Category: application software

IGT rolls dice on Facebook gaming, but hedges bet

Contact: Brian Satterfield

In yet another sign of the power of social networking, casino gaming systems maker IGT agreed on Thursday to purchase Facebook casino videogame startup Double Down Interactive for a potential consideration of up to $500m. The Double Down deal highlights the growing importance of social networking websites to traditional gaming companies, as Double Down enables IGT to reach millions more players online in a single day than the company could ever hope to in the smoke-filled parlors of Las Vegas or Atlantic City. But in a nod to the risk associated with entering a new market, IGT has hedged its bet by structuring the deal to include a $165m earnout (as well as $85m in retention incentives), which is equal to two-thirds of Double Down’s $250m price tag.

The transaction is one of the largest in the social gaming industry, and follows half a year after Electronic Arts made a similar move in buying PopCap Games for $750m (that acquisition also included a substantial earnout payment of up to $550m, or nearly three-quarters of PopCap’s deal value). Founded in 2009, Seattle-based Double Down’s large user base and rapid growth could help to explain why the company commanded such a large valuation for its sector. In November 2011 alone, its games received 54 million visitors, of which 1.2 million returned to play on a daily basis. Double Down also has a healthy base of what it calls monthly ‘active users,’ which the company said rocketed 30% from 3.3 million in October 2011 to 4.7 million at the time of acquisition.

Social software M&A on the uptick in 2011

Contact: Brian Satterfield

As more businesses leverage social networking websites for marketing and customer support purposes, many big-name buyers are finding social media software vendors to be increasingly attractive targets. The number of deals in the sector rose more than 150% in 2011 from 2010, while spending during that same period soared more than five-fold from $75m to $389m.

The bulk of 2011 social software spending came in March, when salesforce.com forked over $326m for Radian6, a Canadian startup that had raised just $6m. Radian6 was both the CRM giant’s largest deal as well as the priciest transaction ever in the sector. Salesforce.com bought Radian6 in order to add social media monitoring features to a number of products in its portfolio. On a smaller scale, we saw similar purchases around that same time by Meltwater Group, which added JitterJam for $6m, and call-center software maker KANA Software, which reached for Overtone.

But enterprise software providers aren’t the only takers in the social software world. Many tech companies that have partial or completely social business models got in on the action, presumably in order to track activity on their own networks. Twitter, for instance, picked up social media monitoring software maker BackType, while Google bought a similar company called PostRank.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

It’s time to once again hand out our annual award for Tech Deal of the Year, as voted by corporate development executives in our recent survey. For the second straight year, the voting came down to a tight race between two transactions. For 2011, Google’s planned purchase of Motorola Mobility just edged SAP’s reach for SuccessFactors. (Last year, Intel’s rather unexpected acquisition of McAfee slightly topped Hewlett-Packard’s takeout of 3PAR following a drawn-out bidding war.)

Both of the deals in the running for the 2011 prize certainly would have been worthy recipients of the Golden Tombstone. Google’s all-cash $12.5bn purchase of Motorola Mobility is more than the search engine has spent on its more than 100 other acquisitions and, beyond that, stands as the largest tech transaction (excluding telecommunications) since mid-2008. (Specifically, it is the largest deal since HP’s $13.9bn pickup of services giant EDS, which was voted the most significant transaction of 2008.) Meanwhile, SAP is paying an eye-popping 11 times trailing sales for SuccessFactors. With a price tag of $3.5bn, the deal is the largest-ever SaaS acquisition, more than twice the size of the second-place transaction.

A December rebound in tech M&A

Brenon Daly

Contact: Brenon Daly

After three months of basically standing on the sidelines, tech dealmakers have stepped back into the market in a big way in December. During just the first week of the final month of 2011, the value of announced transactions across the globe hit $8.6bn, led by SAP’s announcement of the largest-ever SaaS deal with its $3.6bn purchase of SuccessFactors and Verizon’s mammoth $3.6bn reach for some excess wireless spectrum with its pickup of SpectrumCo.

To put that $8.6bn of deal value in December into context, consider this: it already equals the full-month total for September and is fully twice the amount of spending in November. But then, last month was particularly grim for M&A. In fact, spending in November sank to its lowest monthly level in more than two and a half years, which was the depths of the Great Recession. Further, the number of transactions in November (only 240) stands as the lowest of any month so far in 2011 and is roughly 20% below the typical monthly volume.

