A new player in a new game

by Brenon Daly

Twenty years after the IPO of CDN giant Akamai, rival startup Fastly has announced its own plan to go public. We mention that at the open because one of the main selling points of Fastly’s pitch to Wall Street is setting itself apart from the competition. In its just-filed prospectus, Fastly uses the term ‘legacy CDNs’ more than 20 times.

The repetition isn’t meant to flatter. Eight-year-old Fastly discusses Akamai – and, to a lesser extent, Limelight Networks – in connection with the limitations of their offerings, which are meant to speed up and secure internet traffic.

Already having collected a rich, double-digit valuation in the private market, Fastly is making the economically rational effort to put some distance between itself and its discounted public-market comps. (Even with its shares near their highest level since the dot-com collapse, Akamai garners just 4.5x trailing sales, while Limelight lags far behind at not even 2x trailing sales.)

Like most other ‘new generation’ IT providers, Fastly plays up its growth rate while playing down the cost of that growth. Sales at the company rose about 40%, year over year, in 2018 to $145m. In comparison, Akamai is a single-digit percentage grower, although it is roughly 10 times larger than Fastly. Fastly also runs in the red, largely because its gross margins are just 54%, 10 percentage points lower than those at Akamai.

For us, though, the biggest difference between the two companies isn’t their technology or their business models or their target customers. Instead, it’s the IPO itself. It’s hard to imagine, but Akamai went public in 1999 on just $4m in sales and a staggering $58m loss. (It was a time of ‘irrational exuberance’ after all.) In other words, at the time of Akamai’s IPO, its entire business was smaller than the revenue that’s probably generated by a single key customer at Fastly.

Advertisers continue to fly from Twitter

Contact: Scott Denne

Earnings calls this week from Google, Facebook and Twitter highlight how far the latter has fallen behind those two giants. While advertisers flocked to Google and Facebook, they fled from Twitter. Although its results were dismal, the onetime contender for Facebook’s social media crown seems to have correctly identified its differentiator and is building – slowly – a strategy to capitalize on that.

Twitter’s top line dropped 5% to $574m in the second quarter, a decline that would have been more dramatic without a rise in its data-licensing business. An 8% slide in its revenue from advertisers mixed with a 12% jump in daily active users points to the shrinking price of Twitter’s ad impressions. Facebook, by comparison, experienced a 25% boost in its revenue per user on its way to a 45% increase in revenue in Q2.

In an attempt to get sales growing once again, Twitter’s management has focused on the appetite of its audience for real-time information and embraced video partnerships in verticals with a similar focus – music, sports and news. Yet its drooping ad rates attest to the slow burn of such efforts: declining ad rates amid an environment of rising prices for digital video inventory.

To raise its ad sales, Twitter could pursue a media rollup in verticals that match its strengths. The $4bn it has in the bank, along with a stock that still trades near 5x TTM revenue, gives it the flexibility to pursue a series of modest-sized targets as well as larger digital media properties. For example, music video site VEVO would complement its existing streaming partnership with Live Nation and get Twitter one of the most trafficked video sites on the internet.

Twitter’s platform will never have the scale and reach of Facebook, whose monthly audience is six times larger and increasing at a higher rate. But it can expand its reach into the audiences it has by leveraging its real-time strength and extending them off its platform. As a social media company, Twitter’s a runt. But as a digital media company its open, conversational platform gives it a way to engage audiences in ways that aren’t available to other digital media firms.

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

Internet Brands pays healthy premium for WebMD in otherwise ailing internet M&A market

Contact: Scott Denne

Private equity firms seem to be the only ones browsing for big consumer internet deals these days. Today’s acquisition of WebMD by Internet Brands marks the third billion-dollar purchase of a consumer internet company this year. The acquirers in those other deals, like KKR-owned Internet Brands, are also backed by PE firms.

Internet Brands’ $2.8bn acquisition of WebMD fits in the strategy, although not scope, of its past acquisitions. Since its days as Carsdirect, the company has rolled up 63 internet businesses across automotive, fashion and healthcare. Although the deal sizes of those were largely undisclosed, sites like dentalplans.com and racingjunk.com didn’t have the scale or notoriety of WebMD, and were certainly smaller deals – even Internet Brands itself was reported to have traded to KKR at just over $1bn in 2014.

In landing its biggest prize, Internet Brands paid a healthy valuation. At $66.50 per share, the deal prices the target company’s stock at a record level for the current iteration of WebMD (since its founding in the heyday of the dot-com bubble, WebMD has been through a couple of reorganizations, but has been trading on the Nasdaq since 2005). The acquisition values it at 3.9x trailing revenue, two turns above what Everyday Health – a competing health site that’s about one-third the size – took in its sale to j2 in 2016.

