2019 Technology M&A Mid-Year Market Review

CEO Ismael Wrixen sat down with ABC News following FE International’s inclusion on the Inc 5000 to discuss the implications of this report, why the tech companies in the Inc 5000 will outperform traditional sectors and how M&A is driving industry disruption by market leaders. Watch the full segment here.

After a record setting 2018, the M&A market in 2019 is proving to be yet another active year for technology firms. Building off over a decade of growth, the continued upward trend seems set to stay despite public market volatility and economic uncertainty. Investors and executives seeking extraordinary returns and inorganic growth through technology acquisitions have led to a sustained growth curve in the sector’s market performance. Mega-deals like Vimeo’s acquisition of Livestream, illustrate the strategic benefits of M&A perfectly, as it allowed them to become the market leader in non-advertised video platforms for livestreamed content after trying to build a competing product in-house. Similarly, Salesforce have continued to acquire billion dollar businesses, namely ClickSoftware announced in August 2019.

In May, CB Insights reported that 2019 will prove to be a record year in terms of Tech IPO valuations, and SaaS M&A activity surpassed the first half of 2018, according to SEG. Gains at the top of the market, where the Nasdaq routinely outperforms the S&P, are reflections of the profitable investment opportunities being found in the middle market SaaS, e-commerce and content business sectors in the first half of 2019. The industry sentiment echoes this: Software Equity Group predicted in Q1 that SaaS M&A in 2019 will outperform the near-record highs of 2018.

Source: Refinitiv

Tech IPOs in 2019 Point to High Investor Confidence

Several major tech companies went public in the first half of this year, confirming expectations that 2019 would bring marked enthusiasm for technology market debuts. On the SaaS front, Uber, Lyft, and Slack brought in record valuations; though Uber did not achieve the $126 billion valuation it sought, its initial market cap reached $75 billion following the IPO, with $8.1 billion raised at $45 a share—very much the high end of 2019 IPO metrics. Interestingly, major tech companies have taken to going public in new ways as they are able to rely on consumer demand and healthy investor appetite to generate a profitable liquidity event.

Slack followed Spotify’s example in their June direct listing, debuting at over 48% above the reference point set for its shares, for a market cap of $19.5 billion. Slack’s most recent private valuation before going public, in April of this year, was $17 billion (according to Forge Global) following funding rounds in 2018 of $427 million (bringing its total funding to $1.4B over ten rounds). With its IPO outperforming its private valuation, we see investor confidence in the technology sector remaining high despite trade uncertainty in other industries. Consequently, as we at FE continue to note, strong valuations in the public markets for tech companies point to steady valuations in the mid-market.

Consumer Behavior Leads to Continued Growth in E-Commerce and Advertising Sectors

E-commerce activity has seen a steady rise year over year, as perhaps most obviously indicated by the astronomical new records set during this year’s Prime Day. Amazon announced that the two-day shopping event this year yielded a higher sales volume than the most recent Black Friday and Cyber Monday combined, noting top selling items included over 100,000 laptops, 200,000 TVs and 350,000 luxury beauty products. According to the BOND Internet Trends 2019 Report, not only did e-commerce sales grow 12.4% from 2018 to 2019, but the rate at which e-commerce sales grow is getting faster year-on-year. Digital advertising is similarly outpacing previous years, with Internet advertising spend rising 22% YoY to reach c.$115B, more than half of which was spent on mobile in 2018.

The integration of e-commerce and digital advertising in the lives of consumers has had a long time to mature. The last decade has brought with it the longest uninterrupted period of economic expansion in the United States, according to The Economist, and we are seeing this combine with Internet-led globalization to the effect of increased consumer confidence in both online shopping and the conducting of crucial core activities online—both in business and in personal lives. This makes it no surprise that e-commerce retailers (and the tech companies which serve e-commerce businesses) are experiencing steady revenue growth in 2019. Customers increasingly rely on online shopping for retail needs—indeed, the first half of 2019 has seen major retailers announce store closures including JC Penney, Family Dollar, and others like GAP who are not meeting profitability requirements. The low overheads and logistical simplicity of e-commerce models such as dropship, facilitated by programs like Amazon FBA, have led to more and more entrepreneurs entering the space with a focus on smaller batch, well-branded, tailored products.

At FE International, we have noted a global shift in the way consumers buy their products, preferring strong brands with social proof (e.g. product reviews) and high rankings of conscientiousness.

