Category: networking

Windstream misses the message

Ben Kolada

Contact: Ben Kolada

As the telecom industry continues its buying spree, some firms are missing the bigger picture – hosting and datacenter services are the new growth channels for telcos. While CenturyLink and Verizon have each announced acquisitions in the growing datacenter services industry, Windstream Communications appears to be satisfied with consolidating telecom assets. The telco’s purchase of complementary competitive carrier PAETEC is its seventh telco rollup since its formation in 2006. And while PAETEC does provide a wealth of network assets, it contributes little in the way of revenue growth. For the price it’s paying for PAETEC, Windstream could have gobbled up a number of hosting properties at a fraction of the cost.

To be fair, Windstream’s PAETEC pickup does provide more than 50,000 high-revenue enterprise accounts and an expanded fiber footprint. But the target’s organic revenue has been flat in recent years, and growth this year is likely to come primarily as a result of the Cavalier Telephone buy it completed in late 2010. (We would also note that Cavalier’s revenue was in precipitous decline, due primarily to churn in its consumer division. Cavalier’s revenue dropped from $421m for full-year 2009 to an estimated $390m in trailing revenue at the time of its sale.)

Beyond fiber and enterprise accounts, Windstream is also interested in PAETEC’s datacenter services assets. And rightfully so, considering Windstream’s hosting assets could certainly use a boost. The company’s last pure M&A foray into the hosting sector was in November 2010, when it shelled out $310m for Hosted Solutions. That target only generated $51m in trailing sales, or about 1% of Windstream’s total revenue. But for the $2.2bn the telco is paying for PAETEC (including the assumption of debt), it could have easily expanded its hosting footprint in the US and abroad by acquiring both InterNap Network Services and Interxion. Applying a flat 20% equity premium to the pair would put their combined deal value at about $1.6bn on an enterprise value basis, or about three-quarters of PAETEC’s price.

Dual track, but singular outcomes

Brenon Daly

Contact: Brenon Daly

For the third time in just two months, a tech company that had planned to go public has instead ended up inside a company that’s already public. The latest dual-track sale came Wednesday when Force10 Networks opted to accept a bid from Dell rather than see through its IPO plan. The networking gear vendor had filed its prospectus in March 2010.

The deal follows one month after would-be debutant Apache Design Solutions sold to ANSYS and two months after SiGe Semiconductor went to Skyworks Solutions. Those three transactions probably only generated about $1.2bn in liquidity, including Force10’s reported price of roughly $700m. (As a side note, we might point out that Deutsche Bank Securities was a book runner on all three proposed IPOs.)

As this trio of enterprise-focused startups finds itself snapped out of the IPO pipeline, consumer-oriented companies continue to receive a warm welcome on Wall Street. Consider this: Zillow, which went public earlier this week, now trades at about 20 times trailing revenue. In contrast, Force10, SiGe and Apache Design garnered much more modest valuations ranging roughly from 2-6x trailing revenue in their sales.

Intel buys Fulcrum to further datacenter product push

Contact: Thejeswi Venkatesh, Ben Kolada

In a move that further boosts its 10-Gigabit Ethernet push, Intel has announced that it will acquire Fulcrum Microsystems, a fabless semiconductor company that developed the fully integrated FocalPoint family of 10Gb and 40Gb Ethernet switch chips. The acquisition advances Intel’s desire to transform itself into a comprehensive datacenter provider that offers computing, storage and networking building blocks.

Terms of the deal were not disclosed, though we estimate that Fulcrum generated about $13m in revenue in the 12 months before its sale. For a comparable transaction, we could look to Broadcom’s November 2009 acquisition of Dune Networks for about 3 times trailing sales, or twice the median for all semiconductor design deals announced so far this year. However, given Fulcrum’s strategic importance to Intel, we wouldn’t be surprised if its valuation is not only higher than the median, but also surpasses Dune’s. We would also note that Intel already had an insider’s view into Fulcrum – its venture investment arm, Intel Capital, provided mezzanine financing to Fulcrum in 2010.

