Category: Uncategorized

Groupon diversifies its dealmaking

Contact: Brian Satterfield

Before its IPO last November, Groupon acquired 16 companies, 10 of which were competitors that expanded the daily deal heavyweight’s reach into regions such as South America, Asia, Africa and the Middle East. Having grown its coupon empire to cover most corners of the globe and established itself as the sector’s market leader, Groupon has since taken a broader approach to M&A, buying into areas that complement its core coupon business.

Since the capital infusion that accompanied its Nasdaq debut last November, Groupon has been on an acquisition spree. More than one-third of its total 25 deals have come in just the past five months. In fact, according to its recently filed annual report, the company completed six transactions in just the first two months of 2012. But with the exception of the purchase of Mertado in January, Groupon has strayed away from scooping up other daily websites, instead targeting businesses that allow the company to bolster its online community and commerce capabilities. More specifically, Groupon’s recent M&A moves have been primarily to obtain the startups’ expertise in information database development, search engine development, location-based technologies, merchant products and support, and transactional marketing.

Earlier this week, Groupon picked up San Francisco-based Ditto, the maker of an iPhone application that enables users to plan activities with friends based on their location. A Ditto blog post hinted that the deal was primarily geared toward Groupon’s need to add community features, the same rationale that likely drove the company’s purchase in February of online travel enthusiast community Uptake Networks. Groupon’s other post-IPO mobile play also came in February, when it reached for VC-backed Kima Labs, which developed an iPhone application that allowed consumers to make online purchases with their phones. That same month, the company made yet another e-commerce move when it took out online shopping recommendation software provider Adku.

It’s also worth noting that while Groupon has expanded its M&A strategy in terms of technology, its geographic focus has clearly shrunk. Eight of the nine companies it has acquired post-IPO have been based in the US.

Facebook’s big-money mobile maneuver

Contact: Brian Satterfield

Ahead of what’s shaping up to be a seminal IPO next month, Facebook has purchased San Francisco-based mobile photo application developer Instagram for $1bn in cash and stock. The deal not only stands as Facebook’s priciest ever, but also as the largest acquisition we’ve yet seen in the consumer smartphone application sector.

Until Monday’s reach for Instagram, Facebook had never even officially released a deal value, despite having made nearly 30 buys in the past five years. Of those transactions, nearly one-third (including all three of its other acquisitions announced this year) were geared toward adding key patents or employees that the social networking behemoth needed to build out features on its own platform. In the case of Instagram, though, Facebook specifically mentioned that it planned to continue operating the company as a stand-alone entity rather than attempting to completely integrate its photo editing and sharing features.

Founded in 2010, Instagram had accumulated a large user base despite employing just 13 people. Instagram’s flagship iOS application, which allows users to apply filters to mobile photos before sharing them, has racked up 30 million downloads since its launch. Demand for the Android version of the application, released only on April 3, was also high, with more than one million downloads in less than a week.

Instagram, which offers its applications for free, likely had next to nothing in terms of revenue, but that didn’t stop VC firms from injecting nearly $58m into the company over the past two years. Andreessen Horowitz and Baseline Ventures were responsible for the bulk of this investment, co-leading a $50m series B round in late March. The recent infusion was not only the largest ever for either firm but also yielded by far the highest return on investment. Baseline Ventures’ previous largest exit came in 2010, when salesforce.com purchased its portfolio company Heroku for $249m. Meanwhile, Andreessen Horowitz has come up big on mobile software for the second time – the firm’s only other $100m-plus exit came early last year, when then-PE-backed Skype paid $121m for video recording application developer Qik.

LifeLock buys an insurance policy

Brenon Daly

Contact: Brenon Daly

In its first-ever acquisition, LifeLock bought itself a bit of an insurance policy. The identity theft prevention player recently raised a big slug of money and handed it over for ID Analytics, an acquisition that we suspect was partly motivated by LifeLock’s plan to go public soon. How do we figure that?

