Author: Scott Denne

Semiconductor M&A: bigger, fewer deals

Scott Denne

Contact: Scott Denne

Semiconductor deals keep getting bigger as the industry consolidates and the startups vanish. More buyers are looking for big targets where they can make significant cuts to operating expenses, rather than young companies that can bring them new products or revenue growth – largely because such young companies no longer exist. Avago Technologies’ $6.6bn purchase of LSI is a prime example.

Avago obtains a business that, last quarter, saw revenue decline 3% year over year to $607m but has better margins than Avago’s, something the acquirer plans to improve further by cutting $200m in annual operating costs out of the combined company in the second year following the deal’s close. At an enterprise value of $5.94bn, the transaction values LSI at 2.5x trailing 12-month revenue, higher than the 1.8x median multiple this year for vendors in its market.

Until the past few years, semiconductor suppliers had a pool of startups that could provide them with revenue growth (or at least the potential for growth with new products). Venture capitalists, however, have abandoned that space as the costs of building a chipmaker have soared and public market multiples for those businesses have stagnated. For the most part, chip startups are now extinct, and that’s unlikely to change anytime soon as almost all venture firms have refocused or eliminated partners that formerly specialized in chips.

That has led to an inverse relationship between the value and volume of deals in this sector: the median size of semiconductor purchases has been rising as the total number of such transactions has fallen. This year, the median price paid for a semiconductor provider rose to $75m, higher than it’s been in a decade and up from 2012 ($54m) and 2011 ($39m), according to The 451 M&A KnowledgeBase.

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With a booming market ahead of it, Nimble’s IPO pops on day one

Scott Denne

Contact: Scott Denne

Banking on the growth of the hybrid storage market, hungry investors sent Nimble Storage’s shares surging almost 50% above its IPO price for a market cap of $2.3bn in its first day as a public company. It is currently valued at a whopping 21.7x trailing sales.

Hybrid storage arrays like those Nimble sells combine flash and hard-disk drives in the same device, giving customers a better ratio of price to performance than traditional disk storage. Today the market is dominated by incumbents that have simply replaced disk drives with flash drives, rather than creating a new file system from scratch to accommodate both types, as Nimble has done.

A look at data collected by TheInfoPro, a service of 451 Research, shows that Nimble and its market are poised for more growth. This year the number of storage administrators who said they would spend more money on hybrid storage systems than they did a year earlier increased 27% compared with 18% who said the same thing last year.TIPfor1213KBI

Our surveys also show Nimble accelerating within that market. While incumbents EMC and NetApp topped the list of vendors being implemented in the survey, Nimble was the highest ranked among the private, stand-alone companies. In 2012, it didn’t even get mentioned as a player in that category.

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Marketo buys Insightera to expand automation pitch to CMOs

Scott Denne

Contact: Scott Denne Matt Mullen

In its first deal as a publicly traded company, Marketo spends $19.5m to pick up Insightera, a website automation vendor that deepens its portfolio of marketing automation offerings and gives it technology that its larger competitors don’t yet have.

Marketo is shelling out about $6m in cash, with the remainder in stock, for Insightera, an early-stage company that raised $6.5m in series A funding last summer. The target’s technology enables customers to personalize the content of their websites for each visitor – a technology that many startups, including Demandbase, Dynamic Yield and Causata (acquired by NICE Systems in August), are developing while other large marketing software providers stick to email and social for their automation offerings.

While Marketo faces intense competition in the wake of consolidation in this market, its focus on selling straight to CMOs is an advantage. The acquisition of Insightera provides another product that directly serves that audience. While salesforce.com became a major competitor with its purchase of ExactTarget, it’s approaching marketing software as an extension of CRM. Likewise, Oracle sees marketing as part of a bundle to be sold to CIOs, rather than a stand-alone marketing sale.

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Network Instruments sale is Thoma Bravo’s third tech exit in as many weeks

Scott Denne

Contact: Scott Denne

While most of the country has been pounded by snow, Thoma Bravo has been making it rain. With today’s sale of Network Instruments to JDS Uniphase for $200m in cash, the private equity firm has announced exits for three portfolio companies in as many weeks.

Two of those deals were turned around relatively quickly and without the bolt-on acquisitions that typically follow a Thoma Bravo investment. The firm owned Network Instruments for less than 18 months, during which time the network performance equipment provider hadn’t announced a single purchase. Though Thoma Bravo’s ROI is unknown, it seems that JDSU was eager to own the asset – the transaction is JDSU’s largest in seven years and at 5x trailing revenue it is the highest multiple we’ve seen the company pay, according to The 451 M&A KnowledgeBase.

