PE’s UK holiday

by Scott Denne

Amid the uncertainty surrounding Brexit, private equity (PE) firms are slowing their activity in the UK for the first time in five years. With an October deadline on the horizon and little clarity about how the UK’s exit from the EU might proceed, buyout shops are scooping up fewer targets in that country than they did last year. Most of the decline, however, has occurred at the edges of the market.

According to 451 Research’s M&A KnowledgeBase, PE firms and their portfolio companies have bought just 45 UK-based tech targets in 2019, on pace for an 18% decline from last year’s total (122). That shift counters a years-long increase, as the number of sponsor acquisitions of UK-based vendors has previously risen each year since 2014. Questions about a target’s ability to hire or sell its wares abroad post-Brexit seem to be having the most impact on those buyers that don’t often purchase UK-based companies, and lowering the appetite for discounted targets.

The most frequent acquirers remain active. The PE firms that have bought the highest number of UK-based vendors this decade (TA Associates, Vista Equity, Inflexion and HgCapital) have all continued to purchase there this year. All but Inflexion have acquired more than one UK-based company in 2019. And the decline seems concentrated on deals with below-market valuations. The pace of UK-based vendors trading to buyout shops for more than 3x trailing revenue has risen, our data shows, while transactions where companies sell for less than 2x have declined.

PE firms paying SaaSy valuations

by Michael Hill

A years-long increase in SaaS acquisitions by private equity (PE) firms is flattening out. Yet sponsors are spending far more than in the past for those targets – typically paying more for SaaS vendors than strategic acquirers do – as businesses shift more of their budgets toward hosted software offerings.

According to 451 Research’s M&A KnowledgeBase, PE shops have bought roughly the same number of SaaS targets as this time last year, following several years of increasing the volume of those deals 25% or more each year. Despite that, sponsors have spent more than $20bn on SaaS acquisitions so far in 2019, compared with $24.7bn for the entirety of 2018. Much of the jump stems from Hellman & Friedman’s $11bn take-private of Ultimate Software. Still, even without that transaction, PE firms have spent nearly three times as much on SaaS purchases this year as they did during the same period last year.

And 2019’s larger deals are coming at a premium. So far, the median trailing revenue multiple for a SaaS target in a sale to a buyout shop or PE portfolio company stands at 4.9x, a turn higher than any full year this decade. Our data also shows that 2019 marks the first year that PE firms have paid higher multiples than strategic buyers, whose acquisitions of SaaS vendors carry a 4.5x median multiple this year.

The increase in valuations comes as businesses are pushing more of their IT budgets into SaaS. According to our most recent Voice of the Enterprise: Cloud, Hosting and Managed Services, Budgets & Outlook – Quarterly Advisory Report, 67% of respondents expect to increase their spending on SaaS this year. What’s more, 38% expect SaaS to be their largest area of spending growth among cloud and hosted services.

A change of guard in the infosec market

by Brenon Daly

After an uncharacteristic half-year absence from the top end of the information security (infosec) market, a private equity (PE) shop has now put up the largest print in the bustling sector so far this year. Insight Venture Partners built on an earlier investment in Recorded Future to take a controlling stake in the threat intelligence startup in a deal valued at $780m.

Other than that, however, most of this year’s activity has been coming from newly resurgent strategic acquirers. In fact, except for Insight’s reach for Recorded Future, strategic acquirers account for all of the 10 largest infosec transactions listed in 451 Research’s M&A KnowledgeBase so far in 2019.

Already this year, Palo Alto Networks has announced three acquisitions totaling a cool $1bn in aggregate spending, Sophos has doubled up on deals, and FireEye has shelled out a quarter-billion dollars in its largest single purchase in a half-decade. Other infosec M&A mainstays such as Symantec, Akamai and Proofpoint have also been heard from this year, with all of them inking $100m+ acquisitions.

The key to many of these corporate deals getting done is that buyers are paying up. That’s particularly true for Palo Alto, which has made a practice of paying hundreds of millions of dollars for startups that measure their revenue in the tens of millions of dollars. But FireEye and Symantec have also paid double-digit valuations this year.

As strategic acquirers stretch on valuation, they have been able to elbow PE buyers aside. According to the M&A KnowledgeBase, buyout firms are behind just one of every five infosec transactions so far in 2019, down from at least one of four deals in each of the previous three years. Further, our data indicates that PE shops’ slumping market share of only 21% in infosec M&A so far in 2019 is a full 10 percentage points lower than their share of the overall tech M&A market.