On its own, LifeLock has built a powerful business since its founding in 2005. With more than two million registered users, the company recorded revenue of about $190m in 2011. LifeLock is known for its unapologetically brash marketing, including the full-page newspaper advertisements in which the company’s CEO tauntingly gives out his real social security number to any would-be identity thieves. (In the past, some of the company’s claims have landed LifeLock in hot water with regulators and consumer advocacy groups.)

Indeed, many critics have blasted LifeLock as little more than a marketing machine, one that chews through tens of millions of dollars each year to keep its consumer brand growing. With the acquisition of ID Analytics, however, some of that criticism has been knocked down. For starters, the purchase gets LifeLock into the enterprise business for the first time. (ID Analytics, which was founded 10 years ago, has 280 enterprise clients and will continue to operate as a stand-alone subsidiary following the acquisition.)

But perhaps more important than buying its way into a new market is the fact that LifeLock shored up some serious IP around identity risk management, compliance and credit analytics. Indeed, ID Analytics had been a key data provider to LifeLock since 2009. LifeLock likely paid roughly $150m (plus a bit of equity) for ID Analytics, which we understand was generating about $30m in sales. But that may be a small price for LifeLock to pay for being taken more seriously on Wall Street, if it does indeed go public.

All quiet on the Eastern front

Ben Kolada

Contact: Ben Kolada

In contrast to the surge in deal flow that we’ve seen so far this year, IT giant IBM has been extremely muted. So far this year the Armonk, New York-based company has announced only one deal – the pickup of real estate and facilities management vendor Tririga in March for an undisclosed amount. In comparison, last year Big Blue announced 15 transactions worth more than $5bn. But that’s not to say that the company hasn’t been looking for new properties, and likely would have inked a couple of extra deals had it not been for Oracle’s meddling. In fact, Oracle’s most recent move could motivate IBM to announce a transaction of its own soon.

We’ve written in the past that IBM may have looked at Datanomic, which Oracle quietly picked up April. We considered Datanomic a nice complement to the business Big Blue got when it bought Initiate Systems in early 2010. (Initiate had an OEM arrangement with Datanomic.) More recently, though, the company was once again thwarted by Oracle in the Web content management (WCM) sector. Oracle announced yesterday that it is acquiring WCM vendor FatWire Software, and we see IBM as the potential loser here. Big Blue could use a stronger WCM component, as it is also positioning for Web experience management, and we hypothesized recently that FatWire could possibly fill this gap. However, there are a few alternatives left for IBM. For instance, the company could make a play for CoreMedia, which is the only other WCM independent with a Java-based offering that competes at the high end.

US telcos feeling the squeeze

Ben Kolada

Contact: Ben Kolada

Amid double-digit revenue growth in the cloud infrastructure market, US telcos are increasingly buying their way into this industry in an effort to stem losses in their traditional wireline businesses. However, just as the hosting and colocation sectors are growing rapidly, so too are the major players being acquired. So far this year, we’ve already seen three of the largest hosters scooped up by eager telco service providers, with CenturyLink’s $2.5bn Savvis purchase being the most recent. If the remaining telcos don’t move fast enough, they could increasingly be squeezed out of the growing cloud infrastructure space. And competition for the remaining firms is expected to increase as foreign operators could look to enter the US market as well.

Atlanta-based Internap Network Services is among the short list of firms most likely to be taken out next. The company has a wide-reaching geographic footprint, with facilities spread throughout the US, Europe, Asia and Australia. The company’s large US and international presence makes it a particularly attractive target, especially for large CLECs such as tw telecom and PAETEC, or even cable MSO Comcast. However, its footprint could also attract foreign operators looking for synergies in their home markets, as well as entry into the US market. My colleague Antonio Piraino at Tier1 Research recently penned a piece reminding buyout speculators that just a few years ago Internap rebuffed a takeover offer from Indian telco Reliance Communications. He notes that Reliance may once again be a potential suitor, alongside Asian firms Pacnet and China Telecom or European provider Colt Technology Services Group.

