From consolidation in adtech and semiconductors, to the continued flexing of power by activist shareholders and private equity in the technology sector, 2016 shows no signs of a slowdown in deal-making. The new year should see the continued slaying of some unicorns, enterprises embracing both the private cloud and big data, and new B2B payment services. These trends may not only help push M&A, but also show a substantial, fundamental shift in networking, security and other enterprise services. Mergermarketreporters have identified the top 10 technology trends that are likely to spur on deal-making in 2016.
1. Unicorns will face a year of mark downs
“Unicorns” – the tech startups privately valued at USD 1bn or more – face a year of reckoning in 2016. They will see a correction in their valuations because public market investors are fatigued with their inability to turn a profit and because big tech acquirers do not want to do dilutive deals.
There are more than 120 so-called unicorns and, if history is a guide, the majority won’t see billion dollar-plus exits. Mergermarket data show that in the last five years only 16 private technology companies achieved unicorn status when selling. Meanwhile, about 40 went public at valuations in excess of USD 1bn, with only half still trading above their listing price.
An M&A exit is barely an option because of the high revenue multiples and the general lack of profits at many unicorns, executives at two technology giants said. “You can’t really buy them without destroying your earnings per share,” one executive said.
Independence will not be a viable path either. Many will need more capital or a liquidity event for investors within one to two years. As much as 90% will have a down round as the private funding markets tighten, an industry banker predicted. Mutual funds that participate in pre-IPO rounds, such as T Rowe Price and Fidelity, are expected to reduce their pace of private investments, especially as their insistence on downside protection becomes less palatable for private companies, he said. In a sign of things to come, Fidelity marked down several of its unicorn investments in November.
Only the biggest and brightest will succeed as public companies - such as Airbnb, Uber, Snapchat, Pinterest, Spotify and Dropbox. A large number in the middle will have to adjust their valuation expectations by going public at a valuation below their last private round. That happened to Square (NYSE:SQ) when it went public just before Thanksgiving at half its private valuation.
What are the sectors most likely to see sub-par exits? Companies in crowded sectors like security, financial technology and advertising technology will have a tougher time differentiating themselves, while the food delivery space is another category where unicorns will face a tough time sustaining their valuations. — Mark Andress
2. Record-breaking semiconductor consolidation to continue into 2016
The challenging demand environment and a shrinking customer list is expected to continue to fuel deals as semiconductor companies look to build scale and gain cost synergies.
The semiconductor industry enjoyed a record year of M&A activity totaling USD 110bn for 2015, topping the previous peak of USD 75.2bn in 2006.
Also, China’s ambitious goal to become self-sufficient in semiconductors and reduce the number of chips it imports is also expected to contribute to the M&A frenzy. State-backed entities such as Tsinghua Holdings (and its subsidiaries), China Resources, China Electronics Corp and Shanghai Pudong Science Technology Investment showed increasing boldness in 2015 and will continue searching for targets that can bridge the gap in China’s semiconductor development.
Notable transactions last year included Avago Technologies’ (NASDAQ: AVGO) USD37bn purchase of Broadcom, Western Digital’s (NASDAQ: WDC) purchase of SanDisk for USD 19bn, as well as Intel’s (NASDAQ: INTC) USD 16.8bn acquisition of Altera. Industry leaders predict that the pace of consolidation will continue if not increase into 2016.
Potential buyers include Qualcomm (NASDAQ: QCOM), Texas Instruments (NASDAQ: TXN), Analog Devices (NASDAQ: ADI) and STMicroelectronics (NYSE: STM), all of which were left out of the string of sector M&A. European players Infineon (ETR: IFX) and NXP Semiconductors (NASDAQ: NXPI) remain acquisitive after completing recent deals. Other companies such as Skyworks Solutions (NASDAQ: SWKS) and Cypress Semiconductor (NASDAQ: CY), who lost out on deals in 2015, will need to make bets in 2016.
Many more targets exist in the sector, since companies with a market cap of less than USD 2bn are considered subscale and will find it hard to survive more than five years. Some large potential acquisition targets would be Maxim Integrated (NASDAQ: MXIM), Marvell Technology (NASDAQ: MRVL), NVIDIA (NASDAQ: VNDA), Qorvo (NASDAQ:QRVO) and Cavium (NASDAQ: CAVM). — Tong Zhang
3. Activists’ successes will drive more shake-ups
With cash continuing to flow into activist funds, it is expected to be another busy year in America’s boardrooms.
