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.

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

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.

PE bags another elephant

Extending this year’s record pace of private equity (PE) spending, Siris Capital plans to pay $2bn to take Web.com private. The transaction matches the largest deal Siris has made, according to 451 Research’s M&A KnowledgeBase. Debt-heavy Web.com, which has been public since 2005, has struggled with a declining number of subscribers in recent quarters.

The web hosting vendor has been slowly reorganizing its operations in recent quarters, and Siris’ offer reflects its transition. Terms call for the buyout shop to pay $25 for each share of Web.com, below the company’s share price last October. There’s a six-week ‘go shop’ included in the agreement, with the transaction expected to close in Q4.

Siris’ reach for Web.com marks the 10th deal announced by PE firms so far this year valued at $2bn or more. That nearly matches the total number of 11 similarly sized transactions announced in the first half of the two previous years combined, according to the M&A KnowledgeBase.

Of course, as active as the financial acquirers have been, they still have some distance to go to catch up to their corporate rivals, which had been largely unchallenged in the tech M&A market until just a few years ago. The M&A KnowledgeBase shows these strategic buyers have already announced 20 deals valued at $2bn or more this year. (451 Research subscribers can see more on the relentless rise of PE and the impact it is having on the tech landscape in our special two-part report: Part 1 and Part 2.)

Still, the dramatic increase in elephant hunting by PE firms is changing the top end of the tech M&A market. Of course, that is being driven by the unprecedented amount of capital buyout shops have to put to work. Estimates for the total amount of dry powder available to PE firms to go shopping in the tech industry is estimated in the hundreds of billions of dollars, with a handful of tech-focused shops raising single funds that top $10bn. Several other buyout firms have announced multibillion-dollar funds of their own. On top of that, the leverage available to PE shops multiplies their true purchasing power.

Buyout firms are putting that money to work at a record rate. Already this year, they have announced $71bn worth of transactions, according to the M&A KnowledgeBase. For perspective, that’s almost three times the average amount spent in the first half of the years since the start of this decade.

Corporates open doors for PE exits

Contact: Scott Denne

After a dry spell in 2017, strategic acquirers have come pouring back into the tech M&A market, printing larger deals and paying higher prices. In doing so, they’re delivering a disproportionately high amount of exits for private equity (PE) investments.

According to 451 Research’s M&A KnowledgeBase, strategic acquirers have spent $19.6bn so far this year to buy tech assets out of PE portfolios. That’s up from $8bn through May of last year and more than the same period in any year since 2002. The volume of such deals has risen as well, yet soaring valuations play an outsized role.

Among the 10 largest sales of PE-backed companies to strategic acquirers this year, six have traded above 5x trailing revenue. At this point last year, only two such transactions surpassed that mark. Strategic buyers appear willing to pay more than in the past, both in terms of multiple and check size. Take Adobe’s purchase of Magento (a Permira Funds portfolio company) earlier this week. In that deal, the acquirer paid 11x trailing revenue – an organizational record and more than twice the median multiple for an Adobe purchase.

In other cases, infrequent buyers are making remarkable acquisitions. TransUnion, for example, has upped its deal-a-year pace with six purchases in the past 12 months, including the $1.4bn pickup of GTCR’s Callcredit in April – its biggest-ever acquisition. Likewise, healthcare software vendor Inovalon Holdings moved past printing the occasional tuck-in with the $1.2bn acquisition of ABILITY Network from Summit Partners in March.

The trend aligns with the predictions for the PE exit environment in the M&A Leaders’ Survey from 451 Research and Morrison & Foerster. In that April survey, respondents overwhelmingly predicted an increase in PE exits via strategic acquisitions, with eight times as many respondents predicting an increase as those anticipating a decrease. Indeed, more foresaw an uptick in strategic exits than any other avenue we asked about (secondary sales, IPOs, reverse mergers and bankruptcy).

