Telco buys and sells

by Scott Denne

M&A activity among telcos is surging as phone, internet and wireless service providers increase both their buying and selling amid a general, though not complete, movement back toward their core markets after a streak of investments in ancillary tech sectors. Just this month alone, three carriers have unwound deals and scaled back their venture units. Still, acquisitions by carriers have hit their highest level since 2015.

According to 451 Research’s M&A KnowledgeBase, telcos have spent a collective $96bn on tech M&A this year, nearly four times the total spending among those acquirers in all of 2017. At the same time, publicly traded telcos have sold assets worth a combined $19.5bn, or twice the amount they sold in 2016 and 2017 combined.

Telstra is among the most recent sellers as it shed its $270m bet on Ooyala, a video streaming software vendor, in a sale to the company’s management. Alongside that transaction, it announced a restructuring of its venture arm, a move that reflects the recent decision by Rogers Communications to do the same. Telstra’s decision is part of a broader restructuring plan to cut costs and focus on customer service to return to growth (the Australia-based carrier’s topline declined 5% in each of the past two quarters).

Similarly, Sprint decided to divest its Pinsight Media unit in a sale to ad network InMobi. Like Telstra, Sprint is doubling down on telecom services – although in Sprint’s case, that’s taking the form of a $26.5bn sale to T-Mobile, a carrier that’s shown little appetite for moving beyond communications services. But that’s not to say that all carriers are sticking to the markets they know best.

Most notably, AT&T, following its massive $85bn pickup of Time Warner, has increased its acquisitions in digital media, ad-tech and even network security – its purchases of AppNexus and AlienVault account for more than half of the $3.6bn that telcos have spent this year on ancillary technologies. Given the recent failures of its competitors, not to mention the many abandoned forays into datacenters earlier in the decade, it’s tempting to take a dim view of bets in media and advertising.

Still, AT&T, as well as Comcast and Verizon – which made similar, earlier acquisitions in media and advertising – haven’t been the best stewards of their core businesses. There’s scant evidence to suggest that focusing strictly on their legacy business would be without its own risks. Multiple surveys by 451 Research’s VoCUL show consistently low levels of customer satisfaction among phone and TV service providers. For example, mobile services from Sprint and Verizon have trended down over the decade while AT&T has demonstrated little growth, with just 24% of customers saying they’re satisfied with the current service (only T-Mobile has posted long-term gains on that front).

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

Harris’ acquisition of L3 puts 2018 on pace for a record

by Mark Fontecchio

Harris’ $15.6bn purchase of fellow defense contractor L3 Technologies brings the total deal value within striking distance of 2015’s record haul and above any other full-year total since the dot-com bubble. While an industry consolidation play from Harris may have gotten this year to that mark, this transaction looks more like the acquisitions that pushed 2015 to a record than those that are putting 2018 in contention for a new one.

In handing out $15.6bn of its stock for L3, Harris seeks increased scale to compete with still-larger defense players that include Lockheed Martin, Northrup Grumman and Raytheon. This type of large consolidation play is not without precedent for Harris – in 2015, it spent $4.8bn for Exelis, a deal that valued the target at 1.5x trailing revenue, in line with its acquisition today.

According to 451 Research’s M&A KnowledgeBase, the total value of 2018’s tech M&A market stands at $457bn, currently on pace to surpass 2015’s record haul of $577bn. Back then, consolidation among legacy telcos or aging hardware giants bolstered the annual total – that was the year Dell inked its $63bn purchase of EMC and Charter paid $57bn for Time Warner Cable.

This year’s largest deals are distinctly different. Although there’s still plenty of consolidation, including Comcast’s $39bn reach for Sky and T-Mobile’s planned tie-up with Sprint, there’s more diversity of acquirers and buying strategies beyond industry consolidation. For example, there are two venture-backed targets (GitHub and Flipkart) among the top 10, as well as two private equity purchases – not to mention Broadcom’s head-scratching $18.9bn pickup of CA, a transaction that left Wall Street puzzled.

