Category: VC

Is mobile advertising back?

-Contact Thomas Rasmussen

In a clear sign that mobile advertising has grown up, Google spent a whopping $750m in stock on Monday to pick up San Mateo, California-based AdMob in what we hear was a contested process. This transaction goes a long way toward securing control of mobile display advertising for Google and comes just days after the launch of Android 2.0. Although we’ve been projecting dealmaking in the mobile advertising market for quite some time, we’re nonetheless floored by the rich valuation for AdMob, a three-year-old startup that’s raised just shy of $50m. We estimate that the 140-person firm pulled in about $20m in gross revenue in 2008 and was on track to double that figure this year (we surmise that this translates to roughly $20m on a net revenue basis).

The double-digit valuation for AdMob reminds us more than a little bit of the high-multiple online advertising deals that we saw in 2007. Viewed in that context, Google’s purchase of AdMob stands as the third-largest ‘new media’ advertising purchase since 2002. Of course, like many of those transactions, this was not based on revenue, but instead on technology and market extension, which is consistent with Google’s strategy of acquiring big into core adjacencies.

Looking forward, AdMob’s top-dollar exit is sure to have a number of rival mobile advertising startups excited. One competitor that’s preparing to raise an additional sizable round of funding quipped at the near-perfect timing of this transaction. This is an industry that has seen its ups and downs over the past few years. When we first wrote about AdMob back in May it was in the backdrop of fire sales and failed rounds of funding. If nothing else, this deal will dramatically change that.

Microsoft has been actively playing catch-up to Google in advertising and search, and is sure to follow it onto the mobile device. As are many other niche advertising shoppers such as Yahoo, Nokia, AdKnowledge, Adobe-Omniture and traditional media conglomerates such as Cox. AOL has already made its move, reaching for Third Screen Media two years ago. (We would note that AOL’s $105m purchase of Third Screen is a rare case of that company actually being ahead of the market.)

Startups that could benefit from this increasing focus on the sector include AdMarvel, Amobee, InMobi, and Velti’s Ad Infuse. However, we suspect that some of the major advances – and consequently the most promising targets – are likely to come from players that are just now getting started, with fresh and profitable approaches to location-based mobile advertising.

Some recent mobile advertising deals

Date announced Acquirer Target Deal value Target TTM revenue
November 9, 2009 Google AdMob $750m $20m*
September 14, 2009 Nokia Acuity Mobile Not disclosed Not disclosed
August 27, 2009 AdMob AdWhirl Not disclosed Not disclosed
May 21, 2009 Limelight Networks Kiptronic $1m $2m*
May 12, 2009 Velti Ad Infuse <$1m* $1.3m*
March 11, 2008 Qualcomm Xiam Technologies $32m Not disclosed
August 21, 2007 Yahoo Actionality Not disclosed Not disclosed
May 15, 2007 AOL Third Screen Media $105m $3m*

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

Is IAC looking to sell Ask.com?

-Contact Thomas Rasmussen

It looks like acquisitive IAC/InterActiveCorp could be gearing up to undo its largest buy ever, Ask.com. At least Barry Diller’s opening remarks during IAC’s conference call last week seem to indicate a desire to explore the possibility. The New York City-based Internet media company has successfully expanded into a content giant by snapping up dozens of Internet properties. IAC has inked 36 deals worth more than $4.5bn since 2002. Many of those purchases have been tiny (Airfarewatchdog.com, for instance), but IAC did make a significant pickup when it handed over $1.85bn for Ask.com in March 2005.

However, we suspect that Ask.com hasn’t delivered the kind of returns that IAC had hoped for, since the search engine remains far behind Yahoo, Microsoft and Google in terms of usage. Still, with roughly 4% of US search market share, Ask.com would be a significant addition to any acquirer in the competitive scale-driven space, where every percentage point counts.

