With two months in the books, 2016 tech M&A is still slogging along

Contact: Brenon Daly

For the second straight month, tech M&A in February looked more like the post-recession years leading up to 2015’s record activity than last year’s bonanza. Spending on tech, media and telecom (TMT) acquisitions around the globe in the just completed month hit $28.7bn, according to 451 Research’s M&A KnowledgeBase. While that represents a significant bump from the paltry $20.5bn of aggregate spending in January, February’s total falls more than one-third lower than the average monthly level in 2015. Further, the number of transactions in this leap-year February slipped to the lowest monthly number since late 2014.

Looking inside the pricing of last month’s deal flow, transactions tended to be polarized. On the top end, big buyers Cisco and Microsoft both paid double-digit valuations in their purchases of Jasper Technologies and Xamarin, respectively. Also, in terms of deal size, IBM’s $2.6bn reach for Truven Health Analytics is notable as Big Blue’s largest acquisition since late 2007.

However, as might be expected as the equity markets ground lower across the globe in February, many more tech acquisitions went off at significantly reduced valuations. For instance, onetime IPO hopeful Yodle fetched just $342m, or 1.6x trailing sales, in its sale to Web.com. LoJack got erased from the Nasdaq at just 1x trailing sales. And LeapFrog Enterprises, an educational toy maker whose shares once traded at north of $40 each, is set to be consolidated for just $72m, or $1 per share.

In addition to pressuring valuations, the turmoil in the equity markets has also scared off any companies from going public. Two months into 2016, we still haven’t seen a tech IPO. Even Nutanix – which filed its initial S-1 in late December – hasn’t updated its paperwork in the 10 weeks since then. The drought so far this year comes as corporate development executives in a 451 Research survey gave their lowest forecast for the number of tech IPOs since the credit crisis.

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

The Glow of social media businesses

Contact: Scott Denne

ADTZ Group picks up Glow in the latest instance of a tie-up of two social media firms. Social media is arguably the most potent means for marketers to reach new audiences and engage with known customers. Despite that, there’s limited potential to build a business around this channel: there are few companies reaching significant scale and exits so far have run the (limited) gamut from strategic tuck-ins to outright fire sales.

London-based Glow was one of dozens of players that launched with a platform to enable marketers to make their Facebook ad campaigns more efficient. A few years ago, Facebook was lacking some basic functionality that gave Glow and its peers an opening. Lately, though, the ad formats and new features – including custom audience targeting, the ability to integrate broad product catalogs and a growing suite of ad formats – have limited the need for such tools, which has made growth hard to come by for many vendors servicing this ecosystem.

In the past two weeks, there have been three tuck-ins in this space. Last week, Rakuten Marketing scooped up Manifest Commerce, a provider of a social ad platform for retailers with noticeable overlap with Facebook’s Dynamic Product Ads service (launched a year ago). And in mid-February, Sprinklr inked its eighth deal with the purchase of Postano, a four-year-old social analytics firm with $3m in trailing revenue.

Glow’s focus was on direct-response advertisers and it had built several tools that go beyond what Facebook offers today, such as data integration for building custom audiences and reach into Twitter. Indeed, all companies serving this market struggle with finding the right balance between offering tools that add value beyond what the core platforms provide. If they go too far afield, they narrow the addressable market – if they don’t go far enough, they risk seeing their opportunity swallowed up by Facebook’s next product announcement.

Though the opportunity to launch many of these businesses came from a deficit of product functionality on the part of Facebook, we believe the best opportunity for these vendors today is to provide a range of workflow tools and services (both media buying and strategy) to link multiple social networks. Our surveys show that social media is gaining a leading share of people’s attention; however, if Facebook continues to be the overwhelmingly dominant platform – and from an advertisers’ perspective, it certainly is – there might be little any company can do to build a sustainable, scalable business around social.

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

To ‘D’ or not to ‘DSP’: the question for Adobe

Contact: Scott Denne

Could Adobe be the company to deliver an exit to some of programmatic advertising’s pioneers? Though the shift to programmatic (i.e., automated) media buying is reshaping the landscape of advertising – in digital and beyond – the companies that built the first programmatic media buying platforms (most commonly called demand-side platforms, or DSPs, in the ad-tech space) have seen almost no exits.

