Author: Scott Denne

SeaChange seeks deals to navigate rough waters

Scott Denne

Contact: Scott Denne

The aptly named SeaChange International is struggling through a dramatic transition of its own market. The maker of back-end and front-end software for television service providers is at the tail end of transforming its products to remain relevant in the increasingly multiscreen and mobile world of TV viewing. It’s been guarded in the past about its prospects as an acquirer, saying it might explore tuck-ins. In its most recent earnings call, however, the company’s new CEO struck an aggressive note, saying it planned to pursue acquisitions and canceling its previous announced share buyback plan.

SeaChange has spent the past few years ridding itself of hardware products and watching revenue from its legacy software decline steadily and at a rate that’s well above the growth of its new lineup of software. It has offerings that manage the back-end delivery systems of cable providers and a front-end gateway for serving video through set-top boxes and, now, mobile devices. Last quarter, SeaChange’s revenue dropped 18% year over year to $30m and its guidance disappointed Wall Street, something it has done consistently as its stock has dropped by more than half over the past year.

The company plans to grow revenue by becoming an end-to-end supplier of software needed to transition cable operators and content providers into the emerging world of over-the-top video, mobile and video on demand (VoD). Some areas where it may find acquisition targets include content discovery software – mirroring recent purchases by Rovi (Fanhattan) and TiVo (Digitalsmiths) – and advertising, as it currently partners with both BlackArrow, a VoD advertising specialist, and INVIDI, a networking firm that enables targeted advertising in linear TV and is already embedded at many of the largest US service providers.

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Cypress is latest to ink a $1bn chip deal

Scott Denne

Contact: Scott Denne

In what’s becoming a familiar refrain in semiconductor M&A, Cypress inks its largest-ever deal with the $1.6bn stock acquisition of Spansion. The transaction, which will leave Spansion shareholders with 50% of the combined company, is the sixth $1bn-plus takeout of a chipmaker this year. Like Cypress, all but one (Qualcomm) of the acquirers had never crossed that threshold before.

What’s more, most of the dealmakers driving this year’s big purchases hadn’t previously been very active. Cypress, for example, had only bought three companies for a combined $198m in the decade prior to yesterday’s announcement. Or take Analog Devices, which snagged Hittite Microwave for $2.4bn this summer. Prior to that deal, it had only done seven acquisitions since 2002, and never paid more than $150m. Only RF Micro Devices had come close to the $1bn mark, with a $900m purchase back in 2007.

That data points to two polarized trends in the semiconductor market: the exponentially growing cost of building a new chip vendor in the past 10 years has left a dearth of modestly sized targets, while better margins through bigger scale has become a key differentiator for many businesses. Cypress’ management points to a need to get its opex margins down to 30%, from about 37%, as a motivation for the Spansion buy. A few $1bn transactions aren’t an anomaly in the chip business. According to The 451 M&A KnowledgeBase, the median deal value has risen in each of the past five years to $92m in 2014 from just $33.9m in 2010.

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Dell’s turkey needs more gravy

Scott Denne

Contact: Scott Denne

A year after Dell’s $25bn take-private, the PC giant is like a Thanksgiving turkey: it has a rich, golden exterior but the meat is a little dry. As is done by nearly every private technology company, Dell enjoys being able to selectively disclose numbers. No surprise that those numbers highlight its recent momentum. Our surveys, however, aren’t as optimistic.

For example, Dell said at its recent customer conference that PC shipments (not revenue) grew 10% worldwide and 19.7% in the US in 2013. A survey from ChangeWave Research, a service of 451 Research, shows consumer intention to buy a Dell laptop or desktop hit a four-year high last quarter, but among corporate buyers, which account for about 80% of Dell’s PC business, intention to buy Dell dropped to an all-time low.

Dell also claims to be the market leader in storage (in terms of terabytes shipped, which includes storage in servers). According to a survey by TheInfoPro, a service of 451 Research, a full 25% of Dell storage customers are considering switching to a competitor in 2015 (only Oracle and Fusion-io fared worse). However, more customers in the same survey did indicate they would increase their spending with Dell in 2015, compared with the same survey a year earlier.

All that is not to say the buyout provided nothing more than a bountiful table for Dell’s marketing department. The company is showing signs of progress on several fronts: management appears more engaged and many customers view Dell as a more interesting vendor to work with. Subscribers to 451 Research’s Market Insight Service can read a more detailed report on Dell’s progress and strategy across several lines of business here.

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Rubicon crosses into the deepest part of publishers’ ad sales

Scott Denne

Contact:  Scott Denne

Rubicon Project has picked up two companies to move further beyond a marketplace for leftover ad inventory. The purchases of iSocket and Shiny Ads should enable Rubicon to offer publishers automated selling of direct-sold media. The deals are aimed at enticing publishers to use Rubicon to manage other forms of inventory, rather than just deploy it as an outlet for unsold media. But the price tag for the two targets speaks to the nascence of this portion of the ad market.