Though we won’t rule out a financial buyout, which would have more than a few echoes of the just-closed Skype carve-out, we think a strategic buyer for Ask.com makes more sense. Two obvious suitors spring to mind: Google and Microsoft. Although Google recently made its intentions for more acquisitions known and even signaled a willingness to do large deals again, we do not think it is likely to pick up Ask.com. Rather than make a consolidation play, we expect Google to continue to snare startups to offer additional services to existing users, while also bolstering its recent moves into new markets such as online video and mobile communications.

On the other hand, Microsoft has displayed a willingness to spend a lot of money in its game of catch-up with Google. With an acquisition of Ask.com coupled with its impending Yahoo deal, Microsoft could come very close to capturing one-third of all search traffic. While that would undoubtedly help Microsoft, a divestiture of Ask.com could also benefit IAC. Granted, it would mean slicing its revenue roughly in half, but IAC would have a cleaner story to tell Wall Street. And it could use some help in that area. Investors give a paltry valuation to the cash-heavy company, valuing the business at less than one times sales on the basis of enterprise value. IAC sports a $2.6bn market capitalization, but holds $1.8bn in cash.

IAC’s historic acquisitions and divestitures, 2002 – present

Year Number of acquisitions Number of divestitures
2009 5 4
2008 7 0
2007 6 0
2006 3 0
2005 3 0
2004 4 0
2003 4 0
2002 4 0

Source: The 451 M&A KnowledgeBase

A unanimous quartet

Brenon Daly

Contact: Brenon Daly, Dennis Callaghan

With BMC Software reaching across the Atlantic this week for Tideway Systems, the Big Four systems management vendors are now four for four in terms of buying startups that do datacenter asset discovery and dependency mapping. The deal, which is the second acquisition by BMC in as many months, should help the company round out its datacenter management lineup. Although terms weren’t disclosed, we understand that BMC paid $30m for Tideway, which was running at about $15m in revenue. Tideway, which is based in London, had raised some $37.5m in backing, including a whopping $27m series C in April 2008.

Most of BMC’s other rivals had already inked deals in this market. In addition to the Big Four, other tech giants also picked up startups that had discovery and mapping technology. The deals started in mid-2004, when Mercury Interactive (now part of Hewlett-Packard) reached for Appilog. After that, a yearlong flurry of transactions starting in late 2005 saw pretty much all the big names make their play. IBM acquired Collation, Symantec reached for Relicore, EMC grabbed nLayers and CA Inc bought Cendura. Based on disclosed or estimated deal values, all the buyers during that period paid in the neighborhood of $50m for their respective discovery and mapping startups, roughly 40% more than we hear BMC handed over for Tideway. Look for a full report on the transaction in tonight’s MIS sendout.

Does Wall Street run through the RedPrairie?

Brenon Daly

Contact: Brenon Daly

Along with the rising equity markets, there’s a new flow of companies that are planning to file their IPO paperwork in the next few weeks. For instance, we know of two venture-backed mobile vendors that have picked underwriters and plan to put in their prospectuses shortly. And we’re willing to bet that the expected strong offering from Fortinet, which initially filed in early August and is likely to debut before Thanksgiving, will catch the eye of quite a few VCs who have sizeable security providers in their portfolios.

Altogether, it looks like a decent IPO pipeline for VCs, as long as the equity markets hold. But what about their brethren at PE firms? We’ve seen the buyout barons file to flip a few non-tech holdings back onto the market, and the big offering from Avago Technologies (the carve-out of Hewlett-Packard’s semiconductor business by Kohlberg Kravis Roberts and Silver Lake Partners) has been above water since it hit the Nasdaq in early August. But there are still a lot of PE firms with pretty full portfolios that would like to post a realized gain – as opposed to ‘paper gains’ – before going out and raising a new fund.

