Author: Scott Denne

Turnaround at Harris capped off in sale to Nielsen

Scott Denne

Contact: Scott Denne

Harris Interactive has lost revenue, added a few new products and made only subtle changes to its income statement since launching a turnaround effort in 2011. Despite few changes, the stock is up dramatically since then, and today it found a buyer in Nielsen, which plans to purchase the polling and market research firm for about $117m.

Harris Interactive’s stock, which at one point was close to being delisted, is up 2.5 times since bringing on new management in June 2011. Its revenue has declined to $140m, from $164m in 2011. The main change at the company has been to interest investors in its stock, which it has done by posting predictable results, slowing the pace of declining revenue (some of the decline came from getting rid of its lowest-margin services) and trimming expenses just enough to tip it back to profitability.

Although losing money, the company was able to shift its operating profile enough to become profitable, but hardly the sort of changes one would expect given the growth in its stock price. As a percentage of revenue, the cost of services ticked down slightly to 62% last quarter from 66% before its most recent turnaround effort began, and its sales and administrative expenses dropped just three percentage points to 31%. It posted $1.3m in profit last quarter, its fifth consecutive quarter of profitability.

While management was successful in more than doubling Harris’ share price, the shrinking company was never going to find a stellar exit. That’s apparent in Nielsen’s $2-per-share offer, which comes in slightly below recent closing prices for Harris’ shares. On an enterprise value basis, the deal values Harris at 0.7x trailing sales and 9.1x trailing EBITDA. When the turnaround began, Harris was valued at less than 0.3x trailing sales.

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The world’s smallest Violin

Scott Denne

Contact: Scott Denne Tim Stammers

Before its IPO paperwork was made public, Violin Memory was expected to be the next enterprise tech knockout. The sensationalism subsided, however, when the company’s financials became public and potential investors noticed it was bleeding cash. Now, after its first-ever quarterly conference call showed worse-than-expected results, Violin is obviously in need of a tune-up.

The flash storage vendor reported past and future revenue numbers below what the Street was expecting. In the just-closed quarter, the company put up $28m in sales, below what analysts were anticipating, and projects revenue of just $30-32m in the fourth quarter – nearly 40% less than the $43m benchmark analysts were forecasting. Violin’s shares plummeted 50% on the news, erasing more than $200m in market value.

Management blames a slowdown in federal spending for the weak results – the company began the quarter tracking toward $10m in federal revenue and finished with just $2m. While blaming the federal government, which accounted for about one-fifth of its sales last year, is convenient, it’s not the only problem. Based on its projections for next quarter, Violin isn’t expecting much growth in other verticals, either, and tempered expectations for its PCIe product, saying revenue from that would only be about $1m.

Violin was early to the all-flash market. Now that the space is quite contentious, the absence of certain core technologies exposes the company’s weakness against rivals that had more time to build table-stakes storage functions such as de-duplication, compression, snapshots and thin provisioning. Violin’s focus should be on promoting the products that other all-flash providers don’t have, including its Windows-powered server incorporating flash and its GridIron-originated caching appliance.

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Trimble bucks tech M&A trends

Scott Denne

Contact: Scott Denne

Bucking the overall tech M&A landscape, Trimble Navigation continues its steady M&A program with the acquisition of 3-D structural engineering software provider CSC. With this transaction and the seven others it’s done this year, Trimble goes against the grain of two notable M&A trends: declining deal volume and increased spending.

Trimble, which provides a variety of industry-specific software and systems, has announced eight deals so far this year, on par with the number of acquisitions it announced in each of the previous two years. Each individual transaction has been too small to necessitate disclosing the price paid, and CSC is no exception. The target posted just $15.5m in revenue for the year ending March 2012 (according to public filings of one of its British investors), up from $12.7m in 2007, the year ISIS Equity Partners led a $39m management buyout of the business.

Through the first three quarters of the year, Trimble spent $200m buying companies, down from $355m in the same period last year. In 2012 it spent $728m on nine companies (including a single $335m purchase), and in 2011 it spent $760m (including $489m on one deal), with the same number of disclosed acquisitions. The declining spending bucks the trend that we’re seeing throughout tech M&A, as the value of announced deals is up 33% so far this year from the year-ago period.

Tech M&A volume and value, year-over-year comparisons

Year Volume Volume percent change Value Value percent change
2013 (YTD) 2,811 -14% $214.55bn 33%
2012 (YTD) 3,265 -4% $161.6bn -20%
2011 (YTD) 3,397 $200.82bn

Source: The 451 M&A KnowledgeBase

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Bankrate boosts insurance biz with recent deals

Scott Denne

Contact: Scott Denne

Though Bankrate’s dealmaking has slowed since its 2011 IPO, its recent acquisitions, including its latest purchase of LeadKarma, have been focused on a single strategic initiative – shifting from a quantity- to a quality-based approach to selling sales leads to insurance companies.