And while WebMD fetched a premium compared with its closest competitor, when compared with the broader market, it falls just shy of the 4.3x median multiple for similarly sized consumer internet deals across the last decade. As private equity firms account for an outsized amount of the consumer internet M&A market, premium valuations become harder to find. According to 451 Research’s M&A KnowledgeBase, $2 of every $3 spent on M&A in this category this year has involved a PE firm or PE-backed buyer, yet none of the $1bn-plus consumer internet deals this year – Bankrate, Chewy and WebMD – printed above 4x.

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

E-commerce’s discounted disruptors

Contact: Brenon Daly 

For the second time in as many weeks, a would-be digital disruptor of the commerce world has been snapped up on the cheap by an analogue antecedent. After the closing bell on Monday, sprawling marketing giant Harland Clarke Holdings, the owner of a number of advertising flyers that clutter postal boxes and newspapers, said it would pay $630m for online coupon site RetailMeNot. The amount is just one-quarter the price Wall Street had put on the company three years ago.

The markdown on RetailMeNot comes just days after Samsonite gobbled up eBags, a dot-com survivor that nonetheless sold for a paltry multiple. The $105m acquisition is supposed to help the world’s largest maker of luggage sell directly to consumers. Samonsite, which traces its roots back more than a century, certainly didn’t overpay for that digital know-how. Its purchase values eBags at just 0.7x trailing sales.

While a bit richer, RetailMeNot is still only valued at 2.25x trailing sales and 2x forecast sales in the bid from Harland Clarke. And that’s for a sizable company that’s growing in the low-teens range (eBags is about half the size of RetailMeNot but is growing at twice that rate). The valuations paid by the old-world acquirers of both of these online retail startups were clearly shaped more by the staid retail world than the supercharged multiples generally paid for online assets. It’s a reminder, once again, that disruption – that clichéd goal of much of Silicon Valley – doesn’t necessarily generate value. Sometimes trying to knock a market on its head just gives everyone involved a headache.

‘Eyeballing’ the farcical Snap IPO

Contact: Brenon Daly 

It might seem a bit out of step to quote the father of communism when looking at the capital markets, but Karl Marx could well have been speaking about the recent IPOs by social networking companies when he said that history repeats itself, first as tragedy and then as farce. For the tragedy, we have only to look at Twitter, which went public in late 2013. The company arrived on Wall Street full of Facebook-inspired promise, only to dramatically bleed out three-quarters of its value since then.

Now, in the latest version of Facebook’s IPO, we have last week’s debut of Snap. And, true to Marx’s admonition, this offering is indeed farcical. The six-year-old company has convinced investors that every dollar it brings in revenue this year is somehow three times more valuable than a dollar that Facebook brings in. Following its frothy offering, Snap is valued at more than $30bn, or 30 times projected 2017 sales. For comparison, Facebook trades at closer to 10x projected sales. And never mind that Snap sometimes spends more than a dollar to take in that dollar in revenue, while Facebook mints money.

Snap’s absurd valuation stands out even more when we look at its basic business: the company was created on ephemera. Disappearing messages represent a moment-in-time form of communication that people will use until something else catches their eye. (Similarly, people will play Farmville on their phones until they get hooked on another game.) Some of that is already registering at the company, which has seen its growth of daily users slow to a Twitter-like low-single-digit percentage. Any slowing audience growth represents a huge problem for a business that’s based on ‘eyeballs.’

And, to be clear, the farcical metric of ‘eyeballs’ is a key measure at Snap. In its SEC filing, the company leads its pitch to investors with its mission statement followed immediately by a whimsical chart of the growth in users of its service. It places that graphic at the very front of the book, even ahead of the prospectus’ table of contents and far earlier than any mention of how costly that growth has been or even what growth might look like in the future at Snap. But so far, that hasn’t stopped the company from selling on Wall Street.

Inmar nabs Collective Bias to connect online influencers with in-store sales

Contact: Scott Denne

In a bid to bring hard metrics into the world of influencer marketing, Inmar, a digital promotions and analytics vendor, has acquired Collective Bias. The deal brings together two of the most potent trends in advertising – the appetite among marketers to link spending to purchases and the growing use of long-tail content as a marketing channel.

