When England sneezes, Europe catches a cold

by Brenon Daly

As Europe fractures politically, it is slowing economically. The International Monetary Fund (IMF) recently forecast that Europe would post the lowest growth of any major region of the globe in 2019. The IMF clipped its outlook for economic expansion across the EU to an anemic 1.3%, which is just half its forecast for US growth.

The slowdown across the Continent is starting to hit M&A. Tech deals by Western Europe-based acquirers in Q1 2019 slumped to its lowest quarterly level in two years, according to 451 Research’s M&A KnowledgeBase. More tellingly, the ‘market share’ held by European buyers is starting to erode.

In both 2017 and 2018, the M&A KnowledgeBase shows European buyers accounted for one in four tech acquisitions and 16% of overall M&A spending. So far this year, both of those measures are running three percentage points lower (22% of deals and just 13% of spending).

Much of the fall-off in M&A can be traced back to the UK, which has always been Europe’s biggest buyer of technology companies. With Brexit still unresolved, dealmakers there remain uncertain. Based on Q1 activity, UK-based acquirers are on pace in 2019 to announce the fewest tech transactions since 2013. When it comes to dealmaking, if England sneezes, Europe catches a cold.

Emerging healthcare tech acquisitions are on the rise

by Michael Hill

Acquirers are reaching for healthcare companies built around emerging IT categories at an unprecedented rate in 2019. Our data suggests that widespread adoption of the Internet of Things (IoT) and machine learning among healthcare providers could make these technologies an increasingly prominent feature of healthcare IT M&A.

Just three months in, 2019 has already seen nine emerging healthcare tech deals, matching the total from all of last year, according to 451 Research’s M&A KnowledgeBase. Targets include both early-stage startups with roots in machine learning or IoT (e.g., KiviHealth and SOMA Analytics) and more mature vendors that have refined their offerings around emerging technologies (e.g., MedecinDirect, Temptime and Lightning Bolt Solutions).

Healthcare providers have been adopting IoT and machine learning throughout their networks for some time now. Indeed, our Voice of the Enterprise: IoT, Workloads and Key Projects 2018 survey found that 73% of healthcare providers report having at least one IoT project in either production or proof-of-concept stage. That level of IoT adoption puts healthcare at the top of industry verticals, right alongside manufacturing.

We expect healthcare’s adoption of these technologies to continue to build off of that head start. In 451 Research’s report on The Medical Internet of Things, we anticipate the deployment of connected medical devices to expand to 600 million by 2025 from about 300 million in 2015. And although most IoT and machine learning acquisitions in healthcare IT have been modestly sized, that level of deployment implies a prognosis of increasing size and frequency of such transactions.

Figure 1

The ‘wealth effect’ in effect

by Brenon Daly

If you’re looking for direction on pricing in the tech M&A market, you might just want to cast a glance at your stock portfolio. When there’s a lot of green there, acquisition valuations tend to be ticking higher, as well. As the equity markets go, so goes the M&A market.

We saw that clearly in the just-completed first quarter, when previously beaten-down stocks surged to their strongest start to a year since 1988. Likewise, according to 451 Research’s M&A KnowledgeBase, acquirers in Q1 paid the second-highest multiples in any quarter since the end of the recession a decade ago. The valuations in the just-closed quarter only trail Q2 2018, when the US equity market was at a similarly lofty level as it is now.

First-quarter deals valued at more than $200m went off at 4.6x trailing sales, according to the M&A KnowledgeBase. That multiple is more than a full turn higher than the quarterly median since 2010, when the equity market was just one-quarter the level it is now. Even looking at the market on a relative basis, stocks are much more expensive now: The price-to-earnings ratio for the S&P 500 Index, for instance, was in the mid-teens at the start of the decade, compared with the low-20s now.

Of course, there’s long been a correlation between M&A valuations and the stock market. In some cases, there’s a direct link. For instance, when acquirers – whether fellow corporate buyers or, increasingly, financial firms – have to pay a premium on already historically high prices to pick up a publicly traded target. During Q1, First Data, Ultimate Software Group and Mellanox Technologies all got acquired at their highest-ever stock price. The M&A KnowledgeBase shows the average valuation for that trio was about 7x trailing sales.

