Social software M&A on the uptick in 2011

Contact: Brian Satterfield

As more businesses leverage social networking websites for marketing and customer support purposes, many big-name buyers are finding social media software vendors to be increasingly attractive targets. The number of deals in the sector rose more than 150% in 2011 from 2010, while spending during that same period soared more than five-fold from $75m to $389m.

The bulk of 2011 social software spending came in March, when forked over $326m for Radian6, a Canadian startup that had raised just $6m. Radian6 was both the CRM giant’s largest deal as well as the priciest transaction ever in the sector. bought Radian6 in order to add social media monitoring features to a number of products in its portfolio. On a smaller scale, we saw similar purchases around that same time by Meltwater Group, which added JitterJam for $6m, and call-center software maker KANA Software, which reached for Overtone.

But enterprise software providers aren’t the only takers in the social software world. Many tech companies that have partial or completely social business models got in on the action, presumably in order to track activity on their own networks. Twitter, for instance, picked up social media monitoring software maker BackType, while Google bought a similar company called PostRank.

Securing a tweet

Contact: Wendy Nather

Whisper Systems has announced that it has been acquired by Twitter (appropriately enough, the news was tweeted). Terms of the acquisition were not disclosed, but given Whisper’s emphasis on Google Android security, we expect that the deal was as much about the brains behind the technology as it was about the tools themselves. Whisper’s products include WhisperCore, a set of functions for data and network encryption as well as permissions management; WhisperMonitor, an Android-based firewall for mobile devices; Flashback, a cloud-based secure backup service for Android data; TextSecure, a facility for encrypting SMS messages on the fly; and RedPhone, an encryption function for voice that saw heavy use by activists during Egypt’s political uprising.

Twitter has inked 15 transactions, but this is the first one that focuses on security, and it’s in an area that appears to add real gravitas to the communications technology: it’s not just for ensuring that your Uncle Fred can’t accidentally get to your status updates. Mobile devices and protection against regimes make a solid combo, and they bolster Twitter’s use as a real-time reporting system. It’s not clear how many of the current products will remain viable under Twitter’s control, but the reasoning behind the choice of Whisper, as opposed to any number of other mobile device security startups, seems pretty clear.

But we find this deal even more interesting due to the fact that one of Whisper’s founders, security researcher Moxie Marlinspike, has also been making the conference rounds discussing a well-known problem: that of Internet-wide trust in domain name system (DNS) and SSL infrastructure. Certificate authorities that underpin transactions over the Internet have been increasingly attacked directly (with COMODO and DigiNotar being prime examples; the latter went bankrupt as a result of its breach), and DNS-based attacks are on the rise. Marlinspike not only points out the inherent design problems in the trust-based system, but also has proposed the most plausible solution: overhauling the structure into a new system he has dubbed Convergence. When you have access to an Internet security architect of Marlinspike’s caliber, you don’t let it go to waste. We’ll be watching for new developments on a possibly more fundamental level than just secure text messaging for Tweets.

What’s up with the Bay Area?

Contact: Ben Kolada

Bay Area buyers have roared back to life in 2010. Compared to the same period a year ago, Bay Area buyers’ deal volume has increased 46%, while at the national level M&A has risen only 21%. Year-to-date, Bay Area-based acquirers announced 230 transactions, 19% of all technology deals undertaken by US-based companies. Further, these companies represent 19% of the total declared deal amount, including four of the 18 billion dollar-plus transactions made by US-based buyers. In the same period last year, Bay Area acquirers did only 162 deals.

So, what’s up with the Bay Area? Our data suggests that 15 big serial acquirers accounted for most of the increase. In fact, the number of Bay Area buyers acquiring three or more companies increased five-fold in 2010, compared to a 50% increase at the national level. After waiting on the sidelines in 2009, these companies have resumed M&A activity in full force. As a group, they bought 52 more companies in year-to-date 2010 than they bought in 2009. (An interesting note, Internet content providers were the preferred targets across the board, representing 22% of acquired companies at both the Bay Area and national levels.)

M&A activity by Bay Area buyers

Acquirer 2010 deal volume, year-to-date 2009 year-ago period
Google 15 0
Oracle 7 5
Playdom 6 0
Apple 4 0
Facebook 4 0
Symantec 4 1
Synopsys 4 1
Trimble Navigation 4 5
Cisco Systems 3 3
Hewlett-Packard 3 2
TIBCO Software 3 0
Twitter 3 0
VMware [EMC] 3 0
Yahoo 3 0
Zynga 3 0
Totals 69 17

Source: The 451 M&A KnowledgeBase, 451 Group research

Google is the poster child for Bay Area M&A. Year-to-date, the company has been involved in 15 transactions – the most since it inked the same amount of deals in full-year 2007. However, the search giant is noticeably absent from the 2009 ranking. Even though Mountain View, California-based Google had $8.6bn in cash at the end of 2008, the vendor took nearly a year-long break from M&A activity. Google’s M&A drought began after it acquired TNC in September 2008 and ended 11 months later, when it announced its first purchase of a public company – On2 Technologies – in August 2009.

nextstop gets Facebooked

Contact: Jarrett Streebin

After years of building up its platform organically, Facebook has been acquiring like mad this year. The Palo Alto, California-based startup has just purchased its fourth company since January, up from only one in 2009. The latest acquisition is nextstop, a user-generated travel recommendation site. Like earlier buys this year, this one is about adding features to the Facebook platform.

