Author: Scott Denne

The Krux of Salesforce’s advertising push

Scott Denne

Contact: Scott Denne

Salesforce makes a bold and belated move in advertising technology with the $680m purchase of Krux. The transaction brings Salesforce into the market for audience management platforms at a higher price and a few years behind rivals Adobe and Oracle. That’s not to say it’s too late – in Krux, Salesforce has picked up a company that’s been able to thrive as software giants poured into its market.

The acquisition of Krux caps a record amount of M&A for Salesforce. According to 451 Research’s M&A KnowledgeBase, one-third of the company’s purchases have been announced since the start of 2015. Deals during that same period, including Krux, account for almost half of Salesforce’s total disclosed and estimated M&A spending.

Its recent moves have printed at aggressive multiples. In its largest, the $2.8bn reach for Demandware, Salesforce paid 11x trailing revenue for an established and growing e-commerce platform. In nabbing smaller companies, such as configure-price-quote vendor SteelBrick and predictive analytics startup BeyondCore, Salesforce paid upward of 20x. The acquisition of Krux likely came in above 10x, but shy of 20x as it’s a more mature business than those latter two. While steep, there’s justification in that price.

For one, Krux was able to grow from serving mostly publishers to mostly marketers. The company also did that at a time when most of its peers were reformatting their strategies to avoid Adobe and Oracle – Krux, in contrast, was expanding by going head to head. Second, most of its competitors had already been acquired, leaving Salesforce with few options in this category – and the players that had sold went for 6x and up. As the advertising market begins a transition from valuing reach toward valuing individuals, audience management platforms are becoming the link between a company’s first-party data and its advertising.

Krux isn’t Salesforce’s first foray into advertising – it already sells a social media ad platform and has partnered with Krux and other ad-tech providers to enable Salesforce Marketing Cloud customers to use their marketing audiences for paid media campaigns. Still, the deal goes beyond its previous ambitions in the space. Krux is built to be the repository of advertising data for sophisticated advertisers and some of the world’s largest media buyers. Salesforce’s prior efforts in this niche revolved around enabling email marketers to spread into new channels.

Look for a full report on this transaction in tomorrow’s 451 Market Insight.

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The Trade Desk trades up

Scott Denne

Contact: Scott Denne

The first successful ad-tech IPO in two years made a strong debut on Wall Street today. But don’t expect the floodgates to open for ad-tech offerings anytime soon. The Trade Desk priced at $18 per share and began trading at $28 for a market cap north of $1bn, or 7.2x trailing revenue. Within ad-tech, there aren’t many companies that offer investors the scale, growth and potential sustainability to draw such interest.

Trade Desk deployed a different sales strategy than most of its media-buying software peers. Vendors in that space were forced to choose between scaling up quickly through short-term, low-margin deals with ad agencies or fighting those agencies for direct business with marketers. Trade Desk positioned itself as a software provider to agencies only, and therefore not a threat to its own customers. Its positioning and product led revenue to grow 2.5x last year to $114m. Through the first half of this year, it’s running at $149m trailing revenue. It’s not the largest of its peers, but does have the highest growth at that scale.

Trade Desk’s debut is good news for AppNexus, which has been working toward an IPO of its own for the past year or so. However, most ad-tech vendors with the kind of growth that Trade Desk generates are simply too small to consider a public offering. And those that have the size don’t have the growth.

Today’s offering is reminiscent of Rocket Fuel’s 2013 IPO. That company also went public on the strength of scorching growth derived from sales to the agencies. Rocket Fuel currently trades down 95% from its debut. One of its problems was that it was winning high-margin sales from agencies. Once it went public and those margins became known, its customers began to demand that it take lower margins, which hindered its growth. While that’s a risk for Trade Desk, it’s far less pronounced.

Rocket Fuel was keeping about 55% of the media spending running through its platform, while Trade Desk keeps 21%. Trade Desk targets a different part of the agency business. As its name suggests, Trade Desk sells to agency trading desks – sophisticated digital media buying operations – many of which have a contractual relationship with the company. At the time of its IPO, Rocket Fuel was catering to agency buyers on a one-time basis and before most agencies’ holding companies sought to consolidate digital spending via their trade desks.

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

Google and other tech giants understand the value of natural-language technology

Scott Denne

Contact: Scott Denne

Virtual assistants, bots and conversational software interfaces are sending the world’s largest tech companies hunting for natural-language-processing (NLP) technologies and expertise. Google is the latest to make a kill with its acquisition of API.AI, which provides developers with access to NLP capabilities. With the purchase, Google could benefit from API.AI’s developer network, giving the search giant access to a significant number of bots, applications and devices already using speech recognition and NLP technologies.

