Facebook’s facing limits

by Scott Denne

Facebook’s second-quarter revenue miss lays bare a problem that goes well beyond its momentary struggles with new European privacy regulations or the resentment it faces for sharing user data with Cambridge Analytica and its profiting from misinformation. The social media giant’s valuation is bumping into the limits of its addressable market – a market that its main rival looks more likely to win.

Facebook shed about 18% of its market cap after delivering 42% topline growth – enviable for almost any other company, although below what the street expected. Exacerbating the decline, it told investors to expect high-single-digit deceleration of its growth rate in each of the next two quarters. That’s a stark contrast to Google, its rival for dominance of the advertising market, which reported accelerating ad revenue earlier this week.

By most estimates, the entire global ad market (digital and offline) sits at roughly $550-600bn and by that measure Facebook, whose sales come almost entirely from ads, commands nearly 10% of it. While it’s still growing, its market cap, which was about $620bn before earnings, implied that much of that market would shortly come under its control. Slowing growth tamps down those expectations, as does the larger share that Google’s taking – its yearly growth jumped four percentage points last quarter to 23%.

An ambitious set of acquisitions has given Google’s ad business – already twice the size of Facebook’s – a stronger trajectory. While Facebook’s major purchases have mostly been extensions of its core social media business, Google (now Alphabet) has bought a diverse set of products both inside and outside of advertising. Outside of advertising and media, it shelled out billions to buy, among others, a thermostat company (Nest), a phone maker (Motorola) and a mapping app (Waze). Although a bit of a spendthrift, Google generates 14% of revenue outside of advertising.

Even within advertising, Google printed big deals to move beyond search. For example, it paid $1.65bn for YouTube in 2006, when such an investment in online video seemed laughable, although that transaction has now given Google a foxhole to launch a digital assault on the TV market. According to 451 Research’s Voice of the Connected User Landscape, 58% of consumers watch video content on YouTube, more than any other free streaming service and double the number that stream from TV networks’ own websites.

By comparison, Facebook hasn’t made a large acquisition outside of social media since reaching for Oculus VR more than four years ago. In fact, it hasn’t made any $1bn deals since it bought that virtual reality headset vendor. This year, it has only purchased three startups, including workplace messaging service Redkix, which it announced Thursday. If Facebook plans to regain the value it lost with its latest earnings announcement, it’s going to have to ink some riskier acquisitions that increase its addressable market, or at least take it into new corners of advertising. A seed-funded company with yet another new spin on email isn’t going to be enough.

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Can Criteo spark interest on Wall Street?

-By Jonas Kristensen

Although Wall Street has not been overly bullish on the prospects of advertising technology companies recently, Criteo may be the next company from this fast-growing market to make its pitch to investors. But to do that, the Paris-based online ad retargeter will have to overcome a lot of burned adtech shareholders, who have seen the shares of recent IPOs in the sector (Marin Software and Millennial Media) both shed about one-quarter of their value so far this year. Meanwhile, Tremor Video is still underwater from its IPO last month.

But Criteo, which is rumored to have gross revenue of more than $500m, has one thing these other companies don’t – a profitable business. And it’s been printing black numbers for several years now. Further, it has shored up its mobile offering, where much of the adtech growth is expected to happen. (Witness the 75% growth in Q2 mobile ad revenue Facebook reported on Wednesday.) Just last week, Criteo announced the acquisition of mobile ad-tracking startup AD-X Tracking, which closes the gap in the company’s product offering and should enable it to take its retargeting technology mobile.

Given its growth rate and product portfolio, Criteo is probably out of reach of most would-be acquirers. Indeed, although M&A activity in the adtech space has increased steadily, the deals haven’t necessarily been at the top end of the market. According to The 451 M&A KnowledgeBase, there hasn’t been an adtech acquisition valued at more than $1bn since 2007.

