Author: Scott Denne

Common Yahoo M&A gossip lacks context

Scott Denne

Contact: Scott Denne

There’s no shortage of breathless ideas floating around about what Yahoo should do with its new-found Alibaba cash. The two most commonly touted are a $4bn purchase of AOL – an idea that now has the backing of an activist hedge fund – and buying Yelp (current market cap $5bn). While not impossible, there’s a common thread in both these ideas: they ignore Yahoo’s stated growth strategy and its past behavior.

Yes, Yahoo now has about $5-6bn in additional cash (half of which it said will be returned to shareholders), but it wasn’t strapped for capital before this. Over the last two years, its stock price rose 2.5x, giving it a $40bn market cap to spend with, and it ended last quarter with $2.7bn in cash. So, it has plenty of currency to make a big purchase, but hasn’t. In fact, CEO Marissa Mayer has only one major purchase in her tenure: the $1.1bn purchase of social media company Tumblr. Aside from that deal, the company hasn’t spent more than $500m on a deal since 2007, when it bought Right Media.

Under Mayer, Yahoo’s clear focus has been on expanding video and editorial content while transitioning to a mobile-first company, and the deals it has done this year reflect that. According to the 451 M&A KnowledgeBase, Yahoo bought nine, mostly mobile, companies in the first half of this year. And for that, it laid out an inconsequential $21m of its cash, according to its most recent quarterly report. Making one of the biggest deals in its history – to pair up with a company such as AOL or Yelp that is rooted in Web content and display advertising – would be an about-face.

Millennial adds mobile exchange in pickup of Nexage

Scott Denne

Contact: Scott Denne

Millennial Media turns to Nexage in a $107.5m acquisition to better position the mobile ad network into programmatic mobile advertising as it looks to return to growth. Most importantly, Nexage provides the publisher-facing pieces Millennial needs to offer a complete mobile ad stack that serves the entire ecosystem from advertiser to publisher – but it comes at a big price.

Nexage will cost Millennial $85m in stock and $22.5m in cash for the mobile-focused supply-side platform. For Millennial, that’s a hefty amount as it will have to print 37 million new shares (26% of the total outstanding post-close) and use up almost one-quarter of its cash. In return, it doesn’t immediately add much to the top line, as Nexage posted about $8m in trailing revenue. Roughly $45m in ads ran through its system, making it about one-sixth the size of Millennial (closer than Nexage’s revenue would suggest), but since Nexage is an exchange, rather than an ad network like Millennial, it only books as revenue the portion of the spending it keeps.

Millennial already faced competition from several dozen ad networks and DSPs, and with this deal will add a smattering of ad exchanges to that mix. But in one way, this purchase pivots it away from much of the competition in mobile. Most of the mobile ad-tech industry – especially the programmatic portion – is aimed at serving performance-based advertisements, particularly geared toward driving app downloads. While this is still part of Millennial’s business, it’s a shrinking segment and the company has turned to brand advertising to fill the gap. Nexage, with its focus on larger publishers, brings Millennial an inventory set that’s desirable to those advertisers.

GCA Savvian advised Nexage on the sale, while LUMA Partners advised Millennial.

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Stratasys’ new M&A game

Scott Denne

Contact: Scott Denne

Coming off a handful of successful deals, Stratasys is ramping up its M&A activity. The 3-D printing company has picked up GrabCAD in its fourth acquisition of the year. With GrabCAD, Stratasys gets a library of designs and CAD collaboration software to help spur sales of its 3-D printers.

Until the 2012 purchase of its peer, Objet, for $634m in stock, Stratasys had only inked one deal for $38m. In the year after that transaction, the company posted 35% organic revenue growth – and anticipates another 30% this year, excluding the results from its $403m reach for MakerBot Industries, which itself has grown more than 50% and contributed $54m to Stratasys’ $283m top line through the first half of 2014.

With those acquisitions behind it, Stratasys has moved from one deal per year to four this year, including some tuck-ins – Harvest Technologies and Interfacial Solutions – that hadn’t been part of its M&A playbook during the previous decade.

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Micro Focus links with Attachmate in $1.18bn stock deal

Scott Denne

Contact:  Scott Denne

Micro Focus spends 40% of its stock to pick up Attachmate in order to expand its sales, but at the price of its profit margins. The combined company will have more than 3x the revenue of Micro Focus, but only a 25% jump in profits. Micro Focus finished its most recent fiscal year (ending in April) with $433m in revenue and $124m in income. For comparison, that’s 4x the income Attachmate generated on $957m in trailing revenue.

