Mark Fontecchio – Page 23 – Inorganic Growth

Thoma Bravo Qliks ‘buy’ on $3bn analytics deal

June 3, 2016 Mark Fontecchio

Qlik, widely discussed as a potential target, has gone private, selling to private equity (PE) firm Thoma Bravo. The price tag is $3bn, making it the largest analytics acquisition we’ve seen and the biggest in BI since a trio of firms were taken off the market nearly a decade ago.

The enterprise value – 4.2x Qlik’s trailing revenue – comes in below the 4.7x median for all $1bn+ BI deals in the past decade, according to 451 Research’s M&A KnowledgeBase. The difference in this case is the buyer. All other $1bn+ BI transactions were done by strategic, not financial, acquirers. Thoma Bravo and other PE shops typically don’t offer valuations as rich as strategic buyers. It’s also worth noting that this is the second-highest multiple Thoma Bravo has paid on a $1bn+ purchase – the largest was 9.1x for SolarWinds last year, a deal it did in concert with Silver Lake Partners.

In many ways, Qlik is in a stronger position as a private company than it was operating as public one. Its strategy of crafting an analytics platform to cater to the dual and often conflicting needs of IT and business users is a solid one. But it needs further execution. Fulfilling it without the quarterly scrutiny that goes with being publicly traded should provide Qlik with the chance to win back some of the momentum it has lost, as the core market in which it has operated has been swamped by competitors.

Goldman Sachs advised Thoma Bravo on the transaction, while Morgan Stanley banked Qlik.

Four biggest BI acquisitions

Date	Acquirer	Target	Deal value
October 7, 2007	SAP	Business Objects	$6.8bn
November 12, 2007	IBM	Cognos	$5bn
March 1, 2007	Oracle	Hyperion	$3.3bn
June 2, 2016	Thoma Bravo	Qlik	$3bn

Source: 451 Research’s M&A KnowledgeBase

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Datacenter asset sales up sharply in 2016

May 24, 2016 Mark Fontecchio

Contact: Mark Fontecchio

Big datacenter companies are munching on the crumbs of their earlier feast. Massive datacenter consolidation in recent years has left the market with few large targets available, yet that doesn’t mean activity is dead. While overall hosted services M&A has dropped in value this year, the volume and value of asset acquisitions in that category has risen, according to 451 Research’s M&A KnowledgeBase. So far in 2016, big datacenter vendors are expanding their portfolios at a bite-sized pace.

Hosted services M&A value sits at $1.8bn year to date, off 53% from the same period last year. Yet asset sales are on pace to rise by a factor of 21 and account for 85% of 2016’s deal value, and have already surpassed the combined totals of 2014 and 2015. Even if you back out Equinix’s $874m divestiture this month of eight facilities to Digital Realty – an unusually large asset sale – such deals are still up 50% by volume and more than 8x in value.

Bolting on a few facilities at a time was always part of a multipronged strategy by the biggest datacenter operators, and it’s become more prominent as several of them have been taken off the market in the past couple years. Largest among them were Telx, Latisys and ViaWest in the US and TelecityGroup and e-shelter in Europe. With fewer sizable targets to pursue, providers have opted to purchase facilities singly or in small clusters, largely to expand geographically, resulting in transactions such as Digital Realty reaching for Equinix’s datacenters, CyrusOne paying $130m in a sale/leaseback deal for a facility in Illinois, Zayo buying a datacenter in Dallas and the always-active Carter Validus Mission Critical REIT purchasing facilities in Texas and Georgia.

We expect the trend to continue this year. While there are still some large potential whole-company targets, they are few and far between. Interxion is the most visible. Earlier this year, it was rumored to be in talks to sell to Digital Realty Trust. That provider’s recent acquisition of eight Equinix datacenters muted that talk. Meanwhile, Verizon divesting facilities from its Terremark buy in 2011, or CenturyLink shedding some of its datacenters, could make for big-ticket transactions.