There will be no prejudice in terms of size as large, mid and small capitalization companies will all be viewed as opportunistic targets.
Plenty of paths remain for these investors to create value for shareholders: from pushing companies to sell to forcing boards to evaluate spinoffs or the sale of individual assets. And, if that does not succeed, activists can influence how companies deploy their balance-sheet cash and how they use profits in future years.
In 2016, attention will turn to relatively large companies, such as Autodesk (NASDAQ:ADSK), which drew the ire of Sachem Head Capital Management and Eminence Capital late last year. The San Rafael, California-based company may be forced to focus more on managing costs and influencing how cash will be managed over time as a sale appears unlikely.
Another one to look out for is Ciena (NYSE: CIEN). This news service reported in November that a few activists were circulating the provider of communications equipment, as investors eye its low margins as a potential area for improvement.
Yet another to watch is Forrester Research (NASDAQ: FORR). Its shareholders, who are more prone to saber-rattling behind closed doors rather than taking a high-profile approach, are calling for the company to initiate a strategic review, this news service reported in November.
Large cash positions, underleveraged balance sheets, maturing industries and steady cash flow are all powerful trends that should remain in place throughout the year, allowing activists to successfully push for change. The one obstacle that could limit the options of corporate boards and activist is a potentially unfriendly high-yield bond market. – EdMullane
4. Fintech spotlight will turn to B2B payment technologies
Retail-branded digital wallets and other consumer payment products, such as Apple (NASDAQ: AAPL) Pay have got a lot of attention over the past year. Yet an area to watch for venture capital investment in 2016 is business-to-business payments (B2B) companies that form a much larger opportunity than the business-to-consumer (B2C) payments world.
Money movement by companies far surpasses what consumers do, said Reetika Grewal, a banker at Silicon Valley Bank. The B2B payments market is a whopping USD 36tropportunity, while the B2C payments market is USD 4tr, she says.
Innovation is needed to make invoice processing faster and more streamlined, and to help companies move money internationally to ensure a frictionless supply chain on both ends, she says. It’s an area ripe for disruption, as many companies still use crude platforms like Office spreadsheets.
Firms such as FTV Capital, formerly FT Ventures, and Northbridge Venture Partners are expected to invest in start-ups that address this, according to consultant Richard Crone. These firms are backed by players in the financial sector who will use the technology that is developed. Crone’s data shows electronic invoicing and payments in North America as a USD 3.5bn annual revenue opportunity - and that’s just for logistics, manufacturing, distribution and media. Companies to watch in B2B payments as both buyers and targets include Billtrust and VersaPay (CVE: VPY), businesses involved in invoicing and accounts receivables. Others that play in this space include Payoneer and Tipalti.
Grewal says that companies already in merchant processing like Stripe and Square could expand their offerings into business-to-business payments and alternative lending. Square has already begun with Square Capital, its cash advancing business. This is possible through the accounts receivable data streams these merchant processors have gained. — Thomas Zadvydas
5. The container revolution begins to take hold
Container providers will shore up existing shortcomings in networking and security services to make the technology more enterprise-friendly and put increased pressure on the virtual machine industry.
San Francisco-based companies Docker and CoreOS have brought containers into the mainstream, allowing developers to create, package, distribute and manage applications faster and easier than ever before. This lightweight approach to virtualization cuts down on the number of servers that need to be deployed, which in turn reduces power usage and saves businesses money. It’s a compelling value proposition that has generated interest and adoption from technology companies big and small.
But containers still have work to do when it comes to securing the data they transport, and improving container-to-container communication. Startups such as Joyent are working to solve these problems by developing custom platforms that improve container management, while incumbents such as Cisco Systems (NASDAQ: CSCO) and VMware (NYSE: VMW) are enabling their network management tools to better control containers.
M&A is also playing a role. In March 2015, Docker acquired SocketPlane for its software-defined networking capabilities that are designed to improve communication between containers regardless of whether they are hosted in different data centers or in a cloud environment.
Additionally, Docker created an open-source project that allows third-party developers to plug in their own network functionalities for advanced capabilities such as firewall installations and load balancing.
However, competition will get fiercer in the space.
