Author: Scott Denne

Vista Equity Partners picks up Marketo for $1.8bn

Scott Denne

Contact: Scott Denne

Three years after the peak of marketing software acquisitions, Vista Equity Partners pays $1.8bn in cash for Marketo. The waiting didn’t hurt Marketo. It fetched the second-largest price tag in a marketing automation deal – at $2.5bn, ExactTarget claims first – and at 8x trailing revenue, the valuation lands above the median 5.1x for marketing software transactions worth more than $250m, according to 451 Research’s M&A KnowledgeBase.

Marketo has a claim to that kind of multiple. Its peers – ExactTarget, Responsys and Neolane – all drew valuations in the 8x neighborhood, while Eloqua and Demandforce brought in 10x and 11x, respectively. Those earlier valuations, however, were predicated on synergies with strategic buyers. In hindsight, some of those were imagined synergies. Still, that kind of valuation becomes tougher to justify with a financial acquirer. More so when considering that Marketo has shown little sign of slowing down its spending or reaching profitability: it lost $72m on $224m in revenue over the past 12 months.

Worse still, Marketo has been moving upstream from the medium-sized business market toward the enterprise segment as it seeks continued growth – revenue grew 35% year over year last quarter. As it enters the enterprise arena, it has faced tough competition on pricing from Oracle and other larger software providers that can sustain substantial losses to win market share among CMOs. Valuations have trended much lower in recent months on big-ticket marketing deals than they were in the 2012-13 heyday. Small-business specialists Yodle and Constant Contact were both valued at about 2x, while EQT paid 5x for Sitecore, whose topline and growth are similar to Marketo’s.

That said, Vista Equity will pay slightly less than Marketo’s 52-week high and one could argue that it’s getting a bargain in that respect – it paid the same multiple for Cvent, the event-planning software vendor it took private earlier this year (also below the 52-week high). And it may turn out to be one if there is another wave of marketing software M&A as Marketo is one of only a handful of large, independent players in the sector.

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

Calling Wall Street: Twilio looks to break the slump of VC-backed IPOs

Scott Denne

Contact: Scott Denne

Twilio has set itself up for the first venture-backed IPO of the year. The maker of communications tools and services for mobile app developers unveiled its prospectus showing solid revenue growth, mild losses (for a venture capital portfolio company) and a lack of long-term contracts that will make its future results challenging to predict.

The San Francisco-based company finished 2015 with $167m in revenue, an increase of 88% from a year earlier and a growth rate that’s 10 percentage points higher than 2014’s growth. Its losses increased to $36m from $27m. Losses, measured as a percentage of revenue, decreased to 21% from 30% as Twilio generated increasing revenue for each dollar of sales and marketing spending. Marketing spending will likely trend back up in the wake of the company’s IPO as it plans to invest in building its enterprise sales team to land more business within that sector.

Twilio will have to be successful in that strategy to keep growth near its historic pace. The company depends on a single customer for much of its revenue: Facebook’s WhatsApp accounted for 17%, or $28m, of last year’s sales. Meanwhile, its top 10 customers made up a combined 32% of its revenue – so aside from WhatsApp, those clients spent only an average of $3m on the platform. The average account outside the top 10 paid just $4,000 (some customers have more than one account). Unlike most SaaS vendors, the bulk of Twilio’s revenue – over 70% – is billed based on usage. Few accounts, including WhatsApp, have contracts with minimum spending levels – the company maintains just $6m in deferred revenue on its balance sheet.

The variability, lack of contracts and dependence on WhatsApp will weigh down the valuation and, we believe, push Twilio’s market cap toward the lower end of the spectrum among SaaS firms. The company seems to be aware of this and invented a non-GAAP financial metric (something that’s always worrisome to see) called ‘dollar-based net expansion rate’ that, no surprise, shows a growth rate that’s nearly twice that of its GAAP revenue.

