Category: Europe

Concur is just the latest of SAP’s pricey plays in the cloud

Brenon Daly

Contact: Brenon Daly

Announcing the largest SaaS acquisition in history, SAP will pay $8.3bn for travel and expense management software provider Concur Technologies. The purchase comes as the German giant is on the hook for doubling its cloud revenue in 2015 – a corporate target that has driven SAP’s recent M&A.

In its 42-year history, SAP has announced seven acquisitions valued at $1bn or more, according to The 451 M&A KnowledgeBase . However, the five most recent deals have all been pickups of subscription-based software vendors. (SAP’s two consolidation plays for firms hawking software licenses came in 2007 and 2010, with Business Objects and Sybase, respectively.) The purchase of Concur is the Germany company’s largest acquisition, and the fifth-largest transaction in the software market overall.

More significantly, SAP is paying up as it tries to move to the cloud. Including the Concur buy, SAP has handed out a lavish multiple, on average, of 11x trailing revenue to its SaaS targets. (Obviously, revenue doesn’t fully reflect the economic value of multiyear contracts common at SaaS firms. But even on a more liberal measure of business activity such as bookings, SAP has paid double-digit multiples in its subscription-based acquisitions.)

The SaaS premium stands out even more when compared with the valuations SAP has paid for conventional license-based vendors. The purchases of both Business Objects and Sybase went off at slightly less than 5x trailing revenue, or half the average SaaS valuation. Further, SAP itself trades at less than half the valuation it has paid for its SaaS acquisitions.

SAP acquisitions, $1bn+

Date announced Target Software delivery model Deal value Price/revenue multiple
September 18, 2014 Concur Technologies Subscription $8.3bn 12.4
October 7, 2007 Business Objects License $6.8bn 4.7
May 12, 2010 Sybase License $6.1bn 4.8
May 22, 2012 Ariba Subscription $4.5bn 8.6
December 3, 2011 SuccessFactors Subscription $3.6bn 11.7
June 5, 2013 hybris Subscription $1.3bn 10.7*
March 26, 2014 Fieldglass Subscription $1bn* 11.8*

Source: The 451 M&A KnowledgeBase *451 Research estimate

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ECM consolidators clash

Brenon Daly

Contact: Brenon Daly

The gloves are coming off in the latest consolidation in the enterprise content management (ECM) market. Just a month after accepting a $195m offer from the ever-acquisitive Lexmark, old-line Swedish ECM vendor ReadSoft has found itself in the center of an unusual public bidding war. On Wednesday, PE-backed Hyland Software topped the bid by a few million dollars.

The brawl over ReadSoft pits two able acquirers – one strategic, one financial – against each other. Collectively, Lexmark and Hyland have done 16 deals over the past half-decade alone. But looking inside those transactions, we can see differences between the buyers, which may help indicate how the fight for ReadSoft will play out. On paper, it would appear that Lexmark needs ReadSoft more than Hyland does.

For starters, Lexmark has been a more active acquirer than Hyland. Since the printer company established its ECM unit in mid-2010 with the $280m purchase of Perceptive Software, it has shelled out an additional $600m on another nine targets, according to The 451 M&A KnowledgeBase . In comparison, Hyland has announced just six deals since PE shop Thoma Bravo acquired a majority stake in July 2007.

Further, Lexmark has been more deliberate in buying larger companies, while Hyland has targeted smaller bolt-on acquisitions that typically bring either technology (document capture, for example) or vertical market specialization (e.g., healthcare) to its flagship OnBase product. In short, Hyland’s M&A approach – including playing the spoiler against Lexmark – appears more opportunistic than the systematic drive for scale at Lexmark.

In our initial analysis of Lexmark’s reach for ReadSoft, my colleague Alan Pelz-Sharpe noted that while the transaction would bring a new customer base and about $120m in revenue to Lexmark, there was a fair amount of technology overlap. (451 Research subscribers can click here for the full report.) But for Lexmark, it has little choice but to buy in bulk.

Because of the declines in its legacy core printer and ink business, overall revenue at Lexmark will drop again this year. While its software business is the fastest-growing division at the company, it can’t make up for the drop-off in printers. Lexmark has set the goal for its software unit hitting about $500m in revenue in 2016, which would be about twice the revenue it generated in 2013. To get there, Lexmark will have to continue to rely on M&A, which just may include countering for ReadSoft.

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Overseas shopping in November drives tech M&A to post-recession record

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in the just-completed month of November nearly doubled from the same month last year, as European shoppers went on an unusually big spending spree. However, the rest of the market was very quiet. The number of announced transactions last month sank to the lowest monthly level since the end of the recession.

Across the globe, the total value of tech deals announced last month came in at $23.3bn, slightly above the monthly average in 2013 but dramatically above the $12.2bn recorded in November 2012. Four of the five largest acquisitions announced last month involved targets based outside the US, including Germany’s Scout24 and Dutch software vendor UNIT4.

