Category: application software

What’s the outlook for mobile payment startups?

-Contact Thomas Rasmussen

The consolidation in the mobile payment market that we outlined recently is still on. Startup Boku announced on Tuesday a $13m venture capital infusion in the form of what we understand was a $3m series A round followed quickly by a $10m series B round a little over a month later. Benchmark Capital led the latest round, with Index Ventures and Khosla Ventures also pitching in some cash. The money was used to acquire two competitors, Paymo and Mobillcash. We estimate that very little of the cash was used to buy the vendors. We understand that the purchase of Paymo, which raised a reported $5m itself, was primarily done in stock. The deals were largely a way for Boku to gain customers and technology, as well as expand its international reach. It’s increasingly important for mobile payment startups to do something to stand out among the dozens of rivals also trying to crack this market. What’s unusual about Boku is that this strategy is playing out so quickly. The company only incorporated in March.

The real question for Boku and other promising startups in the mobile payment space such as RFinity is what will ultimately happen to this hyped market. Despite hundreds of millions of dollars poured into startups, they haven’t been able to generate much revenue, certainly not to the level that would make them viable businesses at this point. We believe the best outcome for these firms is an exit to a larger strategic acquirer. An example of this that may well be in the offing is Obopay, which took an investment from Nokia a few months ago. We suspect that could be a ‘try before you buy’ arrangement for the Finnish mobile company. Research in Motion and others could look to use acquisitions to catch up, as well.

However, we wonder how long it will be before other smartphone providers, platforms and mobile operators do as Apple has done. Micro-transactions are a huge selling point for the new iPhone 3.0 update and, frankly, one of the few bright spots for the mobile payment sector. However, all transactions for iPhone applications are done through Apple itself, leaving companies such as Boku out in the cold. If other vendors – including RIM, Palm Inc, Google, Microsoft and even application platforms like Facebook – stay in-house to develop the technology, there isn’t much need to go shopping. That could well hurt the valuations of mobile payment startups, even those that survive this current period of consolidation.

Zix: a prescription for divestiture

Brenon Daly

Contact: Brenon Daly

One conclusion to draw from the recent pickup in divestitures is that dividing corporate attention often means diluting corporate returns. Consider the situation at Zix Corp. The Dallas-based company has a small but growing business selling email encryption. In mid-2003, Zix moved into electronic prescriptions through its $1.5m acquisition of the assets of PocketScript. The plan was to expand its business of providing secure communications to the billions of prescriptions written every year in a less costly and more secure way.

However, after nearly six years of trying to realize those goals, Zix has little to show for it. Revenue from the e-prescriptions unit totaled just $5.4m, or 19% of Zix’s overall sales, in 2008. Sales at the division last year slipped 11% from the year before, compared to a 26% increase in its core email encryption business. (And we would note that both units employed some 73 people, giving an idea of the relative returns of each unit.)

Moreover, the e-prescriptions division has only one-third the number of subscribers that Zix estimates would be required to cover the costs of developing the service, according to the company’s own calculations. And now, Zix has acknowledged that it may never get the business to that level on its own. The firm hired Allen & Co late last week to advise it on ‘strategic alternatives’ for its e-prescriptions unit.

What’s on NICE Systems’ shopping list?

Brenon Daly

Contact: Brenon Daly

After being out of the market for more than a year, NICE Systems is looking to do deals again. The Israeli company inked a pair of asset purchases in 2008, with a total bill just shy of $20m. Those pickups came after NICE made its largest acquisition to date, the $280m cash-and-stock purchase of Actimize. With no debt and some $530m in cash and equivalents, NICE certainly has the means to do deals. The firm didn’t offer a peak at its shopping list, but said Tuesday at the RBC Technology, Media and Communications Conference that it will be active.

As its most-significant acquisition, the addition of Actimize bolstered NICE’s analytics offering, helping to expand the number of applications the company sells. (Actimize has also thrived under NICE. We understand that the startup has doubled its revenue to $60m in the two years since NICE acquired it.) Founded in 1986, NICE sold recording technology for call centers for much of its corporate life. In the past year or so, it has expanded into additional applications, such as workforce management, customer feedback and governance, risk and compliance. Roughly three-quarters of NICE’s revenue comes from its enterprise business, with the rest coming from its security unit.

