Companies venture lightly into investments

Contact: Brenon Daly

A little more than a half-year after striking an initial partnership, Concur Technologies recently led the second round of a $4.6m funding for RideCharge, a startup that allows users to book and pay for taxis over mobile phones. John Torrey, Concur’s head of business development, told us the company, which provides an on-demand employee spending management offering, isn’t interested in being in the content business, so an acquisition wouldn’t have made sense. Concur, which holds some $210m in cash, has done three acquisitions but has been out of the market since mid-2007.

Concur’s investment comes despite a sharp tail-off in corporate VC in the years since the Bubble era. While several tech giants have continued to support their venture wings – including Intel, EMC and SAP, among others – most other companies have wound down their venture operations. And, based on our survey of corporate development officers late last year, they don’t expect to get back into the venture business. Some 36% said they planned to do fewer minority investments in 2009, compared to 22% who expect to do more investments this year.

Startup scrap sales

With new funding difficult to come by, many cash-burning startups are finding that they have no choice but to take a scrap sale. Those desperate deals cut M&A spending on VC-backed startups in the second half of 2008 by nearly three-quarters over the same period in 2007. From July to December last year, 100 venture-backed startups got acquired, for a total bill of just $3bn. That compares to 153 startups sold for a total of $11.1bn during the same period in 2007.

And we’ve seen more of these types of deals so far this year. Oracle, SAP, Barracuda Networks and Quest Software, among other large technology buyers, have all purchased companies for less than the money raised by the startups, according to our estimates. Consider the specific case of Mirage Networks. The network access control (NAC) vendor raised some $40m before discovering that NAC wasn’t really a market after all. (The eight-year-old company generated an estimated $5m in sales last year.) Trustwave picked up Mirage for some $10m, we estimate. Meanwhile, Mazu Networks will have to hit all of its earn-outs to make its investors whole again. About a month ago, Riverbed Technology said that it would pay $25m upfront for the network security vendor, with a possible $22m earn-out. That’s actually not a bad outcome for unprofitable Mazu, which we understand was burning about $1m each quarter. And yesterday, Netezza picked up the assets of data-auditing and protection vendor Tizor Systems for $3.1m; Tizor had raised $26m from investors.

VC-backed tech startups M&A

Month 2007 deal volume 2007 deal value 2008 deal volume 2008 deal value
July 23 $2.3bn 21 $994m
August 18 $1.2bn 16 $497m
September 25 $1.7bn 16 $642m
October 39 $2bn 13 $487m
November 27 $3.1bn 20 $346m
December 21 $788m 14 $56m
Total 153 $11.1bn 100 $3bn

Source: The 451 M&A KnowledgeBase

SAP goes (Cog)head hunting

Contact: Brenon Daly

Having put a bit of money into Coghead about two years ago through its venture wing, SAP picked up all of the platform-as-a-service vendor in a wind-down sale late last week. Coghead drew in $11m in two rounds from backers El Dorado Ventures, American Capital Strategies and SAP Ventures. American Capital and SAP Ventures joined in Coghead’s last round, raised in April 2007, which came a little more than a year after El Dorado provided a $3.2m first round.

We had heard late last year that Coghead, originally known as Versai Technology, was trying to land another round. However, like so many other startups these days, the company wasn’t having success in raising new capital. Indeed, earlier this month, my colleague Dennis Callaghan noted that Coghead had been quiet for several months. He speculated that the company might fit well into the portfolio of open source business process management vendor Intalio. Coghead actually embedded Intalio’s process engine, and the two startups share SAP Ventures as a backer. (Overall, SAP Ventures has some 38 active investments.)

Instead of landing with Intalio, the Coghead assets are headed to SAP. And what will the German giant do with them? While much of the speculation has portrayed the purchase as SAP buying its way into the cloud, a more tangible indication is the ‘situational applications’ that Coghead announced at last summer’s SAP conference, Sapphire. With Coghead’s technology, users could build and manage applications that integrate with SAP. Given SAP’s proprietary language and platform, allowing customers to build applications or Web front-ends to those applications could go some distance toward getting SAP a return on its investment.

