Author: Scott Denne

Ingenico moves past POS with $1.7bn Bambora buy

Scott Denne

Contact: Jordan McKee, Scott Denne

Ingenico scoops up yet another European payments service provider to fuel its evolution beyond a point-of-sale (POS) terminal supplier. Today’s $1.7bn pickup of Nordic mobile payments vendor Bambora marks its third acquisition of 2017, the payment giant’s busiest year of dealmaking to date.

Its two previous deals of the year brought it international expansion – into Ukraine and India. Yet where Ingenico has spent the most money has been growth beyond its core POS business into services and other payment channels. Prior to todays’ transaction, its $1.1bn purchase of e-commerce payments company GlobalCollect in 2014 had been its largest acquisition. It also spent $485m for transaction-processing services firm Ogone a year earlier. Since that deal, Ingenico has inked eight acquisitions, according to 451 Research’s M&A KnowledgeBase.

With the bulk of its revenue indexed to brick-and-mortar commerce – and more specifically, hardware sales – Ingenico realizes that it must craft a digital strategy that will ensure its relevance as more transactions flow into card-not-present channels. By reaching for omni-channel capabilities, Ingenico expands the role it can play within its retailer client base while embedding itself further in their commerce options.

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Garmin races toward higher margins with cycling deal

Scott Denne

Contact:  Scott Denne

Up against a stagnant market for fitness trackers, Garmin reaches for Alphamantis Technologies, a maker of specialty products for cyclists. Today’s acquisition isn’t likely a sizeable one, as the target only has a few employees. Yet it highlights Garmin’s strategy of weathering a decline in one market through expansion into another, particularly specialized products with higher margins. Other companies with too much exposure to the wearables market – particularly Fitbit – would do well to get in Garmin’s slipstream.

Best known for its automotive navigation devices, Garmin has long sold GPS products into a variety of categories – fitness, aviation and outdoor recreation. Its revenue rose a modest 2% to $639m in the first quarter from a year earlier, despite a steep drop in automotive products, which still account for one-quarter of its business, and a modest decline in fitness trackers, which it blamed on a maturing market for basic wearables.

Our own data also shows that maturation. According to 451 Research’s most recent VoCUL survey, just 7.4% of people planned to buy a fitness tracker in the next 90 days – a response rate that hasn’t changed meaningfully in two years. More telling, the largest maker of wearables, Fitbit, shed 40% from its top line in the first quarter.

In response, Fitbit is turning to the smartwatch market, having inked two deals in that space since December. Our surveys show that market to be almost as flat as fitness trackers. More importantly, it’s a broad market that’s flooded with entrants from the legacy watch sector and the cell phone segment (including the world’s largest maker of consumer electronics).

Garmin’s purchase of Alphamantis brings it technology for tracking cycling performance data. A niche market to be sure, and in that sense, it’s similar to last year’s pickup of DeLorme, a maker of satellite radio products for hikers, boaters and pilots traveling to remote locations. Those niche markets, while lacking the scale of smartwatches, lead to higher margins. Garmin’s fitness business posted 56% gross margins last quarter – Fitbit didn’t crack 40% despite being twice the size.

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

Private equity gets bigger wrench for bolt-on deals

Scott Denne

Contact: Scott Denne

As buyout shops expand their role in tech M&A, a growing share of private equity spending is coming from bolt-on acquisitions by portfolio companies rather than stand-alone purchases. The sales of Sandvine and Rocket Fuel – both announced this week – show that PE firms are more willing to make sizeable additions to their portfolio companies.

Bolt-on deals have long been part of the private equity playbook. Every year since 2009, acquisitions by portfolio companies (often funded by their PE owners) have accounted for half of PE tech deal flow. This year, PE firms have kept that pace and bolstered the ratio of spending on such transactions. According to 451 Research’s M&A KnowledgeBase, PE-backed companies spent $12.5bn on purchases so far this year – that’s more than one-quarter of PE spending, a mark they’ve never previously hit.