However, multiple redundancies are the most striking feature of this deal – Google already offers developer tools for NLP and speech recognition, as well as its own conversational assistant in its recently launched Allo messaging app and its Google Home smart speaker. Those redundancies highlight the demand for NLP expertise as the acquisition of API.AI will expand Google’s team of experts working on conversational interfaces.

Google’s move comes just three months after Microsoft’s pickup of API.AI rival Wand Labs as the enterprise giant seeks to transform the functionality of its products with NLP, machine learning and data. IBM, Facebook, Google and Amazon have all inked previous NLP transactions and we anticipate continued interest in other independent NLP platform providers such as Recast.AI, init.ai and msg.ai, as well as bot-building platform specialists that include an NLP component. Both categories of vendors bring expertise and cater to developers, which is an important element to growing out diverse sets of training data to tune NLP algorithms.

Subscribers to 451 Research’s Market Insight Service will have access to a full report on Google’s API.AI buy later today. Meanwhile, click here to view a previous Spotlight on developer platforms for chat bots and NLP.

Notable NLP acquisitions

Date announced Acquirer Target
September 19, 2016 Google Speaktoit (dba API.AI)
June 16, 2016 Microsoft Wand Labs
March 4, 2015 IBM AlchemyAPI
January 5, 2015 Facebook Wit.ai
April 17, 2013 Amazon Evi Technologies

Source: 451 Research’s M&A KnowledgeBase

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Infoblox sells for $1.6bn amid a slew of PE take-privates

Scott Denne

contact: Scott Denne

Billion-dollar take-privates continue to rise to record levels as Vista Equity Partners pays $1.6bn for Infoblox. Vista has ended the network management vendor’s four-year run as a public company – a run that has seen shifts toward virtualization catch up with the target. Many of Infoblox’s capabilities – e.g., DNS, DHCP and IP address management – are now included in different virtualization and cloud management products. As that has happened, Infoblox’s growth has slowed and it has become more reliant on specialty deployments, particularly for security, which now generates 16% of sales, up from 8% a year ago.

Today’s deal marks the third time this year that Vista has taken a public company off the market. The first two, Marketo and Cvent, went off at 8x trailing revenue – aggressive multiples for a private equity (PE) transaction. By comparison, Infoblox is selling for 3.7x. Marketo and Cvent were posting about 30% annual revenue growth at the time of their sales. Infoblox, on the other hand, was slightly down year over year last quarter and expects 6% or less growth over its recently begun fiscal year.

Being lower than Vista’s recent deals doesn’t mean that Infoblox isn’t commanding a strong multiple. Despite growth challenges and the fact that it puts up negative EBITDA – squinting past a restructuring charge gets it nearly in the black this year – Infoblox’s multiple comes in right at the median multiple for similar transactions.

Availability of debt has helped drive PE deals to recent highs. According to 451 Research’s M&A KnowledgeBase, there have now been 10 take-privates by PE firms valued at or above $1bn, more than any other full year in the past decade. (The total value of such transactions is higher than most years, but not breaking records as no single deal has cracked $5bn).

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Amdocs’ engaging trio of acquisitions

Scott Denne

Contact: Sheryl Kingstone Scott Denne

Amdocs, the dominant provider of operational telecom software, stretches into customer engagement with a trio of uncharacteristic acquisitions. The telecom support systems giant must push beyond traditional operational and billing software (OSS/BSS) as the nature of customer service changes in the telecom industry.

The Israel-based company spent a combined $260m to acquire Brite:Bill, Pontis and Vindicia, enhancing its billing experience and customer engagement capabilities. Acquisitions have been a part of Amdocs’ legacy. However, three deals in a day in unusual. In fact, it’s been a decade since Amdocs inked three transactions in a single year.

It’s not just the number of new purchases that defies Amdocs’ M&A M.O. The vendor bought its way toward consolidating OSS/BSS, first pushing from BSS into OSS and then, more recently, doing deals to shore up its market share in that sector. Now Amdocs is looking to M&A for new capabilities to address the changing requirements of consumers. And there’s an urgent need to do that.

The increasing availability of digital communications and customer service has unleashed an abundance of new consumer demands. Telcos are no longer competing on price alone. Mobile, social and other digital channels are empowering customers to dictate the terms of engagement with their chosen service providers. That is forcing service providers to complement systems of record with systems of engagement that are agile and intelligent. According to our surveys, 76% of consumers prefer to use digital channels to avoid calling a customer service agent. Of those, 42% view that capability as a prerequisite for future loyalty.

