M&A Leaders’ Survey last spring accurately predicted that Trump’s singularly unfriendly views toward China would disproportionately impact US-Sino deal flow. In the survey, fully one out of five respondents (20%) forecast that Chinese buyers of US tech companies, such as Lattice Semi, would ‘substantially’ cut their activity due to the Trump administration, compared with just 3% who said they expected overall cross-border M&A to drop off ‘substantially’ in the current regime.

451 Research and Morrison & Foerster are currently in market with the latest edition of the M&A Leaders’ Survey, and would appreciate your views on where the tech M&A market is and where it’s heading. In addition to broad market questions, we also revisit questions around Trump’s impact on cross-border M&A as well the specific outlook for China-based buyers. We would appreciate your time and thoughts. To participate, simply click here.

A private equity play in the public market

Contact: Brenon Daly

In a roundabout way, private equity’s influence on the technology landscape has also spilled over to Wall Street. So far this year, one of the highest-returning tech stocks is Upland Software, a software vendor that has borrowed a page directly out of the buyout playbook. Shares of Upland – a rollup that has done a half-dozen acquisitions since the start of last year – have soared an astounding 150% already in 2017.

Investors haven’t always been bullish on Upland. Following the Austin, Texas-based company’s small-cap IPO in late 2014, shares broke issue and spent all of 2015 and 2016 in the single digits. For the past four months, however, shares have changed hands above $20 each.

Upland’s rise on Wall Street this year essentially parallels the recent rise of financial acquirers in the broader tech market – 2017 marks the first year in history that PE firms will announce more tech transactions than US public companies. As recently as 2014, companies listed on the Nasdaq and NYSE announced twice as many tech deals as their rival PE shops. (For more on the stunning reversal between the two buying groups, which has swung billions of dollars on spending between them, see part 1 and part 2 of our special report on PE and tech M&A.)

Although Upland is clearly a strategic acquirer in both its origins and its strategy, it is probably more accurately viewed as a publicly traded PE-style consolidator. The company has its roots in ESW Capital, a longtime software buyer known for its platforms such as Versata, GFI and, most recently, Jive Software. Upland was formed in 2012 and, according to 451 Research’s M&A KnowledgeBase, has inked 15 acquisitions to support its three main businesses: project management, workflow automation and digital engagement.

Selling into those relatively well-established IT markets means that Upland, which is on pace to put up about $100m in revenue in 2017, bumps into some of the largest software providers, notably Microsoft and Oracle. To help it compete with those giants, Upland has gone after small companies, with purchase sizes ranging from $6-26m.

However, the company has given itself much more currency to go out shopping. Early this summer – with its stock riding high – it raised $43m in a secondary sale, along with setting up a $200m credit facility. Given Upland’s focus on quickly integrating its targets, it’s unlikely that it would look to consolidate a sprawling software vendor. But it certainly has the financial means to maintain or even accelerate its rollup of small pieces of the very fragmented enterprise software market.

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

Container craze could spark monitoring M&A 

Contact: Nancy Gohring

Even though it’s early still for the use of containers and microservices, we’ve seen a handful of startups enter the market with technology designed specifically for the monitoring needs of those environments. Established vendors also are developing techniques for this segment, yet adoption of these technologies is moving fast enough that broader application monitoring companies may decide to buy a specialist to speed time to market.

In our 2016 Voice of the Enterprise (VotE): Cloud Transformation, Budgets and Outlook survey, 26.7% of respondents said they were either in broad or initial implementations of containers in production environments. A further 11.3% said they were using containers in test and development environments, 21.4% said they were employing containers in trials, and 40.7% said they were evaluating containers.

Emerging vendors such as Sysdig, Outlyer and Instana are developing new approaches that aim to solve the particular challenges of monitoring applications built using containers and microservices, especially the challenges that emerge in dynamic environments. Most of these startups are quite small, with relatively few customers, indicating that they still have work to do to prove their worth. However, we believe both legacy and newer-breed providers looking to quickly add capabilities around this fast-growing use case could benefit from a pairing with one of the new entrants, allowing them to start serving users now.