In the acquisition of Sandvine, a previous bid by Vector Capital was bested by a $441m offer from Francisco Partners on Monday to combine the company with Procera Networks, a Sandvine competitor. Francisco paid just $240m to buy Procera in 2015. Today’s pickup of Rocket Fuel by Vector’s Sizmek has a similar dynamic. Vector proposes to pay $23m more for Rocket Fuel than the $122m it spent on Sizmek. (In yet another potential similarity between these deals, Wall Street is betting that Vector’s offer will again be beaten as Rocket Fuel trades at $0.10 per share above the bid.)

It’s tempting to think that higher spending and the benefit of potential cost synergies would lead PE shops to pay higher multiples. That hasn’t been the case. Francisco values Sandvine at 3.7x trailing revenue compared with 1.8x in its acquisition of Procera, but in the case of Rocket Fuel, Vector will pay just 0.3x, less than the 0.5x it spent on Sizmek. Overall, the median multiple on purchases by PE portfolio companies sits at 2.2x in the past 24 months, compared with 2.6x for stand-alone PE acquisitions.


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Doors shutting for VC exits

Scott Denne

Contact: Scott Denne

Venture capitalists haven’t faced an exit environment as challenging as they’ve seen this year since the start of the decade. Through the first half, VCs are on pace to sell the fewest number of portfolio companies in seven years. Yet at the high end of the market, the exits have never been bigger, driving the total value to a near-record level. Only five venture-backed companies have ever sold for $3bn or more and two of those deals – AppDynamics and Chewy – printed this year.

The dollar value of sales of venture-backed companies sits abnormally high at $16.2bn through the first half of the year. According to 451 Research’s M&A KnowledgeBase, that’s the highest value of VC exits in the first half of any year since 2002, with the exception of 2014. Yet the number of sales from VC portfolios sits at 285, the slowest start to the year since 2010.

The deceleration continued through the end of the second half as only 33 venture-backed companies were sold in June, the least of any month in the past eight years. And the decline in volume (as well as the abnormally high value of exits that came with it) extended across both enterprise- and consumer-tech startups – although in the latter category the decline marks a continuation of a four-year streak that became more pronounced as the most frequent acquirers of consumer tech stepped back from the market.

Google, the most active buyer of venture-backed startups over the previous four years, inked just three such deals this year (of five total transactions). Facebook hasn’t done a single one, while Yahoo sat on the sidelines for the 18 months leading up to its just-closed sale to Verizon. Apple and Amazon have been in the market, although neither has printed a deal for more than $250m since 2015. Subscribers to 451 Research’s Market Insight Service can access a detailed look at first-half venture exits.

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

Could Snap crack open location tech M&A? 

Scott Denne

Contact: Scott Denne

Snap has picked out a battleground in its attempt to become the next internet giant. In less than a month, the social media upstart has acquired two location technology companies – ad attribution vendor Placed and location-based social app provider Zenly. Those moves into a nascent space could lead other firms to give location tech a closer look.

A valuation of 39x trailing revenue has saddled Snap with hefty expectations and in bolstering its location-based marketing tools, it’s shown how it is planning to meet those expectations. Many of Snap’s features are intimately tied to location – geo-filters and stories, for example – and its larger competitors have only made limited moves toward location-based marketing. That could change, and as it does, acquisitions could follow. Notably, Facebook regularly counters Snap’s announcements with similar products of its own.

Even companies that lack such a direct rivalry with Snap may be enticed into the space as marketers become more aware of the possible applications of location tech following Snap’s deals. Adobe, AOL, Oracle, Google and dozens of smaller vendors expect to expand by serving legacy marketers with large budgets and sales that are tied to a physical location, whether movie theaters, retailers or auto dealerships. Also, Amazon’s dramatic bet on the convergence of physical and digital retail – its pending $13bn purchase of Whole Foods – could put location tech on its shopping list.

Outside of a handful of large GPS and mapping transactions, mobile location technology M&A has been sparse. Location tech encompasses multiple overlapping capabilities, most of which are lacking among the biggest marketing and media firms. Some startups, such as Snap’s Placed, sell the infrastructure to collect, cleanse and deploy location data for targeted marketing and attribution (e.g., NinthDecimal, Placecast, PlaceIQ and Reveal Mobile). App providers like Snap’s Zenly have a legitimate need to collect location data and could bolster the scale of an organization’s location data assets – Foursquare, for example, plays in this segment as well as the former one. Then there are those such as MomentFeed, Placeable and Yext that enable national brands and retailers to manage local presence.

