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RETAIL TECH M&A MARKET TRENDS 2019 JANUARY 2019

M&A Trends and Technologies Driving Enterprise Retail/Wholesale M&A

Retail/Wholesale and associated Software and IT markets have undergone a transformational change in the past few years with the emergence of new technologies and the ongoing change in consumer behaviours.

As a result of this shift, we have seen unprecedented levels of M&A activity here in the past few years as firms in all areas of this market, at all sizes, have been pursuing active acquisition strategies as they strive to incorporate new technologies, extend their market reach, and respond to change across all facets of the market, from AI, to cloud, to digital transformation and the user experience, and more.

This state of flux has created significant opportunities for shareholders, as both strategic and financial buyers compete to find the right acquisition targets to meet their growth objectives.

Transactions began to accelerate rapidly in both volume and value from 2014 onward, with last year’s total deal value almost two times that of the next highest year, 2015:

M&A Deal Trends Retail/Wholesale Market from 2015 to YTD:

Even though 2018 saw a slight decline in deal volume from 2017, total valuation was way up, with 2018’s Deal Value reaching $22.8B, vs the $4B reported in 2017, in large part due to multiple $1B+ transactions announced last year, which included:

  • Flipkart acquired by Walmart for $16B
  • Cotiviti Holdings acquired by Verscend Technologies for $4.3B
  • VeriFone acquired by Francisco Partners for $2.7B
  • iZettle AB acquired by PayPal Holdings for $2.2B
  • CommerceHub acquired by GTCR for $1.1B

Top 20 Retail/Wholesale Transactions with Announced Value in 2018

Source: 451 Research

It is interesting to note that in the last several years retailers have increasingly been actively acquiring technology companies. In 2018, PwC reported that the consumer and retail industry accounted for 32% of cross-sector deals involving tech. Recent acquisitions in the tech sector by retailers in addition to the Flipkart acquisition noted above include:

  • Ulta Beauty (QM Scientific - AI-based retail customer management)
  • Nordstrom (BevyUp - Social shopping SaaS analytics)
  • Williams-Sonoma (Outward Inc - 3D visualization software)
  • Walmart (Parcel Inc. - Logistics SaaS and services)
  • Target (Grand Junction - Shipping logistics SaaS)
  • Shiseido Americas (JWALK NY - Digital marketing and advertising)

Most Active Acquirers in the Vertical

Of the 735 transactions announced in this vertical from January 2015, 586 (or 80%) were done by Strategic buyers, showing that strategics are still winning a far greater share of transactions over financial / private equity buyers.

Retail Software & POS Systems Subsector 2015-YTD

As we drill down further to look exclusively at Retail Software and POS Systems transactions, there were 289 deals announced in this period with a total reported value of $17.9B.

2018 saw a marked increase in deals closed over 2017. But more importantly, while the number of transactions increased 33% YOY, total reported value increased fourfold, from $1B in 2017 to $4B in 2018.

The median deal value of $27m indicates brisk activity now for companies in the mid- and slightly lower markets as organizations (many of whom have previously completed sizeable transactions) look to pursue add-ons to fill in technology or market gaps and extend their offerings and market reach. This will be a strong year for enterprise retail software and IT firms to explore options.

Transactions were dispersed across market segments here with Retail Systems, Payments, and Enterprise Software in the top 3, followed by Online Marketing and Customer Analytics:

The Top 10 Most Active Acquirers in this Subsector

Tequity’s former client Mi9 Retail has been the most active acquirer here since 2015, with 5 acquisitions announced to-date.

Enterprise Value and Median Multiples

Most shareholders ask, “what are the multiples in my market?” and unfortunately there is not one set of rules that can be applied across the board. Looking at the annual median multiple in the Retail Software and POS Systems subsector from 2003 to 2018, it’s apparent that there is no “one” number that can be applied. Nor is it how companies are valued. Buyers look at a wide set of variables that include the company’s performance YOY, technology, team, culture, fit with their strategy, and post-transaction opportunities and synergies, and many other areas.