PE’s customer experience play

by Scott Denne

As budgets for customer relationship management (CRM) software hit a four-year high, private equity firms (PE) are pouring into the space, picking up new platforms and inking bolt-on deals. The number of acquisitions by sponsors is heading toward a record as customers spend more in the face of complex customer experience challenges, our data shows.

Across sales, marketing and customer service, businesses are grappling with finicky customers. In 451 Research’s VoCUL: Digital Transformation survey, 75% of respondents said they are dealing with rising expectations among customers in recent years and 78% said their customer experience processes have increased in complexity. As a result, they’re spending more on software. In a separate survey last summer, 15% of respondents said they would increase their spending on CRM software – the highest reading since August 2014.

Last year, PE shops and their portfolio companies bought a record 45 customer experience and CRM software vendors, spanning subcategories such as marketing automation, contact center and social media analytics. According to 451 Research’s M&A KnowledgeBase, those buyers are set to surpass that level with 24 so far in 2019. Many of the transactions are aimed at addressing a larger market through bolt-on deals. SugarCRM, for example, printed its second acquisition of the year with today’s purchase of marketing automation specialist SalesFusion. Prior to its sale to Accel-KKR last year, SugarCRM hadn’t bought a company since 2016, our records show. In another deal this week, Insight Venture Partners’ Campaign Monitor printed its third transaction of the year with the acquisition of Vuture.

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.

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.

Software valuations soar in sponsor deals

by Scott Denne

The coordinated efforts of strategic and financial acquirers took purchases of application software vendors to a new height last year. Now, it’s the efforts of the latter alone that are pushing software deals back toward a record as sponsors place hefty valuations on such companies.

According to 451 Research’s M&KnowledgeBase, $23bn of software assets have traded hands through the first quarter of the year, putting 2019 on pace to match 2018’s record haul ($93bn). As we discussed in 451 Research’s Tech M&A Outlook 2019, the reentry of strategic buyers played an equal role in driving last year’s total. This year, private equity (PE) buyers have contributed the lion’s share of investment through the first quarter, having spent more than $17bn on such transactions, our data shows.

PE shops are acquiring application software providers at a slightly higher clip, having bought 117 of them in the first quarter, compared with 108 in the same period of 2018. More importantly, those firms are paying an unprecedented premium through the start of the year. According to the M&A KnowledgeBase, software vendors selling to buyout shops are trading hands at a median 5.5x trailing revenue, a full turn higher than last year and extending a streak of soaring prices for software companies in sponsor-led deals.

That rise in software valuations largely follows the rise in public stocks (which usually corresponds with an increase in tech M&A valuations, as my colleague Brenon Daly pointed out last week). Looking at the three largest sponsor acquisitions of application software providers this year, two of the targets – Ultimate Software and Solium – sold above their all-time-high share price. The third, Ellie Mae, was a few percentage points below its peak, but still sold at roughly 50% higher than where it finished 2018. With the S&P 500 up 15% this year, prices for software deals don’t look ready to settle.

2019 Tech M&A Outlook: Introduction

by Brenon Daly

Each January, we look back on deal flow over the previous year and look ahead at what we expect in the coming year. Our Tech M&A Outlook: Introduction provides a broad overview of acquisition activity in the tech market and the trends that shaped – and will shape – the multibillion-dollar tech M&A market. A few of the insights from the report include:

Both strategic and financial acquirers printed a record number of billion-dollar deals in 2018, with their combined pace topping two big-ticket transactions announced every week last year, according to 451 Research’s M&A KnowledgeBase. Microsoft, Salesforce, SAP, Adobe and IBM all inked billion-dollar acquisitions last year, after not one of the tech giants announced a blockbuster print in 2017.

With its broad applicability for buyers across the tech landscape, machine learning (ML) cemented its standing as the fastest-growing trend in the tech M&A market. The number of deals has increased roughly 50% every year since the start of the decade, our data shows. And no slowdown is expected in 2019, since bankers told us they have more ML transactions in their pipelines than anything else.

VC has turned into an industry characterized by ‘fewer, but bigger.’ That’s true in funding as well as exits. The M&A KnowledgeBase tallied the sale of just 603 startups in 2018, the second-fewest exits in the past half-decade. Proceeds from those deals, however, smashed all records. Last year’s total of $83bn in announced or estimated deal value almost eclipsed the total for the three previous years combined.

