Category: online advertising

HomeAway finds its way back into the market

Brenon Daly

Contact: Brenon Daly

As a private company, HomeAway was a steady buyer. Founded in 2005, the vacation rental website had notched 11 transactions through last year. When it went public last June, the company raised $216m. With the new cash – not to mention shares that, at least initially, were richly valued – HomeAway had plenty of resources to continue its shopping. But that’s not the way it played out for the consolidator.

The company only stepped back into the M&A market earlier this week, reaching for Top Rural, a Madrid-based site that offers vacation rentals in small towns and the countryside in Europe. (The purchase comes roughly 11 months since HomeAway’s previous acquisition, the second-longest M&A dry spell at the company.) What’s more, it’s a rather small step back into the market. HomeAway, which held some $184m in cash and short-term investments at the end of December, is handing over just $19m for Top Rural.

With Top Rural, HomeAway returns to an acquisition strategy it has frequently used: geographic expansion. The Austin, Texas-based company has reached for similar rental sites in Australia, Brazil, France and the UK. (Currently, HomeAway has listings in some 168 countries.) In its other international shopping trips, HomeAway has paid between $2m and $45m for the sites.

Millennial Media doubles on debut

Ben Kolada

Contact: Ben Kolada

Taking advantage of the emerging market for mobile advertising, platform vendor Millennial Media leapt onto the public stage Thursday, creating nearly $2bn in market value in its debut on the New York Stock Exchange. The company priced its 10.2 million shares at $13 each – the high end of its proposed range. Shares traded at about twice that level in early afternoon. Millennial Media is trading under the symbol MM. Morgan Stanley, Goldman Sachs and Barclays led the offering, while Allen & Company and Stifel Nicolaus Weisel served as co-managers.

Millennial Media, which has nearly 75 million shares outstanding, currently garners a market cap of $1.9bn. That values the company at 18 times trailing sales, in the ballpark of where we estimate Quattro Wireless was valued in its sale to Apple, but about half the valuation we believe AdMob received from Google. Those two companies are Millennial’s primary rivals, although Millennial stakes its claim as the largest independent mobile ad platform provider.

Interest in advertising technology has been building throughout both the equity and M&A markets. Earlier this month, for instance, telco SingTel announced that it was acquiring Amobee for $321m. (We estimate the startup, which provides mobile ad campaign management software, garnered roughly 9x trailing sales in its purchase by the Singapore telco giant.) Meanwhile, the Adtech pipeline is far from dry, even after a recent slew of big-ticket exits. Earlier this month, advertising intelligence firm Exponential Interactive filed its paperwork to go public. The company, which plans to trade under the symbol EXPN, increased revenue 35% last year to $169m.

A pivot that pays off for ExactTarget

Brenon Daly

Contact: Brenon Daly

In the startup world, there are more pivots than in an NBA game. But often lost in this flurry of activity is that – at some point – changing the direction of the business needs to produce some actual value. (Otherwise, the pivoting just becomes pirouetting, as one of our VC friends recently quipped.) One of the most successful pivots we’ve seen recently came to light on Thursday, with the IPO of ExactTarget.

The online marketing vendor stormed onto the NYSE with a debut valuation of more than $1bn, and then surged from there. (The offering – led by J.P. Morgan Securities, Deutsche Bank Securities and Stifel Nicolaus Weisel – priced at an above-range $19 per share and then traded above $24 in early-afternoon session.) Followers of the IPO market will know that this was actually ExactTarget’s second run at an offering. It had been on file in 2008, before pulling the paperwork in mid-2009.

At roughly the same time that it took itself off the IPO track, ExactTarget dramatically changed its business. It went from selling a single product (email marketing) to a single slice of the market (SMB) to a full cross-channel marketing vendor serving companies of all sizes. The pivot had immediate consequences on its P&L sheet: ExactTarget went from running solidly in the black when it was on file four years ago to running deeply in the red now.

