Category: divestitures

GlassHouse unloads US consulting biz

Scott Denne

Contact: Scott Denne

GlassHouse Technologies actively used acquisitions to scale up its storage-turned-cloud services business, but now it’s turning to divestitures as it scales back down. The company is selling its US consulting practice to Signature Technology Group in its fourth divestiture since taking its second shot at an IPO.

Founded in 2001 with the vision of building a vendor-agnostic storage consultancy, GlassHouse picked up 13 businesses between 2003 and 2009 for their expertise and for geographic expansion. The dealmaking helped grow the company’s top line, setting it up for a public offering; however, headwinds from the financial crisis prevented it from completing an IPO in 2009. GlassHouse tried once more in 2011 when growth picked up again and it expanded its scope from storage to cloud, but its balance sheet changed for the worse, prompting its auditor to express concern about the company’s ability to stay in business with $4m in cash and $100m debt. Once more, GlassHouse pulled its prospectus.

Since that time, GlassHouse sold subsidiaries in Israel and Turkey and divested two separate units to Signature Technology: first selling its customer support services division in November 2013, and now the US consulting practice. That leaves GlassHouse with a European consulting business, a systems integration unit and a managed services offering.

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Trust-busters push BazaarVoice to unplug PowerReviews

Brenon Daly

Contact: Brenon Daly

As industry consolidation goes, Bazaarvoice’s mid-2012 purchase of rival PowerReviews was definitely a small-scale move. The deal only added a little more than $10m – or a boost of about 10% – to the top line at Bazaarvoice, a consumer reviews site that had just gone public at the start of 2012. And while the two startups regularly beat up on each other, they were arguably facing much more formidable competition from rating-and-review offerings that were often baked into the websites of many of the largest and most-active online retailers.

In other words, there was little to suggest that the proposed $152m cash-and-equity transaction would even register any antitrust attention, much less any trustbusting. And yet, on Tuesday afternoon, Bazaarvoice bowed under the pressure of a lawsuit brought a year ago by the US Department of Justice and essentially unwound that acquisition. Bazaarvoice plans to divest PowerReviews to small Chicago-based vendor Viewpoints Network.

Viewpoints has raised just $5m in funding since its founding in 2006 and told us that it won’t need to raise more to cover the purchase of PowerReviews. That suggests Bazaarvoice is recouping only a fraction of the $152m that it paid for PowerReviews two years ago. Viewpoints currently has 20 employees and, post-acquisition, will have about three times that number. Further, it will substantially boost its revenue when it buys PowerReviews, which we estimate is running at about $10m in revenue.

Of course, that assumes the planned acquisition goes through. (Expectations are that the deal will close before the end of July.) At this point, only a letter of intent has been signed between the parties. It still needs to be finalized, and then regulators have to approve the latest purchase of PowerReviews. As we have seen, regulatory clearance is not always a given.

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iPass roams away from managed Wi-Fi services business

Scott Denne

Contact: Peter Christy Scott Denne

As its core business of Wi-Fi roaming services grows, iPass plans to shed its managed network services division, which chalked up $33.2m in sales last year, down slightly from $33.4m the year before. We understand the company has already passed on an unsolicited offer from a private equity firm to buy its managed network services business, prompting it to hire Blackstone Group to run a broader effort to sell the division.

After a long sequence of revenue decline and profitless operation, iPass has been inching back toward growth. Since its beginnings as a dial-up access roaming service, the company has transitioned to include Wi-Fi , survived the brief over-exuberance around metro Wi-Fi, and then reengineered its roaming platform as Wi-Fi-only beginning around 2012. Revenue has declined as iPass phased out its legacy connectivity businesses, and the growth of its Wi-Fi services isn’t enough to offset the difference. Last year, the company posted $111.1m in revenue, down from $126.1m in 2012.

Its legacy connectivity business fell by $35.8m to $29.8 in 2013; however, the worst declines are likely behind it. The legacy business shrank sequentially by just $1m to $5m in the fourth quarter, while its Wi-Fi roaming business grew to $13m in the quarter, up from $9.1m a year earlier. Today, iPass has about $24m in cash and a sale of its managed network services business could double that amount.

