Webinar: ML implementations and acquisitions

by Brenon Daly

There’s no faster-growing segment of the relatively mature enterprise software market right now than machine learning (ML). Join 451 Research on Wednesday morning for a special webinar on the collection of technologies that help companies get smarter about their operations, customers and partners. The webinar will cover not only how ML works, but also what it’s worth.

Whether it’s using ML to vault ahead of rivals or to explore bountiful new markets, ML can truly alter the fortunes of a business. And yet, even with the near-universal relevance of ML (who doesn’t want smarter software?), the technology is only starting to find its way into companies.

In a recent survey of 550 IT decision-makers, Nick Patience, 451 Research’s head of software research, found that just 17% said they have deployed ML technology. Further, most of those use cases were rather narrowly defined.

At the same time, however, our survey of tech buyers and users showed they are planning to be much more expansive and aggressive with ML. Looking ahead, roughly half of the respondents expect to have ML technology up and running by mid-2019, up from just one in six right now. The soaring forecast for ML implementations is unprecedented in the relatively mature software industry.

That same sort of pattern is playing out in acquisitions in this market, as suppliers look to pick up ML technology at an ever-increasing pace. Already this year, buyers have announced more ML deals than any year in history, according to 451 Research’s M&A KnowledgeBase. At the current rate, the M&A KnowledgeBase will record roughly 140 ML-related prints for the full-year 2018, twice the number from just two years ago and more than three times the number in 2015.

To get smart on machine learning and get even smarter on doing ML deals, 451 Research will be hosting a special hour-long webinar on Wednesday, December 12 at 11:00 ET. We will be looking at both the technological underpinnings of this rapidly emerging technology trend, as well as how suppliers are using M&A to respond to this unprecedented demand. Join us later this week to learn more about the most-transformative enterprise technology trend in the market right now.

IBM sells software for once

by Scott Denne

Amid the growing perception that technology is disrupting a wide range of industries, it’s worth noting that the software business itself is one of those industries. And perhaps no company is responding to that shift as dramatically as IBM. With a record acquisition recently announced, Big Blue has now made a record divestiture, shedding several software assets in a $1.8bn sale to HCL Technologies.

Throughout its history, IBM has frequently turned to a combination of acquisitions and divestitures to reorient its business. Those earlier sales, however, were almost entirely in services and hardware, while this deal marks its largest software divestment to date. In today’s transaction, Big Blue is selling software units that specialize in security (Appscan and BigFix), marketing (Unica, Commerce and Portal) and collaboration (Domino, Notes and Connections). All received scant attention from IBM in recent years and none reside in the areas that the company considers to be its strategic priorities, such as artificial intelligence (AI), blockchain and cloud computing.

It was that latter trend that sparked the recent $33.4bn purchase of Red Hat, setting an all-time record for the largest software deal. Having lost to Amazon and Microsoft in the first phase of the shift toward cloud computing, IBM sees another opportunity as the market shifts to hybrid- and multi-cloud environments. Today’s divestitures did nothing to aid the company in pursuit of that market.

Others have taken a similar tack, sensing that changes are coming to their sectors. In 451 Research’s VoTE: Digital Pulse survey, 47% of respondents among B2B software and IT tech vendors told us that digital technology would be highly disruptive to their organization’s market. Nuance Communications, for example, recently shed its document imaging business in a $400m sale as it focuses its resources on a raft of new challengers in the AI and voice recognition space. According to 451 Research’s M&A KnowledgeBase, public companies around the globe have divested a collective $6.5bn in software assets so far this year, the second-highest annual total in the current decade.

Survey says…

by Brenon Daly

Talk about the wisdom of the crowds. In a pair of 451 Research surveys last December, the tech M&A community accurately forecast this year’s stunning resurgence in dealmaking. In separate surveys last year, both corporate development executives and senior investment bankers predicted that 2018 would be a banner year for tech M&A, reversing two consecutive annual declines.

Strategic buyers gave their strongest outlook to any survey since the recession, while an above-average number of advisers indicated last year that they expected an uptick in acquisition activity this year. Tellingly, the bullishness from both groups has come through in actual deal flow, with this year on track for the highest level of annual spending since the dot-com collapse. (451 Research subscribers can see our full report on last year’s survey of corporate acquirers and bankers.)

Having presciently predicted activity in 2018, what do the main buyers in the tech M&A market and their advisers see coming in 2019?

To get the forecast, 451 Research is currently surveying both groups. If you work in a M&A capacity at a company or are a seasoned investment banker (VP and above), we would like to hear from you. The surveys are quick and painless, taking just 5-10 minutes. There’s even a fun question or two in both of the surveys. (If you haven’t received an emailed link for the survey, please contact me.)