Of course, the market has been speculating on and off for many years about a large deal by NICE involving a combination with archrival Verint Systems. However, valuing any potential transaction remains a challenge because of Verint’s majority owner, Comverse Technology. (Yes, that’s the company that has been wracked by allegations of fraud and options backdating scandals, with its founder and former CEO living on the lam in Africa. The company’s financial statements are also woefully out of date.) We understand that Comverse retained a banker some time ago to help sell off some assets. If Comverse wanted to reheat that effort and shed Verint, we’re pretty sure that NICE would put aside historical rivalries and consider that consolidation play.

Quick to offer, slow to vote

Brenon Daly

Contact: Brenon Daly

Even with the recent flurry of deal announcements, the pace of actually getting those proposed transactions in front of shareholders hasn’t necessarily followed suit. On Monday, a pair of buyers of public companies said they wouldn’t be holding votes on the proposed acquisitions, which were both announced in mid-April, until mid-July. To be sure, the anticipated three-month gap between announcing the transactions and shareholders voting on them isn’t alarmingly long. But it does continue the rather drawn-out dealmaking process that we’ve seen since the credit crisis tore apart Wall Street.

In the larger of the two announcements, Oracle said Sun Microsystems shareholders will have the opportunity to sound off on the planned $7.4bn deal on July 16. That is almost two weeks longer than it took to close its slightly larger purchase of BEA Systems last year. And if, as expected, Sun shareholders agree to the pending acquisition and Oracle closes it immediately, the time from announcement to closing would be roughly twice as long as the time for its multibillion-dollar purchase of Hyperion Solutions as well as its smaller acquisition of Stellent.

Meanwhile, Thoma Bravo, which plans to pick up Entrust, originally intended to put its $114m offer before shareholders on Monday. Instead, they will vote on the deal July 10. The delay comes despite not a single superior bid surfacing for the security company during its ‘go-shop’ period. The target said it shopped itself to 35 other potential suitors from mid-April to mid-May, but received only three non-binding offers. Entrust’s board didn’t judge any of them ‘superior’ to Thoma Bravo’s original offer. Shareholders will have their say on that in a month.

Auction action

Brenon Daly

Contact: Brenon Daly

With one bidding war over a Nasdaq-traded company wrapped up last week, two new skirmishes broke out on Monday. Both Borland and MathStar received conditional offers of higher prices than had previously been floated for the companies. The bid-and-raise process at both these otherwise-neglected companies indicates the M&A market has recovered notably from its low point earlier this year.

In the larger of the two transactions, Borland said in a proxy filed in support of its existing agreement to sell to Micro Focus that it has received a nonbinding ‘expression of interest’ from an unnamed buyout shop. The offer – which is conditional on the firm completing due diligence on the application lifecycle management software vendor – has the firm paying $1.20 for each share of Borland. That tops Micro Focus’ offer in early May of $1 for each share of Borland.

Micro Focus’ bid, which has been blessed by the boards of both companies, came after it first showed interest in picking up Borland in July 2007, according to the proxy. Meanwhile, the proxy indicated that the unnamed financial acquirer only contacted Borland on May 21 of this year. The buyout firm added that due diligence would take about two weeks, and that its offer was not conditional on financing. Borland said in the proxy that it has opened its books to the unnamed suitor.

Meanwhile, after being in play for more than a half a year, MathStar attracted the interest of Tiberius Capital, a Chicago-based fund that offered to buy half of the company at $1.15 per share. That tops an existing offer of $1.04 for each MathStar share from another company. We would note both of these deals come after a seven-week bidding war over SumTotal Systems, which saw the final price soar 50% above the opening bid.

Former high-flyer Cassatt sold in low-multiple deal to CA

Brenon Daly

Contact: Brenon Daly

Few datacenter startups in recent memory have commanded as much attention – or as much investment – as Cassatt. The company, which drew in some $100m in backing, had top engineering talent and proven executives, starting with CEO Bill Coleman. Realizing the promise of all that, however, has proved difficult for Cassatt. It has shuffled through a number of business plans, trying to find a viable strategy. And now, we understand, Cassatt has sold to CA Inc for a fraction of the amount it raised. An announcement is expected next week.

