"Life can only be understood backwards; but it must be lived forwards."
Happy Holidays – The martinwolf Annual Letter
To Clients, Partners, and Friends of martinwolf M&A Advisors!
Happy Holidays and wishing you a wonderful New Year as we look ahead into a new decade.
But first, a few quick notes on 2019. This has certainly been an eventful year— globally and for us here at the firm. I expect that movement to continue into 2020. As in past years, I want to take this brief opportunity to reflect on the biggest takeaways from 2019. I hope you’ll join me in doing so.
Another Active Year
We’re closing in on another promising year for tech M&A, but there has been a clear slowdown in activity compared to 2018’s exceptional year. Fewer, larger deals have closed and there’s been a major increase in the time it takes to close them. While overall deal value and volume were down from recent years, 2019 saw announcements of many mega deals, with 108 deals with a value of over $600 billion. Companies in all industries remained active through cross-industry acquisitions – with the most significant transactions in the IT space.
An especially active area in 2019 for transactions was Fintech. Fidelity National Information Services’ acquisition of Worldpay for $43 billion, Global Payments’ acquisition of Total System Services for $26 billion and Fiserv’s acquisition of First Data for $22 billion were some of the most notable deals from the last year. A nascent technology just a few years ago, Fintech has morphed into a booming industry.
We’ve also seen increasingly higher valuations and more acquisitions from leading software and SaaS providers. Microsoft finally reached the $1 trillion valuation mark and completed one of its most acquisitional years with 20 transactions in its 2019 fiscal year. Google purchased data analytics firm Looker for $2.6 billion and Fitbit for $2.1 billion, and VMware acquired Pivotal and Carbon Black for $4.8 billion. Salesforce made two significant acquisitions as well – with a $2.6 billion acquisition of ClickSoftware and its $14.5 billion acquisition of Tableau.
Globally, IT Solution Providers are in desperate need of consolidation. What we’ve seen in our own pipeline is that transactions are getting larger, more complicated, and closing at a slower pace. In the coming year, I suspect consolidation will be a necessity for these companies. We saw distinct movement this year, such as CDW’s acquisition of Canadian VAR Scalar for $250 million, Staples’ acquisition of Dex Imaging, Insight and PCM, Inc.’s $537.8 million merger, HPE’s $1.3 billion acquisition of Cray, Presidio’s $2.1 billion buyout to go private and Intel’s $2 billion acquisition of Habana Labs. Not all of these deals were friendly—consider Xerox’s hostile takeover bid for HP. To stay ahead of the curve though – before the aforementioned ‘recession,’ uncertainty, or risk becomes too much to bear — solution providers must take steps to consolidate to stay relevant and competitive in today’s market.
IT services also had a dynamic year, albeit with fewer high-profile transactions than their software and SaaS counterparts. Cloud-based connectivity provider LogMeIn was bought by Francisco Partners and Evergreen Coast Capital for $4.3 billion, DXC Technology acquired seven companies including its $1.8 billion acquisition of Luxoft Holding, Inc., and Accenture has announced the completion or acquisition of over 30 companies.
Strategics and private equity buyers have been active this year – and pending any unforeseen upheavals in the M&A market, we expect the cautious but persistent deal pace to continue.
The ‘X Factor’ Realized
Last year in our annual letter, I wrote that the real X factor of 2019 would be the trade cold war with China. At that point tariffs were limited and the impact on the multi-trillion-dollar global economy was muted. That’s not the case anymore. In 2019, we have moved beyond a trade ‘skirmish’ and it appears we are in the actual ‘war’ territory now. US-China trade impact is not just limited to soybeans and wheat. That suggests that it will be a long-term affair where years, not months, of combat are counted.
It was recently announced that the Trump Administration ‘signed’ off on a Phase 1 trade deal. The signing of the Phase 1 deal lessens the risk of the near-term trade conflict – but the future is still opaque. It should become clearer over the 180 days after the agreement is executed if China will comply, particularly in regard to IP restrictions. The trade war has negatively impacted numerous technology giants (primarily hardware vendors) including Apple, Broadcom, Qualcomm, Cisco, Intel, AMD, Nvidia, Micron, and Texas Instruments. Phase 1 is a step in the right direction, but it’s much too early to claim victory.
Increased scrutiny and the trade war with China have proved to severely impact cross-border M&A between the US and China. It has been almost nonexistent this year – down 90 percent from its peak in 2016. Additionally, numerous cross-border deals have been blocked by the Trump administration. Regulators forced Beijing Kunlun Technology Company to sell the US-based developer of dating app Grindr, and video app TiKTok, owned by a Chinese company, is under the same scrutiny. The Committee on Foreign Investment in the US (CFIUS) has also expanded its blacklist to include many high-profile Chinese tech companies.
The trade war is bad for M&A in general but damaging for technology companies in particular. American and Chinese technology firms are especially vulnerable – and that vulnerability grows by the day. We’ve seen Chinese technology companies reigning in operations that rely heavily on US technology, with demands from the government to eliminate use of US tech from government offices and public institutions within three years. State-operated-entities (SOEs) create friction in global commerce that slows global market growth. Huawei recently achieved a big step with the deployment of its new 5G phone without any US components. But China’s reliance on US tech should not be understated and many companies simply cannot operate without our technology – unless, of course, China does not follow terms in the trade agreement and continues to steal US IP.
