Monkeying around with the competition

By Scott Denne

Qualtrics is looking to become 2018’s second public offering from a survey software vendor as it unveils its prospectus, moving one step closer to an IPO. In doing so, Qualtrics draws a contrast to SurveyMonkey, outpacing its rival on most metrics that matter to Wall Street. That contrast wasn’t missed by investors, who trimmed $250m from SurveyMonkey’s market cap following the Qualtrics filing.

Qualtrics’ revenue jumped 52% to finish 2017 at $290m and, despite spending almost half that amount on sales and marketing, it managed to eke out a $3m profit (the company claims to have generated positive free cash flow in every year since its 2002 founding). SurveyMonkey, by comparison, expanded just 14% to $218m with a $20m loss during the same period. When Qualtrics does list, its combination of size, growth and profit are likely to be rewarded.

In a sale of its shares to existing investors, the company commanded a valuation a bit above $2.5bn. With $343m in trailing revenue, Qualtrics should be able to increase that previous valuation when it hits the Nasdaq. SurveyMonkey, for its part, was valued just a bit shy of 10x trailing revenue on its first day, although that’s come down by 30% since, including a 14% drop since the Qualtrics prospectus became public.

The general outlook for unicorns like Qualtrics is increasingly bullish. In the October edition of 451 Research and Morrison & Foerster’s M&A Leaders’ Survey, 62% of respondents expect the average unicorn IPO to finish its first day of trading above its last post-money valuation, compared with just 48% that predicted increasing valuations when we asked the same question six months earlier.

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Blood on Wall Street

by Brenon Daly

It wasn’t quite blood on the streets. But the deep red that has colored Wall Street in recent trading sessions did kill the IPO dreams of at least a few companies. Not so with Anaplan. The corporate performance management vendor priced its offering at the top end of its range, and then saw its newly minted shares tack on another one-quarter in value as they debuted on the NYSE on Friday.

Already a unicorn in the private market, 10-year-old Anaplan boosted its value substantially in the IPO. With 124 million shares outstanding (or 150 million on a fully diluted basis), the company created roughly $3bn of market value. That’s about twice the value realized by rival Adaptive Insights, which was on track for an IPO of its own but then sold to Workday instead in June.

Of course, investor sentiment has deteriorated noticeably between those two exits. Anaplan priced its offering amid a sharp and sudden stock market rout. (Just in the two trading days before Thursday evening’s final decision to come public, the Nasdaq Index plummeted almost 5%.) That broad-market mauling was enough to convince two non-tech firms to shelve their plans to join the ranks of public companies.

The current worries on Wall Street show up even when we compare Anaplan with the previous enterprise software IPO, last week’s offering by Elastic. The open source search software provider came public valued at an eye-popping price-to-sales valuation in the mid-20s. And Elastic shares have held up solidly over the past week, even as most other stocks have been roughed up. That’s particularly true for many of the dozen enterprise-focused tech vendors, including Zuora and DocuSign, that have come public so far this year.

For its part, Anaplan secured a more-sedate price-to-sales valuation in the mid-teens. (The company’s roughly $3bn market cap is 15x its trailing 12-month sales of $200m.) Still, the fact that Anaplan found plenty of buyers for its stock, as most investors were selling stocks, has to count for something.

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Contact:Scott Denne

A four-year streak of expanding ad-tech M&A is set to end as strategic acquirers and foreign investors give way to price-sensitive buyers. There are several reasons why the streak is heading toward its conclusion, and today’s acquisition of Taykey highlights one such reason: despite the potential for programmatic advertising to reshape the advertising ecosystem, the complexity and variety of tools have outpaced advertisers’ ability or desire to deploy them.

Starting with 2013, the annual value of ad-tech dealmaking has jumped each year. According to 451 Research’s M&A KnowledgeBase, there was $2.3bn in ad-tech M&A spending last year, although just $1.8bn in 2017 with only a month to go. High-priced deals are notably lacking from this year’s total. While 2016 saw three companies exit at north of $500m, there’s only been one such transaction this year – Oracle’s purchase of Moat, one of only two targets that fetched more than 4x trailing revenue.

