In the past year over 8,000 middle market M&A and investments worth nearly $150bn in transactions were completed. In 2018, we, like many others, see a healthy M&A horizon ahead and expect overall M&A trends to continue or even accelerate with recent tax law changes and cash repatriation by multinationals. However, there is no question that valuations have increased as this economic expansion is moving into its tenth year. Further, as the credit markets appear very open and companies and funds appear to have ample capital available, M&A should continue to see more than its share of capital action. Although expectations are running high that business conditions will continue to improve, there is the looming thought that the bull market will not last forever.
- Secular trends in technology investing show no signs of abating in the immediate future and should continue to attract funding from both investors and strategic acquirers in 2018. Although platform investments are harder to come by, add-on, tuck-in and innovative extension acquisition opportunities abound.
- Competition between strategics and private equity firms will continue to intensify. Companies are investing in their M&A brand and adding Corporate Development bandwidth to execute more deals.
- Expect the “Amazon threat”, real and perceived, to permeate every niche where supply chains or distribution channels have grown complacent or inefficient. The mentality is one of “innovate now before it’s too late”.
For 2018, we identified four key niches where transaction dynamics should intensify: Human Capital Management (“HCM”), Financial Technology and Mortgage Technology (“FinTech” and “MortgageTech”), Marketing Technology (“MarTech”) and Healthcare Services and Technology (“HealthTech”).
In the chart below, market segments are depicted by bubbles of different sizes based on the total value of disclosed investments whether by private placement or acquisition. In 2017, median valuations within the broadest category below, Technology and Business Services (“Tech/Biz Svcs”), have risen to 10.0x EV/EBITDA for transaction values below $500mm.
Human Capital Management (“HCM”)
- We consider the HCM world in three distinct, yet overlapping segments, Recruitment/Talent Acquisition, Workforce management and Learning and Development, where we expect to see further convergence as solutions providers respond to the forces of opportunity.
- Within these segments, employers are centrally focused on engaging employees as the following secular trends continue to play out:
- A tightening labor market and changing demographics
- Demands on productivity improvement
- The widening skills gap
- A tightening labor market and changing demographics are intensifying the need to attract and retain top talent.
- Recruitment insight has evolved beyond not only hiring for skills but also hiring for fit.
- In 2017 talent acquisition led HR Tech funding with $550mm invested. Notable fundings include:
- Jazz Venture Partners’ $8mm investment in Pymetrics, a provider of artificial intelligence and neuroscience games to match people with jobs
- Adams Street Partners’ $40mm investment in Lever, a provider of applicant tracking system (“ATS”) and customer relationship management (“CRM”) functionality on an analytics-based platform
- The “gig” and “sharing” economies have increased the volume and complexity of the contingent/hourly workforce.
- This trend has led to increasing emphasis on productivity and outcomes as opposed to business as usual (results vs. activities). The result is a new dynamic between employers and employees.
- Notable workforce management transactions include:
- Bullhorn’s acquisition of PeopleNet to combine Bullhorn’s market share in the contingent workforce industry with PeopleNet’s cloud-based workforce solution. Although terms were not disclosed, we believe this was a $50mm-$75mm transaction valued on an aggressive revenue multiple.
- ADP’s acquisition of Work Market, a software platform for managing the on-demand workforce.
Learning and Development (“L&D”)
- Clients are focused on bridging internal skills gap and retaining top talent.
- A notable example of M&A in L&D includes:
- Saba’s acquisition of Halogen for $215mm, a valuation of nearly 3x revenue, to combine Saba’s expertise in L&D with Halogen’s focus on performance management.
- Recruitment/Talent Acquisition: Automation and revamping of the recruitment process is expected (particularly interviewing) and greater emphasis on tools that utilize predictive analytics, gamification and artificial intelligence.
- Workforce Management: More workforce management platforms that leverage work flexibility are expected to foster employee engagement and productivity.
- Learning and Development (“L&D”): An emphasis on continuous performance management and feedback is expected to drive more adaptation of learning management systems (“LMSs”) and gamification of training.
- Special note: Watch for more dynamic activity in two more specialized areas: Rewards and Recognition and Background Screening. Two notable transactions this past year are likely a harbinger of more to come:
- Rewards and Recognition: Industry leader Blackhawk was taken private last week by a syndicate of PE firms for $3.5bn in cash, a valuation of 1.7x TTM Revenue and 25x TTM EBITDA. Expect more activity this year like what leading growth investor HIG Growth Capital accomplished at year end by acquiring Carlton Group. This followed other notable transactions including Michael C. Fina’s acquisition by HALO Branded Solutions. Watch for more multi-generational family firms joining corporate forces in scale and specialization-driven exits.
- Background Screening: Airbnb vertically integrated into the consumer information ecosystem with the acquisition of background check startup Trooly, a very “Amazon-like” move.
- MortgageTech, an important niche within FinTech, has benefitted from strong M&A activity. As we noted last year following the annual Mortgage Bankers Association (“MBA”) conference, technology investments are on the rise and innovative companies are breaking into the main stream.