Either way it’s clear that companies, especially in the tech industry, should prepare to wither a much longer conflict that far outlasts the current administration. To paraphrase the famous Chinese proverb, “A journey of a thousand miles begins with a single step.”
The Election of the Decade
Not only is 2020 a new decade, it’s a pivotal election year. And M&A is on the ballot.
During a presidential election year investors and business owners are shrouded with uncertainty. But heading into 2020 – they have a right to be overtly more cautious. In early November the House Financial Services Committee held a hearing dubbed “America for Sale? An Examination of Practices of Private Funds,” that examined private equity’s role in American capital investment. This comes on the heels of Democratic Senator and presidential contender Elizabeth Warren’s striking criticisms of the industry, policy plans to dramatically change the industry, and new legislation introduced in the Senate called “Stop Wall Street Looting Act of 2019.” The US Chamber of Commerce predicted that if this bill passes 6.2 million to 24.3 million jobs could be lost. It cannot be overstated that private equity has been the lubricant for all M&A, even when strategics ultimately prevail.
Leading market participants think the election of left-wing Democrats like Warren would be detrimental to the industry and the market. Billionaire investors Leon Cooperman, Steve Cohen and Paul Tudor Jones all think the market would plunge anywhere from 15 to 25 percent. Hedge fund manager Stanley Druckenmiller predicts an even bigger drop of 30 to 40 percent. I’m with Stan.
If the White House flips and the policies introduced during the primary come to fruition, our corner of the financial industry would be severely impacted. A flip in the White House and Senate would cause a ripple effect on the industry. If PE firms become convinced that the White House and policymakers will crack down and impose new regulations, U.S.-based deals will slow, at best. Specifically, if policymakers raise the corporate tax rate back to 35%, we’ll likely see tax inversions. The last time we saw tax inversions, American companies such as Accenture, Johnson Controls, ADP, Eaton Corp. and Medtronic PLC restructured such that they are now owned by foreign entities, mostly to avoid double taxation and higher U.S. rates. In this case, companies would be acquired by foreign buyers, largely arbitraging a lower offshore tax rate with the United States’ higher tax rate; that would move jobs, deal flow and capital elsewhere.
Economic shocks, market downturns or dramatic policy changes could send dealmakers on the defensive. However, unless there is a Black Swan in our midst, strong multiples, accelerated consolidation and record cash on balance sheets are all good indicators that the midmarket remains a favorable place to be.
It appears that the tech M&A market will not have a blow-off-the-top 2020 – but will remain steadfast and consistent. There’s too much uncertainty both domestically and globally to predict either a buyers’ or sellers’ market. One positive we’ve seen in the last month is that the cloud has been lifted on Brexit. We think Brexit is good for Europe and Britain, but especially positive for the US. The introduction of a trade agreement between the US and Britain should help ease certain global economic trade uncertainty. Much of this assessment can change from a myriad of other factors – a backtrack on the Chinese trade deal, unexpected changes in interest rates, and significant policy changes out of Washington.
Right now, I see no immediate prospect of turmoil within the M&A ecosystem. I expect today’s deal pace to continue. Private equity firms and strategic buyers still have cash in their pockets – but I expect moving forward they will be even more careful about where they spend their money.
We’re cautiously excited and optimistic as we look ahead to 2020 and the resolve of some of these uncertainties.
On a Personal Note
I know I say this every year, but this truly has been one of our most productive and fulfilling years ever. We had and are experiencing a number of notable developments:
- We moved into our new Arizona headquarters in 2019 and our team remained as devoted as ever. The long tenure, dedication, loyalty and domain expertise our associates bring is what allows us to prosper. Thank you to the entire martinwolf team!
- We’ve continued to solidify our domain expertise and have closed more VAR 500 transactions than any other boutique investment bank in North America.
- We released more than 80 new pieces of Intelligence, launched a new publication (Quarterly Earnings Reports), and added over 1,000 new subscribers to surpass 50,000 total contacts.
- We’ve been called on by the media more than 50 times this year including by prestigious publications such as Business Insider, Fortune, Yahoo! Finance, US News & World Report, Entrepreneur, The Economic Times, TechTarget, CRN and M&A Magazine.
- We’ve continued to expand our global reach and currently have active engagements in North America, India, Pakistan, Germany, the UK, Netherlands, Australia and the Philippines.
- LMM Group, a division of martinwolf that launched last year serving companies with enterprise values of $10 – $30M, closed several transactions in the security and MSP space and has numerous active engagements in the works.
- We were a keynote speaker at one channel conference and attended several other industry gatherings, including the invite-only Captains of the Industry dinner at Canalys Channel Forum in Barcelona where we met with leaders in the solution provider space.
- We worked with numerous smart clients on both the buy and sell side, learning about management, corporate strategy, go to market focus and sales techniques from real thought leaders in the industry.
Which brings me to the most important part of this letter – in which I thank you for your contributions to our success. We would not be where we are today without you – and I hope we have the opportunity to continue to profit together in the new year.
Happy Holidays, Happy New Year, and, as always, Happy Selling!