Last year, deals by enterprise software vendors (Adobe and Salesforce) along with overseas companies (China’s Beijing Miteno and Norway’s Telenor) spurred a 16% increase in spending on ad-tech targets, despite a drop in volume to just 66 transactions. This year, the volume continues to decline – just 56 companies have been bought so far – as those categories of buyers have grown quiet. Enterprise software providers have cooled their overall M&A spending after a pair of record years, while activity from foreign acquirers for any kind of US-based target has cooled, particularly the China-based buyers that took an interest in ad-tech in 2016.

Even if terms of Innovid’s pickup of Taykey were disclosed, the deal wouldn’t move the annual ad-tech M&A total. All signs point to a tuck-in: Innovid plans to shutter Taykey’s media and data businesses and fold the contextual analysis technology into its video ad server. Even those types of transactions will struggle to get done. There are few ad-tech firms like Innovid with stable, expanding revenue, and even fewer with access to capital to ink acquisitions – venture capitalists in the US have largely abandoned the space, and the public markets are even less welcoming.

Why have investors and acquirers retreated from ad-tech? Those that wanted to make a bet here already have. And, although the industry is undergoing a significant change as media consumption becomes ubiquitously digital, advertisers must pass through a gauntlet of challenges and opportunities to capitalize on that shift, entailing dozens of vendors ranging from what kind of audience data to use, who to partner with on measurement, how to gain visibility on the media supply chain, and how to scrutinize providers making vague promises on the power of artificial intelligence, blockchain and other technology themes that haven’t been part of the advertisers’ expertise.

All those choices mean there are a lot of Taykeys out there struggling to build a lasting business with advertisers across segments of ad-tech, including mobile location, identity resolution, cross-device matching, antifraud, brand safety, media buying and ad exchanges, to name a few. And there aren’t many Innovids with the appetite to buy them.

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Genesys boosts August PE totals with Interactive buy

Contact: Scott Denne

Genesys’ $1.4bn purchase of fellow contact-center software vendor Interactive Intelligence wraps up a busy August for private equity (PE). This month, PE firms and the companies they own, like Genesys, have racked up $14.5bn in deal value – almost half of August’s total tech M&A, according to 451 Research’s M&A KnowledgeBase.

Today’s transaction values Interactive at 3.3x trailing revenue. That’s a bit lower than the 4x multiple in both NICE’s acquisition of Interactive’s SaaS rival inContact earlier this summer and Genesys’ own $3.8bn post-money valuation on a minority investment from Hellman & Friedman last month. (That deal left a majority stake in the hands of Genesys’ earlier owners, Permira and Technology Crossover Ventures.) Interactive’s 14% revenue growth, compared with inContact’s 25%, accounts for much of the difference.

Genesys has recently set its sights on expanding beyond call-center software into broader customer experience applications to increase its single-digit annual growth. Yet today’s move is more of a consolidation play. It does, however, bring Genesys an asset whose SaaS business is growing – that product grew its revenue 43% year over year to $31m last quarter, accounting for about one-third of Interactive’s sales. Genesys also obtains a team that can help it target smaller customers – Interactive’s average revenue per customer is less than half of what Genesys takes in.

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Deals — not dollars — drive tech M&A in July

Contact: Brenon Daly

While tech acquirers weren’t especially ‘spendy’ last month, they certainly were busy. The number of tech, media and telecom (TMT) transactions announced in the just-completed month of July topped 420, a record level since at least the credit crisis, according to 451 Research’s M&A KnowledgeBase. Acquisitions last month by many of the major tech bellwethers – including Microsoft, Cisco, HP, IBM, Amazon and eBay – helped push deal volume about 40% higher than the average monthly total for the past three years.

It wasn’t just the big buyers, either. A number of smaller acquirers also stepped back into the market in July. Yahoo put up its first print of 2015 at the end of July, after inking 19 acquisitions last year. (The search giant had made 11 purchases by this time last year.) Additionally, Groupon, Callidus and Zillow all got on the board for the first time this year with July transactions. Meanwhile, both Time Inc and Accenture announced three deals last month.

