Category: VC

Tapping online TV ad revenues

After running up an M&A bill of more than $10bn on advertising deals last year, Internet titans are now taking the wraps off some of the platforms built on those acquisitions. This week, for instance, Google struck a content distribution deal with Family Guy founder Seth MacFarlane. Google will distribute a new Internet-exclusive cartoon series using the AdSense platform it picked up through its $280m acquisition of Applied Semantics back in 2003. Additionally, Google launched its Google Affiliate Network, which is essentially a re-branding of DoubleClick’s affiliate marketing product, Performics.

Through the AdSense deal, Google will syndicate two-minute ‘webisodes’ with accompanying advertisements to thousands of demographically chosen websites. Of course, other sites already offer Web video streaming. However, few of them have found a way to offer the content in a profitable way. Consider the online TV network Hulu, a $100m joint venture of NBC and News Corp that streams videos from its stand-alone website. Although it consistently sells out its ad inventories, Hulu still struggles to get viewers to its site, much less run profitably.

One boost to the flagging revenue outlook for this market may well come from online video advertising markets, particularly mobile video markets. While the top players, including Google, keep busy monetizing on previous acquisitions, we expect the scores of smaller players to get snapped up. Among those that might find themselves on a shopping list: VC-backed Qik, which streams live TV and video to mobile phones and enables users to upload content to social networking websites; a similar startup, Myframe’s Flixwagon, which has partnered with MTV Israel; and finally, decentral.tv’s Kyte.tv, based in San Francisco, is streaming video on the iPhone. If any of the big online advertising platforms want to go wireless, we expect they will probably take a close look at one or more of these startups.

Selected Google online advertising deals

Date announced Target Deal value Company description
April 13, 2007 DoubleClick $3.1bn Online advertising and marketing services
April 23, 2003 Applied Semantics $281m Online advertising and analytics platform

Source: The 451 M&A KnowledgeBase

Microsoft makes meaningful buy

Since shelling out nearly $10bn in a year and a half to reinvent itself as an online contender, Microsoft, on July 1, confirmed reports of its purchase of online search and natural language vendor Powerset. Microsoft aims to add Powerset’s Web search linguists, engineers and technology to its Live Search division. On the heels of its $1.2bn purchase of enterprise text analytics giant FAST Search and Transfer in January, Microsoft inked this much smaller deal to enhance its consumer Web search.

Founded in 2006, Powerset released its Web search technology earlier this year. In partnership with Xerox’s PARC (Palo Alto Research Center), the San Francisco startup, which has raised some $12.5m in funding, has been developing search software that reads online text and discerns semantics as well syntax. So far, Powerset’s semantic technology has been publicly tested only on Wikipedia and fellow open source encyclopedia Freebase, both of which have a solid structure that Powerset leverages. The company has also been in talks with major publishing companies about an ad-supported service it has in the works.

With Powerset having been sold to an established technology company to realize its plans, we wonder what that will mean for the rest of the semantic technology companies. Currently, the poster child of the market is Radar Networks, which is backed by $18m in VC. It is developing a semantic social networking application, Twine, which is still in private beta and due to be released this fall. There’s also New York-based semantic search engine Hakia, also in private beta, which has landed over $20m in funding. However, if Powerset, which was often referred to as ‘the next Google,’ got picked up for just $100m (as the rumors have it), then what’s the exit picture for the two remaining rivals, both of which have raised more money than Powerset? Maybe we need to Google the answer.

Selected Microsoft search acquisitions

Date announced Target Deal value Target description
July 1, 2008 Powerset $100m (reported) Semantic Web search engine
January 8, 2008 Fast Search and Transfer $1.2bn Enterprise search software

Source: The 451 M&A KnowledgeBase

M&A goes MIA in Q2

Brenon Daly1 Comment

With the second quarter wrapped up, we’ve been busy tallying the deal flow from the period. As you might guess, M&A levels for the past three months mirror the dour economic climate. The quick numbers: Overall tech M&A fell 40% in the second quarter, year-over-year, dragged down by private equity players that have been knocked out of the market by the credit market turmoil. The total shopping bill of $148bn is a sharp decline from the $241bn in the same period last year, putting it only slightly above the $122bn recorded in the second quarter of 2006.