Google’s Kubernetes (NASDAQ: GOOG) and Rackspace’s Carina (NYSE: RAX) are already becoming significant players in the market, and while companies like Docker and Joyenthave been successful with their container offerings, open-source companies sometimes can be victims of their own success since the technology is nonproprietary and thus hard to effectively monetize.
Nevertheless, as adoption and security challenges are gradually solved, the container revolution will begin to take hold in 2016 and win over some of the biggest and brightest enterprise customers in the industry. — Troy Hooper and Chris Metinko
6. Telecoms will jostle to make their ‘dumb pipes’ smarter
When T-Mobile (NASDAQ: TMUS) announced its new Binge On program in November, allowing subscribers to view certain video services without it counting against their data caps, FCC Chairman Tom Wheeler gave it his blessing. “It is highly innovative and highly competitive,” he said.
This “zero rating” was, arguably, the object of the net neutrality debate. Now that the floodgates are open, telecoms are looking to use it to reshape the nature of their service.
The central question is how these companies will shape the nature of their subscribers’ interaction with their connection, or “pipe”. The so-called “dumb pipe” is simply the best possible connection through which to get content delivered from independent services. T-Mobile is trying to make its pipe the best one for accessing services like Netflix (NASDAQ: NFLX) and Spotify, using zero rating to make their delivery frictionless.
Comcast (NASDAQ: CMCSA) and Verizon Communications (NYSE: VZ), meanwhile, want to use zero rating to expand their hold beyond the pipe. Both are introducing streaming services – Stream and Go90, respectively – that are delivered to customers through zero rating, and hold an advantage over competing independent services like Netflix.
This reflects the companies’ varying ambitions. Comcast is a behemoth stretching across multiple industries, and wants to use zero rating to maintain its hold. Verizon wants to expand beyond being a simple wireless carrier.
T-Mobile, meanwhile, is still very much for sale, if anyone can step up with a price appealing to majority-owner Deutsche Telekom. So it is positioning itself as the most attractive wireless connectivity operator that could be slotted into a larger company. CEO John Legere made this clear enough himself when he took the stage at last year’s Communacopia, presenting T-Mobile as one element of a broader telecom ecosystem. — Jonathan Guilford
7. Big data platforms will be simpler and more widely used
Until now, data scientists have been the only ones able to use big data platforms. But those days may be over.
Look for so-called “big data” to continue getting faster and easier in 2016. Companies such as DataTorrent and Databricks are helping to add new application layers such as Storm and Spark to the typical Hadoop infrastructure to bring real-time streaming data into the world of analytics.
On top of that, the newer platforms also include new visualization tools and features that help non-data scientists make sense of queries. Integration with other business intelligence tool platforms like Tableau Software (NYSE: DATA) will make the confusing world of big data simpler.
Databricks and DataTorrent are not the only competitors in the space, with startups such as WebAction and Kafka-based Confluent also entering the fray.
Longtime data companies have taken notice, with IBM (NYSE: IBM) announcing last summer it would invest USD 300m through the next few years to help develop Spark and make it available on its cloud service IBM Bluemix. Intel (NASDAQ: INTC) — which invested USD 740m in Cloudera’s Hadoop platform — also appears willing to invest in the newest additions to the big data field. The company already has partnered with Databricks, and Intel Capital led a USD 20m venture capital round for WebAction. The heat in the space could draw the attention of database companies such as Oracle (NYSE: ORCL) or Internet of Things companies that need massive amounts of real-time data analytics for industrial purposes, such as Cisco (NASDAQ: CSCO). — Chris Metinko
8. The private cloud will come to the fore in 2016
Security concerns and enhanced regulations in verticals such as healthcare and financial services have created increased interest in the private cloud.
Public-cloud service providers such as Amazon's (NASDAQ: AMZN) Amazon Web Services and Microsoft's (NASDAQ: MSFT) Azure allow companies to access data and applications over the Internet. By contrast, a private cloud sits behind a firewall and is run by a company’s own IT department or by managed service providers, such as Hewlett Packard Enterprise (NYSE: HPE).
Throughout 2015 there were signs of gathering momentum for the private cloud. In May, EMC (NYSE: EMC) acquired Virtustream for USD 1.2bn. Then in June, IBM decided to make a move in the space and acquired managed private cloud provider Blue Box, while Cisco acquired Piston Cloud Computing. Another OpenStack cloud company, Mirantis, received a USD 100m funding round led by Intel Capital in August. Then in October, HP said it would shutter its own public cloud offering by January 2016 to focus on the private cloud.
