Category: M&A

Strategy games

Scott Denne

Contact: Scott Denne

Mobile game developers are playing with different M&A strategies. So far, none are winning. Mobile gaming is a high-growth but hits-driven business, making it tough for one company to grab and maintain market share. That doesn’t mean they’re not trying.

King Digital Entertainment, maker of the ‘Candy Crush’ series, thinks it can predict where lightning will strike. The company is making its second purchase post-IPO with its $45m reach for Z2. In acknowledgement of the uncertainties of this particular market, there’s also a $105m earnout attached to the deal. That’s similar to King’s pickup of game studio Nonstop Games last year – $16m upfront with an $84m earnout.

Zynga has taken a different approach that has yet to pay dividends. The company has bought businesses that have already produced a hit. It has, we hope, learned that predicting what will be a hit is as difficult as predicting how long a hit will last. Zynga’s M&A strategy is more expensive than King’s in that it pays more upfront, with a small or no earnout. The company spent $180m in 2012 to buy OMGPOP right at the zenith of its ‘Words with Friends’ game. Last year, it snagged NaturalMotion for $487m. In addition to a game studio, that transaction got it some unique technology to apply across its portfolio, but it hasn’t been enough to slow its fall. Despite the addition of NaturalMotion’s revenue to 11 months of last year’s top line, Zynga’s sales dropped 21% to $690m in 2014.

Glu Mobile is among the few employing a winning strategy. The company has been scooping up inexpensive, well-known brands that it can revamp for mobile games. This has led to a portfolio of modest hits. Nothing that would move the needle for Zynga or King. Even with Glu’s success (revenue doubled year over year in the most recent quarter), Wall Street values the company at 2x trailing revenue (slightly below Zynga’s multiple and just above King’s).

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

Could Publicis make the next play in social advertising?

Scott Denne

Contact: Scott Denne

Today’s announcement by Perion Network that it will buy France’s MakeMeReach marks the second acquisition in social advertising in a week. As we pointed out in a longer report, the rapid growth of advertising dollars into social networks, the coming diversification of platforms and a hodgepodge of startups serving the category are laying the ground for a busy year of M&A activity for businesses that enable buying ads on social media.

Now that Perion and Marin Software , two ad-tech vendors, have bought into the space, who will be the next acquirer? We believe Publicis Groupe, one of the largest ad agency holding companies, will make the next move here. Publicis isn’t new to social. It’s inked some recent, modest purchases of social agencies overseas (Italy’s Ambito5 and China’s Net@lk) and in 2011 nabbed a majority stake in social creative agency Big Fuel. Also, Publicis, with its recently closed pickups of Sapient and RUN, has shown a larger appetite than most agency holding companies to own tech-enabled services and software firms.

Keeping in mind that appetite for tech and Publicis’ existing capabilities in social (mostly in creative, not executing media buys), Facebook API partners such as SocialCode, Ampush, Adaptly, SHIFT and Kinetic Social would make a good match with Publicis. Valuation could trip up a potential deal, though. Most of the above listed vendors are venture-backed and might have expectations for software-like multiples, rather than the services-like multiples that Publicis typically pays (though it has gone higher, as it did with RUN ). A possible solution would be for one of the social advertising vendors to sell off its managed services business to Publicis. That would get Publicis the services business it’s more comfortable with and allow the remaining social ad firm to become the self-serve software provider that most in this space now aspire to be.

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

Voltage is key to decrypting HP’s M&A

Scott Denne

Contact: Scott Denne

HP’s acquisition of encryption vendor Voltage Security suggests that it’s being more disciplined on price than it had been before its M&A break. It is HP’s first security deal in four and a half years. Terms of the transaction weren’t disclosed, though encryption hasn’t garnered the high multiples that other categories of security have produced.

In the year before its reach for Autonomy shut down its M&A program, HP paid north of 10x trailing revenue on four of six purchases (and 7.7x on another). Compare those valuations with multiples in the maturing encryption space – SafeNet and Cryptzone both traded hands last year a hair below 3x trailing revenue, while earlier deals in the space, namely Symantec’s pickups of GuardianEdge and PGP, both went for 4x.

As the hangover from Autonomy fades, HP’s M&A is starting to come back online, and it has printed three acquisitions in the past 12 months. Security is likely benefiting from some M&A attention as it’s a bright spot in a declining software portfolio. In each of the past two years, HP’s enterprise software sales have ticked down a few percentage points. Security has been a growing part of that business, but could be at risk. According to a survey by TheInfoPro, a service of 451 Research, 40% of HP’s security customers anticipate spending less with that provider than they did the previous year (only Websense customers reported a higher percentage of reduced spending).

