We hope you find the below introduction to our annual Tech M&A Outlook useful as an overview of the broad- market trends that are shaping acquisition activity across a number of key technology sectors. For an in-depth look at specific markets - including software, information security and IoT - we recommend learning more about the full M&A Outlook report. 

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Introduction
Tech M&A spending in 2019 dropped nearly 20% from the previous year's record level as mainstay acquirers stayed away and an up-and-coming group came up short. The combination of the tech industry's bellwether companies not buying and buyout shops slowing their record roll clipped the value of tech and telecom acquisitions announced around the world last year to $461bn, according to 451 Research's M&A KnowledgeBase.

Figure 1:
1 tech mna activity.png

Source: 451 Research's M&A KnowledgeBase

Still, 2019 stands as the fourth-highest annual total since the internet bubble collapsed. The fact that last year hit such heights is rather remarkable, given that it was missing the main engine that has powered tech M&A since the first prints in the industry – traditional big-cap acquirers. The tech industry's household names are no longer buying like they did.

As an indication of that, consider that the M&A KnowledgeBase shows that Oracle, Microsoft, IBM and SAP, collectively, did not put up a single billion-dollar print in 2019. It was the first time since 2003 that the always-hungry quartet haven't been in the 'three comma club.' Up until last year's notable absence, the big buyers had been averaging three or four acquisitions between them valued at more than $1bn each year.

Further, our data indicates that the 'first-gen' quartet collectively put up just half the number of total deals in 2019 that they had been averaging each year over the previous decade and a half. It was as if the old guard, having shaped and driven the broader tech M&A market in the 2010s, stepped aside as the curtain came down on the decade – 2019 marked the beginning of the end of an era.

Figure 2:

Source: 451 Research Tech Corporate Development Outlook

In place of tech's Baby Boomer-era buyers, Millennials made their mark in 2019, and appear set to extend their influence in the new decade. And, importantly, these richly valued buyers have few reservations about handing out similarly rich valuations on the companies they acquire. No single-digit multiples here. That's a change from the original corporate buyers, who often had to stretch on valuations, paying two or three times their own trading multiples for the vendors they wanted to buy.

Bid up by the unprecedently pricey valuations paid by these new acquirers, overall M&A valuations in 2019 hit the highest annual level ever recorded in the M&A KnowledgeBase. (We look more closely at valuations across a number of sectors later in this report.)

Whatever market we considered, the out-with-the-old, in-with-the-new transition showed up. Tech firms born in the past two decades or so displaced older, more-established buyers. As the new acquirers did so, they almost invariably paid astoundingly rich prices:

In software, the largest transaction of the year – by a mile – came from Salesforce, an enterprise software provider founded at a time and with the intention to upend its industry. (It opened for business in 1999 with the tagline: 'No software.') For years, the top ranks of application software M&A had been dominated by mature vendors such as Oracle, IBM and SAP handing over huge checks for horizontal SaaS firms. Yet in 2019, it was Salesforce paying $15.5bn, or more than 12x trailing sales, for BI software provider Tableau Software.

In digital infrastructure, VMware announced more transactions in 2019 than Cisco, while also spending more on those deals than any year in its history. Over their full corporate histories, however, Cisco has put up more than three times the number of acquisitions and spent roughly 10 times more than its newer rival. Last year, VMware reached deep for security startup Carbon Black (paying 9x trailing sales) as well as handing over a half-billion dollars for very early-stage startup Heptio, which we estimate still measured its revenue in the mid-single-digit millions of dollars.

In information security (infosec), an industry where 'next-gen' disruption has been reallocating market share and market value for the past decade, the shift finally came to the M&A market as well. From 2002-17, Symantec stood alone as the busiest buyer in infosec, by far. In the two years since, no company has come close to Palo Alto Networks, which is averaging a deal every quarter since the start of 2018. To buy its way into those growth markets, we estimate that Palo Alto paid an average of 30x trailing sales in the transactions it did in 2019.

More than a turn of the calendar
Admittedly, a decade serves as a convenient – if imprecise – marker of time. Adding on the idea of an era being completely contained in a tidy 10-year period probably overlooks more than it includes. (As if the 'Age of Aquarius' entirely wound down on December 31, 1969.) That said, 2019 had the markings of a generational transition in several key segments of the tech M&A sector. The upcoming decade doesn't look like it will just be a continuation of the previous decade.

Figure 3:

Source: 451 Research's M&A KnowledgeBase

As we have mentioned, new strategic buyers have upended legacy vendors, although the transition is still in its early days. Elsewhere, financial acquirers may have hit the limits of their disruption of the tech M&A market. They closed a decade that saw them emerge as a major force in the industry on a rather soft note. In 2019, private equity (PE) firms announced their first year-over-year decline in deal volume in six years, while their spending dropped 20% from 2018. (For a full examination of the trends shaping the still-powerful PE industry, see below.)

And finally, in the private markets, the decade was dominated by attention on the 'unicorns,' a term that was coined by a venture investor in 2013 to describe startups valued at $1bn+. However, through a combination of charitable investment terms and bubble-like mentality among investors, unicorns lost their uniqueness as the decade moved along.