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

Conga drums up more sales software M&A

Contact: Sheryl Kingstone, Scott Denne

Continuing a streak of consolidation in sales software, Conga, a document and contract management provider, has acquired Octiv. Sales software has seen a spurt of M&A as sales organizations seek technology platforms with more uses – in this case, the digitization of the entire sales cycle.

On the surface, both companies have similar capabilities. Octiv, formerly known as TinderBox, focuses on the upstream aspects of managing content and workflow automation for sales processes such as proposals and quotes, whereas Conga, an Insight Venture Partners portfolio company, concentrates on intelligent automation once the quote or proposal has been agreed upon. Octiv also brings capabilities to measure engagement throughout the sales process. This deal is both a consolidation of the market for customers and a technology enhancement.

As we previously suggested, the shift to engaging, from merely transactional, sales interactions would spur M&A as sales software vendors seek to expand beyond systems of record and into systems of engagement. According to 451 Research’s M&A KnowledgeBase, many of the early returns on such transactions – including Marketo’s acquisition of ToutApp and Corel’s purchase of ClearSlide – have traded below the amount of venture funding they brought in. (Terms of Octiv’s sale weren’t disclosed so the return on the $20m it raised isn’t clear.)

Despite some modest returns, deals are increasing as the market for more advanced sales software capabilities begins to heat up. In a custom study by 451 Research, 90% of sales managers told us they have some form of investment in sales technology, although most of those are likely nothing more than legacy CRM or sales force automation, neither of which has the functionality to enable sales teams to optimize around the expanding flow of digital signals that are available to inform the sales process, as we outlined in our Sales Technology Platforms Market Map.

Sales organizations are coming to that same conclusion. According to a survey by 451 Research’s Voice of the Connected User Landscape, sales analytics and intelligence, engagement, and content are the most sought-after capabilities, outpacing legacy capabilities like pipeline management and lead generation. More importantly, that survey shows that sales teams are shifting toward advanced intelligent automation across a broader range of processes with the goal of eliminating manual processes. As they do so, more functionality will be consolidated by platforms such as Conga with intelligence at the core of their sales software.

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

CommerceHub in sellers’ market

Contact: Scott Denne

A pair of private equity (PE) firms has taken CommerceHub off the public markets in a $1.1bn acquisition. The deal carries a scorching multiple that punctuates the value of e-commerce software as retailers struggle to make digital engagement a centerpiece of their business.

GTCR and Sycamore Partners’ joint purchase of CommerceHub values the firm at 10x trailing revenue, or 32x EBITDA – atypical multiples for an e-commerce software provider with the target’s growth. With that valuation, CommerceHub finds itself in the same neighborhood as Demandware and hybris, which each fetched about 11x revenue in their respective sales to Salesforce and SAP.

Yet CommerceHub’s revenue expanded by just 11% last year, compared with Demandware and hybris, which both posted topline growth in the 50% neighborhood leading up to their exits. Ariba offers a more accurate, if aging, comp for CommerceHub – both vendors provide back-end commerce services, such as integration between retailers and suppliers, whereas Demandware and hybris build customer-facing software. CommerceHub is fetching a multiple that’s a full turn above Ariba’s 2012 sale, despite the latter company having double the growth rate and being triple the size of the former.

In part, today’s multiple reflects higher prices being paid by buyout shops as their investments in tech M&A rise. According to 451 Research’s M&A KnowledgeBase, the median multiple paid by a PE acquirer last year rose to 3x, up from 2.5x a year earlier. Moreover, that median has hovered above 2.5x every year since 2014. In the preceding decade, it never once hit that level, and in only three years did the median reach 2x.

All that’s not to say nothing but a flood of PE money drove up CommerceHub’s price. Digital commerce technology is evolving into a core element of customer engagement and retailers need timely, accurate product information, which CommerceHub facilitates, to integrate into their customer-facing marketing and commerce software systems. According to 451 Research’s VoCUL Quarterly Advisory Report: Digital Transformation Leaders and Laggards, digital commerce and web experience management are the two most common areas of investment for enterprises, as 27% of enterprises told us they plan to deploy or upgrade those technologies in late 2017 and early 2018.

