Author: Scott Denne

Birch Communications blossoms with $323m Cbeyond acquisition

Scott Denne

Contact: Scott Denne

Birch Communications has moved out of tuck-in territory with its acquisition of Cbeyond, a network service provider that’s larger than Birch itself. Having existed in some form since 1996, Birch has grown through acquisitions, but most have been small customer or geographic expansions – nothing on the scale of its $323m purchase of Cbeyond.

The acquisition values Cbeyond at 0.7x its last 12 months revenue, and Birch expects the combined company to have about $700m in annual revenue, with Cbeyond contributing more than half the total. Prior to this deal, Birch had completed 21 acquisitions. Most of those were asset purchases, including the three deals it closed in 2013: Ernest Communications’ customers, Lightyear Network Solutions’ network and customer assets, and switching facilities in 10 states from Covista Communications.

In exchange for $323m, Birch gets a business that faces declining revenue in the face of shrinking margins and growing churn for its legacy network connectivity business. It also gets Cbeyond’s core mid-Atlantic network and the potential to expand deeper into cloud services – something Cbeyond had tried to do on its own, but the growth of that business couldn’t keep pace with the decline of its legacy offerings. Cbeyond’s annual revenue dropped 5% in 2013 to $463.4m, and it anticipated further declines, projecting 2014 revenue of $410m-430m.

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

GlassHouse unloads US consulting biz

Scott Denne

Contact: Scott Denne

GlassHouse Technologies actively used acquisitions to scale up its storage-turned-cloud services business, but now it’s turning to divestitures as it scales back down. The company is selling its US consulting practice to Signature Technology Group in its fourth divestiture since taking its second shot at an IPO.

Founded in 2001 with the vision of building a vendor-agnostic storage consultancy, GlassHouse picked up 13 businesses between 2003 and 2009 for their expertise and for geographic expansion. The dealmaking helped grow the company’s top line, setting it up for a public offering; however, headwinds from the financial crisis prevented it from completing an IPO in 2009. GlassHouse tried once more in 2011 when growth picked up again and it expanded its scope from storage to cloud, but its balance sheet changed for the worse, prompting its auditor to express concern about the company’s ability to stay in business with $4m in cash and $100m debt. Once more, GlassHouse pulled its prospectus.

Since that time, GlassHouse sold subsidiaries in Israel and Turkey and divested two separate units to Signature Technology: first selling its customer support services division in November 2013, and now the US consulting practice. That leaves GlassHouse with a European consulting business, a systems integration unit and a managed services offering.

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

Zebra gains a lot of new stripes in $3.45bn acquisition

Scott Denne

Contact: Scott Denne

Zebra Technologies, a maker of asset-tracking technologies, has picked up Motorola Solutions’ enterprise business in a $3.45bn deal; one that’s larger than Zebra’s own market cap. The company will spend about half the cash on its balance sheet and raise $3.25bn in debt (it has none today) to complete the acquisition.

In addition to nearly tripling its sales and headcount, Zebra also gains a range of hardware products, such as mobile computing and RFID products, that will better enable it to transition into the Internet of Things. Zebra is no stranger to machine-to-machine technologies – it has consolidated several RFID assets over the last decade or so, but that category only made up about 5% of its business, which is concentrated on sales of printers and related software for printing items such as barcodes and plastic cards.

Motorola’s enterprise business brings about $2.5bn in trailing revenue to Zebra, which crested $1bn in annual sales for the first time in 2013. While Zebra will triple its revenue at a price of 1.4x trailing revenue, it’s paying a bit more than the 1x we usually see in a hardware divestment. Wall Street is skeptical about the deal so far, and is pushing its stock down 11% today.

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

Hexagon mining more M&A

Scott Denne

Contact: Scott Denne

Hexagon has shored up its position in the mining sector with the purchase of Mintec, a mine-planning software company. The deal is the fourth mine-focused acquisition in the last year for Hexagon, a maker of measurement, mapping and CAD software that’s picked up its pace of acquisitions lately.

The acquisition of Mintec, which we estimate has roughly $30-40m in annual revenue, comes a month after Hexagon’s reach for SAFEmine, a maker of fleet management sensors and software for the mining industry, and six months after it bought Devex, a Brazil-based maker of 3-D mine-visualization software. Over the last year, Hexagon has acquired six companies that were at least partially focused on the mining industry. Terms of the Mintec acquisition were not disclosed.

Those deals came amid a backdrop of consolidation in mining technology during the last two years. According to the 451 M&A KnowledgeBase, there have been 20 acquisitions of technology companies that serve the mining sector, worth a combined $5.58bn in disclosed value. The entire five-year period before that saw only 19 deals worth $287.7m.