Rubicon shelled out less than $30m, mostly in stock, in total consideration for both companies (including earnouts). The lion’s share of that will go to iSocket, which is being acquired for $10m up front and as much as $12m in earnout payments. LUMA Partners advised iSocket on its sale.

Adding automation and software to the direct sale of large chunks of advertising inventory certainly brings efficiencies to a sector that’s been transacted through a combination of emails, faxes, meetings and phone calls. Publishers, however, aren’t convinced that efficiency will necessarily translate into more revenue. For that reason, this corner of the ad tech market is still in its early stages.

The real-time ad exchange segment continues to grow rapidly, but for the largest publishers, it likely only accounts for a small portion of their media sales. Rubicon Project has reached for two companies that provide products to help publishers automate the process of selling media directly to advertisers. Such tools are still a niche portion of the automated advertising universe, but offering them to customers gives Rubicon a way to deepen its relationship with large publishers and morph into a broad workflow and automation stack for selling ads beyond the ad marketplace for leftover inventory that it is today.

Subscribers to 451’s MIS service can access a more detailed report on this deal and the competitive landscape here.

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Online food delivery moves to the front burner

Scott Denne

Contact: Erin Zion

Online food-ordering companies have acquired a taste for international fare lately. Takeouts of these businesses are on a tear, and all of the action is happening outside the US. Today’s deals are no exception, as German vendors foodpanda and Delivery Hero both sell off and acquire Latin American and Indian assets to consolidate rapid expansion and increase international footholds, while UK-based Just Eat’s subsidiary reaches for online food delivery website Delivery Town in Canada.

In the US, the supersized merger of GrubHub and Seamless North America in May 2013, followed by an IPO last April, created a leader in the market, where powerful network effects – more customers bring more restaurants, more restaurants bring more customers, and so on – may have tamped down the enthusiasm for dealmaking. But elsewhere, many markets are still up for grabs. According to The 451 M&A KnowledgeBase, there have been 17 deals in this sector so far this year (15 since July), up from just five for all of last year, and all of these transactions have occurred outside US borders.

Including today’s acquisitions, Rocket Internet’s foodpanda has snagged four companies to jump into new markets: Entrega Delivery in Brazil, Delivery Club in Russia, TastyKhana in India and PedidosYa in Mexico. Germany’s Delivery Hero has shored up its home market through the purchases of Subdelivery and Pizza.de, and has continued its expansion into Latin America with the pickup of foodpanda’s hellofood assets. Just Eat has also nabbed three businesses this year – one in its core UK market, one to expand in France and one to further its growing Canadian operations – along with signing a joint venture with Brazil-based iFood.

The sense of urgency to ramp up across many international markets, mixed with the deep pockets of many players in this space, should lead to continued M&A. As freshly debuted public companies, GrubHub and Just Eat have plenty of currency for acquisitions, while private companies Delivery Hero and foodpanda have raised a collective $735m in venture capital.

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Mandalay parlays Appia buy into tighter carrier relationships

Scott Denne

Contact: Scott Denne

Mandalay Digital Group makes its most ambitious deal yet with the $65m acquisition of Appia in its drive to carve away at the dominance of Google, Apple and Facebook in the application discovery and installation business. Mandalay has accumulated tools that enable wireless carriers to get back in the app distribution game – a market they were essentially booted from with the launch of the iPhone and the growth of the smartphone sector that followed.

At first glance, the idea that carriers could carve away at the dominant app distribution channels seems like a long shot. And in the US, it is. In emerging markets, however, carriers have an advantage as they have existing payment relationships with customers who often lack credit cards and rely on carrier billing to buy apps and content.

Since its acquisition of Digital Turbine Group, Mandalay has built and bought tools for carriers to get their cut of the app industry, such as payments, app marketplaces and preloaded apps. With Appia, it adds a mobile ad network with an app-install focus to the mix. Mandalay expects the deal to boost both businesses as it can bring Appia’s gains in exposure to more carrier-specific channels, such as preloaded apps and carrier app stores. Mandalay also obtains another monetization channel to offer carriers.

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Waterfall capitalizes on Archer’s bankruptcy

Scott Denne

Contact: Scott Denne Sheryl Kingstone

Waterfall sifts through Archer’s bankruptcy to pick up some mobile marketing and messaging assets. The acquirer will pay $2.9m upfront (plus as much as $1m more if certain closing requirements are met) for Archer’s marketing services division, which is essentially the iLoop Mobile business that Lenco Mobile (Archer’s parent company) bought in 2011 for $42m.

