Author: Scott Denne

LivingSocial moves $260m worth of product in its biggest sale

Scott Denne

Contact: Scott Denne

In an unusual divestiture among close competitors, LivingSocial sells its Korean Ticket Monster business to Groupon for $260m. Looking past the surprising development that LivingSocial will shortly own about $160m in stock (the rest is cash) of a rival, the transaction shows the companies’ paths diverging as the daily deals market cools down.

Sales at both businesses soared in the early days of flash sales and have since stalled as the novelty of the concept faded. To bounce back, LivingSocial, whose revenue was down this quarter for the first time (its financial performance is made public in Amazon’s filings, as the company has a 31% stake in LivingSocial), is expanding its role as a marketing partner for merchants, while Groupon is taking a different tack by moving into physical goods.

Ticket Monster fits well with the new Groupon – more than half of the Korean company’s business is physical goods. Last quarter, physical goods sales at Groupon set a record, accounting for more than one-third of the company’s $595m in revenue. While the new strategy has enabled Groupon to grow revenue as its daily deals business shrinks, its profits have taken a hit – margins on its physical goods are 10% compared with 86% from its merchant business. That’s OK for Groupon, which has $1.1bn in cash on hand, but it’s a less appealing strategy for LivingSocial, which is still private, unprofitable and raised another $110m from investors earlier this year. Following this transaction, physical goods will be less than 10% of LivingSocial’s business.

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Today NYSE, tomorrow NBC

Scott Denne

Contact: Scott Denne

Twitter harbors ambitions of being a force in both online video and traditional television. Now that the distraction of an IPO is behind it, we expect the company to focus its dealmaking efforts on video advertising technology.

Twitter’s audience isn’t growing as fast as it once was, and to ensure that its revenue growth rate doesn’t slow, it needs to squeeze more revenue from its audience. That was the rationale behind picking up MoPub, which will help Twitter build programmatic features into its own platform and serve as a gateway to the mobile ad market. A video ad firm would enable it to monetize Vine, extend into the growing online video ad space and, most important, grab a piece of the TV ad sector (which still dwarfs the entire digital ad market) by bringing those dollars into its own platform and helping spread them to other places on the Internet by enabling advertisers to follow an audience beyond the living room.

Talent and technology have been the guideposts for Twitter’s past acquisitions, and there’s no reason to think that would change. (The same principles shape the company’s organic growth, as it spends a whopping 40% of its revenue on R&D.) Along those lines, potential targets that would be a good fit are BrightRoll, TubeMogul or even a smaller, emerging video ad provider.

While much of BrightRoll’s business comes from its video ad network, it also operates a video ad exchange, which is similar to what MoPub does in the mobile market. We understand the business has about $240m in annual revenue, so it would be a big bite. TubeMogul sits on the other side of the ad tech table, selling a platform to advertisers to distribute video ads across real-time exchanges, making it a potential complement to MoPub. In addition, it doesn’t come with the ad network baggage, making it a more attractive target for Twitter. TubeMogul also has substantial revenue of its own, bringing in $54m last year and likely well over $100m this year, all with profit margins that are far above the norm in ad tech, according to our sources.

There’s also a handful of emerging players that would likely require less of a capital commitment and could impact Twitter’s efforts in this space. For example, firms like Spongecell and Vungle would bring creative talent, as well as tech. Another possibility is StickyADS.tv, a Paris-based company that would bring Twitter video ad technology as well as a deeper presence in Europe, potentially helping it with low spending among advertisers outside the US.

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Will Criteo be a have, or have-not, ad-tech IPO?

Scott Denne

Contact: Scott Denne

Ad-tech IPOs have had mixed results this year. While Wall Street has shown little inclination to get behind most ad networks, it’s been quick to reward high-growth companies with demonstrated technology chops. Which bucket will Criteo fall into when it starts trading?

