Category: SaaS

For Vocus, a costly step into a new market

Brenon Daly

Contact: Brenon Daly

Even though Vocus got pummeled on Wall Street Wednesday after it announced the largest acquisition in the company’s history, the rationale for the purchase of iContact is fairly sound. (As it announced its Q4 results, Vocus also said it would basically be cleaning out its treasury to cover the iContact purchase. The deal helped to push shares of the PR management software vendor down 40% to their lowest level since early 2009.)

But adding iContact to the Vocus portfolio at least gets the company into the faster-growing market of email marketing. Consider the relative growth rates on the two sides of the deal: Vocus increased revenue 19% to $115m in 2011, while iContact’s sales grew 25%. Granted, iContact is growing off a smaller base, but a quick look around the rest of the industry also shows that email marketing is outstripping Vocus’ core business.

For instance, Emailvision, which is only slightly smaller than Vocus, grew 55% to $90m in sales last year. (The European email marketing vendor went private in mid-2010.) Meanwhile, ExactTarget and Constant Contact outgrew Vocus in 2011, even though they are nearly twice as big. In fact, ExactTarget posted a stunning 54% growth rate last year, which pushed sales to $207m. We understand that snappy rate is likely to come up next week as ExactTarget gets ready to hit the public market. ExactTarget filed its IPO paperwork only late last November.

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Tangoe finds a European dance partner

Brenon Daly

Contact: Brenon Daly

Looking to increase its international business, Tangoe recently reached across the Atlantic for UK-based ttMobiles. The geographic expansion effort is a key initiative for Tangoe, which opened its European headquarters in Amsterdam less than a year ago. The company currently gets virtually all of its revenue from US-based customers, although a representative for Tangoe noted Wednesday that slightly more than one-quarter of the $16.8bn that flowed over its platform in the fourth quarter came internationally.

The purchase of ttMobiles is the third acquisition Tangoe has made since its IPO last summer. (And that’s on top of the five deals it inked as a private company.) Like most of its other acquisitions, the latest purchase by the communications lifecycle management vendor is a small one: Tangoe will hand over just $9m for ttMobiles. At the end of 2011, Tangoe was basically running at breakeven and had $43m in its treasury, mostly thanks to the IPO.

Tangoe expects ttMobiles to contribute $4.5m in revenue this year, meaning it is valued at basically 2 times projected sales. (For its part, Tangoe trades at more than 4x projected sales.) We understand that the company will continue to pursue deals that offer geographic expansion, as well as look to consolidate rivals to bulk up the number of customers it serves

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.

More of the same at SuccessFactors under SAP

Brenon Daly

Contact: Brenon Daly

With the official closing today of SAP’s $3.6bn acquisition of SuccessFactors, it’ll be business as usual for the human capital management (HCM) vendor – starting at the top. Certainly the new ownership hasn’t throttled CEO Lars Dalgaard in the least. During his Wednesday luncheon keynote at the Pacific Crest Securities Emerging Technology Summit, Dalgaard was jarringly blunt, colorfully profane and wickedly insightful. In other words, same old Lars.

For instance, during his keynote he gave the flick to the more than 70 venture capitalists that he said passed on SuccessFactors when he was raising money back in the early part of last decade, and then rubbed that in by pointing out that the VC firms that did invest got a return of more than 4,000%. Similarly, in a video clip he played during his speech, Dalgaard noted that one of the more gratifying parts of the sale to SAP – the largest-ever SaaS deal, which valued SuccessFactors at its highest-ever price – was the fact that the acquisition ‘fried’ investors who had shorted SuccessFactors’ stock.

Dalgaard also indicated that even though his company is now owned by SAP, it will continue to be active in M&A. (On its own, SuccessFactors announced six acquisitions, after looking at some 140 companies, according to Dalgaard.) In fact, we understand that SuccessFactors will actually have an expanded corporate development role, taking on responsibility for cloud deals that would go beyond the HCM sector it focused on as a stand-alone company. That mirrors SAP’s decision to tap Dalgaard to run its overall cloud business

SaaS, SaaS and more SaaS

Ben Kolada

Contact: Ben Kolada

Oracle today announced the $2bn acquisition of Taleo, and SAP is getting closer to completing its $3.6bn purchase of SuccessFactors. Both announcements come less than a month after Oracle closed its $1.5bn RightNow Technologies buy. These transactions are the largest we’ve seen in the SaaS sector. However, we doubt they represent the end of the acquisition spree of these companies, with their highly disruptive business models. Although SaaS M&A has been playing out for some time now – and even set new records in 2011 – dealmaking in this sector is far from over.

If the growing use of SaaS and public cloud is any indication of deal flow, we expect volume to continue to rise. According to a report by ChangeWave Research, 22% of respondents currently use applications that run on public cloud services, up from 17% a year earlier. We’ve been beating the drums on cloud and SaaS M&A for a while now. The reason is simple: customer demand is pushing IT vendors to change the way IT services are delivered.

