Author: Scott Denne

Verizon looks to data to dial up AOL

Scott Denne

Contact: Scott Denne

Verizon is reaching for AOL in its latest move to generate new revenue streams beyond its services businesses. The purchase gets Verizon access to a broad suite of advertising technology products that it can now supercharge by injecting its own data for improved audience targeting and advertising attribution. AOL’s advertising properties will likely benefit from Verizon’s data, and the company will also have new opportunities for advertising distribution (through Verizon’s EdgeCast CDN and LTE network), as well as cross-selling opportunities with Verizon’s growing portfolio of content and media infrastructure technologies.

Verizon’s purchase of AOL for $4.4bn marks the highest amount it has ever paid to acquire a company outside its core business of wireless, Internet and TV services. It has made a number of substantial purchases to push beyond its core, including a $1.4bn deal for hosting company Terremark and, more recently, a $395m acquisition of EdgeCast. In those deals it was more generous with valuation than it’s being with AOL.

Terremark fetched 5.8x trailing revenue. EdgeCast got 3.1x. AOL is being valued at 1.6x, making it the second-lowest multiple we’ve tracked on a Verizon acquisition over the last decade. AOL, however, is a multi-faceted business, and not all revenue is created equal. Of its $2.5bn in 2014 revenue, 24% comes from its lingering ISP business and 40% from its Internet publications and portals – two businesses that hold limited appeal for Verizon. AOL’s advertising technology business, which generated $856m in 2014 and grew more than 20%, is what Verizon is really after. Shifting most of the $4.4bn in value to that unit makes the deal look a bit more generous, and puts the valuation on par with the 3.7x that Alliance Data Systems paid for Conversant – the closest recent comparison in terms of size and product offering to today’s announcement.

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Gravity4’s Rocket Fuel bid lacks grounding

Scott Denne

Contact: Scott Denne

A startup with less than a year of operations has made a $350m cash offer to buy Rocket Fuel. While Rocket Fuel’s board has an obligation to take this offer seriously, we’re under no such obligation. This bid is ridiculous. Aside from the fact that it barely offers a premium to Rocket Fuel’s recently depressed stock price, Gravity4 doesn’t look well positioned to make such a purchase.

Rocket Fuel has struggled as a public company. Its stock is down almost 70% in the past year as the company hasn’t maintained its earlier growth rates. It is, however, still a business that generates more than $400m in annual revenue. Even with a deceleration of its growth rate, Rocket Fuel still put up 40% year-over-year growth when it posted its first-quarter totals on Thursday.

Gravity4, by comparison, has been operating for less than a year and there is no reason to think it has the kind of cash that it’s offering to pay. Even if it’s working with a financial sponsor, that begs the question, why would a sponsor need Gravity4 to make a play for Rocket Fuel? There’s nothing compelling about the tie-up from a product perspective. In fact, Gravity4’s core offering – a data management platform – is largely duplicative of what Rocket Fuel obtained in its purchase of [x+1]. Also, Gravity4’s founder and CEO, Gurbaksh Chahal, has never managed a company of that size and his legal trouble would be a distraction for a business trying to turn itself around – he was fired from his last CEO post after pleading guilty to battery and currently faces a gender discrimination lawsuit from a former Gravity4 employee.

There’s also no precedent for a deal like this. According to 451 Research’s M&A KnowledgeBase, since 2002 only 14 businesses have been taken off the Nasdaq or NYSE exchanges in a cash acquisition of more than $200m by a private company in a deal that didn’t involve a private equity firm. The median age of the acquirer in those deals: 18 years. The youngest was Novafora, which bought chip maker Transmeta for $255m in 2008 and went out of business itself the next year.

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Capgemini’s IGATE is no copy of Xerox

Scott Denne

Contact: Scott Denne

Not content to be France’s second-largest outsourcing company, Capgemini answers Atos’ Xerox buy with the $4bn purchase of IGATE Global Solutions. From a strategic perspective, Capgemini’s deal and the recent acquisition of Xerox’s ITO business by local rival Atos are quite similar. But from a valuation perspective, they couldn’t be more different.

