Author: Scott Denne

Take-Two’s second coming 

Scott Denne

Contact: Scott Denne

After nearly a decade on the sidelines, Take-Two Interactive has returned to the M&A game. Back then, the birth of the smartphone and explosion of low-cost mobile gaming loomed over developers of pricey console games. But now that the shift to digital is delivering expansion, not irrelevance, Take-Two and its peers are printing more acquisitions that align with that trend.

Take-Two’s latest move, the pickup of space simulation game Kerbal Space Program from developer Squad, marks its second purchase of the year, following its $250m reach for Social Point in February. Prior to those deals, Take-Two hadn’t bought anything since early 2008. Both recent transactions have brought on digital assets – Kerbal sells through PC downloads, while Social Point makes mobile games. (Unlike Social Point, Kerbal’s price tag wasn’t disclosed, suggesting it was the smaller of the two deals.) And they follow a 52% jump in Take-Two’s annual revenue to $572m and 55% increase in bookings from digital sales.

Other companies with a history of making games for the PlayStation and other consoles have adjusted their M&A strategies. Ubisoft, also experiencing growth amid greater digital revenue, has printed two gaming purchases this year as well, putting it on pace for its most acquisitive year since 2013. Warner Brothers Entertainment also ended a drought of its own – almost seven years since its last videogame acquisition – when it bought mobile developer Playdemic in February.

Greater digital sales provide gaming vendors with more predictability in sales, lower costs of revenue and a buffer against seasonality, in addition to revenue growth. Market disruptions, such as shifting sales channels and business models, are most often associated with opportunities for startups. But the experience of Take-Two and its rivals shows that startups aren’t the only companies that can win that game.

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Enterprise mobile’s moment passes 

Scott Denne

Contact:Scott Denne

The surge of smartphones over the past decade delivered a shock to businesses, changing everything from how they manage employees to how they engage with customers. Such sudden transformation leads to confusion, and confusion often leads to big acquisitions at salacious multiples. It appears that mobile enterprise technology vendors are no longer benefiting from that disorientation as deals dwindle and buyers look for tuck-ins and consolidation plays rather than strategic gambles.

Case in point: VMware’s purchase of Apteligent earlier this week. In the startup’s early days, it appeared to be defining a new category of mobile application performance monitoring. Instead, it’s folding into VMware’s workforce management tools at a price that’s likely short of the $50m that venture capitalists plunked into it.

Or take Tangoe. At just $305m, the sale of the device management firm leads the pack of enterprise mobile tech deals in 2017. It sold to Marlin Equity Partners for 1.6x trailing revenue and about one-quarter of its market cap at its zenith. Last year’s largest mobile enterprise transactions – a pair of telematics providers picked up by Verizon and Microsoft’s reach for app developer tools specialist Xamarin – all went off at above-market multiples.

The pace of deals – not just the type – is also shaping up differently from last year. Acquirers spent $6.4bn on enterprise mobility vendors in 2016, according to 451 Research’s M&A KnowledgeBase. This year, just $510m has been spent on 42 transactions, on track for less than half of last year’s volume. Investors are matching the drooping appetites of acquirers. By our reckoning, there has been just $112m of fresh venture capital poured into these businesses. That’s about the same rate as last year, when these companies drew about one-quarter the amount of funding that they did in 2013 and 2014.

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The unicorn trend looks ready to Snap 

Scott Denne

Contact: Scott Denne A debacle of a first earnings report sent Snap shares down 20% this week, making the mobile app company the latest high-value startup whose private investors are taking a haircut. Silicon Valley spent the past few years building an unprecedented number of alpha startups. Now that they’re delivering beta exits, the funding that propelled their rise is drying up.

Snap’s last private round carried a valuation of $25bn, compared with its $21bn market cap today. Cloudera’s public debut valued it just beyond half of the $4.1bn that Intel assigned to the company in a 2014 investment. On the M&A front, storage provider SimpliVity came up shy of its $1bn-plus private valuation in a $650m sale to HPE; and Turn, an ad-tech vendor that reached near-unicorn status with a $750m valuation, sold to Singtel for $310m. All of those outcomes should be the envy of investors in LivingSocial, which literally gave itself away to daily-deals rival Groupon last fall.

That’s not to say there haven’t been any positive returns this year from heavily funded and highly valued venture-backed firms. AppDynamics’ investors came out ahead when Cisco paid $3.7bn for the company and with its $2.8bn market cap, MuleSoft has held up as a public entity, as have Okta and The Trade Desk.