So which PE-backed company is likely to hit the public market? Several sources have indicated that RedPrairie, an inventory management software vendor owned by Francisco Partners, has selected bankers and plans to ink an S-1 in the coming weeks. Francisco acquired RedPrairie in mid-2005, 30 years after the company was founded. Since the buyout, RedPrairie has rolled up six other companies. In 2008, the firm generated almost $300m in revenue. That puts RedPrairie’s revenue in the same neighborhood as rivals i2 and Manhattan Associates, but below the sales of JDA Software and Epicor Software.

Microsoft pals up with Opalis?

Brenon Daly

Contact: Brenon Daly, William Fellows

Having already seen a trio of notable runbook automation (RBA) startups get snapped up by major tech players, we’re now hearing buzz about another pairing. Word is that Microsoft has snagged Opalis Software for about $60m, according to both financial and industry sources. Opalis, which has raised $25m in venture backing, is thought to be running at about $10m in revenue – a much higher level than its rivals at the time of their acquisitions. Current CEO Todd DeLaughter is the former head of Hewlett-Packard’s OpenView division.

The rumored deal comes more than two years after a pair of high-multiple RBA pickups put the focus on the sector, and a year since the industry’s most-recent significant transaction. In March 2007, Opsware (now part of HP) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. Both iConclude and RealOps had only just started to produce any revenue at the time of their respective purchases. And exactly a year ago, CA Inc reached for Optinuity, which we understand was also generating sales in the low single digits of million of dollars.

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. Of course, that would be lost if the company does indeed end up belonging to the Redmond behemoth. It wouldn’t be surprising if Microsoft does announce the deal. We understand that the company had a preliminary look or two at Optinuity before that startup sold to CA a year ago. More significantly, Microsoft and Opalis announced in late April 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.

What’s next for billionaire Twitter?

-Contact Thomas Rasmussen

At a time when the social networking bubble is quickly deflating, micro-blogging startup Twitter seems to be living in an alternative universe. We are, of course, referring to the much-publicized $1bn valuation the San Francisco-based company received in a recent round of funding. The rich funding dwarfs even the kinds of valuations we saw during the height of the short-lived social networking bubble last year. And it’s pretty difficult to justify Twitter’s valuation based on its financial performance, since the money-burning startup has absolutely no revenue to speak of, nor a clear plan of how to change that. It seems the entire valuation is predicated on the impressive user growth it has experienced over the past year, as well as the charismatic founders’ wild dreams of ‘changing the way the world communicates.’ That’s pretty thin, particularly when compared to LinkedIn’s funding last year at a similar valuation. That round, which was done at a time when the social networking fad was near its peak, nonetheless had some financial results to support it. Reid Hoffman’s startup was profitable on what we understand was about $100m in revenue and a proven and lucrative business model.

The interesting development from this latest funding is that it makes a sale of Twitter less likely, we would argue. This may be fine with the founders, who have drawn in some $150m for the company and will (presumably) look to the public market to repay those investments at some point in the future. But without any revenue to speak of at this point, any offering from Twitter is a long way off. Also, an IPO by Twitter in the future hangs on successful offerings from Facebook and LinkedIn, which are far more likely to go public before Twitter. If both of those social media bellwethers enjoy strong offerings, and Twitter actually starts to make money off its fast-growing base of users, then a multibillion-dollar exit – in the form of an IPO – might not be farfetched. But we should add that there are a lot of ‘ifs’ included in that scenario.

An offering looks all the more likely for Twitter because the field of potential acquirers has gotten significantly slimmer, since not many would-be acquirers have deep-enough pockets to pay for a premium on the startups’ already premium valuation. As we know from Twitter’s own embarrassing leak of some internal documents, Microsoft, Yahoo, Google and Facebook have all shown an interest in the startup at one point or another. But we’re not sure any of those companies would really be ready to do a 10-digit deal for a firm that’s still promising – rather than posting – financial results. Moreover, we wonder if any of the four would-be buyers even need Twitter. Yahoo and Microsoft seem focused on other parts of their business. Meanwhile, Google is hard at work on Google Wave, and Facebook appears to have moved on already with its much-cheaper acquisition of Twitter competitor FriendFeed in August.