However, it’s a move that has paid off. Counter to the typical pattern, the growth rate at ExactTarget has actually accelerated as the company has gotten bigger. As it consciously increased its spending (particularly around sales and marketing), ExactTarget has taken its annual growth rate from 32% in 2009 to 41% in 2010 and then pushed that to 55% last year. And this is not some rinky-dink business. ExactTarget recorded $208m in sales in 2011. Another way to look at its growth: the $60m in revenue that ExactTarget did in Q4 2011 is more than it did in the full year when it was previously on file (2007 revenue was $48m).

With the benefit of hindsight, it’s probably a good thing that ExactTarget didn’t go public when it had initially hoped to. Three years ago, it was a sub-$100m revenue company, putting up a decent, but hardly spectacular, growth rate. Sure, it could have expanded the business as a public company, but the moves would have been far riskier and (almost certainly) slower because of the myopic scrutiny of Wall Street.

Instead, ExactTarget had the freedom behind closed doors to reposition its business to accelerate. The series of investments it chose to make have almost certainly meant the creation of several hundred million dollars of additional market value. In fact, on just a back-of-the-envelope calculation, ExactTarget’s debut has created more value than any other IPO of an on-demand vendor that we can think of. The company has some 66 million shares outstanding (or closer to 74 million fully distributed), so at a price of $19 each, ExactTarget was worth an astounding $1.25bn (or closer to $1.4bn fully distributed) before it even hit the aftermarket. In comparison, salesforce.com priced at a valuation of about $1.1bn in its 2004 IPO, based on the prospectus share count.

Few targets left in FEO, but are there any buyers?

Ben Kolada

Contact: Ben Kolada

In the past year, networking vendors have acquired many of the independent front-end optimization (FEO) startups, further narrowing the field in this already niche sector. In fact, there are only a few notable independents left. But is this really a race to consolidate the market, or are acquirers simply adding these capabilities to their portfolios by picking up properties at fairly cheap prices?

FEO focuses on getting a browser to display content more quickly, as opposed to dynamic site acceleration and other services that use network optimization to speed content delivery. For the most part, the FEO segment has been made up of a handful of startups. However, consolidation in the past year took three of these companies out of the buyout line. In May 2011, AcceloWeb sold to Limelight Networks for $12m and two months later Aptimize sold to Riverbed for $17m. Terms weren’t disclosed on Blaze Software’s recent sale to Akamai, but we’re hearing that the price was in the ballpark of $10-20m. That leaves Strangeloop Networks as one of the last companies standing, and its fate is basically secured. After the Blaze deal severed Strangeloop’s partnership with Akamai, the company is likely to find an eventual exit in a sale to remaining partner Level 3 Communications.

Firms interested in entering this sector shouldn’t fret over potentially losing Strangeloop to a competitor. Instead, they should actually reconsider their entry into the FEO market. FEO providers, both past and present, have done little to validate the space. According to our understanding, Aptimize was the largest of the acquired vendors, and its revenue was only in the low single-digit millions. The fact that each target sold for no more than $20m further suggests that the market isn’t yet living up to expectations.

Selling to Facebook

Ben Kolada

Contact: Ben Kolada

Rather than buy into Facebook after it debuts on the open market, many companies may consider selling to the social networking giant after its IPO. Facebook is already rich with cash, and is about to become much richer. Meanwhile, its M&A strategy has so far focused on acquiring smaller startups for their IP and engineering talent, but the company has said it may do bigger deals in the future.

According to The 451 M&A KnowledgeBase, Facebook has so far bought 25 companies, mostly for their specialized employees such as software engineers and product designers, but also for complementary technology. The company has been fairly cash conscious in its transactions, preferring to motivate acquired personnel with stock options rather than upfront cash payouts – in fact, Facebook spent just $24m in cash, net of cash acquired, on the deals it closed in 2011.