A number of trends shaped M&A in the quarter, including the continued use of bear hugs to pressure reluctant sellers, the frozen IPO market and the rise of consolidation deals. Of course, the single largest crimp on deal-making in the second quarter was the utter disappearance of tech buyouts. The value of tech LBOs in the second quarter fell more than 90% compared to the same period last year, when credit was flowing freely. In the just-completed quarter, we recorded some $7bn worth of tech buyouts, down from $85bn in the year-ago period. Looked at another way, LBOs accounted for just 5% of all tech M&A spending in the second quarter, after representing a full one-third of total spending in the same period last year.

Deal flow breakdown

Quarter PE deal value Corp. deal value Total deal value
Q2 2006 $13bn $109bn $122bn
Q2 2007 $85bn $156bn $241bn
Q2 2008 $7bn $141bn $148bn

Source: The 451 M&A KnowledgeBase

Bear market mauls debutants

Brenon Daly

The talking heads at the Nasdaq and the New York Stock Exchange generally define a bear market as a 20% decline from the index’s highs. And, as anyone who picked up a weekend newspaper knows, the markets have officially slumped into bear territory since peaking last fall.

Of course, an index is made up of individual stocks, with some getting more roughed up than others. Oracle has basically traded flat since the Nasdaq meltdown began last October; Microsoft has matched the index’s decline; and VMware has been hammered, plunging nearly three times the Nasdaq decline over the same period. (Another way to look at the meltdown in shares of VMware: At its peak, VMware stock was worth roughly the same amount as a barrel of oil at current prices. Now, you’d have to pony up nearly three shares of VMware to trade for that same barrel of oil.)

With investors not willing to take a chance on shares of existing companies, what chance do the shares of largely unknown and entirely untested IPO candidates have? The short answer is ‘zilch.’ Actually, it’s somewhat of an academic question as there hasn’t been a VC-backed IPO since ArcSight floated on the Nasdaq four months ago. (As we’ve written in the past, we wouldn’t be surprised to see ArcSight get gobbled up, with Hewlett-Packard a logical buyer, in our view.)

With the IPO window closed, corporate acquirers have even more leverage in negotiations. (In other words, don’t expect transactions going off at a double-digit price-to-sales multiple, like IPO candidate EqualLogic got from Dell last November.) We’ve already seen Initiate Systems scrap its proposed offering and go hat-in-hand to a gaggle of investors. Meanwhile, a handful of other S-1s from other companies are gathering dust at the SEC. And we hardly expect any movement during the third quarter. Given the parched IPO market and corporate acquirers in the doldrums, it’s going to be a long, hot summer for a few of these IPO candidates.

Proofpoint buys Fortiva, expands into email archiving

After a courtship that lasted the better part of a year, on-demand security provider Proofpoint finally picked up software-as-a-service email archiving startup Fortiva this week. Based on similar transactions and industry buzz, we estimate this tuck-in acquisition cost Proofpoint somewhere in the neighborhood of $70m. Fortiva, which has 45 employees, was running at about $15-20m in revenue from about 200 enterprise customers. This marks a solid exit for the company’s venture backers, Cargill Ventures, Ventures West and McLean Watson Capital, which only pumped $8m into Fortiva.

The interesting question sparked by this transaction is what’s next for Proofpoint, which is now up to 250 employees. Though some have suggested the company has now effectively dressed itself up as an acquisition target, we believe otherwise. We think an IPO will represent the next major milestone for the company. (In wrap-up of April’s RSA conference, we said as much, adding that an acquisition by Proofpoint was likely in the next few months.)