The herd of unicorns numbered more than 400 startups at the end of 2019. And yet, for the first time in a decade, public-market investors didn't universally share the feeling that these startups were somehow special in 2019. Not every unicorn saw its valuation bid up on Wall Street, which became increasingly skeptical of money-burning startups. The 'growth at any cost' business models that had fueled the 2010s looked unsustainable in the new decade. (We look at the venture industry – both in terms of funding and exits – in this Introduction's final section.)

It's also worth noting that all of these shifts took place in a decade that was marked by virtually uninterrupted economic growth and massive creation of market value in the tech industry. After two systemic collapses bookended the previous decade, the 2010s got off relatively unscathed, broadly speaking.

Without the damage from a recession littering the economic landscape, the bull market could find its stride. And with only a few exceptions over the just-closed decade, markets galloped higher. From 2010, the S&P 500 Index tripled, with tech leading the rally. In 2019, for instance, the tech names in the S&P 500 returned 48%, handily outperforming the overall 29% gain for the full index.

Most of the gains on the US stock market were heavily concentrated in a handful of names. And yet, those companies, which enjoyed such overwhelming support from investors, didn't do many deals. Typically, the confidence drawn from a rising stock price helps fuel acquisitions. When Wall Street tells companies that they are on the right track, the favorable view tends to embolden buyers to look to add new businesses. Over the years, the M&A market has been tightly correlated with the equity market.

Figure 4:

Source: 451 Research's M&A KnowledgeBase

And yet Microsoft, which closed out the year valued at more than one trillion dollars, having gained more than 50% in 2019, didn't do much last year. Its total acquisition spending in the M&A KnowledgeBase for 2019 stands as the lowest of the past decade. With its new 'Business 2.0' focus, this is a company that has shown itself prepared to throw around billions of dollars to maintain its relevance. Microsoft dropped $7.5bn on Github in mid-2018 and $26.2bn on LinkedIn in mid-2016, but didn't put up anything like that in 2019.

Things fall apart, the center cannot hold
If a supportive market tends to bring out the buyers, the opposite is true as well. When 'activist' hedge funds begin agitating at a company they feel is underperforming, one of the first casualties of the push is the M&A program at the targeted company. It's hard to get deals done with a chorus of critics peering over your shoulder.

Consider the relative pace of purchases at a vendor like Citrix Systems, which had been averaging a deal about every quarter from the mid-2000s through the mid-2010s. That steady cadence ground more or less to a halt after gadfly Elliott Management took a significant stake in Citrix and began pressing for changes at the old-line vendor in 2015. The M&A KnowledgeBase shows that Citrix has done just three acquisitions over the past three years. In 2019, Elliott announced a significant stake in old-line software giant SAP.

Elliott's pressure hasn't resulted in a sale of Citrix (although reports throughout the year indicated that the targeted company is in play). The same can't be said for LogMeIn, which Elliott now co-owns with PE firm Francisco Partners after a year-long campaign to 'unlock shareholder value.' The buyout tandem announced the $4.2bn take-private in mid-December, valuing LogMeIn at a middling 3.4x trailing sales.

The fractious process that erased LogMeIn from the Nasdaq also underscores yet another difference between technology's old guard and the emerging generation. High-profile tech vendors that have come public in recent years were more likely than not to protect against the possibility (eventuality?) of falling on hard times and drawing the unwanted attention of these activist hedge funds. They did this by giving themselves outsized voting power through a special equity structure.

The 'Class A' shares held by company executives – which represent yet another concession by public shareholders, who effectively give up their voice in the direction of the business they ostensibly own – mean that many of the newly public companies are basically untouchable from outside. Many of the faded tech bigwigs that have been pushed from Wall Street into PE portfolios in recent years (Informatica, BMC, Riverbed) undoubtedly wish they, too, could have enjoyed the protection from shareholders when they popped up on a hedge fund hitlist.

Thus far, these activist programs, which have bagged some billion-dollar elephants, have all come as tech, broadly speaking, has vastly outperformed all other sectors during Wall Street's record bull market. Any downturn, and the activists are likely to have many more 'underperformers' to go after. Yet a number of the newest names have insulated themselves against that.

An incomplete exchange of new for old
In any transition, there is an incomplete exchange. New rarely replaces old, one-for-one. In our view, that's a primary reason why 2019 slipped from the top tier of M&A spending to the second rung. To put some numbers on that decline, consider this: The M&A KnowledgeBase indicates that the average monthly spending on tech transactions around the world in 2018 clocked in at almost $50bn; in 2019, that monthly level dropped to roughly $40bn.

As the tech industry’s 'usual suspects' for doing big deals went missing, there was a lull in the market. Incoming acquirers needed time to rewrite their corporate strategies to include M&A, which means committing to a messy, indeterminant process that, statistically speaking, is probably not going to deliver the hoped-for returns in any case. Plus, the companies then had to underwrite the considerable effort and expense that transactions require to negotiate, close and then integrate. Acquisitions shouldn’t be taken lightly, particularly those done by companies without any real practice in the game.

Coming into last year, Splunk had only really dabbled in M&A. The vendor had picked up just 10 targets over its 15-year history, and our data shows that most of them had been small purchases measured in the tens of millions of dollars. Strategically, it's fair to say the company had been internally focused, growing what it had rather than adding new products. And, it's fair to say that strategy had served the vendor well, as it increased revenue at a healthy 40%+ clip even as sales topped $1bn.

