Turn on, tune in, pay up

by Scott Denne

The few above-market valuations captured by ad-tech companies are increasingly reserved for those vendors remaking the TV advertising market. Although the overall value of acquisitions of ad-tech firms has continued to tumble from the market’s peak in 2015, targets that can help businesses capitalize of the evolving market for TV ads are still able to find buyers at premium prices.

The most recent example comes with The Rubicon Project’s announcement that it will spend nearly half of its equity to purchase Telaria, a maker of software for managing sales of digital video ads. Although both companies operate ad exchanges and publisher-facing ad software, Telaria was built around video, with a focus on connected TV advertising. Rubicon, on the other hand, was built for display ads, later expanding into mobile and online video. Its acquisition of Telaria values the target at 4.4x trailing revenue, while Rubicon itself, a larger and faster-growing company, commands just 2x on the NYSE. (We’ll have a detailed report on this deal later today for subscribers to 451 Research’s Market Insight service).

Telaria isn’t the only ad-tech vendor fetching a premium because of its connected TV capabilities. In its sale to Roku, DataXu nabbed a higher multiple than most of its peers as Roku sought a way to expand its reach in connected TV ads (subscribers to 451 Research’s M&A KnowledgeBase can see our estimates of that multiple here). And LiveRamp, seeking to expand its identity graph into television, paid $150m for Data Plus Math, a vendor with just 25 employees.

These transactions, and the accompanying valuations, come as TV viewing (the largest nondigital ad market) repositions from over the air to over the internet. The pace of this shift can be seen in 451 Research’s VoCUL: Communications & Media surveys. In the space of a single quarter, the rate of respondents telling us they use a streaming video device (Roku, Apple TV, etc.) to watch video every day rose to 26% from 21%. Similarly, those telling us they do the same on a videogame console jumped to 17% from 11% from our firstquarter to secondquarter survey.

Figure 1: Ad-tech M&A
Source: 451 Research’s M&A KnowledgeBase

More public private equity

by Scott Denne

Although the volume of overall tech acquisitions by private equity (PE) firms has declined a bit from last year’s record, the number of take-privates continues to increase. The latest of such deals is Francisco Partners and Elliott Management’s $4.3bn purchase of LogMeIn – a typical take-private from what’s becoming an atypical source.

According to 451 Researchs M&A KnowledgeBase, buyout shops have erased 42 tech vendors from public markets this year, the second-most of any annual total and seven more than they bought in 2018. In acquiring those companies, they’ve spent $74bn, the second-highest annual outlay for such transactions. (The highest came in 2016, the year that Dell, a Silver Lake portfolio company, shelled out $63bn for EMC.)

In some ways, LogMeIn is a typical LBO – it’s a large, profitable public company that’s struggling to put up growth. Garnering a 3.4x trailing revenue multiple on the sale, its valuation sits right in line with the annual median for take-privates this year. But unlike LogMeIn, fewer vendors are coming off the major US exchanges.

As sponsors are spending more than usual on take-privates, they’re having to go further afield to do it. For just the second time in the decade, PE firms are purchasing fewer companies that trade on the Nasdaq or NYSE exchanges than public companies that trade elsewhere.

Canvassing for corporate votes

by Brenon Daly

Who better to pick this year’s top deal than the folks who actually do the deals? One question in 451 Research’s annual survey of corporate acquirers, which is only open for two more days, is which tech print in 2019 stood out to them the most. The top vote-getter receives our coveted Golden Tombstone award.

As the professional buyers look at the $450bn in M&A spending on 3,500 tech transactions so far this year, which single acquisition will get the nod from their peers? Could it be PayPals sweet reach for Honey? Or will Salesforce elbow other deals aside? What about Broadcom becoming one of the largest information security vendors on the planet? Or is the take-private of Ultimate Software this years ultimate transaction? (Of course, all of us here at 451 Research have our own pick for this year’s most-significant deal: Hello S&P Global, Inc.)

This year’s top tech transaction is just one of several questions that we have asked each year in all of our surveys of tech M&A professionals since 2007. Other areas that the quick and painless 451 Research Tech Corporate Development Outlook Survey explore include activity forecast, valuation expectations and even their take on the other exit, IPOs. For corporate acquirers interested in taking part in our annual survey, simply click here.

Figure 1: M&A activity

Source: 451 Research Tech Corporate Development Survey

Wanted: Bankers with 20/20 vision for 2020

by Brenon Daly

Every year since the middle of the previous decade, 451 Research has surveyed senior tech investment bankers for their thoughts on M&A in the year ahead. The forecasts have proven remarkably prescient, with advisers accurately calling a record rebound in activity in 2018 and a notable downtick in valuations in 2019. And now, we want to see if that 20/20 vision extends to 2020.