Last week, Thoma Bravo landed a five-month flip of Digital Insight that added $625m to the company’s value when NCR agreed to buy it for $1.65bn. The week before, Thoma Bravo sold Roadnet Technologies, formerly known as UPS Logistics, to Omnitracs for well over $100m (subscribers can see our specific price estimate and valuation by clicking here).

The firm could chalk up another exit soon, as it is rumored to be shopping enterprise content management vendor Hyland Software for an asking price of $1.2bn.

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Verizon set to shake up CDN market with proposed EdgeCast buy

Scott Denne

Contact: Scott Denne Jim Davis

Verizon picks up EdgeCast Networks in a move that’s likely to shuffle market share and partnership arrangements in the CDN space. The deal will likely alter Verizon’s current partnership with Akamai, the largest CDN vendor.

We estimate the enterprise value of the transaction at $395m, making it the largest acquisition of a CDN company and valuing EdgeCast at about 2.9x the $135m annual revenue that it expects to have by the close of 2013. The deal values EdgeCast slightly below the 4.8x that Akamai fetches and roughly in line with the 3.1x median for CDN purchases in the past decade, according to The 451 M&A KnowledgeBase.

Akamai gets about one-fifth of its revenue from resellers. While it’s not clear how much of that comes from Verizon, it is clear that it will lose some revenue when that partnership ends. Despite that, this could be an opportunity for Akamai or other CDNs to land additional carrier partnerships as telcos that resell EdgeCast, including Deutsche Telekom and TELUS, may not be comfortable reselling a Verizon service – not to mention the multi-tenant datacenter providers that partner with EdgeCast and also compete with Verizon’s Terremark.

Getting into the CDN business brings Verizon another source of revenue to help offset its declining fixed-line revenue, a need that’s driven most of its M&A spending in the past couple of years as it has bought companies such as Terremark for $1.4bn, CloudSwitch for an estimated $80m and fleet management vendor Hughes Telematics for $612m. And that’s in addition to the $130bn it paid for the 45% of Verizon Wireless that it didn’t already own.

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Cloudy skies for Cbeyond

Scott Denne

Contact: Scott Denne Al Sadowski

Cbeyond’s transition into cloud services is moving slower than planned – and slower than the deterioration of its legacy sales. Now the company, which was founded around IP connection services for small businesses, is contemplating whether to sell itself or pursue acquisitions to ignite its move to the cloud. We believe a sale is a more likely outcome of that review, given its limited M&A history, small amount of cash and depressed valuation.

In the most recent quarter, revenue from Cbeyond’s cloud services, including hosted applications, managed hosting and cloud PBX, grew 87% year over year to $17.8m, up only $1.7m sequentially. That’s not nearly enough to staunch the bleeding on its legacy business, where sales shrank by $16m, or 14% year over year, as cable providers like Time Warner Cable and Cablevision have encroached on that market, where it already faced heavy competition from incumbent carriers.

Cbeyond currently trades at 0.4x trailing 12-month revenue of $471m and 2.4x EBITDA, well below comparable companies such as CenturyLink (2.1x revenue, 5.2x EBITDA) and Windstream (2.3x revenue, 6.1x EBITDA). With a depressed stock price and only $25m in cash on its balance sheet, Cbeyond’s ability to make acquisitions is limited (though it does have options in the form of an untapped $75m line of credit).

In a sale, we believe Cbeyond would attract interest from a larger regional CLEC that would find Cbeyond’s core mid-Atlantic network a complement to its own. Other suitors may be midsized MTDC vendors considering their own datacenter interconnection backbone or perhaps hosting providers seeking an opportunity to become full-service ICT suppliers. A sale would certainly give a boost to shareholders. Over the past 24 months, the median multiple for communications services and Internet access businesses is 1.65x trailing revenue, according to The 451 M&A KnowledgeBase.

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Intuit’s ledger needs larger deals

Scott Denne

Contact: Scott Denne

Intuit has carved out an incumbent position for itself around its accounting software, and that’s a position it needs to leverage now while the competition is limited. The company is in an enviable position as a provider of software to small businesses, a market that has taken off in recent years as lower-recurring-cost SaaS products are easier to sell to cash-flow-conscious small businesses.

Most of Intuit’s recent acquisitions have been small. If it were to look to make bigger deals, it could, for example, use its payroll software businesses to help it get deeper into human resources with an add-on such as PeopleMatter, which provides software for managing hourly employees, or iCIMS, which offers a suite of cloud HR software for smaller businesses. Intuit has willingly spent heavily on M&A in the past, including its $423.5m purchase of marketing software vendor Demandforce in 2012.

