Surging strategics

Contact:  Scott Denne

Following a pair of down years, publicly traded strategic acquirers have come roaring back to the tech M&A market. Through the first four months of 2018, those buyers have collectively paid more for tech acquisitions than any start to the year since 2015. Our recent survey suggests that could continue through the rest of the year as newcomers print big deals and veteran acquirers outdo themselves.

According to 451 Research’s M&A KnowledgeBase, public companies spent $123bn on tech acquisitions through April, up from $73bn in the same period last year. Put another way, only 2015 and 2006 had produced more spending at this point in the year since 451 Research began tracking tech M&A in 2002. More than any other deal, T-Mobile’s $26bn reach for Sprint has propped up the total. Still, even backing out that purchase, which may well be undone by regulators, and Fujifilm’s increasingly doubtful agreement to buy a majority stake in Xerox for $6bn, the current year remains ahead.

In the April version of the semiannual M&A Leaders’ Survey from 451 Research and Morrison & Foerster, 58% of respondents projected an increase in strategic M&A. They also said – at a rate of six to one – that the new tax code, by lowering rates and making offshore cash available, would bolster strategic M&A. Whatever the role that tax law has played, strategics do appear to be coming back to market – and bigger than before.

T-Mobile, for example, had only acquired one other company since its reverse merger with MetroPCS in 2012. Fujifilm had only done the occasional tech deal, never approaching the $1bn mark. Looking at the buyers that round out the top five strategic transactions this year – General Dynamics, Microchip Technology and Salesforce – all had been frequent acquirers but had never before spent more than $5bn on a single deal until 2018.

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America’s first MAGA-deal

Contact: Scott Denne

T-Mobile’s marketing smarts propelled the company to the number three spot among US wireless carriers. Now the company is leaning on those same skills to get its $26.5bn acquisition of Sprint through regulatory approvals. Its pitch for the deal, which has an enterprise value of $59bn, is laced with potential benefits to the US, particularly benefits that align with President Donald Trump’s rhetoric.

The FCC already threw cold water on the pairing once before under a previous administration, so getting this one past the government was always going to be a challenge regardless of who occupied the White House. While highlighting the broader benefits of a large transaction isn’t new, T-Mobile’s push is remarkable in its breadth.

In addition to the usual talk about the negligible (or positive) impact on competition and consumer prices, T-Mobile and Sprint are highlighting the potential for the combo to create jobs (particularly jobs in rural areas) and beat China and other countries in having the first nationwide 5G wireless network – it even set up a website to promote the deal at

The press release announcing the acquisition mentions ‘job growth’ or a similar idea 12 times. Compare that with the release announcing the previous $50bn-plus US telecom pairing – Charter Communications’ 2015 takeover of Time Warner Cable – which made just one mention of jobs. In fact, according to 451 Research’s M&A KnowledgeBase, only four other $1bn-plus transactions among US publicly traded companies mentioned the potential for job growth in their press releases. And none did so more than twice.

T-Mobile has been massively successful in catering to its customers with its ‘Uncarrier’ strategy. According to a February survey by 451 Research’s VoCUL, T-Mobile’s percentage of satisfied customers (49%) has lurched beyond its competition. Whether its purchase of Sprint goes through or not may end up turning on the legal merits, not its marketing chops. Yet it clearly feels compelled to make a political case for the match – announced a day before closing arguments in a specious antitrust action against AT&T’s acquisition of Time Warner – to an administration that’s been unusually active in stopping deals.

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Teradyne’s acquisitions are anodyne to industrial M&A

Contact: Scott Denne

Teradyne has announced a pair of deals at elevated valuations as developments in the Internet of Things (IoT) and artificial intelligence (AI) stoke the staid market for industrial automation technologies. The semiconductor testing vendor brought two new additions to its burgeoning robotics business: Mobile Industrial Robots (MiR) and Energid. Both fetched above-market valuations – valuations that are justified by a surge in deployments of automation tech.

Teradyne paid $148m, or 12.3x trailing revenue, for MiR and $25m, or 4.2x forward revenue, for Energid. Both transactions also include earnouts that would roughly double the ultimate price (we don’t include those in calculating the multiples). Those prices are well above the median valuation for players in the industrial automation segment. According to
451 Research’s M&A KnowledgeBase, the median multiple for targets in that space have hovered between 2.2-2.4x trailing revenue in each of the past four years.

The deals that have come in well above that mark often have an IoT or AI angle. Today’s acquisitions align with that trend – MiR makes robots that deliver parts and supplies around a factory and Energid develops motion-control software. Other industrial automation transactions that went off at high multiples include Teradyne’s 2015 purchase of Universal Robots (at 7.5x) and PTC’s pickup of Kepware (5x), a provider of software that enables legacy industrial equipment to link to IoT networks.