Proofpoint has drawn in some $86m in funding since its inception in 2002, including a $28m round in February, even though it was running at close to breakeven. With more than 1,600 customers, bookings are up 70% on a year-over-year basis for 2008. The growth comes despite stiff competition. Google, Cisco and Autonomy Corp made a big push into the market last year with their respective acquisitions of Postini, IronPort Systems and Zantaz.

Yet, Proofpoint has held its own against these larger vendors, even recruiting a few high-ranking employees from Postini, we’ve heard. Speaking of hiring at Proofpoint, we would also highlight last year’s move to bring Paul Auvil on board as CFO. Auvil served as the top numbers guy at VMware, guiding that company from the tens of millions of dollars in revenue to hundreds of millions of dollars. Of course, that company never made it fully public. We have a feeling Auvil may yet have a chance to be CFO at a public company, given the direction of Proofpoint.

Select on-demand security deals

Announced Acquirer Target Deal value Target revenue
July 9, 2007 Google Postini $625m $70m*
July 3, 2007 Autonomy Zantaz $375m Not available
May 14, 2007 Verizon Business Cybertrust $450m* $225m*
April 26, 2007 Websense SurfControl $400m $220m
Jan. 4, 2007 Cisco IronPort $830m $100m*
May 19, 2004 Symantec Brightmail $370m $26m

Source: The 451 M&A KnowledgeBase, * official 451 Group estimates

Captive deal

Brenon Daly1 Comment

For many startups, the deeper a partnership is, the shallower the pool of potential acquirers. Consider the case of SwapDrive and this week’s quiet sale to Symantec. The two sides inked an OEM agreement nearly two years ago – a bit of paperwork that turned out to be a precursor to an M&A contract. With Symantec likely accounting for a majority of sales at SwapDrive, a trade sale seemed the realistic exit for SwapDrive. That became even more likely as sales of Norton 360, which is based on the technology supplied by SwapDrive, outstripped Symantec’s early projections, according to our understanding. The Norton 360/SwapDrive offering targets the consumer market, which complements the company’s enterprise-focused Symantec Protection Network.

However, perhaps because it was essentially a captive deal, SwapDrive ended up getting taken out at a significant discount to its rival Berkeley Data Systems. Just half a year ago EMC shelled out $76m for Berkeley Data, which runs the Mozy service. We understand Mozy generated about $8m in sales in the year leading up to the sale, meaning EMC paid 9.5 times sales for the online backup startup. In contrast, SwapDrive went for 5.6 times trailing sales. According to reports, Symantec paid $123m for SwapDrive, which was running at $22m.

Symantec’s purchase of SwapDrive continues a run of larger storage players snagging online backup vendors. The earlier deals – inked by Iron Mountain and Seagate Technology – got done at multiples closer to Symantec-SwapDrive, although the market has heated up a bit since those first combinations. We wonder what that will mean for the last remaining online backup vendor of note: Carbonite Inc. The company took in $20m in its series B in February and has indicated it’s looking for an IPO late next year. Who knows, maybe the window will be open by then. 

Selected online backup deals

Acquirer Target Date Price Target revenue
Symantec SwapDrive June 2008 $123m* $22m*
EMC Berkeley Data Systems [Mozy] Oct. 2007 $76m* $8m*
Seagate EVault Dec. 2006 $185m $35m*
Iron Mountain LiveVault Dec. 2005 $42m $10m

*estimated, Source: The 451 M&A KnowledgeBase

Wire buys wireless

Brenon Daly

Two weeks ago, we noted Trapeze Networks had been sold without indicating what company had been sitting across the table from the wireless LAN (WLAN) infrastructure vendor. The buyer can now be named: Belden. The St. Louis-based company is more known for its wiring and cable products. (Indeed, before inking the Trapeze deal, Belden’s previous deal had been the $195m purchase of a Hong Kong cable company.) We’ll have a full report on this transaction – and the implications for the sector – in tonight’s Daily 451.

