Author: Scott Denne

Avago unloads another bit of LSI

Scott Denne

Contact: Scott Denne John Abbott

Intel is bolstering its network processor offerings and system-on-a-chip capabilities through the acquisition of LSI’s Axxia networking business. Intel will pay $650m in cash for the unit, which Avago Technologies obtained via the recently closed purchase of LSI.

This is Avago’s second divestiture of a piece of its LSI portfolio – transactions that make its initial deal more compelling. Through this sale and an earlier unloading of LSI’s storage business, Avago has paid back $1.1bn of the $6.6bn it shelled out while only losing about one-tenth of the target’s $2.37bn in 2013 revenue.

The move by Intel adds to the growing portfolio of infrastructure silicon and software that the company has been assembling over the past few years. Intel exited the mobile application processor business in June 2006 via the sale of its ARM-based PXA line to Marvell for $600, and followed that deal by licensing its IXP network processor to startup Netronome. Then, in August 2010, Intel renewed its interest in the networking sector, buying Infineon Technologies’ wireless modem business for $1.4bn, followed a year later by the purchase of Fulcrum Microsystems and, in December, the pickup of MindSpeed Technologies’ wireless assets.

We’ll have a more in-depth report on Intel’s Axxia acquisition in tomorrow’s 451 Market Insight.

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Telstra nabs Ooyala as TV goes IP

Scott Denne

Contact: Scott Denne

Telstra reaches for Ooyala in a purchase that values the video company at $360m. The deal is the latest in a string of transactions aimed at profiting from the shift of video from broadcast to broadband. Seven-year-old Ooyala offers broadcasters and service providers the tools and services to distribute, manage and monetize video content.

Ooyala remained independent through an earlier wave of consolidation in this space at the end of the last decade when Comcast bought thePlatform for $90m, Cisco purchased ExtendMedia, and EchoStar paid $45m for Move Networks. Those deals were part of the first iteration of Web video – PC-based, short-form content, with little participation from major broadcasters.

Now that long-form television content is rapidly shifting to the Internet, it’s spurring another round of acquisitions from companies looking to build out their stack of video tools needed by traditional broadcasters, such as content protection and digital rights management. Earlier this year, Kaltura nabbed Tvinci to obtain those capabilities and Ericsson picked up Azuki Systems, following the purchase of Microsoft’s Mediaroom business. In June, Google bought mDialog with the aim of offering ad formats to appeal to broadcast companies – a rationale that mirrors Comcast’s reach for FreeWheel Media.

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IBM aims for IAM targets

Scott Denne

Contact: Scott Denne Garrett Bekker

IBM inks its second acquisition in a month to grow its identity and access management (IAM) capabilities. In reaching for Lighthouse Security Group, Big Blue gains a managed services offering that already runs on its IAM suite, as well as hard-to-find talent in the IAM sector.

Though Lighthouse brings some unique intellectual property, the rationale is different than last month’s purchase of CrossIdeas, which added access governance and analytics software to IBM’s already broad IAM portfolio, which is mostly built around assets from Tivoli.

The relative importance of IAM within the security landscape expands as the notion of a security perimeter retreats. As we noted in an earlier report, IAM has already played a role in a number of smaller deals this year, including Ping Identity’s pickup of accells technologies and HID Global’s takeout of Lumidigm, as well as Gemalto’s agreement to spend $890m on SafeNet last week.

Whether customers are seeking decreased complexity of IAM deployments via a service like Lighthouse or advanced capabilities like CrossIdeas, IAM is a top priority for CISOs. According to a 2013 survey by TheInfoPro, a service of 451 Research, identity management was the most common security-related priority for IT shops over the next 12 months.

We’ll have a more detailed look at this transaction in tomorrow’s 451 Market Insight.

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A black stripe for Zebra’s Motorola deal

Scott Denne

Contact: Scott Denne

The outlook for Zebra Technologies’ acquisition of Motorola’s enterprise business dampened this week as Motorola announced that revenue from the unit dropped 8% year over year. While shrinking sales is no surprise (and a big part of the company’s reasons for unloading the business to begin with), the decline is larger than the 1-5% dips that Motorola typically posts, and is the largest drop in almost two years.

