Flurry of Enterprise Software Deals Filling Semiconductor Dearth
Salesforce CEO Marc Benioff (L) speaks with Meg Whitman, CEO and president of Hewlett Packard Enterprise, during a keynote address at the 2013 Dreamforce conference in San Francisco. (Photo by Justin Sullivan/Getty Images)

Flurry of Enterprise Software Deals Filling Semiconductor Dearth

As chip acquisitions halt, enterprise software deals dominate this year's tech M&A space

(Bloomberg) -- Semiconductor mergers were so 2015. This year’s hottest club is business software deals.

A flurry of enterprise software transactions have been announced in the past two months, helping the technology sector recover from a major drop in semiconductor merger activity. The latest was last week's announcement that Qlik Technologies agreed to be bought by private equity firm Thoma Bravo for about $3 billion. It followed last Wednesday’s $2.8 billion takeover of Demandware by Salesforce, announced just a day after Vista Equity Partners’ $1.8 billion acquisition of marketing-software firm Marketo.

The high demand for enterprise software stems from a decline in public valuations from the beginning of the year and a realization among private equity funds and strategics with lots of cash that the money needs to be spent, according to Joel Fishbein, an analyst at BTIG in New York. Once one deal is announced, it gets competitors moving and the cascade begins, he said.

“I’ve never seen more deals and more things happening,” Salesforce CEO Marc Benioff said Wednesday in an interview with CNBC. “The M&A season is the most intense, most exciting I’ve ever seen.”

Chip Deals

While chip deals dominated US technology M&A last year, there’s barely been a peep among semiconductor companies in 2016. There have been no chip deals of more than $1 billion announced this year. That compares with at least 10 last year, according to data compiled by Bloomberg, including five valued at more than $10 billion, led by Avago Technologies' $37 billion deal for Broadcom and Intel’s $16.7 billion takeover of Altera.

Semiconductor companies spent a record $113 billion on acquisitions in 2015, triple the volume of the previous year.

Some of this year’s lack of chip activity can be attributed to digestion, as many buyers work on integrating their acquired companies from last year and pay down debt, said Mark Edelstone, Morgan Stanley managing director who heads the bank’s semiconductor group. The pause may not last long, he said.

“The predictability of the semiconductor business is decent and valuations have recovered, which sets up a healthy M&A environment for the second half of the year,” Edelstone said. “There are about 60 pure-play public semiconductor companies left, and I fully expect that number to halve in the next five years.”

Marketo, Cvent

The cluster of software deals isn’t reaching the value levels of last year’s chip transactions. Apex Technology’s $3.4 billion takeover of Lexmark International is arguably the biggest of the year, and only 17 percent of Lexmark’s revenue stems from enterprise software.

Still, the recent avalanche can’t be ignored. Vista agreed to buy Marketo last week and Cvent, which makes event management software, for $1.7 billion in April. Nice Systems said on May 18 it agreed to buy on-demand call center software company InContact for nearly a billion dollars.

Dell is selling its enterprise-software businesses Quest and Sonicwall, again targeting private equity firms.

Mitel Networks said in April it agreed to merge with Polycom, only to see its offer challenged by, yet again, another private equity firm, Siris Capital Group, according to people with knowledge of the matter.

Falling Values

“When valuations for some of these software companies started falling in February, private equity firms started looking at them and said, ‘This is ridiculous,’ and started doing work on them,” said Pat Walravens, an analyst at JMP Securities in San Francisco.

“Once that started happening, the strategics, who thought they’d have all the time in the world to own some of these assets, realized it would be a bummer if private equity bought them first,” he said. “The private equity firms could put the firms with other companies they own, and the strategics would never see some of these assets as standalone again.”

Expanding to include enterprise services, Computer Sciences Corp. agreed to merge with Hewlett Packard Enterprise’s services business last month in an $8.5 billion deal, and Oracle agreed to buy two companies in one week -- Textura for more than $600 million and Opower for more than $500 million -- about a month ago.

‘Legacy Providers’

“You’re seeing guys looking for growth, especially some of the more legacy providers,” Fishbein of BTIG said. “Then you’re seeing guys like Salesforce that are saying, ‘Look, where are these big adjacent secular growth markets that we can go after?”’

Enterprise software M&A is off to its best start in five years in terms of deal volume, according to UBS Group. Cloud application companies including NetSuite, Veeva Systems, and Cornerstone OnDemand could be next to be scooped up, according to Mandeep Singh, an analyst at Bloomberg Intelligence.

“SAP, Oracle, and IBM may have to accelerate their cloud strategies after Salesforce’s pending acquisition of Demandware,” Singh said. “This puts focus on other pure-play cloud application companies.”

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