When you take a short-term look at the transaction, Micro Focus is giving up a lot (a 40% stake) for a small boost to its profits. When you look at the long-term benefits, however, it’s a much better deal. For one thing, part of Attachmate’s comparably lower profit margin comes from one-time restructuring costs. If you factor those out, Micro Focus is getting a 50% boost to profits and a tripling of revenue at a relatively cheap price.

While more restructuring and other one-time costs are likely to come as the companies integrate and look to squeeze more sales from Attachmate’s host of software assets, a year or two out from closing, the additional cash being generated by Attachmate could more than make up for the dilution – and help Micro Focus pay down the additional debt it’s taking on from Attachmate.

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Alliance becomes biggest dealmaker in move from offline to online marketing

Scott Denne

Contact: Scott Denne

Amid similar moves by its peers, Alliance Data Systems makes the biggest leap from marketing data to marketing software in its $2.3bn acquisition of Conversant. Like other offline marketing data service providers, Alliance sees a move into digital marketing as the only real way to grow its offline marketing data business.

Alliance is handing over 7% of its stock (worth $1.2bn) as well as shelling out $1.1bn in cash to get its hands on Conversant; despite that, the stock is up 2% on the news. That’s as much a reflection of Conversant’s financial metrics – the target has better margins than Alliance’s Epsilon and will boost the EBITDA margins of that unit (which will be home to Conversant) from about 22% to above 25%.

At a multiple of 3.7x trailing revenue, the transaction is on the high end of valuations for ad-tech firms – again, reflecting Conversant’s unusually high profit margins in that sector – but lower than the 10x and beyond paid (in smaller deals) by Alliance’s peers Acxiom and Neustar.

This isn’t Alliance Data’s first move into digital marketing: it picked up a handful of email marketing businesses last decade and again in 2011 and 2012 when it bought a pair of digital marketing agencies – Aspen Marketing Services and Hyper Marketing – for a combined $820m. The company has also dabbled in other areas of digital marketing and ad tech, but has found little success beyond email and has remained a services-heavy business.

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Idera could reignite M&A binge with TA cash

Scott Denne

Contact: Scott Denne

Idera’s bid to roll up companies in the IT performance management space gets a boost as TA Associates acquires the company. Idera launched beyond the database management business with a pair of acquisitions last summer – CopperEgg and Precise Software – with plans to ink more, but has been quiet since.

Idera is one of several vendors primed to consolidate the performance management category, fueled by the expansion of cloud deployments and mobile software and, in part, by private equity (PE) money in the sector, such as Thoma Bravo’s $2.5bn purchase of Compuware and earlier pickup of Keynote Systems, as well as Insight Venture Partners’ investments in SmartBear and Kaseya.

With trailing revenue of about $40m and little growth, the transaction is likely on the small end of a TA acquisition (the PE firm’s median deal size is $150m, according to The 451 M&A KnowledgeBase ), suggesting that TA has set aside more capital for add-on purchases. The PE firm’s move delivers an exit to longtime investor Austin Ventures, which first backed Idera more than a decade ago, as well as Vector Capital, Silverton Partners and Greylock Israel, which became backers though the acquisitions of Precise Software and CopperEgg.

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Rakuten reaches for Ebates in latest bid for international growth

Scott Denne

Contact: Scott Denne

Rakuten makes its largest bet yet to expand its international e-commerce efforts. The Japan-based Internet conglomerate is shelling out $1bn, at 6x last year’s revenue, to buy Ebates, a shopping rebates site.

Best known as an online retailer, Rakuten runs a variety of mostly Web-based services, which are linked together through a common membership database where customers can earn rewards points by shopping across services. Despite a concentration on international M&A – only two of the 21 acquisitions it’s made over the past decade were based in Asia – the company’s e-commerce membership overseas is only half what it is in Japan. Also, its overseas e-commerce sales dropped 6% last year to $1.17bn.

The addition of Ebates boosts Rakuten’s exposure outside of Japan – about twice the value of merchandise is sold through Ebates than all non-Japanese sales on Rakuten. Though not a retailer, Ebates attracts members to its platform by offering rebates on products that they find on Ebates (though the buying is done on a retailer’s site).