Compare the 2x and 4x trailing revenue multiples given to YuMe and Tremor Video with the 11.6x given to Rocket Fuel. On the one hand, Criteo looks more like Rocket Fuel. The company posted $253m in revenue through the first half of 2013, up 72% from a year earlier. While that’s about half the rate Rocket Fuel grew, it is off a base that’s about twice as high.

The price Criteo pays for inventory – the empty slots where it puts its customers’ ads – could hamper its valuation. That cost is now 60% of revenue, up slightly from 56% a year earlier, and enough of a change to tip the profitable company into the red this year for the first time in at least three years.

Ad networks like Criteo and Rocket Fuel compete by offering customers the lowest prices for a desired outcome (typically, clicks on an ad). To offer lower prices, they can either build technology to lower their media spending without lowering the click-through rates, or they can swallow smaller profit margins on each ad campaign. Criteo’s rising media costs suggest it’s moving toward the latter camp, perhaps because its technological advancements may not be keeping up with competitors’ price cuts. Rocket Fuel, by comparison, is seeing its media costs shrink steadily, to 45% of revenue so far this year, from 51% in 2011.

Criteo last adjusted its proposed price range up to between $27 and $29 per share, which would give it a valuation of about $1.5bn, or 3x its last 12 months of revenue, were it to set a price at the midpoint of that range. When it becomes available to public investors, we anticipate the company will trade with a valuation multiple between 6x and 7x its trailing sales – higher than most ad-tech companies, but lower than Rocket Fuel – giving it a valuation between $2.8bn and $3.2bn.

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NTT Com doubles its US M&A activity with two new deals

Scott Denne

Contact: Scott Denne Kelly Morgan

NTT Communications jumps into the US hosting market with two of the biggest purchases in its history, paying $525m for networking services company Virtela Technology Services and $350m for an 80% stake in RagingWire, a Sacramento, California-based datacenter vendor. NTT Com’s strategy is all about providing infrastructure and services, and these deals feed both aspects.

The Japanese telecom giant first revved up its US dealmaking with the $8m pickup of a former Harley-Davidson datacenter just over a year ago; it followed that up with the acquisition in June of Solutionary, a managed security services provider generating about $50m in annual sales. Virtela gives NTT Com an expanded networking services portfolio, both in the US and abroad, complementing its organic efforts to offer SDN capabilities.

NTT Com is paying an exceptionally high multiple to buy RagingWire, filling a notable gap in its infrastructure portfolio. Not only is the $350m it’s handing over the second-highest amount (behind Virtela) that NTT Com has ever disclosed paying for a company, at 5.1x RagingWire’s annual sales it’s the highest multiple for any US hosting firm since Verizon’s takeout of Terremark two and a half years ago. (The median value for such deals over the past 24 months is 2.1x.) DH Capital advised RagingWire on its sale.

Prior to this transaction, NTT Com had four datacenters in the US. Most were older, nearly full and certainly not as well-known or high-quality as RagingWire. RagingWire comes out of the deal with strong financial backing, a deeper portfolio of managed services and a large roster of potential customers, all while retaining an element of independence as it will operate its own brand under the guidance of its existing management team and founders.

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PROS announces first acquisition in its 28-year history

Scott Denne

Contact: Scott Denne

PROS Holdings is paying $36m for configure, price and quote (CPQ) sales automation vendor Cameleon Software, adding fuel to an already steady growth rate. The deal, PROS’s first in its 28-year history, should boost the company’s top line by providing new cross-selling opportunities and expanding its presence in Europe.

Using an enterprise value of $33m, Cameleon is being valued at 2.2x trailing sales, a bargain compared with the 7.3x valuation PROS is currently sporting. Cameleon’s shares are being valued 45% higher than their 90-day average trading price.

PROS, which makes software that helps determine the optimal price to charge each customer for a given product, grew revenue 22% last year, to $118m. That follows a record-setting 36% growth rate in 2011. Cameleon is much smaller, but still saw sales rise 29% last year to $14m.