RingCentral provides a good predictor of where Twilio’s valuation might fall when it hits the public markets. That company also offers voice and text communications services, although mainly to businesses. While RingCentral has a slower rate of growth – about 30% year over year – it posts more predictable revenue. As Twilio is seeking to do, it started at the low end of the market and has been pushing upstream. RingCentral trades at 4x trailing revenue and we would expect Twilio to fetch something in that neighborhood, giving it a market cap of about $750m on $192m in trailing revenue.

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

HPE unloads services biz as outsourcing consolidation gains momentum

Scott Denne

Contact: Scott Denne Katy Ring

Hewlett Packard Enterprise (HPE) is looking to get out in front of a wave of consolidation in the IT outsourcing and services sectors by selling its services business to CSC for $6bn in stock and cash. The deal marks the latest and largest of HPE’s divestitures as the company shifts its focus toward building its software-defined infrastructure capabilities on the back of its legacy enterprise software and hardware group. In divesting its services division, the company risks losing one of its largest sales channels, although not selling the unit presents the same risk as HPE was unlikely to invest heavily in a line of business that’s outside its primary focus just to keep up with market consolidation.

CSC will hand over half of its equity (valued at $4.6bn before the announcement, although CSC stock jumped by one-third afterward) to HPE’s shareholders to acquire the services business. In addition, it will pay $1.5bn in cash to HPE and assume $2.5bn in liabilities, including pension payments and $300m in an outstanding bond taken out by EDS. The deal is structured as a Reverse Morris Trust, where HPE will spin off the target to its shareholders and sell it to CSC in a 50:50 merger, making it a tax-free sale. It values the unit at $8.5bn, or 0.4x trailing revenue – below the 0.6x that HP paid to buy EDS back in 2008.

Along with the cash and stock, CSC has agreed to maintain the level of purchases of HPE gear to service the target’s legacy customers for the next three years. This give HPE a window to maintain a major sales channel while bolstering its appeal to CSC and other major IT services providers, now that it will no longer be a competitor. HPE CEO Meg Whitman will have a seat on CSC’s board and HPE will name half of CSC’s directors.

Although the services unit has shrunk under HPE’s ownership, it had become more profitable in recent quarters. Its top line declined 2% year over year in Q1, but the total value of its contracts and the value of new accounts were both up, suggesting that declines were leveling off. In the overall IT services space, a wave of consolidation will make that increasingly tough to maintain. According to 451 Research’s M&A KnowledgeBase, $27.8bn worth of IT services and outsourcing businesses have been sold this year, already topping last year’s tally and on pace to be the highest total value of such deals since 2007. All of that despite this year being among the lowest in IT services transaction volume.

HPE may have been slow to invest in its services business as the market for traditional IT outsourcing declines and the demand for newer, business application-focused services increases – however, CSC has shown no such hesitation. CSC has inked seven acquisitions in the past 12 months, including consolidation plays such as today’s move and the $720m pickup of Xchanging, as well as deals for new talent and tech, such as its recent acquisitions of SaaS specialists Fruition Partners and Aspediens.

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

Content and data form foundation of Adobe’s M&A strategy

Scott Denne

Contact: Scott Denne

At its annual marketing user conference, Adobe laid out a strategy to extend throughout and beyond marketing by touching on every part of the customer experience with content and data offerings. The company has accumulated the biggest and broadest suite of marketing software products among any of its enterprise software peers. However, it will take many years for marketing software to become a mature segment. For Adobe to maintain its position, it will need to continue to expand its offerings.

Despite the hyperbole about the level of technology spending among CMOs, marketing software remains in an early – though promising – stage. Spending continues to rise and the landscape is fragmented. It will likely remain so as new forms of media and mobile devices continue to sprout. And with them, new methods of customer engagement and increasingly fragmented audiences and data sets. The exits of enterprise software vendors such as Teradata, Hewlett Packard Enterprise and SDL provide Adobe and other remaining incumbents with an opportunity to gain market share and push into emerging corners of this category.

Adobe began its foray into digital marketing with acquisitions – first website analytics company Omniture (2009), and then website content management vendor Day Software (2010). Those two products currently sit at the core of Adobe’s marketing suite and much of the growth in its Marketing Cloud, which currently generates $1.4bn in trailing revenue, comes through the sale of them or cross-selling other offerings to customers that already use Adobe for analytics or content management.

