Author: Scott Denne

Amid Super Bowl fever, the sports business needs to take its medicine

Scott Denne

Contact: Scott Denne

Super Bowl ad prices continue to rise each year, and that masks the symptoms of the sporting world’s concussion. Sports had previously blocked television audiences from completely heading to the sidelines in favor of video on demand, video games and other forms of media; no longer is that the case. Yet networks continue to increase investments in sports – the NFL just sold a package of Thursday Night Football games next fall for $450m, up from $300m last season. This comes during an exodus of subscribers from the sports-industry’s flagship network, ESPN. And as networks, teams and leagues look for ways to stanch the losses, we expect to see increasing investment in technologies that enable them to keep those audiences.

Time may not be on their side (always good news for bankers). Our surveys suggest acceleration in linear TV’s declining audiences. Only 35% of respondents to one of our 2015 consumer surveys reported seeing a TV ad in the previous week. In a separate survey, 8.4% said they had altogether canceled their traditional TV service, while another 16.7% said they are ‘somewhat’ or ‘very’ likely to cancel within the next six months – the highest level to date on both figures.

Increasing fan engagement was the logic behind the heavy investments into daily fantasy sports. The two leading companies in that space – FanDuel and DraftKings – raised more than $700m combined, much of it from networks, sports leagues and team owners. Although those bets don’t look set to pay off, the lure of free cash isn’t the only way to keep fans interested. We recommend the sports industry’s heavy hitters start acquiring and investing in areas that are beginning to change how fans interact with sports.

The first is the technology and talent that power mobile apps. Buying and developing apps gives teams, leagues and networks a direct link to their fans today. Broadcast signals and ticket stubs don’t generate data. Apps do, and having such data will ultimately make their audiences more valuable, and help them find ways to grow and keep them. The second area is in emerging categories of virtual and augmented reality. Madison Square Garden Company, owners of the New York Knicks and Rangers, has already made two venture investments in virtual reality – NextVR (along with Comcast) and Jaunt (alongside Disney). A ringside seat to the growth of these technologies would help sports grow within the next generation of media, rather than succumbing to it, as might happen within the current one.

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Yahoo-dini: magical thinking continues at Yahoo

Scott Denne

Contact: Scott Denne

Yahoo’s leadership still doesn’t understand the business that the company is in. Overshadowed by the news – not really news at this point – that Yahoo’s core business is for sale, Tuesday’s earnings call showed that management believes it can grow a position at the center of people’s digital lives. Yahoo’s new strategic plan (and its old one as well) is to invest in mobile, social and video. Instead of navigating these trends, Yahoo has tried to lead them with heavy investments in product development at the expense of its core business. Yahoo is not a hub of ‘discovery’ in people’s digital lives, as its CEO envisions it – it is a media business and should be run as a media business.

CEO Marissa Mayer isn’t responsible for bringing this magical thinking to Yahoo. The board’s decision to hire an executive whose most significant experience came in managing product development betrayed their thinking that new offerings were the solution to Yahoo’s predicament. True to that belief, the company has launched a lot of new products and made a big bet on social with the $1.1bn reach for Tumblr, which fell short of its revenue targets and is being mostly written down. The introduction of native advertising that melds display with search (Yahoo Gemini) has been more successful. Unfortunately, new products were a solution to the wrong problem.

Yahoo’s legacy banner ad and search revenue plummeted in the past few years, close to $500m annually. Overall, Yahoo’s revenue stands right where it did in 2012, just shy of $5bn, with operating expenses at a similar level. Mayer treats the decline of legacy revenue as an unavoidable fate, saying in the earnings call that Yahoo’s choice was to cut the business entirely or ‘weather’ the slow decline. Had the board installed a CEO with turnaround experience, display wouldn’t have been written off as a forgone conclusion.

Display advertising, particularly the direct-sold banner ads that Yahoo specializes in, isn’t a major growth business. Yet it doesn’t need to evaporate. A few well-timed acquisitions of programmatic buying and selling platforms could position Yahoo for growth in programmatic display. It’s not an unthinkable strategy: a series of such deals enabled AOL to parlay its display-ad-dependent business into a $4.4bn sale to Verizon last year. Yahoo smartly picked up video ad network BrightRoll at the end of 2015 (an asset that contributed most of its revenue growth last year), though such a transaction should have been done earlier and before the company had invested in developing a media buying platform in-house as that offering became immediately redundant.

Aside from an awareness of the need to trim costs, Yahoo’s new strategic plan isn’t that different from its old one. Most disturbing is its plan to invest in mobile search. Even if Yahoo were able to gain ground on Google – an unlikely prospect – it’s extremely uncertain how consumers will ultimately use mobile search as that space continues to evolve. And however it evolves, Apple and Google, with their ability to control the mobile OS, are clearly in the pole position.