Arma Partners advised Brite:Bill on its sale.

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Coupa is latest SaaS firm to seek IPO following Apptio, The Trade Desk

Scott Denne

Contact: Scott Denne

Wall Street’s recent generosity toward software IPOs hasn’t gone unnoticed as a slew of such companies are looking to debut. Apptio and The Trade Desk recently set a range for their offerings and now Coupa has moved toward an IPO by unveiling its prospectus. The spend management vendor’s accelerating growth replicates a story that has played well lately and could enable it to top the valuation from its venture rounds.

Coupa offers cloud-based spend management software and an integrated (and free) portal for suppliers. The company believes that integrating supplier capabilities into the portal will help create a network effect to draw more buyers onto the software and vice versa. It still has massive sales and marketing costs, although there are signs that this strategy is beginning to work. Revenue rose 65% in 2015 to $83m and, more importantly, accelerated to 75% growth in the first half of this year. Coupa’s sales and marketing expense was 70% of its total revenue for the first half of last year, but dropped to 58% this year. Its net loss was $46m for the year.

Accelerating revenue has been a theme among SaaS IPOs. Talend, with 20% growth last year, fetches 8.5x trailing revenue on the strength of 34% and 38% year-over-year growth in the two most recent quarters. Twilio, which increased revenue 88% in 2015 from 78% the previous year, commands a 20x multiple. Coupa will be challenged to hit the heights of Twilio when it prices, although moving past Talend seems possible. Coupa and Talend have similar costs and the former’s higher growth should be enough to take it to 9x or beyond, giving it a valuation of approximately $1bn.

Consumer sentiment favors continued liberal multiples. According to 451 Research’s VoCUL survey in August, 17% of people are more confident in the US stock market than they were 90 days ago. That’s up from 14% in the same survey the previous month and just 5% from a year ago.

Genesys boosts August PE totals with Interactive buy

Scott Denne

Contact: Scott Denne

Genesys’ $1.4bn purchase of fellow contact-center software vendor Interactive Intelligence wraps up a busy August for private equity (PE). This month, PE firms and the companies they own, like Genesys, have racked up $14.5bn in deal value – almost half of August’s total tech M&A, according to 451 Research’s M&A KnowledgeBase.

Today’s transaction values Interactive at 3.3x trailing revenue. That’s a bit lower than the 4x multiple in both NICE’s acquisition of Interactive’s SaaS rival inContact earlier this summer and Genesys’ own $3.8bn post-money valuation on a minority investment from Hellman & Friedman last month. (That deal left a majority stake in the hands of Genesys’ earlier owners, Permira and Technology Crossover Ventures.) Interactive’s 14% revenue growth, compared with inContact’s 25%, accounts for much of the difference.

Genesys has recently set its sights on expanding beyond call-center software into broader customer experience applications to increase its single-digit annual growth. Yet today’s move is more of a consolidation play. It does, however, bring Genesys an asset whose SaaS business is growing – that product grew its revenue 43% year over year to $31m last quarter, accounting for about one-third of Interactive’s sales. Genesys also obtains a team that can help it target smaller customers – Interactive’s average revenue per customer is less than half of what Genesys takes in.

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

Ritchie Bros. scoops up IronPlanet amid increased activity from non-tech buyers

Scott Denne

Contact: Scott Denne

Ritchie Bros. Auctioneers’ $759m reach for heavy-equipment commerce site IronPlanet marks the latest technology deal by a non-tech acquirer. Today’s acquisition helps demolish previous records of non-tech buyers in the tech market. According to 451 Research’s M&A KnowledgeBase, such shoppers have spent $33.7bn since the start of the year, more than $4bn over any other full year since 2006.

Not only are non-tech acquirers paying more, the strategy behind their transactions is changing. With the acquisition of IronPlanet, Ritchie hopes to bring in new customers with different preferences for buying and selling heavy equipment. IronPlanet offers a mix of white-label websites for dealers, different auction formats and additional partnerships that Ritchie doesn’t have today. What it isn’t obtaining is an online presence. More than half of Ritchie’s auction proceeds already come through online sales.

That same dynamic – the desire to reach a new set of customers via a technology acquisition – was also a driver of deals earlier this summer. Walmart’s $3.3bn purchase of Jet.com and Unilever’s $1bn pickup of Dollar Shave Club were both targeted at opening new market segments to those companies. Compare that with earlier non-tech transactions in the retail space, such as Nordstrom’s acquisition of HauteLook ($180m) in 2011 and Walgreen’s purchase of Drugstore.com ($429m) that same year. Both of those deals aimed to provide a new channel of services for customers already served by those retailers. Non-tech acquirers are moving from defense to offense, and spending more in the process.