Owning a media buying platform fits squarely with Adobe’s strategy of building out a wide suite of marketing software. While other enterprises have wavered from this approach – Oracle took a data-focused strategy, while IBM is turning more toward services and Teradata is abandoning its marketing software ambitions altogether – Adobe has stayed the course with a software-led roadmap. Its strategy has been to scoop up marketing vendors whose products are ancillary related to ones where it has an established channel. For example, its acquired Demdex (an audience management platform) and Efficient Frontier (a paid search platform) units sell largely to existing Adobe Analytics (fka Omniture) customers. It’s been a successful strategy – sales of the company’s Marketing Cloud products grew 16% last year to $1.4bn.

In the past, a combination of higher prices and business models that were more focused on services than software may have kept Adobe out of this segment of ad tech. Now would be a good time for it to get in as more players are proving that they can build direct relationships (and therefore more predictable revenue) with marketers. Currently, many of the large ad agencies still treat media buying platforms as a media purchase, rather than a software purchase, though that’s slowly changing and more agencies are adopting an approach where they advise their clients on which platforms to use. Buying into this market now would enable Adobe to leverage its existing partnerships with agencies – Publicis Groupe was named its ‘Marketing Partner of the Year’ at a recent Adobe sales conference.

Adobe does have media buying capabilities today. It has built display buying services off of the Efficient Frontier (now Adobe Media Optimizer) pickup, though that platform wasn’t initially built for real-time bidding. We view DataXu and Turn as the two best targets for Adobe to explore. Among other capabilities, DataXu has been building out its video advertising and multi-touch attribution technology, which would plug other holes for Adobe. Turn, for its part, has invested in workflow and data analysis capabilities that would align well with Adobe Analytics and possibly with some of the creative software tools that make up a large part of Adobe’s presence in the advertising space.

Adobe isn’t the only vendor that could make a move in this segment. We’ll have a detailed report on the exit outlook for this corner of the advertising software market in our next 451 Market Insight.

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What is Charles Darwin doing at this year’s RSA Conference?

Contact: Brenon Daly

In addition to the Pollyanna marketers and go-getter executives that make up most of the attendees at the RSA Conference, there will also be a slightly more unsettling figure looming around the security industry’s marquee event: Charles Darwin. No, the long-dead scientist won’t be actually docking his ship, HMS Beagle, on the San Francisco waterfront to attend next week’s confab. But Darwin’s seminal theory about ‘natural selection’ is going to be one of the more visible – if unacknowledged – themes at this year’s RSA Conference. Bluntly put, some of the 500 companies and sponsors that help put on this year’s event won’t be around when RSA opens the doors on future conferences. (451 Research subscribers, see our full preview of this year’s RSA Conference.)

This isn’t to say that the RSA show floor is somehow going to turn into a killing ground. Rather than viewing it cinematographically, we view it clinically. The RSA Conference is nothing more than a petri dish of organisms that, until now, have had ideal conditions to evolve and reproduce. In the months leading up to this year’s gathering, however, those life-sustaining conditions have deteriorated to the point where some of the organisms will not survive. The weak will be ‘selected out’ – a process that in some ways is overdue in the crowded information security market.

We’re already seeing some of that pressure come through in infosec M&A. Consider the contrast between the two largest acquisitions by FireEye, which has served as a convenient bellwether for the next-generation infosec vendors. Two years ago, it spent almost $1bn, more than 10x trailing sales, for incident response firm Mandiant. Last month, it handed over just $200m upfront for iSIGHT Partners, valuing the threat intelligence specialist at half the multiple it paid for Mandiant. Further, according to our understanding, iSIGHT garnered only a slight uptick in valuation in its sale compared with its valuation in a funding round announced a year earlier. The return can still be boosted, provided iSIGHT hits the targets of a $75m earnout. But even including the additional kicker, it’s still a relatively modest exit for a company that as recently as last year had positioned itself in the IPO pipeline.

