Author: Scott Denne

No earnout burnout this year

Scott Denne

Contact: Scott Denne

If the tech M&A boom ends tomorrow, at least the lawyers will stay busy. Earnouts hit $3.6bn on 92 deals so far this year, compared with $2.77bn on 126 acquisitions through all of last year. In some ways that’s to be expected – deal values are up this year, so earnout values are following. Indeed, similar to the way blockbuster telecom transactions are driving up overall deal values, the $1bn performance incentive on Altice’s $23.4bn takeout of wireless carrier SFR accounts for one-quarter of all the 2014 earnout value.

What’s different this year is that earnouts are far more common on larger purchases. In acquisitions with an upfront payment of $50m or more, we see 29 deals with earnouts, already surpassing the full-year totals for each of the past two years, and well above the pace of 2011, when 39 transactions of $50m or more contained an earnout.

Also, the size of a typical earnout shrank dramatically this year to just 18% of the upfront deal value, down from 38%, 29% and 24% in each of the previous three years. The increased use of earnouts suggests that more buyers and sellers are far apart on price. The shrinking proportions of earnouts, however, shows that while buyers would like to use more performance-based incentives to defray M&A costs, it’s a seller’s market right now.

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Monitise reaches into retail

Scott Denne

Contact: Scott Denne

Monitise expands its M&A profile with the pickup of Markco Media, a company that owns and operates two deals and discounts websites. Though this is the mobile banking vendor’s first move into retail, Monitise has been an active acquirer of payment providers as it has sought to expand the geographic reach and technological capabilities of its mobile payments service.

With the deal, Monitise aims to capitalize on Markco’s relationships with both retailers and consumers by getting more of both groups signed up on its mobile payments platform. The target also brings a team that will strengthen Monitise’s own deals service, where it enables banks to send targeted coupons to customers based on purchase activity.

While this is Monitise’s first M&A foray outside of finance, it’s bringing its old negotiating habits along with it. The $46m acquisition of Markco comes with a potential $47m more in performance-based incentives. Three of Monitise’s five acquisitions have come with earnouts that could double the deal value and a fourth purchase had an earnout that could reach two-thirds of the upfront price.

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

Audience senses opportunity in wearables

Scott Denne

Contact: Scott Denne

Audience takes a different angle to its customer concentration problem with the $41m purchase of Sensor Platforms. The rationale behind the acquisition is similar to Cirrus Logic’s $488m pickup of Wolfson Microelectronics in April – both audio component providers get the vast majority of their revenue from a single phone maker, and while Cirrus took out Wolfson to find more wiggle room in the cell phone sector (it hopes to upsell Wolfson’s low-end device makers), Audience’s M&A answer to the concentration conundrum is to find new markets.

Audience has wrestled with the downside of overreliance on a single vendor in the past. In mid-2012, Apple accounted for more than half of Audience’s revenue, but that number has steadily slipped since, reaching 5% last quarter as Apple opted not to use Audience’s technology in iPhone 5 models. That announcement in September 2012 carved 63% off of Audience’s stock price. Today, Audience’s growth has rebounded, but the stock hasn’t gotten back to its highs and 74% of sales come from Samsung. (Not coincidently, Apple accounted for about 80% of Cirrus’ business in 2013.)

Companies selling voice processors and other audio components for cell phones are boxed in. Smartphones are the fastest-growing segment of the market, but that market is dominated by two players. According to a March survey by ChangeWave Research, a service of 451 Research, 70% of people planning to buy a smartphone in the next 90 days planned to purchase an Apple or Samsung device – Motorola occupied third place with a whopping 3%.

In reaching for Sensor Platforms, Audience aims to crack into the market for wearable devices by integrating Sensor’s motion technology into its voice processors. It’s smart for Audience to snag a software firm with 20 employees that likely has a low burn rate, meaning there’s little downside to the deal aside from the upfront price. Today, however, there are no clear applications for a chip that combines voice processing with motion sensing in the wearables space (Sensor’s business is currently in phones), and Audience could remain vulnerable to the whims of a single OEM for several years.

