VC exits soar for some

by Scott Denne

With its $8bn purchase of Qualtrics earlier this week, SAP helped push venture exits into the nosebleeds. About seven weeks remain in the year and the total value of acquired startups has already smashed the previous post-dot-com record. Yet the spoils aren’t evenly distributed. Those startups getting sold are often commanding a premium, although most aren’t getting sold at all.

According to 451 Research’s M&A KnowledgeBase, venture funds have sold a collective $75bn worth of tech vendors, 50% more than the previous record of $50bn. Rising prices, rather than deal volume, are driving that total. Since the dot-com days, VCs have sold five private companies for more than $5bn. Four of them have traded this year. Moreover, 11 have sold at $1bn-plus, more than the previous two years combined.

The trend isn’t limited to the big-ticket transactions. Overall, the businesses that are getting sold are selling for more. The median price tag for a venture-funded vendor stands at $123m this year, well above the typical $55-65m for the most recent years. Demand from acquirers isn’t the only reason for rising startup prices. Venture-backed companies are also raising more and bigger rounds, staying private longer and, therefore, fetching more when they do sell. Still, the number of venture-backed vendors to find a buyer this year – 520 so far – is on pace to be the lowest since 2009.

The perception that there’s a major tech-driven transformation afoot has sparked many of this year’s exits. Indeed, the largely untried idea of combining ERP, CRM and HR data with customer and employee sentiment drove SAP’s Qualtrics purchase. According to 451 Research’s Voice of the Enterprise: Digital Pulse report, 46% of respondents told us that they expect digital technology to highly impact their organization’s industry over the next five years. Whether acquirers view the looming transition as an opportunity or a challenge, it’s pushing them toward the perceived winners in each category and creating a willingness to pay up. There doesn’t appear to be much of a prize for second place.

A monkey riding a bull

by Brenon Daly

Already valued at about $2bn in the private market, SurveyMonkey held that ‘double unicorn’ valuation as it debuted in the public market. The company priced its upsized offering above the expected range, and watched the freshly printed stock jump about 50% on the Nasdaq. Yet even with all that bullishness, the IPO was more about value confirmation than value accretion.

Still, the online survey provider does enjoy a rather healthy valuation. With roughly 125 million shares outstanding (on a nondiluted basis), Wall Street is valuing SurveyMonkey at about $2.25bn. That’s roughly nine times the 2018 revenue that we project for company. (Our math: So far this year, SurveyMonkey has increased revenue about 14%. Assuming that rate holds through the second half of this year, 2018 sales would come in at about $250m.)

In the IPO, the company raised $180m plus another $40m from a separate direct sale to Salesforce Ventures. That goes on top of the roughly $1bn that the company had previously raised in debt and equity. The company’s main backer, hedge fund Tiger Capital Management, still owns about one-quarter of the company. (In addition to being the largest shareholder of SurveyMonkey, Tiger is also its largest customer, according to the company’s prospectus.)

Having probably taken in all the financing it could reasonably expect to collect as a private company, SurveyMonkey might well look at today’s IPO as a necessity. (It will be using $100m of the proceeds to pay off its debt.) The fact that Wall Street investors received the dot-com survivor so warmly not only splashes a bit of liquidity in the 19-year-old company, but may have other companies of its scale and vintage also give a closer look at the public market. As everyone on Wall Street knows, you always want to sell into demand.

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

VC is looking easy this year

Halfway through the year, venture capitalists have already reaped a near-record amount of value from their portfolio companies. In any dissection of venture exits, a large deal or two can drive the annual total. This year is no exception, as the second-highest-priced VC exit since the dot-com days printed in May. Still, the rise in value isn’t limited to the high end of the market.

According to 451 Research’s M&A KnowledgeBase, VCs globally have sold $46.4bn worth of tech portfolio companies through the first half of the year. That’s already 45% higher than the amount from all of last year’s exits and just shy of the record for annual VC-backed sales – $50bn in 2014. Facebook’s $19bn reach for WhatsApp, the largest acquisition of a venture-funded company, led that year’s totals. Embedded in this year’s figure is the second-largest, Walmart’s $16bn purchase of Flipkart.

