Author: Ben Kolada

Cable & Wireless Worldwide may lose independence

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Just two years after parent company Cable & Wireless Group split itself into two businesses, the consumer division Cable & Wireless and the business services unit Cable & Wireless Worldwide (CWW), CWW may once again find itself as part of a larger organization. Vodafone confirmed Monday that it is in talks regarding the possible acquisition of CWW. The deal, which is rumored to be valued at roughly $1bn, should be welcome news to CWW’s investors, who have seen the company’s stock plummet by two-thirds in the past year.

Independent CWW, which provides fixed lines that link to wireless transmitters and switches, among other voice and data services, has fared poorly since the split, as revenue flatlined and the company issued several profit warnings. However, exploding Internet usage on mobile phones has caused renewed interest in CWW. Vodafone, which is light on its fixed-line capacity in the UK, would likely use the acquisition to enable more bandwidth availability for its mobile users. Vodafone will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. CWW’s investors are hopeful that the deal will come to fruition, with shares of the telco closing the trading day 30% higher. Vodafone has until March 12 to make a decision on the acquisition.

SaaS, SaaS and more SaaS

Ben Kolada

Contact: Ben Kolada

Oracle today announced the $2bn acquisition of Taleo, and SAP is getting closer to completing its $3.6bn purchase of SuccessFactors. Both announcements come less than a month after Oracle closed its $1.5bn RightNow Technologies buy. These transactions are the largest we’ve seen in the SaaS sector. However, we doubt they represent the end of the acquisition spree of these companies, with their highly disruptive business models. Although SaaS M&A has been playing out for some time now – and even set new records in 2011 – dealmaking in this sector is far from over.

If the growing use of SaaS and public cloud is any indication of deal flow, we expect volume to continue to rise. According to a report by ChangeWave Research, 22% of respondents currently use applications that run on public cloud services, up from 17% a year earlier. We’ve been beating the drums on cloud and SaaS M&A for a while now. The reason is simple: customer demand is pushing IT vendors to change the way IT services are delivered.

As businesses increasingly adopt cloud services, as opposed to packaged software maintained on-premises, the largest IT firms are increasingly looking to break into this industry. Oracle’s RightNow and Taleo acquisitions alone represent a total of $3.5bn invested in cloud services in less than a half-year. SAP spent that much on SuccessFactors alone. And there’s undoubtedly more to come. We’ll take a deeper look at the Taleo buy, as well as provide information on SaaS valuations, in a longer report in tonight’s Daily 451.

Source: Corporate Cloud Computing Trends, January 2012. ChangeWave Research, a service of 451 Research

Selling to Facebook

Ben Kolada

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.

j2 Global buys into CRM, nabs Landslide Technologies

Ben Kolada

Contact: Ben Kolada

J2 Global continues to diversify its business through M&A, this time with the acquisition of Landslide Technologies. The company’s latest deal, its second in as many weeks, is j2’s first CRM purchase – a stark contrast from its recent M&A plays, which have focused primarily on propping up its managed messaging business at home and abroad.

We’ve previously covered j2’s dealmaking, noting that the company has expanded via M&A from its core fax offering to now include a number of services for small businesses such as email, Web-based collaboration and even marketing. Landslide provides Web-based CRM SaaS, including online, social and mobile CRM applications, to SMBs.

Terms of the deal weren’t disclosed, but the majority of j2’s transactions have gone off for less than $15m. We see no reason why this acquisition would significantly diverge from this path. The company was likely cautious in its first move into the CRM market, meaning j2 likely paid at or below market valuations. And even with a possible premium given to the business because of its SaaS delivery model, we still doubt that the price was too high, considering an SEC report filed in December 2010 noted that Landslide’s revenue was $1m-5m.

IBM plays small ball in big market

Ben Kolada

Contact: Ben Kolada, Vishal Jain, Chris Hazelton

After a streak of batting in the majors, Big Blue recently took a swing in the minor leagues. The company’s recently announced pickup of Worklight is one of the smallest deals it has announced in more than two years. (In fact, Worklight’s $70m price tag is a fraction of the estimated $475m that IBM has spent on average for its acquisitions since the beginning of 2010.) Nonetheless, it’s a handsome price for a small company, and is indicative of the premium that acquirers are willing to pay for technologies that cover the entire scope of mobile app lifecycle development and management.

According to our understanding, Big Blue’s offer gives Worklight a boisterous valuation of 20-30x trailing sales. Why the sky-high valuation? Basically, as the PC era diminishes, IBM felt pressure to prop up its existing enterprise offerings for mobile clients. Faced with the extent of fragmentation, both on the client and back-end services side, IBM saw Worklight as key to the missing pieces in its puzzle. Worklight completes Big Blue’s coverage of HTML5 frameworks, brings single-code-based development, and provides encrypted local device storage as well as cross-platform publishing and packing capabilities.