The almost unprecedented activity translated into only marginal spending, however. Acquirers spent just $22.7bn on TMT transactions across the globe last month, according to the KnowledgeBase . While that roughly matches the average monthly spending for the post-recession period of 2010-14, it is the second-lowest monthly spending total for this year’s record romp, and is less than half the average value of deals announced monthly in the first half of 2015.

Of course, the July activity comes on the heels of record-setting spending in the April-June quarter. (See our full report on the blockbuster Q2, where the value of acquisitions announced hit an astounding $200bn, the highest quarterly level in 15 years.) While spending last month fell short of other recent months, it nonetheless keeps 2015 on track for a new post-bubble annual record. So far this year, TMT dealmakers have spent $345bn on transactions, just $70bn less than the record years of 2006 and 2007.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 358 $11bn
February 2015 335 $48bn
March 2015 339 $61bn
April 2015 364 $46bn
May 2015 303 $122bn
June 2015 372 $33bn
July 2015 420 $23bn

Source: 451 Research’s M&A KnowledgeBase

Rapid7 rapidly nears 10-digit valuation in IPO

Contact: Brenon Daly

Despite Wall Street being a fairly inhospitable place for recent tech IPOs, Rapid7 came to market Friday with a stunning debut. The vulnerability management vendor priced its 6.45-million-share offering at an above-range $16 each, with the stock surging to about $25 once it hit the Nasdaq. With roughly 38 million (undiluted) shares outstanding, Rapid7 is valued at $950m.

That’s a fairly strong valuation for a company that will only put up revenue of slightly more than $100m in 2015. Rapid7 generated revenue of $77m in 2014, an increase of 28%. It picked up its sales rate in the first quarter of 2015 to 41%. (Even if the company maintains that accelerated pace, however, it would still post just less than $110m in sales this year.) Further, Rapid7 does business in the old-fashioned license/maintenance model, rather than the subscription model that Wall Street favors. (See our preview of the IPO.)

Rapid7’s direct rival, Qualys, sells subscriptions only. It is about half again as big as Rapid7, tracking to a mid-20% growth rate that would result in almost $170m in revenue for 2015. (For what it’s worth, Qualys turns a profit while Rapid7 runs deeply in the red.) Wall Street values Qualys at $1.25bn, or 7.4x projected 2015 sales. That’s a full turn lower than the 8.6x projected 2015 sales that Wall Street is currently handing to Rapid7.

The premium valuation for Rapid7 stands out even more because virtually all of the other enterprise tech IPOs have all been discounted recently. The main reason: uncertainty on Wall Street. A just-published survey by ChangeWave Research, a service of 451 Research, found that more than half of the retail investors they surveyed are less confident about the direction of the US stock market than they were just in April. The 53% response, which tied a record for the survey, was six times higher than the percentage who said they were more confident about Wall Street. Keep in mind, too, that uncertainty tends to hit unknown, unproven companies – like IPOs – much harder than established tech names.

To see how that has pressured other newly listed companies, consider the two enterprise tech vendors to brave the IPO market in the US last quarter: Apigee and Xactly. Both have been roughed up on Wall Street, and are currently underwater. The muted reception extended to Sophos, the only other infosec provider to come public in 2015. That company, which listed on its home London Stock Exchange, accepted an extremely conservative value as it sold shares to the public for the first time. For some perspective, consider this: although Sophos is nearly five times larger than Rapid7, its market value only slightly exceeds Rapid7’s freshly printed valuation.

Wall Street confidence July 2015

Francisco dives into network monitoring with Procera take-private

Contact: Mark Fontecchio, Scott Denne

Emerging opportunities in the network monitoring space lead Francisco Partners to make its first foray into networking and its largest solo purchase in eight years as the investment firm swoops in to buy Procera Networks, a deep-packet inspection vendor that was being hounded by activist investors.