We plan to cover the resurrection of public Wi-Fi access in a forthcoming 451 Spotlight.

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IBM shifts x86 biz to Lenovo

Scott Denne

Contact: Scott Denne John Abbott

IBM sheds its x86 server business in a $2.3bn sale to Lenovo, continuing its record-breaking streak of divestitures. When the deal closes, Big Blue will have rid itself of a division that generated $4.6bn in revenue last year and, like most x86 server businesses, experienced declining revenue.

Asset sales generally go for about 1x revenue, and hardware and pure services businesses are usually valued below that. Still, at 0.5x revenue, the deal comes toward the low end of IBM asset sales, but it’s still far better than the last time these two companies met at the M&A table. In 2005, Lenovo acquired IBM’s PC business for just 0.16x sales. Only once has Big Blue sold a business for more than $250m and collected more than 1x revenue.

IBM’s largest divestitures

Date announced Asset Acquirer Valuation Revenue multiple
January 23, 2014 x86 server business Lenovo $2.3bn 0.5x
April 17, 2012 Retail store solutions Toshiba TEC $850m 0.7x
January 25, 2007 Printing systems division Ricoh $1.42bn 0.7x
December 7, 2004 PC business Lenovo $1.75bn ~0.16x
June 4, 2002 Hard drive operations Hitachi $2.8bn 1.4x

Source: The 451 M&A KnowledgeBase

The sale lines up with several of IBM’s strategic ambitions. For one, it helps free the company to be a cloud services provider, instead of having to sell x86 servers to service providers while simultaneously competing with them. However, in some ways the move could complicate that effort, as Lenovo, which will be the primary supplier of x86 technology to IBM, may not be able to make the required R&D investments that will keep its products at the cutting edge. The Lenovo business model relies on volume shipments and won’t bear heavy R&D spending.

Also, the x86 business has low margins and shrinking revenue; unloading it will help Big Blue reach its goal of $20-per-share annual earnings by 2015. According to surveys by TheInfoPro, a service of 451 Research, customer spending on IBM servers has moved backwards a bit, with 36% of its customers in 2013 stating they would spend less on IBM servers during the following year, up from 23% and 27% in 2012 and 2011.

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Best Buy backs out of tech M&A market with mindSHIFT sale

Scott Denne

Contact: Scott Denne

Here’s something that is selling at Best Buy: its own acquisitions. With the divestiture of mindSHIFT Technologies, Best Buy has now sold every tech business it has bought since 2007. During better days, the electronics retailer experimented in tech by buying a few companies as it sought possible synergies with its retail outlets. Now that its core business is facing harder times, it has abandoned that strategy, with the SMB-focused MSP being the latest to go in a sale to Ricoh.

Best Buy acquired mindSHIFT in November 2011 for $167m to capture more of the SMB market by coupling the MSP with Geek Squad, its in-store services group and its lone remaining technology buy. The rationale mirrors Best Buy’s $97m acquisition of IP phone service provider Speakeasy, which it divested at the end of 2011. Napster, the online music service it bought for $121m in 2008, a year after Speakeasy, was also intended to attract new customers. That business was sold in pieces to Rhapsody International.

MindSHIFT appears to have grown as part of Best Buy: at the time of the sale it had 5,400 customers and 500 employees, and today it boasts 6,900 customers and 650 employees (terms of the sale to Ricoh and mindSHIFT’s current revenue weren’t disclosed). Given Best Buy’s current problems with shrinking sales and its track record of buying businesses that turned out to have little relevance to its core, we don’t anticipate that Best Buy will be back in the tech M&A market anytime soon.

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AOL won’t try to Patch up its content strategy

Scott Denne

Contact: Scott Denne

Four years ago, upon buying Patch Media, a network of local news and information websites, AOL’s CEO declared that local content would be a core focus for AOL. Now, after failing to make the unit profitable, the company is handing a majority stake and management of the Patch business to Hale Global.