It's a similar story at Workday, where organic growth has historically been the driver for its business as well. Roughly the same age as Splunk, the cloud-based software provider has built a bigger business (and bigger market cap) on even fewer acquisitions than Splunk. Our data shows that during its first decade in existence, Workday purchased just two small startups.

And yet, both of those highly valued companies have recently joined the M&A big leagues. After never spending more than $100m on any single deal, Workday announced the $1.6bn pickup of Adaptive Insights in mid-2018 and then followed that up in 2019 with the $540m reach for Scout RFP in November 2019.

Similarly but in the inverse order, Splunk announced its first-ever significant acquisition in 2018 (the $350m purchase of Phantom Cyber) and then graduated up to a billion-dollar deal with its pickup of SignalFX in August 2019. (Although terms weren't released, our proprietary estimates have Splunk paying slightly more than 40x and 20x, respectively, in its two significant transactions.)

In some ways, Splunk and Workday are just following the strategy of Salesforce, which stands as the world's most valuable SaaS vendor. In the first decade after its founding in 1999, Salesforce inked just a handful of tiny purchases. It had already built its core product, which manages sales records, into a $1bn business before turning to M&A and using acquisitions as a way to offer new 'clouds,' as the company call its product portfolios.

The classic playbook for corporate strategy has entire chapters on growing businesses via M&A, both consolidation and expansion. The 'urge to merge' has reshaped entire industries over the years. For the generational transition to truly take hold in the tech M&A market, we would look for more companies like Workday and Splunk to embrace big deals as a viable growth strategy. That is, companies of a similar vintage (born in the current millennium) that have built multibillion-dollar market values while putting up 40%+ overall growth rates on what essentially is a single product.

Among the Millennials we consider most likely to kick-start their M&A programs with a significant acquisition in the near term are ServiceNow, which has $1.5bn in cash on hand but hasn't spent more than $100m on any single transaction, and Okta, which has sat out the recent record M&A run in infosec. (Last year saw more infosec deals announced – and with more spending attached to them – than any year in history, according to the M&A KnowledgeBase.) Further, the recent crop of enterprise IPOs, particularly in the rapidly consolidated infrastructure software space, also stand as potential major acquirers that could replace the first-gen buyers.

New faces among the big buyers
Fittingly for a year of transition, 2019 saw several next-gen buyers solidify their membership in the 'billion-dollar club.' Yes, some of the names that have been on the list year in and year out appeared again in 2019: HPE, Intel and Cisco, among others. Those well-established acquirers have been doing similarly sized purchases since the 1990s, before some of this year's big spenders had even launched.

Companies born in the past 20 years or so that put up $1bn+ prints in 2019 included Salesforce (twice), VMware, Alibaba, Alphabet/Google and Splunk. Probably the most notable addition, however, was a new entrant to the club, Uber. The high-profile unicorn did a deal worth three unicorns just before it came public. Uber handed over $3.1bn in cash and convertible notes for Middle East-based rival Careem. The transaction is the largest (by far) in the rather eventful 10 years that Uber has existed.

Figure 5:

Source: 451 Research's M&A KnowledgeBase

However, even with relatively new names writing big checks, they couldn't make up for the fact that many of the 'usual suspects' were missing from the tech M&A market. Overall, companies announced just 64 transactions valued at more than $1bn in 2019, down from 75 in the previous year, our data shows. Highlights among last year's blockbuster acquisitions by tech vendors include:

Salesforce's $15.5bn purchase of data analytics vendor Tableau Software. In our survey, corporate dealmakers overwhelmingly voted it the year's 'most-significant' deal in all of tech.

Just two months after announcing the largest software purchase of 2019, Salesforce spent $1.35bn for ClickSoftware Technologies. The transaction effectively stands as a 'billion-dollar bolt-on' since it will be added to an existing platform at the SaaS giant, rather than establishing it in a new market.

As the runner-up most-significant deal in our survey of corporate buyers, VMware's $2.1bn reach for security provider Carbon Black marked the first billion-dollar-plus transaction for VMware in a half-decade.

Although technically an asset deal, Broadcom's $10.7bn purchase of Symantec's enterprise security business stands as the largest-ever infosec acquisition. However, corporate buyers overwhelmingly voted this deal as the most likely to struggle to generate the hoped-for returns.

Continuing the recent consolidation of the semiconductor industry, Infineon paid $9.1bn for Cypress Semiconductor. The transaction is three times bigger than any single deal the German chipmaker had ever done.

The newly-appointed head of Google Cloud looked to M&A in a big way to help close the gap on other cloud infrastructure suppliers. Google handed over $2.6bn for data visualization vendor Looker in June.

After being out of the M&A market for a full half-decade, F5 Networks stepped back in with the $1bn purchase of Shape Security. The buyer indicated that it paid about 17x trailing sales for the cybersecurity startup.

PayPal handed over $4bn for discount shopping tool provider Honey, the kind of exit that keeps VCs in business. The target raised just $26m.

Looking to obtain a bit of wearable technology and a few users, Google spent $2.2bn for onetime highflyer Fitbit. The fact that Google is paying just 1.2x trailing sales indicates how much the pioneering vendor had faded.

PE no longer taking over the world
Up until now, we have been looking exclusively at corporate acquirers, since they are the primary buyers in the tech M&A market. (Not to mention the fact that they appear to be going through a once-in-a-generation change in leadership, or at least stand on the cusp of it.) As we turn to the rival group – financial acquirers – we see a change among those buyers as well. In short, private equity wasn't the same disruptive force in 2019 that it had been recently.