Source: 451 Research’s M&A KnowledgeBase

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Trade Desk looks to trade publicly

Scott Denne

Contact: Scott Denne

The Trade Desk unveiled its prospectus Monday, showing that its agency-focused strategy may have enabled it to meet the challenge of scaling an ad-tech business. Most of Trade Desk’s peers have a complicated relationship with ad agencies and the holding companies that own them. Agencies control an outsized amount of ad spending, yet they treat most media buying platforms as a media rather than software purchase, and play ad-tech competitors off each other to see who will take the lowest margin for a campaign. This has led many media buying platform purveyors to seek to sell their wares to marketers directly, bypassing the agencies and hoping to exchange unpredictable, low-margin orders from agencies for long-term, software-like contracts.

Rather than fight ad agencies, Trade Desk embraced them by selling its software strictly to them and not to the agencies’ marketer customers. That bet has paid off. The company’s revenue increased to $114m in 2015 from $45m a year earlier. Its topline rose 83% year over year through the first six months of 2016. That growth hasn’t come at the expense of profits. The Ventura, California-based vendor eked out a tiny profit in 2014 and grew that to $15m last year. This year it’s on pace to bump that up a bit.

Selling to ad agencies is expensive. Profits remain elusive for many ad-tech firms because the sales process is never-ending, as many agencies choose to purchase media buying platforms as a one-off media expense, rather than an ongoing license or subscription. Trade Desk appears to have gained more traction in selling software contracts to agencies (389 of its agency customers have contracts in place with minimum spending levels), which has kept its marketing and sales costs down as the use among existing customers has risen.

Trade Desk allocated just 24% of its 2015 revenue toward selling its products. Other publicly traded ad-tech providers spend far greater portions of their net revenue on this activity. TubeMogul spent 41% of its revenue on sales and marketing last quarter. Rocket Fuel shelled out 55%, though far lower than the 88% it was spending at its IPO. Ad network specialists Tremor Video and YuMe were even higher at 65%.

Its ability to sell ad-tech as software, its high growth and its profitability should enable Trade Desk to fetch a superior multiple than its peers when it does begin to trade. And it will need to trade well up from those companies to get a valuation above the $600m it garnered in a private financing earlier this year. TubeMogul is the best available comp for Trade Desk. Both vendors offer a media buying platform, and both position themselves as software firms rather than services or media companies. At 57% last year, TubeMogul’s growth is less than half that of Trade Desk and the vendor has yet to turn a profit. Despite garnering one of the best multiples in ad-tech, TubeMogul trades at roughly 2x net revenue. To hit $600m, Trade Desk would need to get 4x trailing revenue.

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Media.net becomes latest Chinese ad-tech target

Scott Denne

Contact: Scott Denne

Inflated stock value on China’s exchanges and a belief in a coming currency devaluation continue to fuel a boom in overseas M&A from the People’s Republic. The latest acquirer to add to that trend is Beijing Miteno Communication Industrial Technology, which announced the purchase of Media.net, a contextual advertising technology firm, for $900m in cash. With more than four months left to go in the year, China-based buyers have crushed their previous record on foreign acquisitions three times over by spending $13.1bn, compared with $3.7bn in all of last year.

We expect such deals to continue, particularly in ad-tech, as vendors in that country widely anticipate an eventual devaluation of their currency. Whether such a devaluation will occur isn’t known, but it’s generally accepted by much of the business community in the country and that has been a factor in the sudden spurt of M&A.

China-based acquirers have been particularly aggressive in their pursuit of ad-tech companies like Media.net. These businesses play well into the arbitrage strategy that’s driving much of China’s overseas acquisitions. The buyer trades at 12.6x trailing revenue on the Shenzhen Stock Exchange – adding Media.net at a 3.5x multiple should boost that nicely. That’s a dynamic we’ve seen in several, though not all, such purchases.

Advertising technology plays well in that arbitrage strategy and those businesses have become popular targets for Chinese shoppers. On a revenue basis, valuations tend to be lower in ad-tech than other tech sectors because gross margins are lower – 15-25% gross margins are quite common. Also, a recent dearth of US acquirers for those assets has driven prices even lower. According to 451 Research’s M&A KnowledgeBase, the median historic multiple on ad-tech transactions is 2.7x TTM revenue. That has dropped to 2.2x in the past 24 months.

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