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

Opera hits a high note

Scott Denne

Contact: Scott Denne

Opera Software departs from its measured mobile advertising M&A strategy with the $75m purchase of AdColony, which operates a mobile ad network for HD video ads. Opera has built a mobile ad business with $133m in trailing revenue, having spent only about $40m (excluding earnouts) on a half dozen companies, starting with the acquisition in January 2010 of AdMarvel for $8.3m.

This deal is very different. For one, a $75m upfront payment makes it Opera’s largest. And though the mobile software firm is no stranger to earnouts, it’s on the hook for as much as $275m more in cash and stock payments should AdColony hit its revenue and EBITDA targets. Unlike Opera’s previous targets, AdColony comes with substantial revenue: it finished 2013 with $53m in revenue, up from $11m in 2012, and is expected to contribute $170m to Opera’s 2015 top line (25% of total anticipated revenue).

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

Google ups premium video play with mDialog buy

Scott Denne

Contact: Scott Denne

ABC, CBS and their peers can’t be expected to dump their primetime lineups onto YouTube alongside cat videos and ukulele covers of ‘Stairway to Heaven.’ That’s why Google’s premium video efforts are built around DoubleClick, including the just-announced acquisition of mDialog, a maker of ad-insertion technology for long-form and live-streaming video, which will support DoubleClick’s efforts to build an ad exchange for premium video.

Through owning YouTube, Google led the first phase of online video: short clips, occasionally pirated and often user-generated. Owning the second phase, as traditional television (not to mention traditional television advertising dollars) goes digital, will take a new technology stack as well as relationships with a new set of advertisers and content creators.

Google is not the only company to recognize the need for new teams and technologies to accompany this latest phase. For example, Comcast picked up FreeWheel Media in March to provide traditional media companies with services and software to monetize and manage their digital video. And last month, Kaltura, a maker of video editing, streaming and management software, bought over-the-top video specialist Tvinci in a deal that was as much about the target’s relationships with broadcasters as it was about its technology.

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

BlackBerry’s software sweetens

Scott Denne

Contact:  Scott Denne

While BlackBerry continues to decline, enterprise software provided a bright spot in the struggling phone maker’s earnings announcement. Though only 7% of BlackBerry’s overall revenue, software – mostly licenses of email server and mobile management software – moved up to $67m, a 15% increase on a sequential basis. Software declined on a year-over-year basis, as did every other part of the business, but the falloff was slower when compared with other divisions.

The uptick in software suggests that BlackBerry is holding on to enterprise clients far better than individual customers. That’s born out in surveys by ChangeWave Research, a service of 451 Research, where 20% of corporate IT buyers in May reported plans to buy BlackBerry phones in the coming quarter. Though that’s down by two percentage points from a quarter earlier, the results are exponentially better than the consumer market, where only 2% of smartphone buyers plan to pick up a BlackBerry.

With its decision earlier this year to provide customers of AirWatch, Good Technology and MobileIron with free licenses of its own mobility management software, BlackBerry doesn’t look ready to concede the enterprise just yet.

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Cisco’s first big buy of 2014

Scott Denne

Contact: Scott Denne

Cisco ends a brief respite from substantial acquisitions by purchasing Tail-f Systems for $175m. The networking giant hasn’t paid more than $100m for a business in almost 10 months, marking its longest break between $100m deals since 2010-11, when no purchases crossed that mark.

The recent slowdown in Cisco’s dealmaking (this is only its second acquisition of the year) comes amid declining sales. After three years of growth, the company’s revenue dropped below year-ago levels in each of the last two quarters.