Still, this year’s record-setting pace isn’t propped up by a single transaction. Since 2002, only four VC portfolio companies have sold for more than $5bn – three of them came in the first half of this year. Even looking at the VC exit market without those rare $5bn-plus exits, this year’s first half generated more VC exit value than the first half in 15 of the past 16 years. In fact, more companies than ever are benefiting from higher prices. The running median value of a venture exit this year, at $123m, sits more than twice as high as last year’s median of $56m – a number that’s roughly in line with values between 2014 and 2016.

Many of the reasons for the surge are the same as those driving the broader tech M&A market toward another record, including increased activity among strategic acquirers buoyed by a tax windfall, a pageant of IPOs, the continued rise of private equity, and other trends that we’ll discuss in a webinar on Tuesday (more info here). Amplifying those trends, VCs benefit from a widespread fear of changes wrought by new technologies.

According to 451 Research’s Voice of the Enterprise: Digital Pulse, 46% of IT decision-makers predicted that digital technology would have a large impact on their companies’ markets over the next five years, compared with just 14% who forecast little or no impact. Those anticipated changes are playing out not just in the valuations, but in the type of deals getting done. Case in point: the $1.9bn pickup of oncology trial software developer Flatiron Health by Roche, a pharmaceutical firm that had never spent $100m on an information technology provider. Or Microsoft’s new tack in building software developer relationships via its $7.5bn acquisition of GitHub.

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

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.

Tech companies have long, long shopping lists

Contact: Brenon Daly

Despite a lackluster year for tech M&A in 2017, corporate acquirers overwhelmingly forecast that their companies will be looking to shop again this year. More than six out of 10 (62%) respondents to the annual 451 Research Tech Corporate Development Outlook Survey indicated that their firms would be more active with acquisitions in 2018. That was the most-bullish outlook since the end of the recent recession, coming in more than three times higher than the 18% of corporate buyers who expect their companies to step out of the market. (To see the full 451 Research report, click here.)

The company-specific outlook, which came from major acquirers across the tech landscape, is far more buoyant than their view of the broader M&A market, however. Looking ahead at the overall dealmaking environment for corporate buyers, only slightly more than four out of 10 respondents (43%) said it would be more favorable in 2018 than it was in 2017. On the other side, fully one-quarter (25%) predicted that general tech M&A conditions would deteriorate this year.

Although the broad-market outlook – with slightly more than four out of 10 respondents projecting an improved M&A environment in the coming year – ticked higher from last year’s survey, it is still lower than the two surveys before that, when tech acquisition activity did indeed hit multiyear highs. In those two previous 451 Research Tech Corporate Development Outlook Surveys, slightly more than half of the respondents forecast a favorable environment for their fellow strategic buyers. In both 2015 and 2016, spending on tech deals topped $500bn for the first time since the internet bubble burst, according to 451 Research’s M&A KnowledgeBase.

To see what else corporate acquirers told us about their financial rivals (PE firms), valuations and even what President Donald Trump is doing to the business of M&A, click here.
 

Every reason to shop, yet tech companies still empty-handed

Contact: Brenon Daly

As tech companies said goodbye to 2017, most of them did so with fond memories of the past year. Public companies nearly all saw steady gains on Wall Street, with more than a few hitting record highs. Record amounts of venture money flowed to startups, while more-established companies looked ahead to their already-stuffed treasuries getting even fuller when the benefits of the recently passed tax program kick in. And probably most importantly, customers are saying they are ready to spend on tech like they haven’t been since the recent recession.

In a November 2017 survey by 451 Research’s Voice of the Connected User Landscape, fully 50% of the 872 respondents said their company is giving a ‘green light’ for IT spending. That was the highest reading since 2007, and 13 basis points higher than the average survey response for the month of November for the previous five years. During that 2012-16 period, in fact, respondents unanimously said their companies were more likely to cut their IT spending than increase it.