Just as data generated by web servers became the heart of digital marketing, consumer location could fill the same role for the convergence of physical and digital marketing. But the applications for this data are poorly understood today. Major retailers spent years investing in beacon deployments although few have developed a strategy to get a return, while advertisers continuously test how to make use of location data, whether through targeting places and people or measuring results. Despite the growing pains, the attention on this corner of the tech ecosystem from a widely watched company like Snap could make location the place to be.

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

LendingTree’s uncommon interest in internet M&A 

Scott Denne

Contact:  Scott Denne

A sudden streak of dealmaking for LendingTree has culminated in today’s purchase of MagnifyMoney.com as the financial comparison site angles to accelerate its growth beyond mortgages. That streak makes LendingTree an outlier as few other Internet companies have been in a buying mood lately.

MagnifyMoney marks LendingTree’s third acquisition since November, when it bought CompareCards, a deal that ended a 12-year M&A drought for the buyer. In the waning years of that drought, LendingTree’s top line has expanded (up 51% last year to $384m) while new lines of business have sprouted. Five or six years ago, almost 90% of revenue came from its mortgage comparison product – now it’s less than half. MagnifyMoney, which aggregates offers from multiple types of financial services, further diversifies the business – as did CompareCards and last week’s reach for DepositAccounts.com.

The kind of transactions that LendingTree has been printing – adding new services while soaking up smaller competitors – has become rare. According to 451 Research’s M&A KnowledgeBase, consolidation among consumer internet vendors has declined. Only 66 deals have been inked this year, compared with 101 at this point last year, a number that itself was down 50% from 2015.

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Soft start to sales-enablement M&A 

Scott Denne

Contact: Scott Denne

Startups developing sales-enablement software have been the targets of a recent spate of acquisitions after indulging in readily available venture capital for the burgeoning category. But the early deals appear modest and bigger exits still seem a ways out.

Among the startups in this category, three have sold in the past two months – all of them with modest headcount after several years in the market, suggesting equally modest growth. Two of those, KnowledgeTree and Heighten Software, were lightly funded. The third, ToutApp, raised $20m, making it more representative of the two dozen or so venture-backed startups selling software that enables sales teams to automate processes, share content and analyze their pipelines.

Gobs of venture money combined with an early, confounding market has meant that revenue traction comes via cash-burning investments in evangelism and marketing. Such a situation isn’t likely to draw the most natural acquirers – the largest CRM companies (Salesforce, Oracle and Microsoft) that today address the nascent need for sales enablement mainly through their app stores.

When other categories of sales software have come into their own, those would-be buyers made big purchases. Take configure, price and quote (CPQ) software: both Oracle and Salesforce inked nine-figure acquisitions in that sector. But sales enablement hasn’t yet become as widely embedded into sales workflow as CPQ, so there’s little motivation for CRM vendors to make a strategic-sized investment in a sales-enablement startup until those offerings gel into an obvious complement (or threat) to CRMs.

Still, there’s potential for a steady stream of modest exits for sales-enablement providers. As Marketo did with ToutApp, other B2B marketing software companies could look to this category to build products that connect marketing and sales processes. Likewise, vendors in enterprise content management, file sharing, conference calling and collaboration could reach into this category for software to target a key vertical.
Source: 451 Research’s M&A KnowledgeBase

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The vanishing internet acquirer 

Scott Denne

Contact: Scott Denne

One of the most active acquirers of internet companies goes dark as Yahoo settles into its recess at AOL (now known as Oath). To be sure, the disappearance of Yahoo from the M&A scene happened well before the recent close of its sale to AOL. Yahoo hasn’t printed an acquisition in nearly two years, yet its official exit dampens an already stagnant environment for consumer internet deals.

Yahoo’s M&A machine shut down in 2015 – first through shareholder displeasure, then by its impending sale. In each of the two years before that, it printed an average of 24 transactions. Its more successful peers haven’t been much more aggressive lately. According to 451 Research’s M&A KnowledgeBase, last year saw 383 acquisitions of consumer internet businesses worth almost $60bn. Almost halfway through this year, we’ve tracked barely one-third as many deals and one-sixth of last year’s value.