And as more money goes into new strategies beyond consolidation, the largest deals have fetched higher multiples. According to the M&A KnowledgeBase, in the 10 largest acquisitions this year, targets fetched a median 4x trailing revenue, compared with less than 3x among 2015’s biggest.

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Apple goes back to its old ways for a new reality

by Scott Denne

Despite its massive market cap, Apple rarely makes large acquisitions. With the $300m purchase of Dialog Semiconductor’s power management assets, the company inks its largest disclosed acquisition since the $3bn pickup of headphone maker Beats back in 2014. Yet today’s deal doesn’t imply the start of a new phase for Apple’s M&A program as much as a return to its old ways.

For $300m, Apple is obtaining a license to Dialog’s power management chip technology, along with 300 employees and four facilities in Europe. (As part of the transaction, it’s spending another $300m to preorder certain other products from Dialog.) Prior to buying Beats, some of Apple’s largest purchases were for suppliers, according to 451 Research’s M&A KnowledgeBase. For example, it paid $356m for biometric sensor provider AuthenTec in 2012 and $278m for microprocessor designer P.A. Semi in early 2008.

Reaching for hardware suppliers isn’t the only way Apple’s dealmaking activity is regressing. According to the M&A KnowledgeBase, it wasn’t until 2013 that the Cupertino-based computing company printed more than six transactions in a single year, although in all but one full year since then it’s done at least 10 acquisitions (in 2016, it printed eight). This year, it’s made just five.

Still, the return to the old strategy reflects a new reality for Apple – smartphones are a fully mature market, so it’s logical for Apple to turn to acquisitions that stabilize its supply chain and expand its gross margins. The most recent smartphone survey from 451 Research’s VoCUL shows that just 9.9% of respondents plan to buy a smartphone in the next 90 days, nearing the lowest second-quarter reading on record and part of a continuing downward slope in smartphone demand.

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

Preview: Tech M&A Summit

by Brenon Daly

Companies that have signed off on the certainly-trite-but-possibly-true adage that ‘data is the new oil’ have discovered that the analogy extends far beyond the original meaning of both of the raw materials powering vast and varied industries. Most users of both resources have inevitably found that data and oil become valuable only after they are refined. In the Information Economy, most of that refinement gets done through the application of machine learning (ML) technology.

In a recent Advisory Report, my colleague Nick Patience, who heads up 451 Research’s software practice, notes that ML is a broad collection of technologies that serve a broad collection of uses. Yet, even with the near-universal relevance of ML (who doesn’t want smarter software?), the technology is only starting to find its way into companies. In Nick’s inaugural survey of 550 IT decision-makers, just 17% said they have deployed ML technology, with most of those use cases rather narrowly defined.

At the same time, however, his survey of these tech buyers and users shows they are planning to be much more expansive and aggressive with ML. Looking ahead, roughly half of all of the respondents expect to have ML technology up and running by mid-2019, up from just one in six right now. The soaring forecast for ML implementations is unprecedented in the relatively mature software industry.

That demand has sparked a record rise in the number of ML acquisitions, as suppliers look to pick up technology that helps them get a sense of the ever-increasing piles of information that companies accumulate about their own operations, as well as their ever-expanding relationships with clients, suppliers and partners.

Already this year, buyers have announced more ML deals than any year in history, according to 451 Research’s M&A KnowledgeBase At the current rate, the M&A KnowledgeBase will record roughly 140 ML-related prints for the full-year 2018, twice the number from just two years ago.

To get smart on ML and get even smarter on doing ML deals, 451 Research will be hosting a pair of special ML-themed M&A Summits next week, with morning events held on Tuesday, October 16 in New York City and Wednesday, October 17 in Boston. To reserve your spot for the M&A Summit in New York City, simply click here, and the M&A Summit in Boston, simply click here.