The deal shows that AOL is not only rethinking its local content strategy, it’s also rethinking the entire content strategy that’s driven its dealmaking for many years as the company increasingly favors advertising infrastructure over its content assets (blogs, news, video). Patch is AOL’s second divestiture of a content asset since the start of the year and its fifth such move in the past 12 months.

Prior to beginning this round of divestitures, AOL spent $1.4bn on 24 content companies, including social networks, photo-sharing sites and popular blogs, over a five-year span, according to The 451 M&A KnowledgeBase. Those deals have come to a halt since the divestitures began and AOL’s only acquisition in the meantime was its $465m reach for video ad tech vendor Adap.tv, its biggest transaction since the $850m purchase of social network Bebo, which it has since sold (for pennies on the dollar, we might add).

Ad tech revenue is growing faster than any other AOL business and is well on its way to becoming the company’s largest division. Its revenue from enabling the buying and selling of ad inventory grew to $149m in its most recent quarter, up 32% from the year-earlier period. Advertising revenue from its own properties (largely powered by in-house technology) grew only 4%. Even in the quarter before buying Adap.tv, AOL’s ad tech revenue was still its fastest-growing segment, with year-over-year growth of 9%.

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HomeAway returns from its M&A vacation

Scott Denne

Contact: Scott Denne

Though HomeAway’s M&A activity initially slowed following its IPO two years ago, the vacation rental company has resumed its earlier pace, logging three deals in the past five months, including today’s acquisition of Stayz Group for $198m in cash.

Stayz, HomeAway’s largest purchase, amplifies a few of the vacation rental giant’s strategic projects. Stayz generates nearly all of its $23m in revenue (for the year ended June 30) by charging owners a per-booking fee, a business model that HomeAway itself only began extending to some of its websites last quarter. Also, Stayz is based in Australia, fitting well with HomeAway’s ambitions in Asia-Pacific. All three of its acquisitions since July have been of companies in that region, including Stayz, an operator of several vacation rental websites in Australia. Prior to those transactions, HomeAway had bought only one (European) company following its IPO in July 2011.

That pause was unusual for HomeAway, which began a dealmaking spree in November 2006 when it raised $100m from several venture firms and picked up VRBO.com for an estimated $120m. Between that acquisition and its IPO, it spent more than $138m buying nine other vacation rental websites (and one software firm) around the globe.

HomeAway’s largest deals

Date announced Target Deal value
December 4, 2013 Stayz Group $198m
March 3, 2010 BedandBreakfast.com $31.6m
February 4, 2009 Homelidays.com $45.4m
November 13, 2006 VRBO.com $120m*

Source: The 451 M&A KnowledgeBase *451 estimate

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Acxiom looks to sell its $271m datacenter biz, according to sources

Scott Denne

Contact: Scott Denne

Acxiom has spent the last two years separating a fragmented set of services into discrete units and sharpening its focus around the largest portion of its business: marketing data and technology services. Now sources tell us it may take the next step in separating those units by selling its IT infrastructure services business, a unit that accounts for about a quarter of the company’s revenue.

Its IT infrastructure business, which includes mainframe, server hosting and cloud infrastructure services, generated $271m in revenue over the last 12 months. The division’s sales have been shrinking as it lost customers and faced pricing pressure. Revenue is down from its most recent fiscal year (ending in March), when it brought in $275m, and from FY 2012, when it logged $292m. But the unit is becoming more profitable. In the most recent quarter, operating profit rose to $12m from $9m a year ago, with operating profit margins increasing from 12% to 18%. Acxiom’s IT infrastructure business recorded $89m in EBITDA in its last fiscal year.

Acxiom already sold off several of its other business units, including its background-screening business in early 2012 for $74m. The company’s divestitures are part of a plan to make its three separate business units – marketing data, IT services and other services – operationally independent. Axciom even separated its internal IT functions from its IT services business, likely in preparation for a sale.

Based on recent acquisition valuations, Axciom’s IT infrastructure business could fetch a price as high as $600m. Hosting companies landed a median valuation of 9.4x EBITDA in the last few years, but Acxiom’s assets will likely sell for less. Telecommunications companies have paid the highest multiples so far, but those buyers may be put off by the mainframe portion of the business, or at least value that portion significantly less. The unit’s improving profit margin make it attractive to private equity firms or sponsored companies, which have paid a median 6.8x EBITDA since 2010, according to the 451 M&A KnowledgeBase.

