Author: Scott Denne

Adobe’s search for markets beyond the web 

Scott Denne

Contact: Scott Denne 

Adobe is extending its ambitions beyond the website. Having thrived in the first iteration of digital marketing, the vendor is turning its attention to the next one – where software has a role in all of a business’ customer interactions, not just those coming in through the homepage. It needs a wider set of software to capture that larger market opportunity and fend off old adversaries in web marketing, as well as new ones in segments such as mobile marketing, e-commerce software and customer service that are eyeing the same prize.

Today Adobe opens Summit, its annual marketing conference, with the theme of building customer experiences. It’s roughly the same theme as last year’s show, with the subtle shift that much of the content has a more instructional bent, whereas last year Adobe was more intent on convincing marketers that customer experience matters in the first place. In the intervening time, there’s been a correspondingly subtle shift in the company’s M&A strategy. Its most recent acquisition wasn’t just a bolt-on to sell into its existing sales channel like past deals. It was an attempt to open up a new path to market for its products.

Adobe entered digital marketing almost eight years ago with the $1.8bn purchase of website analytics company Omniture and followed that, according to 451 Research’s M&A KnowledgeBase, with $2bn worth of M&A that took its capabilities beyond the website, but always with an eye toward adding products that it could upsell to web-oriented digital marketers. In the last quarter, its marketing unit grew 26% year over year to $477m in revenue.

Its latest acquisition, TubeMogul, stands out not so much for its size ($540m) as for the fact that its video media-buying software is built for brand managers and TV media planners – a group with far different priorities than digital marketers, and access to larger budgets. The deal, along with Adobe’s messaging, show that it’s ready to start exploring purchases that will enable it to sell to marketers that don’t have a website-first bent and to other customer-facing parts of a business.

Increasing its appeal to mobile app developers and app-centric marketers would be a logical next step from Adobe’s roots in web marketing. Both mParticle and TUNE would serve as a cornerstone acquisition in that space – the latter for its breadth of mobile analytics and marketing tools, the former for its customer data platform that plugs into most mobile app tools. Adobe may also look to add to its e-commerce capabilities by reaching for a larger social media management product or even expanding into customer service software. Whatever its next move, Adobe seems intent on doing more these days than refreshing its website-based marketing business.

M&A drives Intel’s future 

Scott Denne

Contact:  Scott Denne 

Intel missed the last big shift in computing. Now it’s spending aggressively to make sure that it doesn’t miss the next one. The storied chip company is using $15.3bn of its $20bn in cash to acquire Mobileye, a maker of semiconductors for assisted and autonomous driving applications. The price puts an unheard of valuation on its latest target – a valuation that suggests that Intel is still smarting from missing out on the mobile phone market. Mobileye is the latest in a line of acquisitions that show that Intel is no longer willing to bet on R&D alone to carve out its place in emerging markets like artificial intelligence (AI) and the Internet of Things (IoT).
The multiple that Intel is paying for Mobileye smashes the previous record for an acquisition of a similarly sized tech company. The purchase values the target at 41x trailing sales ($14.7bn in enterprise value on $358m in 2016 sales). According to 451 Research’s M&A Knowledgebase, that’s the highest multiple ever paid for a tech business with more than $100m in annual sales. Prior to this deal, Sirius Satellite Radio held the record from the 21.5x it paid for XM Satellite Radio 10 years ago.

Despite the valuation, Mobileye isn’t Intel’s largest acquisition. That was Altera, which it picked up in 2015 for $16.7bn to help it secure its spot in cloud datacenters and push into industrial IoT. Intel isn’t relying on a few big strategic transactions to enter emerging tech markets. In the 21 months that separate its Altera and Mobileye acquisitions, Intel purchased 11 other companies, mostly startups, including a maker of aerial drones, a pair of computer-vision vendors, and Nervana, a pre-revenue developer of AI chips (click here to see 451 Research’s estimate for that deal).