Premium valuation drivers include:

  • Top line revenue growth well above others in your market (this is the single most defining predictor for achieving a premium valuation in the tech sector)
  • 80% or more recurring SaaS revenue
  • Annual or longer agreements
  • High customer retention
  • Enterprise vs SMB customers
  • Technology fit
  • Rapidly growing market (vs. mature market)
  • Profitable OR meets the “Rule of 40” (growth rate + profit = 40%)
  • And many more

Key Market Findings:

  • A recent 451 Research survey found 40% of business users say the largest challenge their organization faces in providing positive customer experiences is limited integration of data across marketing applications and other systems.
  • Retailers now need to capture, analyze, understand and act on customer information coming from an array of in-store and online touchpoints to deliver more personalized, “contextual” customer experiences. This is a double-edged sword though. As more data is made available to retailers and brands, consumers are becoming less trusting of businesses than they were even a year ago. Security in the underlying technology is of major importance now.
  • Transactions initiated on smartphones and tablets in mobile apps and browsers are outpacing eCommerce transactions. Mobile transactions are projected to grow at a 24.5% CAGR through 2022, compared with 16.9% for e-commerce (so mobile is essentially growing at the expense of eCommerce).
  • Large online retailers are increasingly offering and promoting wallet acceptance. As mobile commerce becomes increasingly dominant, digital wallets will become a component of or embedded into the mobile check out process.
  • Technology is creating profound changes in the relationship between consumers and retailers and brands. The retail experience is changing from a transactional relationship between people into a more intricate relationship between humans and automated systems and devices. Machine learning-driven interactions, voice-activated smart speakers (Amazon Echo, Google Home), and chatbots are all helping to drive the anytime, anywhere buying experience. Heightened demands for context, convenience, and control in all customer interactions is driving retailers to re-evaluate how they serve their customers across the shopping journey to deliver the ultimate buying experience.
*Source 451 Research

What Will 2019 Bring?

Advisors are predicting no immediate decline in deal activity this year and many believe there may be a slight increase in the number of transactions in 2019 as some buyers may view the recent stock market adjustment as an opportunity to do large acquisitions this year at a more realistic valuation than may have been possible at the beginning of 2018. In general, as there is an increase in activity in the top end of the market, there is an associated increase in deals across the middle and lower markets as companies strive to remain competitive in each of these respective segments.

Additionally, there is a general consensus among advisors and market analysts that market conditions are currently optimal for shareholders looking to explore their strategic options in the market. The current bull market is expected to continue through 2019 but many advisors and bankers are less confident about market conditions moving into 2020.

Many shareholders have recognized that if they don’t do something this year, it may be another 5 or more years before market conditions match those we are currently experiencing.

Drivers behind Retail Tech M&A in the coming year will include:

  1. Machine learning increasingly infiltrating all layers of the supply chain, retail, and customer experience
  2. Warehouse automation technology through increased adoption of robotics
  3. Hyper personalization of the shopper experience to offer more fine-tuned products and a better user experience - “contextual retail”
  4. Changing shopping habits as more users purchase online through new channels (ordering products in cabs, ordering through smart home devices, or Walmart’s proposed Retail “Pods” for example)
  5. Integrating data sources to provide a 360-degree view of customers to better understand habits and help shape behaviours to increase the likelihood to purchase
  6. More integration between brands and consumers through the automated systems and devices they use daily
  7. Financial institutions’ response to the increasing threat from person-to-person payment apps like Venmo and Square’s cash app
  8. Location-based data driving more refined and targeted advertising
  9. Retailers embracing digital technology to enhance their physical storefronts and drive customer engagement
  10. Desire to move into adjacent markets, enter new geographies, add product and/or service offerings, add bench strength, add new customer markets, or other growth initiatives.

Tequity’s Transactions in Retail:

SUMMARY

As innovation continues to disrupt the Retail storefront, online, and mobile experience, and while confidence in the economy remains strong, we anticipate seeing continued high levels of deal flow as buyers compete for the right strategic acquisition targets. Acquisitions will be sought by companies looking to fill in technology gaps, enter new vertical or geographic markets, or add new product or service offerings.

This year would appear to be an ideal time to consider exploring strategic options - conditions are not likely to get better than they are currently for the next few years.

If your timeline is 2 to 3 years out, it’s important to examine your market’s current indicators to determine whether it makes sense to revise your timing. In the past, we have seen shareholders work on growth through a strong market only to find that when they were ready to explore a transaction the market had dipped, and valuations were lower, even though they had improved. For those whose timeline is 5+ years out, planning will need to include strategies to weather any economic downturn that may be on the horizon.

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