In return, we’ll send all respondents an advanced look at the key findings of the survey, so they’ll know exactly where the market is heading next year. Again, to take part, simply email me and I’ll get you the correct survey. Thank you for offering your take on tech M&A in 2019.

Raining on the M&A parade

by Brenon Daly

Not everyone is loving the record pace of tech M&A this year. In a novel survey, 451 Research’s Voice of the Enterprise (VotE) recently asked more than 1,000 IT users for their take on the seemingly ceaseless stream of acquisitions that has unalterably reshaped the tech landscape. Their verdict: they are hesitant about doing business with those companies after the deal closes.

Specifically, four out of 10 respondents to our VotE: Digital Pulse, Vendor Evaluations survey said they had concerns that one of their key vendors would get snapped up within the next year. That’s a legitimate concern when we consider that this year, we’ve already seen over 100 major tech vendors acquired for more than $1bn, according to 451 Research’s M&A KnowledgeBase. Further, survey respondents told us that most transactions break down because of product, not pricing.

Disruptions and distractions caused by the acquisition were – by far – the main reason for the dour assessment given to deals. Roughly one-third of respondents who had concerns about M&A cited those two reasons, which was twice as high as any of the other concerns. In contrast, just one out of 10 (11%) cited ‘price increase’ as a reason for the concern. (Note to all the would-be trust-busters in Washington DC: you can relax your scrutiny of tech transactions just a little bit.)

The VotE survey is important because it draws responses from IT users, or as we like to call them, ‘customers.’ In many cases, the VotE respondents are the very people who have supplied the growth that made the acquired company attractive to the buyer in the first place.

Further, it is these customers – not the acquirer or its phalanx of paid supporters of the deal – that will ultimately determine the returns on the thousands of tech transactions done each year. (Our VotE survey captures their ‘vote’ on M&A, if you will.) And yet, a significant number of them are saying that, post-close, it may not be business as usual with their suppliers. That’s a decision that could potentially swing hundreds of millions of dollars in IT spending to different vendors.

Of course, a skeptical take doesn’t necessarily doom a deal. But the bearish outlook from customers does stack the odds a bit higher against buyers getting the hoped-for returns from the acquisitions they are inking. The sentiment in our survey stops short of saying ‘buyer beware’ – instead, it’s more ‘buyer be aware.’

Sunny weather for hybrid cloud deals

by Scott Denne, James Curtis, Steven Hill

To stay relevant during a massive shift toward the use of public clouds, makers of on-premises IT hardware and software need products that help customers develop, run and manage their infrastructure on multi-cloud and hybrid cloud environments. The hunt for those products has been a catalyst for recent acquisitions, including, most notably, IBM’s $34bn pickup of Red Hat. Two other deals that match that theme were struck today, one by Hewlett Packard Enterprise and one by Red Hat, while it awaits the close of its sale to IBM.

The transactions cover different segments of IT – Red Hat purchased storage software, while HPE bought a data platform. Yet both illustrate that helping clients navigate mixed cloud environments has become a strategic priority for legacy IT technology firms. In its deal, Red Hat reached for NooBaa, a provider of object-storage management software for data that resides across multiple clouds.

In the other transaction, HPE nabbed BlueData, a maker of virtualization software for data workloads. That acquisition gives HPE software to bundle with its HPC systems, enabling it to offer both on-premises hardware and the software to run elastic data workloads across a hybrid environment. It’s a move HPE needed to make as more data and analytics tasks are transitioning from on-premises infrastructure at a faster pace than other IT workloads.

According to 451 Research’s Voice of the Enterprise: Cloud, Hosting and Managed Services, Workloads and Key Projects, 19% of organizations will use public cloud offerings as their primary IT environment by 2020, compared with 11% who did so this year. Data workloads are moving to the cloud even faster, with 27% saying that a public cloud (such as AWS or Azure) will be the primary environment for data processing, analytics and business intelligence, compared with 12% this year.

‘Buy now’

by Brenon Daly

As holiday-sated workers troop back to the office, they are expected to go through the annual ritual of logging onto their favorite online shopping sites and, collectively, throwing a few billion dollars into those virtual cash registers. The unofficial holiday of Cyber Monday pits retailers of all stripes against each other in an annual test of who can get online shoppers to click the ‘buy’ button.

For retailers not named Amazon, drawing in more of those digital dollars has meant making ever-larger M&A bets. This year has already seen two of the four largest acquisitions of online retailers since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase. The big prints have pushed this year’s spending on internet retailers to a record level, with the value of 2018 deals roughly matching the previous five years combined.