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

Ratcheting up bolt-ons

Contact: Scott Denne

In another sign that the private-equity playbook is changing, financial sponsors are moving faster than before to add to their newest holdings. While PE firms typically have taken several quarters to allow a new asset to settle in before making bolt-on acquisitions, they’re abandoning that waiting period as they put a record amount of cash to work in the tech M&A market.

According to 451 Research’s M&A KnowledgeBase, of the 10 largest companies taken off a major US exchange by a PE firm in the last 12 months, three have already announced a bolt-on deal – all of which have come less than a month after the close of the buyer’s take-private. For comparison, among the 10 largest US take-privates in 2016, three also did a bolt-on, yet none within six months of the platform acquisition.

In the most recent example, Bazaarvoice picked up speech-recognition company AddStructure just three weeks after Marlin Equity closed its February take-private of Bazaarvoice. West Corp also waited less than a month after its take-private closed to make its first acquisition, and has announced two more since that November 2017 deal. Xactly didn’t wait a full two weeks before its first follow-on under Vista Equity’s ownership. Barracuda Networks hasn’t yet completed a deal under Thoma Bravo’s purview, which officially began two weeks ago, although it did get one done in the 10 weeks between the take-private announcement and the close.

The rush for bolt-on deals shows that competition for targets from PE firms is increasing on all fronts. As we noted in our 2018 Tech M&A Outlook report, acquisitions by PE firms and their portfolio companies matched those by NYSE- and Nasdaq-traded strategic acquirers for the first time in 2017. As the rush for bolt-ons shows, competition won’t be limited to the big platform deals. Strategics will have to move faster to win smaller, additive deals.

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

Sensitive ‘barbarians’?

Contact: Brenon Daly

Although private equity (PE) is often portrayed as heartless and hardened dealmakers, it turns out the group is actually quite sensitive. We don’t necessarily mean emotionally sensitive but rather economically sensitive. This hyperactive group of acquirers is far more attuned to interest rates, credit availability and other economic factors than rival corporate buyers. What happens outside buyout firms goes a long way toward shaping what goes on inside.

We’re seeing that right now in the tech M&A market. The just-enacted sweeping overhaul to the US tax code has changed some of the key calculations that buyout shops have to make before they can put their unprecedented pile of cash to work in tech deals. Under the new tax regime, PE firms are facing higher costs and potentially longer holding periods – both of which would weigh on returns. (Buyout shops are getting hit with numerous changes, the most significant of which is that they are now only able to deduct a portion of the interest payments for the debt they use to acquire companies.)

The tax changes, which were negotiated and passed in the final few months of last year, knocked PE almost completely out of the market during that time. Through the first three quarters of 2017, buyout shops were clipping along at an average of about $10bn in spending each month, according to 451 Research’s M&A KnowledgeBase. However, spending plummeted to just $7bn for the entire fourth quarter. The aggregate value of deals in December – the month when the new tax code was approved – didn’t even reach a half-billion dollars, the lowest monthly total since early 2014.

Of course, this is only the most-recent case of macroeconomic conditions shaping PE activity. A far more vivid example of that came a decade ago, when the mortgage crisis effectively killed the first wave of tech buyouts. As we noted last summer on that unhappy anniversary, the last four crisis-shadowed months of 2007 accounted for just $7bn of the then-record $106bn in PE spending that year. The PE industry took until 2015 to reclaim the level of spending it put up in 2007, according to the M&A KnowledgeBase.

No one is suggesting the changes from the tax code will be anywhere as severe as the disappearance of credit, which is what we saw in the recession a decade ago. This time it’s more of a recalibration than a retreat.

What to look for in tech M&A in 2018

Contact: Brenon Daly

As we look back on 2017 and ahead to 2018, 451 Research has published its annual forecast for tech M&A, highlighting the trends that we expect to shape deal flow and the markets that we think will see much of the activity. The 2018 Tech M&A Outlook – Introduction serves as an overview of the broad M&A market, setting the stage for the upcoming publication of our comprehensive report that features analysis and predictions for eight specific IT markets on what deals are likely in 2018.