The surge in November spending means that 2013 will set a new record for the value of tech deals since the end of the recession. In the first 11 months of this year, buyers announced transactions worth an aggregate value of $222bn, higher than any other full-year total since the credit crisis knocked the economy into a tailspin from which is has only haltingly recovered.

The incomplete recovery shows up dramatically in the number of prints. Consider this: The number of announced transactions has declined, year over year, in every single month in 2013, leaving the total number of deals so far this year down 14% compared with last year. And deal flow is drying up even more. In November, buyers announced just 209 transactions – the lowest monthly total in four years and down nearly one-third from the level in November 2012.

Post-recession deal flow

Period Deal volume Deal value
January-October 2013 2,861 $222bn
January-October 2012 3,338 $163bn
January-October 2011 3,462 $204bn
January-October 2010 3,003 $173bn
January-October 2009 2,758 $137bn

Source: The 451 M&A KnowledgeBase

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DT makes $735m move into Eastern European B2B

Scott Denne

Contact: Scott Denne

Deutsche Telekom hands over $735m for GTS Central Europe in a deal that brings a geographically unique set of fiber and datacenter assets but little growth. The move plays into DT’s desire to build its B2B offerings that service a set of customers beyond its base of Germany-based multinational corporations.

GTS has both fiber networks and datacenters across multiple countries in Eastern and Central Europe, making it the region’s only multi-country, multi-tenant datacenter business, according to a 451 Research report. That reach is valuable to the German telecom giant because it needs fixed-line networks and datacenters to go along with its wireless-only services in the region, especially in countries such as the Czech Republic and Poland.

GTS’s Slovakia operations, where DT already has fixed-line network assets, are not included in the deal. The portion of the business that is going to DT posted $459m in revenue and EBITDA of $115m last year.

Despite its geographic reach in its home market, GTS hasn’t grown since its acquisition by a consortium of private equity investors in 2008. The year before that transaction, it reported $587m in revenue – a mark it hasn’t hit since, which DT attributes to tight regulations and difficult economic conditions in Europe. Last year, GTS as a whole, including its Slovakia operations, reported $511m in revenue and EBITDA of $136m.

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Time is money

Ben Kolada

Contact: Ben Kolada

Novacap Technologies is selling Canadian hosting portfolio company iWeb Group to Internap Network Services for $145m, representing a quick – and solid – return for the Canadian private equity firm. Just two years ago, it took iWeb private for $69.6m (including the assumption of net debt).

Under Novacap, iWeb grew total revenue 50% while maintaining basically the same operating profit margin (only adjusted EBITDA was disclosed in iWeb’s sale to Internap). It also now serves 10,000 SMB customers in more than 100 countries. Though Novocap’s total ROI isn’t immediately clear, the firm undoubtedly did well on its two-year holding. Jefferies advised Internap, while Bank Street Group worked the sell-side.

On the flip side, for Internap, this deal highlights the interplay between two of the most important elements of any transaction: time and money. In this case, waiting longer to buy iWeb meant Internap ended up paying more for it, both on an absolute and relative basis. And Internap will end up paying for it longer: the company is taking on new debt to cover some of the cost of iWeb, which is twice as high as it was the last time the company was on the block.

iWeb’s rising valuation

Metric Sale to Novacap* Sale to Internap
Deal value $69.6m $145m
Price/sales 2.3x 3.3x
Price/EBITDA 9.3x 13.2x**

Source: The 451 M&A KnowledgeBase *Using enterprise value **Using adjusted EBITDA

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.

 

Groupon gets lost in translation

Brenon Daly

Contact: Brenon Daly

Sometimes, business models lose a little something in translation. For all of the talk about globalization, commercial homogeneity and so on, we often get reminders that what works in one country may not necessarily flourish in another. That’s particularly true around commerce, as was evident once again in the Q2 results that Groupon announced Wednesday.

First, a bit of history: About a year and a half after its launch in late 2008, Groupon went on an international shopping spree. The heavily funded company picked up about 10 ‘clones’ in locations around the globe, ranging from its massive $126m consolidation of Berlin’s CityDeal, which it paid for with pre-IPO shares, to the tiny tuck-in of Israeli online coupon service Grouper. Other acquisitions got the Chicago company into markets such as Russia, the Philippines, South Africa and beyond.

But so far, Groupon isn’t getting the kind of returns it had hoped for when it started throwing money around the globe. Revenue from business outside of Groupon’s home North American market has actually shrunk so far this year. And it’s not just a slight downtick, but a full 20% decline in sales. Further, international sales are barely breaking even, as investments in ‘rest of world’ (primarily Asia) operations nearly siphon off all of the operating income produced in its EMEA division.

The dramatic slide in international sales contrasts sharply with the 44% growth Groupon posted for revenue in North America. (Add to that the fact that North America business at Groupon is almost half again as large as business outside of its home market.) That disparity stands as a reminder that while the world may be ‘flat’ (as Thomas Friedman and his cohorts have termed it), the business done on it tends to be lumpy.

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Can Criteo spark interest on Wall Street?

