Battered by Brexit

by Brenon Daly

Despite EU and UK leaders agreeing to terms on the country’s departure from the larger political and economic body, there’s still no actual Brexit. A weekend vote on the accord now looms large in the British Parliament, with early forecasts indicating the hard-won deal will likely struggle to get final approval. Parliament rejected a similar agreement earlier this year.

Regardless of whether the ‘ayes’ or the ‘nays’ carry the vote about the EU bloc, Brexit has already notably diminished the UK’s standing in another large marketplace: tech M&A. British buyers as well as British sellers in 2019 are on pace to announce their fewest tech deals in a half-decade, according to 451 Researchs M&A KnowledgeBase. The slowdown there is being felt much more broadly, since our data shows the UK has perennially ranked as the second-busiest M&A market in the world.

Deal volume – both on the buy- and sell-side – is on track this year to drop about one-quarter from the recent highs they hit. Incidentally, our M&A KnowledgeBase indicates that tech M&A in the UK peaked in 2015 – the year before the Brexit vote. Since the contentious vote in mid-2016 and the still-unresolved results, the number of British tech prints has dropped every year.

Somewhat unexpectedly, however, recent M&A spending has clipped along at exceptional levels. Based on annualized totals for year-to-date activity from our M&A KnowledgeBase, British buyers will spend a record amount on tech acquisitions in 2019, while spending on acquired UK-based tech companies is on pace for its second-highest annual level.

For dealmakers, Brexit has essentially meant fewer bets but much bigger bets. As an example, consider this week’s take-private of British endpoint security vendor Sophos. To erase Sophos from its home on the London Stock Exchange, Thoma Bravo is paying $3.8bn. To put that price into context, the Sophos take-private is more than the combined price of the buyout firm’s two next-largest information security LBOs.

As the sale of Sophos also shows, deals can still be struck in times of uncertainty, but extra work is required. More than three years since the original decision, Brexit has left open vexingly large questions for businesses, such as taxation rates, employee permits and supply chains. All of those have a direct impact on a company’s valuation, which is the key consideration in all acquisitions. Fittingly enough for the contentious three-year Brexit process, the British Parliament’s vote this weekend may only add to the volatility.

A change of seasons in tech M&A

Rising global uncertainty coupled with slowing economic growth combined to knock Q3 spending on tech acquisitions to the lowest quarterly level in nearly two years. Buyers around the world announced tech purchases valued at just $96bn from July to September, according to 451 Researchs M&A KnowledgeBase. (451 Research subscribers can look for our full report on Q3 M&A activity on our site later today.)

The late-summer slowdown, where Q3 spending declined 25% from this year’s two previous quarters, has effectively removed 2019 from the top rank of tech M&A. Our data indicates that full-year 2019 is now on track to fall more than $100bn lower than recent strong spending years. That drops this year from an exceptional one to merely above-average.

To put some numbers on that, the third-quarter slump snapped the unexpectedly strong start to 2019 and, more symbolically, it likely ended this year’s march to top a half-trillion dollars of acquisition spending. Dealmakers had been very much on track for that significant $500bn+ threshold through the first half of this year. But now, with the change of seasons, it looks increasingly out of reach. Again, we’ll have a full report on Q3 M&A activity – including the quarter’s top prints, recent trends in private equity dealmaking and how the broader macroeconomic economy is shaping tech acquisitions – on our site later today.

Figure 1:
Run this search in the M&A KnowledgeBase to see more detail.

The end of Omniture’s overture

by Scott Denne

This past weekend marked 10 years since Adobe’s $1.8bn purchase of Omniture, the deal that arguably started the race among enterprise software vendors to build out customer experience software portfolios. Although that transaction marked the beginning, its decennial looks like the beginning of the end. While we tracked a record haul for customer experience software M&A in 2018, those companies are becoming increasingly harder to sell.

According to 451 Researchs M&A KnowledgeBase, buyers spent $29.6bn in 2018 on vendors developing software for advertising, marketing, customer service, e-commerce and other forms of customer engagement. So far this year, just $8.3bn has been spent on such targets, on pace for the lowest annual total since 2015. Moreover, we’ve seen just five companies in this space sell for $200m or more, while each of the six previous full years have seen at least 10 deals of that size.