LeadKarma furthers this strategy by bringing search engine marketing savvy to Bankrate (as well as about $3m in quarterly revenue, according to the acquirer). Bankrate runs a variety of websites with financial content (Bankrate.com, CreditCards.com, CarInsuranceQuotes.com, etc.) and generates cash mainly by selling leads to credit card and insurance firms. Its lead-generation business accounted for nearly three-quarters ($89m) of its $121m in revenue last quarter. Until recently, Bankrate had a volume-based approach to selling insurance leads, but it has been in the process of moving to lower-volume and higher-quality leads.

The company made a similar move toward quality in 2010, picking up CreditCards.com for $143m to grow the size of its credit card lead-generation business and focusing on performance-based pricing for credit card leads. Bankrate’s last two purchases before LeadKarma (InsWeb in 2011 and InsuranceAgents.com last year) also focused on improving the quality of its insurance leads. The insurance portion of the business grew 30% sequentially in the most recent quarter, following a few down quarters as a result of the strategy shift.

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CenturyLink continues to make cloud plays with Tier 3 buy

Scott Denne

Contact: Scott Denne Al Sadowski

CenturyLink continues to look to M&A as it expands its cloud business, this time reaching for Tier 3, a provider of cloud management software that will enable the acquirer to offer a complete set of outsourced IT services – from hosting to enterprise cloud. Terms of the deal weren’t disclosed, though we understand Tier 3 is on track to have just north of $10m in annual revenue.

The wireline telecom vendor expanded into the hosting and managed services business with its acquisitions of Qwest Communications and Savvis in 2011. Last summer, CenturyLink bought AppFog, an early-stage PaaS provider, and now is complementing that with the purchase of Tier 3, enabling it to sell production-ready IaaS (an offering it developed internally but will now migrate to the target’s technology).

CenturyLink is looking for those expanded capabilities to stem recent losses in its datacenter division. In its most recent quarter, the managed services business shrunk by $5m to $342m due to the faster-than-expected loss of colocation customers from Qwest. CenturyLink also took a $1.1bn impairment charge on goodwill related to its datacenter group to account for some overzealous growth expectations. Even its managed services business is moving slower than the industry average, growing about 15%. We project managed services to grow 21% this year.

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Software’s haves and have-nots

Scott Denne

Contact: Scott Denne

Advent International said Monday that it will hand over $1.6bn for software provider UNIT4. The announcement, however, was almost lost in the hoopla surrounding the opening of Dreamforce, salesforce.com’s annual customer and developer lovefest. The two events – along with the buzz they generated, respectively – go a long way toward explaining the chasm between valuations for traditional enterprise software vendors and their SaaS counterparts.

Advent’s proposed take-private values the Dutch ERP vendor at 2.7x its trailing 12-month revenue. That’s a far cry from the rich 10.3x valuation that salesforce.com fetches on the public market. We’re not picking on UNIT4. In fact, it secured a slight premium to the median price-to-sales multiple of 2.1x in comparable purchases of software firms by PE shops. (On another – perhaps more relevant – measure, Advent is paying basically 14x EBITDA for UNIT4, right in line with precedent transactions.)

Like many other traditional software firms, 33-year-old UNIT4 hopes to transition its business to include more SaaS revenue – part of the motivation for going private. From 2011 to 2012, its (still small) SaaS business increased 25% and accounted for 10% of its sales. The reason for the messy and complicated transition to SaaS? Growth.

A recent survey by ChangeWave Research, a service of 451 Research, found that 32% of respondents plan to increase their SaaS spending over the next six months – that’s about twice as high as the percentage who forecast an increase in overall software spending. That trend is what has boosted shares of salesforce.com to roughly their all-time high, some 1,300% higher than where they came public in mid-2004. Salesforce.com is expected to report fiscal third-quarter sales growth of about 33% after the closing bell on Monday.

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Under Armour expands mobile community with MapMyFitness buy

Scott Denne

Contact: Scott Denne

The opportunity to build a community of customers is pushing non-technology companies toward mobile application businesses. The latest such deal, Under Armour’s $150m acquisition of MapMyFitness, shows the opportunity for consumer goods vendors to enter new markets – and expand current markets – by moving into mobile.

Under Armour is covering the entire purchase price in cash, though it hasn’t yet decided if the funds will come from its own balance sheet (it held $186m in cash and equivalents as of September 30), its revolving credit facility or a combination of the two. Allen & Co advised MapMyFitness on its sale, while Peter J. Solomon Company advised Under Armour.

While Under Armour already sells some wearable technology that monitors athletes, it lacks an online and mobile community, which traditional tangible goods suppliers are seeing as increasingly crucial to brand value and customer retention. MapMyFitness changes that. Founded in 2009, the company quickly grew to more than 20 million registered users. And unlike many other fitness applications, which offer little in the way of social networking, MapMyFitness provides a wide-reaching social network of fitness enthusiasts, as well as a directory of fitness events.