Figure 6:

Source: 451 Research’s M&A KnowledgeBase

Between direct investments and deals done by their portfolio companies, PE firms actually announced fewer tech transactions in 2019 than they did in 2018, according to the M&A KnowledgeBase. Last year marked the first decline in deal volume in six years for deep-pocketed financial buyers. The drop-off was even more pronounced at the top end of the market. Buyout shops announced just 24 tech acquisitions valued at more than $1bn, the fewest since 2015, when they held significantly less capital than they do today.

Figure 7:

Source: 451 Research's M&A KnowledgeBase

While slight, the decline in the overall number of PE deals is nonetheless significant. The sole growth sector of the broader tech M&A market is no longer growing. Our data shows that from 2014-18, sponsor-backed transaction volume increased at a compound annual growth rate in the mid-teens, doubling the total number of deals they did during that period.

Inevitably, getting the deals they wanted meant that buyout shops had to elbow aside their corporate rivals, who had dominated the tech M&A market since its inception. However, in 2019, sharp-elbowed PE firms no longer knocked aside corporate acquirers in every transaction. Buyout shops accounted for 31% of all tech transactions last year, which is the same share they held in 2018, according to the M&A KnowledgeBase. This flat-line period comes after three consecutive years of expanding their share of the overall M&A market, a period in which PE firms doubled the percentage of the market they held.

Figure 8:

Source: 451 Research's M&A KnowledgeBase

Further, the competitive landscape isn't supposed to change much in 2020. In our annual survey of corporate acquirers, they forecast that the rivalry would further diminish in the coming year. For the first time in three years, fewer than half of the corporate buyers (46%) said they expected an increase in competition from PE in the deals they want to do in the coming year. That's a dramatic swing from our survey just two years ago, when two-thirds of respondents (64%) projected sharper rivalry with buyout shops.

Figure 9:
9 PE outlook.png

Source: 451 Research Tech Corporate Development Outlook

The findings of the 451 Research Tech Corporate Development Outlook suggest that the two rival groups are drawing closer together, after PE firms had upended the long-standing order and emerged as the primary competitor in our surveys of corporate buyers. Although respondents still rated financial acquirers more of a threat than fellow strategic buyers in this survey, the gap between the two sets of shoppers has narrowed from a double-digit difference in percentage points in the two previous surveys to just eight percentage points. (In our just-closed survey, 38% of corporate acquirers said they expected more competition from other strategic buyers for deals in 2020, compared with 46% who said that about financial acquirers.)

In many ways, the most recent view on the rivalry between corporate and financial acquirers is getting closer to the historic norm: In the first decade of the 451 Research Tech Corporate Development Outlook, respondents ranked their strategic brethren ahead of rival financial buyers every single year.

In a separate survey, tech investment bankers also indicated that their work with PE firms is waning a bit. Only slightly more than half (53%) of the respondents to the 451 Research Tech Banking Outlook said they have more PE mandates for 2020 than they did at the start of 2019. That's a significant decline from recent surveys, when roughly two-thirds of bankers predicted a likely acceleration in sponsor-backed deals. In fact, as they looked ahead to the coming year, bankers reversed the ranking of the past few years: Business with PE in 2020 is expected to lag the growth they see for the overall tech M&A market.

Still, PE is hardly a spent force in the tech M&A market. As we head into a new decade, there are more buyout shops holding more equity than at any time in history. Their purchasing power, solely for the tech industry, is measured in the hundreds of billions of dollars. And unlike their corporate rivals, PE firms have only really one option when it comes to capital allocation: Do deals: They are built to transact.

That's how Vista Equity Partners, for instance, averaged nearly four acquisitions each month in 2019. (It is currently investing out of a $16bn fund.) For its part, Thoma Bravo clipped along at three deals per month last year. The paces at both firms have ticked up in recent years, helping to push the overall number of PE transactions to record levels.

Figure 10:

Source: 451 Research's M&A KnowledgeBase

As we think about transitions in the overall tech M&A market, it's useful to take a historical perspective to highlight the emergence of PE as a significant force in the sector. In 2019, which was admittedly a down year, financial acquirers announced more than 1,100 tech purchases, according to the M&A KnowledgeBase. That works out to more deals each quarter in 2019 than PE firms announced in any year from 2000-09.

'Below plan' is the new plan
Regardless of the buyer type, the business environment looms somewhat ominously as we head into the new decade. Corporate growth is slowing across the board as vendors tell us they are having difficulty hiring skilled employees and are struggling to navigate recently enacted trade legislation, which is increasingly contentious and punitive. Roughly one-third of respondents to the most recent 451 Research Voice of the Customer (VoC): Macroeconomic Outlook pointed to those two difficulties as 'threats' to sales at their companies. Further, those percentages ticked higher in all three of our survey periods in 2019.

Figure 11:

Source: 451 Research Voice of the Enterprise; Macroeconomic Outlook – Business Trends

More significantly, those concerns are having a real-world impact on their business. In the same VoC survey, nearly one of four (23%) indicated in Q3 2019 that sales at their company were running behind their forecasts. It was the first time in two years of our quarterly surveys that more respondents said they were 'below plan' than 'above plan.' (In the VoC survey, 20% of respondents noted that their organizations are outperforming.)