That bearishness might not come through on the RSA Conference show floor or even in the afterhours cocktail parties next week. But long after the booths are packed up and the drinks have stopped flowing, infosec startups will have to get back to business. And what they are likely to find is that business for the rest of the year is going to get a whole lot tougher as buyers and backers hold much more tightly onto their life-sustaining purchases and investments, respectively. To help adapt to that new environment, startups might be well served to tuck a copy of Darwin’s On the Origin of Species into their RSA Conference swag bag and look for some pointers on how to make it through the upcoming selection cycle in the infosec industry. See our full report.

CW infosec spend 2016

There’s not much data in these shoes

Contact: Scott Denne

All kinds of legacy brands are racing into the mobile app business. The latest example: shoemaker ASICS’s $85m reach for FitnessKeeper, maker of the RunKeeper app. The purchase is the first step in ASICS’s five-year-plan to become a direct-to-consumer business. To do so, ASICS will need a direct line of communication with and data about its customers. Shoes and apparel provide neither – RunKeeper offers both.

In the past, brands that built businesses via mass-media marketing and retail channels relied on inexact measurements to understand and reach the audience for their products. Data taken from surveys and panels was the main source of such knowledge. The rise of digital marketing ushered in a new set of metrics through which to gauge the success or failure of marketing strategies and tactics: this is finally providing legacy brands with the data and tools they need to execute on the latest metrics.

Sports and fitness companies like ASICS have been particularly aggressive in moving into mobile. Under Armour has picked up four mobile app providers since late 2013, spending more than $700m. Adidas inked a deal of its own last year by paying $241m for runtastic. Weight Watchers, Anytime Fitness and TopGolf have also bought apps related to their core businesses in the past 12 months.

Having that direct line into customers will surely be a boon for ASICS; however, a mobile app is a business unto itself and the challenges of developing and marketing an app are growing. Our conversations with app marketers indicate that the cost of downloads has risen substantially in the past year or two, while our surveys show that downloads are increasing. Therefore, ASICS and its peers will have to compete for engagement with a growing cohort of apps on each user’s phone. In our 2015 US Consumer Survey, 29% of respondents had downloaded five or more apps in the past month, up two percentage points from the same survey a year earlier.

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

Now available: 451 Research’s 2016 M&A Outlook

Contact: Brenon Daly

Every year in our M&A Outlook, 451 Research looks ahead and highlights a number of the most significant trends that are expected to shape acquisition activity and valuations for key IT sectors in the coming year. All of the transaction data comes from 451 Research’s M&A KnowledgeBase , while the outlook and predictions for acquisition activity within the specific sectors come from extensive research and forecasts from the more than 100 analysts at 451 Research – who, collectively, will write about 4,500 reports this year on the strategy, innovation and financial events at the companies they cover. The 80-page report, which is our version of an M&A playbook, is now available for download.

In addition to highlighting many of the major trends in their sectors, 451 Research’s analysts also put specific names to the strategy by speculating on deals that could get printed this year. (Altogether, our 2016 M&A Outlook maps nearly 250 potential target candidates to broader themes, including 50 specific parings. Two of the companies we highlighted as attractive acquisition candidates have already been snapped up since we finished writing our forecasts.) In the same vein, our analysts also put forth almost 50 companies that we think are of a size and mind to go public in 2016, even as the IPO market remains a rather inhospitable place.

Similar to overall 451 Research coverage, the 2016 M&A Outlook covers activity from the datacenter all the way out to the device, not only offering insight on the technology developments in each of those sectors, but also bringing a financial consideration to the transactions. The 2016 M&A Outlook report opens with an overview of the tech M&A market, including activity of both corporate and financial acquirers, the valuations they are paying (and expect to pay) as well as what broad forces are likely to shape deals in the coming year. Following that, we feature specific reports from seven sectors: software; systems and storage; information security; enterprise mobility (including the Internet of Things); hosting and managed services; networking; and DCT and eco-efficient IT. Download the full 2016 M&A Outlook.MAO 2016 cover

Infoblox jumps on threat intel bandwagon with IID buy

Contact: Scott Denne Scott Crawford

Adding threat intelligence to a wider security portfolio has potential, though as a stand-alone offering growth has been tough to come by. Against that backdrop, we’ve seen a notable uptick of acquisitions in this space, with Infoblox’ purchase of IID being the latest. The DNS security vendor will pay $45m in cash for IID and its threat intel capabilities, putting the deal right in the same neighborhood as several other recent transactions.

