Brenon Daly – Page 48 – Inorganic Growth

Best Buy buys outside the box

November 7, 2011November 8, 2011 Brenon Daly

Best Buy continues to buy outside the box. The consumer electronics giant, which has more than 1,000 big-box stores, announced a pair of deals Monday that add to its emerging businesses that have been responsible for most of the company’s recent growth. In the larger of its purchases, Best Buy will pay $1.3bn to pick up full ownership of its US and Canadian mobile phone business, which had been run as a joint venture with British retailer Carphone Warehouse Group. Additionally, Best Buy will pay $167m for mindSHIFT Technologies, a managed service provider that has about 5,400 small business customers.

The transactions continue a revamp of Best Buy, which started out life as an audio equipment store in 1966. More recently, it has made several acquisitions to expand beyond its historic business. For instance, it bought Geek Squad in 2002 to provide helpdesk support for customers. Service revenue, which has been bolstered by Geek Squad, currently accounts for 7% of the roughly $50bn in sales Best Buy will record this year, and it’s one of the few business lines that has actually increased same-store sales so far this year.

While the Geek Squad pickup has paid off for Best Buy, others have been disappointments. The retailer paid almost $700m for mall-based CD retailer Musicland in 2001, just as the business got ambushed by online music. More recently, it spent $97m in a puzzling purchase of Speakeasy, an Internet service provider. And then there’s the $121m acquisition in September 2008 of Napster. While some of those M&A missteps may have hurt Best Buy, they’ve been nothing like the stumble by its main rival, Circuit City. The company, which pioneered the electronic superstore model, got liquidated in 2009.

Yahoo: hunted, but still in the hunt

November 2, 2011 Brenon Daly

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Amid all the speculation that Yahoo would sell itself (or not), the search engine operator swung to the other side of the table on Tuesday, announcing the $270m all-cash purchase of interclick. The planned acquisition, which is expected to close early next year, is the first time Yahoo has reached for a fellow public company in more than eight years. Yahoo has picked up more than 45 privately held companies and one Bulletin Board-listed company since it acquired Overture Services in 2003 for $1.6bn, its largest-ever acquisition. (Another interesting side note on the interclick deal: Boutique advisory firm GCA Savvian has now advised the past two companies that Yahoo has acquired.)

And in its purchase of interclick, Yahoo is getting a relative bargain, at least on one key measure. (Interclick only generates a few million dollars of cash flow each year, so calculating an EBITDA multiple doesn’t make much sense.) At a $270m equity value, interclick is valued at roughly two times projected 2011 revenue. Even with the takeout premium, that’s less than half of Yahoo’s corresponding valuation. The search engine operator currently garners an equity value of about $19bn, or 4.2 times projected sales of $4.5bn this year.

A frightfully slow October

November 1, 2011 Brenon Daly

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Spending on tech M&A in the just-completed month of October slumped to the third-lowest monthly tally of the year, amid concerns about the growth prospects across the globe as well as specific questions about the stability of Europe. The total value of deals in the past month hit just $10.7bn, trailing only the totals for September ($8.5bn) and February ($10.3bn). Spending for the month of October hasn’t been this low since 2004.

The main reason for the rather anemic spending level in the past month is the absence of significant transactions. October’s priciest deal (Oracle’s $1.5bn all-cash purchase of RightNow Technologies) doesn’t even land in the top 25 largest acquisitions announced so far this year. We would add that the small amount of M&A spending came despite a stunning 11% gain on the Nasdaq index in October. Of course, that equity market surge has to be considered in context: The index has only returned to the level where it started the year, and is still below the level where it started August.

‘Googorola’ close to closing

October 28, 2011 Brenon Daly

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In what could be its last financial report before it is formally acquired by Google, Motorola Mobility said after the closing bell Thursday that mobile device revenue in the third quarter rose 20% over the same period last year to $2.4bn. That was nearly twice the overall rate of growth at the company in the quarter, although it was a slower rate than the mobile device division had grown in earlier quarters this year.