Connecting thousands of nodes at maximum bandwidth is the holy grail of datacenter networking. Fulcrum’s FocalPoint portfolio provides high-performance, low-latency network switches to support evolving cloud architectures and the growth of converged networks in the enterprise. Intel’s earlier foray on this front was with InfiniBand, which it supported for many years before finally being squeezed out by faster, ultra-low-latency architectures like AMD’s HyperTransport consortium on the one end and on the other end by cheaper but slightly slower 10GigE. Intel has been supportive of 10Gb architecture and this acquisition further enhances that strategy. More importantly, 10GigE makes more sense for Intel if it is looking for a common single interconnect architecture for datacenters, since all applications run on it anyway.

Telefónica nabs cloud hosting firm acens Technologies

Ben Kolada

Contact: Ben Kolada

Consolidation between the telecommunications and hosting industries continued today with Madrid-based telco Telefónica purchasing cloud hosting and colocation provider acens Technologies from buyout shop Nazca Capital. Although this deal seems to be just another in the long line of telco-hosting pairings, it actually represents one of the biggest foreign consolidations that we’ve seen.

Terms of the transaction weren’t disclosed, though public reports claim that Telefónica shelled out approximately €75m ($110m) for the hosting vendor. With some loose math based on applying acens’ historical growth rate to the €30m ($43m) in revenue that Nazca claims acens generated in 2009, we estimate that the company’s 2010 total revenue was likely in the ballpark of €35-40m ($46-53m). If our estimates are correct, that price-to-sales valuation would be slightly less than what Nazca paid for acens in January 2007, though it would still represent a nearly 100% return on capital in just four years. We’ll have more context on this deal, including analysis from our cloud infrastructure and hosting colleagues at Tier1 Research, in a full report in tomorrow’s Daily 451.

Cisco shares are a flop for Flip’s owners

Brenon Daly

Contact: Brenon Daly

Since the purchase of Flip, Cisco Systems shares have been a flop. That’s actually an important consideration for the former owners of digital camera maker Pure Digital Technologies, which Cisco shuttered on Tuesday. Recall that when the networking giant (somewhat inexplicably) reached for Pure Digital two years ago, it covered the $590m purchase with its own equity. It was the first time Cisco had used its own equity as currency in four years, according to our records.

For the first year or so after the deal closed on May 21, 2009, Cisco basically tracked the S&P 500 Index. However, over the past half-year, Cisco stock has slumped as it has failed to execute, as the company indicated in a recently leaked memo from CEO John Chambers. Those acknowledged missteps have left Flip’s backers (at least the ones who haven’t sold) underwater on their holdings. Since the deal closed, Cisco stock has dropped 10% while the S&P 500 has tacked on 50%.

EMC bolsters security portfolio with NetWitness

Brenon Daly1 Comment

Contact: Brenon Daly, Josh Corman

Announcing its first deal in almost five months, EMC moved to bolster its security management portfolio by picking up fast-growing NetWitness. The purchase adds the rich network data and powerful analysis capabilities of the NetWitness NextGen platform, which is a bit like a TiVo for network traffic – capturing, indexing and storing massive amounts of network traffic. From a financial point of view, it is EMC’s first significant security acquisition since buying RSA Security in mid-2006.

In fact, we would estimate that the price of NetWitness tops EMC’s spending, collectively, on the four bolt-on acquisitions it has made to RSA since the $2.1bn deal. According to our understanding, NetWitness more than doubled revenue to about $45m in 2010. Given the growth rate and premium customer list NetWitness had assembled, we have no trouble believing market speculation that EMC paid $450-500m for NetWitness. A double-digit multiple isn’t out of whack for a fast-growing startup that has strategic value to EMC. We understand, for instance, that last summer EMC paid just shy of $400m for Greenplum, a data-warehousing startup that was clipping along at just under $30m in sales.

The 451 Group picks up ‘voice of the consumer’

Brenon Daly

Contact:  Brenon Daly

For today’s deal, we move a little bit closer to home: The 451 Group announced today that it has acquired the assets of TheInfoPro, a New York-based advisory and research firm. Founded in 2002, TheInfoPro counts more than 100 organizations as clients and draws on extensive surveys of those IT buyers to get real-world perspectives and forecasts on IT innovation. Focus areas for TheInfoPro include security, storage, networks, servers as well as virtualization.