Despite that decline, Zebra’s management stuck to its projection that the combined business would be able to log 4-5% annual growth. Zebra’s own business grew 14% this quarter to $288m, but is less than half the size of the target’s revenue. Management was also upbeat about the prospects for cost reductions gained through the merger, lifting its estimate to $150m from $100m at the time of the announcement (the deal is expected to close in the fourth quarter).

News of the drop sent Zebra’s stock down 9% this week, though it still trades above the level that it did before the $3.45bn transaction was announced.

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Rocket Fuel ignites first acquisition

Scott Denne

Contact: Scott Denne

Rocket Fuel built a business on delivering advertisers more clicks for fewer dollars, launching its revenue growth well beyond most other ad tech companies. That growth, however, is decelerating as its lack of a software offering and perceptions of fraudulent clicks on its service caused it to lower its guidance and carved away one-third of its stock price this morning. Now it’s picking up [x+1] in a $230m bid to solve its underlying problem: beyond the results it delivers, Rocket Fuel has little hold on its customers.

The target’s core offering is a data management platform on which advertisers mix third-party data with audience data gathered from their campaigns. Managing marketing data for customers (rather than just promising cheap clicks) will help Rocket Fuel build a case for longer contracts with advertisers, as well as enable the company to apply its artificial intelligence to other marketing applications, such as website optimization.

Rocket Fuel will burn up $100m in cash and $130m in stock ($100m after today’s drop) for [x+1], with an estimated trailing revenue multiple of just below 3x. That’s quite a bit lower than what [x+1]’s peers, such as Aggregate Knowledge and BlueKai, have fetched – mainly because a significant portion of [x+1]’s revenue comes from low-margin media sales, rather than licenses of its data management platform.

We’ll have a more in-depth report on this deal in our next 451 Market Insight.

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Shaw nabs ViaWest for $1.2bn

Scott Denne

Contact: Scott Denne Kelly Morgan Michael Levy

Canadian cable company Shaw Communications swoops into the multi-tenant datacenter market with the $1.2bn acquisition of ViaWest. Shaw may be wading in later than its Canadian telco peers, but the deal brings it instant scale. In terms of enterprise value, this is the fifth-largest purchase of a managed services vendor, according to The 451 M&A KnowledgeBase.

The transaction ($830m in cash and the assumption of $370m in debt) values ViaWest at 17.4x its 2013 EBITDA of $69m – a higher multiple than GI Partners was rumored to have paid for Peak 10 (12x), or Rogers Communications paid for BLACKIRON Data last year (15x), but less than Cogeco’s multiple for PEER 1 (22x). RBC Capital Markets served as adviser for ViaWest (as well as for Peak10), while TD Securities advised Shaw.

ViaWest will provide the hosting and cloud expertise needed to layer services on top of Shaw’s new fiber and datacenter assets, including a recently unveiled datacenter in Calgary and ENMAX Envision, the bandwidth service it picked up last year for $222m.

The sale of ViaWest should generate a solid return for Oak Hill Capital Partners, which bought the company four years ago (see our estimates of that transaction here).

Subscribers to 451’s Market Insight Service can find a more detailed report on Shaw’s purchase here.

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RTL Group latest to jump into video ad fray

Scott Denne

Contact: Scott Denne

German broadcasting company RTL Group’s $144m pickup of SpotXchange pushes independent video ad exchanges to the brink of extinction. The programmatic video market is still in the early stages, but a series of acquisitions has left few independent players.

SpotXchange’s sale comes weeks after one of its closest competitors, LiveRail, was picked up by Facebook, and a year after AOL bought Adap.tv, the early leader in programmatic video exchanges. RTL is taking a 65% stake in the business (valuing the company at $221m), with an option to buy the rest plus a performance-based earnout. We believe SpotXchange has trailing revenue of $40-50m, which would give this deal a multiple that’s in line with those transactions.

