More deals to be done

by Brenon Daly

Even after strategic acquirers led the tech M&A market to a near-record level in 2018, they still plan to step up their shopping in 2019. More than half the respondents to the annual 451 Research Tech Corporate Development Outlook predicted that their companies would be more active in the coming year. The 56% that forecast an acceleration in acquisitions is nearly five times the 12% that expected a slower pace.

The bullishness comes after many of the mainstay acquirers placed an unprecedented number of big bets in 2018. Corporate acquirers announced a record 74 transactions valued at more than $1bn in 2018 – double their number of big prints annually at the start of the decade, according to 451 Research’s M&A KnowledgeBase. Big-name buyers such as Microsoft, SAP, Adobe, Cisco Systems and IBM all put up single prints valued in the billions of dollars last year.

However, the folks who do the buying at tech companies did see some clouds on the horizon. Nearly four in 10 corporate acquirers (39%) told us that the deteriorating economic picture around the globe created a ‘pain point’ for deals they worked on in 2018. That was almost twice the number of respondents who said their work didn’t get snagged by any of the broad market concerns.

Subscribers can see our full report on the annual 451 Research Tech Corporate Development Outlook, which drew responses from some of the tech industry’s biggest buyers on what they see coming in 2019.

Cloudy days ahead boost infrastructure management M&A

by Scott Denne

The overwhelming shift toward cloud environments, mixed with reliable cash flow from pre-cloud companies, has taken M&A to unseen levels in a normally sleepy corner of the tech M&A market. IT infrastructure management vendors, those companies that make the software to monitor, manage and automate IT environments, fetched 10x the total value that such deals see in a typical year. The surge comes as legacy IT companies reach the inescapable conclusion that the cloud – from SaaS to IaaS – has forever changed IT.

According to 451 Research’s M&A KnowledgeBase, companies developing infrastructure management technology sold for a combined $94.4bn in 2018. To say that’s a record doesn’t suffice. Last year’s total came in six times higher than the previous annual high. Put another way, the total deal value for the sector was more than the combined total of the nine preceding years, which includes the previous sector record set in 2016.

In a market that typically sees 125-150 deals annually, a single transaction often skews the year’s total deal value. Certainly, IBM had such an impact with its $33.4bn acquisition of Red Hat last year. But it wasn’t a single outlier that made last year unique. It was an abundance of such deals. Since the dot-com crash, just eight infrastructure management companies have sold for more than $5bn, and five of them were sold last year. Both the largest (IBM’s Red Hat) and second-largest (Broadcom’s proposed $18bn purchase of CA Technologies) infrastructure management acquisitions were announced in 2018.

The growing dominance of Amazon and Microsoft Azure in the cloud market catalyzed the Red Hat deal. IBM inked the largest software acquisition of all time to carve itself an opportunity, as IT environments and applications spread among different cloud services. A similar rationale drove Salesforce’s $6.6bn purchase of MuleSoft – the largest ever done by that buyer – aiming to give the SaaS giant a stake in helping businesses integrate SaaS, hosted and on-premises applications.

451 Research’s Voice of the Enterprise surveys show how fast this future will arrive. In our Digital Pulse: Vendor Evaluations report, 44% of respondents told us that most of their IT workloads reside in traditional, on-premises infrastructure. Yet only 16% of them expect that will be the case in two years, as respondents spread their workloads across SaaS, on-premises private clouds, hosted private clouds and IaaS – each of which saw 15-20% predicting those deployment options would be home to the majority of their workloads.

And the Golden Tombstone goes to…

by Brenon Daly

For our final M&A Insight of 2018, we’re going to look back on the astonishing year of dealmaking in the tech industry. Or rather, we’re going to have the pros do it, and tell us what stood out for them.

In our just-closed 451 Research Tech Corporate Development Outlook survey, among other questions we asked dealmakers to look at the handiwork of their peers around the tech industry and select what they thought was the most significant transaction of the year. They had plenty to consider from 2018. 451 Research’s M&A KnowledgeBase lists a record 105 transactions valued at more than $1bn from this year, which is twice the number announced at the start of the decade.

Without further ado, this year’s Golden Tombstone goes to IBM’s record-breaking purchase of Red Hat. The deal represents the largest software transaction in history, nearly twice the size of the second-biggest purchase. In the voting by some of the tech industry’s most seasoned dealmakers, IBM’s big bet slightly edged out Microsoft’s reach for GitHub.