Looking at the blockbuster online retail transactions in 2018, however, we’re struck by the disconnect between the most-basic tenant of any market: supply and demand. Specifically, there’s a notable divergence between how an acquirer plans to use the target company to bolster its e-commerce site (supply), compared with what customers actually want from an e-commerce site (demand). One of our recent surveys of hundreds of online shoppers suggests that companies might do well to focus on optimization, rather than acquisition.

Consider the rationale for the two largest online retailing deals in 2018, which, admittedly, skewed overall spending in the sector compared with previous years. Walmart spent $16bn last summer for a majority stake in India-based e-commerce giant Flipkart, as part of a geographic expansion by the world’s largest retailer. A few months earlier, Swiss jewelry retailer Richemont handed over $3bn to expand into the clothing market as it purchased YOOX Net-A-Porter.

Broadly speaking, both of those transactions were driven by the buyer’s desire to expand into new markets. But merely offering more stuff – whether new products or new geographies – doesn’t necessarily lead to more sales. Without streamlining the acquired property, offerings turn into clutter. That’s an inconvenient fact that undermines much of the rationale for big e-commerce purchases like this year’s pair of billion-dollar deals.

As clearly shown in a recent survey by 451 Research’s Voice of the Connected User Landscape (VoCUL), more online stuff can slow sales, and send would-be buyers to other sites. In fact, three of the four top attributes that respondents to the VoCUL survey said they valued the most when shopping online had to do with being able to find and purchase things quickly. Would-be acquirers in the online retailing market should remember that when it comes to commerce, convenience is key.

Autodesk reinforces its construction biz with PlanGrid

by Scott Denne

Autodesk tops off a blockbuster year in construction software with the $875m acquisition of PlanGrid, a maker of project management applications. In acquiring the SaaS startup, Autodesk inks its largest deal and provides the latest indicator of the construction industry’s status as a maturing software market.

PlanGrid should augment the design and modeling focus of Autodesk’s construction and workflow software with the its more document-based approach. The acquirer also gets a new path to market. Where Autodesk typically sells subscriptions to IT departments of architectural firms, general contractors and the like, PlanGrid mainly sells its software on a by-project basis.

The construction market is propelling the topline at both firms – PlanGrid’s ARR expanded about 50% over the past year to roughly $65m, while Autodesk’s construction unit (its biggest) grew 28% in the most recent quarter, compared with 22% for the overall business. Autodesk’s peers and competitors have been equally eager to capture their share of that growth.

In 2018, purchases of construction-related technology vendors spiked to $4.2bn, more than the combined total deal value for 2017 and 2016. According to 451 Research’s M&A KnowledgeBase, three of the four largest transactions in that category were announced this year and all four in the past 12 months (Oracle disclosed its $1.2bn pickup of Aconex in the closing days of 2017.) Like Autodesk with PlanGrid, Trimble made its largest acquisition on record with the $1.2bn purchase of construction software provider Viewpoint in April.

Capital One builds up its M&A credit

by Scott Denne

Anticipating a digital disruption in finance, Capital One has printed its third tech acquisition of the year with the purchase of Wikibuy, a comparison shopping site. Today’s deal sets a new high-water mark for tech M&A for the consumer credit firm and comes as other banking and insurance companies look to add technology assets in anticipation of changes to the banking and insurance industries.

Capital One opened the year with the pickup of Notch, a machine learning consultancy. In the spring, it reached for Confyrm, an antifraud specialist. Prior to today’s transaction, Capital One had never bought more than two tech vendors in a single year and had only hit that mark twice, according to 451 Research’s M&A KnowledgeBase.

While those earlier deals address the operational side of disruption by adding to Capital One’s arsenal of risk management and credit-scoring tools, today’s move expands its footprint with consumers. Wikibuy provides a price-comparison website, along with services that offer consumers price updates on certain products. The transaction could help Capital One start to play a role, beyond payments, in its customers’ financial lives.

Taken together, these deals follow three or four years of public prognostications by Capital One’s management of a coming digital disruption in banking. Now the company appears to be turning toward tech consolidation to prepare for it. In that respect, it’s not unique among its peers. Allstate, for example, inked its second-ever tech acquisition with the purchase of credit-monitoring service InfoArmor in August. Three months earlier, Principal Financial Group made its first tech deal by acquiring RobustWealth, a maker of customer engagement software for financial advisers.

According to our surveys, the notion of a coming disruption to financial industries is widely anticipated. In 451 Research’s Voice of the Enterprise: Digital Pulse survey, 62% of respondents in finance anticipated a highly disruptive impact on their industry over the next five years – only media and telecom scored at or above that level.