It’s an unfortunate – if unsurprising – end to Cassatt. The company has been for sale for several months and we understand that a number of tech giants, including Oracle and IBM, looked at Cassatt. We can only imagine that talks with any would-be buyers must have been complicated by the fact that they would have had a hard time knowing exactly what they would be buying. Cassatt itself would have had a different answer, depending on when the question was asked.

In its early days, Cassatt was a high-performance computing vendor, but then switched to utility computing and, most recently, positioned itself as an eco-efficient IT vendor. (One byproduct of the ever-evolving business model is that Cassatt was only able to collect two dozen or so customers over its six-year history. We understand that the company did about $12m in revenue last year.) That’s not a knock on Cassatt. The company had grand plans – and raised money to match them. But in the end, it was probably too early into this market. Cassatt’s technology may well play a role in helping to manage the datacenter in the future, but that’s up to CA now.

Emptoris shrugs off possible fine, goes shopping

Brenon Daly

Contact: Brenon Daly

A little more than four months after selling to Marlin Equity Partners, Emptoris reached into the deep pockets of its buyout shop owner to fund its first acquisition: the recent pickup of the contract and service management business from Click Commerce. The deal was part of a larger divestiture of Click Commerce by Illinois Tool Works (ITW), effectively unwinding its September 2006 acquisition. In all, three Click Commerce units went to Marlin, with only the contract and service management unit getting slotted under Emptoris.

As we noted when ITW announced the divestiture last October, Click Commerce was a puzzling purchase for ITW, a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. ITW paid $292m for Click Commerce in 2006. Although terms weren’t disclosed, we understand that the unit Emptoris acquired was generating some $15m in sales. With the additional revenue, we estimate that Emptoris would be running north of $50m.

Whatever size the check that Emptoris wrote for the Click Commerce division, we would note that one insider at rival Ariba quipped that Emptoris better not spend all ‘our’ money. The Ariba source was needling its rival about the fact that a patent lawsuit between the two companies is currently in the final stages. A jury has awarded – and the court has affirmed – some $6m in damages to Ariba. Emptoris is appealing the judgment.

Intalio gets its rollup rolling

Brenon Daly

Contact: Dennis Callaghan

Intalio’s open source rollup has finally started to roll. The company recently took the wraps off a deal it actually did earlier this month, picking up open source CRM software vendor CodeGlide. The acquirer, which has raised some $45m in venture funding, said earlier this year that it planned to do as many as 10 acquisitions over the next two years. (Intalio indicated that it was eyeing small firms with only a dozen or so employees. For its part, CodeGlide had only four employees, all of whom have gone over to Intalio.)

Intalio has wasted little time in making CodeGlide’s software available as Intalio CRM and it plans to eventually make components of this software available under the AGPL open source license. While we can think of more exciting markets than CRM that Intalio could have bought its way into, the deal nonetheless makes a lot of sense, particularly when viewed in light of its Intalio Cloud offering.

In the same breath that it announced the CodeGlide acquisition, Intalio unveiled Intalio Cloud, which is an IBM or Hewlett-Packard server appliance preloaded with Intalio’s applications – both business process management (BPM) and CRM – along with elastic compute and storage utilities. The box is designed to be the basis for companies’ internal private clouds and is available as a managed service offering. It also powers Intalio’s own on-demand wares. So why does this all make sense?

Combine CRM, BPM and cloud infrastructure and you have the main ingredients for becoming a true platform-as-a-service (PaaS) vendor. Intalio will be able to make both its BPM software and new CRM software available on demand and now has the technology to allow customers to build and/or customize their own business applications; it can offer this technology in the cloud or via private clouds. Successful PaaS initiatives – think LongJump and Salesforce.com – require not only good development tools but also an actual application platform that underlies these tools, which are then used for building customizations, mashups and process applications on top of the platform. Less-successful PaaS offerings like those from Coghead, whose technology was built on Intalio’s software, were separate from an underlying application platform and found it harder to deliver on their promise (at least until Coghead was acquired by SAP).