Mintec is a typical deal for Hexagon, which has grown its business across several industrial markets through a combination of technology and geographic tuck-ins over the past decade. Its pace of deals slowed a bit while it digested the $2.1bn purchase of Intergraph in mid-2010. The company didn’t make a single acquisition in the year following that deal, only one in 2011, four in 2012 and then nine in 2013. Mintec is its second so far in 2014.

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

MobileIron forges on toward IPO

Scott Denne

Contact: Scott Denne

Mobile device management (MDM) vendor MobileIron unveiled its S-1 this week, posting strong revenue growth as it inches toward becoming a profitable business. Our surveys indicate that there’s more to come: MobileIron is on the cusp of pulling ahead in a market where spending shows few signs of slowing.

The company finished 2013 with $105.6m in revenue, up from $40.8m in 2012. And it isn’t having a hard time managing that growth. MobileIron’s operational costs are growing at a slower rate than revenue and while it is still far from profitable, its losses shrank to $32.5m last year from $46.5m in 2012. Although its revenue growth is decelerating as it scales, it’s still growing fast: in the most recent quarter, revenue doubled year over year to $28m.

Surveys by TheInfoPro, a service of 451 Research, indicate that there’s plenty of blue sky left for the MDM market and MobileIron. In a survey of IT pros last year, 46% expected to spend more on MDM in 2014 than in 2013, up from 41% a year earlier. In those surveys, MobileIron was the second-most-implemented MDM provider (Good Technology was the first, with AirWatch in third and BlackBerry a distant fourth), and was in more planned deployments and trials than any other vendor.

 

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

GTCR gets into marketing software with Vocus buy

Scott Denne

Contact: Scott Denne

GTCR jumps into the pricey marketing software industry with a value play. The private equity firm will pay $446.5m in a take-private of Vocus, a public relations and marketing software provider. The deal gives Vocus an enterprise value of $413m, or 2.2x its last 12 months revenue, well below where others in this space have traded hands lately.

At 2.2x, the acquisition is the second-lowest multiple we’ve seen for a marketing software company in the past 24 months. According to The 451 M&A KnowledgeBase , the median multiple for marketing software deals in that period is 7.7x, reflecting the double-digit growth and promising prospects of many vendors in the marketing space. Vocus, on the other hand, has had little growth and doesn’t expect that to change this year.

The company has struggled to grow since it launched a suite of marketing products and acquired email marketing vendor iContact in early 2012. The market reacted negatively to that transaction, pushing its stock price below $20 per share, where it has remained as Vocus has been unable to leverage that deal to grow its business. (GTCR will pay $18 per share; Vocus closed at $12.18 before the deal was announced.)

Vocus finished 2013 with $186.9m in revenue, only $6.5m more than the combined revenue of iContact and Vocus for 2012 and well below the $200m it initially projected for the year – projections that were regularly adjusted down to reflect weaker than expected performance for both its PR and marketing software. For 2014, the company anticipates revenue to shrink by about $4m amid declining sales of iContact and some of its other point products, as well as a flatlining of its PR software business.

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

New dawn for M&A at Morningstar

Scott Denne

Contact: Scott Denne

Investment data and software company Morningstar makes its first purchase since 2010, reaching for ByAllAccounts, a data aggregation vendor. The deal supports Morningstar’s financial advisory software business by giving it technology that enables advisers to aggregate their clients’ portfolio performance data across asset classes.

In the years leading up to (and shortly after) the financial crisis, Morningstar picked off about four companies a year and inked 24 acquisitions between 2006 and 2010. While its revenue bounced back from pre-crisis levels by the end of 2010, it hasn’t put up the 25%-plus annual growth that it enjoyed for several years before that. Acquisitions weren’t the only reason for its higher growth back then (even its organic growth tended to be higher than it is today), but they did help.

The purchase of ByAllAccounts complements one of Morningstar’s underperforming units: software sales to financial advisers and wealth managers. While it’s the company’s second-largest business unit – accounting for 13.3% of its $698m in total revenue last year – its growth has been considerably slower than its institutional data business. With $93m in revenue, sales to financial advisers only grew 8% in each of the past two years, while the institutional data business grew 12% and 11% in those years.

Morningstar is paying $28m for ByAllAccounts. And though it’s the company’s first transaction in a while, it’s a typical one for Morningstar. This acquisition is just a hair above its $19m median deal value, according to The 451 M&A KnowledgeBase. Morningstar has never been a big spender, having only cracked the $50m mark on three occasions and never done a deal above $60m.