With the pickup of network orchestration vendor Tail-f, Cisco aims to bolster its service-provider business, a segment where orders declined 13% in the first quarter of its current fiscal year, 12% in the second, and 5% in the most recent quarter. Cisco expects it will take multiple quarters to return to growth in that segment.

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Amobee moves past mobile

Scott Denne

Contact: Scott Denne

Amobee’s pair of acquisitions today shows a dramatic increase in the mobile ad network’s ambitions since becoming a subsidiary of SingTel in late 2012. The purchases of Adconion and Kontera for a combined $359m take Amobee beyond offering mobile advertising products and into selling advertisers the capability to reach their intended audience across digital mediums.

The pickup of Adconion brings Amobee the ability to send targeted ads to individuals across different ad channels (mobile, video, display, social, etc.) It also didn’t hurt that most of the target’s $185m in 2013 revenue came from North America, giving Amobee an instantly larger footprint in that market (about 40% of Amobee’s revenue comes from Asia). With Kontera, Amobee obtains technology that improves contextual understanding of where and how ads are placed on the Web and mobile devices.

These deals stand in contrast to Amobee’s only two previous acquisitions, which were mobile-focused technology tuck-ins (Gradient X and Adjitsu.com). The increasing importance of audience-specific, rather than channel-specific, digital media is a trend that’s playing out across the ad-tech industry as advertisers seek to optimize interactions with target audiences, rather than experiment with individual ad channels.

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

Analog tunes to a growth frequency

Scott Denne

Contact: Scott Denne

Analog Devices looks to the cellular infrastructure market to burst out of its growth funk, paying $2.4bn to acquire Hittite Microwave. Not only is the purchase Analog’s largest by a factor of 20, it also has an unusually high multiple.

In the company’s most recent quarter, sales of chips for the communications infrastructure market jumped 25% year over year, surpassing management’s expectations for the sector. (Communications accounted for 20% of its 2013 revenue.) That level of growth – beyond anything Analog typically sees in its various segments – points to a way out of the company’s growth slump. The signal-processing vendor’s annual revenue skidded down 12% between 2011 and 2013.

Hittite specializes in communications chips that utilize high frequencies, compared with Analog’s communications portfolio, which was built around the lower frequencies typically used in cellular communications. As frequencies become increasingly crowded, cellular signals are drifting into higher frequencies, and Hittite has benefitted, as its portfolio, which was initially geared toward government and military applications, has seen growth in the broadband and cellular markets.

While Analog expects there will be opportunities to cut costs when the deal closes, the chance to grow by cross-selling the higher- and lower-frequency products drove this acquisition – and pushed up the price to 7.1x Hittite’s trailing 12-month revenue. Since cost synergies, not new sales, drive most chip transactions these days, the multiple for Hittite is substantially larger than most. In fact, it is three times larger than the median for chip deals of more than $500m in the past 12 months and is the highest multiple paid in such a transaction since Broadcom’s reach for NetLogic Microsystems in September 2011.

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Dropbox syncs collaboration strategy

Scott Denne

Contact: Erin Zion Scott Denne

Dropbox nabs another collaboration startup as the file sync and sharing vendor expands its communications and collaboration products to shore up sales to businesses. The announcement that Dropbox has picked up Droptalk, which makes a messaging app focused on sharing files and Web content, marks its third collaboration acquisition in as many months.

This strategy stands in contrast to Dropbox’s competitors, most notably Box and Hightail, which have recently reached for security firms to make their offerings business-compatible. However, it’s worth noting that Dropbox’s business ambitions are mostly in the SMB space, and it doesn’t have much traction among enterprise customers, where the bar for security would be higher.

Though Dropbox is a marquee name in file sharing, the sector is commoditizing rapidly (as we pointed out here and here) and is crowded with dozens of startups and some of the biggest names in tech. Layering on collaboration capabilities can help Dropbox alter the terms of its competition and is certainly a more attractive option than vying on price alone – an option that would quickly become onerously expensive, even for a heavily funded company like Dropbox.

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