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Yahoo’s latest deal illuminates strategic shift

Contact: Scott Denne

Yahoo’s reach for Luminate shines a light on its new M&A strategy. The purchase of the in-image advertising company marks Yahoo’s third ad-tech deal in two months, following a three-year hiatus from buying in that market – a time in which it has made at least 45 acquisitions.

Until recently, Yahoo’s purchases have been aimed at building out its content offerings, especially picking up mobile app products and the teams that built them. But now, three of its four latest targets (mobile ad network Flurry, antifraud vendor ClarityRay and Luminate) have brought it monetization tech. Ad tech has been a development focus internally, as well – earlier this year, Yahoo launched an effort to integrate its existing ad products in one place and launched Yahoo Gemini, which combines mobile search with native advertising and is the likely home for Luminate’s team and technology.

The big question is whether this trend will continue when Yahoo soon finds itself flush with another $8bn in cash from Alibaba’s pending IPO. We think it likely that it will. Given its declining display ad revenue and penchant for picking up video content (both organically and via partnerships) and video technology (with its recent acquisition of video distribution software company RayV), new technologies to monetize video and provide it with more sources of video ad inventory could be a target. However, in light of its talks to buy NDN earlier this year, we wouldn’t rule out another big content play.

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Contact: Scott Denne

The outlook for Zebra Technologies’ acquisition of Motorola’s enterprise business dampened this week as Motorola announced that revenue from the unit dropped 8% year over year. While shrinking sales is no surprise (and a big part of the company’s reasons for unloading the business to begin with), the decline is larger than the 1-5% dips that Motorola typically posts, and is the largest drop in almost two years.

Despite that decline, Zebra’s management stuck to its projection that the combined business would be able to log 4-5% annual growth. Zebra’s own business grew 14% this quarter to $288m, but is less than half the size of the target’s revenue. Management was also upbeat about the prospects for cost reductions gained through the merger, lifting its estimate to $150m from $100m at the time of the announcement (the deal is expected to close in the fourth quarter).

News of the drop sent Zebra’s stock down 9% this week, though it still trades above the level that it did before the $3.45bn transaction was announced.

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Contact: Scott Denne

Audience takes a different angle to its customer concentration problem with the $41m purchase of Sensor Platforms. The rationale behind the acquisition is similar to Cirrus Logic’s $488m pickup of Wolfson Microelectronics in April – both audio component providers get the vast majority of their revenue from a single phone maker, and while Cirrus took out Wolfson to find more wiggle room in the cell phone sector (it hopes to upsell Wolfson’s low-end device makers), Audience’s M&A answer to the concentration conundrum is to find new markets.

Audience has wrestled with the downside of overreliance on a single vendor in the past. In mid-2012, Apple accounted for more than half of Audience’s revenue, but that number has steadily slipped since, reaching 5% last quarter as Apple opted not to use Audience’s technology in iPhone 5 models. That announcement in September 2012 carved 63% off of Audience’s stock price. Today, Audience’s growth has rebounded, but the stock hasn’t gotten back to its highs and 74% of sales come from Samsung. (Not coincidently, Apple accounted for about 80% of Cirrus’ business in 2013.)

Companies selling voice processors and other audio components for cell phones are boxed in. Smartphones are the fastest-growing segment of the market, but that market is dominated by two players. According to a March survey by ChangeWave Research, a service of 451 Research, 70% of people planning to buy a smartphone in the next 90 days planned to purchase an Apple or Samsung device – Motorola occupied third place with a whopping 3%.

In reaching for Sensor Platforms, Audience aims to crack into the market for wearable devices by integrating Sensor’s motion technology into its voice processors. It’s smart for Audience to snag a software firm with 20 employees that likely has a low burn rate, meaning there’s little downside to the deal aside from the upfront price. Today, however, there are no clear applications for a chip that combines voice processing with motion sensing in the wearables space (Sensor’s business is currently in phones), and Audience could remain vulnerable to the whims of a single OEM for several years.

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

Contact: Brenon Daly

Spending on tech, media and telecom (TMT) deals in May quadrupled from the same month in the past two years, continuing the record pace of M&A activity in 2014. Dealmakers around the globe spent $61bn on 308 acquisitions in the just-completed month, according to The 451 M&A KnowledgeBase. That pushes the total value of TMT transactions announced so far in 2014 above an astonishing quarter-trillion dollars.

Altogether, worldwide spending on M&A in 2014 has surged to $237bn – exactly matching the amount spent in the first five months of the previous high-water mark set back in 2007. Another way to look at the spending total so far in 2014: the amount is only slightly lower than spending in the same January-May period of the past three years combined.