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

Exclusive: Perforce’s Perfecto purchase?

by Brenon Daly

Veteran software development vendor Perforce has only recently emerged as a slow-and-steady consolidator of the various tools and technologies that make up that fragmented market. However, since the 23-year-old company changed private equity (PE) owners earlier this year, it has gotten more aggressive on acquisitions. It has also gotten more ambitious, with the market buzzing that Perforce has just sealed its largest-ever deal.

Although the purchase has not yet been announced, we understand that Perforce has acquired Perfecto Mobile. Exact terms couldn’t be learned, but several market sources put the deal value at $150-200m. Assuming the price is in that neighborhood, Perforce would be valuing the mobile application development startup at 3-4x trailing sales.

After bootstrapping its way through its first two decades of business, Perforce sold to PE shop Summit Partners in early 2016. Summit owned Perforce for two years, with the company picking up a DevOps tool provider in each of those years, according to 451 Research’s M&A KnowledgeBase. In its inaugural acquisition, Perforce bought application lifecycle management specialist Seapine Software, and followed that up by reaching across the Atlantic Ocean for Hansoft Technologies, an Agile tool planner vendor based in Sweden.

More recently, fellow buyout firm Clearlake Capital purchased Perforce in January, in a transaction that priced the company at nearly three times higher than Summit paid, according to our understanding. (Subscribers to the M&A KnowledgeBase can see our estimates for terms for both Summit-Perforce and Clearlake-Perforce.)

In its first deal in the Clearlake portfolio, Perforce nabbed Programming Research, which added security and compliance development features to its platform. That trend has driven several similar acquisitions in the DevOps market, as has the emergence of mobile apps as a major initiative at many companies. With its focus on customer-facing mobile apps, Perfecto extends Perforce’s platform to that market. The transaction is expected to be announced next month, according to our understanding.

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

A barbell lift in Q3

by Brenon Daly

At the top end of the market, tech deal flow in the just-completed Q3 resembled a barbell. Blockbuster transactions came thick and fast in both the quarter’s opening month of July and the closing month of September, but were split in August, when seemingly all of the acquirers went on vacation. 451 Research’s M&A KnowledgeBase shows both July and September put up twice as many billion-dollar-plus tech deals as the dog days of August.

Inevitably, the start-stop-start pattern of big prints in Q3 also shaped the overall monthly totals of announced deal value. All M&A tends be fairly lumpy, skewed by occasional large transactions. But the activity in Q3 was particularly episodic. According to the M&A KnowledgeBase, July acquisition spending hit a relatively high level of $51bn, then fell by half to $23bn in August but then rebounded sharply in September, more than tripling to $79bn. September spending represented the highest monthly total in more than two years.

Bookended by big months, Q3 kept alive this year’s streak of consecutive quarterly M&A spending increases. Dealmakers around the globe handed out $154bn on tech and telecom transactions in the July-September period, slightly more than they spent in Q2 and about one-quarter more than they spent in Q1, according to the M&A KnowledgeBase. We would note that the continued increase came even as private equity (PE) firms turned into uncharacteristic clutchfists last quarter, with both the number of PE deals and the spending dropping for the first time in 2018.

Overall, the strength of Q3 puts 2018 on track to rival the highest annual spending level since the dot-com collapse. 451 Research subscribers can see our full report on Q3 M&A activity, as well as a look ahead to the final quarter of the year, on our site on Tuesday.

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

Marketing deals rise, once again, on Marketo

by Scott Denne

Marketo has now twice driven marketing tech M&A to new heights. Adobe’s $4.8bn acquisition of the marketing automation vendor pushes the total value of marketing deals past its previous record, set in 2016, a year when Vista Equity Partners’ $1.8bn take-private of the same company was the largest transaction in the category. Although only a year separates those record runs, the motivations of the largest buyers in each year are far apart.