Blackstone Advisory Partners advised Voltage on its sale.

We’ll have a detailed report on this transaction in tomorrow’s 451 Market Insight.

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

NIMBOXX wraps up VDI deal

Scott Denne

Contact: John Abbott

NIMBOXX looks to make its mark on hyperconvergence by scooping up Virtual Bridges’ VDI assets. VDI is one of the most common use cases for hyperconvergence, and by incorporating Virtual Bridges’ VERDE software, NIMBOXX gets full ownership of a software stack that it had previously offered only through partnerships. That full ownership should enable the company to significantly undercut the prices fielded by market incumbents Citrix and VMware.

The acquisition is a quick way for NIMBOXX to expand and strengthen its expertise in a key market segment. Since NIMBOXX came out of stealth last year, it’s seen hyperconvergence go mainstream with the introduction of EVO:RAIL by VMware and, more recently, Citrix’s purchase of Sanbolic’s file system software for use in its own hyperconverged VDI appliance, the WorkspacePod.

By building out its entire stack based on the KVM hypervisor, NIMBOXX reckons it has both pricing and technology advantages over the incumbents. The VERDE buy is a good fit for two very specific reasons. One, the VERDE software has also been built based on KVM. And two, the team is local, headquartered in NIMBOXX’s hometown of Austin. The transaction leaves Virtual Bridges with Bridgepoint, the cloud orchestration software it launched last year.

We’ll have a detailed report on this transaction in tomorrow’s 451 Market Insight.

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

SS&C pays a premium for Advent

Scott Denne

Contact: Scott Denne

SS&C Technologies scoops up Advent Software in one of the highest multiples we’ve seen among software vendors serving the investment and finance community. At $2.5bn, SS&C values the target at 6.8x trailing revenue.

The valuation is predicated on cross-selling Advent’s portfolio management software and services alongside SS&C’s broader offering of fund administration and related software, then using the accelerated revenue to pay down the combined company’s new debt. SS&C is funding the deal with $3bn in new debt and refinancing. Few businesses switch out their portfolio management systems and given that those products generate about 70% of Advent’s revenue, cross-selling could be a tricky proposition.

The combined company, however, will be well-positioned to win sales among new firms and new lines of business at existing ones. For example, SS&C has a hedge fund administration business (one it obtained in 2012 with the $895m purchase of GlobeOp) and Advent also has portfolio management for that same audience. As stock markets rise, so too will new hedge funds.

While the transaction is the highest multiple in this sector in nearly a decade, according to The 451 M&A KnowledgeBase, it’s not without precedent. Carlyle Group paid 8.2x TTM revenue when it took SS&C private in 2005 for $982m. And SS&C itself is trading today at 6.8x, benefiting from a 10% bump in its share price on news of the deal.

Following the close, SS&C will have a 5.3x debt-to-EBITDA ratio. The acquirer has leveraged up before to get a transaction done. Following its own take-private, it was at 6.8x and after its pickups of GlobeOp and Thomson Reuters’ PORTIA business in 2012 it was up to 4.2x, which today stands at 1.4x. Judging by the increase in share prices, Wall Street is confident it can de-lever again.

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

After a high-water mark, tech M&A spending ebbs

Brenon Daly

Contact: Brenon Daly

After a recent record run, tech M&A spending started slowly in 2015. Acquirers across the globe announced deals valued at just $10bn in January, only one-third the amount they dropped in January 2014 as they started a shopping spree that pushed last year’s total spending to a 14-year high. More broadly, January’s total is the lowest monthly M&A spending level since mid-2013.

While last month’s deals may not have been big, there were a lot of them. With deal volume topping 350 transactions, activity in January came in at one of the highest levels we’ve seen since the end of the recession. Buyers who rang in the new year with an announced acquisition included AT&T, Citrix, Dropbox, BMC and Demandware.

The activity, particularly by acquirers that have been largely absent from the M&A market recently, help to ease two primary concerns about the outlook for the rest of 2015. First, the recent flash of volatility hasn’t necessarily derailed deals. Wild swings and downward pressure in the US equity markets in January obviously make pricing acquisitions much more difficult. (US equity indexes fell about 3% last month alone.) But the uncertainty doesn’t appear to have eroded buyers’ confidence, which is a key component of M&A.

