PE firms paying SaaSy valuations

by Michael Hill

A years-long increase in SaaS acquisitions by private equity (PE) firms is flattening out. Yet sponsors are spending far more than in the past for those targets – typically paying more for SaaS vendors than strategic acquirers do – as businesses shift more of their budgets toward hosted software offerings.

According to 451 Research’s M&A KnowledgeBase, PE shops have bought roughly the same number of SaaS targets as this time last year, following several years of increasing the volume of those deals 25% or more each year. Despite that, sponsors have spent more than $20bn on SaaS acquisitions so far in 2019, compared with $24.7bn for the entirety of 2018. Much of the jump stems from Hellman & Friedman’s $11bn take-private of Ultimate Software. Still, even without that transaction, PE firms have spent nearly three times as much on SaaS purchases this year as they did during the same period last year.

And 2019’s larger deals are coming at a premium. So far, the median trailing revenue multiple for a SaaS target in a sale to a buyout shop or PE portfolio company stands at 4.9x, a turn higher than any full year this decade. Our data also shows that 2019 marks the first year that PE firms have paid higher multiples than strategic buyers, whose acquisitions of SaaS vendors carry a 4.5x median multiple this year.

The increase in valuations comes as businesses are pushing more of their IT budgets into SaaS. According to our most recent Voice of the Enterprise: Cloud, Hosting and Managed Services, Budgets & Outlook – Quarterly Advisory Report, 67% of respondents expect to increase their spending on SaaS this year. What’s more, 38% expect SaaS to be their largest area of spending growth among cloud and hosted services.

Another cycle of data analytics consolidation

by Scott Denne

The ability to properly analyze data has become a core element of how organizations are evolving their operations. As such, we’ve seen two multibillion-dollar analytics software deals in a week – Google’s $2.6bn acquisition of Looker and Salesforce’s $15.1bn purchase of Tableau. Not only did those transactions bring back a key feature of 2018’s M&A market – big-name companies printing big-ticket deals at scorching valuations, as we noted yesterday – they also reflect the central role that data and analytics are expected to play in a modern enterprise.

Our surveys of IT professionals and managers show that improved analytics is a key reason for businesses to undergo digital transformation. According to451 Research’s Voice of the Enterprise: Digital Pulse, 43% of respondents that are executing or planning a digital transformation said ‘data-driven business intelligence and analytics’ is a primary purpose for that larger initiative. That central role of analytics helps explain why Google and Salesforce are looking to data visualization and analysis to build deeper relationships (and larger contracts) with customers.

For a similar surge in analytics software M&A, look back to 2007, the year IBM, Oracle and SAP each picked off the top three BI software vendors (Cognos, Hyperion and Business Objects, respectively). Yet Tableau’s acquisition, which stands as the largest-ever purchase of a business application provider, according to 451 Research’s M&A KnowledgeBase, dwarfs all those previous deals, the largest of which (Business Objects) was $6.8bn. And on valuation, Tableau commanded 12.2x (subscribers to the M&A KnowledgeBase can access our estimates of Looker’sforward and trailing multiples), while those earlier transactions fell shy of 5x.

We’ll be hosting an in-depth discussion of the importance of data to the future of business and its impact on valuations at our Cycle of Innovation Summit on Thursday morning in London. Those wishing to attend can request an invitationhere.

A pair of 2018 software deals in 2019

by Brenon Daly

When Google and Salesforce announced their recent blockbuster software acquisitions, we had to check the date of the deals. The two high-multiple purchases of analytics vendors didn’t look like anything that’s been printed in 2019. Instead, the pair of transactions looked like something of a 2018 vintage.

Both Google-Looker and Salesforce-Tableau share all of the hallmarks of the significant deals that pushed software M&A to record levels last year: Deep-pocketed, brand-name software giants top an already high valuation for a company in a key segment of the emerging tech landscape. Consider the transactions fitting that description that 451 Research‘s M&A KnowledgeBase had already recorded at this point in 2018:

Microsoft’s seminal $7.5bn acquisition of DevOps kingpin GitHub.

Adobe’s $1.7bn purchase of e-commerce software provider Magento Commerce.

Salesforce’s $6.6bn reach for integration specialist MuleSoft, which had been the cloud company’s largest transaction until Tableau.

SAP’s $2.4bn pickup of CallidusCloud, a SaaS sales compensation management vendor.