Those valuations – rare for the industrial automation sector – come as manufacturing facilities, warehouses and the like are increasing their budgets for automation projects. According to 451 Research’s Voice of the Enterprise: Internet of Things, Budgets and Outlook 2017 report, 39% of respondents told us their organization had deployed IoT projects for the management and automation of buildings, factories and warehouses, up from just 26% in the middle of 2016.

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The healthy state of healthcare IT M&A

Contact: Mark Fontecchio

Healthcare IT M&A has passed its recent quarterly checkup with flying colors. Massive high-multiple acquisitions by strategic buyers resulted in a record quarter of M&A value in the sector. The consolidation comes as healthcare enterprises are pulling back spending.

Purchases of healthcare IT targets totaled $6.1bn in the first quarter, significantly above any previous quarter in 451 Research’s M&A KnowledgeBase. The deals also occurred at higher multiples. Inovalon’s $1.2bn pickup of ABILITY Network – one of four $1bn+ transactions last quarter – valued the target at 8.6x trailing revenue. That’s the highest multiple on any healthcare IT acquisition in the M&A KnowledgeBase, and several turns higher than the 3.9x median for the previous five years.

At the same time, 28% of healthcare enterprises expect IT spending to decrease this year. That’s more than any other vertical, according to 451 Research’s Voice of the Enterprise: Digital Pulse, Budgets and Outlook survey. Strategic acquirers accounted for more than 60% of healthcare IT M&A spending in Q1, upping activity through the first quarter as they seek to expand their portfolios in search of cross-selling opportunities and battle for every available dollar.

Case in point: Inovalon’s purchase of ABILITY Network brings the buyer healthcare data analytics, as well as 44,000 provider customers. Also, the $100m acquisition of Practice Fusion and its 30,000 customers should help Allscripts extend its electronic health records software into smaller medical practices.

The indications are already there that M&A spending on healthcare IT will continue this year. Two days into the second quarter, Veritas Capital agreed to pay $1.1bn for healthcare IT assets from GE Healthcare. The private equity firm has a history of buying healthcare IT firms and then selling them off after a couple of bolt-on acquisitions.

MuleSoft carries a hefty valuation

Contact: Scott Denne

A pinnacle acquisition of an IT infrastructure vendor shows just how much Salesforce is betting on the digital transformation trend. In shelling out $6.6bn for MuleSoft, Salesforce is spending twice what it did on its previous largest purchase in an effort to push its business from a developer of enterprise apps to the go-to technology provider for organizations in the cloud era – a position occupied by IBM, Microsoft, Oracle and SAP in the fast-fading client-server age.

The deal not only sets a new high for Salesforce, it stands well apart from other transactions in the infrastructure management corner of the tech M&A market. Salesforce will pay $6.6bn (20% of it coming in stock) for MuleSoft, making it the fourth-largest infrastructure software acquisition, according to 451 Research’s M&A KnowledgeBase. The sales of HPE’s software business ($8.8bn), BEA Systems ($8.5bn) and BMC Software ($6.9bn) fetched similar prices, although the multiples couldn’t be further apart.

Salesforce’s purchase values MuleSoft at 22x trailing revenue, the highest ever for a $1bn deal in its category. Moreover, compared with those three larger transactions, MuleSoft, with $296m in trailing revenue, is the only one to post less than $1bn in revenue. The next-highest valuation on a $1bn-plus infrastructure software deal came with Cisco’s $3.7bn AppDynamics buy, nearly five turns lower than today’s pairing.

In most of its acquisitions since the start of the current decade, Salesforce has angled to build off its CRM roots and into the broader category of customer engagement – acquiring new apps to sell to marketing, sales and service teams. Selling apps to the line of business differs from selling apps to IT. The marketing team, for example, gives little consideration to what software the sales team uses.

The combination of apps with MuleSoft’s integration software, which can load those apps with data from legacy IT systems and other SaaS products, should strengthen Salesforce’s ability to sell a strategic package of software for digital transformation initiatives, where IT innovation is driven by business strategy. As idealistic as that sounds, a real change is underway. According to 451 Research’s Digital Transformation Leaders and Laggards report, 53% of surveyed companies are either considering or planning their digital transformation strategy.

Salesforce also sets up a strong challenge to its competitors with this move. In owning MuleSoft, Salesforce now has an asset that can lift data from on-premises database, CRM and ERP systems to essentially reside in SaaS applications, potentially converting older systems into commodity repositories, rather than cornerstones of the IT stack.