Compare that activity with 2005-2009, when Intel was plodding its way into mobile phones and never inked more than three acquisitions per year. That doesn’t mean that its attempt at the mobile phone market wasn’t costly. Between 2012 and 2014 (the last time it broke out its mobile business), Intel’s mobile unit put up a combined operating loss of $9bn and made a negligible boost to the overall topline. Intel abandoned that market as part of a restructuring midway through 2016.

Raymond James & Associates advised Mobileye on its sale, while Citigroup Global Markets and Rothschild Group banked the buyer.

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Spotify looks to machine learning as competitors raise the volume

Scott Denne

Contact: Scott Denne 

Spotify hopes that machine learning will be its encore. Two years ago, the company seemed to be pulling away from its pint-sized competitors with its then-novel on-demand music-streaming service. Now Apple and Amazon have gotten into this space, where they can leverage their large audiences and deep pockets.
Spotify has neither of those advantages. Instead, the company hopes that better data will enable it to compete with the internet’s largest vendors. On the one hand, trying to beat the likes of Amazon and Google through better data seems laughable. But music is a different beast. The data that’s easy to collect doesn’t tell you much. The data that’s hard to get provides more value.

Take the problem of music recommendation and discovery. Analyzing the relationships among simple data – artist, track and category – leads to results that are obvious and uninteresting. Telling a fan of Led Zeppelin that they might also like Aerosmith, while likely true, is of no value as such a person is likely familiar with both bands. Using that same data to make ‘long-tail’ recommendations scales up the chances of inaccurate results as it forces recommendations of less-popular music.

Although the music itself is becoming a commodity, Spotify is looking to draw non-commodity data from it. Take this week’s acquisition of Sonalytic. The London-based startup is developing tech that identifies songs from short clips and musical stems, even when masked by changes in pitch, tempo and so on. Similarly, its 2014 purchase of The Echo Nest brought it technology that combined digital processing of music with natural-language-processing algorithms. By understanding the music, not the metadata, Spotify is positioned to make better recommendations, beyond identifying what’s already popular.

Similarly, a more nuanced picture of audiences could help Spotify attract artists to its platform – not just as a place to host their catalogue, but also for the analytics tools it provides. Those tools could entice artists to encourage sharing and listening of their music on Spotify and open avenues to grow its business beyond a simple subscription app into other parts of the music industry, such as promotion.

Spotify needs these efforts to bear fruit soon as its competitors are gaining ground fast. According to 451 Research’s VoCUL surveys, the company’s paid app is making only modest subscriber gains – 7% of people surveyed in December said they intended to use the paid service over the next 90 days, up from 5% a year earlier (its free service hovered at about 17% in recent surveys). Meanwhile, Apple Music went to 12% from 7% in a year and Amazon Prime Music is consistently above 20% in those surveys.

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

Snap’s debut through a TV lens

Scott Denne 
Contact:  SCOTT DENNE

Wall Street investors seem to think social media will be a winner-take-all game. Our view is that just as there were many TV shows vying for audiences in the last era of media, there will be many new-media ‘shows’ such as Twitter, Spotify and Tinder where audiences divide their time. Snap, the maker of the popular Snapchat app, priced its offering Wednesday night at $17 per share and jumped more than 50% by Thursday afternoon, giving it a market cap of $29bn, or 72x trailing revenue. Snap is a show that’s valued as a network.

The company builds social media apps focused on the smartphone camera. It was founded around the idea of sending photos to individuals that would vanish and has since built out other capabilities such as filters and lenses to augment the pictures and stories to share with larger groups. Those features have made it popular with 18-34 year olds in North America, a demographic that’s highly coveted by advertisers and increasingly hard to reach as they spend less time on TV than older audiences. That demographic, mixed with ad offerings such as sponsored lenses and other nontraditional, interactive products, has led to scorching revenue growth.