All of those transactions went off at double-digit multiples, as did the Salesforce-Tableau and Google-Looker pairings. (Clients of the M&A KnowledgeBase can see our full estimates for both the trailing and forward valuation that the search giant paid in its largest deal in more than five years.)

Rather than the expansive (and expensive) software transactions of 2018, corporate acquirers so far this year have looked to consolidate much more mature markets. For instance, the M&A KnowledgeBase already lists three semiconductor acquisitions valued at more than $1bn in 2019, along with a similar number of massive deals in the electronic payments industry. Compared with those down-to-earth moves, the cloud plays of Google and Salesforce seem to belong to a different era of dealmaking.

A single unicorn sighting

by Brenon Daly

The total number of VC-backed startups hitting the exit so far this year has surged to a three-year high. But most of those deals are at the lower end of the market, according to 451 Research’s M&A KnowledgeBase. Actual unicorn sightings are extremely rare.

In fact, the M&A KnowledgeBase lists just one sale of a venture-backed company for more than $1bn so far in 2019. For comparison, last year the venture industry averaged one unicorn-sized exit every single month. The shift from last year’s ‘fewer – but bigger – deals’ for VCs to this year’s ‘more deals, but far fewer big ones’ could dry up billions of dollars of liquidity for venture firms.

Even excluding last year’s stampede of unicorns, our data shows that the previous half-decade (2013-17) averaged slightly more than four big $1bn+ exits each year for VC portfolio companies. Right now, 2019 is on track for half that number. And yet, the current number of VC-backed startups that have achieved billion-dollar valautions stands at a record high, roughly 10 times more startups than when Aileen Lee initially coined the term ‘unicorn’ in 2013.

Why haven’t venture-backed startups been realizing the same big paydays in 2019 as they have in recent years? Part of the answer is that the IPO market has been more welcoming than in years past, supplying exits this year to some of the most valuable private companies, including Uber, Lyft and Pinterest. (Don’t forget that three of the $1bn+ exits for VCs last year came when startups were snatched out of IPO registration.)

While dual-tracking may be slightly influencing the supply side of the M&A equation for venture startups, we would suggest that a significant shift in the other side (demand) is the main reason for this year’s drop-off. Simply put: The conventional buyers – the tech industry’s well-known names that tend to pay top dollar when they reach into VC portfolios – just aren’t doing deals like they once did.

To illustrate, the M&A KnowledgeBase indicates that SAP, Cisco and Microsoft all inked $1bn+ acquisitions of startups last year, paying roughly 20x in those transactions. So far in 2019, however, that big-cap trio has printed only small tuck-ins.

Medallia’s new CEO follows a tested path

by Scott Denne

With its second acquisition in as many months, Medallia’s new CEO appears to be following the same playbook he used to take his last company, Callidus, to a $2.4bn exit to SAP. In the 11 years leading up to that deal, sales software vendor Callidus bought 20 businesses and never spent $30m on a single deal. Medallia, a customer experience management software provider, is executing that strategy, but in a market with soaring budgets and swarming competitors.

This week, Medallia acquired Cooladata, a developer of behavioral analytics, to bolster its expansion from survey software into a broader portfolio that includes customer profiles, segmenting and reporting. The transaction follows last month’s purchase of Strikedeck (Medallia’s first ever) to add B2B capabilities to its platform. Although terms of neither deal were disclosed, both likely fetched Callidus-like prices. According to 451 Research’s M&A KnowledgeBase, Strikedeck had just 24 employees and Cooladata hadn’t raised any venture funding since a $5.6m series B round almost three years ago.

Medallia’s buildout begins less than a year after CEO Leslie Stretch took the helm – just in time to see a surge in budgets for customer management software. According to 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019, 18% of respondents expect to increase their budgets for the broader category of CRM software, the highest reading of any quarter since the end of 2013. In a separate survey, 50% of respondents told us they were considering purchasing or upgrading customer experience analytics.

With the attention from customers have come new contenders and acquirers. SAP, for example, spent $8bn for Medallia’s main rival, Qualtrics, and SurveyMonkey is attempting to move upmarket into enterprise accounts, acquiring Usabilla for $80m along the way. Call-center software firms Verint and NICE have also printed deals in this space, scooping up Satmetrix and ForeSee, respectively. Not to mention that Adobe recently rebranded its marketing software portfolio as Experience Cloud. With a diverse set of players swirling into the customer experience market, converting conservative acquisitions into a major platform could be more of a stretch than it was for Callidus.

