Tag: M&A

Adknowledge inks super deal for social advertising dominance

-Contact Thomas Rasmussen

Rumors of the sale of Super Rewards (also known as SR Points) have been swirling for quite some time. On Wednesday, acquisitive Adknowledge announced that it is indeed the winning bidder in a competitive sales process for Vancouver-based Super Rewards, a bootstrapped, 40-person incentives-based online advertising startup. (We understand that Super Rewards is profitable and generating approximately $60m in gross revenue – a number the firm says could hit as much as $100m this year. Of course, the company’s net revenue is much lower, likely in the neighborhood of one-fourth the gross amount after revenue share.) The purchase of Super Rewards marks the sixth acquisition for Adknowledge in less than two years, and we estimate this transaction is by far its largest yet. The deal also marks a shift in the M&A strategy of the Kansas City, Missouri-based online advertising giant, which has typically been more inclined to pick up heavily discounted distressed assets.

Nonetheless, Adknowledge, which we estimate was running profitably on close to $200m in revenue prior to the acquisition, has made a smart purchase in reaching for Super Rewards. Incentives-based advertising companies like Super Rewards have received quite a bit of attention recently because they seem to have found a way to actually make money off of social networks. (The fundamental business principle of profitability has largely eluded the social networks themselves.) Much like other online advertising niches, it is a sector that stands as a small, faster-growing piece of a much larger overall market. But in order to reach their full potential, incentives-based advertising vendors need the scale brought by established and wealthy companies like Adknowledge, which boasts more than 50,0000 advertisers. Because of that, we weren’t surprised to see Super Rewards gobbled up – and we wonder if the same thing might not end up happening to the firm’s two main rivals.

We’re thinking specifically about Fremont, California-based Offerpal Media and San Francisco-based Peanut Labs, which have taken approximately $20m and $4m in venture capital, respectively. The largest independent startup remaining in the niche sector, Offerpal Media recently said it was doing around $40m in revenue. Potential acquirers include dominant online advertising players such as Microsoft, Google, Time Warner’s AOL and ValueClick. In particular, we suspect ValueClick could be ready to shop as a way to stand out from its larger competitors. The Westlake Village, California-based company certainly has the means to do a deal, since it has no debt and some $100m in cash. Other potential suitors for incentives-based advertising startups include large-scale application platforms such as Facebook and NewsCorp’s MySpace that would benefit greatly from bringing the ad service in-house.

Adknowledge M&A

Date announced Target
July 22, 2009 KITN Media [dba Super Rewards]
March 12, 2009 Miva Media
November 6, 2008 Lookery (Advertising business assets)
November 3, 2008 Adonomics [fka Appaholic]
December 6, 2007 Cubics Social Network Advertising
November 8, 2007 Mediarun (UK and Australia divisions)

Source: The 451 M&A KnowledgeBase

MathStar’s moves just don’t add up

Brenon Daly

Contact: Brenon Daly

After about a decade in business as a fables semiconductor vendor, MathStar hasn’t been doing much of anything for the past year. We mean that literally. The Pink Sheets-listed company has no ongoing business, no products and, as of Wednesday, no chief executive. However, MathStar nonetheless finds itself the target of several buyout offers. And now, in a fittingly bizarre development, the unwilling seller has turned into a would-be buyer. In a rather curious move, MathStar announced a nonbinding offer Wednesday for a language-translation company called Sajan. (Minneapolis-based investment bank Craig-Hallum Capital Group is advising MathStar on the proposed transaction.)

Even in the murky world of Pink Sheets-listed firms, MathStar’s move stands out as opaque. CEO Douglas Pihl, who also founded the vendor, apparently thought as much. As MathStar announced its play for Sajan, Pihl blasted the proposed acquisition – and then backed that up by resigning his position. Pihl noted in his resignation letter that the planned deal would result in about 50% dilution of existing MathStar shareholders.

The proposed purchase of Sajan also didn’t sit too well with the firm’s largest shareholder, Tiberius Capital, which has been trying to buy MathStar outright for the past month. The Chicago-based fund is currently offering $1.25 for each share of MathStar, or about $11.5m in total. MathStar’s board has repeatedly rejected the bids from Tiberius, just as it shot down the overtures from privately held PureChoice late last year. MathStar announced in May that it would explore strategic alternatives.

