Category: VC

Tech bankers: Business is back

Brenon Daly

Contact: Brenon Daly

Every year, we survey our investment banking contacts to get a sense of what they anticipate for both their business and the overall technology M&A market in the coming year. The results this year seem to fully indicate that the recession that flattened business – and entire institutions – in 2009 will give way to a busier and more vibrant dealmaking market in 2010. Bankers projected that activity will pick up across virtually every part of the business, including the IPOs and private equity buyouts that had all but disappeared this year.

Altogether, the results show a stunning turnaround from our previous survey. (See our report on last year’s survey.) Of course, 2008’s survey went out when the Nasdaq was trading around 1,550 amid the historic upheaval and blood-letting on Wall Street caused by the credit crisis. As devastating as the crisis seemed at the time, it has actually turned out to be a boon for most. More than half of the bankers responded that those unprecedented changes actually boosted their firm’s opportunities – and they expect to be hiring to handle the additional work they see coming in 2010.

The main reason why the banks see the need to hire is that business has recovered dramatically. When we asked bankers to gauge their current pipeline compared to where it was at this time last year, the recovery was striking. Two-thirds said the dollar value of mandates on the deals they are currently working on is higher than it was in late 2008. In the 2008 survey, half of the bankers said their pipeline was drier. Look for our full report on the survey in tonight’s 451 Group MIS sendout.

Change in number of formal tech mandates

Pipeline volume 2006 2007 2008 2009
Increase 84% 70% 39% 67%
Increase 25% or more 58% 31% 9% 39%
Decrease 4% 13% 34% 19%

Source: Annual 451 Tech Banking Outlook Survey

Microsoft (officially) pals up with Opalis

Brenon Daly

Contact: Brenon Daly

Two months after we first indicated that Microsoft was interested in Opalis Software, the software giant has indeed acquired the runbook automation (RBA) vendor. No terms were disclosed, but when we talked with sources in mid-October, the price being kicked around was $60m. Opalis was thought to be running at about $10m in revenue. We understand that Cowen Group banked Toronto-based Opalis.

The deal, now that it is official, comes after other fellow RBA startups were snapped up. In March 2007, Opsware (now part of Hewlett-Packard) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. As that wave of consolidation swept through the RBA market, Opalis positioned itself as an independent alternative to the offerings from the system management giants. That said, the vendor had been drawing closer to Microsoft. In late April, the two companies announced a joint technology agreement that saw, among other things, Opalis integrated into Microsoft’s System Center Operations Manager 2007 and System Center Virtual Machine Manager 2008 consoles.

More businesses on the block at LexisNexis?

Brenon Daly

Contact: Brenon Daly

When LexisNexis announced last month that it was selling off its HotDocs business, it got us thinking about other divestitures that the information provider may be contemplating. More specifically, we wonder if LexisNexis is considering reheating its effort to shed Applied Discovery. Not too long ago, we heard rumors that LexisNexis had hired a bank to help it unwind its $95m purchase of the Seattle-based e-discovery startup. LexisNexis picked up Applied Discovery in mid-2003.

According to one source, LexisNexis came close to selling Applied Discovery to the Silicon Valley-based buyout shop for about $70m, but talks collapsed during due diligence. Shortly after that, LexisNexis cut its asking price for Applied Discovery to basically half of the $95m that it originally paid for the company, but a second source indicated that the unit still didn’t generate much interest. The reason? Many would-be financial buyers are put off by the lumpy business in the e-discovery sector. Sales are typically driven by investigations or lawsuits, which can make it difficult to predict. Meanwhile, among the strategic buyers, many of the large information management vendors – including Autonomy Corp, Iron Mountain, Seagate and EMC, among others – have already announced acquisitions of e-discovery players.

Amex buys into the alternative online payments revolution

-Contact Thomas Rasmussen

As the first significant deal that adds online payments technology to a legacy payment platform, American Express’ recent $300m acquisition of Revolution Money essentially amounts to a shot across the bow of eBay’s PayPal and Google’s CheckOut. The relatively rich purchase of four-year-old Revolution Money also stands as the third-largest alternative online payments buy to date, trailing only eBay’s pickups of PayPal and Bill Me Later. We estimate that Revolution Money, which had taken some $100m in venture funding, was running at around $10m-$20m in sales.

The alternative payments market is both large and fragmented, and is likely to see substantial consolidation in the coming years. It is also a space that has had difficulties in establishing a coherent offering, with early efforts ranging from ill-conceived ‘sci-fi-esque’ biometrics offerings to SMS-based payment methods. Until recently, it has mostly been marred by failed startups, poorly executed acquisitions and fire sales. Nonetheless, thanks to the continuing success of PayPal and new alternatives (Google Checkout, among others), as well as the boom in online micro-transactions and an uptick in general online shopping, the sector is again gaining favor, particularly as a way to cut transaction costs.

Looking ahead, we believe Amex’s acquisition of Revolution Money will serve as a wakeup call to other legacy payments vendors as well as financial institutions that might now look to do some catch-up shopping of their own. This inevitable consolidation should serve as good news for some of the established startups in the industry such as mPayy, Moneta, eBillme and Secure Vault Payments, among many others. These firms could well find themselves getting some overdue attention in 2010 as alternative online payments continue to gain currency.