Collective Bias operates a network of social media content creators that it can leverage for branded content creation and distribution. The company already provides marketers with engagement metrics and under Inmar’s ownership will be able to extend that to actual sales. Inmar was founded in the 1980s as a coupon processor and has since expanded into digital coupons and other retail analytics that will enable it to draw a direct line between engagement with a Collective Bias campaign and consumer purchases.

Making the link between online ads and offline sales has become a substantial driver of acquisitions. That was the rationale behind such big-ticket deals as Oracle’s purchase of Datalogix, Nielsen’s pickup of eXelate and Neustar’s reach for MarketShare Partners. And as we discussed in a recent report, that trend will likely continue. Today’s transaction demonstrates that Inmar and other players in the payments ecosystem recognize the opportunity to use their data to fill this gap.

M&A activity around influencer marketing has seen a recent spurt. Both Facebook and Google, the two largest channels for distributing this content, made tuck-ins (CrowdTangle and FameBit, respectively) to improve their capabilities in this segment. Last summer, Monotype Imaging paid $130m for Olapic, a maker of software for managing branded, user-generated content. Given that deal and the size of Collective Bias (145 employees), today’s transaction may also have reached into nine figures.

GCA advised Collective Bias on its sale.

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

Verizon strikes $4.8bn deal for Yahoo’s core biz

Contact: Scott Denne

Verizon moves to augment its media business with the $4.8bn purchase of Yahoo’s central assets. The deal, which wraps up years of speculation about Yahoo’s future in the new media landscape, will see its core business and operations head to Verizon to be integrated with AOL, while its investments and other assets will stay behind in a company that will be renamed and restructured as a publicly traded, registered investment entity.

Aside from licensing revenue from some of the noncore patents that Yahoo will keep, nearly all of its $4.9bn in trailing revenue will head over to Verizon. The transaction values the target’s assets at about 1x trailing revenue, compared with the 1.6x that Verizon paid for AOL last year. The discrepancy in value reflects the depth of the comparative technology portfolios. Both vendors spent heavily on ad network businesses in the back half of the past decade and early years of this one. More recently, AOL turned its investments toward programmatic, attribution and other advanced advertising technology capabilities. Yahoo doubled down on content while its ad network technologies aged.

This move is all about scaling Verizon’s media footprint. Both Yahoo and AOL have roots in the Web portal space. And both are selling to Verizon for similar prices. But Yahoo’s media assets are substantially larger. AOL generates roughly $1bn from its owned media properties – Yahoo pulls in 3.5x that amount. Owning Yahoo’s media properties will enable Verizon to offer greater reach to advertisers and therefore land bigger deals and at better margins than the ad network revenue that made up almost half of AOL’s topline. Also, having a larger audience for its owned properties will provide AOL’s ad-tech business with more data that it can use to improve its audience targeting.

Telecom services is a saturated market with few net-new customers. Most growth comes from winning business away from competitors. With this acquisition (and AOL before it), Verizon plans to leverage its investments in mobile bandwidth and distribution – its existing mobile and TV customers – to find growth in the digital media sector. According to 451 Research’s Market Monitor, digital advertising revenue in North America will increase 12% this year to $40.6bn, compared with just 4% growth for mobile carrier services.

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

Twitter should be more antisocial

Contact: Scott Denne

Twitter’s biggest problem is that it fancies itself as the next (or at least the number two) Facebook. While Twitter is a substantial social network, its growth on that front has peaked and isn’t likely to come back in a big way. Instead of thinking of what it could be next, management seems focused on recapturing the growth of the past or, even more worrisome, turning to strategies that are best left to the largest Internet firms.

In its earnings call this week, the company emphasized what it perceives as Twitter’s strength: ‘Twitter is live.’ True, but ‘live’ isn’t a thing people are interested in. People care about live (something). As Twitter looks to invest its $3.5bn in cash, the company should leverage its strength in live commentary, live sharing and live video to build up communities and content around particular topics and interests. The core – and overly broad – platform should power a set of interest-driven media offerings, not be the main product itself. Commentary without context is unlikely to draw major brand advertisers to the platform. It could, however, draw them in with unique communities and the content to go along with them. Twitter has a perfect opportunity to build along those lines with its recent deal with the NFL to stream 10 games next season.

The amount of US monthly users on Twitter’s network has been flat for four consecutive quarters and international growth hasn’t fared much better. The company has been able to squeeze revenue growth out of a flat audience by developing its ad products. Those efforts are now losing momentum. Twitter reported revenue growth of 36% year over year, down from 48% in the previous quarter. It’s guidance for next quarter is flat.