The main drag on the unprofitable division was anemic sales of its Xoom tablet, with the company indicating that it shipped just 100,000 units in the quarter. That’s just half the number it shipped in Q1 and one-quarter the number it shipped in Q2. But Motorola Mobility did manage to ship more smartphones in the just-completed quarter (4.8 million) than it did in either of the two previous quarters.

And once Google does assume ownership of the company, it may well see a slight bump in demand for those devices, at least according to a finding by our ChangeWave Research division. In late September, ChangeWave asked more than 4,100 consumers what impact Google’s acquisition of Motorola Mobility would have on their plans to buy a smartphone from the combined company. The vast majority said Google’s ownership wouldn’t have any impact. However, of the respondents that indicated a preference, four times the number said they were ‘more likely’ (13%) than said they were ‘less likely’ (3%) to buy a smartphone from the combined company in the future.

The planned $12.5bn sale of Motorola Mobility stands as the second-largest tech acquisition announced so far this year. (The purchase doubled Google’s aggregate M&A spending.) Shareholders in the Libertyville, Illinois-based company are slated to vote on the proposed deal November 17, although it will still need to be cleared by regulators. Assuming that all goes to plan, Google should close its acquisition of Motorola Mobility by the end of the year or early next year.

Survey: Consumers may hang up on combined AT&T-T-Mobile

October 26, 2011 Brenon Daly

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As the largest telco deal announced in a half-decade, AT&T’s proposed purchase of T-Mobile USA has had an outsized impact on the still-nascent mobile market. To get a sense of some of the implications, our subsidiary ChangeWave Research surveyed more than 4,100 consumers at the end of September on a number of questions, including a few that touched on the transformative transaction. The takeaway: customers give the thumbs down to AT&T’s planned consolidation move, largely because of network performance problems.

On questions about wireless service providers, the ChangeWave survey found that T-Mobile and AT&T each have the lowest percentage of subscribers who say they are ‘very satisfied’ with their service. Only one-quarter of T-Mobile subscribers said that (half the level of industry leader Verizon Wireless), with only one out of five AT&T subscribers saying that. The combination of AT&T and T-Mobile would create the largest US wireless carrier, with roughly 130 million subscribers.

Perhaps more of an indictment of AT&T’s service, however, came when ChangeWave asked existing T-Mobile subscribers whether they were planning to continue with the combined company, assuming the acquisition clears regulatory review. One of five current subscribers said they planned to change wireless providers, with another 38% saying they didn’t know what they would do. Just one-third of current T-Mobile subscribers indicated they will continue subscribing if AT&T takes over.

If you are interested in finding out more about the consumer smartphone market and trends, be sure to join ChangeWave for a special Webinar on Thursday at 1:00pm EST. The presentation will cover overall market demand, as well as look specifically at the recently launched Apple iPhone 4S and the all-important holiday season forecasts by consumers. To join the Webinar tomorrow, simply register here.

RightNow: A seller rather than a buyer

October 25, 2011 Brenon Daly

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Ever since it raised $175m in a convertible debt offering last November, RightNow Technologies has been telling anyone who would listen that it intended to go shopping with some of that money. The move more than doubled the amount of cash on hand for the customer service automation vendor. And since RightNow was generating cash on its own, and had only a small share buyback program in place, it wasn’t like there were a lot of claims on the company’s treasury.

But with the $1.5bn sale to Oracle, RightNow’s M&A program has been snuffed out before it ever really got going. It would have been a dramatic change at the company, which had largely stayed out of the M&A market. Over the past decade and a half, RightNow has only tallied four deals with a total value of just $52m.

While RightNow was unlikely to ever be a big acquirer, we can’t help but make the larger point that the sale to Oracle removes yet another player from the pool of potential tech buyers. And that pool is constantly getting shallower, even just in terms of public companies. Along with RightNow, some 50 other tech vendors have been erased from the Nasdaq and the NYSE in just 2011 alone.

Oracle buys big, again

October 24, 2011 Brenon Daly

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Announcing its third deal in just the past month, Oracle said Monday that it will pay about $1.5bn for customer service software provider RightNow Technologies. The purchase brings the acquisitive software giant even closer into competition with salesforce.com, which has also used M&A to expand its customer service offering. However, true to form, the deals by the rivals underscore their wildly different approaches to dealmaking.