Legacy vendors specifically, which have been eclipsed in recent years by more modern players, may have the most to gain from such an acquisition. Subscribers to 451 Research’s Market Insight Service can access a detailed report that analyzes the potential acquisitions of application monitoring companies built for container environments.

Webinar: PE activity and outlook

Forget Oracle, IBM, or any of the other big-name, publicly traded acquirers that – until now – have always set the tone in the tech M&A market. If a tech deal printed in 2017, the buyer is more likely to be a private equity firm than any of the well-known serial acquirers on the US stock market. This is the first time in the history of the multibillion-dollar tech M&A market that financial acquirers have been busier than these strategic acquirers.

To understand how the ever-growing influence of buyout shops is reshaping both M&A and the tech industry, join 451 Research for an hour-long webinar on Thursday, September 7, 2017, starting at 1:00pm ET. Registration is available here: https://www.brighttalk.com/webcast/10363/274289.

One and done for tech M&A in August

Contact: Brenon Daly

For tech M&A in August, there was one big print and then everything else. The blockbuster transaction, which saw Vantiv pay $10.4bn for UK-based rival payments processor WorldPay Group, accounted for almost half of the $22.7bn spent on tech deals around the globe this month, according to 451 Research’s M&A KnowledgeBase.

After the massive fintech consolidation, however, the value of transactions declined sharply. No other deal announced in August figures into the M&A KnowledgeBase’s list of the 25 largest transactions announced in the first eight months of 2017.

The slowdown at the top end of the tech M&A market pushed this month’s spending level to the lowest total for the month of August since 2013. More recently, the value of deals in August came in slightly below the average monthly spending so far this year.

Altogether, tech acquirers across the globe have spent just less than $200bn so far this year, according to the M&A KnowledgeBase. At this point in both 2016 and 2015, spending on transactions had already topped $300bn.

With eight months now in the books, 2017 is on pace for the lowest level of M&A spending in four years. The main reason for the slumping deal value is that many of the tech industry’s most-active acquirers have largely moved to the sidelines, especially when it comes to big prints. IBM, Hewlett Packard Enterprise and Oracle all went print-less in August.

In contrast, the rivals to those strategic buyers, private equity (PE) firms, continued their shopping spree. PE shops announced 77 deals in August, an average of almost four each business day. That brings the total PE transactions announced this year to 600, a pace that puts 2017 on pace to smash last year’s record number of deals by roughly 30%. (For more on the record-setting activity of buyout shops, be sure to join 451 Research for a webinar next Thursday, September 7, at 1:00pm ET. Registration is available here.)

Western Digital takes a familiar path into new markets with a pair of deals 

Contact: Scott Denne, Tim Stammers

Western Digital has printed two different deals that follow the same pattern. The disk-drive giant has acquired enterprise storage vendor Tegile Systems along with Upthere, a developer of consumer cloud storage products, continuing its recent feast-then-famine M&A pace. Those targets mark the first companies it has bought since reaching for SanDisk in a $17bn transaction at the end of 2015.

In Western Digital’s last cycle, it spent $1bn across three acquisitions in the solid-state storage sector in the third quarter of 2013, followed by a 15-month hiatus from the market. Before that string of SSD deals, but after its $4.3bn purchase of HGST in 2011, it had only bought one company – a tuck-in of backup software firm Arkeia.

Like each of the last four private companies that Western Digital purchased, both of today’s targets took minority investments from Western Digital, which led the most recent venture rounds raised by Tegile and Upthere. Both transactions also push Western Digital further upmarket. Upthere sells high-performance cloud storage services designed for pictures, extending Western Digital’s consumer storage business and, since Upthere builds its own infrastructure rather than running on AWS, it brings a technical team that could bolster the acquirer’s ability to deliver enterprise offerings for other cloud services.

With Tegile, Western Digital becomes a full systems provider – a shift that’s been many years and many deals in the making. Purchases of Virident and SanDisk brought it hardware products to sell directly to enterprises, rather than OEMs, and acquisitions of Skyera and Amplidata brought it software IP that could potentially be used to build its own storage systems. If the past is any indication, Western Digital is wise to stick to its patterns – the company’s stock is up 90% in the wake of its SanDisk buy and a year-long streak of beating Wall Street’s projections.