As has been the case throughout 2014, deals in May came from across the tech lifecycle, with old-line industries consolidating as well as flashy young startups getting picked up at big prices. AT&T’s $48.5bn cash-and-stock purchase of DirecTV stands as the second-largest TMT transaction of the past 12 years. On the other side, Apple announced its largest-ever acquisition, paying $3bn for Beats Electronics, an eight-year-old provider of headphones and a streaming music service.

With five months of M&A now in the books, the annualized pace for M&A spending is running at about $560bn for full-year 2014. That is a full $100bn higher than the previous annual record for TMT deals, set back in 2006, according to the KnowledgeBase.

M&A activity

Period Deal volume Deal value Jan. 1 – May 31, 2014 1,447 $237bn Jan. 1 – May 31, 2013 1,348 $90bn Jan. 1 – May 31, 2012 1,534 $65bn Jan. 1 – May 31, 2011 1,565 $102bn Jan. 1 – May 31, 2010 1,406 $74bn Jan. 1 – May 31, 2009 1,188 $42bn

Source: The 451 M&A KnowledgeBase

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Contact: Scott Denne

Zebra Technologies, a maker of asset-tracking technologies, has picked up Motorola Solutions’ enterprise business in a $3.45bn deal; one that’s larger than Zebra’s own market cap. The company will spend about half the cash on its balance sheet and raise $3.25bn in debt (it has none today) to complete the acquisition.

In addition to nearly tripling its sales and headcount, Zebra also gains a range of hardware products, such as mobile computing and RFID products, that will better enable it to transition into the Internet of Things. Zebra is no stranger to machine-to-machine technologies – it has consolidated several RFID assets over the last decade or so, but that category only made up about 5% of its business, which is concentrated on sales of printers and related software for printing items such as barcodes and plastic cards.

Motorola’s enterprise business brings about $2.5bn in trailing revenue to Zebra, which crested $1bn in annual sales for the first time in 2013. While Zebra will triple its revenue at a price of 1.4x trailing revenue, it’s paying a bit more than the 1x we usually see in a hardware divestment. Wall Street is skeptical about the deal so far, and is pushing its stock down 11% today.

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

Contact: Wendy Nather Scott Denne

Trustwave continues to add compliance offerings to its managed security service with the acquisition of Cenzic. The deal brings application security testing to Trustwave, which added database monitoring to its portfolio in a transaction late last year.

Cenzic fits the profile of a typical Trustwave purchase. It’s a company whose sales have plateaued with a niche product that will play better as part of a larger suite of services. We estimate that Cenzic clocked several years of $5-10m in annual revenue and $10m in trailing revenue, while competitors including Veracode and WhiteHat Security have grown faster. Cenzic is as well-known for its security testing as its patent litigation – it reached cross-licensing agreements with HP (WebInspect) and IBM (Watchfire), and forged settlements with NT OBJECTives and WhiteHat.

Terms of the deal weren’t disclosed, but most of Trustwave’s transactions have been valued at 1-2x trailing revenue. We’d expect this one was too, given that Cenzic was a motivated seller that had been in the market for some time.

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

Contact: Scott Denne

A10 Networks sets a price range of $13-15 per share, which would give it a market cap of $767-885m. At the midpoint of that range, A10 would be valued at 5.9x trailing revenue, a bit higher than the 5.5x granted to F5 Networks, its main competitor and leader in the application delivery controller market. A10’s revenue growth rate, most notably that of its product sales, has outpaced F5’s. While A10’s product sales grew 18% year over year in the most recent quarter, F5 expanded by 7%, the first quarter it has topped the 5% mark in more than a year.

The top line at the application delivery controller upstart grew a respectable 18% to $141m in 2013. Its net loss was $27m as it invested a larger portion of its revenue back into sales and marketing. The net loss was lower than the $90m it chalked up in 2012, but that year’s expenses were driven by a legal settlement, without which it would have had three straight profitable years starting with 2010.

At the current price range, the IPO will generate a solid return for Summit Partners. The private equity firm invested $80m in A10 last summer for stock that will be worth $132m at the midpoint of the proposed range.

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Contact: Scott Denne Michael Cote

Chatter about how Microsoft lost its way and spread itself too thin characterized the end of Steve Ballmer’s rein as CEO. Though the company is facing challenges from new competitors and two tectonic shifts in IT – mobile and cloud – that threaten a franchise built around the PC, Satya Nadella takes over as CEO while the company is still in a position of strength.

Microsoft posted 5% revenue growth in the past two years and sales of enterprise software, which make up more than half of its sales, grew faster at about 9% annually. The company already has promising assets that could enable it to maintain that growth. While it wasn’t the first to cloud computing, its base of Windows Server and Office users will give Microsoft an easier time than most in making the transition to cloud. And while Apple and Google currently have a lead among mobile developers, Microsoft still has a massive developer audience and was the company that invented the model of leveraging developers to grow a platform.

