Author: Scott Denne

ReachLocal extends into booking software

Scott Denne

Contact: Scott Denne

ReachLocal makes another move beyond media sales and into subscription software with the purchase of Kickserv. The target adds online appointment booking and related management software to go with ReachLocal’s focused marketing and sales software – a stack it has been building out as its original business has decelerated and shrunk.

The company was built around providing software to manage and optimize the digital advertising efforts of small businesses, especially search engine marketing. ReachLocal has expanded further down the sales funnel with lead management and other software. This acquisition gets it a step closer to covering the full funnel, from lead generation to conversion. In particular, Kickserv is an attractive target because, like ReachLocal, it’s strongest in home services, a vertical that’s less competitive for booking software than other SMB segments like medical and legal.

Reach Local’s path to becoming a SaaS vendor has been bumpy. Revenue dropped 11% year over year this quarter to $118m, largely the fallout from a reorganization of its sales team to align with its strategy to reach beyond digital marketing. Last year it attempted to build its own online bookings capabilities, but the offering’s lack of functionality led to ReachLocal’s divestment of that product line.

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Carpathia to play up fed angle

Scott Denne

Contact: Scott Denne Michael Levy

Carpathia Hosting will again test the market’s appetite by putting itself in play by the end of the year. The colocation and managed services provider has been a consistent target of deal rumors since Spire Capital Partners, its owner since 2008, set out to raise its third private equity fund around the start of last year.

We understand that Carpathia made earlier approaches to potential buyers a year or two ago but felt that the market wasn’t properly recognizing the value of some recently developed, underutilized datacenter space. The company’s 2014 revenue is likely to near $100m and it could fetch $200-250m in a sale, given that the median TTM revenue multiple for vendors in this space for the past two years is 2x, according to the 451 M&A KnowledgeBase.

Carpathia has 10 datacenters in three different US markets with a healthy utilization rate of 76%, according to the 451 Datacenter KnowledgeBase , which makes it an attractive target. The company’s most compelling value, however, is its footprint with the federal government. Though it’s too small to handle large physical deployments from the federal government on its own, Carpathia meets compliance needs and has the experience that would be valuable to larger players chasing federal business, such as CenturyLink, QTS Realty Trust and Verizon Terremark.

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SiTime’s good timing

Scott Denne

Contact: Scott Denne

SiTime nabs a $200m exit in a sale to Japan’s MegaChips, navigating a market that’s crowded with failed competitors. Time, ironically, seems to be the element missing from earlier attempts by semiconductor companies to break into the timing market.

SiTime designs chips that take the place of the quartz crystals that for decades have provided the timing element in nearly all electronic devices – from high-end communications equipment to everyday consumer electronics. As silicon is smaller, cheaper and more energy efficient than quartz, it’s a large and promising market. You wouldn’t know it looking at SiTime’s peers, almost all of which ran low on capital while waiting for OEMs to get comfortable enough to replace quartz.

Earlier deals in this space have ranged from $6m-25m, typically at a loss to investors. While not the oldest of this group, SiTime had products in the market far longer, having generated revenue since 2008 (last year it posted $15.5m). It was also better capitalized: SiTime raised $79m from investors, including a $25m debt and equity round just last month.

Needham & Company advised SiTime on the transaction.

Acquisitions of timing chip vendors

Date announced Target Acquirer Deal value
October 29, 2014 SiTime MegaChips $200m
August 30, 2013 Discera Micrel $6.1m
March 30, 2012 Multigig Analog Devices $24.2m
April 28, 2010 Silicon Clocks Silicon Labs $21m
January 14, 2010 Mobius Microsystems Integrated Device Technology $20.2m

Source: The 451 M&A KnowledgeBase

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Microsoft’s mobile efforts are tabulating gains

Scott Denne

Contact: Scott Denne

Record tablet sales helped Microsoft beat revenue expectations by more than $1bn last quarter. Redmond reported $908m in sales from its Surface tablet devices in the quarter – twice the tally of the previous quarter and the same quarter a year ago. The momentum looks set to continue.

According to an August survey by ChangeWave Research, a service of 451 Research, 20% of consumers looking to buy a tablet in the next quarter planned to purchase one built by Microsoft. Among corporate IT departments, Microsoft commanded the same 20% of respondents, putting it in second place behind Apple in both surveys.

The results of Microsoft’s efforts in smartphones have been tepid, but it’s essentially the only vendor growing market share in the tablet business. The company gained the most ground in our consumer survey, nearly doubling the positive responses from 11% in the same survey a quarter earlier. Both Apple and Samsung lost ground in the consumer and corporate surveys.

Come big, come small or don’t come at all

Scott Denne

Contact:Scott Denne

In addition to a spirited defense of her tenure at Yahoo during this week’s earnings call, CEO Marissa Mayer laid out in detail the company’s acquisition strategy: buy big or buy small, no middle ground.

According to The 451 M&A KnowledgeBase, Yahoo has bought 46 companies since Mayer’s tenure began in July 2012, and all but eight of them have been pure talent acquisitions. On the call, the company said it has spent $1.6bn on those deals, with just two, Tumblr and Flurry, accounting for $1.3bn of that (Tumblr alone was $1.1bn). Only six other transactions brought Yahoo any tech or products.

The massive amount of talent tuck-ins (most of which are obviously in the single-digit millions or less) is a stark departure from the previous decade of Yahoo M&A, when the company purchased only 47 companies at a median price tag of $88.5m.

