Category: services

HCM&A

-by Thomas Rasmussen, Brenon Daly

Rather than hitting the public markets, Authoria has landed in a private equity (PE) portfolio, where it is slated to serve as the initial plank in a rollup in the fragmented human capital management (HCM) market. PE shop Bedford Funding picked up Authoria last week, after checking out the market for about a year and a half. (The guys behind Bedford know a thing or two about market consolidation. Before hanging out a shingle with their $400m buyout fund, the Bedford directors and principals served as executives at ERP rollup Geac, which gobbled up dozens of companies before getting swallowed in a $1bn LBO.)

Its experience with ERP consolidation will likely come in handy for Bedford because we have noted a number of times that the current HCM market – with more than 50 startups, along with three or four large vendors – bears more than a few similarities to the ERP market earlier this decade. The ranks of ERP companies were thinned quite a bit as both strategic and financial acquirers went on shopping sprees. (Oracle, Microsoft and Lawson have all inked significant ERP acquisitions this decade, while PE-backed Infor and Consona got their ERP rollups started in 2002 and 2003, respectively.)

We suspect a similar wave of consolidation may be heading to the HCM market, which covers all the stages of hiring, from pre-employment screening to succession planning. And it’s not a bad time to be a buyer, since HCM valuations are coming down. (Authoria sold for about 1.3x its trailing sales, just half the level Vurv Technology got in its $128.8m sale to Taleo earlier this year. Granted, that’s only one data point, but we’ve heard from sources that the markdown of multiples is being seen across the sector.) Given that, along with Bedford’s stash of cash, we expect the rollup to get rolling very soon. What might it be looking for? Maybe a small vendor that could bolster Authoria’s offering around the early part of the hiring process, such as talent acquisition or screening.

Significant HCM deals since 2007

Date Acquirer Target Deal value Target revenue
September 29, 2008 Bedford Funding Authoria $63.1m $50m*
September 16, 2008 Standard Life Vebnet $43.4m $11.4m
June 9, 2008 US Investigations Services HireRight $195m $72m
May 6, 2008 Taleo Vurv Technology $128.8m $45m*
December 21, 2007 Kohlberg Kravis Roberts & Company Northgate Information Systems $1.2bn $897m
February 4, 2007 Infor Global Solutions Workbrain $197m $96.5m
March 23, 2007 Hellman & Friedman Kronos $1.8bn $599m

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Symantec ‘discovers’ Kazeon?

Brenon Daly

We hear Symantec, which has already inked five deals so far this year, may be getting close to another acquisition. Several sources have indicated that Big Yellow is planning to bolster its e-discovery offering through a purchase of startup Kazeon Systems. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. Mountain View, California-based Kazeon has raised some $51m in venture backing from a handful of firms, including Redpoint Ventures, Clearstone Venture Partners and Menlo Ventures, which led the startup’s second round.

Several large technology vendors have already made e-discovery acquisitions, running up a tab of about a half-billion dollars in the past year alone. Most recently, Interwoven snagged on-demand e-discovery startup Discovery Mining. In the past, we have speculated that NetApp, which at one point accounted for more than half of Kazeon’s revenue through an OEM arrangement, would be a logical buyer of Kazeon. (We would note, however, that NetApp’s share of total sales at Kazeon has declined in recent months.)

While the e-discovery marketplace is relatively crowded, there are also several key challenges for companies looking to sell in this space. For starters, e-discovery products don’t immediately appeal to departments that must budget to buy software, such as IT or finance. The end user of the e-discovery software, which in many cases is a company’s general counsel, may not have the authority to write a check for an offering that can run $100,000 and up. We recently spoke with a venture capitalist who pulled the plug on an e-discovery startup in his portfolio. He pointed out that e-discovery projects are still largely taken on by service providers and companies have been slow to move that work in-house with purchased software. Recognizing this last fact, Kazeon has inked a number of service partners for its e-discovery products.

