As buyout shops expand their role in tech M&A, a growing share of private equity spending is coming from bolt-on acquisitions by portfolio companies rather than stand-alone purchases. The sales of Sandvine and Rocket Fuel – both announced this week – show that PE firms are more willing to make sizeable additions to their portfolio companies.Read More
Bolt-on deals have long been part of the private equity playbook. Every year since 2009, acquisitions by portfolio companies (often funded by their PE owners) have accounted for half of PE tech deal flow. This year, PE firms have kept that pace and bolstered the ratio of spending on such transactions. According to 451 Research’s M&A KnowledgeBase, PE-backed companies spent $12.5bn on purchases so far this year – that’s more than one-quarter of PE spending, a mark they’ve never previously hit.
In the acquisition of Sandvine, a previous bid by Vector Capital was bested by a $441m offer from Francisco Partners on Monday to combine the company with Procera Networks, a Sandvine competitor. Francisco paid just $240m to buy Procera in 2015. Today’s pickup of Rocket Fuel by Vector’s Sizmek has a similar dynamic. Vector proposes to pay $23m more for Rocket Fuel than the $122m it spent on Sizmek. (In yet another potential similarity between these deals, Wall Street is betting that Vector’s offer will again be beaten as Rocket Fuel trades at $0.10 per share above the bid.)
It’s tempting to think that higher spending and the benefit of potential cost synergies would lead PE shops to pay higher multiples. That hasn’t been the case. Francisco values Sandvine at 3.7x trailing revenue compared with 1.8x in its acquisition of Procera, but in the case of Rocket Fuel, Vector will pay just 0.3x, less than the 0.5x it spent on Sizmek. Overall, the median multiple on purchases by PE portfolio companies sits at 2.2x in the past 24 months, compared with 2.6x for stand-alone PE acquisitions.