With the acquisition, TheInfoPro will become a division of The 451 Group, joining the New York City office. (Terms of the transaction weren’t disclosed.) The deal is the third significant purchase by The 451 Group in the past half-decade to expand our offerings around analyzing and advising our clients on the business of IT innovation

Facebook dives into mobile

Contact: Jarrett Streebin

In its eighth acquisition in the last six months, Facebook picked up Seattle-based rel8tion. The startup is only nine months old and still in stealth mode, but it appears to be focused on targeted mobile advertising using location and demographics – data that Facebook has tons of. With 200 million active mobile users globally, and demographics and location on them all, the social media giant is ripe for an ad network of its own.

Facebook already has two location features rolled out, Deals and Places. In addition, it has existing infrastructure with carrier partnerships and mobile apps, including a recently launched app for feature phones that drastically expands its market. These features along with the amount of demographic data that Facebook has on its users could make for a very profitable ad network.

In the next year, we’ll likely see Facebook mobile ads roll out in full. This will provide stiff competition to those in the local deal space, such as Groupon and others. Facebook will also compete with display ad networks that advertise based on search and user check-in, such as Google Offers-AdMob, Where Inc, xAD and other hyper-local advertisers. With Facebook already owning a massive chunk of mobile users’ bandwidth, it appears likely to own a large chunk of the mobile ad and deals space, as well.

SolarWinds looks to shine in other markets

Brenon Daly

Contact: Brenon Daly

Having built a billion-dollar market cap through a cheap and easy offering for network management, SolarWinds is looking to take that approach to new markets through small acquisitions. Exactly a year ago, the company picked up Tek-Tools to add storage management to its portfolio, and now it steps fully into application performance management (APM) and virtualization management with its reach for Hyper9. SolarWinds is handing over $23m in cash for Hyper9, with terms also providing for a possible $7m earnout.

The addition of the small Austin, Texas-based startup, which had only about $2m in sales, gives SolarWinds its first stand-alone virtualization offering as well as a shoring up its APM product. (In the past, SolarWinds had a much less robust APM offering as a module to its flagship Orion product.) The moves also brings the company into more direct competition with management giants such as Hewlett-Packard, CA Technologies and Quest Software, among others.

In terms of competition, we would note with some irony that in a recent technology bakeoff that a nationwide grocery chain held for a monitoring product, Hyper9 got the nod ahead of SolarWinds, among other vendors. (See the full details in our User Deployment Report). So maybe part of the thinking at SolarWinds for the deal was if you can’t beat them, buy them

Google’s growing video ambitions

Brenon Daly

Contact: Brenon Daly, Jim Davis

More than four years after Google acquired YouTube, the video content site is either putting up black numbers, or is very close to it. That’s according to hints offered recently by the company, although Google has often appeared unconcerned about the profitability of the wildly popular site that the search giant picked up in its second-largest acquisition. (YouTube could have slipped to Google’s third-largest deal, but it appears that rumored talks with Groupon have come to nothing.)

Just how popular is YouTube? Google recently indicated that a day’s worth of video (a full 24 hours) is uploaded every single second to the site. And while profitability has not been an immediate concern for YouTube, Google has nonetheless demonstrated that it is committed to online video – and that it is willing to put even more money behind the effort. Just late last week, Google picked up Widevine Technologies.

As my colleague Jim Davis notes, Widevine gives Google technology used to underpin both online and broadcast premium TV services through the use of software-based DRM systems. This means the company – with its recently launched Google TV product, as well as Android-powered phones and laptops running Chrome – will be able to offer secure premium content on any of these platforms and enable subscription and video-on-demand services, as an example.

For instance, YouTube could now charge for access to live events that it has broadcast on occasion, including a U2 concert last year and the Indian Premier League cricket matches this year. Until recently, YouTube had used CDN services from Akamai for live broadcasts. But just in the past few months, YouTube has started testing its own live-streaming services platform (and has hired a number of former Akamai employees to boot). If Google continues to develop a secure and scalable content delivery platform, CDN vendors may well feel the pinch.