Selected e-discovery deals over the past year

Date Acquirer Target Deal value
July 2008 Interwoven Discovery Mining $36m
March 2008 Hewlett-Packard Tower Software $100m
February 2008 Dell MessageOne $155m
December 2007 Seagate Metalincs $74m
October 2007 Iron Mountain Stratify $158m

Source: The 451 M&A KnowledgeBase

Banking deals

With the current credit crisis rocking the big banks, online consumer banking portal Bankrate has sidestepped most of the damage and even plans to do a bit of shopping. In the last month alone, it acquired banking blog Bankaholic and consumer credit resource portal Creditcardguide.com for $12.4m and $34m, respectively. That brought its total shopping tab over the past year to $150m on six acquisitions. (We would note that most of the companies that Bankrate picked up were existing partners.) The company recently told us that it will continue its acquisition spree, and it has the means to do so. Bankrate will have an estimated $35m in cash after its latest acquisitions, and has generated some $25m in cash flow over the past year. So who might the portal bank next?

Bankrate is decidedly a so-called ‘Web 1.0′ company. It lacks the customization and social networking features that many of its newer Web 2.0 competitors tout. This lack of new technology, along with a softening online advertising market, could land the portal in trouble. Bankrate could help shore itself up against those technology shortcomings by focusing its acquisition efforts on personal finance startups like Rudder and Mint.com. However, we don’t think it will do that. Instead, we expect Bankrate to focus strictly on the space that it knows, expanding partly by targeting its legacy competitors.

Given this, we think a likely target might be Creditcards.com, which is both a rival and a partner. Creditcards.com, majority owned by Austin Ventures since 2006, tapped Credit Suisse and Citigroup to bring it public in December, but the economic environment forced it to delay its offering in May. The company is profitable, with $60m in sales, but is laden with debt. Besides having very similar businesses, the two companies are hardly strangers. In fact, current Creditcards.com CEO Elisabeth DeMarse was the CEO of Bankrate prior to becoming Austin Ventures’ CEO-in-residence.

Given Creditcards.com’s likely valuation of several hundred million dollars, however, it is unlikely that Bankrate could afford the acquisition. (Bankrate currently sports a market capitalization of about $700m.) Instead, we suspect that Bankrate will continue to ink tuck-in acquisitions. We wouldn’t be surprised if smaller competitors like Credit.com or Credit-Land.com caught its eye.

Recent Bankrate acquisitions

Date Target Deal Value
September 23, 2008 Bankaholic $12.4m
September 11, 2008 LinkSpectrum (dba CreditCardGuide.com) $34m
February 5, 2008 InsureMe $65m
February 5, 2008 Lower Fees (dba Fee Disclosure) $2.9m
December 10, 2007 Nationwide Card Services $27.4m
December 10, 2007 Savingforcollege.com $2.3m

Source: The 451 M&A KnowledgeBase

Uptake in travel deals

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-by Thomas Rasmussen

The past year has seen a surge in online travel deals as well as venture funding of travel startups. In fact, we wonder if the industry hasn’t gotten a little too crowded. A number of startups have received funding, including Uptake, which was founded by ex-Yahoo Travel execs. Uptake brings the social aspect to the online travel world by aggregating user-generated reviews from various portals. It fetched $10m in venture funding from Trinity Ventures and Shasta Ventures last week, bringing its total raised to $14m. The company says the funds are to be used for internal expansion and acquisitions. Indeed, the current competitive landscape has presented startups like Uptake as well as established players like Expedia with one choice: grow or risk becoming irrelevant.

Against this backdrop, online travel companies have taken different approaches to M&A. Relative newcomer Kayak.com is one company that recently took a major step to buy growth. Hoping to go public eventually, the company doubled its size overnight by acquiring competitor SideStep Inc for an estimated $180m in December. Meanwhile, fellow startup Farecast worked on the other side of a transaction, opting for a sale to Microsoft in April for an estimated $115m to help Redmond shore up its ailing MSN Travel division. Meanwhile, the giant of the industry, Expedia, has been ratcheting up the M&A pace. Of the 15 acquisitions it has done, 11 were inked in the last 18 months. In a recent filing with the US Securities and Exchange Commission, Expedia said it spent $180m on five acquisitions in the first two quarters alone.