That’s the good news for Big Blue. Taking a bit of luster off the coveted trophy is the fact that corporate buyers also selected IBM’s record-breaking pickup of Red Hat as the high-profile deal announced this year that’s most likely to struggle to generate the hoped-for returns.

The dual-placing for the blockbuster transaction probably isn’t unexpected, given its unprecedented scale. But the bears on the deal are overrepresented. IBM’s acquisition of Red Hat got almost three times the number of votes as second-place Broadcom-CA.

Those who ‘shorted’ IBM’s massive deal noted the vast cultural divide between buttoned-up Big Blue and the more freewheeling open source company. Also, IBM has been in the midst of a protracted decline in its business. In fact, since IBM picked up its previous Golden Tombstone award for the June 2013 purchase of SoftLayer, shares of Big Blue have shed 40% of their value.

VCs piling up chip deals

This year’s surging M&A market has brought relief to a tech sector that’s long struggled to find exits. With today’s announcement that Cisco is acquiring venture-backed Luxtera for $660m, venture capitalists have realized more value from their semiconductor investments than any time since 2013. In a reflection of the broader market, the return of strategic acquirers has boosted the sales of chip startups.

As 2018 heads toward a close, buyers have spent a collective $1.4bn on purchasing semiconductor startups from venture portfolios, compared with just $1.8bn in the three previous years combined. The acquisition of Luxtera goes a long way toward boosting this total. According to 451 Research’s M&A KnowledgeBase, the deal is the largest purchase of a VC-backed chipmaker since the dot-com bubble burst. (Neither that record nor the annual totals include acquisitions of public companies that previously raised venture capital.)

That Luxtera’s exit marks a record speaks as much to the dearth of liquidity for chip startups as it does to the target’s accomplishments. In the face of rising development costs, VCs have long shied away from chip investments and acquirers have come to depend on product development more than M&A for incremental improvements. Most of the dealmaking among semiconductor vendors in recent years has been large consolidations, rather than midmarket acquisitions.

Still, there’s been some relief from the paucity of exits this year. Prior to Luxtera, Cisco, a frequent buyer of software vendors in recent months, hadn’t acquired a semiconductor business in nearly three years. The same goes for Skyworks, which provided VCs with the third-largest exit in the category when it shelled out $405m for Avnera in August – it was the acquirer’s first purchase in more than 30 months. And Intel picked up a pair of chip startups this year after a 16-month hiatus from semiconductor M&A.

Two different paths to the top

by Brenon Daly

Although 2018 is closing in on the record year of 2015 for overall tech M&A spending, it’s taken a much different route to arrive at the same heights. Both years total more than a half-trillion dollars in announced deal value, which puts them above all other years since the internet bubble burst in 2000.

And while it’s true that both years are characterized by big spending, only 2015 stands as the year of the big spender. Two of the three largest tech transactions announced this century are 2015 vintage. Taken together, 2015’s two blockbusters (Dell-EMC, Charter Communications-Time Warner Cable) contributed a staggering $120bn, or 21%, of that year’s total announced deal value of $575bn, according to 451 Research’s M&A KnowledgeBase.

In contrast, this year’s largest print only slots in seventh place on the list of biggest acquisitions since 2000. When that deal (Comcast-Sky) is combined with the second-largest transaction (IBM-Red Hat), spending totals just $72bn, fully 40% lower than the total value of the 2015 pair. Or look at it this way: Only one out of every eight dollars of this year’s spending has come from the two massive deals, compared with one out of every five dollars in 2015.

What 2018 has lacked in heights, however, it has made up for in volume. Lots and lots (and lots) of single-digit-billion dollar deals all piled up together. Already this year, the M&A KnowledgeBase lists 96 tech transactions valued at $1-$10bn, up from 75 similarly sized deals in 2015.

Granted, most of this year’s steady flow of billion-dollar prints came from many of the names – both strategic and financial – that we would expect to be putting up big deals. But probably more significant for 2019 and beyond is the fact that this year saw some new entrants to the ‘billion-dollar club.’

Workday and Twilio had never even announced a $100m+ transaction before inking a $1.6bn and $1.7bn acquisition, respectively, in 2018. BlackBerry more than tripled the size of its largest purchase, paying $1.4bn for endpoint security startup Cylance in November. With new acquirers flashing big bankrolls and showing off confidence, the buying pool at the top end of the tech M&A market just got a little deeper.