Though opportunities for US acquisitions are diminishing, domestic telcos still have options. Given the hyper-competitive takeover market that is expected for remaining US hosters, US telcos may instead look for international deals. As seen by regional stalwart Cincinnati Bell’s CyrusOne unit expanding into London, US telcos are showing no fear of international expansion when it comes to their hosting and colocation businesses. If US telcos look abroad, we wouldn’t be surprised if they checked out Interxion. The Schiphol-Rijk, Netherlands-based firm operates 28 datacenters in 11 countries spread throughout Europe, and pulled in more than €200m in revenue in 2010, a 21% jump from the previous year.

Hosters lose another telco acquirer

Ben Kolada

Contact: Ben Kolada

In the latest billion-dollar-plus telco transaction, Level 3 Communications has announced that it is acquiring Global Crossing in an all-stock deal worth $1.9bn. (The actual price of the acquisition – the largest we’ve recorded for Level 3 – is closer to $3bn when Global Crossing’s debt is included.) And while the deal impacts the telecom industry by bringing together two well-known fiber operators, in a way it more significantly impacts the hosting and colocation markets by removing yet another potential telco buyer. (We’ll have a full report on Level 3 buying Global Crossing in tonight’s Daily 451.)

Earlier rumors in the hosting and colocation industries had Level 3 as a potential acquirer, perhaps picking up CDN vendor Limelight Networks or hosting company Internap Network Services. These rumors were made more convincing by the growing trend of telcos buying into hosting and colocation. But in their conference call discussing the transaction, executives at Level 3 and Global Crossing put those rumors to rest, saying they don’t expect to announce another acquisition anytime soon. Further distancing Level 3 from the hosting M&A game is the fact that the company doesn’t appear to be too interested in hosting or datacenter services at all, since it chose a target that generates only 5% of its total revenue from these segments.

We previously noted that CenturyLink is likely out of the market as well, following its purchase of Qwest Communications for an enterprise value of $22.4bn, which saddled the company with a mountain of debt (the deal closed April 1). Last year, CenturyLink and Qwest held an aggregate $19bn in debt; that’s nearly equal to the revenue the two companies generated over the same period. Further, that debt load is more than five times the combined company’s free cash flow. Debt repayment obligations will likely put a halt to CenturyLink’s steady M&A activity, thereby forcing the company to focus on organic growth. With CenturyLink/Qwest and now Level 3 focused on integration, we expect that acquisition speculation following the next telco-hosting deal will be somewhat tempered.

HP’s ‘cloudy’ strategic vision

Brenon Daly

Contact: Brenon Daly

Under Mark Hurd, Hewlett-Packard looked to bulk up all of its divisions through M&A. But software was definitely an afterthought. Hurd’s most-notable transaction, of course, was the $13.9bn purchase of services giant EDS. In his half-decade at the helm, Hurd also sprinkled in deals for companies selling gear for printing, storage and networking, among other areas.

Ever since Leo Apotheker replaced Hurd, people have been speculating that software would become a renewed focus at HP, if for no other reason than Apotheker spent some two decades at software giant SAP. Indeed, as he laid out his grand plan on Monday for HP in his first major strategy speech as CEO, Apotheker hit on software a number of times. (At least we think he did. It was hard to tell what was actually being announced in HP’s buzzword-laden release, which was heavy on ‘convergence’ but light on specifics.)

Apotheker also appeared to indicate that HP would continue shopping, with both security and information management as focus areas for M&A. Actually, that’s already showed up in deal flow since he took over. HP’s three most recent acquisitions (Vertica Systems, Stratavia and ArcSight) have all been done by the software group.

But if we’re brutally honest, we might suggest that the issue with HP’s software business isn’t so much adding to what’s there as it is just making what’s already there actually deliver. While other tech giants rely on software for outsized growth and rich cash generation, neither is particularly true for HP.

HP’s software division is growing in the mid-single digits while posting an operating margin that’s just half the level of most other rivals. To underscore the underperformance, consider this: even though HP’s old and dusty printer business is 10 times larger than its software division, they have the same growth rate. Dare we say that HP’s software unit could probably benefit from a Hurd-like focus on operations by Apotheker?