The purchase of Cameleon brings PROS technology that helps customers/vendors automate the process of getting the right products and right information to prospective clients. (It is similar to what Oracle obtains with its recent purchase of BigMachines .) Cameleon, based in France, also brings PROS a larger European operation. Though PROS is growing overall, its European revenue shrank slightly in its most recent quarter.

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Friends are friends, but business is business

Scott Denne

Contact: Ben Kolada Scott Denne

Oracle is either adding depth or distance to its partnership with salesforce.com by acquiring BigMachines, yet another salesforce.com-integrated startup. The two software giants have had a difficult relationship, most visibly with salesforce.com CEO Marc Benioff being ‘uninvited’ from Oracle OpenWorld two years ago. But the companies seemed to have worked out their differences this year, announcing a nine-year product integration partnership in June. Oracle’s recent dealmaking, however, could undermine some of that reconciliation.

Terms haven’t been disclosed in Oracle’s acquisition of configure, price and quote sales automation SaaS vendor BigMachines. We estimate that the company generated $60m in trailing sales, or about twice the revenue it recorded in the year before its recapitalization by Vista Equity Partners and JMI Equity.

BigMachines is the second salesforce.com partner Oracle has purchased in the past week. On October 17, Oracle bought content marketing SaaS provider Compendium, but the stakes and price are certainly much larger for this deal (subscribers to The 451 M&A KnowledgeBase can see our estimated price and revenue for the Compendium buy here).

BigMachines integrated its price and quoting optimization software into salesforce.com’s core CRM offering in 2010 (it was also an Oracle partner) and salesforce.com became an investor in the company in 2012. (As an investor, salesforce.com almost certainly had right of first refusal on Big Machines.) Compendium – which was founded by one of the founders of ExactTarget, the marketing software company that salesforce.com picked up for $2.5bn earlier this year – integrated its content marketing software into ExactTarget’s offering as well as a rival marketing automation offering from Eloqua, which Oracle acquired a year ago.

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Microsemi’s all about the margin

Scott Denne

Contact: Scott Denne

In picking up Symmetricom for $310m in cash ($230m in enterprise value), Microsemi is taking on a company whose margins are a far cry from its own goals. The semiconductor company has been fruitlessly chasing a self-imposed target of 60% profit margins and 30% operating margins.

Although adding a new element to an already challenging margin target, the deal will be accretive to its earnings per share.

Microsemi posted a 57% profit margin in its most recent quarter, although its operating margin of 10% is much farther away from its goal. Symmetricom reported a 45% profit margin and a negative operating margin. That makes this deal a bigger challenge than Zarlink, its last big purchase, whose margins were just a few points shy of Microsemi’s. Despite that, management claims Symmetricom will be running at its 60/30 target within 12 months of the deal’s close.

As it has in past acquisitions, Microsemi will prune legacy Symmetricom assets worth $10-15m in sales in order to give the target more favorable operating and profit margins. With this deal, Microsemi looks to add to its communications and defense businesses by picking up an asset that will, eventually, have a similar margin profile to itself.

Microsemi employed the same strategy in its acquisition of Zarlink in late 2011. With that deal, Microsemi planned to immediately chop 20% of Zarlink’s revenue-generating assets.

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Hop aboard the Nimble spaceship

Scott Denne

Contact: Scott Denne

From basically a standing start just two years ago, Nimble Storage is on track to put up an astonishing $100m in sales this year. That’s a faster growth rate than we’ve seen at any of the other storage companies that have come public in recent years. The hybrid flash storage vendor recorded $50m in revenue in the first half of 2013 – almost as much as it did in all of 2012.

Nimble also claimed the title of fastest-growing storage company in at least a decade, growing faster than even Data Domain did in its early days – as have several of the latest generation of storage startups, such as Pure Storage and Nutanix. Thanks to the filing, we know that the crown belongs to Nimble, at least for now. Revenue for the year ending January 31, 2013, its third year of sales, nearly tripled to $54m, and was ahead of the $46m Data Domain posted during its third year.