Additionally, coming into 2015, a number of market participants indicated that deals were getting ‘pulled through’ back in late 2014. In other words, acquirers were worried about the direction of the global economy, equity market performance and interest rates in 2015, so they pushed to get transactions done during the relatively supportive times of 2014. (It’s worth remembering that overall, deal volume last year hit its highest level in eight years. See our full M&A Outlook.) At least in early 2015, the M&A pipeline doesn’t appear to be dried up. There may not be as many big prints, but deals are still flowing to start the year.

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

SolarWinds’ Librato buy

Scott Denne1 Comment

Contact: Scott Denne

SolarWinds has scooped up Librato for $40m in a deal that’s a low-water mark among its recent acquisitions. The previously prolific dealmaker slowed the pace of acquisitions in 2014, making just one purchase – the $67m acquisition of Pingdom – after two $100m-plus purchases in 2013 and more than a half-dozen smaller deals over the previous two years.

Even though it’s smaller, the purchase of the cloud application monitoring business is equally aggressive as recent deals. SolarWinds expects Librato to add $2-3m in revenue to the top line this year, meaning that the network and systems management company is likely paying in the neighborhood of 20x TTM. According to the 451 M&A KnowledgeBase, its three previous deals were all done at trailing revenue multiples between 5-13x.

After anticipating slowing growth heading into 2014, SolarWinds finished the year with $429m, up 28% from 2013 and ahead of where management was guiding early in the year. Although SolarWinds is better positioned to entertain M&A, it’s likely to stick to the same strategy it began around 2013 – hunting for deals that expose it to new markets, rather than tuck-ins aimed at adding features and upselling a target’s existing customers on other parts of the SolarWinds portfolio. Librato is in-line with the current strategy since it expands SolarWinds into systems monitoring for cloud-hosted applications.

Amazon’s chip deal highlights new exit ramp for silicon startups

Scott Denne

Contact: John Abbott Daniel Bizo

Amazon’s somewhat surprising acquisition of stealthy chip startup Annapurna Labs for a reported $350-375m isn’t perhaps as unexpected as it appears at first sight. One of the exit strategies of such startups nowadays is to be sold off to a larger company building or operating its own systems hardware that has reached the stage where it needs its own custom silicon. That means the startup abandons the aspirations it had to be a more broadly applicable company. The acquired personnel typically become an internal chip design team for their new parent.

The most obvious example is Apple’s $278m acquisition of P.A. Semi in April 2008 . Apple obtained a 150-strong team of engineers, including the lead designer of the DEC Alpha and StrongARM processors, that boosted the development of its A series chips used in the iPhone and iPad. Apple followed up that move by buying Intrinsity in April 2010 for a reported $121m and flash memory chip designer Anobit in December 2011 for a reported $500m. Three years later, Apple snared yet another silicon startup, Passif Semiconductor, for its wireless networking chips.

Another systems maker that has its eye on chipmakers is Oracle. “You could see us buy a chip company,” said Oracle chief Larry Ellison back in 2010 . It hasn’t yet, but Ellison continues to hint. At the recent launch of Oracle’s X5 Engineered Systems range, Ellison told the audience that the company was in the process of moving more software functionality into silicon: “We are doing a lot of it,” he said. The easiest way of doing this while keeping full control would be to buy a team with expertise in hardware acceleration.

Closer, perhaps, to what Amazon is doing is the example of Google, which bought early-stage chip startup Agnilux in April 2010. Agnilux had been formed by some of the P.A. Semi team that subsequently left Apple. Even before that (in June 2007), Google had acquired PeakStream, a company that had developed a layer to make the programming of multicore processors easier. And since the Agnilux buy, Google has hired several prominent chip designers, including HP’s Partha Ranganathan, who was involved in the development of Moonshot. Google has also been quite public about its interest in IBM’s OpenPower initiative and the possibilities of using OpenPower as the basis for bespoke chip development (although it’s fair to say that things have gone quiet recently in this area).

Facebook has also been investigating the possibilities of its own chip design. The company already designs its own servers and was the driving force behind the formation of the Open Compute Project, a means of opening out the specifications of system designs so that customers can modify servers to more closely fit their own workload requirements.