Beyond its implications for IBM, the transaction is another example of a longer-term trend we’re seeing in mobile app lifecycle management. In our 2012 M&A Outlook – Mobility, we noted that enterprises need a platform that can manage their entire app development life cycle right from development and through to deployment and maintenance. Larger enterprises that have typically used mobile enterprise application platforms will eye app development firms or agencies in their quest to take control of mobile app development. These acquisitions would be similar to ones closed by Antenna Software, Deloitte, Financial Times, VeriFone and Wal-Mart in 2011.

Sizing the SaaS M&A market

Ben Kolada

Contact: Ben Kolada

Traditional IT service providers, accustomed to an on-premises model of delivering products and services, have been rapidly buying into the SaaS sector to fulfill enterprises’ demand for SaaS offerings. The result has been a rapid increase in both the volume and value of SaaS deals announced. The most notable are Oracle’s RightNow Technologies purchase, which just closed, and SAP’s highly valued SuccessFactors buy, which is expected to close very soon.

As businesses increasingly adopt cloud services, as opposed to packaged software maintained on-premises, the largest IT firms are increasingly looking to break into this industry. We’ve seen a record number of acquisitions of private cloud providers, but now public firms are attracting additional attention as well. In 2011, we recorded 200 announced SaaS transactions in The 451 M&A KnowledgeBase – just a baker’s dozen shy of the all-time record set in 2007. However, total spending on SaaS targets came in at a record $9.7bn, shattering the previous record set in 2008. True, the RightNow and SuccessFactors deals accounted for more than half of total SaaS M&A spending in 2011, but the overall volume of large acquisitions is on the rise as well. For example, last year we saw a dozen SaaS transactions announced valued at least at $100m – a steady uptick in big-ticket deal volume since 2008.

Driving these acquisitions, in addition to customer demand, is the SaaS sector’s enviable revenue growth rates. While IBM, for example, grew total revenue just 7% in 2011, our 451 Market Monitor colleagues projected that the global SaaS sector grew 22%. And according to ChangeWave Research, a service of 451 Research, SaaS remains the most popular cloud service. In a ChangeWave report, a whopping 61% of respondents said they were using some SaaS product. The report also noted that 28% of respondents expect to increase their SaaS spending over the next six months, more than any other cloud service ChangeWave covered in the report.

Acquisitions of SaaS vendors, 2005-2011

Year announced SaaS deal volume SaaS deal value
2011 200 $9.7bn
2010 152 $6.1bn
2009 138 $8.1bn
2008 125 $3.5bn
2007 213 $6.7bn
2006 93 $3bn
2005 49 $712m

The 451 M&A KnowledgeBase

A vote of confidence?

Ben Kolada

Contact: Ben Kolada

There’s no denying that behavior in the equity markets is one of the main influencers on big-ticket M&A. Stock market stability provides a vote of confidence for corporate acquirers to pursue large, game-changing deals. Without stable markets, the valuation gap between buyers and sellers becomes too wide for potential sellers to accept. As a result, when the equity markets dip, so too does deal volume.

Nearly every drop in the tech-heavy Nasdaq Composite stock index coincided with a drop in both the volume and value of acquisitions of publicly traded technology companies. (Note: we’ve limited the scope of this research to the acquisition of Nasdaq- and NYSE-listed companies valued at more than $250m.) The number of acquisitions of large public companies tracks the stock market so closely that while the Nasdaq ended 2011 basically flat from the prior year, so too did the number of large tech transactions.

Public company acquisitions relative to Nasdaq activity

Source: The 451 M&A KnowledgeBase, 451 Research

By early 2012, the Nasdaq had effectively regained the level it held before the credit crisis. Despite this bull run, however, there’s very little certainty or stability in the equity markets. Although not a flawless metric, we can use predictions for the IPO market as a gauge of 2012 activity. A stable stock market is desired before a private company hits the public stage. According to our 2011 Tech Banking Outlook Survey, which forecasts activity for 2012, bankers expect the public markets to be stable enough to welcome 25 new technology firms this year – the same number predicted for 2011.

But the number of IPOs is only half of the equation, as subsequent stock performance shows longer-term confidence in the newly public companies’ businesses. In 2011, we saw a number of fairly successful tech IPOs, many of which came from the consumer technology sector, such as LinkedIn and Zynga. But some of these vendors’ initial good fortunes were short-lived. LinkedIn, for example, has lost one-quarter of its market value since the company debuted in May 2011, and Zynga is trading below its offer price.

Among the top issues affecting stock markets are progress toward resolving or containing the European debt crisis and an agreement by the US congress on a bipartisan plan that would reduce the federal deficit by at least $1.3 trillion over the next 10 years. A full 85% of tech bankers surveyed answered that progress on the European debt crisis would increase M&A activity, while 73% said the same about progress on reducing the federal deficit. However, neither of these issues seems likely to be resolved anytime soon. The European sovereign debt crisis appears particularly hairy, after credit rating agency Standard & Poor’s recently downgraded nine major European nations’ credit ratings. Meanwhile, presidential election season in the US is likely to cause most to focus on campaigning rather than the federal deficit. While many weigh their options in voting for the next US president, the stock market may lose its vote of confidence, and deal volume could decline as a result.