While innovative startups with skilled personnel, particularly those in the collaboration and social networking sectors, should still consider selling to Facebook a viable exit, midmarket and larger technology firms should also consider Facebook a potential suitor. In both public reports and in its IPO prospectus, the company has said it could put its treasury to work on larger deals. And it will certainly have the fire power – adding proceeds from its $5bn public offering to its treasury would bring its total spending power to nearly $9bn (including cash and marketable securities).

Facebook could apply some of its rationale for buying smaller vendors to larger acquisitions. For complementary technology, it could target a larger mobile advertising network (it picked up development-stage rel8tion in January 2011). The lack of a mobile ad platform is a gaping hole in Facebook’s portfolio, especially considering it had 425 million mobile monthly active users at the end of 2011. A company similar to AdMob (which sold to Google) or Quattro Wireless (acquired by Apple) such as Millennial Media or Jumptap would go some way toward filling that gap. For regional expansion and consolidation, Facebook could make a move for any of a number of international competitors, including Cyworld in Korea, Mixi in Japan, Vkontakte in Russia or Renren in China. As the trend toward consumerization in the enterprise continues in the form of social networking and collaboration (salesforce.com’s Chatter or Oracle’s Social Network come to mind), Facebook could look at an enterprise offering as well. The leading candidate in this sector would be Jive Software, one of the most prized properties in the social enterprise space with a market valuation of about $1bn.

Social software M&A on the uptick in 2011

Contact: Brian Satterfield

As more businesses leverage social networking websites for marketing and customer support purposes, many big-name buyers are finding social media software vendors to be increasingly attractive targets. The number of deals in the sector rose more than 150% in 2011 from 2010, while spending during that same period soared more than five-fold from $75m to $389m.

The bulk of 2011 social software spending came in March, when salesforce.com forked over $326m for Radian6, a Canadian startup that had raised just $6m. Radian6 was both the CRM giant’s largest deal as well as the priciest transaction ever in the sector. Salesforce.com bought Radian6 in order to add social media monitoring features to a number of products in its portfolio. On a smaller scale, we saw similar purchases around that same time by Meltwater Group, which added JitterJam for $6m, and call-center software maker KANA Software, which reached for Overtone.

But enterprise software providers aren’t the only takers in the social software world. Many tech companies that have partial or completely social business models got in on the action, presumably in order to track activity on their own networks. Twitter, for instance, picked up social media monitoring software maker BackType, while Google bought a similar company called PostRank.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

It’s time to once again hand out our annual award for Tech Deal of the Year, as voted by corporate development executives in our recent survey. For the second straight year, the voting came down to a tight race between two transactions. For 2011, Google’s planned purchase of Motorola Mobility just edged SAP’s reach for SuccessFactors. (Last year, Intel’s rather unexpected acquisition of McAfee slightly topped Hewlett-Packard’s takeout of 3PAR following a drawn-out bidding war.)

Both of the deals in the running for the 2011 prize certainly would have been worthy recipients of the Golden Tombstone. Google’s all-cash $12.5bn purchase of Motorola Mobility is more than the search engine has spent on its more than 100 other acquisitions and, beyond that, stands as the largest tech transaction (excluding telecommunications) since mid-2008. (Specifically, it is the largest deal since HP’s $13.9bn pickup of services giant EDS, which was voted the most significant transaction of 2008.) Meanwhile, SAP is paying an eye-popping 11 times trailing sales for SuccessFactors. With a price tag of $3.5bn, the deal is the largest-ever SaaS acquisition, more than twice the size of the second-place transaction.

The new (unexpected) IPO hotspot

Brenon Daly

Contact: Brenon Daly

Forget Silicon Valley or New York or even Boston. The new tech IPO hotspot is a place that typically only gets flown over by investment bankers looking in the more traditional locations for the next companies trying to make it public. What’s the exotic and (potentially) lucrative new launch pad? Indianapolis. That’s right, the same city that has seen its football team go winless so far this season is putting up big points on the board for IPOs.