And the multiples on those acquisitions have fallen dramatically, our data shows. Last year almost every vendor in the category selling for that amount blew past the 5.2x trailing revenue that Omniture commanded. This year, however, such transactions fetched a median valuation of 2.3x, which is at least a full turn lower than the median valuation of similar deals in any single year over the past decade. This year, Dynamic Yield and TrendKite nabbed north of 8x in their respective sales to McDonald’s and Cision, while none of the other $200m cohort printed above 2.5x.

There’s little doubt that Adobe has seen success with its Omniture buy. The company expects to grow its Digital Experience business, the unit that houses Omniture (now Adobe Analytics) and several other related targets, by 23% to $3bn in the soon-to-close fiscal year. But other early, marquee investments in this sector weren’t as successful and there may not be as many deep-pocketed buyers as there once were. Both IBM and Teradata, for example, shed their marketing software units. Meanwhile Oracle, which still ranks as the most prolific acquirer in the segment, only printed one deal last year and none in almost 18 months.

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Stocking up on an M&A currency

by Brenon Daly

Paper may be pricy these days, but it still has value as an M&A currency. So far this year, US public companies have been using their own shares at a near-record rate to pay for the tech deals they are doing.

451 Research‘s M&A KnowledgeBase shows that buyers have already announced transactions valued at more than $110bn this year that include at least some equity consideration. That puts full-year 2019 on track for the second-highest annual total since 2000. As paper has become more popular, it has figured into a broader spectrum of deals, most notably those transactions where the buyer is spending an unprecedented amount:

After doing only tiny tuck-ins, Shopify spent $450m earlier this week on robotics startup 6 River Systems. Shopify covered $180m, or 40%, of the cost with its own shares, which are up an astronomical 140% so far this year.

Splunk tripled the size of its largest-ever purchase with last month’s $1.1bn acquisition of SignalFx. Some $400m of the total consideration is coming as Splunk shares.

Salesforce used its own shares to cover the full price of its record $15bn pickup of Tableau Software in June. Our data indicates that in its next three largest acquisitions, Salesforce used all-cash structures in two of them, with only a minority portion of stock (20% of total consideration) in the third deal.

Taking hundreds of millions (or even billions) of dollars in payment in stock represents a pretty big gamble by targets and their backers this deep in the current decade-long bull market on Wall Street. Plenty of current signs – from an inverted yield curve to a slump in manufacturing output to an ongoing trade war between the two largest economies on the planet – point to a slowdown.

Already, companies are starting to feel the pinch. A just-published survey by 451 Researchs Voice of the Consumer: Macroeconomic Outlook showed that fewer than one in five respondents said their organization was ahead of its sales plan for Q2. That was the lowest level of outperformance in three years. If sales momentum does indeed stall and companies take down their numbers, stock prices will invariably follow suit. That could leave selling companies holding a bunch of shares that aren’t worth nearly as much as they once were.

Shopify and other new buyers check out VC portfolios

by Scott Denne

Shopify has printed its first major acquisition, spending $450m in cash and stock for 6 River Systems. While the e-commerce technology vendor has inked a handful of tuck-ins, it hadn’t yet bought anything close to this size. In doing so, it joins a streak of new names to deliver significant VC exits this year. Although sales of startups are likely to fall below last year’s record haul, the emergence of new buyers has helped push exits for 2019 above a typical year.

According to 451 Researchs M&A KnowledgeBase, 60% of venture-backed companies, including 6 River, that sold for $250m or more this year were bought by firms that had never paid that much for a startup. Some of this year’s buyers, including Shopify, Etsy and Uber, are youngish, growing businesses and former tech startups themselves Others are companies from more traditional industries that are new to acquiring tech providers, such as H&R Block with its reach for Wave Financial or McDonald’s, which bought Dynamic Yield in March.

Several others that have printed $250m-plus deals for venture-funded vendors this year only inked their first such purchase in 2018, including Blackstone Group, Palo Alto Networks and Splunk. The latter company printed its first $1bn-plus acquisition just last month, when it scooped up venture-funded SignalFx. Meanwhile, Palo Alto Networks has paid more than $1bn across four startup acquisitions in 2019.

In 2018, new buyers accounted for just 40% of $250m-plus startup transactions. Still, there were far more $250m-plus VC exits last year – 63 compared with 24 so far in 2019. Although the number of significant exits and the total deal value of VC exits are down from last year, that’s hardly an alarming sign for the venture community. In 2018, venture-backed companies brought in a post-dot-com record $86bn via tech M&A. This year, they’re on track to bring in $34bn, higher than all but two years in the current decade (not to mention it’s coming alongside a booming IPO market), and the $9.5bn coming from new acquirers has played an outsized role in venture liquidity this year.