Further, that was a notable reversal from our year-ago survey, when business was running high from the tax cut-inspired economic stimulus. In the Q3 2018 survey, almost twice as many businesses said they were more than making their number compared with those that were coming up short. (The Q3 2018 results of 28% above plan vs. just 15% below plan represents a post-recession high-water mark for bullish sales performance sentiment in our VoC surveys.)

As it relates to M&A, the macroeconomic concerns are also slowing business there. Corporate acquirers, who represent the main buyers in the market, overwhelmingly pointed to a possible economic slowdown as the reason for their rather muted outlook for 2020. Nearly six of 10 respondents (58%) to the 451 Research Corporate Development Outlook indicated that fears about a recession would weigh on dealmaking in the coming year.

The economic concerns about 2020 and beyond are compounded by political uncertainty, dealing a one-two punch to the general stability that helps facilitate acquisitions. M&A is an inherently risky undertaking, involving an indeterminate process that yields an unknowable return. Acquirers rarely want to heap on additional risk to their business by rolling the dice on M&A during an extremely volatile period. Risk blunts appetites.

And yet, uncertainty is mounting around the globe. In the US, 2020 obviously brings a new presidential election, one that is shaping up as one of the most politically polarized votes of recent memory. Without wading into the debate around whether voters will 'Keep America Great' or whether a 'Blue Wave' will sweep through Congress and the White House in November, we would note that significant political events tend to produce a bit of a wait-and-see attitude among acquirers.

Figure 12:

Source: 451 Research's M&A KnowledgeBase

That's been the case, for instance, during the divisive and drawn-out Brexit, which has diminished the UK's standing as the second-busiest country behind the US for tech transactions. The activity there shows that deals can still be struck in times of uncertainty, but extra work is required. Brexit left open vexingly large questions for businesses in crucial areas such as taxation rates, work permits and supply chains. All of those represent snags that can – and do – hang up a deal.

The M&A KnowledgeBase indicates that tech M&A in the UK peaked in 2015 – the year before the Brexit vote. Since the contentious vote in mid-2016 and the still-unresolved results, the number of tech prints there (both in terms of UK-based acquirers as well as UK-based targets) has dropped every single year. Deal volume on both sides of the equation (buyside and sellside) is down more than one-quarter from 2015-19, our data shows.

Market participants have their say
As the global economic expansion continues into a second decade, dealmakers are beginning to wonder how much longer the supportive backdrop will be there to help them do their deals. That came through subtly but nonetheless clearly in the 451 Research Tech Corporate Development Outlook, our annual survey of the busiest buyers in the market.

Although there were only minor shifts in sentiment from recent surveys, the 2020 edition of the 451 Research Tech Corporate Development Outlook nonetheless represents the weakest forecast for M&A in four years. Again, the main reason these acquirers said deal volume would drop in the coming year was due to concerns about a recession.

Figure 13:

Source: 451 Research Tech Corporate Development Outlook

If anything, our separate-but-related survey of the intermediaries in the tech M&A market brought an even more bearish outlook for 2020. Only slightly more than six of 10 (62%) respondents to the 451 Research Tech Banking Outlook said the value of transactions they are working is higher now than it was a year ago. Over the past decade of our survey, an average of 68% of senior bankers have reported fuller pipelines.

More of a concern, a recent record one-quarter of respondents (24%) to our survey indicated that the value of deals they are currently working is lower now than it was a year ago. That's the most-bearish outlook since the recession-scarred year of 2009 and is fully 10 percentage points higher than the average response since the start of the decade.

Figure 14:

Source: 451 Research Tech Banking Outlook

The fact that bankers, who tend to be an optimistic group with a bias toward activity, say their pipelines are thin as they head into 2020 is significant. Why? Their predictions in previous editions of our Tech Banking Outlook have proven uncannily accurate, particularly on the downside.

Since 2010, the level of bankers indicating a decline in the dollar value of their mandates for the coming year has only topped 20% in three of our surveys (the forecasts for 2010, 2013 and 2017). Each of those years has subsequently played out that way, with below-average annual spending on tech deals, according to the M&A KnowledgeBase. Now, we add 2020 to that list as the weakest of the weak forecasts.

Fire up an M&A heat map
Regardless of the slight drop in expectations, deals will get done in the coming year. To get a sense of where those transactions would be coming from, we asked bankers to look inside their pipelines and tell us specifically what they were busy with as we rolled into 2020. (Crucially, their assessment is based on their actual workflow, such as ongoing negotiations or where they have been retained. It's not a vague, 'What's hot in 2020?'-type question. It's more tangible than that.)

After looking at what they're working on, bankers told us that what's likely to keep them busy in the coming year is pretty much the same types of deals they've been busy with in recent years. (451 Research has been doing its annual Tech Banking Outlook survey since 2005, although we added the pipeline-specific questions more recently.) There were no significant changes in where tech bankers see activity in 2020:

In terms of broad, cross-sector themes, artificial Intelligence/machine learning (ML) cemented its status as the single-biggest driver of tech deals. It topped the list for 2020 by a wide – and increasing -- margin. ML has been the highest-ranked M&A theme every year since we added the question four years ago to our survey.

For the specific IT sectors, bankers expect even more dealmaking in the infosec market. This marks our fifth consecutive survey where infosec topped a dozen or so other IT sectors in the bankers' forecast for M&A activity.