‘Little brothers’ eyes get big

Contact: Brenon Daly

As virtually all investors are acutely aware, public companies get their valuations reset every trading day. And with the Nasdaq having been cut in half since the highs on the index in November 2007, those valuations are universally being reset lower. That has created a somewhat counterintuitive situation where public companies sometimes trade at a substantial discount to their privately held counterparts, despite typically being larger and certainly more liquid and transparent investments.

That pricing discrepancy has spurred some of the ‘little brothers’ to make runs at their publicly traded brethren. Last year, we saw HireRight taken private after a year on the Nasdaq by privately held US Investigations Services for $195m, or about twice the sales of the human capital management (HCM) vendor. On a larger scale, Sophos reached for German endpoint encryption vendor Utimaco in a private-public transaction last summer.

What other private company might be viewing the Nasdaq as a shopping list? We’ve heard that software-as-a-service (SaaS) roll-up nGenera recently ‘broadened its horizons’ to also include public companies. The vendor, which we understand did roughly $50m in sales in 2008, has raised some $50m from investors including Hummer Winblad Venture Partners, Foundation Capital and Oak Investment Partners. It has already inked six acquisitions.

Our understanding is that nGenera is looking to add HCM or even sales compensation management technology, which it sells as part of a larger on-demand offering. In addition to being attracted to the discount valuations of public companies, nGenera is also eyeing Nasdaq-listed targets because they are typically more mature than startups and would have more customers to add to nGenera’s existing roster of some 300 enterprise clients.

nGenera’s acquisition 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
November 29, 2007 New Paradigm Group Not disclosed Research company
October 3, 2007 Industrial Science Not disclosed Business simulation software
September 13, 2007 Kalivo Not disclosed On-demand collaboration provider
May 7, 2007 The Concours Group Not disclosed Research and executive education firm

Source: The 451 M&A KnowledgeBase

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

Companies go bargain-hunting

Contact: Brenon Daly

It’s a buyer’s market in tech M&A right now, and the buyers are saying they want to do deals but don’t want to pay much. That’s the takeaway from our annual survey of corporate development officials. (We’ll have a full report on the results in tonight’s 451 Group send-out.) Half of the respondents said the M&A climate would get ‘somewhat better’ for them in 2009, with another one-quarter saying it would get ‘significantly better.’

The percentage this year (75%) compares to less than half (43%) who predicted last year that the environment would improve. More than four out of 10 corporate development officials projected that the pace of their company’s dealmaking would pick up in 2009, with three out of 10 saying it would stay the same. As to what will make the environment better for them this year, the short answer is that they don’t expect to pay much. Some 45% said valuations of VC-backed companies would ‘decline substantially,’ with another 42% predicting that valuations would ‘decline somewhat.’ That’s nearly three times as many respondents who projected any decline in startup valuations in 2007. Again, we’ll have a full report on the survey tonight.

Outlook for corporate buyers

Year Improve Unchanged Worsen
2008 (for 2009) 75% 13% 12%
2007 (for 2008) 43% 35% 22%

Source: The 451 Corporate Development Outlook Survey, December 2008

Intersil: Doubling down in Austin

Contact: Brenon Daly

Intersil’s purchase of Zilker Labs last week had more than a few echoes of its pickup of D2Audio last July: same buyer, same banker, same backyard and even a shared backer at the acquired company. Both Zilker Labs and D2Audio are based in Austin and drew venture money from Dallas-based Sevin Rosen. (We understand that Al Schuele, Sevin Rosen’s lone VC in Austin, participated in funding both companies.) On the exit, boutique firm Pagemill Partners advised both Zilker Labs and D2Audio.

Despite the similarities between the exits of Zilker Labs and D2Audio, the companies had virtually nothing to do with each other up until that point. D2Audio makes digital audio power amplifiers, and primarily serves the consumer market. We estimate that Intersil paid around $25m for D2Audio. Intersil’s more-recent purchase of Zilker Labs added power-management technology to its existing portfolio. We estimate that Intersil paid about $18m for Zilker Labs, which raised some $33m in backing.