As Adobe looks beyond marketing and toward becoming the data and content layer that powers the customer experience landscape, it could expand into areas such as e-commerce platforms, cross-channel attribution and customer data platforms. Subscribers to 451 Research’s Market Insight Service can access a full report on Adobe’s strategy, product portfolio, competitive positioning and potential targets in the marketing ecosystem.

Value investing: China’s newest export

Scott Denne

Contact: Scott Denne

As acquirers back down from last year’s frenetic pace of dealmaking, there’s one group that’s opening their wallets – buyers from China. The value of transactions from this cohort, like the rest of the market, is down from 2015 highs, coming in at $12bn compared with $21bn through the first four months of the year. Yet the volume of deals is set to outpace last year’s totals.

China coming into its own as a major economic power accounts for much of the momentum. Also, the broader M&A market has shifted toward value-based buys and away from growth. That’s a core element for many China-based businesses. And when they’re hunting for value, they’re homing in on North American targets. Through April, China-based tech vendors have printed 10 such deals for $9.3bn – those numbers are approximately double the pace of any other year in the past decade, according to 451 Research’s M&A Knowledgebase.

And in reaching for North American companies, China-based acquirers have been uniquely cheap. Only once in the past 10 years has the M&A KnowledgeBase recorded such a transaction coming in above 3x trailing revenue, with only four deals above 2x. This year is no exception. Lexmark, which was picked up by a consortium led by Apex Technology, was valued at $3.5bn, or 1x, making it the largest multiple of the year among American firms selling to China. The largest deal (and lowest multiple) was Tianjin Tianhai Investment Company’s purchase of Ingram Micro for $6bn, or 0.1x.

China’s stock markets have come down substantially over the past 12 months, although valuations there still trend high, leaving room for M&A arbitrage. Shares of Apex (Lexmark’s soon-to-be owner) most recently traded on the Shenzhen Stock Exchange at 13.5x, while Tianjin Tianhai (Ingram’s acquirer) trades at 13.2x.

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

Salesforce’s marketing connection

Scott Denne

Contact: Scott Denne

Salesforce moved into marketing with its boldest acquisitions, but they’ve generated only modest returns. Despite above-average market success, its Marketing Cloud is the smallest cloud within the company and the second-slowest in growth. As it kicks off its annual marketing conference, the environment is ripe for Salesforce to build on its existing capabilities, as digital marketers are ready to spend.

Salesforce’s Marketing Cloud posted $654m in revenue last year, up 29%. That kind of growth in marketing software would be the envy of several other enterprise software vendors – particularly HP Inc and Teradata, both of which recently fobbed off their low-growth marketing assets. Yet marketing feels malnourished at Salesforce. The CRM giant paid $2.5bn, $689m and $326m to pick up marketing automation provider ExactTarget and social marketing specialists Buddy Media and Radian6, respectively. Today, those businesses are the core of Salesforce’s Marketing Cloud – which accounts for just 10% of total revenue and is the second-slowest cloud in growth behind the legacy, and much larger, Sales Cloud. Compare that with its customer-service software business, which jumped 38% to $1.8bn and has its origins in the $32m acquisition of InStranet in 2008.

As Salesforce kicks off its annual Marketing Cloud conference, Connections, there’s much it could do to bolster this unit. For one, there’s still work to be done in integrating Marketing Cloud into a shared UI across other Salesforce offerings. The company has long pitched the vision of a single view of the customer, although today less than one-third of its clients purchase Salesforce products across multiple categories.

Starting with email marketing, Salesforce has added multiple marketing applications, unified around its Journey Builder offering for designing rules-based campaigns. And although Salesforce’s marketing team hasn’t gone shopping in three years, its Marketing Cloud could benefit greatly from the inclusion of additional identity data to better track online and offline customer interactions. Reaching for LiveIntent would bring these capabilities to Salesforce, as well as enhance its email service with some additional personalization capabilities. Alternatively, it could look to buy an audience management platform vendor such as Lotame or Krux. Both have developed cross-device matching as part of their products. In fact, Salesforce recently expanded its partnership with the latter vendor to enable Marketing Cloud customers to match their data with that from third-party providers.

