A safe bet to get rich

by Brenon Daly

Playing defense can be a lucrative strategy. Along with the record deal volume in the information security (infosec) market this year, valuations across the fast-growing sector have surged to their highest level. Already in 2018, 451 Research’s M&A KnowledgeBase lists eight transactions that have gone off at price-to-sales multiples of more than 10x, based on disclosed or estimated terms.

These double-digit valuations have helped to push the multiple across the entire infosec market to new heights, twice as rich as virtually all other major IT sectors. According to the M&A KnowledgeBase, acquirers have been paying 8.1x trailing sales for the infosec companies they have picked up so far this year.

For comparison, the next-richest segment (infrastructure software) checks in at 6.6x trailing sales. One sign of how inflated that market has become is the surprisingly rich valuation of infrastructure software titan CA Technologies. Broadcom is paying the highest price for CA shares since the internet bubble collapsed. The deal values CA at 4.5x sales, roughly a turn higher than other large software vendors that aren’t really growing. Additionally, Salesforce paid more than 20x trailing sales for MuleSoft in March.

More broadly, valuations in the 10 other IT sectors we track in the M&A KnowledgeBase are all less than half the median valuation in infosec. For instance, application software transactions this year are going off at 3.4x trailing sales, which is roughly consistent with the two previous years.

Of course, as in any small market, a few richly valued deals can skew the overall valuation for the sector. (The number of infosec prints each year is only about one-tenth the number of application software transactions in any given year.) And the infosec market has seen an unusually large number of big prices paid for very early-stage startups. Deals such as Palo Alto Networks-Evident.io and Splunk-Phantom Cyber are certainly pushing the median multiple higher. But even outside those outliers, acquirers are having to reach deeper than ever before to secure the security providers they want to buy.

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

Broadcom can’t get there from here

by Brenon Daly

CA Technologies just reported what’s likely to be its next-to-last financial results as a public company, and the numbers don’t add up. We’re not referring to anything about the specific bookkeeping at CA, which has long since distanced itself from the time when the ‘CA’ was said to stand for ‘Creative Accounting,’ with ’35-day months’ and the like.

Instead, our assessment of CA’s financial performance is based on the targets that its soon-to-be owner Broadcom has set for the combined company once the largest-ever software transaction closes later this year. In fact, it looks increasingly inescapable that the only way they get there from here is to shed a bunch of CA’s businesses.

Recall that the chip giant (rather inexplicably) turned its consolidation machine to the software industry, paying $19bn for CA in mid-July. As part of that blockbuster purchase, Broadcom laid out the goal of ‘long-term adjusted EBITDA margins’ above 55% for the combined company. Of course, the phrasing gives Broadcom plenty of wiggle room. ‘Long-term’ can mean a wide range of time, while ‘adjusted EBITDA’ is basically a fictitious financial measure that excludes many of the true costs of doing business.

But even setting aside our unfashionable quibbles around accounting, Broadcom’s margin goal looks like a stretch for CA, at least in its current form. On Monday, the company reported its overall financial performance for its just-completed quarter, and it’s pretty clear there are businesses inside of CA that will appeal to Broadcom and those that may not make the cut. CA’s financial results highlight the vast financial differences between its mature, cash-rich mainframe business and the other lines of more growth-oriented software that it has picked up over the course of a roughly 30-year M&A career.

CA’s two main businesses are nearly the same size, but the mainframe division runs at a 67% operating margin – more than 4x the operating margin posted by its enterprise software division. For the company’s full fiscal year, which ended in March, the enterprise software unit put up $1.7bn in revenue but only $151m in operating income. The tiny margin in CA’s enterprise software business, which contrasts with its richly profitable mainframe division, won’t help Broadcom hit its projected EBITDA targets, no matter how many ‘adjustments’ are made. In fact, the division stands in the way.