Even beyond that, there’s a softer influence of the ‘wealth effect.’ Without going too deeply into behavioral economics, the wealth effect implies that when people – or companies, which are just collections of people, after all – feel flush, they tend to behave accordingly. Whether picking up a shiny new car or a shiny new startup, buyers that feel well-off tend to shop more – and pay up when they do.

M&A Valuations, 2016-2019

Adobe’s M&A experience

by Scott Denne

As Adobe opens Adobe Summit – its annual digital marketing event starting today – the odds are against it using the main stage to announce a major acquisition. After all, 2018 was a record year for the marketing and media software vendor, which printed two $1bn-plus purchases, the first time it’s ever done so in a single year, our data shows. Still, Adobe may have deals left to do as competition intensifies around an expanding market.

In the first iteration of digital marketing, Adobe jumped out to an early lead, largely through its acquisition of website analytics specialist Omniture almost a decade ago. But now the fight has shifted to include new categories such as e-commerce, ad-tech and customer data platforms. That shift is reflected in the tag line for this year’s event – ‘The Digital Experience Conference,’ a change from past billings of the event as ‘The Digital Marketing Event.’ For Adobe, the change has been more than an exercise in corporate branding.

Last year, it paid $1.7bn for Magento, moving beyond marketing and into e-commerce software, and inking its first 10-figure purchase since Omniture ($1.8bn), according to 451 Research’s M&A KnowledgeBase. That transaction was largely a reaction to Salesforce’s earlier pickup of Demandware, which along with the acquisition of Krux in 2016, helped turn the buyer into a major power in customer experience software. Adobe’s other major purchase of 2018, the $4.8bn acquisition of Marketo, a B2B marketing automation provider, was clearly a foray into Salesforce’s turf. Adobe remains the larger of the two in experience software – it posted $2.4bn in sales of such software last year vs. Salesforce’s $1.9bn, although the latter business accelerated at a faster pace (37% annual growth compared with Adobe’s 27%).

Demand from marketers and other line-of-business executives underlies those deals. According to 451 Research’s VoCUL: Corporate Software report, 15% of all businesses are using or about to be using customer experience management (CEM) software. The adoption rates are even higher among organizations investing in a digital transformation project, where 100% of such respondents use CEM software.

With a newfound willingness to spend and a mandate that extends beyond marketing, we see multiple sectors where Adobe could expand its portfolio. It could look to counter SAP’s $8bn reach for customer feedback analytics vendor Qualtrics by purchasing that company’s competitor, Medallia. Such a move would align with Adobe’s ambition to be the system of record for customer data, although it would likely carry a price tag similar to Marketo. Or it could buy an ad server, which would give it additional customer data and a link between Adobe’s creative design software and its ad-tech products by providing creative management and optimization capabilities. Video specialist Innovid and Flashtalking, a rival with a broader portfolio, are the most compelling targets in this market.

Gambling on the go

by Michael Hill

The market for online gambling acquisitions appears to be on another hot streak. After a record 2018 driven by an appetite for mobile gambling, buyers have continued to scoop up assets to bolster their mobile properties just as our data shows that mobile commerce is beginning to overtake other forms of digital commerce.

Paddy Power Betfair and 888 Holdings, both frequent shoppers in the space, have kept the party going into 2019, spending more than $175m so far on purchases of mobile gambling destinations such as Adjarabet, Jackpotjoy and BetBright. These early bets have put 2019 spending for online gambling targets on pace with 2018.

In all, investors put $6.1bn into online gambling properties in 2018, the highest-ever spending total for the sector, according to 451 Research’s M&A KnowledgeBase. The Stars Group’s $4.7bn play for Sky Betting & Gaming accounted for the bulk of last year’s total, while aligning with the trend that’s driven much of the M&A spending in this category – the push toward mobile gaming. In the case of Sky, mobile betting generated 80% of its revenue.