Mid-Market Reaps the Benefits of Record Highs at the Top of the Market

Strong performance by >$1 billion companies in the online business sectors—namely SaaS, e-commerce and content—has brought more attention from traditional investors and private equity firms into the space on a mid-market level. As tangential as their relationship may seem, behemoths like Shopify, Amazon, Casper and other major players have directly led to higher valuations in the mid-market as investors watch the proven performance of such companies drive high returns. Sectors doing particularly well are cloud analytics (11 of the c.300 >$1 billion-dollar companies worldwide today) and Internet software companies (which make up 24% of the 300), e-commerce (13%) and the software companies which service them.

Overall, the first half of 2019 brought with it more demand than high quality supply in the industry, and with that followed a hardy technology market that has weathered geopolitical and economic storms better than other sectors. Tech-heavy indices like the Nasdaq in the US frequently rise at steeper rates than the S&P 500; this lower covariance between the stocks of tech firms and those on the S&P (and therefore more antiquated industries) indicates that the tech sector is less intensely subjected to global policies than many other industries. The Nasdaq has had a phenomenal H1’19, rising 22.6% from year open to July 31, 2019—compared to the 18.7% rise the S&P 500 experienced in the same period. As the first half of the year comes to a close and we being to enter the historically more active period of the year for M&A, the resilience of the tech sector and its ability to outpace other industries repeatedly pushes online businesses to the top of the market.

Valuations for Technology Businesses in 2019

At-a-glance:

As new and maturing entrepreneurs alike become more successful at building profitable online ventures, valuations are maintaining the steady highs sown in 2018, as anticipated in our 2019 Technology M&A Outlook. We can reasonably expect 2019 to be another record year for technology M&A; software companies have already started the year with high valuations and as we have experienced at FE, are in no danger of losing these.

FE International has seen software businesses remain in the 3.2x-4.75x revenue multiple range in the first half of 2019, e-commerce businesses garner 2.0x-4.0x earnings multiples and content-based businesses in the 2.25x-4.0x earnings range. SaaS business owners investing in strategic marketing channels like affiliate partnerships and social proof, as well as the development of a strong brand through intuitive design and clear messaging on the site, tend to pull the strongest valuations. E-commerce companies who can reduce the threat of concentration across products and platforms, as well as build customer loyalty, remain the market leaders. Finally, for content businesses, an emphasis on high-ranking, useful content and diverse revenue channels make for an appealing acquisition target to investors. Full details on what contributes to SaaS, e-commerce, affiliate and advertising business valuations are freely available on the FE International blog.

E-Commerce Drives Digital Advertising (and Vice-Versa)

The business case for a record 2019 when it comes to midmarket valuations is, as mentioned above, largely laid at the top or the market. Enterprise SaaS revenue has recently surpassed the $100B run rate, and e-commerce valuations, which outperformed most U.S. stock market indices by more than 250% in the 2000 to early 2018 time period, are consistently floating near the top of the IPO valuation pool. Casper, which is anticipated to IPO to the tune of over $1 billion, and Poshmark, which brought in over $150 million in revenue in 2018, are two e-commerce unicorns who are rumored to enter public markets this year at hefty valuations—part of a slew of e-commerce companies passing down high multiples and dependable consumer shopping behavior to the middle market. Digital media revenue are on the heels of heightened e-commerce activity, as mobile digital advertising spend continues to outpace desktop, and creeps up on total TV spend. Internet advertising reached c.$115 billion in 2018, and has this year grown 22% as advertisers spot the opportunity to capitalized on increased web traffic due to heightened e-commerce activity.
SaaS Valuation Multiples 2019 – SaaS Businesses Still Earn the Highest Premiums

Global SaaS M&A activity points to another record year for the darling of the technology sector: 2019 has already seen 277 SaaS M&A transactions worldwide in Q1 and more than 250 in Q2. These acquisitions are achieving some of the highest valuations yet, as Crunchbase reported that the end of Q2 saw publicly-traded SaaS companies reach just a few points below the record highs (as measured by the BVP Nasdaq Emerging Cloud Index), likely indicating strong valuations ahead for private sector SaaS companies. The basket of SaaS stocks towards the end of the first half of 2019 was worth 1,248.21, just off its 52-week and all time high of 1,253.05, and Bessemer reports that the SaaS and cloud companies in its index are recently trading 11x their enterprise value. PE firms, as predicted, are intent on deploying the extra capital they have on hand and are paying high multiples across the board to do so. Pitchbook has reported that the median multiple at which private equity firms are acquiring companies is sitting at a 12x multiple in the United States. This in contrast to the 9.3x and 10.5x range we traditionally saw over the last few years.