If indeed Criteo does make it public, it doesn’t necessarily mean that the company will have to take a cut-rate valuation. After all, the other publicly traded adtech vendors have been overly discounted. Even with their sliding share prices, the trio have created more than $1.5bn in market value and trade at an average of 5x trailing sales, a higher multiple than many other tech sectors garner.

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Google’s admission of failure?

Contact: Ben Kolada

Google has finally found a way to monetize Facebook’s platform. After failing to acquire Facebook when it had the chance several years ago, and now with its own attempts at social networking a bit spotty, official word came on Tuesday that Google is acquiring social marketing startup Wildfire Interactive. Google is reportedly paying $250m for Wildfire, a respectable price tag that likely values the target at 7-10x revenue.

Google’s own ‘Insights for Search’ search analysis engine shows interest in Orkut, its attempt at a social network that found most of its popularity outside the US, and its Google+ social network trending downward over the past 12 months. Meanwhile, interest in Facebook has remained remarkably high.

In acquiring Wildfire, Google is recognizing its social shortcomings, and not a moment too soon. There has been rapid consolidation of social marketing startups in just the past three months.

Sector stalwarts Vitrue and Buddy Media have already been acquired by Oracle and salesforce.com, respectively, leaving only a few hot startups left. Beyond Wildfire, we’d point to GraphEffect, Hearsay Social, Syncapse and Lithium Technologies as the next to go. And there will likely be bidding competition for these firms. Large CRM vendors SAP and Microsoft could make a play here, as well as Teradata, which could buy into social to build on top of its recent purchases of marketing specialists Aprimo and eCircle.

Recent select M&A in social marketing

Date announced Acquirer Target Deal value
July 31, 2012 Google Wildfire Interactive Not disclosed
July 10, 2012 Oracle Involver Not disclosed
June 4, 2012 salesforce.com Buddy Media $689m
May 23, 2012 Oracle Vitrue $325m*
April 18, 2012 Marketo Crowd Factory Not disclosed

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

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salesforce.com ‘acq-hires’ Microsoft talent by acquiring Thinkfuse

Contact: Ben Kolada

Taking a page from the playbooks of Google and Facebook, salesforce.com is ‘acq-hiring’ Microsoft-nurtured talent. The CRM giant announced on Tuesday the tiny acquisition of team collaboration SaaS startup Thinkfuse. The target immediately ceased operations and terminated its service, suggesting this was more of an acq-hire than anything else. Through the deal, salesforce.com gets its hands on about five employees, three of whom have had software engineering experience at Microsoft, according to their LinkedIn profiles.

Although three of the four acquisitions salesforce.com has announced this year (including Thinkfuse) have been tiny transactions, this small trend likely doesn’t represent a shift in M&A strategy. The company has a history of buying young firms, primarily for technology tuck-ins. According to The 451 M&A KnowledgeBase, the average time from when a company was founded to when it sold to salesforce.com is just under four years. What’s also notable, though, is that salesforce.com’s last team collaboration acquisition – Stypi, announced in May – was also a small acq-hire. However, the Stypi service is being maintained, at least for now.

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

The Facebook effect

Contact: Ben Kolada

Facebook’s stratospheric growth has had a profound impact on technology entrepreneurship and exits. In addition to creating some $60bn of market value in its own recent IPO, the company has spawned an ecosystem of vendors hoping to further monetize its one billion customers. A myriad of startups have popped up over the years to help advertisers, marketers and brands manage and deliver their message across Facebook’s platform, which some bulls on the company consider something like a new operating system.

Several of these startups are finally starting to show material sales. As a result, the market overall is being targeted by tech titans looking to become advertising and marketing vendors of choice for agencies and brands. That has led to a dramatic rise in the volume of acquisitions of tech firms serving this segment. Last year set the record in both the volume and value of acquisitions.

Dealmaking this year, however, has already shattered that total spending record: The $3.6bn spent so far this year on social-related companies is already twice the 2011 total. The M&A is being driven by phenomenal growth rates in the social media market. As a proxy for that, consider Facebook’s monthly active user (MAU) count, which has grown at a compound annual growth rate of 132% from its founding in 2004 to 2011.