Given Nadella’s background in building Microsoft’s cloud and enterprise business, we expect future M&A to focus on ensuring that its enterprise offerings successfully transition to cloud. Microsoft has a history of taking a measured approach to expanding into new products – it’s rarely the first into any new market – and given that Nadella spent the past 22 years at the company, we don’t expect any drastic shifts in M&A strategy.

Microsoft itself often speaks to being a fast follower in technology, a stance that hasn’t been appreciated with the rapid CAGRs of iOS and Android. However, it is a strategic approach to be reckoned with when a technology has all but reached mainstream, such as mobile and tablets right now, and perhaps cloud.

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Contact: Ben Kolada Scott Denne

In a decade and a half Google built itself into the world’s largest advertising company, though more recently it’s been branching far and wide into new markets. Yesterday the search giant spent $3.2bn of its cash on Nest Labs, a smart-home device company best known for its thermostat. It’s the latest in a line of schizophrenic dealmaking, including Google’s rollup of robotics startups, a smattering of facial-, speech- and motion-recognition businesses, a few book publishers and the $1bn pickup of a mapping application that’s only tangentially related to its core business.

In fact, the last time Google bought a company that directly related to its core business of search, display and video advertising was its mid-2011 purchase of AdMeld. That was 60 deals ago, according to an analysis of The 451 M&A KnowledgeBase.

We’d note as well that Google’s track record of capitalizing on acquisitions outside of advertising is less than stellar. It shelled out $12.5bn for Motorola Mobility in 2012 and while that company already faced headwinds when Google got involved, its annual mobile phone revenue has halved under Google’s watch (the same amount as BlackBerry, for what it’s worth). Surveys by ChangeWave Research, a service of 451 Research, show that only 4% of smartphone buyers plan to buy Motorola, a number that hasn’t changed meaningfully under Google’s watch.

However, with rising interest in consumer hardware and more types of consumer devices becoming Internet-connected every day, we’d expect Google to continue to pay attention to this emerging market. Putting two and two together, Google could next make a move on smart scale and nutrition device maker The Orange Chef. Its VC arm was an investor in Nest and is still an investor in Orange Chef.

Select recent, unusual Google acquisitions

Date announced Target Primary sector Abstract Deal value January 13, 2014 Nest Labs Systems / Controls / General Smart thermostat systems provider $3.2bn December 14, 2013 Boston Dynamics Systems / Other Humanoid robots and software Not disclosed December 4, 2013 Industrial Perception Systems / Controls / Industrial automation 3D-vision-guided robots and software Not disclosed December 4, 2013 Meka Robotics Systems / Other Humanoid robot design and manufacturing Not disclosed October 2, 2013 Flutter Application software / Graphics and design/CAD Motion and gesture recognition software $40m* August 30, 2013 WIMM Labs Mobility / Mobile devices / Other Android-based watch and applications Not disclosed July 22, 2013 SR Tech Group (patent portfolio) Application software / Speech recognition Speech recognition software and development Not disclosed October 3, 2012 Viewdle Information management / Info retrieval / Other Facial-recognition software provider $30m** August 15, 2011 Motorola Mobility Mobility / Mobile devices / General Mobile device provider $12.5bn July 22, 2011 PittPatt Information management / Info retrieval / Other Facial recognition software provider $38m*

Source: The 451 M&A KnowledgeBase *Reported deal value **451 Research estimate

Contact: Scott Denne

Perficient reaches for salesforce.com expertise for the second time in as many deals with the $21.5m purchase of CoreMatrix Systems. In addition to having a similar rationale as its last purchase, the transaction matches the typical profile of Perficient acquisitions.

CoreMatrix provides consulting on and implementation of cloud software, with a focus on software from salesforce.com. This is similar to Clear Task, which Perficient bought in May for $7.9m in a deal that valued the target at roughly 1x trailing 12-month revenue, the median multiple for Perficient’s acquisitions. The acquirer values CoreMatrix, with about $15m in annual sales, slightly above that level. Both transactions came with an earnout that could add about 50% to the deal value – $10m more for CoreMatrix and up to $3.7m more for Clear Task.

As we noted when we covered Perficient’s last salesforce.com-related acquisition , CRM made up only 6% of the company’s revenue in 2012 and because that category of software continues to attract budget, it’s no surprise that Perficient is angling for a bigger piece of that market. In a survey in July, 17% of IT managers were planning to increase their spending on CRM in the coming quarter, making it one of the few categories of IT where more respondents expected spending to go up, according to ChangeWave Research, a service of 451 Research.

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