Additionally, we look at the prevailing trends in M&A pricing; the unprecedented activity of private equity that’s reshaping the tech landscape; and what the outlook is for the other exit, IPOs.

The overview serves as an introduction to our full, 100-page report that covers the outlook for M&A activity in six key enterprise IT markets, including application software, IoT and cloud. The full report, which will be available next week, is included in all subscriptions to 451 Research’s M&A KnowledgeBase, and is also available for purchase.

An unexpected exit from Sand Hill Road

by Brenon Daly

There’s a new exit off Sand Hill Road that’s proving increasingly popular for startups. Rather than following the well-worn path that leads into another venture portfolio, startups are taking an unexpected turn into private equity (PE) holdings at a record rate. For the first time in history, a VC-backed startup in 2018 was more likely to sell to a PE buyer than a fellow VC-backed company, according to 451 Research’s M&A KnowledgeBase.

Last year was a stunning reversal from when ‘inter-species deals’ were the norm. In 2015, for instance, the M&A KnowledgeBase shows almost three times as many VC-to-VC transactions as VC-to-PE transactions. But with ever-increasing amounts of cash to put to work, PE firms have started reaching into VC portfolios much more frequently and aggressively.

The M&A KnowledgeBase shows that buyout shops, which once operated on the diametrically opposite end of the corporate lifecycle from VCs, are now providing almost one out of four venture exits. They are doing this by bolting on startups’ assets to their ever-increasing number of existing portfolio companies, as well as by recapping startups, or buying out an existing syndicate of venture investors.

Altogether, PE firms have doubled the number of VC-backed deals over the past three years. That buying group has increased its startup purchases every single year since 2015, while the number of VC-to-VC transactions has fallen every single year during that period.

Those diverging fortunes have pushed buyout shops’ share of VC exits to an unprecedented 23% in 2018, up from roughly 10% at the start of the current decade, according to the M&A KnowledgeBase. So for a startup looking to sell itself in the coming year, it’s probably more likely to go to a company owned by Silver Lake rather than Greylock, or KKR rather than NEA.

PE goes gray

by Scott Denne

As it celebrates its 25th year in business, ConvergeOne is falling again into the hands of a private equity (PE) shop. With CVC Capital Partners’ $1.8bn acquisition of the communications integration services firm, ConvergeOne joins an expanding list of tech companies landing in PE portfolios when they’re well into adulthood. As buyout firms vary their strategies to incorporate growing businesses and venture-funded startups, there’s a sense that they’re making room for younger companies. But in reality, PE tech targets keep getting older.

According to 451 Research’s M&A KnowledgeBase, the median age of a PE acquisition has risen steadily through this decade. In 2010, the typical technology vendor was 12 years old upon joining a PE portfolio – four years younger than the typical 2018 purchase. (The analysis doesn’t include corporate spinoffs, whose founding dates are difficult to pin down.) Although PE firms are buying more young companies on an absolute basis, those targets make up a smaller share of PE deals. So far this year, they’ve bought 158 businesses – one out of five PE transactions – with less than a decade of operations, while in 2010, nearly one-third were below that age.

The graying of PE portfolio companies reflects a dramatic shift in the source of deals for PE shops. Acquisitions of vendors that have already been through at least one cycle of PE ownership are accelerating at the expense of all other sources of deal flow, including take-privates, buyouts of venture-backed businesses and corporate spinoffs. Excluding bolt-on transactions, such secondary acquisitions account for more than one out of every four tech purchases by PE firms this year.

In its latest move, CVC Capital becomes the third buyout shop to own ConvergeOne. Several companies are passing from one sponsor to another for the second or third time this year. In January, Marketron was bought by its fourth financial sponsor as the radio broadcasting software business approaches its 50th anniversary. And in one of the largest PE deals of the year, Carlyle Group spent $6.7bn to become the third PE owner of Sedgwick, a 47-year-old claims management outsourcer.

PE’s expanding footprint in tech M&A naturally results in a rise in secondary transactions as more of the available targets are PE-owned. By our count, PE firms and their portfolio companies have inked almost one out of every three tech deals this year. Yet the rising age of PE-owned companies suggests that those firms aren’t replenishing their stock of potential targets as fast as they are recycling it.

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