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Progress moves back toward enterprise sales with Telerik buy

Scott Denne

Contact: Scott Denne

Progress Software becomes an aggressive buyer as revenue begins to accelerate. The application development and data infrastructure vendor has announced that it’s acquiring Bulgaria-based Telerik for $263m in its largest deal (and at 4.4x, its highest multiple) on record.

The acquisition is Progress’ third of the year, following just one last year and none in 2012 as the company took a break from buying and divested several of its previous purchases. In an earlier M&A spree between 2005-2008, Progress picked up nine businesses for a median $25m in an attempt to go upmarket to larger enterprises.

The company expects to finish the year with revenue 6-10% higher than last year, compared with 5% growth in 2013, which followed a few years of decline. Now that Progress has refocused its business strategy on its core application development offering, it’s looking to go upmarket again – but with a more cohesive product set – by snagging Telerik.

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Zayo’s zesty debut

Scott Denne

Contact:  Scott Denne

Despite pricing below its target range, Zayo Group receives a warm reception on Wall Street. The fiber services and colocation vendor was trading up about $22 per share (roughly the midpoint of its proposed range) from its $19 IPO price, giving it an enterprise valuation of $8.09bn (7.2x TTM revenue).

Considering Zayo’s organic growth was just 6% in each of the past two years, that’s a healthy multiple, putting it well ahead of others in the colocation and network services sectors, though the diversity of the company’s business – which includes dark fiber, mobile backhaul networks and colocation – makes a direct peer tough to find. Ironically, the best available comparison for Zayo’s valuation is Zayo itself: in 2012, it took AboveNet private in a $2.2bn deal – the largest of the 32 acquisitions it has made since 2007 – at 4.5x trailing revenue.

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Cornerstone’s acquisition strategy ‘Evolvs’

Scott Denne

Contact: Scott Denne

Cornerstone OnDemand often promotes its lack of acquisitions as a competitive advantage but now, like its SaaS brethren, it’s showing an increasing appetite for M&A. Today the company inked its second deal with the $42.5m purchase of Evolv.

In fairness to Cornerstone, this deal doesn’t really dent its ‘organic’ messaging – Evolv provides HR analytics tech that will likely be woven throughout Cornerstone’s talent management offerings, rather than bolted on as an additional product. Even so, it’s indicative of a larger trend that a SaaS company that has, until recently, shunned M&A (calling its acquisition-prone competitors ‘Frankensteins’) is now an acquirer.

According to The 451 M&A KnowledgeBase, SaaS vendors have spent $1.54bn so far this year to buy 205 businesses, compared with 175 in all of last year. A single deal – salesforce.com’s $2.5bn reach for ExactTarget – skews last year’s total value of such transactions up to $3.09bn. Backing out that outlier, SaaS companies have already spent twice the money on dealmaking this year than the previous two years combined.

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Demanding exits on the demand side

Scott Denne

Contact: Scott Denne

While companies that help publishers sell ad space have commanded high multiples in recent transactions, businesses on the demand side haven’t seen similar outcomes. With few obvious buyers in that latter category of ad tech, the situation is unlikely to change in the next quarter or two.

Businesses like LiveRail, SpotXchange, FreeWheel Media and Nexage, which sell yield management, ad exchanges and other supply-side tools to help publishers make the most of their inventory, have commanded premiums of 6-10x trailing revenue in transactions well north of $100m. On the demand side, companies that place advertisements have seen fewer big deals, and those that have happened came in at lower multiples, like the 1.3-3.7x trailing multiples in sales for firms such as Adconion and Conversant, similar to the multiples of demand-side players on the public markets.

Why the disconnect between exits for companies that enable the buying and those that enable the selling of digital media? There are, of course, vertical- and company-specific factors that account for some of the difference in valuations. In the big picture, there is just a larger pool of companies, from Internet giants to traditional media companies and broadcasters, that are comfortable with the business of selling ad space – but historically, only ad agencies have been in the media-buying business, and they’re not buying tech companies.

Long term, the exit window for these demand-side players will open up because there are many high-growth businesses with more than $100m in revenue in this category, such as Turn, MediaMath, DataXu and Quantcast. With the exception of WPP Group, ad agencies have preferred to be customers, rather than owners, of media-buying tech – and that situation isn’t likely to change until they see a credible threat from ad-tech companies selling directly to customers traditionally served by agencies.

Over time, we expect enterprise software companies to drift beyond marketing software and into paid media, as the line between paid and earned marketing begins to blur. But today, most aren’t comfortable being in the media business.

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News Corp nabs home-listing site Move

Scott Denne

Contact:Scott Denne

News Corp has picked up online realty company Move Inc at 37% above the company’s 30-day stock price average. Despite the premium, the media company could have more of a fixer-upper on its hands than the price would suggest.

At $950m net of cash, the purchase values Move, which operates REALTOR.com, at 4x trailing revenue. That’s almost twice the value that competitor ZipRealty fetched earlier this year, although that company’s topline had been shrinking for some time, while Move is posting single-digit annual growth.

Although the price itself isn’t so much of a head-scratcher, the rationale is wishful thinking. News Corp rightly points out that online realty companies like Move have only captured a fraction of the real-estate marketing spend, but Zillow and Trulia are poised to capture most of that potential growth. Those two companies are each posting about 70% annual growth, and when the recently announced merger between the two closes, the combined company will have revenue that’s roughly double Move’s.

News Corp’s plan for ramping up Move’s growth is to use its media properties to help market Move’s listing services and realtor lead management tools. News Corp’s own results, however, suggest that its advertisements aren’t driving that much value: the company’s advertising revenue dropped 8% in its recently closed fiscal year.

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