A blockbuster year for blockbuster deals

by Brenon Daly

Flush with cash and filled with confidence, tech acquirers have put up more billion-dollar deals so far this year than any other year. 451 Research’s M&A KnowledgeBase lists 100 acquisitions valued at more than $1bn already in 2018. For those who don’t have a calendar handy, the pace works out to the head-spinning rate of more than two announced transactions every week since January. Back in the recent recession, tech buyers were taking about a month to do the same number of $1bn+ deals.

The unprecedented activity at the top end of the tech M&A market is being driven by record levels of big-ticket purchases by both of the main buying groups: tech companies and buyout firms. Corporate acquirers, which account for two-thirds of the billion-dollar prints, have seen many of the market mainstays start buying again. And buying big.

For instance, IBM hadn’t paid more than a billion dollars for any company in two and a half years before announcing the $33.4bn purchase of Red Hat last month. That’s the largest-ever software acquisition. For the first half of this decade, Big Blue averaged roughly a billion-dollar deal every year. Elsewhere, German giant SAP had been missing from the list of blockbuster buyers since 2014, until it put together a $10bn double-dip this year. It paid $2.4bn for Callidus Software in January, and followed that up last week with the $8bn pickup of IPO-bound startup Qualtrics.

The recent growth in deals by strategic acquirers, however, has been outpaced by financial buyers. An ever-increasing number of private equity (PE) firms have found an ever-increasing number of ways to shop big in tech. At the start of the current decade they were averaging about a dozen billion-dollar transactions each year. This year, they are on pace to do three times that number.

Fittingly, buyout shops are using their full M&A playbook to get to a record number of $1bn+ deals. They have done large take-privates (Vista Equity-Apptio, Thoma Bravo-Imperva); they have done carve-outs (The Blackstone Group’s $17bn purchase of Thomson Reuters’ financial markets business); and, especially, they have done secondaries (Rocket Software, Eagleview Technologies and BMC Software have all traded one set of PE owners for another). Further, all of that activity comes at a time of relatively high valuations across the tech landscape for these notoriously price-sensitive buyers.

Overall, the activity at the top is important to the broader tech M&A market because the deals are the main contributor to this year’s surge in acquisition spending, which is nearing an all-time annual record. This year’s billion-dollar transactions account for all but $100bn of the total $545bn we tally for all of tech M&A so far in 2018.

But the importance of blockbuster deals goes well beyond their dollars. Big buyers inking big transactions tends to embolden other companies and their boards to pursue their own ambitious acquisitions. That’s how the number of $1bn tech deals in a single year gets pushed into the triple digits for the first time ever.

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

Mixed buyers harvest security targets

by Scott Denne

In making its latest security purchase, BlackBerry joins a pageant of infosec acquirers chasing after ballooning budgets. With BlackBerry’s $1.4bn pickup of Cylance, there have now been 15 acquisitions of infosec vendors valued above $250m this year, according to 451 Research’s M&A KnowledgeBase. Only three of those were printed by buyers who make infosec their primary business.

To be sure, BlackBerry isn’t new to the security market. Since its mobile device business began its decline earlier this decade, it has focused on mobile device management software and expanded on its reputation for secure communications since the purchase of encryption specialist Secusmart in 2014. Still, this deal marks its most significant dive into cybersecurity. (In fact, it’s the company’s most significant acquisition in any category as it’s three times the size of its previous organizational high – the $425m pickup of Good Technology in 2015.)

Many of this year’s acquirers resemble BlackBerry in being on the edges of infosec and looking to go deeper. Splunk, for instance, printed its $350m reach for Phantom Cyber just as its security revenue was expanding to 50% of its topline. Others had little presence in cybersecurity: TransUnion and Reed Elsevier, both already in the risk business, got deeper into digital risk by nabbing antifraud firms. Also, AT&T moved into the market with the acquisition of AlienVault. And, of course, reflecting the broader trend in tech M&A, private equity (PE) firms are the largest category of infosec acquirer.

Whether from telecom or PE, expanding budgets are the draw for most buyers. Across all of our surveys, security budgets have risen steadily and dramatically. Among respondents to 451 Research’s VoCUL: Corporate IT Spending survey, at least 18% have indicated rising security budgets in each of the past five quarters. In that same time, no other single software segment garnered higher than 12%. And in our security-focused panel, the responses have been more dramatic. In 451 Research’s Voice of the Enterprise: Information Security report, 80% anticipate rising budgets in 2018, compared with just 6% forecasting a decline.