Location features are something Facebook has been promising for some time but has yet to deliver. The sheer growth of sites like Foursquare, Gowalla and SCVNGR has demonstrated widespread demand for location-based services and networks. Twitteradded location features through its Mixer Labs acquisition and Google already has a service called Latitude, in addition to having invested in SCVNGR, a network similar to Foursquare. Facebook has also recognized the attraction of such offerings. It’s rumored that it recently had talks with Foursquare about an acquisition.

However, what check-in-based sites like Foursquare and Gowalla lack is user-generated content. People can interact but there is no way for users to write reviews about locations they visit. It’s likely that with nextstop, Facebook will incorporate user reviews into its forthcoming location offering. Not only will users be able to see where their friends are, they will be able to read what they wrote about places. With these features, Facebook’s location offering will represent the next wave in location. That’s if it ever arrives. We’ll be looking at moves by Facebook and other key technology buyers as well as our outlook for dealmaking in the second half of the year in our midyear webinar on Thursday. Click here to register.

Twitter’s tiny transactions

Contact: Jarrett Streebin

Even though it’s one of the biggest properties on the Web, Twitter has only done small deals. Over the last two years, it has been steadily strengthening its platform with small acquisitions. The pace has picked up notably in the past half-year, with Twitter announcing four purchases in that time. Thanks to its shopping spree, the company has added search capabilities, location to tweets and mobile capabilities via an iPhone app and an SMS service.

Twitter’s latest move, the acquisition of Smallthought Systems earlier this month, continues the trend of tiny technology transactions. The target’s main offering is Dabble DB, which provides database software for managing large pools of data. At a rate of 65 million tweets per day, Twitter is overflowing with data. We see the Dabble DB buy as an effort to bolster the vendor’s still-nascent attempt to actually ring up some sales.

Twitter recently rolled out promoted tweets, through which advertisers will be able to place ads on the site. Along with its deal with Google, this is one of the firm’s first attempts at revenue. Smallthought’s Dabble DB should help Twitter to manage and interpret the massive amounts of user data, which should lead to better ad targeting. In that way, the deal flow at Twitter makes sense. The company’s first few buys were about building up its service and broadening its base of users. Now, it’s time to make money.

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

Xing the Atlantic

-Contact Thomas Rasmussen

In 2008, online social networking was the buzzword of choice. But as is the case with most tech bubbles, it imploded nearly as quickly as it ballooned. The year that started with a bang (Bebo’s record $850m sale to AOL in March and Plaxo’s sale to Comcast for an estimated $150m in May) ended with a whimper. Several smaller social-networking companies sold in fire sales, resulting in severe VC write-downs. And we expect this to carry on well into 2009.

Consider the case of business-focused Xing, which finished last year with a $4.1m tuck-in of New York City-based socialmedian. When we checked in with Xing before the holiday break, M&A and attractive valuations were the dominant themes. We fully expect the company to follow up on this with more acquisitions in 2009, particularly as social-networking competition goes global. Based in Germany, Xing has used M&A to expand geographically. In addition to its US deal last month, in 2007 Xing picked up Spanish competitors eConozco and Neurona. Furthermore, we understand that Xing was one of the active bidders for Plaxo, which would have represented a significant drive into the US market. On the flip side, US social-networking giants Facebook and LinkedIn are actively trying to expand across the Atlantic.

For Xing, there are literally dozens of US business-focused vertical social networks that would fit in with its expansion strategy. And the company has the resources to do deals. (It’s the only significant publicly traded social-networking company, plus it holds $61m in cash, no debt and is cash-flow positive on roughly $50m in trailing 12-month revenue.) Companies that we think might make a good match for Xing include Fast Pitch, APSense, Zerodegrees, and, dare we say, even Twitter.

Social networking M&A fizzles

Period Total deals Total deal value
January-June 2008 29 $1.28bn
July-December 2008 28 $15m

Source: The 451 M&A KnowledgeBase

M&A ramp-up for Facebook?

-Contact Thomas Rasmussen

Facebook’s rumored offer for micro-blogging site Twitter had the Web all atwitter recently. The $500m bid was reportedly rejected because it came in the form of a stock swap, with Facebook inflated to the infamous $15bn valuation that the social network got in Microsoft’s investment a year ago. Judging from our talks with insiders throughout the year, everyone knows this is a ludicrous valuation. Still, we wonder why some people – including big media – are still bandying this around, and more to the point, why Facebook thought Twitter would buy into the valuation. (More realistically, bringing the valuation down to earth, the offer amounts to $100-130m.) Nevertheless, the rumored run at Twitter confirms our speculation in June that Facebook, which has hardly ever dabbled in M&A, is gearing up to go on a substantive shopping spree. If that’s the case, it could do a whole lot worse than roping in Loopt.

When we first reported on this possibility, we had heard that initial talks were under way. However, the less-than-stellar adoption of the overhyped location-based services (LBS) applications probably put a damper on the enthusiasm. Nonetheless, recent developments have made LBS an attractive area again: Android devices have hit the market, the iPhone continues to sell well and Nokia is rolling out its own sleek new smartphone. Granted, the degree to which people are interested in having friends and family track their every move is debatable. But for Facebook and other social networks, which essentially base their entire business models on our instinct to pry into each other’s business, adding Loopt’s service to its currently static desktop and mobile offering is a no-brainer. And if Facebook was willing to hand over north of $100m to acquire Twitter, spending the same amount on Loopt, which is roughly where we pencil out its valuation, would make a lot more sense.

Social network M&A, 2006-2008

Period Number of deals Total known deal value
2008 YTD 32 $98.3m
2007 12 $149.7m
2006 8 $31.1m

Source: The 451 M&A KnowledgeBase