Recent high-profile social networking valuations (based on last known valuation event)

Date Company Valuation/exit value Revenue Revenue to value multiple
September 2009 Twitter $1bn $0* N/A
Summer 2009 Facebook $8bn $500m* 16x*
June 2008 LinkedIn $1bn $100m* 10x*
May 2008 Plaxo $150m* (acquisition by Comcast) $10m* 15x*
March 2008 Bebo $850m (acquisition by AOL) $20m* 42.5x*
July 2005 MySpace/Intermix $580m (acquisition by NewsCorp) $90m 6.5x
December 2005 FriendsReunited $208m (acquisition by ITV; divested to Brightsolid in $42m fire sale in August 2009) $20* 10x*

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

‘She got the ring, I got the finger’

Brenon Daly

Contact: Brenon Daly

As every country and western crooner knows, relationships can build you up but they can also break you down. (Suggested listening: ‘I Fall to Pieces’ by Patsy Kline.) That’s as true in love as it is in business, as my colleague Kathleen Reidy notes in a new report. Specifically, she takes a look at the future for StoredIQ, which got dumped by EMC last month when the tech giant acquired rival company Kazeon for its e-discovery offering. (Suggested listening: ‘She Got the Ring (and I Got the Finger)’ by Chuck Mead.)

It was undoubtedly a big blow for StoredIQ, which had a longer-standing and deeper relationship with EMC than Johnny-come-lately Kazeon. EMC has been reselling StoredIQ under its SourceOne brand since 2008. But obviously, StoredIQ will be a bit of a third wheel following the Kazeon acquisition, and the relationship with EMC is effectively over. (Suggested listening: ‘If the Phone Don’t Ring, Baby, You’ll Know It’s Me’ by Jimmy Buffet.) While the official reason has never surfaced as to why EMC passed on StoredIQ in favor of Kazeon, we might chalk it up to the difficult task of parsing out revenue in any reselling agreement, and how to value those sales. That’s always tricky.

In any case, StoredIQ is moving on. (Suggested listening: ‘How Can I Miss You if You Won’t Go Away’ by Dan Hicks and His Hot Licks.) The eight-year-old startup has solid technology to identify and manage data that lives outside companies’ managed repositories, which is a key part of e-discovery. And StoredIQ may well be a good fit for Symantec, which also had a relationship with Kazeon and may now be in the market for a new partner. (Suggested listening: ‘I May Be Used (But Baby I Ain’t Used Up)’ by Waylon Jennings.)

A ‘new normal’ for tech M&A

Brenon Daly

Contact: Brenon Daly

With the third quarter now in the books, we’re busy tallying the buying that went on over the past three months. Not that it involves all that much work, actually. In fact, for all the talk of how much better off we are now than at this time last year, you wouldn’t know it from the M&A levels in the third quarter, which wrapped yesterday.

And just to qualify, when we say ‘better off,’ in most cases we mean ‘less worse off.’ It’s true, for instance, that jobless rates aren’t rising as fast as they once were, but they are still rising. That sentiment is mirrored in statistics covering many other areas of the economy as well, although is does go against the 15% rise in the Nasdaq over the summer.

So where do these currents and crosscurrents leave us in terms of numbers of third-quarter deals and the spending on them? In the just-completed July-September period, we recorded 740 transactions with an aggregate announced value of $34bn. That lines up nearly identically with the 733 deals worth $32bn in the third quarter of 2008, which saw the beginning of the historic credit crisis. Further, the third-quarter results continue the trend of measuring tech M&A spending in the tens of billions of dollars, compared to the $100bn quarters that we saw regularly during the boom years. Our take: there’s a ‘new normal’ in tech M&A.

