Author: Ben Kolada

Cut the CDN already, InterNap

Ben Kolada

Contact: Ben Kolada

We’ve long covered InterNap Network Services as both a potential target and a datacenter services vendor with disappointing earnings. With what’s likely to be another underwhelming quarter (the company reports Q3 results after the bell today), we take yet another look at what can be done to save this barely floating ship.

At this point, InterNap has got to unload some of its non-core assets. The company’s IP services segment, made up of interconnection and CDN services, is dragging on its total revenue (revenue from this segment fell 8% last year). However, interconnection is among the core services for hosting providers, so we’d suggest just divesting its CDN assets. Now may in fact be the best time to start weighing this option, given recent positive developments in the CDN sector. Akamai Technologies, the largest CDN provider, reported earnings yesterday that showed revenue grew 11% in Q3 from the year-ago period. And earlier this month, Japanese telco KDDI announced that it was taking an 86% equity stake in CDNetworks in a deal that gave the target an implied equity valuation of $195m. Even though growth had stalled at Seoul-based CDNetworks, the company was still able to command a 2x price-to-sales valuation (which stands in stark contrast to mostly disappointing valuations in the CDN sector).

Cutting some of the fat from InterNap’s business could make the company more palatable to prospective acquirers. However, the lack of growth is likely to prevent interest from most telcos. Instead, at this point buyout shops may be the most interested acquirers. Not only does InterNap have some of the characteristics PE firms prefer (it has very little net debt and consistently generates healthy cash flow), the company’s price is still within reach of some of the larger firms. Applying a simple 30%-per-share premium would put its price in the ballpark of $400m. For comparison, last year we saw financial firms announce a trio of deals each valued at $400m or more.

The next ‘big data’ buying binge?

Ben Kolada

Contact: Ben Kolada

After last year’s storage and data-warehousing feeding frenzies provided outsized returns to target companies’ venture investors, a new breed of ‘big data’ vendors is renewing venture capitalists’ interests. So-called NoSQL and NewSQL database firms had already been catching investors’ attention, securing millions of additional dollars in VC financing. Eventually, we expect the fast growth that drew interest from VCs to also draw interest from corporate buyers. However, the price potential acquirers will have to pay is constantly rising.

VCs are attacking big data pains again, this time by investing in a number of promising database startups. 10gen, Couchbase and Neo Technology, for example, each secured more than $10m in financing in the third quarter. The size of these recent rounds, which were almost certainly substantial up-rounds, is due in part to the fact that some of these startups have already proven themselves and are posting triple-digit growth rates. My colleague Matt Aslett recently wrote that Basho Technologies is aiming to increase its revenue seven-fold this year. And we’ve got our thumb on the pulse of another startup that expects to nearly quintuple its annual revenue, surpassing its initial 300% growth projection.

While most of the NoSQL and NewSQL startups are still in the single-digit millions of revenue, continued growth rates will likely increase their current valuations. Further, additional venture investments needed to fuel that growth will lead to even wider gaps in valuations between potential acquirers and sellers. In our recent survey of corporate development executives, half of respondents expected the valuation gap between buyers and sellers to widen. And from our view, already sky-high valuations in hot sectors such as big data and cloud computing will almost certainly rise, regardless of what happens in the public markets. If so, potential suitors such as Oracle, Informatica or Teradata will have to reach deeper into their pockets to snare promising database properties.

Select recent NoSQL venture investments (rounded to nearest $m)

Company Latest round Total
10gen $20m $31m
Couchbase $15m $30m
DataStax $11m $14m
Neo Technology $11m $13m
Basho Technologies $7.5m $13m

Source: 451 Group research, listed by size of round

The next ‘big data’ buying binge?

-by Ben Kolada

After last year’s storage and data-warehousing feeding frenzies provided outsized returns to target companies’ venture investors, a new breed of ‘big data’ vendors is renewing venture capitalists’ interests. So-called NoSQL and NewSQL database firms had already been catching investors’ attention, securing millions of additional dollars in VC financing. Eventually, we expect the fast growth that drew interest from VCs to also draw interest from corporate buyers. However, the price potential acquirers will have to pay is constantly rising.

VCs are attacking big data pains again, this time by investing in a number of promising database startups. 10gen, Couchbase and Neo Technology, for example, each secured more than $10m in financing in the third quarter. The size of these recent rounds, which were almost certainly substantial up-rounds, is due in part to the fact that some of these startups have already proven themselves and are posting triple-digit growth rates. My colleague Matt Aslett recently wrote that Basho Technologies is aiming to increase its revenue seven-fold this year. And we’ve got our thumb on the pulse of another startup that expects to nearly quintuple its annual revenue, surpassing its initial 300% growth projection.