While the pairing of a wireless company with a company known for its wires may seem odd, there are actually a fair number of points that make sense for Belden-Trapeze. For starters, Belden is viewed in the WLAN market as a neutral vendor, which means that Trapeze’s sales arrangements shouldn’t be threatened by the acquisition. We would contrast that with the fallout from Cisco’s early 2005 purchase of Airespace, which forced Airespace partners Alcatel and Nortel Networks to scramble to find a replacement supplier of WLAN technology after the deal. Also, Trapeze had decent sales in Europe and Asia, markets that Belden has targeted.

In the end, however, it all comes back to money. In that sense, the Trapeze deal shows how steeply the valuations of the WLAN infrastructure vendors have come down. The multiple in this deal was two-thirds lower than the level that Cisco paid three years ago in its purchase to get into this market. (Granted, Cisco has a reputation of skewing the market with top-dollar bids.) Still, Trapeze exited for $133m after raising about $100m in venture funding. We understand that rival Meru Networks is currently out raising another round. The company already counts Lehman Brothers, Clearstone Venture Partners, Sierra Ventures and DE Shaw among its investors. While Meru may well land an up round, we’re guessing Trapeze’s valuation – combined with Aruba Networks’ rough ride on the Nasdaq – certainly haven’t helped those conversations. 

WLAN vendor valuations

Company Acquirer Price Price-to-TTM sales ratio
Airespace Cisco $450m 7.5x*  
Trapeze Belden $133m 2.3x  
Aruba NA $467m market cap 2.7x  

*estimated, Source: The 451 M&A KnowledgeBase

Deal-making in a desert

Brenon Daly

Exactly a year ago, SonicWall handed over $25m in cash for Aventail. The deal looked like a ‘last-gasp’ transaction in a number of ways, not the least of which was that Aventail’s purchase price was less than one-quarter of the venture funding the company had raised over the years. Beyond the money-in/money-out gulf at Aventail, we would note that in the year that has passed, not a single significant SSL VPN deal has been reached.

Since the big-name consolidation in this market began in mid-2003, most of the large security acquirers have gone shopping here. SSL VPN deal flow hit its high point early on, with NetScreen shelling out $265m, mostly in stock, for Neoteris. (A half-year later, Juniper Networks threw $4bn in stock at NetScreen, in a deal that Juniper has yet to recognize much of a return on.) Other tech giants quickly inked deals of their own, including Cisco, Citrix and Microsoft.

In contrast, the handful of companies that have acquired SSL VPN technology since mid-2007 have been tiny outfits, with a number of consulting shops doing the buying. That hardly suggests top-dollar acquisitions. The SSL VPN vendors that missed out when the big buyers came through the market may need to scale back their exit expectations. We would drop PortWise and Array Networks, among others, into that bucket. 

Significant SSL VPN deals

Acquirer Target Date Price
F5 Networks uRoam July 2003 $25m
NetScreen Neoteris Oct. 2003 $265m
Cisco Twingo March 2004 $5m
Citrix Net6 Nov. 2004 $50m
Microsoft Whale Communications May 2006 $75m*
SonicWall Aventail June 2007 $25m

*estimated, Source: The 451 M&A KnowledgeBase

Mapping vendor Garmin searches for direction

In a time of increasing competition and decreasing margins, the once-soaring navigation companies seem to have lost their bearings. Former Wall Street darlings Garmin and TomTom both reported lackluster quarters last month. Although overall revenue at both companies is still solid, other lines on the P&L sheet have deteriorated – notably margins. Both companies are now trading near 52-week lows, down roughly 70% from their highs for the year. (Undoubtedly, Garmin will face some investor ire when the company holds its shareholder meeting on June 6.)