Final Thoughts

The performance of these business models in the public markets grant VCs and private investors the confidence that consumer behavior is making a fundamental shift towards consumerization of IT, online shopping and an overwhelming and irreversible preference for digital media consumption. At the heart of the technology M&A valuations remaining up at the all-time highs we saw emerge in 2018 is a fundamental change in the purchasing habits of consumers over the past 10 years. Everything from team collaboration to at-home appointment scheduling are now processed through technology enabled businesses, and as new practices are continually put into place to improve security, we anticipate young, innovative entrepreneurs to be increasingly drawn to founding their businesses online.

INVESTOR TRENDS in 2019

At-a-Glance:

Digital Investments Enter—and Stay In—the Mainstream

Investors, who have now made online business opportunities a standard on their radar of acquisition targets, have maintained the bullish activity set forth in 2018. Our predictions from the beginning of this year have come to pass in the first half of 2019. Despite getting off to a seemingly slow start, worldwide deal volume has reached high rates in H1’19 with the New York Times reporting $2 trillion (and counting) worth of transactions having taken place. Microsoft, Amazon and Apple are the first companies to reach trillion-dollar market caps—all three a combination of SaaS, e-commerce, digital service and retail. Models like this make investors more confident as they bet on businesses in the middle market.

Investor Overview – Key Points

• Interest Rates. Investors are more likely to seek inorganic growth channels as inflation and interest rates remain low.
• Business Positioning. Investors are eager to acquire synergistic businesses that integrate smoothly and as such, businesses with strong brands, teams in place and strong customer loyalty metrics remain the most highly valued.
• Recurring Revenues. Strong performance by subscription companies in public markets have driven a noticeable increase in demand for the recurring revenue model. In 2019, investors with no technical expertise have demonstrated a willingness to jump into ownership of SaaS, due to the steady cash flow, scalable cost structure and the relative ease of hiring technical experts to run these businesses. Portfolio, fund and PE investment activity took a sharp increase in H1’19 compared year-on-year, as managers look for opportunities to generate predictable returns.
• Platform Risk. Businesses with diversified sales channels (including offline) are increasingly preferred by investors over those with a single revenue source. Investors have also proven willing to take on opportunities that do not currently fit their profile, yet have strong enough brands and customer loyalty to successfully transition away from incumbent platforms in the medium- to long-term.
• Changing Investor Demographics. Investors are increasingly taking the role of financer in acquisitions, taking on younger and more tech-savvy entrepreneurs (aged 22-29) with the skills but not necessarily the capital to complete acquisitions. This is especially apparent with PEs.
• Trickle-Down Economics. As 2018 saw a record year for IPOs, exited founders and investors have taken the cue to increasingly operate in the small- and mid-market M&A space (often SaaS) to invest for long term returns.

Several major SaaS, e-commerce and digital media acquisitions have been made this year. The e-commerce M&A space has not been dominated by just Amazon and Walmart; Etsy acquired online marketplace Reverb in a deal for $275 million, which not only points to the strong seller economy by people creating handcrafted products and working for themselves, but also the strength of the perceived value of e-commerce businesses among investors. Similarly, the ever-growing trend of digital media advertising spend has continued to make content businesses a popular acquisition target in the middle market.

Improved education available to prospective digital asset investors has made powerful contributions to investors’ willingness to deploy funds on online businesses, as they come to terms with the synergistic efficiencies they are able to achieve through strategic acquisitions. It must also be said that higher margins and virtual-zero attrition and depreciation are attracting younger entrants from otherwise ‘traditional’ investment options to the investor pool. Global M&A in 2019, if slightly more deliberate in terms of integration and education, remains on track to beat past annual acquisition records.

Deal Number and Volume

FE International has observed a marked increase in both listing quantities and year-on-year deal volume over the first half of 2019. Total deal volume in the first 6 months of 2019 has risen by tens of millions, moving FE past the $500,000,000 mark in lifetime acquisition volume.

Deal Multiples

Below we take a look at the three main niches we work with at FE and the typical sales multiples they have attracted in the past six months:

SaaS Businesses

Over the past six months we have seen the average mid-market SaaS business selling for between 3.8x-6x Seller’s Discretionary Earnings (SDE). SaaS businesses multiples are growing quickly as PEs, funds, HNWs and strategics catch on to the potential upside for SaaS businesses as either standalone acquisitions or bolt-ons.

E-Commerce Businesses

Mid-market e-commerce businesses have tended to sell in the range of 2.5x-4x SDE. These prices are driven by many factors, including the competitiveness of the business’ niche, the number of products being sold, branding/proprietary products and the robustness of supplier agreements. This year we have continued to see Amazon FBA businesses gain prominence among individual investors, especially as the SBA loan program is now more receptive to this asset class than ever.