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Retail’s plodding path

Contact:  Scott Denne

It’s hard to find an industry that’s more threatened by emerging technology than retail. In addition to dangers from Amazon and a bevy of younger online retailers, stores are forced to adjust to changes in consumer behavior that impact everything from marketing to inventory management and logistics. Despite all that, the exit environment for startups selling retail technologies is narrowing as retailers and consumer goods companies generally show less inclination to invest in new technology than other industries.

There are exceptions. Take L’Oreal’s recent purchase of augmented reality vendor ModiFace. In reaching for the virtual makeover vendor with 70 engineers specializing in augmented reality and machine learning, L’Oreal hopes to expand new channels for customer engagement – a path it started down in 2014 with the launch of its augmented reality mobile app, Makeup Genius. Still, our surveys of retail technologists, along with acquisition data from 451 Research’s M&A KnowledgeBase, suggest that L’Oreal will be an outlier.

Retailers and related consumer products providers are less likely to be planning to adopt augmented or virtual reality technology in the next 24 months. In 451 Research’s VoCUL: Corporate Mobility and Digital Transformation survey, 24% of retail respondents told us their organization planned to use such technologies, compared with 29% of other respondents. Retail indexed lower in most other categories of emerging technologies as well, including artificial intelligence, where 35% of retail respondents planned to adopt, compared with 47% across all other verticals.

The reticence to invest in newer technologies translates into a decline in dealmaking. According to the M&A KnowledgeBase, acquisitions of retail technology firms – anything from e-commerce businesses to supply-chain software firms that specialize in serving retailers – declined 30% in 2017, with just 232 transactions.

After a few years of expanding, valuations among this group are coming down a bit. For the first time since 2012, we didn’t track a single multiple at or above 8x trailing revenue in 2017 for businesses with more than $2m in annual revenue. The decline in the highest multiples comes as overall deal value for the category rose to $18bn, from $16.8bn a year earlier, as buyers – both retailers and the tech vendors that service them – sought out more mature businesses at higher prices, but lower multiples, than startups dabbling in the latest technology.

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Nordstrom’s new line

Contact: Scott Denne

Retailers’ M&A strategies are moving on from the front to the back of the house. A pair of deals from Nordstrom – BevyUp and MessageYes – exemplify the trend of retailers shifting away from customer-facing businesses, such as mobile apps and e-commerce sites, in favor of supporting technologies with an aim toward changing how customers interact with brick-and-mortar businesses.

In BevyUp and MessageYes, Nordstrom obtains a pair of tools that it hopes will help it improve customer engagement with an app for in-store salespeople (BevyUp) and mobile commerce technology (MessageYes). Although Nordstrom will barely pick up 50 employees between the two transactions, yesterday’s announcement is noteworthy because it marks Nordstrom’s first tech acquisitions in three and a half years and comes as much of management’s time is focused on a contentious take-private proposal from the company’s founding family.

Moreover, Nordstrom is not alone in seeking internal capabilities to lead it to a flexible business model and new methods of engagement. Walmart and Target each inked deals last year (Shipt and Grand Junction, respectively) to build out their delivery capabilities, while Bed Bath & Beyond and Williams-Sonoma reached for virtual interior decorating capabilities with their respective purchases of Decorist and Outward. At Nordstrom itself, its last two tech transactions were for customer-facing properties – online retailer HauteLook and online personal shopping service Trunk Club. That’s different than the supporting technologies it nabbed today.

Amid declining sales and an existential threat from Amazon, retailers and consumer-goods vendors are turning toward tech to drive customer loyalty. According to 451 Research’s VoCUL: Corporate Mobility and Digital Transformation survey, 44% of respondents in those categories said that ‘improving customer experience’ would be among the top drivers of their software investments heading into 2018.

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Conga drums up more sales software M&A

Contact: Sheryl Kingstone, Scott Denne

Continuing a streak of consolidation in sales software, Conga, a document and contract management provider, has acquired Octiv. Sales software has seen a spurt of M&A as sales organizations seek technology platforms with more uses – in this case, the digitization of the entire sales cycle.

On the surface, both companies have similar capabilities. Octiv, formerly known as TinderBox, focuses on the upstream aspects of managing content and workflow automation for sales processes such as proposals and quotes, whereas Conga, an Insight Venture Partners portfolio company, concentrates on intelligent automation once the quote or proposal has been agreed upon. Octiv also brings capabilities to measure engagement throughout the sales process. This deal is both a consolidation of the market for customers and a technology enhancement.

As we previously suggested, the shift to engaging, from merely transactional, sales interactions would spur M&A as sales software vendors seek to expand beyond systems of record and into systems of engagement. According to 451 Research’s M&A KnowledgeBase, many of the early returns on such transactions – including Marketo’s acquisition of ToutApp and Corel’s purchase of ClearSlide – have traded below the amount of venture funding they brought in. (Terms of Octiv’s sale weren’t disclosed so the return on the $20m it raised isn’t clear.)