Network monitoring and visibility was a significant driver of M&A activity in 2014, including Ixia’s $190m reach for Net Optics (with a similar multiple to today’s deal) and multibillion-dollar acquisitions of Riverbed and Danaher’s networking performance business. The sale of Procera is the largest in this category so far this year, but not the only one. Last month, Lookingglass Cyber Solutions picked up Procera competitor CloudShield.

As we highlighted in our 2015 M&A Outlook, we anticipate that smaller players in this space will continue to consolidate amid the convergence of application performance management, network performance management and network visibility. Though consolidation is coming, that’s not to say the market has matured. In the latest networking survey by TheInfoPro, a service of 451 Research, network monitoring was cited as a top pain point by 19% of network admins, up from 13% a year earlier.


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451 Research’s M&A KnowledgeBase tutorial: Search themes

Contact: Adam Phipps

We have posted a tutorial detailing the ability to search 451 Research’s M&A KnowledgeBase by technology themes, in addition to sector, to locate emerging or disruptive technologies that may be spread across multiple 451 categories. For example, Singtel’s pickup of Trustwave has a target theme of cybersecurity, Cisco’s Embrane acquisition has the seller tagged with SDN/NFV, and Neilsen’s eXelate buy is categorized as big data. Meanwhile, search cloud computing deals to find SolarWinds’ Librato purchase, and find Microsemi’s reach for Vitesse in the Internet of Things category.

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Nokia nabs Alcatel-Lucent in latest massive telecom deal

Contact: Brian Partridge

Nokia has acquired Alcatel-Lucent for $16.5bn. The deal brings together former rivals and changes the competitive landscape for the next generation of converged broadband telecom infrastructure. We also think it could incite a new wave of dealmaking among telecom infrastructure suppliers, most notably Ericsson.

The all-stock transaction, expected to close in the first half of next year, will create a combined company with top or near-top market share in several categories, including LTE, fixed broadband infrastructure, IP routing, subscriber data management and customer experience management. Both companies have aggressively pursued SDN/NFV competencies, with Alcatel-Lucent strong in SDN and Nokia being a leader in early implementations of NFV.

Traditional fixed and mobile voice telephony services have steadily declined. Demand for fixed and mobile broadband Internet services has helped fill the gap, but massive network traffic increases have driven incremental revenue growth for operators. These market dynamics have created an environment where bundled fixed voice, broadband and video ‘triple play’ and mobile ‘quad play’ services are imperative to maintain operator profitability and customer stickiness – but they require architectural convergence (to IP networks) to efficiently support them. Against this industry backdrop, Nokia and Alcatel-Lucent bring several complementary assets to the table that will position the new company well to serve traditional customers (telcos) as well as create some new opportunities to sell to large enterprises and Internet vendors.

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IBM attempts to heal with healthcare

Contact: Mark Fontecchio

IBM adds two healthcare analytics software firms – Phytel and Explorys – to its portfolio. Last year, Big Blue said it would invest $1bn in Watson to expand its cognitive computing platform beyond beating Ken Jennings on Jeopardy! and better commercialize the technology. The investment was to focus on sectors where cognitive computing could have commercial success – among financial services, retail and others, IBM cited healthcare.

Phytel’s software analyzes patient data, integrating with providers’ electronic health record systems with the main goal of preventing hospital readmissions. The other deal is for Explorys, which integrates healthcare data from various sources and analyzes patient and provider information. Both will administer technologies to IBM’s Watson Health Cloud, which includes partners such as Apple and Johnson & Johnson and will allow doctors, researchers and insurance companies to dive into a massive trove of anonymized personal healthcare data.

Big Blue’s sickly revenue dropped 6% last year, and it sees the healthcare vertical as a way to help heal its top line. Hemorrhaging hardware sales and steady services declines leave software as the best opportunity for IBM to get out of intensive care, and healthcare is a good bet – according to ChangeWave Research’s recent corporate quarterly survey, healthcare is one of two sectors (IT software and services is the other) expected to see the most spending increases this year. Healthcare tech M&A is also humming along in 2015, on pace to stay even with last year’s volume after a 64% increase over 2013, according to 451 Research’s M&A KnowledgeBase.

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