Still, the private cloud has a way to go before it threatens the market share dominance of the public cloud — Amazon Web Services alone generates more than USD 2bn a quarter. According to RightScale’s fourth annual State of the Cloud Survey, while 88% of enterprises use the public cloud, 63% of enterprises also use some type of private cloud.
While AWS, Microsoft Azure and the Google Cloud Platform still help dominate the cloud market, one or more could look at the private cloud for more market share. Their attention could turn to Mirantis, which is one of the few remaining pure plays in private cloud following the acquisitions of Blue Box, Piston Cloud and Virtustream. — Chris Metinko
9. Adtech will see high levels of consolidation
Adtech companies are likely to undergo similar levels of consolidation as in the semiconductor industry, albeit on a smaller scale.
Exits are likeliest for companies that focus on just one platform — such as mobile or video — while Omni-channel or multi-channel platform providers, like AppNexus, will continue to go it alone.
These single platform companies could be less expensive for larger entities like telecommunications companies seeking to build their own stack and go deeper into adtech. The strategy of building a complete stack via acquisition already has been on display with Verizon, which acquired AOL for its video advertising technology in May and then Millennial Media for its mobile expertise in September. Potential bidders moving into 2016 could be other telecom companies like BT Group (NYSE: BT), Comcast and AT&T.
Several adtech companies that went public in 2013/14 are now trading at a fraction of their listing prices, which has put off many venture-backed companies from doing an IPO but also impacted the valuations at which private companies can raise money. With the public markets effectively closed to them and private financings difficult, virtually all venture-backed adtech firms are thinking about selling. The sale of Undertone to Perion Networkfor USD 180m in December showed that adtech companies with slow growth and aging technology can still find a profitable exit for their investors, albeit at lower valuations than initially sought. Undertone raised USD 40m in 2008 and had sought USD 500m in an attempted sale in 2012. Its sale to Perion could be a bellwether and provides some hope to the sector.
Activists are also starting to target the sector. YuMe (NYSE: YUME), for example, received the attentions of Vertex Capital Advisors in October. The activist, which successfully pushed a slew of semiconductors into a sale, believes the adtech space is ripe for similar consolidation. Like semiconductors, the adtech space is filled with subscale companies that need to sell to create greater scale and cost synergies. — Chris Metinko and MarkAndress
10. Dell’s asset sales to spur private equity dealmaking
Silver Lake-backed Dell’s efforts to help fund and close its acquisition of EMC may point to how well tech deals will be received by private equity firms.
With up to USD 10bn worth of divestitures at both Dell and EMC to be sold, Dell is scheduled to take bids for Perot Systems this month and is reportedly looking to get USD5bn for the asset. Dell acquired the business in 2009 for USD 3.9bn and then merged it with its Dell Services brand.
High-quality and stable enterprise software businesses will continue to be choice targets, along the lines of Tibco Software (NASDAQ: TIBX), acquired by Vista Equity Partners for USD 4.3bn in 2014, and Informatica (Nasdaq: INFA), acquired by Permira and CPPIB for USD 5.3bn last year.
However, the willingness of financial sponsors to buy companies with flat or declining revenue - a company trait that many PE firms have avoided - will also be an area of focus.
Falling into this category is NetApp (NASDAQ: NTAP), which has not piqued the interest of sponsors over the years as the company has struggled growing its core storage business. In late December, NetApp announced the purchase of Solidfire, an all-flash storage provider, for USD 870m on the heels of another drop in product revenue for the October quarter. But with a recently split-up Hewlett Packard and Dell’s deal to combine EMC, could a private equity firm find the Sunnyvale, California-based company an attractive fixer-upper to sell to a strategic down the road?
Private equity could also enter some new sectors of technology, such as gaming and adtech. Struggling gaming company Zynga (NASDAQ: ZNGA) could find salvation in private equity, since it could easily be downsized and quickly generate more cash by releasing more games. Private equity could help other gaming companies that typically shy away from the public market due to the hit-driven nature of the sector. Adtech companies also have traditionally had problems in the public market and private equity firms could provide their venture backers with an exit.
Also affecting private equity interest will be how accommodating the high-yield market will be to fund their deal, and whether the tight market conditions seen at the end of 2015 will reverse course. – Ed Mullane and Chris Metinko