All in all, the end of last year was a good time for publicly traded tech companies to do business. And they did, except in one crucial area: M&A. Tech acquirers announced one-quarter fewer deals in Q4 2017 compared with the final quarter of the previous three years, according to 451 Research’s M&A KnowledgeBase. Meanwhile, spending on tech and telco acquisitions in the October-December period slumped to the lowest quarterly level since Q2 2013.

Historically, there has been a relatively tight correlation between overall IT budgets, company valuations and M&A activity. To some degree, activity in all three of those markets is determined by a single shared characteristic (confidence), so it follows that there would be some interdependence in the trio. And yet, as we step from 2017 to 2018, that connection appears to be breaking down. Tech companies are enjoying record levels of confidence from customers and investors, yet are rather timid when it comes to shopping.

Mainstays missing in the tech M&A market

Contact: Brenon Daly

A number of the mainstay acquirers that had helped boost the tech M&A market to recent record levels stepped out of the market in 2017, clipping spending on deals by more than one-third compared with 2016 and 2015. The value of tech and telco acquisitions around the globe in the just-completed year slumped to $325bn, after topping a half-trillion dollars in each of the two previous years, according to 451 Research’s M&A KnowledgeBase. Last year’s M&A spending ranks as the lowest in four years.

The primary reason for the drop in 2017 is that tech giants – the companies that had set the tone in the overall M&A market over the past decade – didn’t shop like they once did. For instance, Oracle and SAP have, collectively, announced 16 acquisitions valued at more than $1bn since 2010, according to our M&A KnowledgeBase. However, only one of those deals printed last year. (More broadly, Oracle took an uncharacteristically long eight-month hiatus from deal-making in 2017. The prolonged absence of corporate acquirers such as Oracle was one of the primary contributors to last year’s overall M&A volume slumping to a four-year low, according to our count.)

Also weighing a bit on 2017’s totals is that free-spending Chinese buyers, who had turned tech into a favorite shopping ground, all but disappeared from the top end of the market last year. Our M&A KnowledgeBase lists just one $1bn-plus acquisition by a China-based buyer in 2017, down from nine transactions in 2016 and seven in 2015. Currency restrictions imposed by China’s authorities in early 2017 drastically reduced the ability of Chinese companies to put money to work outside their country. Also, the simmering trade fight and sparring over currency policy between Beijing and Washington DC slowed M&A between the world’s two largest economies.

On the other hand, last year saw the full emergence of a new, powerful – and largely underappreciated – force in the tech M&A market: private equity (PE). As corporate acquirers retreated, financial acquirers accelerated. PE firms announced a record 876 transactions last year, more than twice the number they did just a half-decade ago, according to 451 Research’s M&A KnowledgeBase. Deal volume, which has increased for five consecutive years, jumped nearly 25% in 2017 from 2016, even as the number of overall tech acquisitions posted a mid-teens decline year on year.

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.

 

Tech M&A stumbles out of summer

Contact: Brenon Daly

This summer’s momentum in the tech M&A market petered out as autumn arrived. Spending in the just-completed month of October slumped to its second-lowest monthly total of the year. Across the globe, acquirers announced just $17bn worth of tech and telco purchases in October, equaling only slightly more than half the average monthly deal value in the nine previous months, according to 451 Research’s M&A KnowledgeBase.

October’s spending represents a sharp decline from September and, more broadly, the entire third quarter. (See our full Q3 report.) Spending on tech deals in September, which featured this year’s two largest acquisitions, came in more than three times higher than October. The September surge helped boost overall Q3 deal value to a quarterly level more in-line with the boom years of 2015 and 2016. (The two previous years stand out as banner years for tech M&A. At this point in the year, deal makers had spent 85% more in 2015 and 50% more in 2016 than they have so far in 2017.)

However, deal makers abruptly hit the brakes in October, particularly when shopping for big-ticket targets. Our M&A KnowledgeBase records just three transactions last month valued at $1bn or more, down from a monthly average of five 10-digit deals so far in 2017. Without a continuation of those billion-dollar deals, the start of Q4 is tracking much more closely to the first two quarters of this year, rather than the breakout Q3. Overall, with 10 months now in the books, 2017 is on pace for about $340bn in full-year M&A spending, which would represent the lowest annual total in four years.