This feels like a desperate situation. But it shouldn’t. Twitter is a media company that will shortly be larger (by revenue) than The New York Times. And it’s posting 36% growth – certainly unusual for a media company its size. The problem is that it doesn’t consider itself a media company. Management seems intent on scaling up the core platform as its top priority. It’s not likely to reignite the growth it saw in its early days – and it’s certainly unlikely to become the next Facebook, which is unfortunately the lens through which management views its potential.

Based on management comments, it appears the company is determined to invest in building out its ad-tech stack to become a one-stop shop for advertisers. Twitter simply doesn’t have the scale to accomplish this and lacks the ability to match identities across devices, which is becoming a core feature of Google and Facebook and a defining trend of digital advertising. And in video, the fastest-growing segment of digital advertising, the supply-side platforms and ad networks with the most scale have already been scooped up. Twitter’s strength lies in interest-driven data, rather than the demographic data that’s likely to continue to be the currency of video ad buys for at least a few more years.

What happened to Alphabet’s M&A bets?

Contact: Brenon Daly

As part of an effort to provide more strategic focus as well as financial transparency, Google reorganized and renamed itself Alphabet last October. In the half-year since that change, the company has lived up to the ‘alpha’ part of its new moniker, handily outperforming the Nasdaq, which is flat for the period. But when it comes to ‘bet,’ it hasn’t been placing nearly as many M&A wagers as it used to.

So far in 2016, the once-prolific buyer has announced just two acquisitions, according to 451 Research’s M&A KnowledgeBase. That’s down substantially from the average of six purchases that Google/Alphabet has announced during the same period in each of the years over the past half-decade. (Nor do we expect this year’s totals to be bumped up by Google buying Yahoo, as has been rumored. That pairing would roughly be the sporting world’s equivalent of the Golden State Warriors nabbing the Los Angeles Lakers.)

The ‘alpha’ part of Alphabet is, of course, the Google Internet business, which includes the money-minting search engine, YouTube, Android and other digital units. This division generates virtually all of the overall company’s revenue and is the primary reason why Alphabet is the second-most-valuable tech vendor in the world, with a market cap of over a half-trillion dollars. For more on the company’s progress in dominating the digital world, tune in on Thursday for its Q1 financial report and forecast.

Google/Alphabet M&A

Period Number of announced transactions
January 1-April 18, 2016 2
January 1-April 18, 2015 6
January 1-April 18, 2014 8
January 1-April 18, 2013 4
January 1-April 18, 2012 4
January 1-April 18, 2011 8

Source: 451 Research’s M&A KnowledgeBase

Oracle crosses device matching off its shopping list

Contact: Scott Denne

Oracle wastes no time matching Adobe’s cross-device announcement last month with one of its own as it acquires Crosswise, an Israel-based startup that sells data to enable advertisers to link disparate devices to a single anonymous profile. As digital advertising moves from its home base in the desktop into phones, tablets and connected televisions, cookies have lost most of their value as a mechanism for targeting and measurement. Any vendor selling marketing and advertising software for targeted campaigns must move beyond the cookie, and cross-device data providers like Crosswise offer the most obvious path to getting there.

Purchasing several marketing SaaS firms in the early part of the decade was Oracle’s initial foray into the world of marketing software. But following its 2014 reach for BlueKai, an audience management platform and data exchange vendor, all of the company’s efforts have been dedicated to building a digital advertising and marketing data offering. In addition to the pickup of BlueKai (see our deal value and revenue estimates for that transaction here), Oracle paid hefty amounts to buy offline retail data provider Datalogix (estimate) and a source of online behavioral data in AddThis (estimate).

The addition of Crosswise gives Oracle a stronger story around identity. The rationale behind its earlier purchase of Datalogix was to give its BlueKai software the data and infrastructure to form a better picture of consumer identity. Datalogix accomplishes this by taking data traditionally associated with direct mail (household demographics) and matching it with information from retail loyalty card programs and online behavior to form consumer identities that cross the online and offline worlds. Crosswise fills a significant gap in this by linking devices and enabling Oracle to offer a single set of data to power targeted ad campaigns and then measure the impact online and offline.

Several acquisitions of cross-device matching providers have left few available targets for the next round of would-be buyers. Most deals have been modest tuck-ins, such as purchases by privately held companies AppNexus, Lotame and Qualia Media. Oracle’s acquisition of Crosswise, a three-year-old startup with just $5m in funding, is likely a bit larger than those, yet far smaller than the most recent transaction in the category – Telenor’s $360m purchase of Tapad in February. Drawbridge, one of the pioneers and largest independent player in this segment, is the most visible target. Others include Adbrain and Augur.

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