Recent quarterly M&A activity

Period Deal volume Deal value
Q3 2009 740 $34bn
Q2 2009 767 $48bn
Q1 2009 654 $10bn
Q4 2008 725 $40bn
Q3 2008 733 $32bn
Q2 2008 719 $173bn
Q1 2008 836 $55bn

Source: The 451 M&A KnowledgeBase

Like Intel, Microsoft buys scraps of parallel-processing startup

Brenon Daly

Contact: John Abbott

Despite a fair bit of talk about how important it is to demystify the art of parallel programming now that multiple cores and threads have become mainstream in x86 computing platforms, the actual level of activity has been surprisingly low. Over the last few years we’ve identified no more than a dozen small development tools vendors active in this area – some of them focused on the high-performance computing (HPC) sector – that appeared to have some prospect of success. And the companies with the most at stake in seeing better performance levels from new-generation CPUs (notably Intel and Microsoft) don’t seem to have been working particularly hard on the problem, either.

Perhaps, however, that’s starting to change. True, the number of startups is declining rather than expanding, but as they fail their assets are being acquired by larger vendors. One of the first to go was PeakStream in June 2007, snagged by Google after raising $22m in VC funding. But Google had no interest in sharing what it had bought. It withdrew PeakStream’s commercial product and began using it internally to boost the performance of its own software. Just last month Intel – currently in the process or rolling out six- and eight-core microprocessors – revealed that it had quietly picked up two small companies: RapidMind and Cilk Arts. And now Microsoft has announced, equally quietly, that it has purchased the technology assets of Interactive Supercomputing (ISC).

ISC had raised around $18m in VC funding over its four years of life, from Ascent Venture Partners, CommonAngels, Flagship Ventures, Fletcher Spaght and Rock Maple Ventures. It’s perhaps a bit of a stretch to call what ISC was doing mainstream, since it was focused on the HPC market. Its Star-P development environment let users create software models on their desktops using off-the-shelf packages from which parallel code could be automatically generated. The company claimed it could cut months from software development lifecycles. But Microsoft is talking about integrating ISC’s technology into its own products and using it for desktop computing as well as clusters. ISC CEO Bill Rock will bring over a team of experts to join Microsoft’s New England Research & Development Center in Cambridge, Massachusetts. Microsoft says it will continue to support existing Star-P users but won’t continue to sell the product in its current form.

Solid-state storage market: OEM now, M&A later?

Brenon Daly

Contact: Brenon Daly

As buoyant as the Nasdaq has been so far this year, few stocks can come close to matching the stunning 10-fold rise of STEC Inc. After opening the year at about $4, shares in the maker of solid-state drives (SSDs) inched above $40 earlier this month. Perhaps inevitably, gravity (in the form of Wall Street concern over increased competition) has pulled STEC back down over the past week. Shares closed Wednesday at $30.85, leaving the company still with a cool $1.5bn market capitalization.

In a recent report, my colleague Henry Baltazar notes that STEC is the central player in the emerging SSD segment, one that could very well change the face of the multibillion-dollar server and storage markets. SSDs are much faster and far more efficient than traditional hard drives and disk-based storage arrays. Also, the prices of SSDs have come down sharply as they have moved from costly DRAM-based to flash-memory-based drives. Taken together, the pitch of ‘better, cheaper, faster’ has spurred phenomenal growth in the SSD space. For its part, STEC’s sales are projected to hit $350m in 2009, an increase of more than 50% in the midst of one of the softest IT spending environments in recent years.

This trend, of course, hasn’t gone unnoticed by the server and storage giants. So far, however, when these companies have run the ‘buy-build-partner’ calculus for the SSD sector, most have opted to partner. STEC, for instance, has OEM deals in place with nearly all of the major server and storage players, including IBM, Hewlett-Packard and a longstanding accord with EMC. As mentioned, though, competition is heating up as startups look to get established in this fast-growing market. New companies entering the space include Pliant Technology and SandForce (neither of which has announced any OEM agreements of its own so far), plus Fusion-io, which has OEM deals with HP and IBM, as well as reseller agreements with Dell and other vendors. If the SSD market continues to take off, we could certainly imagine one or more of these startups getting snapped up.