Both transactions aim to shore up the North American businesses of the two France-based outsourcing companies. Following today’s deal, North America will account for 30% of Capgemini’s $13.6bn anticipated pro forma revenue this year, while Atos’s acquisition (announced in December) boosts its own revenue in that region to 17%, from 6%, of its total.

The similarities end there. Capgemini’s purchase values IGATE at 3.5x trailing revenue, making it the highest multiple we’ve tracked on a $500m-plus pickup of a North American outsourcer in seven years. Atos, on the other hand, paid 0.7x trailing revenue for an asset with about the same revenue. IGATE posted a percentage point or two of additional revenue growth in each of the past few years.

Profitability is the difference in the two assets. IGATE had a $79m gain on its bottom line last year – right at the midpoint of the previous two years’ profits – and operating margins of 23%. Compare that with Xerox ITO’s 8% on a $112m loss – though it did post $46m and $31m in profits in the two previous years.

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Francisco dives into network monitoring with Procera take-private

Scott Denne

Contact: Mark Fontecchio, Scott Denne

Emerging opportunities in the network monitoring space lead Francisco Partners to make its first foray into networking and its largest solo purchase in eight years as the investment firm swoops in to buy Procera Networks, a deep-packet inspection vendor that was being hounded by activist investors.

Network monitoring and visibility was a significant driver of M&A activity in 2014, including Ixia’s $190m reach for Net Optics (with a similar multiple to today’s deal) and multibillion-dollar acquisitions of Riverbed and Danaher’s networking performance business. The sale of Procera is the largest in this category so far this year, but not the only one. Last month, Lookingglass Cyber Solutions picked up Procera competitor CloudShield.

As we highlighted in our 2015 M&A Outlook, we anticipate that smaller players in this space will continue to consolidate amid the convergence of application performance management, network performance management and network visibility. Though consolidation is coming, that’s not to say the market has matured. In the latest networking survey by TheInfoPro, a service of 451 Research, network monitoring was cited as a top pain point by 19% of network admins, up from 13% a year earlier.

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451 Research’s M&A KnowledgeBase tutorial: Search themes

Scott Denne

Contact: Adam Phipps

We have posted a tutorial detailing the ability to search 451 Research’s M&A KnowledgeBase by technology themes, in addition to sector, to locate emerging or disruptive technologies that may be spread across multiple 451 categories. For example, Singtel’s pickup of Trustwave has a target theme of cybersecurity, Cisco’s Embrane acquisition has the seller tagged with SDN/NFV, and Neilsen’s eXelate buy is categorized as big data. Meanwhile, search cloud computing deals to find SolarWinds’ Librato purchase, and find Microsemi’s reach for Vitesse in the Internet of Things category.

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Nokia nabs Alcatel-Lucent in latest massive telecom deal

Scott Denne

Contact: Brian Partridge

Nokia has acquired Alcatel-Lucent for $16.5bn. The deal brings together former rivals and changes the competitive landscape for the next generation of converged broadband telecom infrastructure. We also think it could incite a new wave of dealmaking among telecom infrastructure suppliers, most notably Ericsson.

The all-stock transaction, expected to close in the first half of next year, will create a combined company with top or near-top market share in several categories, including LTE, fixed broadband infrastructure, IP routing, subscriber data management and customer experience management. Both companies have aggressively pursued SDN/NFV competencies, with Alcatel-Lucent strong in SDN and Nokia being a leader in early implementations of NFV.

Traditional fixed and mobile voice telephony services have steadily declined. Demand for fixed and mobile broadband Internet services has helped fill the gap, but massive network traffic increases have driven incremental revenue growth for operators. These market dynamics have created an environment where bundled fixed voice, broadband and video ‘triple play’ and mobile ‘quad play’ services are imperative to maintain operator profitability and customer stickiness – but they require architectural convergence (to IP networks) to efficiently support them. Against this industry backdrop, Nokia and Alcatel-Lucent bring several complementary assets to the table that will position the new company well to serve traditional customers (telcos) as well as create some new opportunities to sell to large enterprises and Internet vendors.

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

 

IBM attempts to heal with healthcare

Scott Denne

Contact: Mark Fontecchio

IBM adds two healthcare analytics software firms – Phytel and Explorys – to its portfolio. Last year, Big Blue said it would invest $1bn in Watson to expand its cognitive computing platform beyond beating Ken Jennings on Jeopardy! and better commercialize the technology. The investment was to focus on sectors where cognitive computing could have commercial success – among financial services, retail and others, IBM cited healthcare.