Intersil’s 2008 acquisitions

Date Target Target’s headquarters
December 18, 2008 Zilker Labs Austin
September 30, 2008 Kenet Woburn, Massachusetts
July 28, 2008 D2Audio Austin

Source: The 451 M&A KnowledgeBase

Marvell in the land of milk and honey

Contact: Brenon Daly, Gilad Nass

Having already handed over some shekels for Israeli companies in the past, Marvell Technology Group has reportedly gone on another shopping trip in the country. Israeli newspapers reported recently that Marvell has acquired Iamba Networks in a scrap sale. (Iamba, an optical semiconductor company, has its headquarters in Cupertino, California, but maintains a large R&D presence in Israel.) Reports put the purchase price of Iamba, which raised some $30m in funding, at $10m.

The pickup of Iamba, which Marvell declined to confirm, marks the company’s third purchase in Israel in recent years. In February 2003, Marvell paid $50m for Radlan Computer Communications. But Marvell’s big deal in the country came in late-2000, when it used a slug of its freshly minted IPO shares to buy Galileo Technology in a transaction initially valued at $2.7bn.

By the time the Galileo acquisition closed in January 2001, however, Marvell shares had lost more than half of their value. In fact, Marvell shares (on a split-adjusted basis) are currently trading only slightly above where they were when the company inked the Galileo purchase. Marvell shares closed at $5.09 on Tuesday, valuing the company at just slightly more than 1x its trailing sales.

Ad networks: What recession?

-by Thomas Rasmussen

Akamai just got serious about online ads. It acquired ad network acerno from i-Behavior last week for $95m in cash. (See my colleague Jim Davis’ report for more on this acquisition.) This marks not just a somewhat drastic change in focus for Akamai, but is also an encouraging sign for the remaining online advertising networks. Despite the current economic meltdown, and more specifically the declining revenue and abysmal forecasts from ad giants Yahoo and Google, everybody seems to want a slice of the multibillion-dollar online advertising market.

Including the Akamai transaction, a total of 23 online advertising deals have been inked this year. That is up more than 25% from 17 deals for all of 2007, and just four in 2006. This increase in M&A activity stands in stark contrast to the overall Internet M&A picture, where the number of deals has declined more than 10%.

Moreover, despite highly publicized warnings from VCs about the decline in available venture capital and possible exits, funding has been flowing freely and rapidly to online advertising startups. Some of the many to receive funding recently include mobile ad firm AdMob, which raised $15.7m last week for a total of $35m raised to date; Turn Inc., which raised $15m recently for a total of $37m; ContextWeb, which raised $26m in July for a total of more than $50m raised; social networking ad network Lotame, which raised $13m in August in a series B round for a total of $23m raised; and Adconion Media Group, which closed a staggering $80m in a series C round in February, bringing its total funding to more than $100m.

With IPO markets closed, these startups should all be considered M&A targets. Adconion in particular stands out because of its international reach and large base of 250 million users, 50 million of whom are in the US. It would be a nice fit for one of the large media conglomerates competing for online advertising dominance. And they have shown that they are not afraid of opening the vault to do so. VC and banker sources say funding is likely to continue for the near term since there is still a lot of buyer interest. It is unlikely to suffer the same fate as the social networking funding fad, because some online advertising companies actually make money. As this segment continues to consolidate over the next year, we suspect deal flow will likely eclipse that of the past 12 months. Mobile and video advertising ventures are likely to lead the next generation of online advertising-focused startups.

Select recent online advertising deals

Announced Acquirer Target Deal value Deal closed
October 15, 2008 Technorati AdEngage Not disclosed October 15, 2008
June 18, 2008 Microsoft Navic Networks $250m (reported) Not disclosed
April 29, 2008 Cox Enterprises Adify $300m May 2008
March 11, 2008 Qualcomm Xiam Technologies $32m March 11, 2008
February 5, 2008 AOL Perfiliate Technologies $125m February 5, 2008
November 7, 2007 AOL Quigo Technologies $346m December 20, 2007
September 4, 2007 Yahoo BlueLithium $300m October 15, 2007
May 18, 2007 Microsoft aQuantive $6.37bn August 13, 2007
May 15, 2007 AOL Third Screen Media $105m May 15, 2007
April 13, 2007 Google DoubleClick $3.1bn March 11, 2008
April 30, 2007 Yahoo Right Media $680m July 12, 2007

Source: The 451 M&A KnowledgeBase

Fixed on the market

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.