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.

PAETEC’s risky business

Ben Kolada

Contact: Ben Kolada

As the communications industry continues to consolidate and the pool of desirable targets dries up, the remaining buyers appear to be stretching a bit in their M&A moves. But even within that, PAETEC’s recent pickup of Cavalier Telephone looks to us like the riskiest telecom acquisition we’ve seen in the past year. The reason? Roughly three-quarters of Cavalier’s business is outside PAETEC’s focus.

To be fair, other telcos have also made challenging moves. Windstream Communications took big bites in the past 12 months, acquiring four companies that set the telecom provider back $2.7bn. (That figure includes the debt at the acquired companies that Windstream will be taking on.) The vendor’s spree boosts its top line by about 50%, a substantial increase that brings a not-insignificant amount of risk. Even Cablevision Systems, which is typically a stay-at-home company, inked a deal, reaching across the country to pick up Bresnan Communications for about $1.4bn.

However, the deals by Windstream and Cablevision made sense, if just because they expanded on each company’s existing strategy. Not so with PAETEC’s purchase of Cavalier. When we look at the transaction, we suspect that PAETEC was really only interested in Cavalier’s fiber assets. Understandably, the Richmond, Virginia-based competitive local exchange carrier wouldn’t have considered selling its fastest-growing division. Since it was unable to just get the part of Cavalier’s business that it probably wanted, PAETEC was forced to shell out $460m (including assumption of debt) for the whole company.

Cavalier had $390m in sales in the year leading up to the acquisition. However, the company’s fiber division itself generated only about $98m, or 25%, of total revenue. That means that a vast majority (75%) of Cavalier’s business appears to us to be an ungainly match to the business its buyer is in. PAETEC serves enterprises, which generate an average of $2,300 in monthly revenue. On the other hand, the majority of Cavalier’s revenue comes from consumer accounts and small businesses with monthly recurring revenue of only about $500.

Rather than spend to get this odd pairing, we think PAETEC would have been better off buying one of the number of fiber operators looking for a sale. A juicy target would have been Zayo Group. The company is on a $240m run rate for 2010. Based on recent valuations for Zayo’s competitors, we believe it could be had for roughly $500m – only slightly higher than Cavalier’s price tag, but without the unwanted baggage.

Fire-eating Barracuda

Brenon Daly

While not a done deal, Barracuda Networks’ new bid of $8.25 for each share of Sourcefire seems to be closer to the level the market was valuing the Snort shop. Nearly a month ago, the aptly named Barracuda swarmed Sourcefire with an unsolicited bid of $7.50 per share, which worked out to an equity value of $186m for the company. At the time, we called it a ‘floor bid’ – one that the privately held company would likely have to raise. The new offer adds $19m to Sourcefire’s price tag.

That bump appears to be enough for Sourcefire shareholders. (However, the company itself is still holding out for more.) After spending all of the time trading above Barracuda’s initial offer price, Sourcefire shares on Wednesday afternoon were trading in line with the newly raised bid of $8.25. The stock gained 46 cents, or 6%, to $8.11 in mid-afternoon trading.

Since the market has signed off on this deal, we thought we’d note a final curiosity about the proposed transaction: Sourcefire didn’t hire a banker. A company representative said last week that it ‘periodically consults’ with financial advisers but didn’t have any specific bank retained. (We contacted the company again on Wednesday for an update, but we didn’t hear back.)

Sourcefire is actually the second company targeted in an unsolicited offer that is going it alone. Mentor Graphics also told us it didn’t have a banker to help it fight off the ‘bear hug’ from Cadence Design Systems last week. And it wasn’t like the bid was just sprung on Mentor. The two companies had been talking since April, with Cadence advised by Deutsche Bank Securities. However, a representative said it was planning to hire one. (If history is any guide, Mentor will likely be calling Goldman Sachs, given that bank’s legacy of work for companies on the defensive.) Just add the lack of mandates to the growing list of problems for bankers, at least for those who haven’t already been laid off in the recent downturn.