An overwhelming nine of 10 respondents (91%) forecast that ML would be spurring more deals in 2020, including a record 47% indicating that the theme would be a 'very strong driver.' If anything, in the most recent Tech Banking Outlook, bankers put even more distance between ML and the second-place theme, cloud computing. Just eight of 10 (80%) bankers predicted that cloud would be a major M&A driver in 2020, a roughly 10 percentage point slip from the previous survey.

Figure 15:

Source: 451 Research Tech Banking Outlook

As the runaway leading driver for acquisition activity for several years now, ML merits special attention in the larger tech M&A market. A decade and a half since the term 'machine learning' first appeared as the rationale for an acquisition in 451 Research's M&A KnowledgeBase, the must-have technology has become the single-biggest driver for tech deals in the IT market. And the pace of transactions has only accelerated.

Figure 16:

Source: 451 Research's M&A KnowledgeBase

To put some numbers on that, the M&A KnowledgeBase recorded some 280 ML-themed acquisitions in 2019. That's a 75% jump from 2018 and nearly a tenfold increase from the number of ML transactions just a half-decade earlier. Last year's diverse set of acquirers of ML technology shows the near-universal appeal. Buyers include mainstay tech vendors looking to make their products smarter (Oracle, Microsoft) as well as non-tech firms looking to obtain additional value from all of the data flowing from their existing products (McDonald's, Mastercard).

Figure 17:

Source: 451 Research Tech Banking Outlook

Turning to narrower IT sectors, bankers predicted that the infosec market will continue to be a bustling bazaar. The bullish outlook for 2020 comes after both the number of infosec transactions and the spending attached to them soared to records in 2019, according to our data. More than six of 10 respondents (62%) to the 451 Research Tech Banking Outlook expect more infosec deals in 2020, compared with just 4% who anticipate a slowdown.

Based on previous surveys, bankers are on to something once again with their top pick, since their sentiment has come through in actual deal flow. Over the past half-decade when infosec has led the rankings, the number of cybersecurity acquisitions in the M&A database has run roughly 50% higher than the first half of the decade.

Figure 18:
18 infosec mna.png

Source: 451 Research's M&A KnowledgeBase

Elsewhere, there wasn't much change in the sectors that bankers expect to be busy in the coming year. Enterprise infrastructure software tied with the related segment of application software for second place, maintaining their standing on the podium from last year's survey. Mobile technology landed in fourth place once again in our survey, followed by another perennially popular segment, internet content and commerce.

Sold to the highest bidder
As to what buyers will be paying in those transactions, the trend line is pretty clear: Prevailing M&A prices are ticking higher. (In that way, acquisition valuations are staying in step with the historically corelated equity markets, undeterred by any increase in political or economic uncertainty.) The median multiple of 2.8x trailing sales recorded in 2019 for the overall tech market in the M&A KnowledgeBase stands as the highest broad-market valuation since 2002. Further, it was the third consecutive year of broad-market valuation inflation.

For more of a perspective on pricing, consider this: During the 2000s – a period bookended by the dot-com collapse and the Credit Crisis – the average market multiple never topped 2x trailing sales. Our data for that decade indicates that buyers paid, on average, just 1.5x sales. By the end of the following decade, however, the average valuation had nearly doubled.

Figure 19:

Source: 451 Research's M&A KnowledgeBase

And yet, heading into 2020, investment bankers are predicting that gravity will reassert itself on M&A valuations. The consensus view of respondents to the 451 Research Tech Banking Outlook – who make a living, at least partly, through pricing assets – call for acquisition multiples to tick lower. In our just-closed survey, a record 70% of senior bankers forecast a downturn in M&A valuations in the coming year, compared with just 5% anticipating an uptick in the current historically high levels. Of course, bankers gave a nearly identically bearish forecast for 2019, and the market nonetheless got more expensive.

Figure 20:

Source: 451 Research Tech Banking Outlook

For the most part, the M&A multiples have been pushed to record levels by corporate acquirers, specifically those born in the past 20 years or so. F5 paid a mid-teens multiple for Shape Security, while PayPal had to pay an even richer one for e-commerce browser plug-in Honey. RealPage paid twice its own valuation for Buildium just before the end of the year, according to our understanding. Google handed over $2.6bn for Looker, a data analytics startup that we estimate hadn't yet cracked $100m in revenue. Even in the normally predictable multi-tenant datacenter market, Digital Realty valued Interxion at a stunning 30x EBITDA.

On the other side, PE firms slightly trimmed the prices they paid in 2019, after two years of rapid escalation. Of course, last year's decline needs to be viewed in the context of the uncharacteristically rich prices the firms had been bidding recently. According to the M&A KnowledgeBase, financial buyers paid an average of 3.4x trailing sales last year, down from 3.7x in 2018 but still the second-richest overall valuation.

Figure 21:
21 PE mna valuations.png

Source: 451 Research's M&A KnowledgeBase

While we wouldn't necessarily mark 2019 as a transition year for financial buyers the way we have for strategic acquirers, there was a shift in strategy and pricing at the close of a decade that had seen PE shops grow far more aggressive and expansive. No longer limited to their historic focus on out-of-favor sectors or businesses in need of some rehabilitation, buyout firms have chased growth in tech.

That's especially apparent in recent years. Over the past three years, the M&A KnowledgeBase shows that PE shops across the board have been paying twice the average multiple from 2002-16. Even at the start of the previous decade, sponsor-backed deals got done at roughly 2x trailing sales.