That reality won’t be lost on Broadcom, which had collected a bullish following on Wall Street for its reputation as a sharp financial operator. Nor will the fact that most other hardware vendors (including HPE, Dell and fellow chipmaker Intel) that have acquired their way into the software industry have eventually unwound many of their purchases. CA’s enterprise software division sells software in numerous markets, including identity and access management, application development, and security and IT operations management. For Broadcom to reestablish credibility among skeptical investors and hit the targets for the combined company, it is almost certain to divest some of those CA units.

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

Location, location, location (data)

by Scott Denne

Marketers are experimenting with a variety of applications for consumer location data, which is expanding the supply of potential acquirers for a set of startups that was once relegated to a niche corner of the mobile ad sector. The abundance of early-stage startups in this space will likely keep exit sizes modest for now, benefiting companies that need an early exit. Yet vendors that are able to successfully transition from ad-tech suppliers to core elements of the marketing stack could see large exits in another year or two.

Location data was initially gathered in two ways – through beacon deployments at retail locations and via data shared in advertising exchanges. As we detailed in an earlier report, the methods for gathering and managing this data have since expanded and the applications have moved beyond showing mobile ads based on device proximity. That has led to a growing interest among marketers to employ location data for multiple applications, such as behavioral targeting, ad attribution, loyalty programs and competitive intelligence. In a survey from 451 Research’s Voice of the Connected User Landscape, more than half of respondents said this data was ‘very important’ to gaining insight into customer experience.

While the uses of location data are largely experimental today, more marketers are faced with a mandate to meld their physical and digital operations. Location data helps bridge those two by linking digital identity with physical movements. As location data becomes a pervasive part of customer analytics, marketing measurement and campaigns, businesses that can build relationships with brands that encompass multiple parts of the advertising stack will be well-positioned for a bigger payday.

While the exits have been few, they have come at enviable multiples. The most notable of late are Snap’s acquisition of Placed – a supplier of location-based attribution services – and Ericsson’s purchase of Placecast, a developer of white-label advertising software that provides telcos and others with consumer location data to monetize those signals. We estimate that both sold for north of 5x trailing revenue. Each of these deals hits on a theme that we expect to drive future M&A in this market.

Although initially divided between beacon management and mobile advertising firms, we now see five distinct product segments emerging in this market. For a discussion of those segments, along with potential targets in each, read our full sector IQ report on the topic.

Infosec hits the exits

BY Brenon Daly

At Black Hat last year, we half-cleverly noted how information security (infosec) vendors should feel right at home in Mandalay Bay, since exits were hard to find in both the infosec industry and the casino itself. Now, as the annual security conference gets set to open this weekend, it’s a much different picture. The exit door has been thrown wide open, with an unprecedented level of both IPOs and M&A in the cybersecurity market.

Start with IPOs. At this point last year, only one cybersecurity provider had made it public (Okta). As the conference gets set to open this weekend, three infosec startups have already debuted on Wall Street this year (Zscaler, Carbon Black and Tenable). Collectively, this year’s trio of new listings has created $9bn of market value, more than 10 times the amount of venture backing they raised altogether.

More significantly, the long-expected wave of consolidation in the overpopulated infosec market is beginning to take shape. For instance, 451 Research’s M&A KnowledgeBase lists 18 infosec acquisitions in July, which matches the highest-ever monthly total for the sector. Last month’s acceleration continues the already-strong dealmaking activity posted earlier this year, putting 2018 on track for the most infosec transactions in any year in history. This year’s unprecedented rate of M&A activity is being driven by an ever-increasing number of buyers that have been attracted to the fast-growing market.

Subscribers to 451 Research can look for a full report on the exit environment for infosec companies on our site early next week.

Omnicom nabs consulting shop Credera

by Scott Denne

Omnicom comes out of hibernation with its reach for customer experience consultancy Credera Technologies. Today’s announcement marks the ad agency holding company’s first tech deal in almost three years. The purchase comes amid a series of stinging earnings reports by Omnicom and its peers as they struggle to keep up with the evolving needs of marketers – needs that have helped large consulting shops gain ground in Omnicom’s market.