Rather than running the business they wish they had, Yahoo’s leadership should run the business they have. And that means maximizing media revenue and building up the company’s cash (it’s about $1bn poorer than it was three years ago) so it can strategically acquire its way into industry shifts, rather than spending to create them.

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IBM’s Resource-ful push into the CMO office

Scott Denne

Contact: Scott Denne

IBM’s acquisitions of Unica and Silverpop basically bookended a series of deals earlier this decade when enterprise software vendors rushed for marketing applications to push to the CMO suite. That’s what makes today’s reach for digital ad agency Resource/Ammirati surprising: Big Blue shows that its strategy for winning the CMO is shifting toward services and away from software.

Resource/Ammirati is among the largest independent ad agencies to mix creative services with digital marketing. It will join IBM Interactive Experience, the digital marketing services unit that Big Blue created in 2014 by blending its existing digital agency with researchers from its customer experience lab. The addition of Resource/Ammirati brings additional digital marketing expertise and, more importantly, a creative ad agency that develops marketing strategies and ad campaigns across online and offline media, having developed TV campaigns for Labatt Breweries and Birchbox, built mobile apps for Sherwin-Williams and designed Procter & Gamble’s e-commerce platform.

In marketing software, IBM has a set of loosely related marketing apps and seems to have rightly recognized that being half-heartedly committed to building a full marketing stack isn’t going to win the day. In IT, where IBM’s strength lies, buyers have a standard set of needs and a standard set of hardware and applications to fill those needs. Marketing is more complex. New categories and channels of customer engagement appear all the time and the best marketers are constantly making adjustments and running tests to optimize performance. Building a software stack to keep up is challenging – services are more flexible.

IBM’s move into digital marketing and agency services lessens the competition with enterprise software firms, though it invites competition from other IT service providers as well as the incumbents in the CMO suite: large agency holding companies. For its part, the latter group has become more active in nabbing IT-related services. In just the past two days, we’ve seen a couple of ad agencies purchase mobile development shops (WPP’s acquisition of ArcTouch and St. Ives’ reach for The App Business). And let’s not forget Publicis Groupe’s $3.7bn pickup of Web development firm Sapient, among other deals with a technology flare.

While IBM has a massive services business beyond marketing, it hasn’t been a careful steward of those assets of late. Last quarter, continuing a trend from 2015, Big Blue’s services revenue declined 11%, a faster rate than its software business.

Jordan Edmiston Group advised Resource/Ammirati on its sale.

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Cannella nabs MPH as TV ads become digitally measured

Scott Denne

Contact: Scott Denne

Cannella Response Television (CRT) is aiming to capitalize on the increasing need for digital metrics in TV advertising by reaching for Media Properties Holdings (MPH). The target is best known for its REVShare business, which partners with local and regional broadcasters and service providers to package and resell television inventory on a cost-per-action (CPA) basis.

Though the coming programmatic TV (i.e., television that is bought in an automated fashion and closer to real time) generates more excitement and headlines, there’s an intermediate step underway and MPH’s inventory relationships put it in a position to capitalize. It will be many years before there’s a watershed shift of television ad sales into programmatic. Despite that, there is an increasing number of younger, digitally native brands that are expanding their TV buys. As they do so, they’re looking for firm ROI metrics to measure the impact of ad spending, rather than loose measures of reach and demographics. That’s benefiting inventory sources like MPH, attribution vendors and media buying agencies with a history in direct-response advertising.

Buying MPH gives CRT a bridge into that world. Today CRT mostly develops and distributes infomercials. Owning MPH will allow it to offer short-form ads to its base of direct-response clients and attract some younger brands seeking direct-response specialists. While MPH’s inventory partnerships could enable CRT to be a player in the eventual move toward programmatic TV, it will take a substantial investment to get there. MPH has developed some analytics capabilities to enable it to price inventory on a CPA basis, though its greatest asset is its partnerships, not its tech.

Petsky Prunier advised MPH on its sale.

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With digital marketing divestments aplenty, opportunities arise

Scott Denne

Contact: Matt Mullen

For the first half of this decade, the rise of digital marketing technology in the go-to-market strategies of many of the largest global software vendors has been difficult to ignore. Yet in the second half of 2015, there were several indicators that the progress of these transitions toward digital marketing was not uniformly successful, and several large players announced that they were looking to divest their digital marketing divisions – a sign of retrenchment as they protect their core business by shedding underperforming units that failed to generate hoped-for revenue.