As for Uptake, we expect the small company to consider a few tuck-in acquisitions of smaller rivals to add more voices to its reviews. Potential targets include companies such as TravelMuse and TripSay, which also offer user reviews. However, while Uptake is eyeing targets, we have a feeling it may be a target itself. We suspect the social aggregation aspect of Uptake is very appealing to larger players that are trying to bring the social Web 2.0 experience to online travel. Likely acquirers include Kayak and Microsoft, which both lack a social rating system. Expedia and Yahoo Travel, an outfit Uptake’s founders know well, might also want the technology to improve on their own systems.

Number of known strategic online travel deals

Period Deal volume
September 2007-2008 14
September 2006-2007 11
September 2005-2006 6
September 2002-2005 19

Source: The 451 M&A KnowledgeBase

Not ‘Finnish’ with M&A

Finnish cell phone giant Nokia launched its mobile file-sharing Ovi application last week, coming quickly on the heels of the rollout of Nokia Music and other high-profile offerings. Much like Google and its Android and Chrome products, Nokia used technology that it acquired to form the core of its recently launched products. Specifically, its file-sharing technology came when it picked up Avvenu late last year.

And more M&A may be in the cards. Nokia recently told us that it is bullish on making further acquisitions to boost its service offerings. The company is aiming to evolve from strictly a mobile handset maker to a service-oriented handset maker – and strategic acquisitions are expected to play a big role in this transformation. (Of course, Nokia isn’t the only hardware company looking to do deals to get out of its core commodity market and into a more profitable – and defensible – service offering. PC maker Dell has spent some $2bn over the past two years increasing its service portfolio, buying companies offering everything from storage to email archiving to remote services.) What services could Nokia look to add and what companies might it acquire to do so?

With its music, games and mapping services well established, Nokia’s lack of a video service is strikingly curious. We suspect the company will quickly move to fill this gap. Two potential targets come to mind. Startups kyte and Qik both specialize in mobile video, and have already gotten a lot of interest from big mobile companies. In fact, kyte has drawn money not only from large telcos such as TeliaSonera, but also from Nokia’s own investment arm, Nokia Growth. Another venture that was recently brought to our attention is a startup called ZoneTag. It’s a Yahoo Labs startup that does location-based photo tagging. The software was developed for Nokia phones with the support of Nokia research and we hear the two divisions have a very good relationship.

Nokia’s recent mobile software acquisitions

Date Target Deal value
June 24, 2008 Symbian $410.8m
June 23, 2008 Plazes $30m*
January 28, 2008 Trolltech $153.5m
December 4, 2007 Avvenu Not disclosed
October 1, 2007 Navteq $8.1bn

Source: The 451 M&A KnowledgeBase *Official 451 Group estimate

Napster sings the blues

Napster, once hailed as the king of digital music, has fallen on hard times. Its stock is down 35% this year alone, and 55% from its 52-week high set in October 2007. Resulting shareholder ire forced the company to announce last week that it is seeking strategic alternatives to boost value, and it has hired UBS Investment Bank to lead the effort. Who might acquire the house that Shawn Fanning built?

Since relaunching as a legal music service in late 2003, Napster has been unable to turn a profit. The company pulled in $125m in revenue for the trailing 12 months ended June 30 from about 708,000 paid subscribers. Despite increasing revenue 15% year-over-year, the company had a negative EBITDA of $12.3m and subscriber count decreased from last quarter’s total of 761,000. The switch from stagnation to a drop in subscribers for the first time means that Napster will be unable to keep growing revenue. Consequently, that makes it doubtful that it will be able to achieve profitability. Nevertheless, with $36.9m in cash and $30.7m in short-term investments, Napster is an attractive target at its current valuation of $62.25m.

We previously speculated that SanDisk would attempt to acquire a proprietary music service of its own. But given its financial woes, as well as reported takeover negotiations with Samsung, we do not think it will bite. We believe Napster’s fierce competitor RealNetworks, the majority owner of the Rhapsody music service, is the most likely acquirer. Amid growing competition from Apple, which unveiled its iTunes 8 and a new line of iPods this week, and with digital music newcomers Amazon, Nokia and a few promising startups making waves, this is a much more plausible proposition. Last year Rhapsody picked up Viacom’s Urge, which had been struggling despite its high-profile association with MTV and Microsoft. RealNetworks has the cash, and has repeatedly told us it is bullish on acquisitions that spur growth. Given Napster’s current valuation and similar deals, we estimate that it will fetch around $80-100m in a sale.