The wisdom of the crowds

Brenon Daly

Contact: Brenon Daly

As pretty much the only buyers at the table right now, corporate development executives’ views go a long way toward shaping the overall outlook for tech M&A. So it seems a fitting time to survey these shoppers in order to get their expectations for deal flow in 2010. The views of the corporate buyers are crucial to understanding deal flow because, collectively, strategic acquirers account for some 85% of the total M&A spending so far this year. (Note: If you are a corporate development officer and would like to take part in our survey, just email me and I’ll send you the link for the survey, which should only take about five minutes to complete.)

Over the past few years, the survey responses have correlated very closely with how deal flow has actually developed. For instance, when we asked corporate development executives last year what they expected to pay for startups in the coming year, nine out of 10 said private company valuations would come down in 2009. (That has certainly been the case this year.) And in our summer survey, we noted a significant increase in M&A appetite among the strategic buyers. That has certainly been the case, too. Spending on deals in the second half of 2009 is running 50% higher than the amount spent in the first two quarters of the year. Again, if any corporate development officers would like to take part in this survey, contact me and I’ll get you the form.

What a pair of startup sales tells us about the recession

Brenon Daly

Contact: Brenon Daly

If there was any doubt that the M&A climate has warmed since the beginning of this year, consider the relative exits for a pair of database-monitoring startups. Back in February, when venture funding was hard to come by and wind-down sales were plentiful, Tizor Systems sold to Netezza for just $3m. Fast-forward nine months, and Guardium sells to IBM for an estimated $230m. Viewed another way, Tizor returned just one-tenth the amount of venture funding it raised, while Guardium returned more than 10 times the funding it raised.

Granted, the relative returns of Guardium and Tizor probably have more to do with the business performance of the two rivals than what was going on in the economy. After all, Tizor was limping along with just $2m in sales, while Guardium was sprinting along at around $40m. (Both companies were founded in 2002.) That said, we’re pretty confident that the fact that the US is no longer (officially) in a recession certainly didn’t hurt the valuation of Guardium, a company we have thought has been in play for some time.

Indeed, as we look down our list of recent IT security deals, we can’t help but notice that the three largest transactions – all of which saw marquee tech companies paying above-market multiples – have come in the past four months. In addition to the sale of Guardium to IBM at an estimated 6x trailing sales, we’ve also seen Cisco Systems pay the same multiple for ScanSafe and McAfee pick up MX Logic for an estimated 4x trailing sales. A few more of these types of deals and we may start to believe that we are indeed out of the recession.

Navigating a decent exit

Brenon Daly

Contact: Brenon Daly

When we last checked in with Networks In Motion (NiM) two weeks ago, we noted that the turn-by-turn navigation vendor had just been stepped on by the not-so-gentle giant, Google. As it turns out, NiM’s valuation got stepped on a bit, too. The Aliso Viejo, California-based company sold itself Tuesday to TeleCommunication Systems for $170m. Terms call for TeleCommunication to hand over $110m in cash and $20m in shares, along with a $40m note. Raymond James & Associates advised TeleCommunication Systems while Jefferies & Co advised NiM on the transaction, which is expected to close by the end of the month.

The offer values NiM at 2.3 times 2009 revenue and 1.7x the company’s projected sales for next year, according to our understanding. NiM’s expectation of $100m in sales in 2010, representing 33% growth, strikes us as a bit aggressive. The reason? Google has started giving away a turn-by-turn navigation product for select Android devices that run on Verizon Wireless, the only network on which NiM currently offers its service. Although the threat of Google completely wiping away NiM’s business is grossly overblown, we suspect that it did put some pressure on the price of the company. NiM’s early focus on feature phones gave competitors such as TeleNav an early lead on smartphones such as BlackBerry and Windows Mobile. According to one rumor, T-Mobile and NiM had been close to a deal earlier this year. Without the ‘Google overhang,’ we could imagine that NiM would be selling for quite a bit more than the $170m that TeleCommunication Systems is slated to pay.

That said, it’s actually a decent exit for seven-year-old NiM. Although it’s getting an admittedly so-so multiple for its business, the company is providing a solid return for its backers, largely because it didn’t raise much money. It drew in a total of less than $20m, with Mission Ventures and Redpoint Ventures as early NiM backers and Sutter Hill Ventures joining in the third – and last – round of NiM funding in March 2006. (There was also some money from unnamed strategic investors.) Unlike rival TeleNav, NiM was unlikely to go public because of concerns about competition from Google. (TeleNav, which put in its IPO paperwork a month ago, isn’t immediately threatened by Google because the latter’s service isn’t yet available on TeleNav’s networks, AT&T and Sprint.) A solid (if not spectacular) trade sale of NiM in the face of growing competition from Google isn’t a bad bit of navigation for the startup at all.