A mature May for M&A

by Brenon Daly

After slumping to the lowest monthly total in four years in April, spending on tech M&A rebounded in May as consolidation in old-line industries set the pace last month. Overall, the value of tech and telecom transactions announced across the globe in the just-completed month tripled compared with April, hitting $46bn, according to 451 Research’s M&A KnowledgeBase. The resurgence pushed May to the second-highest monthly spending of 2019, slightly ahead of the previous four months’ average.

But among last month’s big prints, more than a few of the targets had a bit of grey hair, at least by the standards of the youth-obsessed tech industry. The companies that sold for more than $1bn in May were all more than a decade old, with our data indicating the average founding date for the targets going all the way back to 2000.

Looking specifically at May’s M&A activity, nearly half of the deal value came in a single transaction in the rapidly consolidating payments market. Global Payments handed over $21.2bn in stock for transaction-processing provider TSYS, which was founded in 1983 and had about 13,000 employees. Other big prints last month included the $8.25bn take-private of fiber-optic networking rollup Zayo Group and Hewlett Packard Enterprise’s $1.4bn consolidation of fellow supercomputing vendor Cray.

Billion-dollar deals were relatively rare last month, however. The M&A KnowledgeBase lists just seven tech transactions valued at over $1bn in May, and just 31 deals during the first five months of 2019 overall. For comparison, that’s one-third the number of big prints listed in the M&A KnowledgeBase at this point last year. The drop-off at the top end of the market is the main reason that 2019 is tracking to roughly $100bn, or nearly 20% less M&A spending this year compared with last year.

A valuation gap across the Atlantic

by Brenon Daly

Europe’s underdeveloped venture industry, combined with its slowing economic activity overall, is turning the Continent into a bargain market for tech M&A. Over the past half-decade, Western European acquirers have consistently paid roughly one turn lower than their North American counterparts. The valuation discrepancy on the two sides of the Atlantic is even slightly more pronounced when it comes to VC-backed startups.

According to 451 Research’s M&A KnowledgeBase, Western European buyers have paid a median valuation of 1.9x trailing sales in their tech deals across all sectors since the start of 2014. During that same time, our data shows North American acquirers paid 2.9x trailing sales overall. (To be clear, we are looking at buyers headquartered in the respective regions, regardless of the target’s location. Just to give some sense of scale, over the past half-decade, acquirers in America and Canada have announced nearly three times as many tech transactions as their European cousins.)

In both regions, the broad market multiples have been led higher by the valuations for VC-funded companies. The M&A KnowledgeBase shows European buyers have paid a median of 4x trailing sales for venture-backed startups since 2014, while North American acquirers have been even more generous, paying 5.3x trailing sales.

That’s a fairly substantial premium for any startup, and it’s one that is paid far more often by North American buyers. In fully one of every five tech deals, a North American company picks up a VC-backed startup, which is almost twice the rate of European acquirers. With more plentiful funding, which can fuel faster growth rates, bigger paydays are being found on this side of the Atlantic. When it comes to tech M&A, risk capital can be rewarding.

LinkedIn set to move marketing services beyond its walls with Drawbridge

by Scott Denne

LinkedIn looks to be setting itself up for a second attempt to influence marketing spending beyond its own platform with its latest acquisition. The immensity of its audience profiles should have helped the company build a B2B advertising powerhouse, yet its influence has been barely felt beyond its own website and app. Five years ago, it tried to build out an ad network business but came up short. With the purchase of identity-resolution specialist Drawbridge, it appears set to try again, but differently.

The professional social network already has a substantial marketing business – it was selling roughly $700m annually in ads on its site when it was acquired by Microsoft in 2016. Reaching for Drawbridge should enable the company to find ways to leverage its data beyond its own site. The target developed technology that matches anonymous consumer profiles with devices, helping advertisers target the same audience across multiple devices – desktop, mobile and smart TVs. Such a technology would have little value in selling ads on LinkedIn itself as people must log in to the site to reach the content.

Still, LinkedIn is not likely to use Drawbridge to sell ads beyond its own properties. It tried that with the 2014 purchaseof B2B ad network Bizo, which it shut down less than two years later. Also, Drawbridge had started life as a programmatic ad network before selling its media sales business to Gimbal last year. More likely, LinkedIn will look to use the new assets to develop reporting and analytics capabilities for B2B marketers, as well as augment its ad-targeting data. Such a service would leverage both companies’ strengths in audience identity without saddling them with a low-margin ad business that both buyer and seller have already shunned.