Albeit for different reasons than Yahoo, the bigger and more successful internet giants have shied away from major purchases, despite seemingly ideal conditions. Amazon, Apple and Google have each inked five acquisitions this year. Facebook hasn’t done any. The stock prices of all four have run up this year – Google, the laggard of the bunch, sits 23% higher than where it was last year.

Yet not a single one of them has printed a $1bn deal since 2014. Back then they were chasing ancillary markets. Facebook shelled out $19bn for WhatsApp to push its social network into mobile messaging; Google, imagining synergies between mobile phones and smart homes, paid $3.2bn for Nest Labs; Apple wanted a new look for its accessories and headphones business so it bought Beats Electronics for $3bn; and Amazon stretched its (then) burgeoning presence in digital video into live videogames with the pickup of Twitch for $970m.

Today they’re still chasing ancillary markets, but the opportunities on their radar are too raw for them to make a large purchase. They’re pushing into self-driving cars, virtual reality and artificial intelligence assistants, markets that are too nascent to offer many big strategic targets.

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

Private equity’s latest venture 

Scott Denne

Contact: Scott Denne

The bulging coffers of buyout funds are delivering a record amount of exits to venture capitalists, providing some measure of relief as strategic acquirers scale back dealmaking and the IPO market remains a selective venue. Yet relying on a different category of buyers could have venture investors rethinking how to value the products – startups – they sell to them.

So far this year, private equity (PE) firms have spent $4.8bn on 40 companies that have taken venture money. That nearly matches last year’s record dollar total ($5.2bn), according to 451 Research’s M&A KnowledgeBase, and is on track to pass the number of such deals in 2016.

Returns from both PE shops and strategic acquirers range from prodigious to paltry, although usually at vastly different multiples on the high end of the market. Take the two largest VC exits this year, Cisco’s $3.7bn acquisition of AppDynamics and PetSmart owner BC Partners’ purchase of Chewy for an estimated $3.4bn. Both delivered outsized returns, but Chewy went off at nearly 4x trailing revenue, which is above market for an e-commerce transaction although not in the same neighborhood as the 17.4x AppDynamics garnered.

In AppDynamics, Cisco is gambling that the application performance management vendor will mature into that lofty price. PE firms are less inclined to make such a wager. While PE shops are buying venture-backed companies – they account for a record 14% of venture exits so far this year – they’re looking for proof, not potential. Those tougher standards could start to trickle down to valuations in venture fundings as PE firms determine a larger share of the outcomes.

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 A taste of the unexpected 

Scott Denne

Contact: Scott Denne

Blue Apron has taken the lid off its burgeoning food-delivery business, and uncertainty is on the menu. The company publicly unveiled its IPO prospectus on Thursday night, showing a rapid rise in annual revenue for the quasi-subscription grocery supplier but a lack of clarity on customer retention that Wall Street might not be able to stomach.

Last year’s annual revenue popped 2.3x above 2015’s total to $795m. And its improving gross margins already outperform traditional competitors. The 31% it posted last quarter puts it on par with its high-end cousin, Whole Foods, while traditional grocers are typically in the 20% neighborhood.

But other costs – administrative, development and technology – moved in tandem with revenue. In that way, it looks like a typical tech offering. Yet on a quarterly basis, its expenses – particularly marketing – are lumpy, which will likely be scrutinized.

Marketing costs jumped 63% sequentially in Q1 after a 25% decline in Q4. Even on a year-over-year basis, the growth of its marketing doesn’t fit a discernable pattern. On top of that, the returns on that investment are diminishing. Blue Apron’s revenue grew just 42% last quarter and for every dollar it spent on marketing, it notched $4.04 in revenue, the lowest return of any quarter in its history and $2 less than the previous average.

Declining ROI would be digestible if it were temporary. Blue Apron runs a no-commitment subscription service, so high upfront marketing costs to land customers with large lifetime value is part of its model. The company claims that 92% of Q1 revenue came from repeat orders. But it’s not clear how many of those already are, or will continue to be, regular clients. It’s also not clear whether Blue Apron faces rising retention costs or rising acquisition costs, or both. Any way you slice it, Blue Apron could struggle to build the kind of predictable business that won’t give investors heartburn.

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