Digital Realty buys eight datacenters from Equinix to expand European presence

May 16, 2016 Mark Fontecchio

Contact: Mark Fontecchio

Digital Realty Trust pays Equinix $874m for eight European datacenters that the target needs to unload as a condition of its antitrust clearance from the European Commission for its $3.6bn purchase of TelecityGroup last year (seven of the eight properties in today’s deal are Telecity facilities). Digital Realty, for its part, obtains an instant presence in central London along with a European retail colocation footprint to complement its $1.9bn Telx Group buy in the US last year.

With the move, Equinix sheds about 20% of the facilities and operational square footage that it picked up when it agreed to acquire TelecityGroup. Digital Realty is paying 13x projected 2016 EBITDA, suggesting that Equinix was able to fetch a decent price despite the urgency behind the sale.

Most facilities divested by Equinix are older and have a stable base of clients that include IT service providers as well as financial services, digital media and content companies. Digital Realty has also granted Equinix a future option to purchase two of its datacenters for $215m. Located outside of Paris, the two facilities total about 140,000 operational square feet, and Equinix already operates there under a leasehold agreement.

Today’s deal also creates challenges for Interxion, a multi-tenant datacenter vendor that was set to be purchased by Telecity before Equinix swooped in and bought the would-be acquirer. Digital Realty was high on the list of potential Interxion suitors, but has now shown that it has other options for spreading its business into Europe.

Greenhill & Co advised Digital Realty on today’s transaction, which is expected to close in Q3.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Vonage pushes further into business communications with Nexmo buy

May 5, 2016 Mark Fontecchio

Contact: Mark Fontecchio

Vonage pays $230m for Nexmo, which offers enterprise voice and text messaging APIs. The deal, Vonage’s largest in 451 Research’s M&A KnowledgeBase, pushes the VoIP provider further into the realm of unified business communications. Vonage has now spent about $600m on M&A in the past few years to pivot from a consumer-focused VoIP supplier into a business communications vendor. The gamble has paid off, with the company’s overall sales growing once again and its business revenue jumping exponentially.

Nexmo is Vonage’s biggest reach yet. Its previous nine-figure (or close to it) acquisitions – starting with Vocalocity in 2013, Telesphere Networks in 2014 and iCore Networks last year – involved business-focused VoIP providers, so Vonage stayed within its wheelhouse. With its cloud-based voice, messaging and chat APIs, Nexmo broadens Vonage’s horizons into business communications services, helping companies more easily embed voice and messaging services within their mobile apps. For that privilege, Vonage is paying a healthy multiple on Nexmo’s trailing 12-month revenue (see estimate here). The multiple is Vonage’s highest to date and one of the largest we’ve seen in mobile messaging and application development. Nexmo’s revenue is also growing at a fast 40% clip, according to Vonage.

Vonage’s overall sales grew 3% to $895m last year, but its business revenue more than doubled to $219m. Two years ago, the company had $8m in business revenue. Now its business revenue is higher than all of rival 8×8’s sales. By our math, at least three-fourths of that increase in business revenue came from its purchases of Telesphere, iCore and SimpleSignal. Meanwhile, its consumer revenue dropped 12% to $676m. Vonage’s challenge has been – and will continue to be – how quickly it can replace its disintegrating consumer revenue with business dollars, whether that be through continued M&A or more organic growth.

Nokia takes IoT biz to the edge with pickup of Withings

April 26, 2016 Mark Fontecchio

Contact: Mark Fontecchio

In a few short years, Nokia has gone from selling devices that consumers hold in their pockets to ones they can wear on their person. With the $191m purchase of Withings, Nokia risks getting into wearables as the market shows signs of slowing. Continuing its transformation from a mobile phone vendor to a networking provider, Nokia’s products now include Internet of Things (IoT) edge devices. In addition to selling wearable activity trackers, Withings offers Internet-connected weight scales, blood pressure cuffs and baby monitors. Nokia’s push into digital health, a growing area of IoT, complements a networking business that the company built primarily with its $16.5bn acquisition of Alcatel-Lucent last year.