Last year's break from the ever-escalating valuations for PE firms nonetheless stands out. In particular, one single landmark buyout announced in early 2019 clearly demonstrated a change in the industry last year compared with just the two previous years – the $11bn take-private of Ultimate Software. That LBO, which was announced in February 2019, would have been very much at home a few years ago, but looks drastically out of step with the rest of last year's big PE transactions.

At 11x trailing sales, Ultimate matched the highest multiple we have in our database for any significant take-private. No other LBO in 2019 comes close to Ultimate. In fact, excluding that double-digit deal, our data indicates that PE firms paid, on average, just a smidge more than 3x sales for all other purchases of US publicly traded companies last year.

Instead, the 'growth' pricing paid for Ultimate, which was still increasing revenue at more than 20% as sales cracked $1bn, looks more like the smaller 2018 take-privates of fellow publicly traded SaaS vendors Apptio and MINDBODY or even the 2016 take-privates of Cvent or Marketo. In that quartet of transactions, Vista Equity paid a consistent 8x trailing sales. Tellingly, according to the M&A KnowledgeBase, Vista Equity didn't announce any take-privates from either the NYSE or Nasdaq in 2019, a year in which the average tech provider in the S&P 500 soared nearly 50%.

Figure 22:

Source: 451 Research Tech Corporate Development Outlook

Finally, we would note that the historically rich 'entrance' prices that have been paid by buyout shops in recent years could come back to haunt them. That's because the 'exit' environment for PE firms is likely to get a bit tougher in the years ahead. At least that's the view from rival corporate acquirers.

When asked about the exit environment for PE owners over the next three years, 46% of respondents to our Corporate Development Outlook survey forecast that the climate would worsen, compared with just 37% who anticipated it improving. With PE portfolios stuffed with an unprecedented number of companies and the financially minded firms looking to shorten their holding periods, any deterioration in the broader outlook could trim returns for PE funds, which have already come under pressure in recent years due to increased competition.

VC: A rush for the exits
After an unprecedentedly lucrative year for VC exits in 2018, last year settled down a bit. It was probably inevitable after the boom year of 2018, which saw buyers shell out more than twice as much on venture-backed startups than they do in a typical year. Our data shows that 2018's record run included three of the four largest sales of VC-backed startups since the dot-com collapse. (On their own, that trio of outsized exits basically matched a full year's worth of spending.) For comparison, the single largest sale in 2019 (PayPal's $4bn reach for Honey) ranks just seventh overall on the M&A KnowledgeBase's list of VC exits.

Figure 23:

Source: 451 Research's M&A KnowledgeBase

Still, 2019 represented a relatively solid year for spending. Further, last year helped solidify a stair-step increase compared with the first half of that decade. Our data indicates that for the five years after the Credit Crisis, annual spending mostly came in at about mid-$20bn; since 2016, the level has been in the mid-$30bn range. (Although, of course, certain years – 2014 and, as noted, 2018 – are distinct outliers.) The addition of $10bn each year flowing to investors, entrepreneurs and employees of startups undoubtedly goes a long way toward maintaining and even expanding the VC industry.

That broadening also shows up in the increasing number of startups that got snapped up out of a VC portfolio. Deal volume rebounded sharply in 2019, basically matching the highest number we've recorded for any year. (Of course, as VC firms themselves raise more funds and put that capital to work, their collective portfolios are bigger than they’ve ever been.) Last year's acceleration in the number of VC-backed exits comes after two consecutive years when deal volume fell sharply lower than average.

Figure 24:

Source: 451 Research’s M&A KnowledgeBase

In some ways, the narrowing exits in 2017 and 2018 were simply a downstream effect of the phenomenon that's shaping VC investments – fewer announced fundings, but much larger announced fundings. Capital concentration isn't a particularly healthy trend for the broader startup market, since it can encourage overfunding a select few while neglecting the many.

Historically, the venture model, which is based on allocation of risk capital, has produced returns by placing a large number of relatively small, speculative bets on early-stage companies. Investors know that most of the bets probably won't pay off, but the ones that do can generate astronomical returns. Yet recently, VCs have gotten away from those long-shot bets. Instead, they've chosen to focus on later-stage startups. However, piling tens of millions of dollars into a well-established startup that – in both scale and operations -- is basically a public company is a bit of a drift in strategy.

But that's where several VC firms have focused the vast majority capital. Trade group National Venture Capital Association has reported that venture firms in 2019 invested more than $100bn in US companies, which marks only the second time in history that threshold has been topped (2018 was the only other time). To get to that massive level, firms have been writing bigger checks overall, especially to late-stage startups. A startup raising $100m in a single round, which was virtually unheard of at the start of the previous decade, had become a regular announcement by the end of the decade.

Figure 25:

Source: 451 Research Tech Banking Outlook

Finally, the 'fewer but bigger' trend will continue to tighten flows across the private capital markets in 2020, according to our survey of senior investment bankers, several of whom work on placing venture rounds. Slightly more than half (53%) of the respondents to the 451 Research Tech Banking Outlook predicted that venture capital will be less available in the coming year, nearly four times the 14% that said it will be flowing more freely. The bankers' view for venture funding in 2020 represents the second-tightest forecast they've given over the past decade in our surveys.