- In the past 24 months, nearly $1bn of transformative deals helped to accelerate the digital trends in mortgages.
- At the beginning of 2017, thought leader CBInsights highlighted 25 ground-breaking MortgageTech startups with marquee investors placing big bets on the mortgage market including:
- CoreLogic’s acquisitions of Mercury/Platinum Data/Appraisal Scope, a provider of an appraisal management platform, a QC technology provider, a valuation management software and FNC, a provider of real estate collateral information technology.
- Ellie Mae’s acquisition of Velocify, a provider of a sales acceleration platform, Black Knight’s acquisitions of eLynx, a provider of a lending document and data delivery platform, and Motivity, a provider of mortgage business intelligence software
- Greylock led the$100mm investment in Blend, a provider of a digital lending platform
- Notably, valuations are also on the rise and leading firms with established customers or leading technologies are commanding revenue-based multiples including:
- Blend’s post-money implied valuation of ~15x revenue
- FNC’s acquisition for 13.5x EBITDA
- Velocify’s acquisition for 3x revenue
- The need for innovation and growth will continue to drive MortgageTech M&A.
- The natural buyers have cash, lack innovation engines to build “move-the-needle” new products or services and have been active in building their M&A funnels for some time.
- Areas likely to see heightened M&A activity:
- Drivers of digital capabilities: Analytics, workflow and proprietary niche market data
- Niche specialization: Appraisal management software, few independents left
- Appraisal Management Companies (“AMCs”): Continued consolidation as scale matters
MarTech – Marketing Technology
- MarTech continues to be an expanding corner within the technology world where digital platforms and tools are attracting well-known investors and high valuations.
- Notable transactions over the past eighteen months:
- Facebook’s acquisition of Source3, a manager of intellectual property in user-generated content
- Snap’s acquisition of Placed, a provider of a location analytics platform to improve campaigns, and Metamarkets, a provider of an interactive analytics platform for programmatic marketing
- Amazon’s launch of Transparent Ad Marketplace as part of Amazon Publisher Services, acquisition of Graphiq, a provider of a data aggregation platform to improve audience engagement, and announcement of ramping more advertising sales staff
- Sizmek’s acquisition of Rocket Fuel, a platform to deliver personalized and timely advertising content to consumers, in a $145mm public-to-private LBO
- FTV Capital and Battery Ventures’ investment in LiveIntent’s personalized marketing platform
- Conde Nast’s acquisition of CitizenNet, a provider of SaaS-based prediction technology to target audiences, and Time’s acquisition of Viant, a provider of a people-based ad targeting platform
- The number of MarTech and related AdTech companies has mushroomed from 150 five years ago to over 5,000 today; however, most providers are still at an early stage.
- With thousands of MarTech companies providing point solutions, watch for larger platforms to consolidate for scale and for suite capabilities as companies struggle against the Facebook and Google juggernauts in digital advertising spend.
- Facebook and Google combined are expected to represent more than 60% of U.S. digital ad revenue. No other digital ad platform has more than 5% share of the U.S. market.
- The AI equivalent in MarTech is Identity Resolution (“IR”), where marketers seek to build a consumer’s identity and behavior across disparate data sets. Expect this theme to gain momentum as M&A is likely to fuel a grab for the leading point solutions.
- Expect more MarTech M&A activity from Amazon. eMarketer estimates that Amazon is the fifth largest digital advertiser in the U.S. in terms of revenue, accounting for ~2% of the market, but appears to be setting up to accelerate.
- Expect further personalization across devices and channels. Companies that hold consumer personally identifiable information (“PII”) and insights into consumer interests will look to leverage and monetize the data they own.
HealthTech – Healthcare Technology and Services
- 2017 was a year of big announcements and continued M&A activity throughout the HealthTech ecosystem.
- Mega-deals will reshape entire delivery channels and shift the balance of power into fewer healthcare payors. Examples include:
- CVS’s announced acquisition of Aetna ($69bn): Development of community-based clinics for more convenient and less expensive healthcare (and to keep patients out of hospitals). Combination follows 7 years of partnership. If approved, ExpressScripts will be the only remaining large independent Pharmacy Benefit Manager (“PBM”).
- Humana’s announced acquisition of Kindred Healthcare ($4bn): Backed by leading Private Equity titans, Welsh Carson and TPG. Kindred is the largest home-health and hospice operator in the U.S. Humana is interested in entering home health to better manage health of Medicare enrollees (reduce likelihood of hospital readmissions).
- Optum (a subsidiary of UnitedHealth Group)’s announced acquisition of DaVita Medical Group ($4.9bn); Davita Medical Group serves 1.7mm patients per year through 300 medical clinics and 35 urgent care centers and 6 outpatient surgery centers.
- Watch for continued vertical integration as scale benefits drive further M&A
- Healthcare treatment cost containment and response to blocked horizontal integrations (e.g. Aetna/Humana, Anthem/Cigna)
- Amazon entry into the healthcare industry is widely anticipated given attractiveness of inefficient and high price point distribution systems. Foreshadowing the next move, Amazon recently applied for a wholesale pharmacy distribution licenses in 12 states.