This acquisition leaves BrightRoll as the only remaining independent video exchange with substantial scale, and that company (which is a combination of video ad network and exchange) is several times larger than SpotXchange in terms of revenue and would be an expensive purchase.

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

Inphi’s marginal acquisition

Scott Denne

Contact: Scott Denne

Inphi picks up most of Cortina Systems for $126m in order to boost its profit margins. The purchase adds revenue but brings few opportunities for additional growth. Both companies make optical components for carrier networking devices and though there is little overlap in their product offerings (Inphi tends to target higher-speed applications), there is significant overlap in customers and little room for cross-selling.

What Cortina does have, says Inphi, is a stable business with gross margins in the high-60% range and $20m in quarterly revenue, compared with Inphi’s $33.9m in revenue last quarter and gross margins that are typically a few percentage points above 60%.

The deal brings Cortina’s investors, many of whom have been backing the company since 2001, close to an exit (Inphi isn’t buying the target’s digital home networking assets, which make up 15% of its business). Nearly all of Cortina’s growth came in 2006, when venture capitalists pumped $134m into the company to fund the acquisition of Intel’s networking components division. Cortina came close to an exit five years later when it filed for an IPO, but that never got out the door. The company logged less than $100m in revenue last year, compared with sales that hovered at about $140m annually in the first four years following the Intel deal.

Inphi doesn’t expect to return Cortina to growth. It anticipates that the target’s revenue will hold steady for the next four years as its carrier business tapers off and sales of datacenter networking components expand.

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BlackBerry’s strategy decrypted

Scott Denne

Contact: Scott Denne

In BlackBerry’s first purchase in more than two years, the struggling smartphone maker buys voice encryption vendor Secusmart, reflecting the importance of security in its turnaround strategy.

Secusmart develops technology for encrypted voice and data communications. The company’s German roots should appeal to BlackBerry’s customers in the region (Europe and the surrounding areas accounted for almost half of BlackBerry’s revenue and is declining at a faster rate than North American sales), where security, especially anti-eavesdropping security, is growing in importance.

Security was a key part of BlackBerry’s rise – its secure email servers helped it become the go-to device for mobile email. This acquisition, along with its CEO’s public statements (he said the words ‘secure’ or ‘security’ 20 times on the company’s last earnings call), demonstrate that BlackBerry is looking to build off of that reputation to recapture enterprise sales of its phones and mobility management software.

BlackBerry still has a foothold in the enterprise segment, but time is limited. According to ChangeWave Research, a service of 451 Research, BlackBerry phones are far more popular among IT buyers than the general public, with 20% of IT departments reporting that they plan to purchase BlackBerry phones in the next 90 days, down from 33% in the same survey a year earlier. A separate survey by ChangeWave shows that BlackBerry still remains a leader in MDM installations, but no buyers reported planned installations or evaluations of BlackBerry’s MDM products in the near future.

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Sold! Zillow buys fellow online real estate firm

Scott Denne

Contact: Scott Denne

Zillow’s acquisition of fellow Internet real estate company Trulia in a stock swap worth $3.5bn shows the premium a company gets by occupying the top spot in its market. Zillow is only slightly larger but is valued substantially higher in today’s deal, which pegs Zillow’s enterprise value at 31x TTM revenue and Trulia’s at 20x.

Both companies have similar revenue, costs and businesses: hosting real estate listings and selling advertising space and other services to real estate professionals. Zillow generated $224m in trailing revenue and grew 70% YoY in its last quarter, while Trulia posted $174m and grew 127% (a lot of that comes from its acquisition in 2013 of Market Leader, but even comparing Trulia’s 2013 growth, minus contributions from Market Leader, it clocks a few percentage points above Zillow).

Ahead of the deal announcement, the market valued Zillow at 18x and Trulia at half that. Zillow sees value in being the leader and by picking up its closest peer, it shows that it’s willing to spend to retain that spot.

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