PE’s pricey paper

by Brenon Daly

Deals in which one private equity (PE) firm sells a company to another PE outfit are sometimes referred to as ‘paper trades.’ These transactions have become increasingly popular in recent years as yet another way for buyout shops to put their record levels of cash to work. By our count, secondary transactions currently account for almost one out of every five deals that PE firms announce, roughly triple their share at the start of the decade.

However, there’s a price for that popularity: the paper is getting a lot more expensive. PE firms paid an average of 4.5x trailing sales for tech vendors owned by fellow buyout shops since the start of 2018, according to 451 Research’s M&A KnowledgeBase. That’s 50% higher than the average PE-to-PE valuation from 2010-17.

There are a lot of reasons for the increase, not least of which is that overall valuations for the broader tech M&A market have been ticking higher, too. But that doesn’t fully explain it.

The M&A KnowledgeBase shows that the average multiple for tech deals since January 1, 2018 with buyout firms on both sides is nearly a full turn higher than the average multiple paid by PE shops to tech providers in that same period. Recent secondaries that secured price-to-sales multiples in the high single digits include Mailgun, Quickbase and the significant minority stake of Kaseya, according to our understanding.

So why do paper trades go off at a premium? Part of it is explained by the view that companies in a PE portfolio have largely been cleaned up, operationally. They are something of a ‘known quantity,’ which takes at least some of the risk out of the purchase.

From there, it’s just a short step for the new buyout owners to one of their favored activities: optimizing the businesses for cash flow. That financial focus, which is undeniably supported by the broad economic growth and continued increases in tech spending, has contributed to the current cycle of ‘pay big now, find a bigger buyer later.’ But if the economy turns, PE firms may well find that high-priced secondaries are one of the first types of deals to disappear, leaving them holding some very expensive paper.

Future farmers of Europe

by Michael Hill

Europe is leading the agricultural technology revolution as IoT and other emerging technologies transform large-scale agricultural operations into connected farms. A combination of European farm subsidies and European IoT deployments is boosting acquisitions of European agricultural technology (agtech) companies.

According to 451 Researchs M&A KnowledgeBase, a record $4.8bn was spent on agricultural technology deals in 2018 – more than the previous five years combined. Of that record spend, $4.6bn went to Europe-based targets, which are currently on pace to exceed 2018 in terms of deal volume.

While a genuine showstopper of an agtech deal has yet to emerge this year, Merck’s $2.4bn reach for Antelliq, a French provider of livestock tracking software, certainly fit that description last year. As in that deal, the emergence of IoT is partly driving the trend (that deal was 2018’s largest acquisition of an IoT company). According to 451 Researchs Voice of the Enterprise: IoT, businesses are expanding their IoT investments in EMEA. Our recent survey shows 21% of respondents are planning to deploy projects there, up four percentage points from the year before.

Farm subsidies from governments are also bolstering European agriculture, making companies that serve that market more attractive targets. According to the Organisation for Economic Co-operation and Development, since 2014 subsidies for European farmers, such as the EU’s Common Agricultural Policy, have grown 8%, while subsidies for US farmers, by comparison, have declined 13%.

A spring sputter for tech M&A

by Brenon Daly

The momentum that had sustained the high-rolling tech M&A market through the opening quarter of 2019 petered out in April. Spending in the just-completed month plummeted to a paltry $15.4bn, just one-third the average of the first three months of the year, according to 451 Researchs M&A KnowledgeBase. More significantly, the total value of tech and telecom acquisitions announced in April stands as the lowest monthly total in the M&A KnowledgeBase in four years.

Last month’s slump started at the top. Buyers in April announced just four tech transactions valued at more than $1bn. That’s the fewest big-ticket prints announced in any month since the fall of 2017, and just half the number that acquirers were putting up each month in 2018. Further, the deals that did get done last month had a distinctly down-market look to them.

Rather than the expansion-minded and expensively priced purchases that acquirers inked last year, the billion-dollar deals in April came back down to earth, as cost-cutting consolidation emerged as the main driver of these large transactions. Our data shows the four companies acquired for more than $1bn last month were each relatively mature assets that all traded for less than 2.5x trailing sales.

The largest purchase announced last month demonstrates that trend very clearly. French ad agency Publicis once again turned to M&A to boost its otherwise sagging top line. It paid $4.4bn, or just 2x sales, for the 9,000-person marketing services firm Epsilon. Similarly, Siris Capital Group took 30-year-old printing company Electronics for Imagining (EFI) private at just 1.4x times last year’s revenue. EFI hadn’t really grown since 2016, a trend that was forecast to continue this year.

Exclusive: Ivanti in market

by Brenon Daly

One of the larger private equity (PE)-backed rollups may be rolling into a new portfolio. Several market sources have indicated that Clearlake Capital Group currently has infrastructure software giant Ivanti in market, with second-round bids expected soon. If the process moves ahead, the buyer is almost certain to be a fellow PE shop, with the price likely to be in the neighborhood of $2bn.

Buyout firm Clearlake has built Ivanti from a series of acquisitions, with the bulk of the business coming from the January 2017 purchase of LANDESK Software. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimates for the price and valuation of that significant secondary transaction.) After it bought LANDESK, Clearlake rolled a pair of existing portfolio companies into that platform, which then took the name Ivanti in early 2017. The rechristened business went on to pick up another two companies later that same year.

Although two years is a relatively short holding period for a buyout shop, Clearlake is looking to take advantage of a hot secondary market. Large PE-to-PE deals have become a popular way for buyout firms to put their record amounts of cash to work in transactions that – rightly or wrongly – they tend to view as less risky than other big-ticket acquisitions. The M&A KnowledgeBase lists roughly a dozen secondary deals valued at more than $1bn over the past year.

A classic rollup, Ivanti offers a broad basket of infrastructure software products, with a particular focus on ITSM and information security. According to our understanding, the business runs at a roughly 30% EBITDA margin. Subscribers to the premium edition of the M&A KnowledgeBase can see our full profile of Ivanti, including financial performance, competitors and other key measures.

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.