The Houses of Morgan are in demand for on-demand work

Brenon Daly

Contact: Brenon Daly

It turns out that the advisers for the largest-ever SaaS acquisition are also the busiest in terms of restocking the ranks of publicly traded subscription-based software companies. J.P. Morgan Securities, which banked SAP, and Morgan Stanley, which advised SuccessFactors, are upper left on the prospectuses of no fewer than five SaaS vendors currently in registration. Between them, the ‘Houses of Morgan’ have a fairly tight grip on the sector, leading the proposed IPOs of on-demand software shops including Eloqua, ExactTarget, Bazaarvoice, Jive Software and Brightcove.

As lead underwriters, the banks stand to pocket tens of millions of dollars in fees from the upcoming offerings. Additionally, they are likely to build on that initial relationship through other advisory services for the companies. For instance, J.P. Morgan co-led Taleo’s IPO in 2005 and, more recently, advised it on its $125m purchase of Learn.com. On an even bigger scale, Morgan Stanley led the IPOs of both RightNow and SuccessFactors and then advised them on their sales, a pair of deals that totaled a whopping $5bn.

SuccessFactors works the other side of the deal

Brenon Daly

Contact: Brenon Daly

In one of the quickest M&A turnarounds, SuccessFactors has gone from a seller to a buyer in just a matter of days. The human capital management (HCM) vendor announced over the weekend that it would be selling itself to SAP for $3.4bn in cash, the largest-ever SaaS deal. The ink was hardly dry on that transaction when SuccessFactors said on Tuesday that it will hand over $110m for Jobs2Web, a recruiting marketing platform with about 150 customers. (For the record, the mammoth SAP-SuccessFactors pairing is expected to close in the first quarter of 2012, while SuccessFactors’ purchase of the Minnesota-based startup should be done by the end of the year.)

The addition of Jobs2Web makes a great deal of sense for SuccessFactors, and in some ways, it shares some similarities to another deal earlier this year – salesforce.com’s $326m pickup of Radian6. In both cases, the startups added technology around mining social media sources and powerful analytics to expand the acquirer’s existing product portfolio.

There are even more similarities between Jobs2Web and Radian6, besides simply having numerals in their names. Both startups were founded far from any of the typical launch pads for tech companies. Jobs2Web has its headquarters in Minnetonka, Minnesota, while Radian6 was in the even more remote location of Fredericton, Canada.

But more importantly, both targets were incredibly capital efficient, each raising about $5m in VC on their way to a solidly valued exit. (Updata Partners was the sole institutional backer for Jobs2Web, which was advised in its sale by Raymond James & Associates.) According to our understanding, Jobs2Web garnered a valuation of roughly 6 times sales in its sale, while Radian6 was valued north of that.

SAP looks to SuccessFactors for success in the cloud

Brenon Daly

Contact: Brenon Daly

After struggling for years to build its own on-demand offering, SAP plans to buy its way into cloud-based software, handing over $3.65bn for SuccessFactors in what would be the largest-ever SaaS acquisition. The deal combines the largest ERP vendor, which has some 500 million users, with the fast-growing human capital management (HCM) provider. However, the acquisition, which is slated to close in the first quarter of next year, does face some challenges. J.P. Morgan Securities advised SAP on the transaction, while Morgan Stanley banked SuccessFactors, after leading its IPO four years ago.

SAP, which is 30 years older than SuccessFactors, has consistently pulled back the targets for its Business ByDesign SaaS suite since it started talking about it a half-decade ago. The difficulty in moving more quickly into a subscription-based software model is underscored by the fact that even after it drops $3.65bn to make SuccessFactors its cloud-based HCM product, SAP will continue to sell its own existing on-premises talent management offering. In fairness, we had our doubts about SAP’s previous big deal – the $6.1bn purchase of Sybase in mid-2010, which thrust the German giant into a host of new markets, including mobility and databases – but the early returns from that combination have been fairly solid.