In addition to asking how full their pipelines are, we also ask bankers what is filling them up. In terms of specific markets, is it deals in application software, Internet or other specific markets that has bankers dreading 80-hour workweeks in the coming year? Or is it cross-sector trends such as cloud or IoT that will be keeping them busy? (Bankers have certainly been onto something recently with their pick of the bustling machine learning market.)

Whatever the case and whatever the pace, 451 Research wants to hear from managing directors and partner-level advisers about the coming year. We ask senior tech investment bankers to give us five minutes of their time for their outlook on tech M&A. In return, we’ll send along full survey results as well as anonymized commentary from fellow bankers about what they’re seeing in the market. (Collectively, survey respondents touch several hundred tech transactions each year across the entire IT landscape, so our survey offers a comprehensive view.)

To participate in 451 Research’s 15th Annual Technology Investment Banking Survey, simply click here.

Figure 1: M&A outlook, by tech theme
Source: 451 Research’s Technology Investment Banking Survey

Xerox in danger of making a bad copy

by Brenon Daly

Of all companies, Xerox should know not to make a bad copy. And yet, as the maker of printers and copiers escalates its pursuit of a much-larger rival, it is in danger of repeating the mistake another tech giant made when it, too, tried to pull in a chunk of the once-formidable Hewlett-Packard. That buyer still hasn’t recovered from that deal, more than three years later.

In terms of M&A strategy, the thinking behind Xerox’s bid for HP Inc is solid: wring out financial efficiencies by combining large businesses in markets that have little – if any – growth. Where the effort breaks down is that Xerox has the strategy a little backwards. It is a fraction of the size of the company it is trying to roll up. (Xerox sells less stuff in an entire year than HP Inc sells in a single quarter.)

And then there’s the small matter of how Xerox, which has an all-in enterprise value of just $13bn, plans to pull off its proposed $33bn purchase. (For a sense of scale of the transaction, 451 Researchs M&A KnowledgeBase only lists 13 tech and telecom deals announced since 2002 with an equity value of more than $30bn.)

Xerox, which already has more than $4bn of net debt on its books, says it has the financing of the proposed pairing covered. Terms call for Xerox to hand over about $25bn in cash for HP, with the remaining nearly one-quarter of the price covered by its shares. For its part, HP Inc isn’t buying Xerox’s offer, either in terms of valuation or even feasibility.

But even assuming Xerox can not only raise but also then service several billion dollars of freshly incurred debt to pick up its larger rival, it’s worth wondering why the company would want to stretch itself financially for a significantly larger business that is significantly less profitable. Both gross margins and operating margins at HP Inc are about half the level of Xerox.

If Xerox needs any further convincing that it might not want to go deeply in hock to buy HP Inc, it might want to reflect on an earlier deal with a lot of the same characteristics as the one Xerox is considering. In 2016, UK-based Micro Focus put together a cash-and-stock bid for the much-larger but less-profitable software business from Hewlett Packard Enterprise. Since that consolidation, which tripled the size of Micro Focus, the company has seen its market value cut in half.

 

Verint disconnects

by Scott Denne

Verint Systems occupies a prime portion of the customer experience software market with an aging portfolio. Now it’s splitting off a smaller, low-growth part of its business in a deal that could give it more currency for acquisitions as the call-center software vendor updates its software suite to meet the changing needs – and rising budgets – of customer service groups.

With an investment from Apax Partners, Verint plans to separate its customer experience software business and its cyber-intelligence unit into two publicly traded companies. Apax will invest $400m across two tranches for a minority stake in the customer experience division. The buyout shop already knows part of the business – it was a previous owner of ForeSee Results (through its ownership of Answers.com). ForeSee, a customer survey specialist that Verint bought in 2018, is a key part of VerintUnified VoC product.

But voice of the customer (VoC) is only a modest, if faster growing, part of Verint’s customer experience business today. Even after the split, Verint will be an on-premises call-center software company that’s growing in the high-single digits. There’s an opportunity to accelerate that growth given the market it plays in.

Our data show that customer service is drawing an outsized share of budgets and attention as businesses contend with rising customer expectations across more communications channels. The days of calling the company to complain seem quaint as customers turn to chat, email and social media. According to a recent survey from 451 Researchs Voice of the Enterprise: Customer Experience & Commerce, 54% of organizations said they’re increasing their investments in customer service software in the next 12 months. And 25% of them said the customer service group has primary responsibility for the customer experience.