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Will Microsoft and Nokia make for a ringing success?

Brenon Daly

Contact: Brenon Daly

In an acquisition that effectively formalizes a partnership of two and a half years, Microsoft plans to hand over $5bn for Nokia’s phone business. Additionally, it announced a $2.2bn agreement to license the Finnish company’s patents and mapping technology. Taken together, the moves mean that Microsoft – in its efforts to make the leap from the PC market to the much broader mobile world – has now tried all three of the corporate development strategies: buy, build and partner.

And yet so far, the results of that effort remain underwhelming. In an August survey by ChangeWave Research (a service of 451 Research) just 9% of corporate respondents indicated they planned to purchase a Windows Phone-powered device in the fourth quarter of this year. Microsoft’s ranking was dead last among the mobile OS providers. Even BlackBerry, which is fading dramatically, drew a level of support that was three times higher than Windows Phone.

Nor does the addition of Nokia, when the deal closes early next year, appear likely to bump up Microsoft’s standing among corporate mobile-device buyers. Just 7% of respondents to the ChangeWave survey indicated they planned to buy a Nokia device in Q4. That was the lowest standing among the six specific vendors included in the ChangeWave survey.

Obviously, Microsoft’s purchase and license agreements with Nokia extend far beyond the immediate timeframe covered in the ChangeWave survey. But even as we look ahead a year or more, we don’t necessarily see the transaction doing much to establish Microsoft as more than a distant fourth-placed mobile OS vendor.

For starters, there’s Microsoft’s mixed record on hardware, including its recent $900m write-off because it hasn’t sold anywhere near as many Surface tablets as it expected. And even when we look at precedent transactions where software companies have reached for hardware vendors (even those with solid underlying IP), the returns have been low. One dramatic example from the enterprise world: Oracle has struggled to get out from under the billions of dollars of hardware that it inherited when it acquired Sun Microsystems.

Even more relevant to the Microsoft-Nokia transaction, Google hasn’t radically altered the fortunes of Motorola’s smartphones since it acquired that business in a deal that was announced two years ago and closed May 2012. Yes, the Android OS continues to gain momentum for all device makers. But specifically for Motorola, the percentage of corporate buyers who plan to purchase a Motorola device in the coming quarter has dropped almost uninterruptedly in the year that Google has owned the device maker, according to ChangeWave research.

 

A ‘betwixt and between’ VMware opens the doors at VMworld

Brenon Daly

Contact: Brenon Daly

Even though it’s only 15 years old, VMware is beginning to look decidedly middle-aged. The virtualization kingpin, which opens its annual users’ conference today, is no longer the flashy young startup that was nearly doubling sales each year in the middle part of the previous decade. Nor is it (by any means) a tech dinosaur, defensively trying to protect its past successes while knowing full well that its best days are behind it.

Instead, VMware finds itself betwixt and between. And fittingly for a company in an indistinct period of its life, there’s uncertainty around its business. That is cascading through not only the operations of the company, but also its very identity. As it kicks off VMworld in San Francisco, VMware is still working through a restructuring, which, among other things, has seen it cut 800 jobs and divest a handful of businesses so far this year.

As one illuminating example of the uncertainty around VMware and its business, consider the company’s license sales, which are the lifeblood of any software firm. Back in the beginning of the year, VMware projected roughly 10% license growth for 2013. Off a 2012 base of about $2bn in license sales, that would imply roughly $200m of new VMware licenses sold this year. Through the first two quarters of the year, VMware has added a grand total of just $20m in additional license revenue.

The problems from the vendor’s flatlining software sales are exacerbated by the fact that it has whiffed on a few of the businesses that it acquired with the hopes of spurring growth in new markets. Misguided acquisitions such as Zimbra and SlideRocket took VMware further away from supplying technology to power datacenters and into the hotly contested consumer application market. VMware has sold off both of those businesses, along with three other divestitures so far in 2013. On the other side, it has bought only one company this year.

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