Of the 13 acquisitions of online gambling properties that took place in 2018, at least 11 featured targets that offer mobile applications for Android and iOS devices. According to 451 Research’s Global Digital Commerce Forecast 2018-2022, mobile app-enabled transactions are expected to surpass e-commerce transactions (i.e., transactions initiated on a laptop or desktop computer within a web browser) this year and will grow to 55% of all digital commerce transactions in 2022.

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

Dialing up the next round of IPOs

by Scott Denne

With its recent IPO filing, IT management software vendor PagerDuty lines up to become the first enterprise software company to come to the public markets after an extended drought. A hiccup in the equity markets last autumn followed by the government shutdown effectively closed the door for new tech offerings, but now the pipeline is beginning to fill up after a record 2018.

Last year witnessed 15 enterprise tech offerings (to be clear, the count includes only business technology offerings, not those from consumer tech startups), mostly in the front half of the year (three deals priced in the first quarter and seven in the second). And while this year’s first half isn’t likely to match that, the pace of filings is picking up. To be the first enterprise tech provider to go public this year, PagerDuty will race security vendor Tufin, which filed a week earlier, while Slack announced in early February that it had confidentially filed for a direct listing.

It’s fitting that PagerDuty could be the one to kick off a new round of enterprise IPOs because it’s almost the prototypical Silicon Valley IPO candidate. It’s growing fast and losing money, though not doing either at an unheard-of pace. In its most recently reported quarter, PagerDuty came up just shy of 50% year-over-year growth as it crossed the $100m TTM revenue mark. It posted a $43m loss, though that’s smaller as a share of its overall revenue than in earlier periods.

In the market for on-call management software for IT, PagerDuty is larger than its rivals VictorOps and OpsGenie, which were acquired by Splunk and Atlassian, respectively. (Subscribers to 451 Research’s M&A KnowledgeBase can view our revenue estimates for VictorOps and OpsGenie). But PagerDuty is banking on expanding into larger and more crowded markets, such as IT event intelligence and incident management, as we noted in a November report on the company. Almost all of its revenue today comes from on-call management.

Whether Wall Street ultimately decides to embrace PagerDuty for the potential of its new products or the financial results from its older offerings, the company should have little trouble pushing past the roughly $1.3bn valuation from its series D last summer. To get there, it will need to trade above 12x TTM revenue. That seems doable given Wall Street’s welcoming mood.

As we noted in our analysis of Lyft’s IPO filing , consumer confidence in the stock market sits at a 12-month high. And even though there hasn’t been an enterprise IPO to hit the public markets since SolarWinds issued shares in mid-October, those that went out last year are being generously priced. Smartsheet, for example, trades at nearly 30x revenue and sports a topline that’s about 50% larger than PagerDuty’s, with growth rates just a few percentage points higher.

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

I.D. Systems keeps on trucking with telematics IoT pickup

by Mark Fontecchio

A series of tentative steps into telematics turns into a plunge as I.D. Systems prints its largest deal to date, continuing to move its business beyond trucking asset management. The $140m purchase of Pointer Telocation gets the buyer telematics systems and software for freight, automotive and insurance industries, and marks its third telematics acquisition. Still, the scale of today’s bet outweighs any previous wagers, as the addition of Pointer more than doubles I.D.’s annual revenue.

According to 451 Research’s M&A KnowledgeBase, the pickup of Pointer eclipses I.D.’s combined spending for all other tech targets by 5x. And it’s paying a premium as well. The median enterprise value multiple for fleet management and telematics transactions has been 1x trailing revenue, according to the M&A KnowledgeBase. I.D. is valuing Pointer nearly a full turn above that – continuing a rise in valuations among telematics targets.

To illustrate that, in the past three months Bridgestone bought TomTom’s telematics business for $1bn at a 6.5x multiple on trailing revenue, while Volkswagen inked a telematics deal of its own with the $121m purchase of WirelessCar from Volvo, which went off at a 2.9x multiple. According to a 451 Research Voice of the Enterprise: Internet of Things survey from last year, three-quarters of respondents in the transportation sector cited fleet tracking and telematics as an existing or future IoT use case, more than any other.