One company based in Indiana’s capital has already gone public this month, and another one has just followed up with a prospectus of its own. Angie’s List raised more than $100m in its mid-November offering. (The subscription-based service review site priced its shares at the high end of their expected range, and has seen them trade back down to around the offer price.) And just before Thanksgiving, ExactTarget filed its paperwork for a $100m IPO of its own.

Or, more accurately in the case of ExactTarget, the online marketer has re-filed for an IPO. It originally filed its S-1 almost exactly four years ago, but pulled that in mid-2009 as the equity market melted down. In the intervening years, ExactTarget has gotten substantially bigger. In fact, the company’s revenue in its most recent quarter ($55m in Q3) is higher than its total for the last year it was on file (full-year 2007 sales of $48m).

Another area it has bulked up: its underwriting team. Although ExactTarget originally went with a full slate of midmarket banks to bring it public, it now has bulge-bracket firms J.P. Morgan Securities and Deutsche Bank Securities leading the deal, along with original sole lead Stifel Nicolaus Weisel (or Thomas Weisel Partners, as it was known back then).

Yahoo: hunted, but still in the hunt

Brenon Daly

Contact: Brenon Daly

Amid all the speculation that Yahoo would sell itself (or not), the search engine operator swung to the other side of the table on Tuesday, announcing the $270m all-cash purchase of interclick. The planned acquisition, which is expected to close early next year, is the first time Yahoo has reached for a fellow public company in more than eight years. Yahoo has picked up more than 45 privately held companies and one Bulletin Board-listed company since it acquired Overture Services in 2003 for $1.6bn, its largest-ever acquisition. (Another interesting side note on the interclick deal: Boutique advisory firm GCA Savvian has now advised the past two companies that Yahoo has acquired.)

And in its purchase of interclick, Yahoo is getting a relative bargain, at least on one key measure. (Interclick only generates a few million dollars of cash flow each year, so calculating an EBITDA multiple doesn’t make much sense.) At a $270m equity value, interclick is valued at roughly two times projected 2011 revenue. Even with the takeout premium, that’s less than half of Yahoo’s corresponding valuation. The search engine operator currently garners an equity value of about $19bn, or 4.2 times projected sales of $4.5bn this year.

‘Googorola’ close to closing

Brenon Daly

Contact: Brenon Daly

In what could be its last financial report before it is formally acquired by Google, Motorola Mobility said after the closing bell Thursday that mobile device revenue in the third quarter rose 20% over the same period last year to $2.4bn. That was nearly twice the overall rate of growth at the company in the quarter, although it was a slower rate than the mobile device division had grown in earlier quarters this year.

The main drag on the unprofitable division was anemic sales of its Xoom tablet, with the company indicating that it shipped just 100,000 units in the quarter. That’s just half the number it shipped in Q1 and one-quarter the number it shipped in Q2. But Motorola Mobility did manage to ship more smartphones in the just-completed quarter (4.8 million) than it did in either of the two previous quarters.

And once Google does assume ownership of the company, it may well see a slight bump in demand for those devices, at least according to a finding by our ChangeWave Research division. In late September, ChangeWave asked more than 4,100 consumers what impact Google’s acquisition of Motorola Mobility would have on their plans to buy a smartphone from the combined company. The vast majority said Google’s ownership wouldn’t have any impact. However, of the respondents that indicated a preference, four times the number said they were ‘more likely’ (13%) than said they were ‘less likely’ (3%) to buy a smartphone from the combined company in the future.

The planned $12.5bn sale of Motorola Mobility stands as the second-largest tech acquisition announced so far this year. (The purchase doubled Google’s aggregate M&A spending.) Shareholders in the Libertyville, Illinois-based company are slated to vote on the proposed deal November 17, although it will still need to be cleared by regulators. Assuming that all goes to plan, Google should close its acquisition of Motorola Mobility by the end of the year or early next year.