The desire to build a live, interactive community reflects the rationale in other similar deals this year, such as Hasbro’s pickup of Backflip Studios, in which the toymaker cited the mobile gaming firm’s existing network of users as part of the motivation for the transaction, and Lonely Planet’s recent acquisition of TouristEye, which has the potential to greatly expand the reach and real-time information of the travel-book publisher’s existing Web community.

Purchases of mobile app developers by non-tech companies this year

Date announced Acquirer Acquirer sector Target Deal value
November 14, 2013 Under Armour Sporting goods MapMyFitness $150m
November 13, 2013 Lonely Planet Travel book publisher TouristEye Not disclosed
August 14, 2013 The Occasions Group Invitations and greeting cards Red Stamp Not disclosed
July 8, 2013 Hasbro Toymaker Backflip Studios $112m

Source: The 451 M&A KnowledgeBase

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In constant transition, Fiberlink sells to IBM

Scott Denne

Contact: Ben Kolada Scott Denne

Fiberlink Communications has been constantly evolving since its launch more than two decades ago. The company found its sweet spot in fast-growing, cloud-based mobile device management software, which has led to its sale to IBM.

Founded in 1991, Fiberlink spent most of its life building a VPN services business that it hoped would eventually hit $100m in sales, but its top line began to shrink as customers viewed those services as commodity. About six years ago, it began offering additional services for IT administrators to monitor and control mobile usage, eventually pivoting the company into the cloud-based enterprise mobile management business it has today.

According to sources, the pivot paid off handsomely – revenue for the cloud product, which launched in 2011, grew to account for about 40% of the $50m in sales the company generated last year. Fiberlink raised at least $84m in venture funding. Deutsche Bank Securities advised Fiberlink on its lengthy sale process (we first heard the company was for sale a year ago).

For IBM, the deal is the latest in a string of mobile acquisitions panning sectors from application development to fraud prevention. The purchase of Fiberlink gives Big Blue a SaaS-based service to complement its on-premises BigFix endpoint management software and a single offering for managing mobile devices and applications.

IBM’s most recent mobile deals

Date announced Target Sector
November 13, 2013 Fiberlink Communications Mobile device management
October 3, 2013 Xtify Mobile messaging
October 1, 2013 The Now Factory Mobile device analytics
August 15, 2013 Trusteer Anti-fraud
April 22, 2013 UrbanCode Software development tools

Source: The 451 M&A KnowledgeBase

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Trustwave’s latest deals bring revenue, not just product

Scott Denne

Contact: Scott Denne

Trustwave picks up Application Security Inc in a $25m stock deal that highlights the acquirer’s shifting M&A strategy since its aborted IPO attempt two years ago. With this transaction, like the purchase of M86 Security before it, Trustwave is grabbing a business with significant revenue, not just interesting products to roll into its MSSP division.

Like Trustwave, Application Security targets customers under pressure to comply with industry regulations like HIPAA and PCI, so pairing the two businesses together should create upsell opportunities. Application Security made a name for itself in the database security sector, but its growth was hindered by the small size of the market and aging investors with limited capacity to add to the company’s coffers – only one of its four venture investors has raised a fund since 2003 and its most recent round came in 2006.

Though smaller than anti-malware vendor M86, which Trustwave bought early last year (see our estimate of that deal here ), Application Security built a business that, we understand, reliably generated $20-25m in annual revenue, though little growth in the past few years. Still, that revenue will give about a 10% boost to Trustwave’s top line and strengthen its position for a potential IPO.

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DT makes $735m move into Eastern European B2B

Scott Denne

Contact: Scott Denne

Deutsche Telekom hands over $735m for GTS Central Europe in a deal that brings a geographically unique set of fiber and datacenter assets but little growth. The move plays into DT’s desire to build its B2B offerings that service a set of customers beyond its base of Germany-based multinational corporations.

GTS has both fiber networks and datacenters across multiple countries in Eastern and Central Europe, making it the region’s only multi-country, multi-tenant datacenter business, according to a 451 Research report. That reach is valuable to the German telecom giant because it needs fixed-line networks and datacenters to go along with its wireless-only services in the region, especially in countries such as the Czech Republic and Poland.

GTS’s Slovakia operations, where DT already has fixed-line network assets, are not included in the deal. The portion of the business that is going to DT posted $459m in revenue and EBITDA of $115m last year.

Despite its geographic reach in its home market, GTS hasn’t grown since its acquisition by a consortium of private equity investors in 2008. The year before that transaction, it reported $587m in revenue – a mark it hasn’t hit since, which DT attributes to tight regulations and difficult economic conditions in Europe. Last year, GTS as a whole, including its Slovakia operations, reported $511m in revenue and EBITDA of $136m.

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