According to 451 Research’s M&A KnowledgeBase, $13.2bn worth of marketing software and services companies have been acquired this year, already well above 2016’s $8.6bn. A surge of private equity buyers paying healthy multiples propelled the latter year’s total – the second-largest marketing tech deal that year was EQT’s $1.1bn purchase of Sitecore. This year, it’s strategic buyers looking to play defense that’s driving up the total.

Take ad agency Interpublic, which spent $2.3bn for Acxiom’s marketing database services business to fend off the consulting shops and SIs that are pouring into advertising as the market goes digital. Similarly, AT&T’s $1.6bn acquisition of AppNexus makes up part of the telecom giant’s plan (along with its pickup of Time Warner) to keep from being just a pipe for Amazon, Facebook, Google and Netflix.

In Adobe’s case, reaching for Marketo seems motivated by its increasing competition with Salesforce. Adobe could have outbid Vista Equity back in 2016 for less than the roughly 12x trailing sales it’s paying today. (Vista paid 7.9x in that earlier transaction). Owning Marketo provides Adobe with a defense against Salesforce’s historical strength among B2B firms. In a similar vein, Adobe’s $1.7bn purchase of Magento in May seemed a strike at Salesforce’s earlier acquisition of Magento rival Demandware and also came at an uncharacteristic valuation (11.2x). Prior to those two most recent deals, Adobe had only once paid more than 8x for a vendor with at least $10m in revenue.

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

With HCTS around the corner, hosting M&A sees slowdown from record highs

by Mark Fontecchio

With 451 Research’s Hosting & Cloud Transformation Summit (HCTS) set to kick off next week, hosted services M&A activity has been a bit quiet in 2018, retreating from recent record highs. Massive multitenant datacenter (MTDC) consolidation in previous years has cut the number of sizable targets available for purchase, drastically reducing M&A spending. However, as enterprises increasingly migrate IT workloads off-premises, hosting providers are offering more managed hosting and cloud services, and inking deals to help them do it.

According to 451 Research’s M&A KnowledgeBase, hosted services acquisitions total $8.1bn in spending so far this year. That pace would put 2018’s year-end total at about $11.5bn, well below outsized spending in 2016 and 2017. That said, the flow of hosting deals has been notoriously lumpy. For example, 2016 saw nearly half of its record spending of $15.6bn come in Q4.

Could that happen again this year? While unlikely, it’s possible. The two largest strategic acquirers, Equinix and Digital Realty Trust, spent an average of $6bn on acquisitions in each of the past three years. In 2018, however, they’ve spent just a fraction of that, the only transaction being Equinix’s $781m purchase of Infomart Dallas. Equinix, with nearly $1bn in cash, is the more feasible of the two to ink a blockbuster deal in Q4, as Digital Realty is likely still working on integrating its largest-ever acquisition, the $6bn purchase of DuPont Fabros in mid-2017.

As for financial buyers, private equity firms have taken much-larger positions in hosted services recently, with five $1bn+ transactions since 2016, which is more than they inked in all of the previous decade. While the $3.8bn in spending by buyout firms so far this year exceeds all of 2017, it is still about half the record $7.6bn in 2016. One potential large target is a group of hundreds of datacenters – mostly in North America and Europe – that CenturyLink obtained in its 2016 pickup of Level 3, which could be sold together or possibly split up. There was also an activist investor pushing QTS Realty Trust to sell earlier this year following accusations of mismanagement, although that sentiment has died down a bit.

Meanwhile, most hosted services M&A this year has happened outside of strictly colocation. Of the three $1bn+ deals, two were for services other than – or in addition to – MTDC. They were Siris Capital’s $2bn purchase of Web.com (web hosting) and GTT Communications’ $2.3bn acquisition of Interoute (fiber and cloud networking). Other $100m+ transactions in cloud and managed services this year include Orange buying Basefarm and Internap reaching for SingleHop. There have even been hosting providers acquiring cloud migration and integration vendors, which we wrote about last month. Examples there include Rackspace buying Salesforce integrator RelationEdge, as well as Green House Data purchasing Microsoft integrator Infront Consulting.