Snap only began to generate sales from its ad offerings in mid-2015 and annual revenue grew almost 7x to $404m in 2016 (its losses are even larger thanks to hefty IT infrastructure costs). Early signs suggest that revenue will continue to grow rapidly – at least in the short term. High-ranking advertising executives have publicly lauded the company and the results that it generates for their clients. And Snap had an ARPU of just $2 last quarter for its 68 million North American users. By comparison, Facebook generates about $20. Yet Facebook trades at just 12x revenue, meaning that Snap’s newest investors have priced the company as if it has already closed that gap. Facebook took more than four years to grow its North American ARPU by that amount.

The key nuance for us is that where Facebook offers a broad identity platform that touches most of the US Internet population, Snap is limited to a single (albeit valuable) demographic. Facebook has a platform that can (and does) bolt on other social networks (or shows, to stick with the analogy). And Facebook is protected by a network effect that Snap doesn’t benefit from.

Snap’s pitch that it could be an Internet powerhouse is built on the assumption of continued growth of revenue and audience through new product development (both new ad offerings and new consumer products). Its total daily average users grew just 3% over the fourth quarter to 158 million. Compare that with its quarterly growth rate of 14% a year ago and it looks like Snap is running out of steam. By contrast, Facebook put up 9% quarterly user growth leading up to its own IPO (off an audience that was then three times as large as Snap’s current count).

A broken promise to be the third leg of the Google-Facebook digital media stool led Twitter’s stock to shed two-thirds of its value since its 2013 IPO once it became obvious that its audience size had plateaued. Snap could be setting itself up for the same trap. Twitter currently trades at 3.5x trailing revenue. Snap’s coveted demographic and unique ad formats give it better growth potential than Twitter, even if audience expansion does indeed stall. Yet Snap’s current valuation forces it to chase an audience with Facebook-like scale and the window for it to be a solid but not dominant media company has now disappeared.

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

Singtel’s Amobee takes a Turn toward a broader ad-tech platform 

Scott Denne

Contact: Scott Denne 

Singtel doubles the size of its ad-tech business with the $310m acquisition of Turn Inc, one of the earliest vendors serving the programmatic advertising market. Together, the two companies manage about $1bn in media spending. Today’s combination could help bring economies of scale to both businesses, an important and rare element of the low-margin ad-tech sector. For Amobee, Singtel’s ad-tech unit, the deal brings it a broader platform – Amobee is mostly a mobile ad player – and a footprint in the North American market.

The $310m price tag assigns Turn a multiple, according to our understanding of the target’s revenue, that’s roughly in line with the 2.5x trailing revenue that Adobe paid for video media platform TubeMogul. Turn is getting a market multiple in its sale, although one that comes in at less than half the post-money valuation of its last venture round in early 2014.

That earlier valuation came during a period of hyper-growth for Turn and the programmatic ad market. Its peers have similar private valuations and Turn won’t be the only one in the space to exit below its previous private funding. There’s an emerging cohort of buyers for these technologies (as we predicted earlier) as growth for many of the vendors has tapered off. TubeMogul, although public at the time of its sale, also exited below the high-water mark of its stock price that it reached in 2014.

LUMA Partners advised Turn on its sale. We’ll have a more detailed report on this transaction it tomorrow’s 451 Market Insight.

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PayPal wants to be a buddy to the underbanked

Scott Denne

Contact: Scott Denne

PayPal continues to push into the market for the underbanked with its $233m acquisition of TIO Networks. The target provides bill payment services and kiosks utilized by North Americans without access to traditional banking and builds off of PayPal’s $1bn purchase last year of Xoom, which also targeted underbanked populations.

Unlike Xoom, which focuses on international remittance, TIO (formerly known as Info Touch Technologies) mostly serves the US market and was founded to provide bill-pay services (that’s a more recent offering for Xoom). The market for consumers without access to traditional banking may have been too risky for many financial services firms, although as money and payments are increasingly digital, opportunities to serve that sector are expanding.