Not always up and to the right
Perhaps the biggest change – or at least the most visible change – in the VC industry in 2019 played out among the narrow selection of companies that looked to step from a venture portfolio onto Wall Street. What was the sudden shift in the IPO market? Valuations didn't automatically go higher. Until last year, startups could virtually count on an 'up round' in their offerings. Not many of them took public market investors up on that near-certainty, because startups could basically get an IPO-sized funding from VCs without all of the legal hassles and business disruptions of going through with an IPO.

Figure 26:
26 B2B outlook.png

Source: 451 Research

But there's still a lot of comfort available for entrepreneurs and their investors awaiting a big payday via a public offering, since portfolio managers were ready and willing to add freshly printed shares to their holdings. The perception that public-market investors would bid up shares in an IPO – regardless of how high shares had gotten in the private market – inflated a bit of a bubble. That bubble lost some air in 2019, when, for the first time in recent years, Wall Street wasn't buying what VCs were selling, at least not at any price.

WeWork beat an ignominious retreat from its planned offering when it became clear that it wouldn't be able to find buyers for its shares even at a fraction of the $47bn valuation the real estate company garnered from private-market investors. While a sudden and severe valuation deflation loomed large for WeWork, it was far from the only high-flying private company that faced a reversal in the public markets. Pinterest, Lyft and Uber, which all went public in 2019, finished the year valued lower than they were at the time of their offerings. Further, the trio were all trading at a discount to the value private investors had lavished on them before their offerings.

Of course, all of those broken issues come from the relatively flighty consumer tech world. It's a different story in enterprise tech, where vendors tend to have their spending more under control. Virtually all of the B2B offerings (as opposed to B2C offerings) traded strongly on the public market following their 2019 debut.

Even Slack -- the one recent enterprise debutant that investors could, rightly, point to as 'underwater' -- has substantially boosted its valuation from the private market. (In its final pre-IPO round, the collaboration software specialist was valued at about $7bn; it finished 2019 above a $12bn market cap.) That said, Slack shares are undeniably changing hands lower than they were first sold to the public. However, that probably has more to do with the mechanics of its unconventional direct listing than the inherent value of business. Even with the downdraft, Slack still trades at more than 20x trailing sales.

Figure 27:

Source: 451 Research

Among the Class of 2019, Slack is fairly representative of the rich valuations that Wall Street was handing to business-focused technology firms. By our count, a total of 13 enterprise tech companies came public, including standout offerings from Zoom Video, CrowdStrike and DataDog. Although last year's total dropped slightly from 2018's recent record of 15 offerings, it still handily topped the number we saw in the middle part of the decade.

Probably more significant than the number that came public last year, however, was their pricing. At the end of 2019, we calculated that enterprise tech IPOs finished their first calendar year as a public company trading at an average of 17x trailing sales. These companies got their bullish receptions because they appeared more financially responsible than the 'growth at any cost' strategy at most consumer tech names.

Uber has measured its GAAP-based quarterly losses in the billions of dollars every single quarter since it came public. In contrast, on the B2B side, Zoom Video generates a profit, yet it still manages to double sales. And even those enterprise tech providers still mired in the red aren't just spending themselves deeper into the red. For instance, CrowdStrike more than doubled revenue in its most recent fiscal year, while holding its net loss at the same level over the past two years.

What's in the IPO pipeline?
Looking ahead to 2020, there are a fair number of enterprise-focused IPO candidates that certainly won't put any downward pressure on the prevailing rich valuations for new offerings. Companies that we suspect are likely tracking to an IPO in the coming year or so that are likely to trade at north of 20x revenue include Hashicorp, Snowflake, Automation Anywhere and Sumo Logic. (Note: In the sector reports that follow in the full 2020 M&A Outlook, we have a complete list of the companies under coverage that we think could be looking to come public soon. Our 'shadow IPO pipeline' is drawn from the more than 5,000 briefings that 451 Research analysts do each year.)

Figure 28:

Source: 451 Research

Whichever startups do chart a course to Wall Street in 2020 will have to navigate some rather difficult-to-read cross-currents. On the one hand, US equity markets overall -- and tech stocks in particular – are enjoying record-high prices. Valuations are historically rich. At the start of 2020, the average price/earnings multiple for the S&P 500 Index had ticked up to the high teens. The only time the ratio has been higher was during the internet bubble in the late 1990s.

Current investors say they are a little skeptical about the record levels. In our monthly surveys of hundreds of US-based investors, a significant number of them view Wall Street as a shaky place. In 451 Research's Voice of the Connected User Landscape, investors gave us a bearish outlook for US equity markets every single month in 2019, without exception. On average, twice as many respondents said they were 'less confident' than said they were 'more confident' about the direction of Wall Street for the coming 90 days.

Figure 29:

Source: 451 Research Voice of the Connected User Landscape, Consumer Spending

The prevailing uncertainty, which comes as the current bull market extends its record length, could limit the number of tech startups willing to move ahead with IPO plans. Against a potentially inhospitable backdrop, no one is expecting 2020 to be a banner year for new offerings. When we asked corporate development executives (half of whom work at public tech vendors themselves) as well as senior investment bankers (some of whom do underwriting for their firms) for their best guess as to how many tech companies would come public in 2020, both groups offered lackluster forecasts. For the tech IPO market in the coming year, flat to down seems to be the consensus view.

Let us know if you're interested in the full Tech M&A Outlook!