For those attending HCTS, be sure to join 451 Research and ING for an opening breakfast on Tuesday morning to discuss the overall tech M&A market, which is currently running at near-record rates. That will be followed by a more focused session on Tuesday afternoon on consolidation trends in the datacenter and managed service market. We look forward to seeing many of you there.

A historic drop, a historic rebound

by Brenon Daly

The bankruptcy of Lehman Brothers, which came in a stunning and terrifying rush exactly 10 years ago, stands as a kind of highlight of an economy brought low. And fittingly enough for the largest Chapter 11 filing in US history, when the bank went under, it took a lot of other things down with it.

Credit disappeared, as would-be lenders began to wonder if other firms – on Wall Street and Main Street – might be going the way of Lehman. Equity markets plummeted, as investors rushed to escape the grasp of the brutal bear market. Businesses stopped spending, as they hunkered down to preserve rapidly evaporating liquidity.

The corporate capital constriction also hit M&A, most visibly at the top end of the market. To understand just how dire dealmaking was during the 2008-09 crisis, consider this: The number of transactions valued at more than $1bn announced in those two years sank to the lowest level since 2004, when the tech M&A market was only recovering from a largely self-inflicted recession at the turn of the millennium.

With just 30 acquisitions valued at more than $1bn in both 2008 and 2009, the number of big prints during the credit crisis dropped to less than half the level of the three previous years, according to 451 Research’s M&A KnowledgeBase. More tellingly, during the darkest days of the recent recession (essentially, the second half of 2008 and the first half of 2009), activity was just a fraction of that. Although the US economy started to find its feet again at the beginning of the current decade, thanks to unprecedented propping up from the Federal Reserve, tech acquirers took some time to find their way back to the top of the market. The M&A KnowledgeBase shows that it wasn’t until 2014 – almost a half-decade after the recession officially ended, with the Nasdaq Index having already tripled off its low – that the number of tech deals valued at more than $1bn reclaimed its pre-recession level.

Now, with equity markets trading near record levels, M&A activity in the rarified air has followed suit. In just the first half of this year, tech buyers – including big names such as Microsoft, Broadcom, Salesforce and others – printed more than 50 transactions valued at more than $1bn. The current record pace means acquirers are announcing two billion-dollar deals every week, a stunning acceleration compared with announcing fewer than two billion-dollar deals every month when the credit crisis was bottoming out.

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

Not wrong, just early?

by Brenon Daly

Call it a case of mistaken identity in the identity security market. In our exclusive report last week that BeyondTrust was nearing a sale, we speculated that One Identity would be the buyer for the often-in-play company. Instead, Bomgar has announced the purchase of BeyondTrust.

We regret missing the mark, which can be an occupational hazard while working in the opaque regions of the information economy. (Subscribers to 451 Research’s M&A KnowledgeBase can see our proprietary estimates for Bomgar’s acquisition of BeyondTrust by clicking here.)

In our defense, however, we were close. We had the correct family (private equity firm Francisco Partners) albeit the wrong sibling (Francisco-owned One Identity rather than Francisco-owned Bomgar). And, for the record, we have heard from numerous sources that One Identity and BeyondTrust have held in-depth M&A discussions ever since Francisco carved the software business out of Dell, which included the assets that became One Identity.

And while we didn’t necessarily get the right buyer for BeyondTrust right now, it may be a bit academic as far as Francisco is concerned. Longer term, we could well imagine that the PE shop will ultimately combine Bomgar, which it bought in April, with One Identity.

Buyout firms often consolidate holdings as a way to cut expenses and boost all-important cash flow. Admittedly, we’re speculating again. But there’s a lot of financial sense to making the move. If that does come to pass, then we like to think we weren’t wrong about the buyer for BeyondTrust, just early.

For now, though, 451 Research subscribers can look for our full report on Bomgar’s pickup of BeyondTrust on our site later today.

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