It may take Intalio a few months to deliver on its PaaS vision, but the company is starting to get the right tools in place. What’s next on its shopping list? We would guess a mashup vendor.

IBM-Exeros: the wind-down and the bid-up

Brenon Daly

Contact: Brenon Daly

Even in the ongoing recession, the fundamental economic laws concerning supply and demand still haven’t been overturned. That’s at least one lesson we can draw from the recent sale of the assets of data discovery startup Exeros. Although terms weren’t disclosed, we believe IBM paid about $13m for Exeros. While that hardly seems like a blockbuster exit for a VC-backed startup that raised some $19m, we would note that the price is four times higher than the offer Exeros received from its first bidder.

As we understand the process, SAP offered just $3m for the assets. Exeros gambled and let the ‘no shop’ period expire on SAP’s bid and then successfully enticed IBM. (Big Blue will slot in the Exeros technology alongside a number of other tools in its Information Management portfolio.) One source added that IBM agreed to an earn-out that could take the final price up to $20m, potentially making Exeros’ backers whole on their investment.

Whatever IBM ends up handing over for Exeros, the target should probably consider any amount over SAP’s initial bid a windfall. The last time we spoke with Exeros (in mid-September, just before capitalism as we know it ended), the unprofitable startup said it was looking to raise a third round of funding that would carry it through to break-even status. Of course, we can all imagine how those fundraising conversations must have gone.

So instead of drawing down money, Exeros was wound down. However, the resulting transaction wasn’t like the dozens of scrap sales that we’ve seen in recent months, where a single buyer pushes the price down so low that the startup’s investors get just pennies on the dollar. With both SAP and IBM bidding, Exeros’ backers may well break even. And that’s not a bad return, given what they were facing.

Is the IPO window open again?

Brenon Daly

Contact: Brenon Daly

With SolarWinds debuting on the public market Wednesday and OpenTable set to follow shortly, some observers have suggested these offerings mark a return of the IPO market. While it’s always healthy to have new issues, particularly after months and months without a technology IPO, we think it’s a bit overly optimistic to say either offering will kick off an IPO market like we had even two years ago. Certainly, there will be a handful of companies that make it out the window. But we don’t expect there to be a flood of new offerings.

That’s particularly true if we look at the astonishing numbers put up by SolarWinds. We doubt many other IPO hopefuls were able to generate anywhere near the $6m in net income in the first quarter that the network management software vendor recorded. In fact, we’re fairly certain that some companies thinking about putting in an S-1 won’t even generate as much profit in all of 2009 as SolarWinds did in one of the toughest economic quarters in recent history. Wall Street appears ready to reward the black numbers at SolarWinds. The company priced its offering at $12.50 per share, ahead of the initial range. With some 64.2 million shares outstanding, SolarWinds started life on the NYSE with a valuation of $803m, although it moved up above $900m in early trading Wednesday.

Nonetheless, the rich valuation at SolarWinds (8.6x 2008 sales) may well encourage a few companies to dust off their IPO paperwork and update numbers. One obvious candidate: NetQoS, a fellow Austin, Texas-based networking software company. (We noted last year that the company had done a bit of ‘portfolio round-out’ ahead of what we expected would be an IPO this year.) And Nimsoft is undoubtedly cheering for a warm reception for SolarWinds. Nimsoft offers essentially the same technology as SolarWinds but targets the midmarket, while SolarWinds sells primarily to small businesses. (Nimsoft was in the market earlier this week, picking up assets from Cittio to bolster its network monitoring product.) Since Nimsoft has only about half the revenue of SolarWinds, it’s probably a bit early for the vendor to plan a prospectus. Nonetheless, it’s always helpful to have a strong, richly valued comparable public company when considering an IPO.

One less obvious – but more intriguing – vendor that could be drawn out by a well-received SolarWinds offering is Barracuda Networks. Both firms have the same models of high-volume sales of software to small businesses, and both are currently running at over $100m in annual revenue. Barracuda is tight with its financials, but word is that the company is closer to $150m in sales right now. Even if it doesn’t have the same rich margins that SolarWinds enjoys, Barracuda would almost certainly be worth more than $1bn on the market.