In August, as part of the HP split, the company decided to put its marketing optimization business in HP Inc, among its PC and printing operations. The rest of its software organization emerged at Hewlett Packard Enterprise. That same month, Intuit announced that it wanted to sell Demandforce, which it acquired for $424m in 2012. That came to fruition earlier this month, with Internet Brands as the acquirer. Other firms looking to sell their digital marketing assets include Teradata and SDL.

That these companies’ adventures in digital marketing are almost over doesn’t suggest that the rush to establish businesses in this market was foolhardy. There remains an opportunity for the assets that are overtly (or covertly) up for sale right now to be refocused – perhaps alongside other complementary assets – most likely via an acquisition by a private equity shop with a vision to do so. 451 Research’s own data shows that the bulk of the digital marketing opportunity currently remains greenfield, ensuring that with the right combination of technical assets aligned with an astute go-to-market strategy, an active channel and agency partnerships, there’s every possibility of creating a successful business.

Look for a full report on this topic in a forthcoming 451 Market Insight.

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FireEye gazes into threat intel market

Scott Denne

Contact: Scott Denne Scott Crawford

FireEye acquires iSIGHT Partners as it seeks to differentiate its security platform among its high-end customers. The purchase expands FireEye’s presence in the threat intelligence market – an extremely fragmented space that caters to deep-pocketed customers due to the high cost of putting together threat intel.

Despite that narrow appeal, FireEye is bullish on the category. The $200m price tag is the highest we’ve seen for a pure-play threat intelligence firm (FireEye also included a $75m half-stock, half-cash earnout in the deal). That’s not to say there haven’t been notable transactions here. Last year, LookingGlass paid $35m for QinetiQ’s Cyveillance unit; Proofpoint nabbed Emerging Threats for $40m; and Cisco paid a bit more than that for ThreatGRID.

Multiples in threat intelligence transactions have varied. LookingGlass paid less than 2x trailing revenue for its acquisition, while Proofpoint likely paid closer to 10x – Emerging Threats had just 30 employees at the time of its exit. FireEye’s purchase values iSIGHT at 5x, making it the lowest multiple we’ve seen FireEye pay in its life as a public company. Considering that FireEye itself now trades at just over 3x, following a 67% decline in the past six months, its pickup of iSIGHT shows that it’s still willing to stretch a bit for a deal. Though maybe not as much as it did with its $1bn all-stock acquisition of Mandiant at the end of 2013.

Aside from the price tag, there are some parallels between today’s deal and the Mandiant buy. At the time of the earlier transaction, FireEye emphasized the complementary nature of automated insights gained via tech and the need for human research and response. The acquisition of iSIGHT extends that rationale and the target has already made an investment in integrating threat intelligence with technology.

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Flashtalking seeks a second act in data with Encore Media pickup

Scott Denne

Contact: Scott Denne

Flashtalking reaches for Encore Media Metrics, a provider of advertising attribution and analytics, as it looks to challenge Google’s dominant position as the preeminent third-party ad server. The company has a footprint in the ad serving business through its creative capabilities, though it typically trails Google’s DoubleClick for Advertisers (DFA) ad server. Flashtalking hopes that with this deal, along with the recent purchase of Germany-based device-fingerprinting firm Device[9], the combination of its creative optimization and data capture and analysis capabilities will be enough to gain traction as a primary ad server.

The acquisition of Encore Media is likely modest in size. The target appears to have just a handful of employees and is mostly being bought to roll the technology into Flashtalking’s ad server. In those ways it is similar to Device[9], which Flashtalking snagged in September. The pair of transactions are the only two it has made since TA Associates took a majority stake in the firm in August 2013.

Flashtalking’s bid to carve away at DFA’s dominant position is ambitious. Other ad servers have fallen short in previous attempts to dislodge DFA, and Flashtalking’s own attempt comes at a time when Facebook is also making a push for this corner of the ad market. There are, however, reasons to think it could be successful. For one, a company of its size need only capture a modest overall share to reap outsized gains. Also, as programmatic advertising gains momentum, particularly among ad agencies, data-driven advertising rises alongside it. Flashtalking is betting that it can leverage its relationships and track record as a secondary ad server into a primary position.

We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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Citrix’s reorg heads to the clouds with Cloud.com divestiture

Scott Denne

Contact: Scott Denne

Citrix has kicked off a restructuring program by selling its CloudPlatform and CloudPortal businesses to Accelerite, a unit of Persistent Systems. Following the attentions of an activist shareholder and an extended streak of lackluster growth – both top- and bottom-line – Citrix disclosed a strategic reorganization late last year that will see it spin off its GoTo SaaS business as an independent public company and divest or shut down several other product lines.

