According to Tomasz Tungz, Cisco’s US$3.7B acquisition of AppDynamics at 17.3x trailing 12–month revenues represents the biggest software acquisition multiple paid in the last 10 years.
Tungz further writes…” if this acquisition is any bellwether of the 2017 acquisition environment, it’s going to be a monster year. With 30-40 IPOs on the docket for 2017 – a staggeringly large class – many companies may choose AppD’s path of acquisition over going public, especially if they can command such an impressive premium. The median publicly traded SaaS company trades at 6x as of today. The AppDynamics multiple is nearly triple. At the top of the heap, Blackline and Shopify trade at 12-13x.
Source: Tomasz Tunguz Redpoint Ventures
Image courtesy of randalldsmith
As we move into 2017, industry pundits are almost unanimously calling for a strong year for both M&A and IPO markets.
According to Global Capital Confidence Barometer conducted by E&Y, the general consensus among corporate executives is buoyant and full of optimism on the prospects for 2017 with 57% of executives expecting to pursue acquisitions within the next 12 months and 49% of those surveyed already having more than five deals in the pipeline.
While we certainly look forward to 2017 being a very positive year, we’re thinking that for companies north of the border “interesting” and “unsettling” may turn out to be better descriptors.
On the positive side:
- 2016 finished on a very strong note with M&A announcements fueling expectations for a very strong 2017;
- Certainly moving into 2017 capital market sentiment continues to be bullish;
|Down Jones Industrial Average (Trailing 5 Year to January 15, 2017)
||NASDAQ Composite Index (Trailing 5 Year to January 15, 2017)
|S&P 500 Index (Trailing 5 Year to January 15, 2017)
||S&P/TSX Composite Index (Trailing 5 Year to January 15, 2017)
- Stock prices continue to trade close to record-high levels, in large part due to the potential of: lowered US capital gains and estate taxes; the possibility of reduced taxes to incentivize US corporations to repatriate offshore cash holdings; a less restrictive regulatory environment; and, future stimulus spending;
- Cash balances continue to grow on strategic buyers’ balance sheets, there is plenty of undeployed capital at private equity funds and debt financing is readily available;
- While the stock markets drive higher, overall GDP growth 0f 3.0% will continue to drive the necessity for companies to make strategic acquisition to maintain competitive positioning and meet market expectations. Acquisition drivers will include increasing digitalization, changing business models (SaaS, Blockchain), entering new markets and pursing product extensions;
- Interest rates, despite the forecast for an increase, remain near or at historic lows;
- CAD/USD exchange rate continues to make Canadian companies attractive to US acquirers;
So how do we see the upcoming year unfolding?
- The uncertainty experienced during the run-up to the US election ended in November. Unfortunately, a new type and level of uncertainty is now beginning to take hold. Only time will tell as to the ultimate impact of the new Trump presidency, regime and GOP majorities but I’m pretty confident that you can count on three things: Canadian exporters could find it a very rough go during the next four years; markets hate uncertainty and associated risk so we can expect to see increased volatility, and traders are going to make tons of money in volatile markets.
- It’s anyone’s guess as to the near and long-term impact of impending NAFTA discussions. While it appears that the main focus could be on the US/Mexico relationship it is difficult to see where there is any upside for Canadian companies in any renegotiation.
- Probably more important than any NAFTA discussion, the possibility of the US implementing a “border adjusted tax” which would apply to goods imported by US companies would present huge challenges for Canadian exporters. Not only would such a policy have a devastating impact on Canadian exporters, I believe that it would also reduce US acquirer interest in Canadian companies while at the same time forcing more Canadian companies to look south of the border to acquire companies to protect market share and revenues. In effect, the pool of potential buyers of Canadian companies could get smaller.
- Large private companies and their institutional (VC and Corporate) investors have been sitting on the sidelines waiting impatiently for the right “market” to take their companies public. The first pure technology company out of the box in 2017 would have been AppDynamics (APPD-Nasdaq), an application performance management software company looking to complete a US$132 million offering priced in the $10 to $12 range. Founded in 2008, AppDynamics reported revenues of $206 million for the 12-months ending October 31 2016 and is looking to value the firm on IPO at $1.76 billion or 8.5X trailing revenues. Unexpectedly, Cisco stepped in just the day before AppDynamics was to set its IPO pricing and acquired the business for US$3.7B or approximately 18X trailing revenues. So much for our first technology IPO test case of the year…
- IPOs in both the US and Canada should rebound but we would expect to see valuations moderated towards the lower end of company and the bankers’ expectations, but this may change as a result of the large premium to IPO price that strategic buyers, like Cisco, was willing to pay for AppDynamics.
- With the current S&P 500 PE Ratio in the range of 26.1 (historical mean 15.6), the Price to Sales Ratio in the 2.0 range (historical mean 1.4) and the Price to Book Value at 2.97 (historical mean 2.75) valuations for the broader market are high relative to historical levels. Near term valuations appear poised to rise but in longer term one should expect to see valuation levels decline closer to “normal” levels.
|S&P 500 Price to Earnings Ratio
|S&P 500 Price to Sales Ratio
- Cybersecurity will become a “more” dominant theme in 2017 (duh!)
- Sub-$50 million acquisitions will continue to dominate the number to M&A transactions;
- Sluggish growth for companies competing in the small to mid-markets may lead to owner fatigue and accelerate their interest in looking for an exit;
- The “biological imperative” (read – getting older) will continue to drive baby boomers to look for exits;
- Slow organic growth rates drive buyer’s acquisition strategy.
And lastly, let’s go out on a limb!
The Canadian public markets appear to have an appetite for strong technology companies à la Shopify, less so for public tech companies like ViXS Systems (VXS-T). There is a dearth of large cap Canadian public technology companies and I’m pretty sure that many investors want to see if Hootsuite, Vision Critical, Desire2Learn and BuildDirect present great investment opportunities. Looking into my crystal ball I see Hootsuite filing for an IPO but at a valuation less than $1 billion, BuildDirect, which has drawn the attention of Goldman Sachs with Co-founder Jeff Booth being named one of Goldman’s 100 Most Intriguing Entrepreneurs of 2016 also filing for an IPO, Vision Critical taking additional steps to prepare for an IPO but not in 2017 and Desire2Learn not going the public market route but is instead acquired.