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

 

Arista: new switches, but old-school IPO

Scott Denne

Contact: Scott Denne

Arista Networks, a next-generation networking vendor, aims to go public with a last-generation IPO – one from a company that boasts growth and profits. A decade of developing Ethernet switches based on innovative software and merchant silicon, rather than custom chips, has led to a 71% CAGR for the past four years.

The company wrapped up 2013 with $361m in revenue, up 87% from the $193m it posted a year earlier as its largest customers, mostly cloud datacenters, Internet providers and financial services firms, bought more of its gear. Arista’s 10 largest customers accounted for 43% of sales in 2013, up from 32% in 2011. Its largest customer, Microsoft, accounted for $80m of its sales last year, up from $14m in 2011.

Unlike most other newly minted enterprise IPOs, Arista’s growth hasn’t come at the expense of profits. Instead, it’s printing cash. Aside from a slight uptick in the resources it earmarks for R&D, all of Arista’s costs have risen in tandem with, rather than ahead of, revenue and it finished 2013 with $42m in profit, up 99% from a year earlier.

Having posted four straight profitable years removes some of the guesswork of estimating Arista’s future cash flows, and we expect that Wall Street will put a premium on that – and its stellar growth, of course. As disclosed in its S-1, shares of the company have traded hands this year at prices that value Arista at $3-3.5bn. As a public company, we’d expect it to trade far higher than that.

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

Lithium takes a dose of Klout

Scott Denne

Contact: Scott Denne Matt Mullen

Lithium Technologies reaches for Klout, a measurer of social media influence, in a deal that aims to boost the marketing capabilities of the acquirer’s social media SaaS suite. The price tag was widely reported as $200m. While we think that’s a bit off, the mostly stock transaction suggests that Lithium’s valuation is growing beyond its nearest public-market peer, Jive Software – a company that’s about double the size of Lithium and trades at a $550m market cap.

In recent years, Lithium has expanded beyond providing tools for online communities into other elements of enterprise-focused social media, including social marketing and customer support via its acquisition in 2012 of Social Dynamx – a service that should get a boost from Klout’s technology, which can be used to determine the priority of each discovered support case.

Behind this deal is, perhaps, a desire for Lithium to get more involved in the marketing data management business. Oracle and Adobe have both made moves in that area, purchasing BlueKai and Demdex, respectively. If Klout’s consumer business remains open and the combined companies can resolve some of the misgivings concerning accuracy around scoring and categorization, then its 500 million profiles should give it a head start in assembling a form of audience-building technology that could be built out from its existing technical assets.

We’ll have a more detailed look at this deal in our next 451 Market Insight.

Lithium Technologies’ acquisitions

Date announced Target Offering
March 27, 2014 Klout Social media analytics
October 9, 2012 Social Dynamx Social media customer service
May 11, 2010 Scout Labs Social media sentiment analysis
June 2, 2009 Keibi Content moderation

Source: The 451 M&A KnowledgeBase

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

Mobile gaming missteps loom in Facebook’s Oculus buy

Scott Denne

Contact: Scott Denne

Facebook’s $2bn purchase of virtual reality vendor Oculus VR, like every billion-dollar Facebook deal, is a bit of a head-scratcher at first glance. The overlap between virtual reality and social networking isn’t obvious, and virtual reality has a long way to travel to go from gaming-focused prototypes to a mainstream computing platform. But Facebook is, in part, a gaming provider and that’s what’s driving this transaction, despite the company’s breathless comments about a future with virtual classrooms and courtside seats for all.

At the time of its IPO in May 2012, gaming was Facebook’s fastest-growing business, but, unlike its core advertising business, gaming revenue failed to make the transition to mobile devices. The quarter before the company went public, revenue from its payments business (derived mostly from taking a cut of fees paid to game developers) doubled from a year earlier to $186m, accounting for 18% of its total revenue. In the most recent quarter, as many of Facebook’s users have migrated away from PCs, its payments (i.e., gaming) business revenue dropped 6% and was less than 10% of its overall revenue.

It’s tough to choke down Facebook’s vision of virtual reality as the future of social networking – its rapid transition to mobile shows that most people are finding PCs too cumbersome, so it’s unlikely that they’ll don headgear to interact with friends. However, the deal gives Facebook a front-row seat to a platform that stands a good chance of being the future of gaming. That level of access and influence during virtual reality’s early days will help Facebook avoid a repeat of its whiff on mobile gaming.

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