Despite some modest returns, deals are increasing as the market for more advanced sales software capabilities begins to heat up. In a custom study by 451 Research, 90% of sales managers told us they have some form of investment in sales technology, although most of those are likely nothing more than legacy CRM or sales force automation, neither of which has the functionality to enable sales teams to optimize around the expanding flow of digital signals that are available to inform the sales process, as we outlined in our Sales Technology Platforms Market Map.

Sales organizations are coming to that same conclusion. According to a survey by 451 Research’s Voice of the Connected User Landscape, sales analytics and intelligence, engagement, and content are the most sought-after capabilities, outpacing legacy capabilities like pipeline management and lead generation. More importantly, that survey shows that sales teams are shifting toward advanced intelligent automation across a broader range of processes with the goal of eliminating manual processes. As they do so, more functionality will be consolidated by platforms such as Conga with intelligence at the core of their sales software.

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CommerceHub in sellers’ market

Contact: Scott Denne

A pair of private equity (PE) firms has taken CommerceHub off the public markets in a $1.1bn acquisition. The deal carries a scorching multiple that punctuates the value of e-commerce software as retailers struggle to make digital engagement a centerpiece of their business.

GTCR and Sycamore Partners’ joint purchase of CommerceHub values the firm at 10x trailing revenue, or 32x EBITDA – atypical multiples for an e-commerce software provider with the target’s growth. With that valuation, CommerceHub finds itself in the same neighborhood as Demandware and hybris, which each fetched about 11x revenue in their respective sales to Salesforce and SAP.

Yet CommerceHub’s revenue expanded by just 11% last year, compared with Demandware and hybris, which both posted topline growth in the 50% neighborhood leading up to their exits. Ariba offers a more accurate, if aging, comp for CommerceHub – both vendors provide back-end commerce services, such as integration between retailers and suppliers, whereas Demandware and hybris build customer-facing software. CommerceHub is fetching a multiple that’s a full turn above Ariba’s 2012 sale, despite the latter company having double the growth rate and being triple the size of the former.

In part, today’s multiple reflects higher prices being paid by buyout shops as their investments in tech M&A rise. According to 451 Research’s M&A KnowledgeBase, the median multiple paid by a PE acquirer last year rose to 3x, up from 2.5x a year earlier. Moreover, that median has hovered above 2.5x every year since 2014. In the preceding decade, it never once hit that level, and in only three years did the median reach 2x.

All that’s not to say nothing but a flood of PE money drove up CommerceHub’s price. Digital commerce technology is evolving into a core element of customer engagement and retailers need timely, accurate product information, which CommerceHub facilitates, to integrate into their customer-facing marketing and commerce software systems. According to 451 Research’s VoCUL Quarterly Advisory Report: Digital Transformation Leaders and Laggards, digital commerce and web experience management are the two most common areas of investment for enterprises, as 27% of enterprises told us they plan to deploy or upgrade those technologies in late 2017 and early 2018.

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Ratcheting up bolt-ons

Contact: Scott Denne

In another sign that the private-equity playbook is changing, financial sponsors are moving faster than before to add to their newest holdings. While PE firms typically have taken several quarters to allow a new asset to settle in before making bolt-on acquisitions, they’re abandoning that waiting period as they put a record amount of cash to work in the tech M&A market.

According to 451 Research’s M&A KnowledgeBase, of the 10 largest companies taken off a major US exchange by a PE firm in the last 12 months, three have already announced a bolt-on deal – all of which have come less than a month after the close of the buyer’s take-private. For comparison, among the 10 largest US take-privates in 2016, three also did a bolt-on, yet none within six months of the platform acquisition.

In the most recent example, Bazaarvoice picked up speech-recognition company AddStructure just three weeks after Marlin Equity closed its February take-private of Bazaarvoice. West Corp also waited less than a month after its take-private closed to make its first acquisition, and has announced two more since that November 2017 deal. Xactly didn’t wait a full two weeks before its first follow-on under Vista Equity’s ownership. Barracuda Networks hasn’t yet completed a deal under Thoma Bravo’s purview, which officially began two weeks ago, although it did get one done in the 10 weeks between the take-private announcement and the close.

The rush for bolt-on deals shows that competition for targets from PE firms is increasing on all fronts. As we noted in our 2018 Tech M&A Outlook report, acquisitions by PE firms and their portfolio companies matched those by NYSE- and Nasdaq-traded strategic acquirers for the first time in 2017. As the rush for bolt-ons shows, competition won’t be limited to the big platform deals. Strategics will have to move faster to win smaller, additive deals.

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