Tiberius claims MathStar disclosed the Sajan purchase to create a ‘cloud of hope’ that it could smartly obtain an operating business that would create more value than the proposed sale to Tiberius. (On the other hand, a more cynical assessment of MathStar’s planned transaction would call it a ‘scorched earth’ defense, since the deal would burn up half of the company’s cash.) Whatever the case, the clock is ticking on Tiberius’ bid, which is essentially the only thing that is propping up the penny stock. Tiberius says its tender offer for MathStar expires next Monday.

Q2 earnings to shape Q3 M&A

-Contact Thomas Rasmussen, Xiaoyue Ma

Is there a correlation between the equity markets and M&A? Anecdotal evidence sure seems to suggest so. After a hot start to the second quarter for both the stock market and deal flow, tech M&A slowed as the Nasdaq cooled in recent weeks. In fact, spending on deals in June was less than half the level that it was in both April and May. Many would-be buyers now seem to be looking to earnings season – both for a report on second-quarter results and the outlook for the balance of the year – to determine if they’ll be going shopping again. We have heard this throughout the year from companies that have both the means and the desire to shop, but have refrained from any meaningful deals because of the uncertain outlook.

That sentiment was clearly evident when we tallied the results of our June survey of corporate development executives, who are pretty much the only acquirers in today’s market. When we analyzed the findings and separated respondents at large firms from those at smaller ones, almost two-thirds of large buyers predicted they will be more acquisitive in the second half of 2009. This stands in stark contrast to the results of our survey conducted last December, in which large acquirers were significantly more bearish on M&A, with less than one-third of respondents indicating they would do more purchases. We should note that the June survey was done when the Nasdaq was trading at its highest level since last October, while the December survey was done at a significantly more bearish time.

Given that there hasn’t been a raft of negative pre-announcements by tech vendors so far, second-quarter results may well come in somewhat stronger than many expect. In fact, tech bellwethers IBM and Google, up 20% and 30% year-to-date, respectively, will report after the bell Thursday and the overall consensus seems to be positive. Big Blue recently reiterated its fiscal year forecasts of at least $9.20 and $10-$11 in earnings per share for 2009 and 2010, respectively. If the tech earnings season does indeed go smoothly, we would anticipate companies to pick up their pace of acquisitions.

Drawing the line between M&A and the equity markets

Period M&A spending Nasdaq median Nasdaq median % change from prior month
October 2008 $20bn 1,711 N/A
November 2008 $13bn 1,532 -10.47%
December 2008 $7bn 1,531 -0.05%
January 2009 $3bn 1,521 -0.70%
February 2009 $2bn 1,494 -1.72%
March 2009 $4bn 1,444 -3.35%
April 2009 $21bn 1,646 13.97%
May 2009 $17bn 1,731 5.17%
June 2009 $10bn 1,832 5.84%
July 2009 N/A 1,787 -2.45%

Source: The 451 M&A KnowledgeBase and the Nasdaq

Halfway through a rough year

Brenon Daly

Contact: Brenon Daly

Since we’re at the midpoint of 2009, we thought we’d tally what we’ve already seen in M&A this year and project what we’re likely to see for the remainder of the year. First, the look back at the first two quarters of 2009: The $58bn in announced and estimated deal spending so far this year is the lowest level of January–June tech shopping in a half-decade. More dramatically, spending on deals in the first two quarters of 2009 is only about one-quarter the amount spent during the comparable period in any of the past three years. June was a particularly slow month, after there were a flurry of deals in April and May.

As to what the rest of 2009 will look like, we suspect it will closely resemble the second half of last year. For the record, the announced spending from July–December 2008 hit just $72bn. Obviously, it’s difficult to predict a lumpy business like M&A. But the way the economy is dragging along right now, we’re inclined to think that big buyers will look to take small bites for the rest of the year. That’s what they did in the second half of 2008. Indeed, it wasn’t that the traditionally busiest buyers in tech took themselves out of the market altogether. Rather, they just scaled back their purchases, despite holding tens of billions of dollars in cash. For instance, the largest transactions inked in the back half of last year by tech giants such as McAfee, Oracle, IBM, Google and Microsoft – among many other companies – were all less than a half-billion dollars.

