There has been an incredible amount of technology mergers and acquisitions (tech M&A) in the news lately. In this post, we are going to dissect the latest tech M&A activity and provide our thoughts on how M&A will influence the sector going forward.
Why does one company acquire another?
First, let's take a moment to understand why companies acquire one another. Management teams and boards of directors are tasked with creating long-term value for shareholders. In this role, they often have to evaluate whether it makes more sense to build intellectual property (IP) in house or to acquire another firm's IP. These decisions, called "build vs. buy", are crucial.
Household names, like Microsoft and Apple, have had massive success through acquisition. PowerPoint was originally developed by Forethought Inc. and Microsoft, in the late 1980s, acquired the company for $14 million. It goes without saying that acquiring PowerPoint – one of the three main products in the Microsoft Office suite – for $14 million was an amazing deal.
The same can be said for Apple's acquisition of Siri in 2010 for a rumored $200 million. Yes, Siri was not developed in-house. That is hard to imagine today when Siri is found in every product – from Mac, iPhone, and iPad to Apple Watch and their new HomePod smart speaker. The purchase gave Apple a foundation to grow Siri into the smart assistant that we see today.
Generally, there are two types of buyers for technology companies. The first buyer is a strategic acquirer, which is a fancy name for a company that receives a tangible market benefit from purchasing the company. Common benefits include owning core technology and patent portfolios, acquiring world-class talent, or holding key revenue streams and market positions.
The second buyer is a financial institution, which most often refers to a private equity firm. Private equity firms usually only acquire companies that generate profits. Their hope is to hold onto this company and generate a return on their capital, or growing the company and selling to another purchaser.
Notable M&A activity in 2018
In June 2018, Microsoft announced its plans to acquire code repository GitHub for $7.5 billion. The deal officially closed in October. For Microsoft, GitHub provides a key resource: developers. GitHub is a code repository that boasts millions of developers, and thousands of companies, as customers. Microsoft could add deeper integrations and advanced automation features to GitHub, swaying developers to try Azure instead of going with AWS or Google Cloud.
While we have already written an entire article on IBM's acquisition of Red Hat for $34 billion, it is worth mentioning again. Red Hat is the company best-known for providing enterprise training, support, and software for open source technologies. It's also another developer-focused company.
Through the acquisition, IBM gains industry-leading knowledge of Linux, virtualization, containers, and more. Why is this important? Well, Linux runs the web and IBM has two major offerings that are bolstered by the acquisition, IBM Cloud (Platform-as-a-Service) and IBM SoftLayer (Infrastructure-as-a-Service). We believe Red Hat's $3 billion of annual revenue is a bonus; IBM acquired Red Hat primarily for its market position.
In October, Twilio has announced plans to combine with SendGrid, which will add SendGrid's email automation to Twilio's SMS, MMS, and voice capabilities. The all-stock deal, valued at $2 billion, provides a single vendor with APIs for the most popular communication channels. A large driver of the deal will be the ability to upsell or cross-sell existing SendGrid customers on the developer-friendly ecosystem that Twilio has built.
In the same month, we also saw Cloudera and Hortonworks announce a merger. The two were formerly competitors in the data warehousing and machine learning space. Both Cloudera and Hortonworks had product and service offerings related to Apache Hadoop, an open source data platform. The new, combined entity will have more than 2,500 customers and $700 million in annual revenue.
Sticking with the theme of data, Oracle recently announced plans to acquire DataFox. DataFox, a Bay Area startup, provides sales information to companies looking to find new leads or enrich their existing customer relationship management (CRM) records. The acquisition provides Oracle, and in particular their Oracle Cloud Applications, an "extensive set of trusted company-level data and signals" (source).
The same combination of unique data seems to be the reason behind SAP acquiring Qualtrics.
A Provo, Utah-based company, Qualtrics touts itself as a "single system of record for customer experience data". In the private markets, Qualtrics raised $400 million dollars and had plans to conduct their initial public offering (IPO). Just days before their IPO, SAP agreed to purchase them for $8 billion – and their reason?
German software giant SAP owns massive amounts of operational data. The new combined SAP and Qualtrics entity will house operations data, customer experience data, and employee experience data for the first time. This new entity, they say, will provide unprecedented insights to their enterprise customers.
In another big ticket deal, Cisco announced plans to acquire Duo Security in August. The deal closed in October 2018 for $2.35 billion. Duo Security, based in Ann Arbor, Michigan, provides unified access security and multi-factor authentication. With the acquisition, Cisco is hoping to bolster its on-premise, public cloud, hybrid cloud, and multi-cloud security offerings.
Given the fall of Blackberry mobile phones, the Canadian company has repositioned itself as a vendor for enterprise software, security, and consulting. In November, Blackberry announced plans to purchase Cylance for $1.4 billion. Cylance's cybersecurity expertise will prove valuable to Blackberry, which is gaining momentum in the IoT and autonomous car markets.
Recently, Adobe has shared its intent to acquire B2B marketing platform Marketo. The $4.75 billion dollar deal will strengthen the Adobe Experience Cloud, adding lead management, account-based marketing, and revenue attribution to Adobe's current offering.
This latest acquisition, combined with the $1.6 billion acquisition of ecommerce platform Magento in May 2018, sheds light on Adobe's plans to quietly build a suite of enterprise-grade ecommerce, marketing, and analytics products.
Private equity firms have also been active in acquiring tech companies this year. It's hard to mention software acquisition without mentioning Vista Equity Partners. Recently, the firm paid over $1.9 billion for Apptio, a cloud software provider that helps CIOs and IT departments manage their technology spending. At the time of acquisition, Apptio has 9 figures of revenue.
Furthermore, Imperva has entered into an agreement to be acquired for $2.1 billion by Thoma Bravo. Imperva provides application and data security, including protection against denial of service (DoS), bot attacks, and malicious data leaks. Thoma Bravo plans to keep Imperva headquartered in Redwood Shores, in the Bay Area. Given the number of large scale data leaks, we think the purchase of Imperva is timely.
Earlier in the year, Thomas H. Lee Partners announced plans to acquire Alfresco Software. Alfresco develops enterprise open source software, specifically content management, process management, and collaboration software. Currently, more than 11 million people in 195 countries use Alfresco in the workplace. This is another big exit for open source software!
Notably, Vista Equity Partners bought Marketo for $1.8 billion in June 2016. And, as mentioned above, Marketo was sold in the last quarter of 2018 to Adobe for $4.75 billion.
Our thoughts on the future
As mentioned, many of these acquisitions are part of a larger strategic plan to offer a suite of products. You can see this back in 1988, where a nascent Microsoft understood the value of packaging Word, Excel, and PowerPoint into a single bundle.
We are seeing the same strategy play out for Twilio adding email to SMS, MMS, and voice; Oracle supplementing their existing enterprise data with detailed company information; and SAP combining operations data with customer and employee experience data.
Adobe, too, understands the power of a suite: with their acquisitions of Magento and Marketo, they now offer B2B products across marketing, ecommerce, and analytics. We expect this trend to continue as creating a personalized end-to-end customer and employee experience becomes paramount.
In the consumer market, customers expect intuitive software that communicates with the other products in their lives. This expectation has recently spread to the B2B and enterprise markets.
We are also seeing strong demand for companies that build developer tools and bolster security. Companies looking to compete in the industry should think long and hard about how their software and hardware fits into the broader tech landscape, and how their product interacts with existing workflows.
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