-By Jonas Kristensen

Although Wall Street has not been overly bullish on the prospects of advertising technology companies recently, Criteo may be the next company from this fast-growing market to make its pitch to investors. But to do that, the Paris-based online ad retargeter will have to overcome a lot of burned adtech shareholders, who have seen the shares of recent IPOs in the sector (Marin Software and Millennial Media) both shed about one-quarter of their value so far this year. Meanwhile, Tremor Video is still underwater from its IPO last month.

But Criteo, which is rumored to have gross revenue of more than $500m, has one thing these other companies don’t – a profitable business. And it’s been printing black numbers for several years now. Further, it has shored up its mobile offering, where much of the adtech growth is expected to happen. (Witness the 75% growth in Q2 mobile ad revenue Facebook reported on Wednesday.) Just last week, Criteo announced the acquisition of mobile ad-tracking startup AD-X Tracking, which closes the gap in the company’s product offering and should enable it to take its retargeting technology mobile.

Given its growth rate and product portfolio, Criteo is probably out of reach of most would-be acquirers. Indeed, although M&A activity in the adtech space has increased steadily, the deals haven’t necessarily been at the top end of the market. According to The 451 M&A KnowledgeBase, there hasn’t been an adtech acquisition valued at more than $1bn since 2007.

If indeed Criteo does make it public, it doesn’t necessarily mean that the company will have to take a cut-rate valuation. After all, the other publicly traded adtech vendors have been overly discounted. Even with their sliding share prices, the trio have created more than $1.5bn in market value and trade at an average of 5x trailing sales, a higher multiple than many other tech sectors garner.

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Adobe back in the market for marketing, drops $600m on Neolane

Brenon Daly

Contact: Brenon Daly

In its second-largest acquisition for its Marketing Cloud, Adobe Systems says it will hand over $600m in cash for marketing automation (MA) vendor Neolane. The purchase of Neolane, which is expected to close in Q3, trails only Adobe’s pickup of Omniture for $1.8bn in 2009 in terms of spending on deals to build out its Marketing Cloud. Collectively, these transactions have cost Adobe more than $3bn.

Although Adobe declined to discuss Neolane’s financials, the Paris-based startup has said it generated 2012 revenue of $58m, which would put it at roughly the same size as rivals Marketo and HubSpot. In terms of valuation, however, Neolane is a good bit off of Marketo’s market cap of some $870m.

We would chalk up the disparity in valuation to two main reasons. First, Neolane’s on-premises business is about as large as its subscription business, while Marketo is a pure SaaS company. Further, we understand that Neolane grew about 40% last year, which is a solid rate but just half the pace of the free-spending – and deeply unprofitable – Marketo. Through midyear, we would pencil out that Neolane generated roughly $70m in trailing 12-month revenue.

Adobe’s MA move comes after many other tech giants have already snapped up MA vendors, including salesforce.com paying a record $2.5bn for ExactTarget earlier this month. Other tech giants that have made significant MA acquisitions include IBM (Unica), Teradata (Aprimo), Oracle (Eloqua) and Intuit (Demandforce). Valuations for those transactions have ranged from 4.4x trailing sales to 11x trailing sales.

Select marketing automation transactions

Date announced Acquirer Target Deal value Price-to-sales valuation
June 27, 2013 Adobe Neolane $600m 8.6x*
June 4, 2013 salesforce.com ExactTarget $2.5bn 7.6x
December 20, 2012 Oracle Eloqua $956m 9.7x
April 27, 2012 Intuit Demandforce $424m 11.4x*
December 22, 2010 Teradata Aprimo $525m 6.3x
August 13, 2010 IBM Unica $523m 4.4x

Source: The 451 M&A KnowledgeBase *451 Research estimate

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The value of information

Ben Kolada

Contact: Ben Kolada

In its largest-ever acquisition, IHS is paying $1.4bn for Southfield, Michigan-based automotive data and information provider R.L. Polk & Co. Consumers may know the company better as the provider of the CARFAX vehicle information product. The deal is a significant move to grow a relatively young IHS division.

While IHS Automotive was launched just two years ago, Polk was founded in 1870, nearly four decades before Henry Ford’s first Model T hit the road. The company today provides online market research and a database of VINs for the automobile industry. Its Polk division accounts for about 40% of revenue. The remainder of revenue comes from its CARFAX division, which provides an online database of vehicle history information for used car dealers and consumers.

IHS claims growth potential was the rationale for this acquisition. Although Polk’s total annual revenue has only grown in the mid- to single-digit range, its CARFAX product has recorded ‘solid’ double-digit growth annually. Meanwhile, IHS says CARFAX is only 20-30% penetrated in the US. IHS also sees particular upside in international markets, where Polk currently generates just 12% of its sales.

IHS is paying $1.4bn (90% in cash and 10% in stock) for Polk, valuing the target at 3.5x its annual revenue and approximately 14x its adjusted EBITDA. (IHS disclosed that Polk generated adjusted EBITDA in the mid-20% range.) Evercore Partners advised Polk, while M. Klein and Company advised IHS.

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