Today’s move also increases I.D. Systems’ international reach: Most of its sales are in North America, while Pointer Telocation’s revenue is concentrated in its home country of Israel as well as South America. In addition, nearly two-thirds of Pointer’s revenue is recurring, compared with less than 40% for I.D. And finally, not only does I.D. more than double its revenue with the acquisition, it also adds a profitable company compared with its own balance sheet awash in red ink. Canaccord Genuity advised I.D., while ROTH Capital Partners banked Pointer.

Low and slow is the tempo

by Brenon Daly

With most tech vendors having completed the song and dance of financial reports for last year, it’s becoming inescapably clear that a lot more changed than just the calendar when 2018 rolled into 2019. Business boomed last year, but it’s more of a whimper so far this year. That shift is having an impact on the tech M&A market, where acquirers are switching from playing offense to shoring up their defense.

Through the first three quarters of 2018, corporate confidence soared as cash flowed. Double-digit revenue increases, coupled with 20%+ expansion on the bottom line, pushed broad-market equity prices to record levels last summer. In contrast, looking ahead to this summer, earnings at most companies will likely flatline or even shrink slightly. Being stuck in place or falling behind doesn’t inspire businesses to place big, bold bets.

Overall, 451 Research’s M&A KnowledgeBase shows spending on tech deals around the globe has ticked down by more than 10% so far this year compared with the same time last year. But the change in sentiment – and the resulting strategy – comes through even more clearly when we look at the headline prints for 2018 and 2019.

Last year, when seemingly no deal was off the table, the largest tech transaction saw IBM roll the dice on Red Hat. If not a bet-the-company deal, the $33.4bn purchase is at least a make-or-break transaction for the current leadership and its (expensively acquired) reorientation of its cloud business, which it is banking on to spur growth after a protracted slide in revenue at Big Blue.

So far this year, however, acquisition ambitions are a little more muted. This year’s biggest deal, which is one-third smaller than the 2018 blockbuster, is a tried-and-true bit of industry consolidation: Fiserv’s $22bn pickup of First Data. Underscoring 2019’s conservative approach to dealmaking, we would note that Fiserv paid 4x trailing sales in its transaction, while IBM paid 10x trailing sales.

Of course, as Q4 2018 showed, markets can change in an instant. Companies that are riding high one day can drop hard and fast. And while no one is really talking about a recession in 2019, no one is talking about a continuation of last year’s record expansion, either. As business slows, the highly correlated M&A market is likely to follow suit.

Working through the M&A backlog

by Brenon Daly

After surging to start 2019, tech acquirers appear to have worked through most of the backlog of deals that built up during the volatility-plagued end of last year. According to 451 Research’s M&A KnowledgeBase, January saw spending on tech and telecom transactions around the globe jump to a three-month high.

In contrast, spending in February dropped by about 25% compared with the opening month of the year. The M&A KnowledgeBase tallied $32bn worth of deals in February, essentially matching the same month last year. If it hadn’t been for financial buyers, this month’s decline would have been much sharper.

Private equity (PE) acquirers accounted for three of this month’s four largest deals, and a whopping $23bn, or more than 70% of total M&A spending in February. That’s roughly twice their typical share of spending in the tech M&A market. Corporate buyers, which had been averaging six transactions valued at more than $1bn each month last year, put up just three billion-dollar prints in February.

Half of the PE spending came in a single landmark software deal: the $11bn take-private of Ultimate Software. In the largest-ever SaaS acquisition, Hellman & Friedman led a group that valued the human resources software vendor at 10 times trailing sales. Similarly, in this month’s fourth-largest transaction, buyout shop Thoma Bravo paid $3.7bn, or 7x trailing sales, for mortgage lending SaaS provider Ellie Mae.

As to what’s coming for the rest of the year, check out 451 Research’s 2019 Tech M&A Outlook. The 125-page report highlights the trends that we expect to shape deal flow in six key enterprise IT sectors, including application software, information security, IoT and cloud. Additionally, our comprehensive report names over 250 potential target candidates and dozens of specific acquirer-target pairings, based on the research of more than 40 of our analysts.

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

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.