The social media sector’s growth is leading to top-dollar prices for hot startups. Buddy Media, probably the largest social media marketing platform vendor, increased revenue 250% last year. On Monday, salesforce.com officially announced that it is paying $689m for Buddy Media. Meanwhile, Google and Meebo made their pairing official: Google is reportedly paying $100m for the social networking and user engagement vendor. Oracle just paid an estimated $325m for social marketing provider Vitrue to gain capabilities competitive to what Buddy Media offers. (And the enterprise software giant tucked in Collective Intellect for social media monitoring on Tuesday.) And finally, even old-line vendor IBM has inked a high-priced deal in the market, likely paying north of $200m for social sentiment provider Tealeaf Technology last month.

Source: The 451 M&A KnowledgeBase *Includes transactions in social software, social networking and related categories.

Selling to Facebook

Contact: Ben Kolada

Rather than buy into Facebook after it debuts on the open market, many companies may consider selling to the social networking giant after its IPO. Facebook is already rich with cash, and is about to become much richer. Meanwhile, its M&A strategy has so far focused on acquiring smaller startups for their IP and engineering talent, but the company has said it may do bigger deals in the future.

According to The 451 M&A KnowledgeBase, Facebook has so far bought 25 companies, mostly for their specialized employees such as software engineers and product designers, but also for complementary technology. The company has been fairly cash conscious in its transactions, preferring to motivate acquired personnel with stock options rather than upfront cash payouts – in fact, Facebook spent just $24m in cash, net of cash acquired, on the deals it closed in 2011.

While innovative startups with skilled personnel, particularly those in the collaboration and social networking sectors, should still consider selling to Facebook a viable exit, midmarket and larger technology firms should also consider Facebook a potential suitor. In both public reports and in its IPO prospectus, the company has said it could put its treasury to work on larger deals. And it will certainly have the fire power – adding proceeds from its $5bn public offering to its treasury would bring its total spending power to nearly $9bn (including cash and marketable securities).

Facebook could apply some of its rationale for buying smaller vendors to larger acquisitions. For complementary technology, it could target a larger mobile advertising network (it picked up development-stage rel8tion in January 2011). The lack of a mobile ad platform is a gaping hole in Facebook’s portfolio, especially considering it had 425 million mobile monthly active users at the end of 2011. A company similar to AdMob (which sold to Google) or Quattro Wireless (acquired by Apple) such as Millennial Media or Jumptap would go some way toward filling that gap. For regional expansion and consolidation, Facebook could make a move for any of a number of international competitors, including Cyworld in Korea, Mixi in Japan, Vkontakte in Russia or Renren in China. As the trend toward consumerization in the enterprise continues in the form of social networking and collaboration (salesforce.com’s Chatter or Oracle’s Social Network come to mind), Facebook could look at an enterprise offering as well. The leading candidate in this sector would be Jive Software, one of the most prized properties in the social enterprise space with a market valuation of about $1bn.

IGT rolls dice on Facebook gaming, but hedges bet

Contact: Brian Satterfield

In yet another sign of the power of social networking, casino gaming systems maker IGT agreed on Thursday to purchase Facebook casino videogame startup Double Down Interactive for a potential consideration of up to $500m. The Double Down deal highlights the growing importance of social networking websites to traditional gaming companies, as Double Down enables IGT to reach millions more players online in a single day than the company could ever hope to in the smoke-filled parlors of Las Vegas or Atlantic City. But in a nod to the risk associated with entering a new market, IGT has hedged its bet by structuring the deal to include a $165m earnout (as well as $85m in retention incentives), which is equal to two-thirds of Double Down’s $250m price tag.