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Yahoo’s latest deal illuminates strategic shift

Scott Denne

Yahoo’s latest deal illuminates strategic shift

Contact: Scott Denne

Yahoo’s reach for Luminate shines a light on its new M&A strategy. The purchase of the in-image advertising company marks Yahoo’s third ad-tech deal in two months, following a three-year hiatus from buying in that market – a time in which it has made at least 45 acquisitions.

Until recently, Yahoo’s purchases have been aimed at building out its content offerings, especially picking up mobile app products and the teams that built them. But now, three of its four latest targets (mobile ad network Flurry, antifraud vendor ClarityRay and Luminate) have brought it monetization tech. Ad tech has been a development focus internally, as well – earlier this year, Yahoo launched an effort to integrate its existing ad products in one place and launched Yahoo Gemini, which combines mobile search with native advertising and is the likely home for Luminate’s team and technology.

The big question is whether this trend will continue when Yahoo soon finds itself flush with another $8bn in cash from Alibaba’s pending IPO. We think it likely that it will. Given its declining display ad revenue and penchant for picking up video content (both organically and via partnerships) and video technology (with its recent acquisition of video distribution software company RayV), new technologies to monetize video and provide it with more sources of video ad inventory could be a target. However, in light of its talks to buy NDN earlier this year, we wouldn’t rule out another big content play.

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LogMeIn signs into identity market

Scott Denne

Contact: Scott Denne Adrian Sanabria

Earlier this year, we took a look at M&A possibilities for the cloud application control (CAC) market, and pegged cloud SSO/IAM products as a good matchmaking opportunity. That’s exactly what’s happened with LogMeIn’s acquisition of Meldium. The acquirer’s AppGuru product allows enterprises to monitor and control employee access to SaaS apps. With authentication being the key chokepoint for CAC services, the ‘melding’ of Meldium’s offering with AppGuru could give LogMeIn customers an opportunity to address two issues with one stone.

The $15m price tag (including an unspecified earnout) for Meldium is a typical deal size for LogMeIn, which has built a diverse set of SMB applications, mostly organically, having only made four acquisitions (all between $7.5-16m) since its debut as a public company in 2009. One difference with its Meldium purchase: LogMeIn is jumping on the target earlier than it typically does. Meldium is a year out of its stint at Y Combinator, whereas Ionia and Bold Software, LogMeIn’s two most recent targets, had more than two decades of operations between them when they were picked up.

While LogMeIn has plenty of cash ($220m and growing) and equity to do larger deals, its M&A activity has been light, opting instead to lean on internal development to expand into areas like collaboration, Internet of Things and IT management for SMBs from its starting point in remote desktop applications. Small, tactical buys have served LogMeIn well – it’s projecting 30% revenue growth this year to $217m, outpacing the 15-20% gains it has put up in each of the past three years.

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

Veritas enters IAM fray with BeyondTrust buy

Scott Denne

Contact: Scott Denne Garrett Bekker

Veritas Capital’s acquisition of BeyondTrust adds to a flurry of recent deals in the identity and access management (IAM) sector. The transactions continue to flow as CISOs become less reliant on perimeter defenses alone.

At $310m, Veritas is valuing BeyondTrust just a smidge over 3x trailing revenue, putting it below the multiple on Thoma Bravo’s purchase of SailPoint and above the 2.5x that Gemalto paid for SafeNet in its $890m acquisition of that company in August. Other recent deals in this sector include RSA’s pickup of Symplified’s assets and a pair of IAM purchases this summer by IBM.

In a December 2013 survey by TheInfoPro, a service of 451 Research, IAM was the most cited security-related spending priority for IT shops over the next 12 months. Given the increasing role of identity as a key security construct in both cloud and mobile computing architectures, we expect that identity-related technologies will remain fodder for future dealmaking.

Recent IAM transactions

Date announced Acquirer Target Deal value
September 3, 2014 Veritas Capital BeyondTrust Software $310m
August 12, 2014 Thoma Bravo SailPoint Technologies Click for estimate
August 11, 2014 IBM Lighthouse Security Group Not disclosed
August 8, 2014 Gemalto SafeNet $890m
July 31, 2014 IBM CrossIdeas Not disclosed

Source: The 451 M&A KnowledgeBase

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