This deal may seem to be somewhat of an outlier for Nokia, yet it has already been slowly dipping its toes back into the consumer products game to capitalize on still-existing cachet. Nokia’s stand-alone venture firm also recently announced a $350m investment fund targeted at IoT startups, with digital health being a focus. However, a recent 451 ChangeWave report showed that demand for health and fitness monitors is slowing, with 5% of consumers planning on buying such a device compared with 9% at the same time last year. Also, while IoT saw a boom in M&A last year with 109 transactions, activity has slowed thus far in 2016 and is on pace to decrease, according to 451 Research’s M&A KnowledgeBase.

The reach for Withings, which is based in France and has about 200 employees, is the latest move in Nokia’s shift in strategy. Five years ago, more than half of every Nokia sales dollar came from its mobile phone business, but the company was hemorrhaging revenue and operating in the red. By divesting its device and auto navigation divisions, as well as buying Alcatel-Lucent, Nokia has become a much smaller organization, albeit one turning a profit with cash in the coffers to spend.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Locally grown is not satisfying enough for Alibaba’s palate

April 14, 2016 Mark Fontecchio

Contact: Mark Fontecchio

Alibaba is aggressively looking to expand its e-commerce empire beyond China, and is spending heavily to do so – its latest investment being $1bn for a majority stake in e-commerce vendor Lazada. The acquirer, which has mostly limited its purchases to China, is beginning to look abroad as the growth of its local revenue slows.

Yesterday’s reach for about two-thirds of Lazada was its first for another online retail business, according to 451 Research’s M&A KnowledgeBase. A deal of that size for online retail is rare – we count just a handful of other $1bn+ transactions in the past 15 years in that space – making Alibaba’s move that much more significant in its international push. Singapore-based Lazada also operates in Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

The challenge for Alibaba will be transforming Lazada into an operation as efficient as its own. While Alibaba has 5x as many employees as Lazada, it generates 61x the sales. And it’s profitable. Lazada’s losses, on the other hand, have grown at a faster clip than its revenue (sales increased 80% to $191m in the first nine months of 2015, but its adjusted EBITDA losses more than doubled). The pickup of Lazada follows shortly behind its participation in a $500m funding round for India-based Snapdeal.

Lower than expected growth is driving Alibaba’s expansion outside its home country. Its revenue last year grew 27% to about $12.8bn, below the 33% growth rate in 2014 and much lower than in previous years. Wall Street has pounded Alibaba’s stock for repeatedly not meeting analysts’ revenue projections, sending shares down 16% from its opening day price in September 2014. Growth is increasingly difficult for Alibaba to find locally – for example, the company is setting up thousands of rural service centers to cater to areas with little or no Internet access. Thus, it is looking beyond its borders to find it.

Credit Suisse Securities advised Alibaba on its acquisition of Lazada, while Goldman Sachs banked Lazada.

Hosted services M&A value craters, yet activity still healthy

April 7, 2016 Mark Fontecchio

Contact: Mark Fontecchio

The value of hosted services M&A crashed to Earth in Q1, despite an uptick in deal volume. Following a boom of six consecutive quarters with more than $1bn in deal value, last quarter saw less than $300m in transactions, the lowest total in four years. The downward movement in hosted services reflects the broader tech M&A sector, which saw a slowdown as credit markets tightened and stocks gained volatility. In addition to that, there just aren’t many large-scale pairings left to be had. The US hosting market underwent a strong period of consolidation over the past few years, and Europe’s not far behind it.