Figure 1

Shaking off the dog days of summer

by Brenon Daly

Even deep in the dog days of summer, tech dealmakers stayed busy. This month, they’ve put up the second-highest monthly total of billion-dollar deals in 2019, helping to boost overall spending on tech acquisitions in August to unseasonable heights for the late-summer month. The $48bn tallied in 451 Researchs M&A KnowledgeBase for the current month stands as a record level for any August since the recession a decade ago. Deal volume in August also hit its highest level of any month so far this year.

Looking more closely at the top end of the M&A market, this month’s parade of big prints has included virtually all the strategies available for doing deals valued in the billions of dollars: low-multiple buyouts by private equity players; consolidations in both mature and emerging markets; and growth-oriented expansion by the well-known and well-capitalized ‘usual suspects’ of tech M&A. Among the transactions that have stood out this month:

In the largest-ever information security (infosec) acquisition, Broadcom said it will pay $10.7bn for the enterprise security business of Symantec. Our M&A KnowledgeBase shows that single deal just about equals the value of all infosec transactions in a typical year, although annual totals do tend to bounce around a bit.

VMware also did its part to add a large chunk of change to this year’s already-record level of infosec M&A spending. The infrastructure technology giant handed over $2.1bn for endpoint security vendor Carbon Black, its first billion-dollar deal in more than a half-decade.

Nearly tripling the size of its largest purchase, Splunk announced its $1.1bn purchase of SignalFX. The acquisition comes as a pair of the targets rivals in the infrastructure monitoring market have headed to Wall Street in highly valued IPOs.

With the unusually strong August spending, the value of tech deals around the world announced so far this year totals $337bn, according to our M&A KnowledgeBase. Assuming the current pace holds for the rest of 2019, full-year spending would slightly top $500bn. That would rank 2019 as the third-highest total for any year since the internet bubble burst almost 20 years ago.

Figure 1: Tech M&A activity

A rare trip into rarified air

by Brenon Daly

Symantec’s blockbuster $10.7bn divestiture of its enterprise security business to Broadcom marks a rare trip into rarified air for the information security (infosec) M&A market. Through the first seven-plus months of 2019, 451 Researchs M&A KnowledgeBase shows not a single deal in the segment valued at more than $1bn.

Obviously, the unusual carve-up of Big Yellow blows past that threshold. But setting aside this transaction, which we would very much describe as a one-time deal, a couple of trends are playing out in the infosec market that may make it tough to see many more of those three-comma deals coming for the rest of 2019. We suspect that this year’s total will end up looking up at the three separate billion-dollar transactions we tallied last year.

Helping to keep a lid on deals at the top end of the infosec sector right now are factors including:

Several of the industry’s largest vendors appear unlikely to pursue big-ticket transactions. In some cases, that’s due to internal upheaval (e.g., Symantec, which has announced five billion-dollar acquisitions in the past 15 years). In other cases, it’s due to a likely period of digestion (e.g., Palo Alto Networks, which has dropped $1.6bn in a half-dozen high-valuation deals over the past 18 months).

After only recently starting to print big purchases, private equity firms have slowed their activity at the top end of the market. That move down-market comes after buyout shops have been behind significant infosec take-privates in the past two years, including Barracuda and Imperva.

And most notably, VC dollars have replaced M&A dollars in the ‘unicorn universe.’ In just the past four months, Auth0, SentinelOne, Cybereason and Sumo Logic have all landed funding rounds that value the infosec startups at more than $1bn, according to the premium version of 451 Research’s Private Company Database.

As long as startups only have to give up a portion of their equity to VCs (rather than full ownership to an acquirer), funding will likely be the option of choice for popular infosec startups. Of course, taking money now at such an elevated level assumes that billion-dollar buyers will return at some point to provide big exits. That may well be the case, but it’s a pretty high-stakes gamble nonetheless.

Broadcom broadens into security

by Brenon Daly

What began last summer as a head-scratching novelty has now become a consistent strategy at chipmaker-turned-software vendor Broadcom. A year after the semiconductor giant inked the second-largest software acquisition in history, Broadcom has made a big splash in information security (infosec), paying $10.7bn for Symantec’s enterprise security business.