The transaction is one of the largest in the social gaming industry, and follows half a year after Electronic Arts made a similar move in buying PopCap Games for $750m (that acquisition also included a substantial earnout payment of up to $550m, or nearly three-quarters of PopCap’s deal value). Founded in 2009, Seattle-based Double Down’s large user base and rapid growth could help to explain why the company commanded such a large valuation for its sector. In November 2011 alone, its games received 54 million visitors, of which 1.2 million returned to play on a daily basis. Double Down also has a healthy base of what it calls monthly ‘active users,’ which the company said rocketed 30% from 3.3 million in October 2011 to 4.7 million at the time of acquisition.

Microsoft pays a princely premium for Skype

Contact: Ben Kolada

In its largest-ever deal, Microsoft announced today that it is buying VoIP provider Skype for $8.5 billion in cash. This is the third time Skype has changed hands since 2005. Microsoft claims that the deal is yet another move in its long line of real-time communications initiatives, but we suspect that the true intent, and more so the price, was driven by a desire to keep the hot property out of the hands of search rival Google, which is expanding its own communications prowess.

That Skype attracted Microsoft should come as no surprise, since the company has consistently garnered more than its fair share of attention in its eight-year history. Since its founding in 2003, Skype has been acquired by eBay, sold to a consortium of private equity investors led by Silver Lake Partners, filed for an IPO, rumored to have been a target by Facebook and Google and is now being scooped up by Microsoft. Its three trade sales combined have totaled more than $13bn in deal flow.

Indeed, Facebook and Google’s rumored involvement in the bidding process would certainly have contributed to the stellar valuation. Consider this: on an equity value basis, Microsoft is paying nearly twice as much as Skype received in its previous two trade sales combined. When factoring in the assumption of cash and debt, the offer values Skype at nearly 11 times its 2010 revenue, and 34x last year’s adjusted EBITDA. And while the price paid represents a fraction of the $50bn in cash and short-term investments Microsoft held at the end of March, it should be high enough to prevent a competing offer from Google alone. A topping bid from Big G would most likely exceed $9bn – or one-quarter of the total cash and short-term investments the search giant held at the end of March.

Skype’s suitors

Date announced Acquirer Deal value
May 10, 2011 Microsoft $8.5bn
September 1, 2009 Silver Lake Partners/Index Ventures/Andreessen Horowitz/Canada Pension Plan (CPP) Investment Board $2.03bn
September 12, 2005 eBay $2.57bn

Source: The 451 M&A KnowledgeBase

China becoming social in public

Contact: Ben Kolada

While talk of social companies hitting the public markets has so far focused on US firms such as Facebook, GroupOn and LinkedIn, the first vendor to do so may actually come from the Far East. Dubbed the ‘Facebook of China,’ Beijing-based Renren filed its prospectus on Friday and will reportedly hit the NYSE in two weeks, trading under the symbol RENN.

Founded in 2002, Renren today offers social and professional networking, online commerce and gaming to an audience of approximately 117 million. According to its prospectus, the company added an average of two million users per month during the first quarter. Sales have grown at a similarly quick pace. Net revenue soared from $13.8m in 2008 to $76.5m in 2010, representing a compound annual growth rate of 136%.

Excluding underwriters’ overallotment options, Renren will offer a total of 53.1 million American Depository Shares (ADS). (Lead underwriters are Morgan Stanley, Deutsche Bank Securities and Credit Suisse.) The company expects to price at $9-11 per ADS, which at the top of that range would be a whopping $584m raised. However, if interest in previous Chinese IPOs is any indicator of what to expect, then Renren’s total amount raised could be significantly higher. Just two weeks ago, Beijing-based security vendor Qihoo 360 Technology made its debut on the NYSE, offering 12 million ADSs (excluding underwriters’ overallotment shares). Shares hit the market at $27 each, nearly twice the expected initial offering price of $14.50, and eventually closed at $34 each. Shares have dipped a bit since then, but Qihoo is still sporting nearly a $2.5bn market cap, which is approximately 43 times its 2010 sales of $57.7m.

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.