Asset acquisitions, such as one-time datacenter deals, accounted for one-third of the activity in hosted services in the quarter as large providers made modest purchases to meet demand and enter new markets. Regional expansion transactions included serial acquirer Carter Validus buying two facilities in Georgia and Texas, and Zayo Group scooping up a 36,000-operational-square-foot datacenter in Dallas. These acquisitions fit one of the three major trends we anticipated for hosted services M&A in 2016: that datacenter operators would continue to grow regionally through M&A. To boot, the biggest hosted services transaction was the $130m leaseback agreement between CyrusOne and CME Group for an 80,000-operational-square-foot facility in Aurora, Illinois.

Meanwhile, service providers didn’t spend much to move up the value chain into managed services and similar segments. Instead, they opted to stay within their wheelhouse – nearly 43% of hosted services deals last quarter were colocation acquisitions, nearly double the portion from a year earlier. We expect those types of transactions to pick up the rest of the year alongside continued geographic datacenter consolidation. Overall hosted services M&A will also likely accelerate, as the first quarter is historically the year’s slowest in both volume and value.

CenturyLink grows managed security services practice with netAura buy

March 30, 2016 Mark Fontecchio

Contact: Mark Fontecchio

CenturyLink acquires IT security services firm netAura as it gears up a managed security services (MSS) practice. In a forthcoming report, we write that CenturyLink has launched an updated MSS suite, which has been a popular portfolio addition for many multi-tenant datacenter and managed service providers in the past year. The target also brings experienced security personnel at a time of a shortage in skilled security workers. Finally, the move bolsters CenturyLink’s managed services platform as its legacy telecom services decline.

CenturyLink has steadily climbed the services stack since 2011, in part through acquisitions such as Savvis, database-as-a-service vendor Orchestrate and cloud management provider Tier 3. Others are doing the same. ViaWest acquiring AppliedTrust and Level 3 buying Black Lotus are just two recent examples of M&A activity in this sector. The deals particularly make sense in security, where staffing issues abound. According to 451 Research’s Voice of the Enterprise survey of 786 IT decision-makers in Q4 2015, staffing information security was one of the top pain points, ahead of options like firewall/edge network security and mobile device security. In today’s transaction, all 15 of netAura’s employees will move to CenturyLink.

We expect interest and activity to continue in this space through the rest of the year. Dell’s cybersecurity unit SecureWorks filed for an IPO in December, a move we predicted last May. Potential M&A candidates that could conceivably become targets in similar deals might include Red Canary, which is focused on advanced endpoint defense, and Encode, a UK-based security analytics firm with a managed service offering.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

IHS makes its mark on financial sector with $5.9bn Markit buy

March 21, 2016 Mark Fontecchio

Contact: Mark Fontecchio

IHS pays $5.9bn for Markit Group, the biggest deal in online financial information and analysis, according to 451 Research’s M&A KnowledgeBase. The acquisition increases IHS’s headcount and revenue by about 50%, giving it strong entry into online reference and analysis data in the financial sector to complement its similar offerings in the energy and automotive verticals. While the two vendors perform similar functions, their customer bases don’t overlap much, with IHS’s clients including most of the top oil and automotive companies and Markit selling to banks, hedge funds and other financial institutions.

IHS and Markit will merge to form a new entity called IHS Markit, of which IHS shareholders will own 57%. The transaction values Markit at 5.9x trailing revenue, a few ticks higher than the 5.5x multiple that Intercontinental Exchange paid for Interactive Data Corp (IDC) in a similar deal last October. IDC’s revenue had a 3.8% CAGR over the previous five years, compared with Markit’s roughly 10% CAGR over the previous four years. That said, Markit’s 4.5% revenue increase to $1.1bn last year was considerably slower than previous rates in the 10-12% range.

The move marks the third $5bn+ transaction in financial technology in the past year, and highlights fintech M&A as one of the few bright spots this quarter. While overall deal value is down about 30% to $62bn thus far in 2016, the Markit sale has lifted fintech M&A up 79% to $7.4bn. The transaction is expected to close in the second half of this year. M. Klein and Company, Goldman Sachs and Bank of America Merrill Lynch advised IHS, while J.P. Morgan Securities banked Markit.