Credera brings to Omnicom a set of consulting services that encompass management consulting, user experience, product development and other disciplines that help businesses deploy digital technology for customer engagement. While it’s common for ad agencies to own firms that specialize in digital commerce, web development and other specialties that are closely linked to marketing, they don’t often acquire service providers that help clients make changes to the business itself. That Omnicom has done so speaks to the current struggles of ad agencies and the new types of competitors they face.

Omnicom lost more than 10% of its value after reporting just 2% organic revenue growth, with a decline in its North American advertising business dragging down results. (It wasn’t alone: a few days afterward, WPP disappointed investors with its first-half report.) With the growth of data-driven digital advertising, ad agencies face clients that now want to roll advertising into a larger digital transformation strategy.

The capabilities needed to pull off those projects – change management, software buying and data integration – are often beyond an ad agency’s expertise. That has helped Deloitte, Accenture and other consulting shops with technology chops to take a chunk of the agency market over the past few years. In our surveys, we see those types of digital transformation projects accelerating. In 451 Research’s VoCUL: Corporate Mobility and Digital Transformation Survey at the end of last year, 40% of respondents told us their company has a formal digital transformation strategy, up from 30% in the first half of the year.

Second-half surge for M&A

by Brenon Daly

After tech M&A spending in the first half of 2018 soared to the second-highest opening for any year since the recent recession, the second half of the year is starting even slightly stronger. In the just-completed month of July, acquirers around the globe announced tech purchases valued at $49bn, including 10 $1bn+ transactions, according to 451 Research’s M&A KnowledgeBase. Last month’s spending slightly topped the monthly average of the previous six months of $44bn.

Corporate acquirers once again led the robust tech M&A activity in July, continuing a recent resurgence after sitting out much of last year. The return of the big-name buyers came at the expense of rival financial acquirers, who had an uncharacteristically quiet July. Private equity (PE) spending last month slumped to its lowest level of 2018, while deal volume dropped to the second-lowest monthly total of the year.

Still, buyout barons are on pace for more tech acquisitions in 2018 than any year in history, with deal flow projected to top 1,000 prints. That would be nearly one-third of all tech transactions announced this year, twice the ‘market share’ buyout firms held at the beginning of the decade. Additionally, PE spending this year is tracking to roughly match the previous high-water mark of $134bn in 2015.

But in July, it was strategic buyers who once again set the tone in the overall tech M&A market. Corporate acquirers, who have seen their treasuries swell dramatically due to this year’s tax law changes, accounted for eight of 10 of last month’s deals valued at more than $1bn. Noteworthy prints by some of the tech industry’s brand names in July included:

The largest software acquisition in history (Broadcom’s $18.9bn reach for CA Technologies)

A significant geographic expansion for a European IT services giant (France’s Atos handing over $3.4bn for US-based Syntel)

An uncharacteristically rich divestiture by a reeling software behemoth (PE shop EQT Partners paying $2.5bn, or almost 8x trailing sales, to carve the SUSE business out of Micro Focus)

With July slightly accelerating the monthly spending average, 2018 is on pace for $540bn worth of transactions for the full year. That would represent the second-highest annual total in the M&A KnowledgeBase, which goes back to 2002. Closer at hand, this year is all but certain to snap a two-year slide in M&A spending. In fact, probably before August ends, the value of announced tech deals in 2018 will eclipse the value of transactions from all of last year.

Strategics stretch for larger PE assets

by Scott Denne

Fortive’s $2bn acquisition of Accruent delivers the latest in a string of 10-figure private equity (PE) exits to come from strategic buyers. Corporations like Fortive, an industrial technology company, are plucking the largest tech assets out of PE portfolios at an elevated rate. Yet despite the increase, secondary exits – sales to other buyout shops – are expanding their share of PE exits.

With two-thirds of the year in the books, strategic acquirers have paid $1bn or more for 11 PE portfolio companies. According to 451 Research’s M&A KnowledgeBase, that’s the fastest pace of such acquisitions in a single year. That said, the pace of such deals is lumpy and could suddenly accelerate or decline. Before today’s transactions, two months had passed without a $1bn PE exit via a strategic sale, and a single day in May saw three such deals announced. On the day Fortive announced its purchase of Accruent from Genstar, SS&C paid $1.4bn to acquire Eze Software from TPG Capital.