Indian acquirers on the go

Announcing its largest deal ever, Indian systems integrator Infosys offered $753m in cash on Monday for SAP consultancy Axon Group. The deal is seen as a way for Infosys to build up its consulting business as well as its sales in Europe, where the UK’s Axon gets roughly 60% of its revenue. Pending shareholder and regulatory approval, the acquisition is slated to close in November. Some Axon shareholders, however, are holding out for more. Shares of the company on the London Stock Exchange have traded above Infosys’ offer price since the deal was announced.

Infosys’ acquisition of Axon would be the second-largest purchase by an Indian services shop, trailing only Covansys India’s $3.2bn purchase of business process outsourcing firm Fortune Infotech in 2005. In addition, the deal would bring to more than 60 the number of deals by Indian acquirers so far this year. That’s up from less than 20 per year in the first part of this decade. Meanwhile, M&A spending by Indian companies is likely to hit its highest level since 2005. Already this year, shoppers have spent $1.8bn on deals, which is within striking distance of the $2.1bn spent in all of 2007. This year’s M&A total will inch even closer to that tally if Axon shareholders succeed in pressing Infosys to up its offer.

Deals by Indian acquirers

Period Deal volume Deal value
Jan.-Aug. 2008 57 $1.8bn
Jan.-Dec. 2007 86 $2.1bn
Jan.-Dec. 2006 78 $672m
Jan.-Dec. 2005 38 $3.7bn
Jan.-Dec. 2004 7 $104m
Jan.-Dec. 2003 8 $132m
Jan.-Dec. 2002 16 $228m

Source: The 451 M&A KnowledgeBase

Corporate castoffs

Brenon Daly

Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.

Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.

On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.

Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)

As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.

Half-billion-dollar communications division up for grabs

Newly appointed interim VeriSign CEO Jim Bidzos is picking up where former CEO Bill Roper left off. In a recent conference call, Bidzos (who founded the company) reiterated VeriSign’s plan to shed many of the businesses picked up by the company’s longtime chief executive, Stratton Sclavos. (The acquisition-frenzied CEO inked more than a half-dozen deals in both 2005 and 2006, in addition to several headline-grabbing purchases at the height of the Internet bubble.) We believe VeriSign’s next divestiture is imminent, with the sale of its Communications Services division likely to go through shortly.

We have speculated on this in the past, but some recent developments suggest that a sale is close at hand. VeriSign placed the division in discontinued operations a few months ago, according to recent SEC filings. The unit, which provides communications services such as connectivity, interoperability and mobile commerce, is the largest and most profitable of the company’s non-core business segments. It pulled in $568m for the previous year, ending June 30. That’s down from $579m for calendar year 2007 and $804m in 2006. The decline is mostly related to VeriSign’s divestiture of Jamba, since sales in the rest of the division have been flat. That stagnation stands in contrast to VeriSign’s core business, the Internet Infrastructure and Identity Services division, which increased revenue 20% in the most recent quarter.

As to who might be interested in VeriSign’s Communications Services division, we have learned that there is at least one strategic buyer at the table. In fact, a deal was supposed to be signed, sealed and revealed with the company’s second-quarter earnings. But the transaction was delayed when the potential acquirer took a closer look due to the continued softness in the economy. We expect the divestiture to close soon. The most obvious strategic buyer of the unit is a big telecom shop – namely, Verizon or AT&T. Private equity has also expressed interest in the unit. But since the mystery bidder is said to be strategic, we believe a telco will likely end up as the new owner of VeriSign’s Communications Services unit for a price in the neighborhood of $1bn.

VeriSign’s communications acquisition binge

Date Target Deal value
November 27, 2006 inCode Wireless $52m
March 20, 2006 m-Qube $250m
March 13, 2006 Kontiki $62m
February 13, 2006 3united Mobile Solutions $65.5m
January 11, 2006 CallVision $30m
January 10, 2005 LightSurf Technologies $270m

Source: The 451 M&A KnowledgeBase