Storage companies’ annual revenue leading to IPO

Company Year 1 Year 2 Year 3
Nimble Storage $2m $14m $51m
3PAR $24m $38m $66m
Data Domain $1m $8m $46m
EqualLogic $10m $30m $68m
Isilon $1m $8m $21m

Oracle deal shows hoosiers own marketing software

Scott Denne

Contact: Scott Denne

Oracle’s purchase of Compendium cements Indianapolis’ transformation into the go-to spot for marketing software deals. This makes six acquisitions of marketing tech companies in that city, which have collectively been valued at more than $3bn.

Earlier this year, salesforce.com spent $2.5bn to acquire ExactTarget, and two years ago Teradata paid $525m for Aprimo. Both those companies were founded more than 10 years ago and helped bring – and train – marketing software talent to the area. Given the shift in marketing software from a niche to a strategic pillar at many major software companies – such as Oracle, which has bought five such companies in the last 18 months – there’s room for more local marketing companies to benefit.

ExactTarget birthed many of these businesses. Chris Baggott, one of the founders of ExactTarget, was a founder of Compendium. Other marketing tech startups in the region, such as Right On Interactive, Marketpath and Smarter Remarketer, also have founders that spent time at ExactTarget.

Recent marketing tech deals with Indy targets

Date Target Acquirer Deal Value
October 17, 2013 Compendium Oracle not disclosed
June 04, 2013 ExactTarget salesforce.com $2.5bn
October 11, 2012 iGoDigital ExactTarget $21m
June 07, 2011 Vontoo One Call Now not disclosed
December 22, 2010 Aprimo Teradata $525m

Source: The 451 M&A KnowledgeBase

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In one acquisition, out the other

Scott Denne

Contact: Ben Kolada

The acquisition and reacquisition of MarketTools and its assets continued last week in what has been the most labyrinthine dealmaking we can recall. Since 2008, the survey creation SaaS vendor and its core assets have been through more than a half-dozen acquisitions, and there’s likely one more to go.

Founded in 1997, MarketTools made its first acquisition on record (we’ve been recording M&A since 2002) in 2008, when it bought customer and employee feedback management SaaS provider CustomerSat.

After that, however, the company began a long unwind. In December 2011, MarketTools was acquired by TPG Growth and simultaneously sold its Zoomerang, ZoomPanel and TrueSample assets to SurveyMonkey. Shortly thereafter, TPG unloaded MarketTools in July 2012 to MetrixLab, which then sold MarketTools’ CustomerSat assets to Confirmit. MetrixLab kept MarketTools alive, using the business to purchase RawData in July 2013.

The MarketTools assets sold to SurveyMonkey didn’t stay in one place for too long. Last month, SurveyMonkey sold ZoomPanel to Critical Mix, and last week it sold TrueSample to Five Peaks Capital Management.

Still with us? If you are, you’ll notice there is one legacy MarketTools asset that hasn’t yet found a third home: Zoomerang. If history is any precedent for the future, Zoomerang will likely be sold again soon enough.

Which way did they go?

Date announced Event
October 9, 2013 TrueSample, now owned by SurveyMonkey, is sold to Five Peaks Capital
September 12, 2013 ZoomPanel, now owned by SurveyMonkey, is sold to Critical Mix
July 25, 2013 MarketTools, now owned by MetrixLab, acquires RawData
August 22, 2012 MarketTools, now owned by MetrixLab, sells CustomerSat to Confirmit
July 9, 2012 TPG Growth sells MarketTools to MetrixLab
December 14, 2011 MarketTools acquired by TPG Growth, simultaneously sells Zoomerang, ZoomPanel and TrueSample assets to SurveyMonkey
April 3, 2008 MarketTools acquires CustomerSat

Source: The 451 M&A KnowledgeBase

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