Intuit has used the popularity of QuickBooks to spring into other corners of small business software, including payments, payroll and marketing. All of those have become solid businesses and are growing nicely, each in excess of 10% annually; however, competition has been limited in the small business sector. Now other firms – including Web hosting giant Go Daddy, marketing software company HubSpot and collaboration vendor Zoho – are making headway into the market. Today’s successful startups scale quickly, making internal innovation at Intuit an untimely choice. If the company doesn’t scoop up promising young companies soon, it could find itself with much more competition for deals and customers in the small business segment.

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HomeAway returns from its M&A vacation

Scott Denne

Contact: Scott Denne

Though HomeAway’s M&A activity initially slowed following its IPO two years ago, the vacation rental company has resumed its earlier pace, logging three deals in the past five months, including today’s acquisition of Stayz Group for $198m in cash.

Stayz, HomeAway’s largest purchase, amplifies a few of the vacation rental giant’s strategic projects. Stayz generates nearly all of its $23m in revenue (for the year ended June 30) by charging owners a per-booking fee, a business model that HomeAway itself only began extending to some of its websites last quarter. Also, Stayz is based in Australia, fitting well with HomeAway’s ambitions in Asia-Pacific. All three of its acquisitions since July have been of companies in that region, including Stayz, an operator of several vacation rental websites in Australia. Prior to those transactions, HomeAway had bought only one (European) company following its IPO in July 2011.

That pause was unusual for HomeAway, which began a dealmaking spree in November 2006 when it raised $100m from several venture firms and picked up VRBO.com for an estimated $120m. Between that acquisition and its IPO, it spent more than $138m buying nine other vacation rental websites (and one software firm) around the globe.

HomeAway’s largest deals

Date announced Target Deal value
December 4, 2013 Stayz Group $198m
March 3, 2010 BedandBreakfast.com $31.6m
February 4, 2009 Homelidays.com $45.4m
November 13, 2006 VRBO.com $120m*

Source: The 451 M&A KnowledgeBase *451 estimate

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Akamai doubles down on security with $370m acquisition of Prolexic

Scott Denne

Contact: Scott Denne

Akamai Technologies reaches for Prolexic Technologies in a $370m all-cash deal that’s a departure from the acquirer’s typical profile. Not only is it Akamai’s largest purchase to date, but Prolexic, a security vendor, doesn’t directly add new capabilities to the company’s core CDN offering.

That’s not to say the transaction isn’t complementary. Prolexic brings Akamai a platform it can use to offer security services – something that could help defend against the downward pricing pressure faced by CDN providers. Also, Prolexic focuses on defending datacenters against denial-of-service (DOS) attacks and has enterprise networking clients – an area where Akamai is trying to expand further and was the focus of its pickup of Velocius Networks, its only other acquisition this year.

From another view, the deal is similar to Akamai’s past M&A strategy of snagging competitors before they can do too much damage. This was the case with its $268m acquisition of Cotendo, which it bought during a contentious patent battle. At about $50m in projected revenue this year, Prolexic is about the same size as Akamai’s own security business, which, like Prolexic, focuses on DOS attacks. We’ll have a longer report on this transaction in tomorrow’s 451 Market Insight.

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Acxiom looks to sell its $271m datacenter biz, according to sources

Scott Denne

Contact: Scott Denne

Acxiom has spent the last two years separating a fragmented set of services into discrete units and sharpening its focus around the largest portion of its business: marketing data and technology services. Now sources tell us it may take the next step in separating those units by selling its IT infrastructure services business, a unit that accounts for about a quarter of the company’s revenue.

Its IT infrastructure business, which includes mainframe, server hosting and cloud infrastructure services, generated $271m in revenue over the last 12 months. The division’s sales have been shrinking as it lost customers and faced pricing pressure. Revenue is down from its most recent fiscal year (ending in March), when it brought in $275m, and from FY 2012, when it logged $292m. But the unit is becoming more profitable. In the most recent quarter, operating profit rose to $12m from $9m a year ago, with operating profit margins increasing from 12% to 18%. Acxiom’s IT infrastructure business recorded $89m in EBITDA in its last fiscal year.

Acxiom already sold off several of its other business units, including its background-screening business in early 2012 for $74m. The company’s divestitures are part of a plan to make its three separate business units – marketing data, IT services and other services – operationally independent. Axciom even separated its internal IT functions from its IT services business, likely in preparation for a sale.

Based on recent acquisition valuations, Axciom’s IT infrastructure business could fetch a price as high as $600m. Hosting companies landed a median valuation of 9.4x EBITDA in the last few years, but Acxiom’s assets will likely sell for less. Telecommunications companies have paid the highest multiples so far, but those buyers may be put off by the mainframe portion of the business, or at least value that portion significantly less. The unit’s improving profit margin make it attractive to private equity firms or sponsored companies, which have paid a median 6.8x EBITDA since 2010, according to the 451 M&A KnowledgeBase.

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