The trailing revenue of the assets Waterfall is getting isn’t clear, as it is leaving behind a side business in healthcare-focused mobile messaging. What is clear is that iLoop hasn’t fared well under Lenco’s ownership. The unit posted about $5.5m in trailing revenue, less than the $9m we estimate it had at the time of its sale.

This transaction is small but indicative of a coming trend toward consolidation in mobile marketing and messaging. The space is intensely fragmented between mobile advertising networks, mobile website and content creators, mobile payment firms, aggregators, mobile publishing and application development providers, and mobile analytic vendors.

Like Archer, several other companies could quickly find themselves in financial distress. In fact, one of Archer’s competitors, Velti, filed for bankruptcy a year ago. Others could land lucrative exits as marketing dollars continue to shift toward mobile and businesses like Adobe, Oracle and salesforce.com that invested heavily in email marketing look to expand their mobile messaging offerings.

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Yahoo makes its video ad play

Scott Denne

Contact: Scott Denne

Yahoo reaches for one of the last remaining video exchanges of any scale with the $640m purchase of BrightRoll. The deal tops a wave of M&A targeting companies that serve the publisher side of the video advertising business.

The transaction benefits Yahoo in a couple of ways. BrightRoll is the largest independent video ad network; bundling it with the video inventory on Yahoo’s owned and operated sites will add scale to that inventory and make it more valuable.

While we believe most of BrightRoll’s revenue comes from its original ad network business, it has a growing video exchange unit that could make a powerful extension to the burgeoning mobile video ad network of Flurry, another recent Yahoo acquisition. BrightRoll also has a nascent programmatic demand-side business. That piece of the target aligns well with Yahoo’s efforts to develop more tools for advertisers, such as its recently launched Yahoo Gemini and its pickup of AdMovate last year.

In terms of trailing net revenue, Yahoo is paying about 6x, on the low end of the 5-10x range we’ve seen in recent purchases of video ad exchanges and publisher tools. While BrightRoll is a scarce asset these days (we covered past video ad M&A and the dearth of targets in a recent report), Yahoo is a rare buyer – not many companies have the strategic need for a video ad platform as well as the capital to take out BrightRoll. That’s not to say this isn’t a good deal for BrightRoll. Without Yahoo, the company would have likely turned to the public markets, where video ad networks Tremor Video and YuMe command 2-3x trailing net revenue.

Morgan Stanley, which advised BrightRoll rival Adap.tv on its sale to AOL last year, also banked BrightRoll on today’s transaction.

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Wall Street has favorable interpretation of Lionbridge deal

Scott Denne

Contact: Scott Denne

Lionbridge Technologies angles for diversity with the $77m acquisition of fellow language translation technology firm CLS Communication. The target doesn’t add much growth to Lionbridge – both companies have seen single-digit revenue gains over the past couple of years. But it does help it diversify into additional verticals and customers just as its overreliance on Microsoft as a customer is hurting it.

Revenue at Lionbridge dropped 4% year over year last quarter as Microsoft, the company’s largest customer, cut back on spending as part of its restructuring. Adding CLS, which is strong in the financial services and life sciences segments, decreases Lionbridge’s reliance on the tech and manufacturing industry and lowers the risk of another Microsoft-induced down quarter.

The deal values the target at 0.9x trailing revenue, about twice what Lionbridge commands. Despite that, Wall Street is reacting well to the purchase – Lionbridge’s stock is up 20% today, even after giving Q4 revenue guidance below analysts’ expectations.

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Vonage rings up Telesphere acquisition for $114m

Scott Denne

Contact: Mark Fontecchio Kenji Yonemoto

Vonage goes back to the business telephony market for another acquisition as its previous play there helped the hobbled consumer VoIP vendor return to growth. Its purchase of Telesphere Networks for $114m in cash and stock values the target at about 3x trailing revenue, compared with the 2.1x it granted to Vocalocity a year ago. Telesphere has 1,200 business customers, as well as a deeper service offering with other elements of unified communications, going beyond the pure VoIP for small businesses that was Vocalocity’s bread and butter. That likely accounts for some of the higher multiple in this deal, but doubtless some of it also comes from Vonage’s confidence that its new tack is working.

The broad abandonment of landlines for mobile phones hit Vonage hard. The company’s revenue ticked down a few percentage points for several consecutive years. In the year since buying Vocalocity, the target’s revenue growth has accelerated, contributing $24m to Vonage’s top line and growing 52% year over year in the last quarter, compared with 38% growth a year ago. That’s playing a role in Vonage’s return to growth. Before the acquisition of Telesphere, the company was projecting $886m in 2014 revenue, which would be its biggest year since 2009.

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