An $11 Billion Buyout Is Fresh Proof of a Hot Software M&A Market
Volatile equity markets and high multiples don't seem to have done much to dampen enthusiasm for software M&A. The latest evidence: Cloud HR and payroll software firm Ultimate Software (ULTI) is getting bought out for $11 billion, or $331.50 per share, in cash by an investor group led by PE firm Hellman & Friedman.
The price represents a near-20% premium to Ultimate's Friday close, and is around 50% above where Ultimate's stock traded a year ago. It's also equal to a lofty 47 times Ultimate's 2020 free cash flow (FCF) consensus estimate of $235 million.
Rivals Paylocity (PCTY) and Paycom Software (PAYC) are up 6.6% and 3.6%, respectively, as of the time of this post, as investors bet that they'll attract M&A interest as well. Cloud HR software giant Workday (WDAY) , whose $40 billion-plus market cap would make it tough for all but a handful of potential suitors to swallow, is up less than 1%.
The deal comes not long after PE firm Vista Equity closed a $1.94 billion deal to buy Apptio, a provider of cloud software used to manage a company's IT investments, and PE firm Thoma Bravo, which just raised $12.6 billion for a new fund, closed a $950 million deal to buy CA Technologies' Veracode app security software unit. CA, of course, was bought for $18.9 billion last year by chip and hardware giant Broadcom (AVGO) , which has long taken a private equity-like approach to M&A and has suggested its purchase of CA could be followed by other deals to acquire infrastructure software firms.
Meanwhile, established, publicly-traded software firms have also been eager acquirers. Notable 2018 deals include IBM/Red Hat ($34 billion), Microsoft/GitHub ($7.5 billion), Salesforce.com/MuleSoft ($6.5 billion), SAP/Qualtrics ($8 billion), Adobe/Marketo ($4.75 billion) Twilio/SendGrid ($2 billion) and Workday/Adaptive Insights ($1.6 billion).
One key driver behind all of this activity: Spending on enterprise software in general, and cloud software in particular, is steadily growing as a percentage of total IT spend, as companies make investments in everything from CRM to analytics to security software strategic priorities. In addition, though not fully immune to macro pressures, software spending is expected to hold up better than, say, IT hardware spending or chip sales in the event of an economic downturn.
And while the high valuations being given to software firms by public investors could give some buyers cold feet, they can also make M&A targets more willing to sell, since they make it likely any offer will be above or at least near the target's 52-week high.
Meanwhile, PE firms might see opportunities to improve the bottom lines of software upstarts that have been investing heavily in sales and marketing to close large enterprise deals. And established software firms definitely see opportunities to use M&A to create more comprehensive cloud software lines that their salespeople and channel partners can sell.
All of that suggests more billion dollar-plus software acquisitions are likely in the coming months. And while it's far from easy to predict which firms will and won't be bought, one safe bet is that industry M&A activity will help prop up the valuations of cloud software firms seen as potential targets.
Microsoft Is Taking Yet Another Step to Profit from Rival Platforms Feb 4, 2019 | 2:12 PM EST
It goes without saying that Microsoft (MSFT) has become a lot more comfortable supporting non-Microsoft platforms during the Satya Nadella era. Notable examples include creating feature-rich iOS and Android Office apps, acquiring a slew of independent iOS/Android app developers and partnering with Red Hat (RHT) and a number of other open-source software providers.
This weekend, another step in this direction was uncovered: At next month's Game Developers Conference (GDC), Microsoft plans to unveil a software developer kit (SDK) that lets iOS, Android and Nintendo Switch (though not PlayStation 4) games support its Xbox Live service, which to date has run only on Xboxes and PCs.
Info on the GDC website indicates that the SDK will allow Xbox Live users to access their game achievement histories and friends lists across new and existing platforms, as well as engage in multiplayer gaming. Should major mobile and Nintendo game developers support the SDK, it would help grow Xbox Live's active user base, which was revealed last week to be 64 million, and increase the value proposition for Microsoft's Xbox Live Gold service, which costs $60 per year and provides (among other things) multiplayer gaming support and access to free and discounted titles.
Getting gamers on non-Microsoft platforms to use Xbox Live could also make it easier for Microsoft to promote its upcoming cloud subscription gaming service to them. The service, codenamed Project xCloud and set to enter public trials later this year, will stream Xbox games to PCs, Xboxes and mobile devices, and will presumably support Xbox Live.
The commercial launch of the xCloud service, meanwhile, might be quickly followed by the launch of next-gen Xbox consoles. Microsoft is reportedly prepping two consoles for 2020: A traditional console that can both play advanced games locally and stream games from the cloud, and a cheaper device that's focused on cloud streaming.
Tesla's Latest Acquisition Could Help Its Cars Accelerate FasterFeb 4, 2019 | 12:20 PM EST
There's a lot that one can criticize about Tesla's (TSLA) history of missed deadlines and promises. However, it's hard to question the company's willingness to innovate, both when it comes to hardware technologies and the software that powers its vehicles. The company's $218 million deal to buy Maxwell Technologies (MXWL) is the latest case in point.
Maxwell has long been a major supplier of ultracapacitors, a type of energy storage device that -- while less dense and more expensive than lithium-ion batteries -- can receive and deliver huge amounts of power in a short amount of time, while also safely functioning at extreme temperatures and potentially lasting for more than a million charge cycles. Though time will tell which of these customers Maxwell continues supplying post-acquisition, the company's client list includes General Motors (GM) , Lamborghini, wind turbine makers and Chinese electric bus makers.
Tesla is paying a 55% premium to Maxwell's Friday close. However, the price is still only equal to less than two times Maxwell's 2018 revenue consensus, and (thanks to Maxwell's recent sales pressures) less than what Maxwell traded at a year ago.
As a look at Maxwell's historical chart shows, ultracapacitors -- though now deployed in a number of end markets -- have struggled to make good on all of the hype that has surrounded them. Though Elon Musk has said for years that he's a fan of the technology, Tesla isn't believed to be using ultracapacitors in its current vehicle lineup.
Still, while it's quite unlikely that ultracapacitors will (given their density and cost issues) fully replace batteries in Tesla cars anytime soon, they could be a useful complement. As they currently do for other EVs, ultracapacitors could capture power from a Tesla's regenerative braking system, and then release that power when a vehicle is trying to accelerate. That could both improve acceleration and (by leveling the load that a car's battery has to handle) improve battery lifetimes.
Ultracapacitors could also be used within Tesla's Powerwall and Powerpack energy storage systems to quickly provide a burst of energy when a primary power source goes down, and then quickly recharge when that power source goes back up. For now, Tesla is staying tight-lipped about its exact plans for Maxwell.
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