For Oracle, bigger appears to be better. The price of its planned purchase of RightNow, which is expected to close by early next year, is a whopping 50 times larger than the amount salesforce.com spent on InStranet back in August 2008. (Salesforce.com handed over $31.5m for InStranet.) While RightNow counts more than 2,000 customers, InStranet had just 50 at the time of its acquisition. And, finally, another key difference: Oracle is valuing RightNow at more than 6 times trailing sales, which is three times the multiple salesforce.com paid for InStranet.

Of course, as the chief consolidator of the software industry, Oracle is accustomed to making big moves. In fact, its pending purchase of RightNow ranks as only its sixth-largest purchase. (It has done more than 80 deals over the past decade.) As a point of comparison, we’d note that Oracle’s single acquisition of RightNow is larger than the $1bn or so that salesforce.com has spent on the 18 deals it has announced in its entire history. We’ll have a full report on Oracle’s pickup of RightNow in tonight’s Daily 451.

Renaissance plays politics

October 21, 2011 Brenon Daly

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It must be election season. That’s what struck us when we saw earlier this week that Renaissance Learning went ahead and accepted a buyout offer that valued the online education vendor at about 10% less than an unsolicited bid. To our ear, some of the material in the proxies filed in connection with the $455m leveraged buyout could very well have come from a campaigning politician. The deal closed earlier this week.

Consider the language that the company used in laying out why shareholders should follow the lead of the company’s cofounders, who controlled some 69% of the equity, and back the initial offer from buyout firm Permira: The deal would be ‘more favorable’ to the employees and the broader community than the unsolicited bid from rival company PLATO Learning. (In addition, Renaissance said PLATO’s offer would take longer and be less likely to close, in their view.)

The concern, presumably, is that there would be far more overlapping employees if the two companies were merged, resulting in more job cuts than if Renaissance were taken private and largely left to run as it had been running. Who knows, maybe if PLATO took the company over, the combined company would start with cuts in the executive ranks. If that were the case, the cofounders of Renaissance would go from majority owners to unemployed.

Don’t get us wrong. We’re all for not contributing to the already intractably high unemployment rate in the US. But as a public company, Renaissance has a fiduciary responsibility to all its shareholders, not just the ones in its hometown. It’s worth noting that Renaissance is incorporated in its home state of Wisconsin, rather than the typical location for incorporation, Delaware. (Roughly half of US companies, including PLATO, are incorporated in Delaware.) So that may go some distance toward explaining why the company made ‘jobs and community’ a part of its pitch.

A splashy IPO for Splunk

October 20, 2011 Brenon Daly

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After spending the past two weeks baking off, Splunk has picked Morgan Stanley, J.P. Morgan Securities and Credit Suisse to run the books on its upcoming IPO, according to sources. The offering is expected to raise $150m for the San Francisco-based company, with the paperwork likely coming in January. Splunk will finish this year at about $110m in sales, an increase of some 65% over 2010. For 2012, projections call for the company to top $160m in sales.

The fast growth – an eager anticipation of the company’s rumored IPO – indicates just how far Splunk has grown beyond its roots as a basic event management vendor. Although most people currently know the company as a simple, easy-to-use search engine for IT data, it has been broadening the information sources it collects, including ever-increasing volumes of machine-generated data. Additionally, we recently profiled the beta release of Splunk Storm, a monitoring tool for cloud-based apps that runs on Amazon Web Services.

While the company has been fairly clearly focused on an IPO, several sources have indicated that Splunk has nonetheless attracted attention from both Dell and Oracle in recent months. However, for both financial and philosophical reasons, the company is expected to remain independent. Splunk has a number of executives that have already helped sell companies for more than $1bn, notably Hyperion Solutions, ArcSight and Opsware. Several bankers who have met with various executives say there is a sort of ‘been there, done that’ attitude toward a trade sale, and they want to build a stand-alone business for the long run. That sentiment also comes through in the rumored clearing price for Splunk: a robust $1.5-2bn.