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.

TITUS goes from bootstrapped to buyout with Blackstone

Contact: Brenon Daly

Private equity (PE) firm Blackstone Group has picked up a majority stake in TITUS, marking an unconventional bootstrapped-to-buyout exit for the 12-year-old data classification startup. Terms weren’t revealed. With the acquisition, PE shops have now purchased more cybersecurity vendors in 2017 than any year in history, according to 451 Research’s M&A KnowledgeBase (see graphic below).

The transaction comes two years after Microsoft made a similar data security move, reaching for Israel-based startup Secure Islands. (Although the price of that deal wasn’t disclosed, subscribers to the M&A KnowledgeBase can see our proprietary estimate on terms.) However, Secure Islands was a much smaller company than TITUS, both in terms of revenue and technology. Secure Islands focused primarily on extending security for Microsoft technology, specifically Office 365 and SharePoint, while TITUS has a broader technology platform. Also, according to our understanding, profitable TITUS generates more than four times the sales that Secure Islands did at the time it was acquired.

For Blackstone (in this case, through its Tactical Opportunities team), the purchase of TITUS represents a return to the information security (infosec) market, with a platform that lends itself to additional bolt-on acquisitions. (The firm used the buy-and-build strategy with infosec reseller/service provider Optiv before selling it to Kohlberg Kravis Roberts a year ago.) Once TITUS is in the portfolio, which should come before the end of the year, Blackstone could help cover the costs of buying into markets where TITUS currently partners. Specifically, markets such as data-loss prevention and archiving would be logical adjacent sectors for Blackstone-backed TITUS to look to shop in.

Cybersecurity turns into a busy bazaar

Contact: Brenon Daly

The holiday shopping season kicked off last week, and for one tech sector, it was a particularly bountiful time for picking up some companies. Information security (infosec) acquirers announced an unprecedented seven transactions during the week that started on Cyber Monday. The pace represented a dramatic acceleration from the year-to-date average of just two deals announced each week.

With last week’s flurry, the number of infosec acquisitions in 2017 has already eclipsed last year’s total, even as overall tech M&A volume this year is heading for a mid-teens percentage drop from last year, according to 451 Research’s M&A KnowledgeBase. (This year already ranks as the second-busiest year for infosec, with deal volume tracking to roughly 50% higher than the start of the decade.) Probably more important than the sheer number of transactions was who was doing the dealing:

-McAfee announced its first purchase since throwing off the shackles of full ownership of Intel last year. By all accounts, McAfee’s step back into the M&A realm with cloud security startup Skyhigh Networks came at a sky-high price.
-An infrequent acquirer, Trend Micro reached for a small application security startup based in Montreal, IMMUNIO. It is only the third acquisition the Japan-based company has done since 2011.
-Thoma Bravo continued this year’s record level of infosec M&A by private equity (PE) firms, taking Barracuda Networks private for $1.6bn. The M&A KnowledgeBase indicates that 2017 is on pace for more PE purchases in this market than any year in history, likely to come in about quadruple the number of sponsor-backed infosec deals in 2012.

Expanding the timeframe beyond just last week, we see a number of other trends this year that have contributed to strong infosec deal volume in 2017, which should continue in 2018. For starters, the industry’s largest stand-alone vendor has stepped back into the market in a big way. Symantec has inked five transactions so far in 2017, more than it has done, collectively, in the previous half-decade. Meanwhile, other infosec providers have either reemerged as buyers (Juniper acquiring Cyphort after a four-year infosec M&A hiatus) or started their own acquisition program (Qualys has announced two deals in the past four months, after printing just one transaction since the company’s founding in 1999).

November tech M&A slumps to pre-boom levels

Contact: Brenon Daly

Dealmaking in 2017 is going out with a whimper. Acquirers in November spent just $15.7bn on tech transactions across the globe, the lowest monthly total in three years, according to 451 Research’s M&A KnowledgeBase. The sluggish November activity comes after a similarly anemic October, with both months coming in only about half of the average monthly spending for the first nine months of 2017. Also, the number of deals announced in the just-completed month slumped to its lowest level of the year.

Even as November featured a decidedly lackluster level of overall M&A activity, a few transactions stood out, including:
-After entirely sitting out the wave of semiconductor consolidation in recent years, Marvell Technology Group shelled out $6bn in cash and stock for Cavium. The deal stands as the largest tech transaction in November, topping the collective spending on the next four biggest acquisitions last month.
-The information security industry saw its largest take-private, as buyout firm Thoma Bravo paid $1.6bn for Barracuda Networks in a late-November deal. A single-digit grower that throws off $10-20m in free cash flow each quarter, Barracuda has long been considered a candidate to go private as it works through a transition from on-premises products to cloud-based offerings.
-Richly valued startup Dropbox stepped back into the M&A market in November for the first time since July 2015, purchasing online publisher Verst. From 2012-15, the unicorn (or more accurately ‘decacorn’) had inked 23 acquisitions, according to the M&A KnowledgeBase.

The recent tail-off in acquisition spending has left the value of announced tech transactions so far this year at just $302bn, according to the M&A KnowledgeBase. With one month of 2017 remaining, this year is all but certain to come in with the lowest annual M&A spending since 2013. This year is tracking to a 34% decline in deal value compared with 2016 and an even-sharper 45% drop from 2015.

Bull market bypasses tech IPOs

Contact: Brenon Daly

Although there’s still a month remaining in 2017, most startups thinking about an IPO – even those already on file ‘confidentially’ – have already turned the calendar to 2018. The would-be debutants want to have results from the seasonally strong Q4 to boast about during their roadshow with investors, as well as toss around a bigger ‘this year’ sales figure to hang their valuation on. There’s no compelling reason to rush out an offering right now.

That’s true even though the tech IPO market has been pretty active recently. By our count, a half-dozen enterprise-focused tech vendors have come public in just the past two months. (To be clear, that tally includes only tech providers that sell to businesses, and leaves out recent consumer tech companies such as Stich Fix and CarGurus.) The total of six enterprise tech IPOs since October is already higher than the full Q4 2016 total of four offerings.

While there has been an uptick in IPO activity, shares of the newly public companies haven’t necessarily been ticking higher, at least not dramatically so. There hasn’t been a breakout offering. Based on the first trades of their freshly printed shares, not one of the recent debutants has returned more than 20%. Half of the companies are trading lower now than when they debuted. Meanwhile, investors who aren’t interested in these new issues can’t seem to get enough of stocks that have been around a while, bidding the broad market indexes to record high after record high this year. The much-desired IPO ‘pop’ has gone a little flat here at the end of 2017, which might have some startups slowing their march to Wall Street in early 2018.