According to 451 Research’s M&A KnowledgeBase, Drawbridge’s exit follows many of its peers in cross-device identity matching. The space has seen a wide disparity of prices. At the high end, ad network Tapad sold to Telenor for $360m. Most recently, Adbrain sold for scraps to The Trade Desk and Oracle picked up Crosswise in a seven-figure deal before that company hit $2m in annual revenue. While terms of Drawbridge’s sale weren’t disclosed, it likely falls between those extremes. Drawbridge had built a larger data business than any of its competitors, generating about $15-20m annually, and had raised roughly $60m from its venture investors.

Payments are getting pricey

by Scott Denne

Amid a wave of consolidation, payment providers are commanding a premium. Long-standing companies in that market are fending off a laundry list of changes, driving larger deals and a willingness to pay up. In less than a week, two acquisitions have printed with revenue multiples that are more than a full turn above where a typical payments vendor trades.

The expansion of digital wallets and P2P payment networks, advancements in integrating payments into software, mobile point-of-sale apps, and the continuing march of digital commerce (and mobile commerce within that) are all reshaping the payments industry. For example, global digital commerce is expected to crest above $6 trillion by 2022, more than double last year’s total, according to 451 Research’s Global Digital Commerce Forecast. Many players in the industry are combining to cope.

With today’s announcement that Global Payments will use $21.2bn of its stock to buy TSYS, there has now been $82bn in purchases of payment providers this year. Put another way, $4 of every $10 spent on a tech target this year has gone to a payments company, according to 451 Researchs M&A KnowledgeBase. While this year’s total is a high point, the trend has been building for some time. Each of the two previous years also saw more than $10bn spent on payment targets, something that’s only happened in one other year since 2008.

To get its hands on its rival TSYS, Global Payments valued the business at 6.1x trailing revenue, well above the median 4x for payment companies across the entire decade, according to the M&A KnowledgeBase. Nuvei paid a similar multiple when it handed over $890m for SafeCharge last week to move into European markets. Those transactions helped propel the median multiple for payment deals up to 5.7x for 2019, according to our data. As the number of potential targets with scale shrinks, payments are looking pricey.

China’s M&A trade imbalance

by Brenon Daly

The economic protectionism and national isolationism that has brought the world’s two largest economies in conflict has cost both the US and China billions of dollars. Yet the wounds in the ongoing trade war aren’t evenly distributed. So far in the early days of the conflict, China has suffered more damage since it started with more to lose.

That imbalance – and the accompanying vulnerability – shows up in broader macroeconomic implications for the two countries. As my colleague Josh Levine recently noted, China’s exports to the US account for 3.5% of their GDP, while only a scant 0.6% of the US GDP is generated by exports to China.

The disparity also plays out in M&A activity, which is also a form of ‘trade,’ after all. As 451 Research’s M&A KnowledgeBase shows, the ledger there is rather imbalanced: Since 2002, China-based acquirers have spent three times more on US tech vendors than the other way around. In that period, China has done more shopping in the US than anywhere else, with American tech firms accounting for one of every six deals announced by a Chinese buyer. (For the record, a majority (60%) of tech transactions by Chinese companies involve a target also based in China.)

More notably, Chinese firms have announced billion-dollar purchases of key tech assets from such prominent US vendors as Uber, IBM and Lexmark. In contrast, there hasn’t been any comparable deal flow in reverse. China’s ‘Great Firewall’ has blocked a lot of business expansion – including acquisitions – by US tech companies in the world’s most-populous country.

The contentious relationship between China and the country that had been its largest supplier of tech targets is just the latest complication in the country’s nascent effort to emerge as an M&A powerhouse. Currency restrictions imposed by Beijing diminished their ability to pay for deals, while the recent domestic economic slowdown has made Chinese companies think twice about taking on any acquisitions. And even if the deals do get done, in the current highly politicized environment, there’s no guarantee now that regulators will sign off on it.

For all those reasons and more, China-based tech vendors have stopped shopping. They are currently averaging just one acquisition a month, according to the M&A KnowledgeBase. That’s just one-quarter the rate at which they were purchasing tech providers in the past half-decade. Assuming that pace holds, our numbers show that Chinese buyers will announce the fewest tech transactions in 2019 since 2003.