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

Broken promise

by Scott Denne

Verizon’s struggles to extract value from its massive investments in digital media became official this week as the company announced that it would write down much of the value of its AOL and Yahoo acquisitions. Given the amount of value it’s lost across those two deals, there’s little doubt now that Verizon will never emerge as a prolific acquirer of digital media vendors, despite owning two businesses that were once among the most active.

In 2015 and 2016, Verizon paid a combined $9.2bn to acquire AOL and Yahoo to transform its telecom network – and the consumer data flowing through it – into a challenger to Facebook and Google. The anticipated benefits have failed to materialize. In the third quarter, Oath (Verizon’s name for the combined AOL and Yahoo business) saw its topline shrink by 7% to $1.8bn, putting the company well short of its 2020 annual revenue target of $10bn. As gains in mobile and video advertising have failed to compensate for declines in desktop and search, Verizon wrote down $4.6bn of the $4.8bn goodwill it carried on the combined transactions.

For would-be sellers of digital media firms, it could mean a major buyer is out of the market. Before joining the telco, AOL and Yahoo were among the most active acquirers of digital media – in the two years before Verizon bought AOL, the two companies spent a combined $2.8bn on 53 tech purchases.

Verizon’s Oath wasn’t nearly as active. According to 451 Research’s M&A KnowledgeBase, Verizon only acquired one company to add to Oath in the past two years, picking up full ownership of Yahoo’s Australian venture. The write-down makes it likely that trend will continue now that Verizon has officially owned up to its overpayment.

In with a bang, out with a whimper

by Brenon Daly

After a record pace throughout much of 2018, the enterprise tech IPO market has basically ground to a halt. And with the traditional extended holiday break for new offerings, it’s looking like the year will wrap with a two-month drought in IPOs. That’s quite a drop-off from the start of the year, when nearly two B2B tech startups were coming public each month.

Overall, our tally shows that twice as many enterprise-focused tech vendors came public in the first half of this year than the second half. (To be clear, we are counting only B2B companies that listed on the NYSE and Nasdaq. That excludes, for instance, this year’s surprisingly numerous biotech offerings as well as the handful of consumer tech startups that came to market in 2018.)

Of course, recent IPO activity has been hit hard by the fact that the broader US stock market has been hit hard. A survey by 451 Research’s Voice of the Connected User Landscape done during some of the volatile days in October showed that three times as many investors had lost confidence in the equity market since last summer as had gained confidence in it. When Wall Street feels like shaky ground, it’s hard for new offerings to find their footing.

None of that precludes new offerings next year. But to the extent that uncertainty continues to cast clouds over Wall Street in 2019, the overall climate could table IPOs for smaller, more speculative enterprise tech startups. Big names tend to be ‘bankable’ regardless of what’s happening in the broader market. (That development is also being driven by VCs, who are concentrating more money into fewer companies.)

That’s starting to play out in the related consumer technology sector. Lyft announced last week that it had put in its IPO paperwork, putting it on track for an offering in the opening months of next year. And not to be outdone, Uber is also reportedly putting its offering in place. Meanwhile, on the enterprise tech side, there’s been plenty of speculation that Palantir will exchange its long-held secrecy for a public listing in 2019.

As welcome as those new names would be, however, they won’t do much for the broader tech IPO market. No one holds out these so-called ‘decacorns’ as representative of the much bigger startup community. As anomalies, they are not going to lead other companies to market or help set a bullish tone for other tech IPOs. Instead, smaller tech vendors will be relegated to observers on Wall Street, watching on as large-cap private companies become large-cap public companies in a rather mechanical process.

Webinar: ML implementations and acquisitions

by Brenon Daly

There’s no faster-growing segment of the relatively mature enterprise software market right now than machine learning (ML). Join 451 Research on Wednesday morning for a special webinar on the collection of technologies that help companies get smarter about their operations, customers and partners. The webinar will cover not only how ML works, but also what it’s worth.

Whether it’s using ML to vault ahead of rivals or to explore bountiful new markets, ML can truly alter the fortunes of a business. And yet, even with the near-universal relevance of ML (who doesn’t want smarter software?), the technology is only starting to find its way into companies.