Q1-Q2 tech spending

Year Deal volume Deal value
2009 1,400 $58bn
2008 1,557 $228bn
2007 2,005 $294bn
2006 2,019 $268bn
2005 1,388 $162bn
2004 999 $111bn

Source: The 451 M&A KnowledgeBase

Q2 ends with a whimper

Brenon Daly

Contact: Brenon Daly

The second quarter is in the books, and we would suggest that the M&A tally is a bit deceptive. Yes, both the number of tech deals and the announced deal values hit their highest levels in a year. But lurking behind that rebound is the fact that M&A tailed off dramatically in June. In fact, the final month of the quarter accounted for just 16% of the total M&A spending in the period. The breakdown of the overall $48.4bn in the second quarter: April-May spending hit $40.7bn, while June spending was a scant $7.7bn.

We noted recently how June saw the return of gun-to-the-head sales of many tech companies, both large and small. That is reflected in the dramatic change in average deal size over the course of the quarter. (Granted, average deal size is a crude measure, but it is illustrative nonetheless.) In the April-May period, the 517 deals had an announced deal value of $40.7bn, yielding an average purchase price of $78m. In June, the average sale was less than half that level: 233 deals with an aggregate spend of $7.7bn, for an average of $33m. That’s a worry trend as we head into the second half of the year.

Overall tech M&A

Period Deal volume Deal value
Q2 2009 750 $48bn
Q1 2009 646 $9bn
Q4 2008 723 $40bn
Q3 2008 737 $32bn
Q2 2008 721 $173bn

Source: The 451 M&A KnowledgeBase

June gloom

Brenon Daly

Contact: Brenon Daly

Whether or not the rebound got ahead of itself, the market has certainly tightened up this month. And no, we’re not talking about the equity market. (Although the sentiment is applicable there, as well, with the Nasdaq recently dipping to its lowest point in a month.) Instead, we’re talking about the M&A market. After a furious start to the second quarter, dealmaking has slipped back to the sluggish pace we saw in the first few months of 2009.

A quick glimpse at the numbers: In both April and May, we saw some 250 deals worth about $20bn in each month. So far this month, we’ve had about 205 deals worth a scant $8bn. With just three business days to go in June, we’re looking at spending being down about 60% from what it was in each of the first two months of the quarter.

We’ve also noticed the recent return of a trend that we saw more often in the opening months of 2009: the involuntary sale. In both large and small transactions, sellers have increasingly found themselves forced to take any offer that comes in. We noted that this week in the startup world, as LucidEra was turned over to a workout firm to sell its carcass. And on a larger scale, bankrupt Nortel Networks gave up on ever emerging as a viable company and began the painful process of liquidation sales. The first deal gives some sign of the resignation: Nortel sold its most valuable unit for what is likely to be less than 1x cash flow.

Second-quarter deal flow

Period Deal volume Deal value
April 2009 263 $21bn
May 2009 242 $19bn
June 2009 205 $8bn

Source: The 451 M&A KnowledgeBase

UPDATE: Borland gets higher bid

Brenon Daly

In a note sent out to clients before the market closed Thursday, we speculated that Borland was likely to get a bid that topped its existing agreement with Micro Focus. (See the full post.) Shortly after the market closed, Borland indicated an unidentified suitor (Company A) raised its bid to $1.25 for each share of Borland, eclipsing the $1.15 per share that the boards of both Borland and Micro Focus have agreed to. Borland shareholders had been scheduled to vote on the deal, which was originally announced May 6, on July 22. The identity of Company A wasn’t revealed. In our earlier post, we noted our suspicions that the bidder might be Embarcadero Technologies, a portfolio company of Thoma Cressey Bravo. However, one informed source has subsequently told us that is not the case.

A new bid for Borland?

Brenon Daly

Contact: Brenon Daly

Nearly a month after Micro Focus and Borland announced their planned combination, a pair of after-the-fact bidders pushed Micro Focus to reach a little deeper into its pockets for the application lifecycle management vendor. Now we’re hearing that one of the mystery suitors may well come back with a higher offer. As it stands, Borland shareholders are set to vote on Micro Focus’ bid of $1.15 in cash for each Borland share, or a total of some $92m, on July 22.