Although it’s been pushing past call-center products via M&A for the past couple of years, Verint has mostly done so with modest-sized acquisitions in the $25-75m range, according to 451 Researchs M&A KnowledgeBase. As a stand-alone customer experience provider, it could well have a higher stock price, giving it currency for larger deals – Wall Street sent Verint’s shares up 15% on news of the split. The vendor also has 25% EBITDA margins, so it should continue to generate cash for purchases.

Social media management should be a priority for Verint after the split. Owning a broad suite of tools for managing and monitoring engagements on social media would bring it into an area it’s already familiar with – tracking and managing customer interactions – and give it a software portfolio beyond customer service as its clients, according to our surveys, are seeing their mandates extend from customer service into customer experience.

Figure 1: Departments with primary responsibility for customer experience

Source: 451 Research’s Voice of the Enterprise: Customer Experience & Commerce, Organizational Dynamics & Budgets Q1 2019

Paying up to restructure Instructure

by Brenon Daly

Dragged down by the uneven performance of its two main products, learning management software maker Instructure is headed toward a period of corporate rehabilitation behind closed doors. The company says it will be going private in a proposed $2bn LBO by Thoma Bravo, wrapping up a three-year stint on the NYSE. Under ownership of the buyout firm’s sharp-penciled operators, we expect Instructure’s portfolio to be thinned in short order.

Although the stock nearly tripled from its IPO price, the ed-tech vendor has been increasingly dogged by questions about its product lineup. For the first few years after its founding in 2008, Instructure had success in selling software to schools to manage their education programs. However, its effort to replicate the uptake that its Canvas offering had in schools with a product targeting learning in the workplace has foundered since its early-2015 launch.

The corporate learning management offering, Bridge, has been a bit of an albatross. Instructure acknowledged that in its recent quarterly report, adding that it had begun separating the underperforming Bridge division from the still-healthy Canvas unit. (Instructure doesn’t break out the respective financials of the two product lines.)

Based on early indications, that separation will likely be accelerated once the sale to Thoma Bravo closes, which is expected in Q1 2020. Consider this: In the release announcing the acquisition of the whole company, Thoma Bravo only references – and indeed, praises – Instructure’s Canvas offering. The Bridge product, which almost certainly burns cash, is conspicuously absent.

Since Instructure had publicly disclosed last month that it was reviewing ‘strategic alternatives’ for the company, the sale isn’t surprising. (Certainly, Wall Street had been betting that Instructure would get a deal done. Investors, including several activist hedge funds, had pushed Instructure shares to an all-time high in anticipation of a transaction. Turns out they got a bit ahead of themselves, as Thoma’s bid represents a slight ‘take under’ relative to the stock’s previous closing price.)

Still, this is not some bargain buyout. At roughly $2bn, Thoma Bravo is paying about 8x TTM sales of $245m at Instructure. According to 451 Researchs M&A KnowledgeBase, that’s the highest multiple for any tech vendor erased from US stock exchanges in 10 months.

Locking the doors opened by new technology

by Brenon Daly

For most technology, security is somewhat of an afterthought. That’s particularly true for emerging enterprise technology, where shiny new gadgets and slick new software dazzle us with promise. Under the spell of early adoption, we focus on all of the great things the technology makes possible for us and our businesses. And then we get hacked.

Or something else happens to take off a bit of the luster of the new products. Reality intrudes on dream technology. Belatedly, we find that we just might need to put a lock on some of the doors opened by the new products. That’s one way to think about the recent record surge in acquisitions done to secure all of the ‘things’ that businesses are offering to make their current products more valuable or expand into more valuable markets.

The term ‘IoT security’ has popped up an unprecedented number of times so far this year in 451 Researchs M&A Knowledgebase. In fact, deal volume in this rapidly emerging field is set to triple in 2019, compared with both 2018 and 2017. And to underscore the seriousness of the challenge around shoring up all of those IoT implementations, big buyers are doing these deals. Cisco Systems, Check Point Software and Palo Alto Networks have all put up IoT security prints so far this year, according to our data.

Yet all of this M&A activity may be too little, too late. Even with this dramatic acceleration in the number of IoT security deals, our data shows this crucial component for all of those implementations still accounts for only a lowly single-digit percentage of all IoT dealmaking. In other words, vendors are still overwhelmingly focused on shopping for IoT technology that they can add to their portfolios rather than making sure their IoT technology is secure.

Those priorities, however, are not necessarily serving customers. In fact, customers who plan to boost their IoT spending in the coming year told us that they plan to spend more on shoring up the IoT technology than anything they can necessarily do with the new technology they plan to buy. Almost half (46%) of respondents to 451 Research’s Voice of the Enterprise: Internet of Things, Budgets and Outlook 2019 indicated ‘improved security’ is the single biggest driver for their increase in overall IoT spending.