The assets it’s unloading today are those it obtained in the $200m purchase of Cloud.com back in 2011. Starting with the 2003 reach for Expertcity (now its GoTo division), Citrix was an active acquirer – averaging almost one deal per quarter in the years since. That transaction and the 40 that followed were an attempt to decrease its reliance on its terminal server product. Now that Citrix has narrowed its focus again, there’s plenty of fodder for other divestitures.

The company has also announced that it will stop investing in Bytemobile, which optimizes Internet video delivery and, like CloudPlatform and CloudPortal, is not linked to its newly minted focus on securing the delivery of apps and data. Today’s deal is the first divestiture we’ve recorded from Citrix and though it will likely be a net seller for the next few quarters, it hasn’t completely stopped buying. Citrix also announced today that it has acquired desktop virtualization assets from Comtrade.

We’ll have a more detailed report on Accelerite’s acquisition of Citrix’s assets in tomorrow’s 451 Market Insight.

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Nutanix sets stage for IPO

Scott Denne

Contact: Scott Denne

Hyperconvergence pioneer Nutanix preps its Wall Street debut with massive revenue growth and equally outsized spending, which is the typical profile for most of the recent IT infrastructure vendors looking to go public. The company’s revenue rose 90% to $241m in its most recent fiscal year (ending July 2015) off the back of a 4x rise in sales a year earlier. The company, which has been selling converged server and storage hardware and software since 2011, has spent generously to achieve that growth. Nutanix posted a $126m loss in fiscal 2015 – up 50% – driven mainly by $162m spent on sales and marketing in the past fiscal year.

Still, Nutanix can at least partly justify the heavy sales and marketing spending as its attempt to satisfy strong demand that potential customers have clearly indicated in recent surveys by 451 Research’s Voice of the Enterprise. In our most recent survey (Q3 2015), 40% of converged infrastructure buyers anticipated their spending to increase in the next 90 days, compared with the 9% who expected to trim spending. Further, that growth is coming as demand weakens for traditional enterprise hardware. In the same survey, only 17% of buyers of standard servers projected spending to increase, while 31% forecast a decrease.

The planned offering from Nutanix comes after a particularly dismal year for tech IPOs, both in terms of the number of offerings and their aftermarket performance. Last year saw just eight enterprise IT startups debut, and half of them were underwater at year-end. Among the ‘Class of 2015,’ Pure Storage is probably the closest comp to Nutanix. The two infrastructure vendors are roughly the same size but have tradeoffs in their respective financial profiles. Pure is growing dramatically faster, while Nutanix loses less money. Still, Wall Street’s muted enthusiasm for Pure does indicate some challenges for Nutanix in increasing its valuation ahead of the $2bn it garnered as a private company in mid-2014.

On the NYSE, Pure is valued slightly below the $3bn it received in its final round of private funding – even though it has more than quadrupled its quarterly revenue level in the 18 months between those events. Pure currently trades at about 6.7x trailing revenue. If Nutanix were to garner that multiple on the $283m in trailing sales it has posted, it would be valued at roughly $1.9bn. Like Pure, that would represent a slight discount to its earlier market value as a private company.

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NetApp nabs SolidFire before all-flash array opportunities burn away

Scott Denne

Contact: Scott Denne Tim Stammers

Making its most aggressive deal to date, NetApp pays $870m in cash for all-flash storage array (AFA) vendor SolidFire. NetApp’s major competitors long ago inked acquisitions to get into the AFA market, while NetApp took the unusual step of trying to develop a product internally – a project that saw only temporary and limited release of a device that was lacking several critical features.

The price tag shows that NetApp feels some urgency to fix that gap. We estimate that the market for AFAs will grow at a 36% CAGR between 2014 and 2019. NetApp typically prints about one transaction per year and has often bought sub-$10m revenue companies for high multiples. On an absolute basis, this is the biggest deal NetApp has done. In 2011, it spent $480m on LSI’s aging RAID storage business – a business that generated $700m in sales. SolidFire, by comparison, likely posted $50-100m in trailing revenue.

It appears that a bit of traction and patience has benefited SolidFire and its investors. Not only is this an unusually large acquisition for NetApp, the price tag is higher than any we’ve seen among AFA providers.

Past all-flash array M&A

Date announced Target Acquirer Deal value
December 21, 2015 SolidFire NetApp $870m
December 15, 2014 Skyera Western Digital Not disclosed
September 10, 2013 Whiptail Technologies Cisco Systems $415m
August 16, 2012 Texas Memory Systems IBM (see 451 estimate)
May 10, 2012 XtremIO EMC (see 451 estimate)

Source: 451 Research’s M&A KnowledgeBase

Look for a full report on this deal in tomorrow’s Market Insight Service.

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