Which brings us back to Amazon, which began advertising for chip designers with ARM expertise last year, and hired former Calxeda chip designer Mark Davis as the manager of a new hardware engineering and silicon optimization team based in Austin, Texas. (As an aside, defunct chip startup Calxeda, which ran out of money at the end of 2013 while trying to develop an ARM server chip, may itself reemerge – its intellectual property assets were picked up at the start of 2015 by Silver Lining Systems, a division of Taiwan-based systems provider AtGames Cloud Holdings, which is working in conjunction with ARM and the server group of Taiwan-based ODM Foxconn Technology).

Little is currently known about Annapurna Labs, an Israel-based company founded in 2011, except that some of its systems-on-a-chip parts are already being deployed in some entry-level storage systems using standard ARM processing cores, integrated networking and IO controllers. Amazon Web Services will likely employ Annapurna’s silicon-tailoring expertise to gain an edge in storage cost performance over rival cloud providers by using unique chips in its storage systems and, over time, networking gears. We expect to see more chip M&A activity from both traditional systems vendors and giant scale-out datacenter operators.

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

Webinar: What to expect in tech M&A in 2015?

Brenon Daly

Contact: Brenon Daly

With a record-breaking year in tech M&A behind us, what’s in store for 2015? Join 451 Research on Tuesday, January 27 at 1:00 PM EST for a look ahead on where acquirers are likely to be looking to do deals, and what they’re likely to pay. The webinar, which highlights the analysis and forecasts in our 2015 M&A Outlook, is free to attend – register here.

We’ll start with a look back at 2014 to highlight some of the trends and big-ticket transactions that helped push tech M&A spending to its highest level since the Internet bubble burst. What had buyers spending freely last year – including 75 transactions valued at more than $1bn – and will that carry over to this year?

Then, we’ll address other timely topics, including:

  • What does the data from our surveys of corporate acquirers and bankers, as well as insight from our analysts, tell us to expect for tech M&A in 2015?
  • Specifically, what sectors of the IT landscape will be active this year – and why? We will highlight trends from a handful of major markets (mobility, cloud, security, networking) that are likely to drive deals.
  • Private equity firms announced more tech acquisitions in 2014 than in any other year, often paying prices they would not have paid in the past. Is this the start of a new aggressiveness by financial acquirers?
  • What’s the outlook for the IPO market, and which startups might be ready to go public this year?
  • Startups may be pulling down sky-high valuations in recent funding, but the forecast among corporate buyers for the exit valuations of startups isn’t nearly as bullish. How big is the bid/ask spread likely to be this year?

The webinar draws from both the qualitative insight of more than 100 analysts at 451 Research, as well as a number of quantitative resources to get a sense of the broad influences that are shaping M&A in 2015. To register for the webinar, click here.

Harman’s automotive biz drives two new deals

Scott Denne

Contact: Scott Denne

Buoyed by a strong automotive business, Harman International Industries makes a pair of acquisitions that both augment and diversify its position in the car market. The two purchases – Symphony Teleca and Red Bend Software – are among the highest prices Harman has paid for tech businesses.

At $780m, Symphony Teleca is Harman’s largest tech buy on record. Prior to that, last year’s pickup of AMX (another attempt to diversify beyond the automotive segment) for $365m was the record holder and, at the time, that was only the second time we had tracked Harman breaking the $100m barrier in a tech deal. With today’s additional announcement that it’s also paying $170m for Red Bend, it’s now broken that barrier four times.

Harman has long been a supplier of audio equipment, GPS, climate control and other hardware to car manufacturers. That part of its business accelerated to 24% year-over-year growth in its most recent fiscal year. While the burgeoning connected car market is driving more opportunity for growth, the automotive industry is a bumpy road. For example, a weak automotive economy pushed Harman’s automotive sales down 5% from a year earlier.

Its reach for Symphony Teleca brings Harman an outsourced software development vendor that’s already doing some business within the automotive segment at a time when software is gaining significance as vehicles add more connected devices. Today, about 50% of Symphony’s revenue comes from mobile or automotive software projects, the remainder from areas including home and enterprise, as well as sectors well outside Harman’s current scope, such as healthcare. That exposure will help Harman diversify beyond the automotive vertical (more than 50% of its revenue today) and into a platform for other parts of the connected device ecosystem.

Likewise, Red Bend both amplifies Harman’s auto opportunities and extends the business beyond those. The target builds firmware for managing connected devices and sending over-the-air software updates. Currently, its revenue (less than $50m annually) is concentrated on mobile devices. On its own, Red Bend has not infiltrated the automotive market, something that Harman obviously plans to change.

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