The full report, which we think of as an ‘M&A playbook’ for the enterprise IT market, has insightful forecasts for activity in application software, information security, mobility and other key sectors. The 80-plus-page 2018 Tech M&A Outlook report will be published at the end of January. It will be available at no additional cost for subscribers to 451 Research’s M&A KnowledgeBase Professional and Premium products, and will be available for purchase for 451 Research clients and others that don’t subscribe to our M&A KnowledgeBase products. (If you’re interested in purchasing the full 80-plus-page report, contact your account manager or click here.)

In the meantime, our introduction provides insights on some of the overall dealmaking trends that are also likely to shape activity and valuations in sector-specific transactions. Key highlights in our overview of the broader M&A market include:

  • After tech M&A spending in both 2015 and 2016 topped a half-trillion dollars, what happened that knocked the value of deals in 2017 down to just $325bn?
  • Many of the tech industry’s biggest buyers printed only half as many deals as they have in recent years. Is that the new pace of M&A at these serial acquirers, or will they rev up again in 2018?
  • The pending tax overhaul will likely add billions of dollars to the treasuries at major tech vendors. Why don’t we think that will necessarily lead to more M&A? If they don’t spend it on deals, what are tech companies going to do with the windfall?
  • Which tech markets are expected to see the biggest flow of M&A dollars in the coming year? Enterprise security tops the forecast once again, but what about emerging cross-sector themes such as machine learning and the Internet of Things?
  • How did private equity (PE) move from operating on the fringes of the tech industry to become the buyer of record? PE firms accounted for an unprecedented one out of every four tech transactions last year. Why do we think their share of the market will only increase?
  • VC portfolios are stuffed, as the number of exits in 2017 slumped to its lowest level since the recession. What challenges loom for startups and the broader entrepreneurial community without the return of billions of dollars from those investments?
  • For startups, will venture capital be flowing freely in 2018? Or will the polarized VC market (fewer rounds, but bigger rounds) continue this year?
  • Despite nearly ideal stock market conditions, why don’t we expect much acceleration in the tech IPO market in 2018? What needs to happen – to both supply and demand – for the number of new offerings to take off?

For answers to these questions – as well as other factors that will influence dealmaking in 2018 – see our just-published 2018 Tech M&A Outlook – Introduction.

For PE, $20bn deals are so 2007

Contact: Brenon Daly

Looking to put its mountainous cash holdings to work, private equity (PE) has become a velocity play. Deal-hungry financial acquirers have scaled back the size of the checks they write, but have compensated for that by writing a lot more checks.

This year, for instance, buyout shops have put up twice as many $1bn+ tech transactions as they did during the pre-credit crisis peak, but only half as many big ones. As PE firms lower their sights, their current overall M&A spending is coming up well short of the amount they threw around in the previous generation.

To understand this shift in price preference, it’s useful to compare PE dealmaking at the top end of the market in 2017, which will see an overall record number of sponsor-backed transactions, with the previous high-water year for PE spending in 2007. This year, 451 Research’s M&A KnowledgeBase has recorded 24 acquisitions by PE firms valued at $1bn or more, with total spending on those deals of $69bn. In contrast, 2007 saw fewer than half that number of billion-dollar transactions (11 vs. 24), but spending on those big-ticket deals was one-quarter higher ($85bn vs. $69bn).

A decade ago, buyout shops were looking to bag elephants. The prices of the two largest transactions in 2007 were both a full $10bn higher than this year’s biggest PE print, according to the M&A KnowledgeBase. (And for the record, this year’s sole buyout blockbuster – the late-September PE-led $17.9bn purchase of Toshiba’s flash memory business – looks more like the consortium deals we saw last decade than the PE transactions we’ve seen recently.)

For the most part, however, those blockbuster deals from last decade, with their 11-digit price tags, haven’t delivered the hoped-for returns. PE firms are now hoping that by going small, they can get a bigger bang.