Nonetheless, some of the newest and largest late-stage venture investors are scaling back as they find that the returns aren’t making up for the lack of liquidity in startup investing. T. Rowe Price, a backer of Snap and LivingSocial, has only announced one new investment in a private tech vendor this year. That’s the same number that BlackRock and Fidelity Investments, which both invested in Turn’s last round, have made so far. Investors that believe in unicorns are becoming as hard to find as the mythical beast itself.

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Zendesk nabs Outbound in small step toward big goal

Scott Denne

Contact: Keith Dawson, Scott Denne

Zendesk shouldn’t be at peace as it strives toward an aspirational growth target. The customer service software firm plans to push its annual revenue from $312m last year to $1bn by 2020. To get there it will need to change its mantra from upselling to cross-selling. Today’s acquisition of marketing software startup Outbound Solutions shows that Zendesk is doing just that.

Landing deals with tech startups ignited Zendesk’s growth – back in 2015 it noted that ‘unicorns’ accounted for 7% of its sales – and the majority of its new revenue comes from adding seats and larger contracts as those customers and others have matured. To be sure, Zendesk posts growth that would be the envy of many a SaaS vendor. Its topline soared 88% heading into its 2014 IPO and expanded by another 50% last year. For this year, it projects 32% to $421m, the midpoint of its guidance. Just maintaining that rate through the next four years would bring it a hair under its $1bn target.

Outbound won’t bring an immediate boost to sales for Zendesk – an infrequent acquirer and light spender on the deals it has made. The target appears to have just a handful of employees, limited funding and, in all likelihood, a price tag that falls at the low end of the range of Zendesk’s previous two purchases – BIME Analytics ($45m) and Zopim Technologies ($15.9m). What Outbound brings is technology that the acquirer can use to engage customer prospects whose responsibilities extend beyond the helpdesk.

Last fall, Zendesk announced a pair of new products – Explore and Connect – to angle its offerings from reactive customer support to proactive outreach and customer experience, a fertile category for the company as 38% of IT decision-makers expect customer service software to have a transformative impact on customer experience, according to a recent report from 451 Research’s Voice of the Connected User Landscape. Outbound supports the forthcoming Connect product with messaging features and supporting analytics to make those more effective.

But the path to nirvana looks crowded. Zendesk’s focus on customer support through websites and apps has kept it out of the crosshairs of large enterprise software providers and call-center technology giants. Now all of those players are looking to customer experience to break out of their niches in marketing, CRM and helpdesks. Zendesk should contemplate more ambitious moves than today’s tuck-in to build the broader software suite it will need to reach its goal.

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

Facebook needs a channel into TV-style video

Scott Denne

Contact:Scott Denne

Hidden behind a 49% jump in its topline last quarter sits a do-or-die moment for Facebook – the social media company must develop a play in long-form video or risk its dominant position in mobile media. Facebook’s main product, its newsfeed, currently provides consumers with a tool to brush away the excess moments of the day. But its competitors are building out destination sites for longer video and threatening to pull audiences on mobile devices toward a product that Facebook doesn’t have.

For now, its strong position in short-form video continues to boost the company’s revenue. Facebook’s first-quarter ad revenue jumped 51% year over year despite increasing ad load by just 32%, pointing to a rising mix of video content and pricier video ads, although the signs point toward consumers spending more time with longer video.

The number of people watching long-form video on mobile is rising from an already significant base. According to 451 Research’s Voice of the Connected User Landscape Q4 2016 survey, 28% of people watch TV shows on their smartphone, up slightly from six months earlier, with 25% and 9%, respectively, saying they watch movies and sports on their smartphones. Few are doing so on Facebook, as barely one out of 10 cited Facebook Live as a source of video consumption, placing it behind YouTube by a factor of six and nearly a full percentage point behind Crackle.

In all likelihood, video consumption on Facebook outpaces Crackle, yet its low ranking in our surveys highlights that few people view Facebook as a destination for video, despite the copious amount of short clips and user-generated video on its app. The fight for longer video is intensifying fast. For proof, look no further than Amazon’s recent interception of NFL streaming rights from Twitter by paying 5x last year’s price, or the $6bn Netflix plans to spend this year on original content. Such outlays are causing a flood of TV-style programming on digital that’s likely to continue to attract audiences as the quality and amount of that content expands.

For its part, Facebook is pushing its way into this market through numerous product developments aimed at consumers, publishers and advertisers, including working with TV studios to develop content, launching an app for smart TVs and rolling out new video ad formats, such as ad breaks in Facebook Live. But it’s made its task all the more difficult by eroding trust among publishers with past measurement errors.