In addition to the growth of large purchases, strategic acquirers are paying more for the companies they buy. Across all acquisitions out of PE portfolios, strategics have paid a median 3.7x trailing revenue, almost a full turn above last year’s prices and higher than the median multiple in any year over the previous decade. Favorable tax rates could account for some of the increase in prices from last year. Just as likely, though, the jump in prices reflects increasing competition from PE firms.

Although strategics still provide most of the total value of PE exits, secondary sales are increasing as a share of PE exits – a reflection of the bursting coffers and broader playbooks of PE funds. So far this year, secondary sales make up 40% of PE liquidity in the tech M&A market, compared with 33% last year. It’s odd that Accruent’s owner – Genstar Capital – has sold to a strategic now that those buyers make up a diminishing share of PE exit value. The facilities management software vendor traded one PE owner for another on two earlier occasions, in 2013 and 2016 – years when secondaries accounted for just one-quarter of PE liquidity.

Facebook’s facing limits

by Scott Denne

Facebook’s second-quarter revenue miss lays bare a problem that goes well beyond its momentary struggles with new European privacy regulations or the resentment it faces for sharing user data with Cambridge Analytica and its profiting from misinformation. The social media giant’s valuation is bumping into the limits of its addressable market – a market that its main rival looks more likely to win.

Facebook shed about 18% of its market cap after delivering 42% topline growth – enviable for almost any other company, although below what the street expected. Exacerbating the decline, it told investors to expect high-single-digit deceleration of its growth rate in each of the next two quarters. That’s a stark contrast to Google, its rival for dominance of the advertising market, which reported accelerating ad revenue earlier this week.

By most estimates, the entire global ad market (digital and offline) sits at roughly $550-600bn and by that measure Facebook, whose sales come almost entirely from ads, commands nearly 10% of it. While it’s still growing, its market cap, which was about $620bn before earnings, implied that much of that market would shortly come under its control. Slowing growth tamps down those expectations, as does the larger share that Google’s taking – its yearly growth jumped four percentage points last quarter to 23%.

An ambitious set of acquisitions has given Google’s ad business – already twice the size of Facebook’s – a stronger trajectory. While Facebook’s major purchases have mostly been extensions of its core social media business, Google (now Alphabet) has bought a diverse set of products both inside and outside of advertising. Outside of advertising and media, it shelled out billions to buy, among others, a thermostat company (Nest), a phone maker (Motorola) and a mapping app (Waze). Although a bit of a spendthrift, Google generates 14% of revenue outside of advertising.

Even within advertising, Google printed big deals to move beyond search. For example, it paid $1.65bn for YouTube in 2006, when such an investment in online video seemed laughable, although that transaction has now given Google a foxhole to launch a digital assault on the TV market. According to 451 Research’s Voice of the Connected User Landscape, 58% of consumers watch video content on YouTube, more than any other free streaming service and double the number that stream from TV networks’ own websites.

By comparison, Facebook hasn’t made a large acquisition outside of social media since reaching for Oculus VR more than four years ago. In fact, it hasn’t made any $1bn deals since it bought that virtual reality headset vendor. This year, it has only purchased three startups, including workplace messaging service Redkix, which it announced Thursday. If Facebook plans to regain the value it lost with its latest earnings announcement, it’s going to have to ink some riskier acquisitions that increase its addressable market, or at least take it into new corners of advertising. A seed-funded company with yet another new spin on email isn’t going to be enough.

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

Life after a breakup

by Brenon Daly

A lot has happened since Qualcomm announced its as-yet-unclosed $44bn acquisition of NXP Semiconductors in October 2016. The would-be buyer has successfully fended off an unwelcome suitor in what would have been the tech industry’s largest transaction. It has seen a former king at the company look to raise an army and reclaim the throne. Meanwhile, as Qualcomm’s deal has languished in limbo, more than 150 other chipmakers have been gobbled up, according to 451 Research’s M&A KnowledgeBase.