However, when we compare SAP’s two most recent significant acquisitions, we can’t help but be struck by one gigantic discrepancy: valuation. SAP is paying a price-to-sales multiple that’s roughly twice as rich for SuccessFactors compared to the one it paid for Sybase. SuccessFactors is projected to do about $330m in sales in 2011, meaning it is garnering a rich 10 times revenue valuation, while Sybase traded at about 5x revenue. Obviously, SuccessFactors’ projected growth of 57% this year goes a long way toward explaining that premium, as does the fact that it’s a subscription-based business with 15 million subscribers. But even when compared with Oracle’s recent purchase of RightNow, which went off at about 6.6x trailing sales, SAP’s move seems pricey. We’ll have a full report on the transaction in tonight’s Daily 451.

J2: from a fax machine to an M&A machine

Brenon Daly

Contact: Brenon Daly

In reporting third-quarter financial results after Wednesday’s closing bell, j2 Global Communications not only posted record revenue and cash-flow levels but also highlighted the returns it has generated in its recent M&A spree. And the communication services provider, which has some $162m in cash and short-term investments in its treasury, hinted that more deals are coming. J2 has done three acquisitions so far in 2011, after eight in 2010.

The purchases come as part of a dramatic overhaul of the company, which has expanded through M&A from its core fax offering to now include a number of services for small businesses including email, Web-based collaboration and even marketing. Most recently, it has moved into online backup, buying three small startups – all of which are based in Ireland – just in the past year. The European acquisitions are also part of a larger effort at j2 to increase international revenue, which accounts for only about 15% of total sales.

Overall, j2 has spent almost $400m on M&A over the past half-decade. One of the reasons why the company has money to go shopping is that it generates a ton of cash each quarter. In Q3, j2 recorded $86m in sales and $37m in free cash flow (FCF), an enviable 43% FCF margin. And we should note that the cash is being generated as the company continues to grow at a healthy clip. It guided that sales for 2011 should come in at about $340m, which represents a 33% increase from 2010. Granted, much of that increase is coming from j2’s $213m all-cash purchase of Protus IP Solutions last December. (Protus had recorded $72m in the year leading up to its sale to j2.) But as the company has said in the past, it ‘isn’t picky’ when it comes to organic versus inorganic growth.

RightNow: A seller rather than a buyer

Brenon Daly

Contact: Brenon Daly

Ever since it raised $175m in a convertible debt offering last November, RightNow Technologies has been telling anyone who would listen that it intended to go shopping with some of that money. The move more than doubled the amount of cash on hand for the customer service automation vendor. And since RightNow was generating cash on its own, and had only a small share buyback program in place, it wasn’t like there were a lot of claims on the company’s treasury.

But with the $1.5bn sale to Oracle, RightNow’s M&A program has been snuffed out before it ever really got going. It would have been a dramatic change at the company, which had largely stayed out of the M&A market. Over the past decade and a half, RightNow has only tallied four deals with a total value of just $52m.

While RightNow was unlikely to ever be a big acquirer, we can’t help but make the larger point that the sale to Oracle removes yet another player from the pool of potential tech buyers. And that pool is constantly getting shallower, even just in terms of public companies. Along with RightNow, some 50 other tech vendors have been erased from the Nasdaq and the NYSE in just 2011 alone.

Oracle buys big, again

Brenon Daly

Contact: Brenon Daly

Announcing its third deal in just the past month, Oracle said Monday that it will pay about $1.5bn for customer service software provider RightNow Technologies. The purchase brings the acquisitive software giant even closer into competition with salesforce.com, which has also used M&A to expand its customer service offering. However, true to form, the deals by the rivals underscore their wildly different approaches to dealmaking.

For Oracle, bigger appears to be better. The price of its planned purchase of RightNow, which is expected to close by early next year, is a whopping 50 times larger than the amount salesforce.com spent on InStranet back in August 2008. (Salesforce.com handed over $31.5m for InStranet.) While RightNow counts more than 2,000 customers, InStranet had just 50 at the time of its acquisition. And, finally, another key difference: Oracle is valuing RightNow at more than 6 times trailing sales, which is three times the multiple salesforce.com paid for InStranet.

Of course, as the chief consolidator of the software industry, Oracle is accustomed to making big moves. In fact, its pending purchase of RightNow ranks as only its sixth-largest purchase. (It has done more than 80 deals over the past decade.) As a point of comparison, we’d note that Oracle’s single acquisition of RightNow is larger than the $1bn or so that salesforce.com has spent on the 18 deals it has announced in its entire history. We’ll have a full report on Oracle’s pickup of RightNow in tonight’s Daily 451.