A quiet end to the year

Brenon Daly

Contact: Brenon Daly

As we flip the calendar to the final month of 2009, it’s worth noting that December is almost always a quiet month for M&A. That was particularly true last December, which saw just $6bn of spending on tech acquisitions. The spending level represented a scant 2% of the total $301bn of spending on deals in 2008. (If the month had recorded its representative one-twelfth (8%) of the annual total, spending would have come in at roughly $25bn.)

Of course, last December was a pretty bleak time, with investment banks reeling and companies ratcheting back their financial projections for the coming quarters. But even in times of more robust dealmaking, December has been a below-average contributor to annual M&A spending. For instance, deals in the final month of 2007 and 2006 represented just 6% of the totals in both years.

So what does all that mean for M&A in the final month of this year? Assuming we return to a more normalized level of activity in which December accounts for about 6% of total annual spending, we’ll be looking at about $9bn worth of deals between now and year-end. Overall, that would put total spending for 2009 at just $151bn – exactly half the amount that we saw in 2008.

A month off

Year Total spending in December December spending as % of annual total
2008 $6bn 2%
2007 $26bn 6%
2006 $29bn 6%
2005 $38bn 10%

Source: The 451 M&A KnowledgeBase

Cyber Monday’s here

-Contact Thomas Rasmussen, Brenon Daly

Even though the receipts from Black Friday, the traditional retailers’ launch of the holiday shopping season, weren’t much bigger than they were last year, online retailers on Cyber Monday appeared to be ringing up a pretty good business this year. Amid all of the cyber-shopping, we couldn’t help but notice that there has also been a fair amount of buying of the shopping sites themselves. For instance, Amazon recently wrapped up its $847m all-stock acquisition of online apparel retailer Zappos. This stands as Amazon’s largest purchase, nearly three times larger than its second-largest buy. (We should also note that when the deal closed earlier this month, the equity was worth a whopping $1.2bn thanks to the recent surge in Amazon shares. The stock, which hit an all-time high on Monday, has risen some 62% over the past three months.) While overall M&A spending this year appears likely to be half the amount of 2008, online retail dealmaking is still going strong. We expect spending on Internet commerce acquisitions to come in roughly where it did in previous years, at some $2.3bn worth of transactions in the sector.

Meanwhile, another e-commerce vendor continues its push for a different exit. Newegg.com filed to go public in late September, and appears to be on track for a debut early next year. The online electronics retailer, which was founded in 2001, has more than doubled sales over the past four years while also posting a profit in each of those years. Although growth has slowed so far this year, Newegg still raked in $2.2bn in revenue and $70m in EBITDA for the four quarters that ended last June.

Given the recent trend in dual-track offerings, we wonder if Newegg might not get snapped up before it hits the Nasdaq under the ticker ‘EGGZ.’ Granted, this is pure speculation, but there are a fair number of parallels between Newegg and Zappos, which could mean that Amazon will reach for it. (Both Newegg and Zappos have developed profitable, growing businesses by specializing in a slice of the market that Amazon has tried – but failed – to dominate.) Additionally, electronics retailers such as Best Buy could well be interested in bolstering their online sales units with Newegg. Although Newegg and its underwriters haven’t set an initial valuation, we suspect that any buyer would have to be ready to hand over slightly more than $2bn to add Newegg to its shopping cart.

Online retail M&A

Period Number of deals Total deal value
2005 30 $1.27bn
2006 53 $3.78bn
2007 36 $2.62bn
2008 45 $1.36bn (excluding the sale of Getty Images)
2009 YTD 55 $2.34bn

Source: The 451 M&A KnowledgeBase

Bets on casual games are paying off

-Contact: Thomas Rasmussen, Brenon Daly

Fittingly enough, on the one-year anniversary of our piece predicting continued consolidation of the social and casual gaming space, Electronic Arts announced the industry’s largest acquisition. The Redwood City, California-based videogame giant acquired Playfish on November 9 for $275m, although an earnout could mean that EA will pay as much as $400m over the next two years for the company. We estimate that Playfish, which will be slotted into the EA Interactive division, generated about $50m in trailing sales. Overall M&A continues to be strong in the still-niche gaming sector, with deal volume up about 25% from last year with about 35 transactions inked so far in 2009.

With the gaming industry seemingly in recovery mode after not-so-horrible earnings announcements from industry bellwethers EA and Activision Blizzard, we’re confident that more videogame and media companies will look to add social networking games. (After all, the big gaming players have used M&A as a way to buy a piece of a fast-growing, emerging market. For instance, EA spent $680m in cash four years ago for Jamdat Mobile to get into wireless gaming.) With Playfish off the board, which other social gaming startups might find themselves targeted by one of the big gaming vendors?

While there are literally hundreds of promising startups, most are too small to be important enough for a big buyer. Nevertheless, there are a few firms that have grown – both organically and inorganically – enough to make them attractive acquisition targets. For instance, Playdom, which develops games primarily for MySpace and Facebook, recently reached for a pair of smaller gaming startups. The company also recently raised $43m. Similarly, Zynga recently raised a funding round ($15m) and has also picked up two small startups this year. Two other names to watch in the emerging social gaming market are Digital Chocolate and Social Gaming Network Inc.