While those matters are mostly closed, Qualcomm’s bid for NXP remains open. At least it remains open for another day. The deadline for gaining the last remaining regulatory approval for the transaction is Wednesday night, just hours after it is scheduled to report fiscal third-quarter results.

Qualcomm and NXP have the green light from all of the necessary national and international bodies except one: China. Qualcomm extended its bid for NXP last April, when it refiled its application to China’s Ministry of Commerce. At the time, the company said it would walk away from the deal if it didn’t get approval on July 25 and pay a $2bn breakup fee to NXP the following day.

Right now, that appears likely to happen. Investors have put almost a 20% discount on NXP shares, compared with Qualcomm’s already raised offer of $127.50 in cash for each share of NXP. Over the past month, the discrepancy between the two prices has widened in almost every trading session. In mid-afternoon trading on Tuesday, NXP stock was changing hands at about $102.

Of course, that period has also seen a near continuous escalation in the trade war between the US and China. (We recently noted how tech acquisitions and investments have suffered pretty serious collateral damage in the ongoing spat between the two economic superpowers. China is currently on pace to purchase the fewest number of US tech providers since the country began shopping here about a half-decade ago, according to the M&A KnowledgeBase.)

Assuming Wall Street’s terminal view of the deal does indeed come to pass, what will happen to the two sides? For NXP, it’s pretty simple: deposit the $2bn termination fee into its treasury and go on with business. (It’s a pretty significant windfall for the company, which generated only $2.2bn in profit in all of last year.)

For Qualcomm, which would remain inexorably tied to the ever-maturing cellphone market, the options are a bit more limited. Nonetheless, one move we can probably rule out: Unlike Broadcom, the chipmaker that tried to buy Qualcomm, we don’t see the 33-year-old semiconductor provider announcing a multibillion-dollar purchase of a software vendor. Even two weeks on, Broadcom’s $19bn acquisition of CA Technologies is still a bit of a head-scratcher.

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

Atos reaches to North America again with $3.4bn Syntel buy

By Katy Ring, Mark Fontecchio

With its appetite for scale and global credibility, France’s Atos continues to spend heavily on targets outside of Europe. Today’s $3.4bn acquisition of US-based MSP Syntel should assist the buyer in developing North American market share – a recurring theme among the purchases it’s made since the $1bn pickup of Xerox’s IT outsourcing business in 2014.

Including debt, the deal values Syntel at $3.6bn, or 3.8x trailing revenue – a substantial premium for Atos, which had never hit 1x revenue on any of its $1bn transactions. Atos isn’t just paying above its norm, the valuation for Syntel surpasses the industry norm. According to 451 Research’s M&A KnowledgeBase, IT services and outsourcing targets fetched a median 2.3x revenue in the past five years. The high multiple highlights Syntel’s substantial North American sales and its ability to deliver services globally.

Two of Atos’ three previous $1bn-plus acquisitions were for US companies, yet its North American revenue declined 3.4% to $1.1bn in the first half. In addition to marquee clients such as American Express, State Street Bank and FedEx, nearly all (89%) of Syntel’s sales come from that continent. Moreover, although Syntel is a US-based multinational provider of integrated technology and business services, it is an offshore supplier with 78% of its workforce in India, which could bolster another of Atos’ weaknesses – global delivery capabilities.

Syntel has built a reputation for modernizing IT divisions for enterprises in financial services, healthcare and retail, all while retaining operating margins of 25%. Atos will look to graft this high-margin, offshore engineering capability, rolling out Syntel’s delivery model to its existing Business & Platform Solutions accounts to improve margins from 9.1% this year to roughly 11.5%. Atos expects about $120m in annual cost synergies from the merged businesses by 2021, as well as cross-selling opportunities that could add an additional $250m in revenue by 2021.

Rothschild Group, J.P. Morgan Securities and BNP Paribas advised Atos, while Goldman Sachs banked Syntel. The deal is expected to close by the end of this year. We’ll have a full report on this transaction in tomorrow’s Market Insight.

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