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

Valassis sees discounts in MaxPoint acquisition 

Contact: Scott Denne

Coupon distributor Valassis Communications has taken another step in its transition to digital with the $95m acquisition of location-based ad-tech vendor MaxPoint Interactive. In addition to getting Valassis another marketing product to sell to consumer goods providers, the target’s technology could plug a substantial weakness in RetailMeNot, a digital coupon firm that Valassis’ parent company, Harland Clarke Holdings, bought in April.

The sale ends a turbulent and short run as a public company for MaxPoint, which debuted in April 2016 with a stock price that’s more than 3x what it’s getting in today’s deal, which values it at a paltry 0.6x trailing revenue.

MaxPoint enables advertisers to run national campaigns for consumer goods that target prospects at the local level, based on a mix of proximity to retail locations and digital demand signals from particular neighborhoods. As one of the world’s largest distributors of coupons, Valassis hands MaxPoint’s media services business a new avenue for growth. But the larger opportunity is in integrating the underlying technology with its recently acquired online coupon business.

RetailMeNot built a business by distributing digital coupons for retail locations. The problem it’s always had is proving to its retailers that those coupons work – did the coupons drive people to the store or did the store just give discounts to people who planned to come anyway? To operate its media business, MaxPoint developed technology that predicts demand for products within the market area for a physical retail location. RetailMeNot could deploy such demand analysis to optimize when and where it launches campaigns and use it to measure the impact.

Moreover, a partnership between the two companies could enable MaxPoint to deliver coupons to RetailMeNot that are tied to a retail location but funded by product vendors and in doing so provide both retailers and consumer products companies a way to navigate a market that’s rapidly shifting to digital with a shared marketing strategy that they’ve employed for decades.

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

Private equity does a number on the public markets

Contact: Brenon Daly

Private equity (PE) is doing a number on the public markets. No longer content with siphoning dozens of tech vendors off the exchanges each year, buyout shops are now moving earlier in the IPO process and targeting companies that may only be thinking about someday going public. These rapacious acquirers are not only harvesting the current crop of tech vendors on the NYSE and Nasdaq, but also snapping up the seeds for next season’s planting as well.

Consider the recent activity of the tech industry’s most-active PE shop, Vista Equity Partners. Two months ago – on the same day, as a matter of fact – the firm ended Xactly’s two-year run as a public company and snagged late-stage private company Lithium Technologies, a 16-year-old vendor that had raised some $200m in venture backing. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates of terms on the Vista Equity-Lithium deal here.) And just yesterday, Vista Equity once again went startup shopping, picking up software-testing firm Applause.

To be clear, neither Lithium nor Applause would have been considered dual-track deals. Both startups undoubtedly needed time to get themselves ready for any eventual IPO. And while it might seem like a PE portfolio provides a logical holding pen for IPO candidates, buyout shops don’t really look to the public markets for exits. As far as we can tell, Vista Equity hasn’t ever taken one of its tech vendors public. The same is true for Thoma Bravo. Instead, the exit of choice is to sell portfolio companies to other PE firms or, to a lesser degree, a strategic acquirer. (Buyout shops prefer all-cash transactions rather than the illiquid shares that come with an IPO so they can speed ahead raising their next fund.)

The PE firms’ expansive M&A strategies – directed, effectively, at both ends of the tech lifecycle on Wall Street – aren’t going to depopulate the public markets overnight. However, those reductions aren’t likely to be offset by an increase in listings through an uptick in IPOs anytime soon. That means tech investing is likely to get even more homogenized. It’s already challenging to get outperformance on Wall Street, where passive, index-driven investing dominates. With buyout shops further shrinking the list of tech investments, it’s going to be even harder for money managers to stand out. With their latest surge in activity, PE firms have made alpha more elusive on Wall Street.

To see how buyout shops are reshaping other aspects of the tech industry and the long-term implications of this trend, be sure to read 451 Research’s special two-part report on the stunning rise of PE firms. (For 451 Research subscribers, Part 1 is available here and Part 2 is available here.) Additionally, a special 451 Research webinar on the activity and outlook for buyout shops in tech M&A is open to everyone. Registration for the event on Thursday, September 7 at 1:00pm EST can be found here.