In some ways, Facebook’s current challenge resembles the shift to mobile that it successfully navigated in the months following its 2012 IPO – consumer attention then, as now, was moving to a new medium and Facebook had to keep pace. But in that first transformation, Facebook could rely on network effects to keep consumers in place while it built out mobile products. For this transition, Facebook will have to contort itself into a destination for active content consumption from the passive one it operates today.

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Paying for performance: Dentsu picks up its M&A pace 

Scott Denne

Contact: Scott Denne 

Dentsu hasn’t been very active in acquiring digital marketing shops until recently. Now, as it sees an opening with marketers looking to change how they compensate their agency partners, it is moving fast to take advantage. The company announced today the purchase of India-based SVG Media Group, the latest in a string of deals it has made to expand its performance advertising capabilities.

According to 451 Research’s M&A KnowledgeBase, Dentsu has acquired 29 companies since the start of 2016. That’s the same number of tech businesses it bought in the previous 13 years combined. A combination of rising ad fraud and displeasure at opaque agency billing practices, mixed with the growing ability to link media spending to specific outcomes, has marketers rethinking how they pay ad agencies. They are placing more emphasis on performance-based pricing models, a notable departure from the historic practice of paying agencies a percentage of advertising budgets.

SVG Media fits into this role, as it sells pay-for-performance media services and ad networks. Earlier this month, SVG reached for conversion optimizer Leapfrog Online and customer analytics firm DIVISADERO, a bolt-on to the $920m it spent last year to snag CRM agency Merkle.

Although Dentsu may be an extreme case, it is part of an overall rise in acquisitions of digital agencies. Last year saw a record 164 digital agencies acquired. The pace so far this year is a bit below that, but well ahead of any other year. The drive for performance-focused digital marketing accounts for a substantial chunk of that upswing, although there are other factors such as the lack of mobile specialists and the movement of ad spending toward digital channels. Dentsu and other ad agencies aren’t the only buyers here. Consulting firms like Accenture and IBM have been inking acquisitions to capitalize on the same weakness.

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

VMware nabs Wavefront as infrastructure M&A hits new frequency 

Scott Denne

Contact: Scott Denne  and Kenji Yonemoto

Responding to the need for new monitoring and management tools to match the growing adoption of infrastructure technologies such as containers and cloud, VMware has reached for Wavefront. The deal embodies the craving for the latest technologies in infrastructure management M&A through the start of the year.

That craving stands in stark contrast to last year, when divestitures and aging assets led to a record $15.3bn spent on infrastructure management targets, according to 451 Research’s M&A KnowledgeBase. Less than four months into the year, buyers have already shelled out $5.6bn, skewing toward younger and growing businesses fetching higher multiples.

While VMware hasn’t disclosed terms of the transaction, it’s likely paying a premium valuation as Wavefront, an early-stage company with about 50 customers, landed a $52m series B less than six months ago. The acquisitions of AppDynamics ($3.7bn) and SOASTA ($200m) – which like today’s deal, were done to improve the buyers’ ability to cope with new types of application deployments – have helped drive up multiples. The median multiple for the category stands at 4.2x trailing revenue this year, compared with 3.4x in 2016.

The pressure to pay up for these technologies could continue. Our surveys show that new forms of application deployment are rising among enterprises. In 451 Research’s most recent Voice of the Enterprise report, 48% of respondents expected their spending on cloud to increase by more than 11% in 2017 and similar surveys have shown a growing shift toward using containers and microservices in production, not just testing and development, environments.

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Accenture buys Genfour for robotic process automation 

Scott Denne

Contact:  William Fellows 

Accenture is looking to stay ahead of a sudden surge of robotic process automation (RPA) offerings from consultants, outsourcers and software vendors. The company has acquired Genfour, a Wales-based RPA services provider, to tackle the most immediate opportunity for machine learning in IT services.

Many IT services providers were quick to jump on the artificial intelligence (AI) bandwagon and most have scaled that back a bit, recognizing that low-level process automation is a more immediate opportunity than large transformative AI projects. RPA typically involves using software to replace repetitive human tasks like processing forms or entering data. As we’ve discussed in other reports, although digital transformation projects get much of the attention from IT services firms, narrower automation projects are a much easier sell and more urgent for those services companies that have historically relied on overseas labor arbitrage to drive their businesses.