However, several sources have indicated that one unidentified party that previously floated a range of $1.10-1.20 per Borland share may well be preparing a bid that would top the existing offer from Micro Focus. The identity of that suitor has never been revealed, and is referred to as ‘Company A’ in the proxy filings. (We suspect, but have not confirmed, that Company A could be Embarcadero Technologies, which went private two years ago in a $200m buyout by Thoma Cressey Bravo. Following a split, TCB now goes by the name Thoma Bravo.) The proxy adds that Company A originally approached Borland with an unsolicited offer in June 2008, and has been more or less present during the process since then. Borland has dismissed several rounds of interest by Company A because of questions about its ability to pay for the deal.

While Company A may or may not come back with a higher offer, the other suitor that emerged after Micro Focus and Borland agreed to their deal – an unnamed private equity firm referred to as ‘Company E’ – will not be dusting off its bid, according to the proxy. Company E has never been identified, but we have a pretty strong suspicion that it could be a recently launched investment firm in the Boston area called 2SV Capital. Calls to the firm weren’t returned.

Certainly, a number of signs point to 2SV Capital as one of Borland’s mystery bidders. Two of the three partners in the firm certainly know the Borland business well, having worked together on the sale of Segue Software in early 2006 to Borland. (As we noted in a recent report on the pending sale of Borland, the Segue business is essentially the main reason why Micro Focus is interested in Borland.) 2SV Capital founder Richard Vieira, who was then working for Jefferies & Co, advised Segue, which was at the time headed up by Joe Krivickas, on the sale to Borland. (Krivickas recently joined Vieira at 2SV Capital.) If indeed 2SV Capital were interested, we suspect the buyout shop wouldn’t have needed to spend too much time on due diligence, given their understanding of the business.

Navigating for relevance in a changing landscape

-Email Thomas Rasmussen

It’s becoming increasingly evident that once-dominant makers of personal navigation devices, such as Garmin and TomTom, have lost their way. They have seen billions of dollars in market capitalization erased as smartphone manufacturers have encroached on their sector, largely through M&A. Consider the most-recent example of this trend: Research in Motion’s acquisition of startup Dash Navigation earlier this month.

RIM’s buy is more of a catch-up move than anything else. Rival Nokia has already spent the last few years – and several billion dollars – acquiring and building a dominant presence in the location-based-services (LBS) market. And let’s not forget about the omnipresent Google. Starting with its tiny 2005 purchase of Where2, the search giant has quietly grown into a LBS powerhouse that we suspect keeps even the larger players up at night.

The Dash Navigation sale may well signal the start of some overdue consolidation, a trend we outlined last year. Specifically, we wonder about the continued independence of TeleNav, Telmap and Networks in Motion. TeleNav, for instance, is the exclusive mapping provider for the hyped Palm Pre through Sprint Navigation. But with the trend for open devices, we wonder how long that will be the case.

The disappearing LBO

Brenon Daly

Contact: Brenon Daly

With private equity (PE) firms bidding against one another (as was the case with SumTotal Systems) and bidding against strategic buyers (as was the case with Borland), we might be tempted to think that the tech buyout barons are back. Umm, not really. So far this year, PE firms have accounted for just $3bn of the almost $53bn in announced M&A spending. (For more, see our second-quarter M&A report.)

To put that into perspective, consider that in 2006 there were nine individual transactions that topped the $3bn amount that we’ve tallied for the entire first half of this year. In 2007, there were another six LBOs that each eclipsed the aggregate PE spending so far in 2009.

Viewed on a relative basis, the diminished activity of financial buyers compared to strategic acquirers is even more dramatic. Not too long ago, buyout shops could outbid public companies simply because credit was cheap. That helped PE firms account for nearly one-quarter of every dollar spent on tech deals. The level now is closer to a nickel of every dollar.

LBOs as percent of overall tech M&A spending

Period Percent
2009 YTD 6%
2008 9%
2007 27%
2006 21%
2005 15%

Source: The 451 M&A KnowledgeBase