As businesses increasingly adopt cloud services, as opposed to packaged software maintained on-premises, the largest IT firms are increasingly looking to break into this industry. Oracle’s RightNow and Taleo acquisitions alone represent a total of $3.5bn invested in cloud services in less than a half-year. SAP spent that much on SuccessFactors alone. And there’s undoubtedly more to come. We’ll take a deeper look at the Taleo buy, as well as provide information on SaaS valuations, in a longer report in tonight’s Daily 451.

Source: Corporate Cloud Computing Trends, January 2012. ChangeWave Research, a service of 451 Research

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.

j2 Global buys into CRM, nabs Landslide Technologies

Ben Kolada

Contact: Ben Kolada

J2 Global continues to diversify its business through M&A, this time with the acquisition of Landslide Technologies. The company’s latest deal, its second in as many weeks, is j2’s first CRM purchase – a stark contrast from its recent M&A plays, which have focused primarily on propping up its managed messaging business at home and abroad.

We’ve previously covered j2’s dealmaking, noting that the company has expanded via M&A from its core fax offering to now include a number of services for small businesses such as email, Web-based collaboration and even marketing. Landslide provides Web-based CRM SaaS, including online, social and mobile CRM applications, to SMBs.

Terms of the deal weren’t disclosed, but the majority of j2’s transactions have gone off for less than $15m. We see no reason why this acquisition would significantly diverge from this path. The company was likely cautious in its first move into the CRM market, meaning j2 likely paid at or below market valuations. And even with a possible premium given to the business because of its SaaS delivery model, we still doubt that the price was too high, considering an SEC report filed in December 2010 noted that Landslide’s revenue was $1m-5m.

Sizing the SaaS M&A market

Ben Kolada

Contact: Ben Kolada

Traditional IT service providers, accustomed to an on-premises model of delivering products and services, have been rapidly buying into the SaaS sector to fulfill enterprises’ demand for SaaS offerings. The result has been a rapid increase in both the volume and value of SaaS deals announced. The most notable are Oracle’s RightNow Technologies purchase, which just closed, and SAP’s highly valued SuccessFactors buy, which is expected to close very soon.

As businesses increasingly adopt cloud services, as opposed to packaged software maintained on-premises, the largest IT firms are increasingly looking to break into this industry. We’ve seen a record number of acquisitions of private cloud providers, but now public firms are attracting additional attention as well. In 2011, we recorded 200 announced SaaS transactions in The 451 M&A KnowledgeBase – just a baker’s dozen shy of the all-time record set in 2007. However, total spending on SaaS targets came in at a record $9.7bn, shattering the previous record set in 2008. True, the RightNow and SuccessFactors deals accounted for more than half of total SaaS M&A spending in 2011, but the overall volume of large acquisitions is on the rise as well. For example, last year we saw a dozen SaaS transactions announced valued at least at $100m – a steady uptick in big-ticket deal volume since 2008.

Driving these acquisitions, in addition to customer demand, is the SaaS sector’s enviable revenue growth rates. While IBM, for example, grew total revenue just 7% in 2011, our 451 Market Monitor colleagues projected that the global SaaS sector grew 22%. And according to ChangeWave Research, a service of 451 Research, SaaS remains the most popular cloud service. In a ChangeWave report, a whopping 61% of respondents said they were using some SaaS product. The report also noted that 28% of respondents expect to increase their SaaS spending over the next six months, more than any other cloud service ChangeWave covered in the report.

Acquisitions of SaaS vendors, 2005-2011

Year announced SaaS deal volume SaaS deal value
2011 200 $9.7bn
2010 152 $6.1bn
2009 138 $8.1bn
2008 125 $3.5bn
2007 213 $6.7bn
2006 93 $3bn
2005 49 $712m

The 451 M&A KnowledgeBase

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.

Proofpoint refills the IPO pipeline

Brenon Daly

Contact: Brenon Daly

Wedged between the strong debuts this week of two tech companies, Proofpoint has put in its paperwork to refill the IPO pipeline. The subscription-based email security vendor filed for a rather small $50m offering, which is being led by Credit Suisse and Deutsche Bank. Earlier this week, Jive Software hit the market well above its expected price while Zynga raised a cool $1bn as it priced its offering at the top end of its range.

Founded in 2002 by a former Netscape executive, Proofpoint has expanded beyond its core email security. Most recently, we noted that the company has begun to position itself as a full compliance platform, complete with email discovery and litigation support. While Proofpoint’s technology is solid, Wall Street may be left wanting a bit more from its financials.

For starters, Proofpoint has never printed black numbers, and has wrung up a total of $155m in accumulated deficit. Meanwhile on the top line, the company increased revenue a less-than-stellar 27% through the first three quarters of 2012. That compares to 43% growth in sales over the same period at Imperva, the most recent security vendor to hit the public market. Proofpoint plans to trade on the Nasdaq under the ticker PFPT.