Figure 1: Drivers of increasing IoT spending in 2019

Source: 451 Research’s Voice of the Enterprise: Internet of Things, Budgets and Outlook 2019

Cleanouts and closeouts in late-year M&A

by Brenon Daly

Tech M&A spending rebounded in November after two decidedly weak months. Last month’s pickup put this year back on track to record slightly less than a half-trillion dollars’ worth of tech and telecom transactions for full-year 2019. However, that strength assumes the buying can broaden in the final month of what’s proving to be a softening period for recent tech dealmaking.

Across the globe, acquirers handed out $48bn in the just-closed month on tech deals, according to 451 Researchs M&A KnowledgeBase. Our data indicates the value of transactions announced in November topped the combined total from both September and October. Yet, in one indication of the concentration of M&A activity in November, we would note that the M&A KnowledgeBase actually lists fewer $1bn+ prints in November than October, even as overall spending surged 70%, month over month.

More than half of November’s spending came in a single deal: Charles Schwabs $26.2bn purchase of rival TD Ameritrade. (The blockbuster consolidation meets our definition as a ‘tech’ transaction, albeit clearly as a fin-tech deal.) After that, however, both the number and – more significantly – valuation of acquisitions last month dropped off sharply.

In the second-largest tech transaction in November, buyout shop Apollo Global Management took Tech Data private for a pittance of its revenue. Granted, IT distributors like Tech Data operate on low margins with little protection for their business model. But even with that disclaimer, it’s striking that a company generating more than $35bn in sales fetched a terminal value of just $5.6bn. Similarly, Alphabet paid just 1.2x trailing sales for Fitbit in last month’s fifth-largest deal.

It wasn’t all cleanouts and closeouts, however. Lightly funded e-commerce browser plug-in Honey got a $4bn payday from PayPal, the kind of exit that keeps the VC dream alive. But far more often in November, deals got done at a mid- to low-single-digit multiple. In fact, the M&A KnowledgeBase shows November transactions going off at a median of just 1.8x trailing sales, a full turn lower than the average for deals announced from January to October.

With 11 months now in the books, tech acquirers have been averaging about $40bn in monthly M&A spending. (That’s down from an average of nearly $50bn per month in last year’s record run.) That decline can be traced back to buyers, particularly financial acquirers, stepping out of the market just since summer.

Our data shows the value of tech transactions in the back half of 2019 is on pace to be roughly 25% lower than the first half of the year. As we look ahead to the final weeks of the year, we expect a continuation of the trend of soft landings in the market – with fewer big-ticket deals and lower overall valuations – that we’ve seen recently. For tech M&A, this year will be a clear drop from last year.

Figure 1: Tech M&A activity
Source: 451 Research’s M&A KnowledgeBase

Infosec’s next-gen acquirer

by Brenon Daly

Fittingly enough, Palo Alto Networks took it to record levels. The next-generation information security kingpin has done more acquisitions than any other company in the sector this year, by our tally. And with its latest purchase – the $150m reach for Aporeto – the overall infosec M&A volume in 2019 has now matched the highest annual total in history.

According to 451 Researchs M&A KnowledgeBase, Palo Alto’s purchase of micro-segmentation security startup Aporeto stands as the vendor’s fifth transaction in 2019. (451 Research subscribers can look for our full report on that acquisition later today on our site, including the prevailing valuation the company is paying.) No other buyer in the sector comes close to that cadence of more than one deal every quarter this year.

Even infosec acquirers with well-worn M&A playbooks are putting up a fraction of the number of prints that Palo Alto has done in 2019. For instance, since the start of the current decade, Symantec and Cisco top the list in the M&A KnowledgeBase of most-active infosec acquirers. Yet both of those once-active buyers have announced just a single transaction in the sector this year. (And, of course, Big Yellow doesn’t appear likely to add to its total anytime soon, following the sale of its enterprise security division to the sharp-penciled operators at Broadcom.)

In that way, Palo Alto has now emerged as the next-gen acquirer in the infosec market, just as it emerged as a next-gen vendor in the infosec market a decade ago. It has displaced the traditional providers of exits (Symantec, Cisco) as surely as it has displaced the traditional supplier of firewalls (Check Point Software). To underscore how the firewall market has shifted, consider this: 14-year-old Palo Alto Networks sells more than $1bn worth of gear each year than 26-year-old Check Point, and is growing more than three times faster.

Figure 1:

Source: 451 Research’s M&A KnowledgeBase