Today’s move combines two companies with a background in securing network identity. Infoblox has roots inside the network, while IID specializes in external networks. Part of IID’s early focus was to protect individuals and organizations from phishing risks and its offering has since matured into an intelligence aggregation and sharing strategy centered on IID’s ActiveTrust threat data exchange platform. The deal combines Infoblox’s ability to manage and control access to enterprise networks with threat intel gathered from multiple sources, including vetted contributors to ActiveTrust. IID will enrich Infoblox’s capabilities for providing secure DNS, network DHCP/IPAM services and control automation through greater insight into network threats. AGC Partners advised IID on its sale.

The potential to add threat intelligence to an existing channel and related product line is pushing up valuations in this segment. Last year, LookingGlass and Proofpoint paid $35m and $40m for Cyveillance and Emerging Threats, respectively. Though there was some variation in the multiples of those deals, most recent threat intel acquisitions have printed above market valuations. Infoblox appears to be paying north of 4.5x trailing revenue (based on its disclosure that IID had $10m in 2015 billings), while Emerging Threats fetched a valuation closer to 10x. Even FireEye’s purchase of iSIGHT, the largest we’ve tracked in the subsector at $200m, got done at 5x. The Cyveillance sale was the exception to this trend, yet it still landed more than most divestitures at just under 2x.

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

Cloud calling: With latest deal, BroadSoft aims to entice enterprises to cloud UC

Contact: Scott Denne

The transition to consumer VoIP and other Internet Protocol communications is well under way, though at the largest enterprises the market for IP-based communications still has plenty of room to grow. Capturing more of that opportunity led BroadSoft to today’s purchase of Transera, a maker of call-center software and analytics. BroadSoft sells software and SaaS that enables telcos to replace their customers’ hardware-based PBX systems with IP-based unified communications services. By expanding its call-center offering, BroadSoft hopes to make its software more appealing to the largest consumers of communications services.

BroadSoft is a frequent acquirer of modest-sized companies. Since the start of 2015, it has inked four acquisitions of such firms to expand internationally and add new products to its portfolio. It hasn’t spent more than $40m in cash annually on M&A in each of the past few years. The pickup of Transera seems to be a similar scale – BroadSoft expects the target to add $7- 8m in revenue for 2016 and to be mildly dilutive to earnings.

As businesses march toward more hosted and IP-based communications systems, vendors and service providers in this space are looking for ways to differentiate beyond basic phone services and give larger organizations a more compelling reason than cost to embrace cloud communications. That was the rationale behind RingCentral’s reach for collaboration platform Glip last year, as well as BroadSoft’s own internal collaboration effort, Project Tempo. Moving beyond calls and call routing has also spurred a push for greater call-center capabilities, a move that’s been reflected in deals from BroadSoft’s rivals: ShoreTel closed the acquisition of Corvisa earlier this year to expand its presence in this sector and 8×8 snagged a pair of call-center companies last year.

For BroadSoft, offering improved call-center analytics isn’t just about winning cloud communications business from competitors – it’s also about getting large businesses onto the cloud to begin with. According to one of 451 Research’s Voice of the Enterprise surveys , 81% of IT departments that had recently deployed unified communications (voice, video and messaging) did so on-premises. That was the highest level of on-premises deployments of any application category in the survey and suggests to us that BroadSoft and its peers will need to find more applications that are unique to the cloud if it wants to entice the largest companies onto it (55% of the respondents to the survey come from enterprises with more than 10,000 employees).

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

Amid Super Bowl fever, the sports business needs to take its medicine

Contact: Scott Denne

Super Bowl ad prices continue to rise each year, and that masks the symptoms of the sporting world’s concussion. Sports had previously blocked television audiences from completely heading to the sidelines in favor of video on demand, video games and other forms of media; no longer is that the case. Yet networks continue to increase investments in sports – the NFL just sold a package of Thursday Night Football games next fall for $450m, up from $300m last season. This comes during an exodus of subscribers from the sports-industry’s flagship network, ESPN. And as networks, teams and leagues look for ways to stanch the losses, we expect to see increasing investment in technologies that enable them to keep those audiences.