Phytel’s software analyzes patient data, integrating with providers’ electronic health record systems with the main goal of preventing hospital readmissions. The other deal is for Explorys, which integrates healthcare data from various sources and analyzes patient and provider information. Both will administer technologies to IBM’s Watson Health Cloud, which includes partners such as Apple and Johnson & Johnson and will allow doctors, researchers and insurance companies to dive into a massive trove of anonymized personal healthcare data.

Big Blue’s sickly revenue dropped 6% last year, and it sees the healthcare vertical as a way to help heal its top line. Hemorrhaging hardware sales and steady services declines leave software as the best opportunity for IBM to get out of intensive care, and healthcare is a good bet – according to ChangeWave Research’s recent corporate quarterly survey, healthcare is one of two sectors (IT software and services is the other) expected to see the most spending increases this year. Healthcare tech M&A is also humming along in 2015, on pace to stay even with last year’s volume after a 64% increase over 2013, according to 451 Research’s M&A KnowledgeBase.

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451 Research’s M&A KnowledgeBase tutorial: Finding venture-backed exits

Scott Denne

Contact: Adam Phipps

We recently noted the imbalanced market for selling VC-backed companies with valuations over $1bn. 451 Research’s M&A KnowledgeBase can be used to identify those deals where the target (or even the acquirer) is venture-backed. Searches can be further refined by venture firm – a search of Accel Partners, for example, shows that firm having a strong start to 2015 by exiting investments in lynda.com and MyFitnessPal. Use our saved search of YTD venture exits, and also watch this short tutorial about finding venture capital information in the KnowledgeBase.

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

LinkedIn hooks its largest deal

Scott Denne

Contact: Scott Denne

Though the acquisition of lynda.com is far larger than any of LinkedIn’s other purchases, it’s picking up an asset that shouldn’t be a drag on its financial performance and one that plays in a market where the company is comfortable. At $1.5bn (which includes $720m in stock), the deal is more than 8x the size of its Bizo buy, its previously largest transaction at $175m. Bizo, by comparison, was a complex (though we think smart) acquisition that brought LinkedIn into the ad network business and involved a significant change to the target’s low-margin business model.

Both LinkedIn and lynda.com have about 70% gross margins, both spend 35% of revenue on sales and marketing, and lynda.com has EBITDA margins in the 5-10% range, just under LinkedIn, which has posted a smidge over 10% in each of the past two years. However, at 20% year over year, lynda.com’s growth is a bit behind LinkedIn’s 45%. At 10x trailing revenue – a full three turns below LinkedIn’s own valuation – the deal looks like a bargain.

With today’s move, LinkedIn is obviously seeking more than matching financial performance. With lynda.com, LinkedIn has an opportunity to boost that 20% growth by marketing educational videos and courses to relevant customers on its network, and it increases its presence in higher education (higher ed and government account for half of lynda.com’s business), which is an important segment for LinkedIn as it looks to snag future professionals at an early stage in their careers. Also, when it integrates lynda.com’s educational materials, LinkedIn will get a better view into what its users want to do, not just what they do today.

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What does Matomy’s MobFox say?

Scott Denne

Contact:Scott Denne

Matomy Media Group has spent the past eight years buying a portfolio of performance advertising products across multiple formats and categories. Its recent focus has been on mobile, an area where we expect it to continue to build and buy, given the immense growth in that segment of digital advertising, matched with the fact that mobile is bleeding into every part of its advertising business.

The Israel-based company often takes a one-and-done approach when it buys its way into a new advertising channel. And while it got into mobile apps with the acquisition of MobFox late in 2014, we expect that the company will still actively seek deals in the space that augment MobFox’s in-app banner and video ad exchange. Matomy posted 23% sales growth in 2014, and an increase in mobile capabilities could propel that further. 451 Research’s Market Monitor projects that the global mobile ad sector will grow 52.6% to $28.7bn this year on its way to $51.6bn by 2018.

Subscriber’s to 451Research’s Market Insight Service can access a detailed report on Matomy Media.

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