Although the transaction is ‘just’ an asset purchase, it nonetheless stands as the largest infosec acquisition in history, according to 451 Research’s M&A KnowledgeBase. Another way to look at it: Broadcom’s massive bet on Symantec basically equals a full year’s worth of M&A spending for the entire infosec market. (The M&A KnowledgeBase shows annual spending across the infosec sector over the past two decades has ranged widely from $2bn to $28bn, depending on blockbuster deals.)

By virtually any measure, Broadcom is paying up for Symantec’s castoff business. Divestitures, particularly those involving low- or no-growth businesses, invariably garner a discount to broad-market M&A multiples. Depending on the segment and the assets, divestitures can get done at 1-2x sales, or half the prevailing prices in outright acquisitions.

At a purchase price of more than $10bn, Broadcom is valuing the enterprise security division at 4.5x sales. (In the most-recent fiscal year, Symantec’s enterprise group posted sales of $2.4bn, a level that hasn’t really changed in three years.) That’s even slightly richer than the 4.3x that Broadcom paid in its landmark acquisition last summer of CA Technologies.

The most-significant portion of Symantec falling into the portfolio of a financially minded consolidator comes after a prolonged slump at Big Yellow, which has served – not entirely fairly – as a company caught on the wrong side of disruption. As one indicator, consider that its stock price has basically been stuck in place for the past half-decade. During that same period, other business-focused security vendors have emerged and created somewhere in the neighborhood of $100bn – or 10x the terminal value of Symantec’s enterprise business – in both the public and private markets. We’ll have a full report on this transaction for subscribers to 451 Research’s Market Insight service later today.

A rare services deal from Salesforce

by Scott Denne

 

Salesforce accelerates its 10-figure acquisitions, making its third such deal in 18 months. The $1.35bn purchase of ClickSoftware is notable not only because, coming just days after the close of its $15.1bn reach for Tableau, it represents an uptick in billion-dollar transactions from the CRM giant, but also because it marks a new phase its Salesforce’s M&A strategy – paying $1bn for a bolt-on acquisition.

In its five previous $1bn-plus purchases, Salesforce launched new lines of business, beginning with its entry into marketing software when it bought ExactTarget back in 2013. More recently, it got into data integration with MuleSoft ($6.6bn) and drastically reshaped its BI portfolio with Tableau. In reaching for ClickSoftware, a developer of field services management applications, Salesforce adds to its already sizeable Service Cloud offerings.

Only twice in any of its previous 57 acquisitions this decade has Salesforce added to its Service Cloud. The reason: it hasn’t needed to. Service Cloud generates about $3.6bn in revenue, making it the second-largest of Salesforce’s product groups, just behind its $4bn Sales Cloud, which it will likely catch, as the former grew 27% and the latter 13% year over year in the last quarter.

Salesforce M&A

Conversation pieces

by Scott Denne

As machine learning permeates the tech stack, spoken and written queries are displacing type and click, leaving companies – from enterprise software developers to consumer electronics manufacturers – to bolt natural-language interfaces onto their products. That has led to a sharp rise in acquisitions of firms developing conversational artificial intelligence (AI), a trend that’s likely to extend through this year.

Today, two such deals were announced, highlighting the range of applications for such technology. In one, Cisco’s Webex nabbed Voicea for the target’s ability to turn recorded meetings into notes and summaries. In the other, Vonage picked up Over.ai to bolster its call-center products with advanced interactive voice response. The scarcity of natural-language-processing expertise, mixed with the broad applicability of the tech, has fueled a surge of M&A.

According to 451 Researchs M&A KnowledgeBase, 23 vendors developing chatbots or other conversational AI capabilities were acquired last year, up from 15 in 2017. So far in 2019, there have been about three such transactions per month. Based on our estimates, most of the disclosed deal values have printed below $30m, with several below $10m. Still, for conversational AI specialists, exiting sooner could be more profitable than waiting.

Although there’s widespread demand for conversational capabilities, few companies are likely to ink multiple purchases and the buyer universe will begin to dry up. And there may be a limited opportunity to build a large independent company in this market as most businesses look to their existing software providers for machine learning capabilities. In 451 Researchs Voice of the Enterprise: AI & Machine Learning report, a plurality of organizations (38%) told us they’ll leverage machine learning by acquiring software with the technology already baked in.