Founded in 2012 with a focus on the finance and utilities sectors, Genfour is one of a handful of RPA specialists. Others include services shop AutomateWork, software vendor Blue Prism, RPAi, Lateetud and Symphony Ventures. The need for RPA products has begun to trickle into M&A moves. It was part of the rationale behind CSC’s $720m acquisition of Xchanging 18 months ago, and business process management software provider Pegasystems spent $52.3m last April to purchase OpenSpan for its RPA capabilities.

Genfour marks Accenture’s third machine-learning acquisition in the past 12 months. Accenture is an outlier in that respect. Aside from IBM, most other IT services companies haven’t expanded their machine-learning offerings through M&A. Yet, with the push toward automation and an expected overall increase in machine-learning deal flow, we could see more consolidation. In 451 Research’s Tech Banking Outlook Survey, a full 82% of respondents projected an increase in deal flow in that category in 2017.

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Extreme’s not horsing around, buys Brocade’s datacenter networking assets 

Scott Denne

Contact: Jim Duffy 

As it stalks one horse, acquisition-hungry Extreme Networks has saddled up another. The suddenly feisty enterprise networking vendor has picked up Brocade’s datacenter business – another piece of Brocade that acquirer Broadcom is not interested in owning. Extreme is benefiting from that lack of interest, paying just a fraction of the asset’s annual revenue.

Even for a bargain shopper like Extreme, the deal comes at a steep discount. According to 451 Research’s M&A KnowledgeBase, Extreme has made just five acquisitions in the past 15 years. Three of them have come in the past seven months. The company recently bought Avaya’s networking business ($100m) and Zebra Technologies’ WLAN unit ($55m). In both transactions, it valued the target at about 0.5x revenue, the same multiple it paid in its 2013 purchase of Enterasys.

Extreme will pay $35m upfront and $20m in deferred payments for Brocade’s VDX, MLX and SLX routing and switching assets, plus its analytics software. Although revenue from the Brocade assets have declined amid the uncertainty over who might ultimately own them, the unit is expected to add $230m to Extreme’s top line in its next fiscal year. This deal, combined with its weeks-old stalking-horse bid for Avaya’s assets, could push its annual revenue beyond $1bn and make Extreme the third-largest wired and wireless enterprise networking equipment provider behind Cisco and HPE.

The divestiture comes as Broadcom is looking to close its acquisition of Brocade’s Fibre Channel business, while shedding the target’s networking equipment assets – Brocade’s Ruckus Wireless WLAN unit was snagged by ARRIS a few weeks ago. Today’s transaction is contingent upon the close of Broadcom’s purchase of Brocade, which is expected in July. Finalization of Extreme’s buy is expected 60 days after that. In addition to the cash consideration, Broadcom is already Extreme’s largest supplier and the acquirer says it will increase its current $100m annual spending with Broadcom.

Customer overlap was minimal, as Brocade’s datacenter business was targeting large enterprise core datacenters with more than 2,000 physical servers, while Extreme was concentrating on the campus edge (WLAN and access switching, and fewer than 2,000 servers). The two have joint customers, for example, that use Brocade in the datacenter and Extreme at the WLAN edge. Nonetheless, Extreme says it will obtain 6,000 customers using Brocade’s VDX, MLX and new SLX routers and switches.

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Mastercard makes an antifraud deal of its own 

Scott Denne

Contact: Jordan McKee 

After December reaches by Visa and American Express for card-not-present (CNP) antifraud providers, Mastercard makes its move in this space. With the purchase of NuData Security, it gains digital identity and behavioral biometrics capabilities that will play an important role as EMV and growing transaction volumes continue to push fraud into digital channels.

A recent study of 500 US merchants by 451 Research underscored the severity of this problem, showing that 60% of respondents are experiencing an increase in fraudulent activity in their digital commerce channels compared with this time last year. This problem will only be exacerbated as the Internet of Things (IoT) spreads commerce into myriad new connected devices, increasing chargeback and data breach risks for merchants.

Given its scale and complexity, IoT presents a security threat an order of magnitude greater than anything the payments industry has previously experienced. Payment networks and their partners are increasingly being required to operate in foreign environments that differ greatly from traditional CNP channels, such as web browsers. The spread of commerce to new connected endpoints will require new technology, talent and security approaches to ensure that the integrity of the card issuance ecosystem remains intact.

While Mastercard has positioned its pickup of NuData as an IoT antifraud play – and could conceivably extend NuData’s technology into various IoT settings over time – we see near-term applicability to traditional CNP antifraud use cases. In particular, its work around digital identity and biometrics will help extend Mastercard’s security efforts from the network to the device, helping to combat the wave of fraud currently occurring in mobile and e-commerce. Terms of the deal weren’t disclosed. NuData had about 70 employees.

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