In addition to enabling PayPal to stretch into another corner of the payments ecosystem, TIO has a modest online bill-pay business that could get a bump under PayPal’s ownership. The deal also gives PayPal a small boost in its dollar-based revenue – the company’s earnings have taken some lumps recently from the strengthening dollar as almost half of its revenue and even more of its profits are derived from overseas markets. By contrast, the majority of TIO’s $57m in trailing revenue was generated in the US.

The transaction values TIO at 3.9x TTM revenue. That’s higher than what PayPal fetches and a turn lower than what it paid for Xoom. That’s likely a function of margin – Xoom was putting up 65% gross margins at the time of its sale, while TIO posted 45% last quarter.

Raymond James & Associates advised TIO on its sale, while Perella Weinberg Partners banked PayPal.

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Divestitures hit record levels

Scott Denne

Contact: Scott Denne

Buyers seeking growth sent tech M&A surging to near-record levels last year. Many sellers were of a similar mindset as enterprise technology companies shed lagging units with an eye on expanding the topline of their core businesses. That trend pushed divestitures to record levels in 2016. According to 451 Research’s M&A KnowledgeBase, divestitures by public companies hit $70bn, capping off five consecutive years of growth in the category.

Sales of Hewlett Packard Enterprise business units (software and IT services) captured the top two spots for the year as it divested those shrinking assets to focus on expanding its IT infrastructure business. HPE wasn’t alone. EMC sold its content software business to OpenText, which itself bought a pair of software assets from HP Inc. Strategics weren’t the only buyers – private equity (PE) firms played a considerable role in bolstering the amount of divestitures.

PE shops enabled Intel to shed its unfortunate McAfee purchase, helped HPE sell another, smaller subsidiary and assisted SunGard in divesting its government and education business in the wake of its own sale to FIS. Those deals and others drove PE spending on public company divestitures past $16bn, a 59% jump from the previous record set a year earlier. Much like overall PE spending last year, firms were more willing to ink large transactions when buying struggling business units. There were five such PE acquisitions valued at or above $500m, surpassing the previous record of three.

The divestitures announced last month (by PE firms or otherwise) don’t indicate that the record levels of such deals will continue – there was $1.6bn worth of public company divestitures in January. However, there’s still a willing pool of buyers, should more tech businesses look to unload underperforming and non-core assets. The 451 Research Tech Banking Outlook Survey anticipates abnormally high levels of PE activity coming in 2017. In that December survey, 54% of bankers said the value of their PE pipelines has increased, beating out the number (51%) who said their overall pipelines grew – the first time in that survey when more respondents anticipated growth in PE deals than in overall M&A.

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

Snap pictures a massive valuation in upcoming IPO

Scott Denne

Contact: Scott Denne

Snap, the company behind the social networking app Snapchat, has taken the next step toward one of the most highly anticipated IPOs by disclosing its prospectus. The documents show astonishing revenue growth and a strong hold on a coveted demographic that will have some investors believing it could become the next major online media company. No less astonishing are Snap’s valuation expectations. Based on the price of its last private funding, the company carries a valuation of about $25bn, roughly 62 times trailing revenue. For comparison, Facebook trades at 12x, Alphabet (Google) at 5x and Twitter at 4x.

There’s no doubt that Snap has built an incredible media business. It has 158 million daily users, 68 million of them in North America. A majority of those users are 18-34 years old, a widely sought after demographic by advertisers and one that’s increasingly difficult to reach through television ads. That’s a big part of the reason why Snap’s revenue has grown sharply – it only began to post sales in 2015.

Snap generated about $2 per user in North America last quarter. Facebook generates about $24, so it’s not unprecedented for Snap to grow this number by 10x. And it will have to do so, as there’s not much space left for Snap within that demographic. There are about 110 million people in North America that fall into that age group and Snap’s daily users in North America grew by less than 5% last quarter. (Sales from international audiences at both social networks are a fraction of those from North America.)