The environment is ripe for Salesforce to build on its existing capabilities. Although much of the basic functionality of digital marketing – website analytics and email marketing – is maturing, the overall space has plenty of momentum for Salesforce to capitalize on. According to a recent survey by ChangeWave Research, a service of 451 Research, 17% of marketers plan to increase spending on digital marketing in the coming quarter. That’s higher than at any point in the previous two years and a larger anticipated increase in spending than any other category in the January survey.

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

Oracle gets back to buying

Scott Denne

Contact: Scott Denne

As valuations and deal volumes come off of last year’s high, Oracle is heading in the opposite direction. With today’s acquisition of Textura, the database giant has printed its fourth deal of 2016, after just two in all of last year. Despite that, it is not necessarily a bargain shopper. In today’s transaction, Oracle is paying $663m, or 7.6x trailing revenue, for construction management SaaS vendor Textura. Not cheap, but better than it would have spent a year ago for the target, when its shares were trading two turns higher. The purchase continues a trend that accounted for much of Oracle’s 2014 spending spree on vertically focused software (MICROS being the most notable example).

Oracle seems to come to the table more often when the market is a bit more favorable to buyers. Last year’s drop in acquisitions corresponded with an overall 18% annual rise in average valuation-to-revenue multiples (excluding those targets with less than $10m in TTM revenue), according to 451 Research’s M&A KnowledgeBase. Similarly, the largest jump in average valuation in the past decade – 36% in 2010 – witnessed Oracle’s second-lowest spending ($1.9bn) during that same period.

All signs point to a continued favorable environment for Oracle to go shopping. In our December 2015 survey of bankers and corporate development executives, nearly two-thirds of respondents anticipated a decrease in valuations in 2016. That’s almost double the previous high-water mark – or low-water mark, depending on your perspective – in our survey. Not to mention, overall deal value was down to $72bn in the first quarter of this year, from $121bn a year earlier. Even with today’s transaction, however, Oracle is still tracking below its historical pace.

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

Twitter should be more antisocial

Scott Denne

Contact: Scott Denne

Twitter’s biggest problem is that it fancies itself as the next (or at least the number two) Facebook. While Twitter is a substantial social network, its growth on that front has peaked and isn’t likely to come back in a big way. Instead of thinking of what it could be next, management seems focused on recapturing the growth of the past or, even more worrisome, turning to strategies that are best left to the largest Internet firms.

In its earnings call this week, the company emphasized what it perceives as Twitter’s strength: ‘Twitter is live.’ True, but ‘live’ isn’t a thing people are interested in. People care about live (something). As Twitter looks to invest its $3.5bn in cash, the company should leverage its strength in live commentary, live sharing and live video to build up communities and content around particular topics and interests. The core – and overly broad – platform should power a set of interest-driven media offerings, not be the main product itself. Commentary without context is unlikely to draw major brand advertisers to the platform. It could, however, draw them in with unique communities and the content to go along with them. Twitter has a perfect opportunity to build along those lines with its recent deal with the NFL to stream 10 games next season.

The amount of US monthly users on Twitter’s network has been flat for four consecutive quarters and international growth hasn’t fared much better. The company has been able to squeeze revenue growth out of a flat audience by developing its ad products. Those efforts are now losing momentum. Twitter reported revenue growth of 36% year over year, down from 48% in the previous quarter. It’s guidance for next quarter is flat.

This feels like a desperate situation. But it shouldn’t. Twitter is a media company that will shortly be larger (by revenue) than The New York Times. And it’s posting 36% growth – certainly unusual for a media company its size. The problem is that it doesn’t consider itself a media company. Management seems intent on scaling up the core platform as its top priority. It’s not likely to reignite the growth it saw in its early days – and it’s certainly unlikely to become the next Facebook, which is unfortunately the lens through which management views its potential.