Content Businesses

Content businesses have seen multiple Google updates since the start of the year, with only the very best businesses still alive and operating well. This has added a level of clarity to this space which was previously lacking, and investors are fighting over these [as good as] Google approved businesses. FE is seeing sales multiples of between 2.4x-4.4x SDE on most businesses with extraordinary growth curves.

Passive Income

Part of the driving force behind an uptick in small to medium-sized tech companies is the increased interest from traditional investors entering the space for the first time (be that a HNW individual or PE fund). FE International has seen many individuals from Fortune 500 companies liquidate their options to invest in their own portfolio of digital assets on a full-time, part-time and more passive basis. In turn this has led to an increased selectivity, as buyers in possession of one or more businesses will often look to acquire new businesses which complement their portfolios. Due to the ease of purchase for online businesses, and the lack of geographical restrictions or physical premises, many investors are taking advantage of the new opportunities to build a business portfolio which can both complement their skills and allow them greater working freedom.

Final Thoughts

According to the Biz2Credit Small Business Lending Index™, the number of SBAs (Small Business Loans) being approved by banks hit an all-time high in July this year. This provides further evidence of how much capital is currently available for lending. Many people looking to buy small to medium-sized tech companies rely on SBA’s to raise capital, but the emergence of new funds investing specifically in tech niches like SaaS serves to highlight this bullish climate.

Company Update

FE International has had a record first half of the year, signing more clients and with higher average deal volumes than in any other previous half year in the company’s decade long history.
We are also thrilled to announce that for the first time since its expansion to the US, FE International has made it on the Inc 5000 list of the top Entrepreneurs in the United States.

The Inc 5000 is the most prestigious ranking of the fastest-growing private companies in America, and we are thrilled to have joined the ranks of some of the most successful companies in the world in our 2019 ranking. Having recently moved our headquarters to New York City from Boston, and opened another office in San Francisco, it is only appropriate that this is the year we enter onto the Inc 5000 US. Previously, FE International has been on the Inc 5000 EU list, and we are excited that recognition of our 100% year-on-year growth is expanding across the Atlantic.

This past six months has seen FE International facilitate a record number of acquisitions, putting us on target for our 100% year-on-year growth target. The growing demand for safe, secure and successful acquisitions continued to be met by our fantastic teams in New York, London and San Francisco to make all of this possible. We will continue growing our global presence over the coming years, bringing our unique and award-winning advisory services to even more investors and business owners.

It has been an exciting six months at FE International, and we look forward to keeping you updated with our Winter report.

Other Notable Updates:

LTV SaaS Growth Fund

FE is pleased to announce the latest private equity SaaS Fund, LTVSG VI, an 8-figure AUM fund aimed at accredited investors seeking exposure to high growth SaaS businesses. This sixth iteration of the fund invited accredited investors to join the first ‘open’ fund structure put in place by the SaaS Fund team, which will give the ability for the fund to grow through increased cash flows, balance sheet appreciation as well as follow-on raises for strategic acquisitions. This unique, first of a kind SaaS Fund structure, allows LTV Fund to truly maximize the strategic vision by acquiring, growing, divesting and re-acquiring larger assets over the 3-5 year timeline.

This is possible through an intimate knowledge of the SaaS M&A industry, as well as an impeccable reputation with the best known entrepreneurs and communities in the space.
2020 will mark the fifth iteration of the LTV Conf SaaS to be held in New York City for the second year running. In 2019, LTV Conf hosted over 300 SaaS founders, executives, professionals and industry experts. We were delighted to hear the positive reviews that came from the event, and would like to thank everyone who joined us for two days of insights, lectures and networking by professionals in the industry. Highlights from the conference included lectures from industry leaders like David Hauser, Patrick Campbell and Dan Martell.

April 2020 will bring about the next LTV Conf, featuring several new leaders in the industry on the agenda, so it won’t be one to miss. You can use code MARKETREVIEW10 for 10% off your ticket today!
The next edition of SaaS Mag, coming in September 2019, will be a Special Market Review Issue and feature articles on the top performing SaaS companies of 2019. This issue will also include the best marketing tips for the coming year, upcoming conferences, the Top 50 SaaS Startups to watch and our SaaS Market Review. SaaS owners, investors and enthusiasts around the world have enjoyed learning about the latest innovations in the space, while keeping up-to-date with industry trends and who’s who in the SaaS world. If you would like a free subscription to SaaS Mag, fill in our quick form here, and we will send you the next issue.

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