With fierce consolidation and price declines, the issue facing Garmin and others is how to differentiate themselves from the new entrants that range from conglomerates Nokia and Research in Motion to small startups such as Dash Navigation. (Looming over all of this is the phenomenal success of Apple’s iPhone.) We foresee 2008 being a year of further consolidation as Garmin continues to shop in an attempt to retain its competitive edge.

Garmin’s gross margins are down to less than 50% from 70% just a few years ago and are expected to decline to below 40% this year, according to CFO Kevin Rauckman. The new competitive environment has forced a steep decline in average selling price: the company’s personal navigation device sold for $500 just a few years ago, but now the gizmo goes for half that amount. Garmin has stated that it intends to stave off the price erosion by setting up its products as a premium brand, much like what Apple did with the iPod. In order to achieve this, Garmin has been looking to make acquisitions in the content segment and will launch its first mobile phone, the Nuvifone, which looks, sounds and works eerily similar to a GPS-enabled iPhone.

So which companies might be ripe for the taking? Aside from the expected distribution acquisitions such as Garmin’s rumored purchase of Raymarine, mapping, traffic and content provider startups such as Dash, Inrix and Networks in Motion offer the kind of technology that Garmin needs. Moreover, if Garmin is serious about branching into the complex mobile phone market, a case could easily be made for an acquisition of longtime partner Palm Inc. The struggling pioneer was reportedly in play last year, but instead opted to have Elevation Partners take a 25% stake in the firm. Palm’s valuation has since been cut in half; we believe the company could surely be had for cheap as investors are eager to recoup their losses. Debt-free Garmin is cash-rich with about $600m, plus another $550m in marketable securities. So financing acquisitions is not a big issue for the company. The real question is whether Garmin can navigate a margin-boosting plan into place before it plummets off a cliff.

Signs of a consolidating industry

Announced Acquirer Target Deal value
Oct. 1, 2007 Nokia Navteq $8.1bn
July 23, 2007 TomTom Tele Atlas $2.8bn

Source: The 451 M&A KnowledgeBase

An Oak accord

Brenon Daly

Oak Investment Partners has finally helped broker a marriage for portfolio company Talisma – a full half-decade after the startup stumbled on its way down the aisle. In both cases, however, it isn’t exactly clear whether the investment firm should be sitting on the bride’s side or the groom’s side at the wedding. In fact, Oak would have a seat on both sides of the aisle.

In this go-round for Talisma, Oak’s late-March investment of $50m in nGenera helped the SaaS rollup add Talisma to its portfolio. If the strategy sounds familiar, it’s because Oak, which owns a majority of Talisma, had a nearly identical plan for the CRM vendor in late 2003. In that case, Oak wanted to stitch together Talisma with fellow portfolio company Pivotal Corp, in a deal that valued publicly traded Pivotal at $48m. Just as that deal was heading toward a vote, however, two other companies outbid Oak for Pivotal. (First, it was Onyx Software, then it was CDC Software. Of course, those companies would go at it again three years later when CDC tried to spoil the purchase of Onyx by Consona, which was then known as M2M Holdings.)

What exactly Oak plans to do with its newly enlarged portfolio company, nGenera, is anyone’s guess. However, it could do a lot worse than follow the strategy of Consona, which was taken private by Battery Ventures. Since the LBO, we understand Battery has pulled out something like six times its money from the CRM rollup, which is still rolling along. Maybe nGenera will serve as Oak’s enterprise SaaS rollup. The company has already done six deals – and counting. 

nGenera’s (fka BSG Alliance) acquisitive history

Announced Target Deal value Target description
May 21, 2008 Talisma Not disclosed SaaS customer service automation
March 5, 2008 Iconixx Not disclosed On-demand talent management HR software
Oct. 3, 2007 Industrial Science Not disclosed Business simulation software
Nov. 29, 2007 New Paradigm Not disclosed Research company
Sept. 13, 2007 Kalivo Not disclosed On-demand collaboration provider
May 7, 2007 The Concours Group Not disclosed Research and executive education firm