Based on management comments, it appears the company is determined to invest in building out its ad-tech stack to become a one-stop shop for advertisers. Twitter simply doesn’t have the scale to accomplish this and lacks the ability to match identities across devices, which is becoming a core feature of Google and Facebook and a defining trend of digital advertising. And in video, the fastest-growing segment of digital advertising, the supply-side platforms and ad networks with the most scale have already been scooped up. Twitter’s strength lies in interest-driven data, rather than the demographic data that’s likely to continue to be the currency of video ad buys for at least a few more years.

Lexmark prints a sale

Scott Denne

Contact: Scott Denne

Lexmark sells to a syndicate of China-based companies for $2.5bn in cash following six years and $2bn invested to transform itself from a printer supplier into an enterprise content management (ECM) software vendor. Despite that spending, its business continued to deteriorate and a series of earnings and guidance disappointments sent it looking for the proverbial ‘strategic alternatives.’

Seine Technology Group leads the acquisition consortium through its subsidiary, Apex Technology – a maker of printer cartridges. Siene also owns Pantum International, a printer and printing services company. Private equity firms PAG Asia Capital and Legend Capital are also participating. Including Lexmark’s debt, the deal values the target at $3.6bn, or 1x trailing revenue – well below the median multiple (1.5x) for hardware providers in the past 24 months, according to 451 Research’s M&A KnowledgeBase. That’s a particularly sorry comparison considering that 15% of Lexmark’s $3.5bn in annual revenue comes from software, where multiples are usually higher.

Lexmark’s printer business has been in steady decline for a few years, dropping 12% last year. Today’s sale aims to reverse that by growing the business in Asia, where Lexmark has little presence at the moment. Lexmark’s software business has grown dramatically via M&A, yet its organic growth doesn’t impress. Enterprise software sales jumped 81% last year to $534m, although most of that was due to a half year of ownership of Kofax ($298m in TTM revenue at the time of its purchase) and its first full year as owner of ReadSoft ($119m in TTM). In the fourth quarter, its software business grew just 5% sequentially. Today’s deal comes as Lexmark is halfway through restructuring those acquisitions, which largely consisted of overlapping products, to improve profits.

Goldman Sachs advised Lexmark on its sale, while Moelis & Company banked the buyers.

Interwoven unwound: HP Inc sells its marketing unit to OpenText

Scott Denne

Contact: Scott Denne

HP Inc unloads some of the lesser bits of its regrettable acquisition of Autonomy with the $170m sale of HP Engage to OpenText. Many of the key pieces of Autonomy – acquired in 2011 for $11.7bn and shortly thereafter written down – remain with Hewlett Packard Enterprise (the software side following HP’s breakup). HP Engage includes most of the assets from Autonomy’s 2009 purchase of Interwoven.

At the time of the split of the original HP, the company hung out a ‘for sale’ sign by housing HP Engage – its customer experience and marketing software unit – within its printer division. Despite its seeming eagerness to unload those assets, HP scored a decent price. According to 451 Research’s M&A KnowledgeBase, the sale values the business at just a hair under 2x revenue and compares quite favorably with the 1.4x median multiple for divestitures from public companies over the past 24 months.

Still, the deal marks the culmination of a steep descent for Interwoven, which fetched $775m in its 2009 sale to Autonomy. With this transaction, OpenText adds content management (HP TeamSite), digital asset management (HP MediaBin), call-center management (HP Qfiniti) and website personalization (HP Optimost), among other capabilities. Along with iManage, which HP sold to the division’s management team last summer, HP has now offloaded Interwoven.

From the other side of the table, the move follows OpenText’s template. In HP Engage, as in many of its acquisitions, OpenText obtains a fading software asset that’s generating cash from a business that’s somewhat complementary and slightly overlaps with OpenText’s existing offering. The valuation falls a bit lower than the 2.3x median multiple on OpenText’s deals this decade – the company has never cracked the 3x mark.