In a recent survey of 550 IT decision-makers, Nick Patience, 451 Research’s head of software research, found that just 17% said they have deployed ML technology. Further, most of those use cases were rather narrowly defined.

At the same time, however, our survey of tech buyers and users showed they are planning to be much more expansive and aggressive with ML. Looking ahead, roughly half of the respondents expect to have ML technology up and running by mid-2019, up from just one in six right now. The soaring forecast for ML implementations is unprecedented in the relatively mature software industry.

That same sort of pattern is playing out in acquisitions in this market, as suppliers look to pick up ML technology at an ever-increasing pace. Already this year, buyers have announced more ML deals than any year in history, according to 451 Research’s M&A KnowledgeBase. At the current rate, the M&A KnowledgeBase will record roughly 140 ML-related prints for the full-year 2018, twice the number from just two years ago and more than three times the number in 2015.

To get smart on machine learning and get even smarter on doing ML deals, 451 Research will be hosting a special hour-long webinar on Wednesday, December 12 at 11:00 ET. We will be looking at both the technological underpinnings of this rapidly emerging technology trend, as well as how suppliers are using M&A to respond to this unprecedented demand. Join us later this week to learn more about the most-transformative enterprise technology trend in the market right now.

IBM sells software for once

by Scott Denne

Amid the growing perception that technology is disrupting a wide range of industries, it’s worth noting that the software business itself is one of those industries. And perhaps no company is responding to that shift as dramatically as IBM. With a record acquisition recently announced, Big Blue has now made a record divestiture, shedding several software assets in a $1.8bn sale to HCL Technologies.

Throughout its history, IBM has frequently turned to a combination of acquisitions and divestitures to reorient its business. Those earlier sales, however, were almost entirely in services and hardware, while this deal marks its largest software divestment to date. In today’s transaction, Big Blue is selling software units that specialize in security (Appscan and BigFix), marketing (Unica, Commerce and Portal) and collaboration (Domino, Notes and Connections). All received scant attention from IBM in recent years and none reside in the areas that the company considers to be its strategic priorities, such as artificial intelligence (AI), blockchain and cloud computing.

It was that latter trend that sparked the recent $33.4bn purchase of Red Hat, setting an all-time record for the largest software deal. Having lost to Amazon and Microsoft in the first phase of the shift toward cloud computing, IBM sees another opportunity as the market shifts to hybrid- and multi-cloud environments. Today’s divestitures did nothing to aid the company in pursuit of that market.

Others have taken a similar tack, sensing that changes are coming to their sectors. In 451 Research’s VoTE: Digital Pulse survey, 47% of respondents among B2B software and IT tech vendors told us that digital technology would be highly disruptive to their organization’s market. Nuance Communications, for example, recently shed its document imaging business in a $400m sale as it focuses its resources on a raft of new challengers in the AI and voice recognition space. According to 451 Research’s M&A KnowledgeBase, public companies around the globe have divested a collective $6.5bn in software assets so far this year, the second-highest annual total in the current decade.

Survey says…

by Brenon Daly

Talk about the wisdom of the crowds. In a pair of 451 Research surveys last December, the tech M&A community accurately forecast this year’s stunning resurgence in dealmaking. In separate surveys last year, both corporate development executives and senior investment bankers predicted that 2018 would be a banner year for tech M&A, reversing two consecutive annual declines.

Strategic buyers gave their strongest outlook to any survey since the recession, while an above-average number of advisers indicated last year that they expected an uptick in acquisition activity this year. Tellingly, the bullishness from both groups has come through in actual deal flow, with this year on track for the highest level of annual spending since the dot-com collapse. (451 Research subscribers can see our full report on last year’s survey of corporate acquirers and bankers.)

Having presciently predicted activity in 2018, what do the main buyers in the tech M&A market and their advisers see coming in 2019?

To get the forecast, 451 Research is currently surveying both groups. If you work in a M&A capacity at a company or are a seasoned investment banker (VP and above), we would like to hear from you. The surveys are quick and painless, taking just 5-10 minutes. There’s even a fun question or two in both of the surveys. (If you haven’t received an emailed link for the survey, please contact me.)

In return, we’ll send all respondents an advanced look at the key findings of the survey, so they’ll know exactly where the market is heading next year. Again, to take part, simply email me and I’ll get you the correct survey. Thank you for offering your take on tech M&A in 2019.