Time may not be on their side (always good news for bankers). Our surveys suggest acceleration in linear TV’s declining audiences. Only 35% of respondents to one of our 2015 consumer surveys reported seeing a TV ad in the previous week. In a separate survey, 8.4% said they had altogether canceled their traditional TV service, while another 16.7% said they are ‘somewhat’ or ‘very’ likely to cancel within the next six months – the highest level to date on both figures.

Increasing fan engagement was the logic behind the heavy investments into daily fantasy sports. The two leading companies in that space – FanDuel and DraftKings – raised more than $700m combined, much of it from networks, sports leagues and team owners. Although those bets don’t look set to pay off, the lure of free cash isn’t the only way to keep fans interested. We recommend the sports industry’s heavy hitters start acquiring and investing in areas that are beginning to change how fans interact with sports.

The first is the technology and talent that power mobile apps. Buying and developing apps gives teams, leagues and networks a direct link to their fans today. Broadcast signals and ticket stubs don’t generate data. Apps do, and having such data will ultimately make their audiences more valuable, and help them find ways to grow and keep them. The second area is in emerging categories of virtual and augmented reality. Madison Square Garden Company, owners of the New York Knicks and Rangers, has already made two venture investments in virtual reality – NextVR (along with Comcast) and Jaunt (alongside Disney). A ringside seat to the growth of these technologies would help sports grow within the next generation of media, rather than succumbing to it, as might happen within the current one.

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

Yahoo-dini: magical thinking continues at Yahoo

Contact: Scott Denne

Yahoo’s leadership still doesn’t understand the business that the company is in. Overshadowed by the news – not really news at this point – that Yahoo’s core business is for sale, Tuesday’s earnings call showed that management believes it can grow a position at the center of people’s digital lives. Yahoo’s new strategic plan (and its old one as well) is to invest in mobile, social and video. Instead of navigating these trends, Yahoo has tried to lead them with heavy investments in product development at the expense of its core business. Yahoo is not a hub of ‘discovery’ in people’s digital lives, as its CEO envisions it – it is a media business and should be run as a media business.

CEO Marissa Mayer isn’t responsible for bringing this magical thinking to Yahoo. The board’s decision to hire an executive whose most significant experience came in managing product development betrayed their thinking that new offerings were the solution to Yahoo’s predicament. True to that belief, the company has launched a lot of new products and made a big bet on social with the $1.1bn reach for Tumblr, which fell short of its revenue targets and is being mostly written down. The introduction of native advertising that melds display with search (Yahoo Gemini) has been more successful. Unfortunately, new products were a solution to the wrong problem.

Yahoo’s legacy banner ad and search revenue plummeted in the past few years, close to $500m annually. Overall, Yahoo’s revenue stands right where it did in 2012, just shy of $5bn, with operating expenses at a similar level. Mayer treats the decline of legacy revenue as an unavoidable fate, saying in the earnings call that Yahoo’s choice was to cut the business entirely or ‘weather’ the slow decline. Had the board installed a CEO with turnaround experience, display wouldn’t have been written off as a forgone conclusion.

Display advertising, particularly the direct-sold banner ads that Yahoo specializes in, isn’t a major growth business. Yet it doesn’t need to evaporate. A few well-timed acquisitions of programmatic buying and selling platforms could position Yahoo for growth in programmatic display. It’s not an unthinkable strategy: a series of such deals enabled AOL to parlay its display-ad-dependent business into a $4.4bn sale to Verizon last year. Yahoo smartly picked up video ad network BrightRoll at the end of 2015 (an asset that contributed most of its revenue growth last year), though such a transaction should have been done earlier and before the company had invested in developing a media buying platform in-house as that offering became immediately redundant.

Aside from an awareness of the need to trim costs, Yahoo’s new strategic plan isn’t that different from its old one. Most disturbing is its plan to invest in mobile search. Even if Yahoo were able to gain ground on Google – an unlikely prospect – it’s extremely uncertain how consumers will ultimately use mobile search as that space continues to evolve. And however it evolves, Apple and Google, with their ability to control the mobile OS, are clearly in the pole position.

Rather than running the business they wish they had, Yahoo’s leadership should run the business they have. And that means maximizing media revenue and building up the company’s cash (it’s about $1bn poorer than it was three years ago) so it can strategically acquire its way into industry shifts, rather than spending to create them.

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