To keep users and advertisers engaged, the company points to its history of generating new products and features. While it’s been successful in doing that to this point, it’s challenging to keep that momentum going on a platform that’s designed to entertain. The Snap team seems to have an eye for design and entertainment, but the offering documents cast doubt on its judgement in other parts of the business.

Nearly all of the company’s infrastructure runs on Google’s cloud and Snap signed a deal last month that commits it to spending $400m per year for the next five years on Google infrastructure. Snap’s ambition is to carve out a large share of the digital advertising market, and it’s hard to justify running its critical infrastructure with its largest rival.

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Time extends Viant into mobile apps with Adelphic purchase

Scott Denne

Contact: Scott Denne
Time Inc has scooped up Adelphic, which provides a platform for buying ad inventory in mobile apps, as the storied media company hedges its bets to make up for its declining print revenue. The acquirer plans to add Adelphic to its Viant division, which it bought last year to build out a targeted digital advertising business.
With Adelphic, Viant adds software that will enable it to push its vision of people-based ad targeting into mobile apps. Adelphic is one of the strongest pure mobile app platforms but operates in a challenging market. Despite the overall growth of mobile advertising and mobile audiences, few mobile advertising vendors have been able to scale well. Much of the revenue in the space has gone to Facebook and a handful of mobile ad networks.
Those advertisers seeking a self-serve platform like Adelphic have often turned to one of the cross-channel media-buying platforms. That cohort tends to be strong in web (both mobile and desktop). With today’s acquisition, Time will be able to offer reach into mobile apps, not just web, for their mobile campaigns. However, Time will face technical challenges in expanding its people-based targeting vision into mobile apps, where ads are targeted based on device IDs, not cookies.
Terms of the deal weren’t disclosed. We estimate that Adelphic finished the year with $13m in net revenue and would expect it to fetch no more than 3x that amount, given the challenges in the mobile sector and that StrikeAd, a peer, got just 1x trailing revenue in its sale to Sizmek last year. Time has been eager to extend into several new segments, although it hasn’t been eager to pay a premium – it picked up Viant largely by assuming the target’s outstanding debt (see our estimate of that transaction here).
In addition to building out a digital advertising offering that extends beyond its core properties, Time is pursuing several other opportunities to expand its revenue. It has invested in a studio to help advertisers develop content and it recently bought Bizrate, a survey and consumer analytics firm, as it enters the affinity marketing space.
LUMA Partners and Oppenheimer & Co advised Adelphic on its sale.
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Atlassian inks its biggest buy with $425m collaboration software deal

Scott Denne

Contact: Scott Denne

Atlassian has stormed into the New Year with its largest acquisition to date – the $425m pickup of collaboration software maker Trello. With this deal, Atlassian has printed at least a dozen purchases yet, until now, spent little money to do so. And though today’s transaction is an outlier for the project management software vendor, it continues the uptick in collaboration software M&A that we saw in 2016.

The Australia-based acquirer will pay $360m in cash for Trello, the remainder of the price tag being restricted stock and options. Compare that with the approximately $30m it shelled out across its previous four acquisitions. Atlassian is spending that kind of cash because Trello should give it another bridge to move its own collaboration products beyond the software developer market – the target’s task management software was built for a general business audience and boasts 19 million free and paying users.

A notable reason why Atlassian hasn’t spent significant sums prior to this deal is because few companies fit with its business model – it doesn’t have any sales staff. That limits the pool of potential targets because buying any enterprise software vendor with a sales team (and most of those commanding a nine-figure price have one) would be a risky integration process.

Having now spent a significant sum on office software, Atlassian joins others that have pushed acquisitions of collaboration and project management tools to a near record as mobile devices, remote workforces and SaaS delivery models conspire to change how work gets done. According to 451 Research’s M&A KnowledgeBase, buyers spent $3.7bn on purchases in this segment in 2016. That’s more than twice the spending of any year since 2007, when a single transaction – Cisco’s $3.2bn reach for WebEx – accounted for nearly all of the deal value. By contrast, no acquisition in 2016 crossed the $1bn mark.

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