NTT continues global expansion, bags Netmagic

Ben Kolada

Contact: Ben Kolada

NTT Communications has made another move in the Indian datacenter services market, this time taking a 74% stake in Netmagic Solutions. Netmagic provides managed hosting, colocation and infrastructure management services, among others, from seven datacenters throughout India. This is the latest in a growing line of transactions NTT has inked that have been meant to expand the company’s global datacenter and cloud services footprint.

The deal is yet another international investment in datacenter and cloud services for NTT. In the press release announcing the transaction, the Japan-based telco noted Netmagic’s footprint in the growing Indian datacenter services market as among the top drivers for the acquisition. Our colleagues at Tier1 Research previously wrote that NTT subsidiary Datacraft has already been working with India-based telecom provider Bharat Sanchar Nigam Limited (BNSL). However, NTT said the deal has strategic benefits beyond India, and that it will accelerate its infrastructure and cloud services throughout greater Asia.

This isn’t the first India-specific or international move NTT has made in the datacenter or cloud sectors. In July 2010, the company announced that it was forking over roughly $3.2bn for Johannesburg-based Dimension Data, which also has a footprint in India. NTT cited the cloud computing opportunity as the main motivation behind that transaction. Almost exactly a year later, Dimension Data, then a subsidiary of NTT, announced that it was acquiring cloud, colocation and managed hosting provider OpSource. Although based in Santa Clara, California, OpSource’s cloud technology and capabilities will be sold throughout Dimension Data’s global footprint.

AT&T’s loss is Verizon’s gain

Ben Kolada

Contact: Ben Kolada

In the land of multibillion-dollar telco mergers, sometimes the piecemeal approach is more effective than a one-and-done deal. AT&T attempted to leap over the competition with its proposed $39bn acquisition of T-Mobile USA; however, the world’s largest telecom company fell flat on its face. In failing to secure the T-Mobile takeover, AT&T is on the hook for a hefty $3bn cash breakup fee and must share spectrum in 128 cellular markets with its still-independent competitor. The spectrum loss is of particular irony, considering the primary driver for the T-Mobile purchase in the first place was the target’s spectrum assets.

Rather than pursue another long-shot acquisition, AT&T should focus on smaller spectrum purchases. That’s precisely what its competition has done. While AT&T spent months attempting to persuade politicians and federal regulators to approve the T-Mobile deal, which would have combined the second- and fourth-largest wireless carriers in the US, Verizon was dutifully seeking out smaller spectrum buys. Just this month, the company announced a pair of spectrum transactions worth a combined total of nearly $4 billion – the same price as the pretax charge AT&T will take in the fourth quarter (that charge includes the $1bn book value for the spectrum agreement with T-Mobile). Meanwhile, AT&T still hasn’t received FCC approval for its $1.9bn acquisition of certain Qualcomm spectrum licenses, which was announced back in December 2010.

Cloud deals arising from the fog

Ben Kolada

Contact: Ben Kolada

Going into the last day of the 9th Cloud Computing Expo, held in Santa Clara, California, we get the feeling that conference attendees will see an M&A shakeout within the next few years. To a degree, this dealmaking has already begun, with a small handful of exhibitors already having been scooped up, including a couple of firms that were acquired just last month. Meanwhile, the remaining vendors, most of whom are young startups, are scrapping to define and prove themselves for what they hope will someday be their own fruitful exits.

The cloud computing market is real and growing. My 451 Market Monitor colleagues, who have the tedious task of sizing the cloud market, estimate global cloud revenue (excluding SaaS) at $9.8 billion for 2011, with nearly 40% revenue growth expected in 2012. Many players in this sector have already taken note of its potential and acquirers’ interest, resulting in an increase in both deal sizes and deal volume for cloud vendors. According to The 451 M&A KnowledgeBase, so far this year a record 465 transactions claimed some aspect of cloud. That’s nearly double what we saw in the same period last year. (To be honest, many of these acquired companies are about as cloudy as snake oil, but there are real cloud deals being done. Platform Computing and Gluster, which both announced their sales last month, sold for an estimated combined deal value just shy of $450m.)

However, in terms of revenue, most of the cloud startups we spoke with haven’t yet really proven themselves commercially. But as these firms transition their focus from product development to marketing and sales, their growth will attract more and more suitors. And double-digit revenue isn’t exactly a requirement for a successful exit, as both the recent CloudSwitch and Cloud.com takeouts proved. Though we understand that none of these companies are looking to sell just yet, we wouldn’t be surprised if cloud-enablement providers such as OnApp, Abiquo and Nimbula are picked off one by one within the next few years. And we were reminded yet again that open source networking and routing vendor Vyatta could someday see a real offer from Dell, though the IT giant would likely face a competing bid from Cisco.