While most of the NoSQL and NewSQL startups are still in the single-digit millions of revenue, continued growth rates will likely increase their current valuations. Further, additional venture investments needed to fuel that growth will lead to even wider gaps in valuations between potential acquirers and sellers. In our recent survey of corporate development executives, half of respondents expected the valuation gap between buyers and sellers to widen. And from our view, already sky-high valuations in hot sectors such as big data and cloud computing will almost certainly rise, regardless of what happens in the public markets. If so, potential suitors such as Oracle, Informatica or Teradata will have to reach deeper into their pockets to snare promising database properties.

Select recent NoSQL venture investments (rounded to nearest $m)

Company

Latest round

Total

10gen

$20m

$31m

Couchbase

$15m

$30m

DataStax

$11m

$14m

Neo Technology

$11m

$13m

Basho Technologies

$7.5m

$13m

Source: 451 Group research, listed by size of round

The emergence of convergence

Ben Kolada

Contact: Ben Kolada

The telecommunications and IT industries are increasingly converging, with Verizon Communications’ recent CloudSwitch acquisition perhaps the best example of a telco moving up the IT stack. But the CloudSwitch deal is just one example of a series of moves by telecom service providers to attack the $3bn cloud computing market. Other telcos – such as Interoute Communications with its recent Quantix buy – are merely gobbling up cloud vendors, and may be missing out on the industry’s full potential.

Somewhat IT ignorant, telecom service providers have understandably taken a cautious and hands-off approach to cloud computing. In fact, telcos that have announced the biggest deals so far have allowed their acquired properties to operate mostly autonomously, rather than fully integrate both companies in order to take advantage of their shared strengths.

To educate service providers on how to effectively move toward the cloud, tomorrow at 8am PST we will host a webinar titled ‘Telcos in the Cloud: Who’s Doing What With Whom, and Why?’ Antonio Piraino, vice president of Tier1 Research, will join me in discussing cloud strategies, partnerships and acquisitions that telcos are and should be employing to harness the cloud industry’s growth potential. Click here to register for this free one-hour webinar.

The ball is rolling in semiconductor networking M&A

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In announcing its largest-ever deal, and paying a princely price at the same time, Broadcom is keeping the ball rolling in semiconductor networking M&A. The company’s nearly $4bn pickup of NetLogic Microsystems comes less than two months after rival Intel announced a smaller strategic play of its own, and it likely won’t be the last transaction before the buyout curtain closes.

After a dearth of big-ticket semiconductor networking acquisitions, such vendors are now becoming hot properties. Before announcing its landmark NetLogic purchase, Broadcom itself bought networking provider Teknovus in February 2010 for $123m (in an earnings call, Broadcom mentioned that Teknovus generated revenue in the single digits of millions, which implies a price-to-sales valuation far north of 10x). And in July, Intel announced that it was acquiring Fulcrum Microsystems for a price we hear was in the ballpark of $175m, or about 13x trailing sales.

Broadcom’s richly priced offer for NetLogic, which values the target at 9.2x trailing sales, likely won’t be the last deal in this sector. If you ask The Street, the next companies to get scooped up could be Cavium Networks or EZchip Technologies. Shares of both firms surged following Broadcom’s announcement. As for likely acquirers, we could point to deep-pocketed vendors Qualcomm and Marvell Technology. With $10.7bn and $2.4bn of cash in their coffers, respectively, either company could easily digest Cavium, which currently sports a market cap of roughly $1.7bn.

Limelight lightens its load

Ben Kolada

Contact: Ben Kolada

In a move to streamline its operations, Limelight Networks is divesting its EyeWonder assets to DG FastChannel. Although the deal comes at a considerable discount – DG’s $66m all-cash offer is only slightly more than half the amount that Limelight paid in cash and stock for EyeWonder less than two years ago – it should help the ailing CDN vendor focus on its core business. It could even pave the way for a sale of Limelight.

As my colleague Jim Davis notes, Limelight’s original decision to buy EyeWonder appeared strategically sound. The idea was that EyeWonder would funnel new customers to the Limelight CDN. That could have worked, but a missed development target meant that ad agencies were taking business elsewhere this year. As a result, revenue for the acquired company essentially flatlined. When Limelight picked up EyeWonder in December 2009, the target generated some $35m in trailing sales. The outlook two years later isn’t much better. New owner DG FastChannel indicated that it expects revenue from the acquired property to max out at $37m this year.

Wall Street appears to back the asset sale. Following the announcement, shares of Limelight closed the day up nearly 6% on volume that was almost triple the monthly average. Although the company has lost half its market value this year, due in large part to flat revenue growth and third-quarter revenue guidance that came in below analysts’ expectations, an opportunistic acquirer could swoop in to scoop up the company. Following the slide in share price, Limelight is sporting a market cap of just $300m. Add in the more than $100m of cash in its coffers and little debt, and the company could be had for relatively cheap for an opportunistic buyer.

Verizon drives toward convergence with CloudSwitch buy

Ben Kolada

Contact: Ben Kolada, Antonio Piraino

True to its intentions of bolstering its cloud prowess and less than half a year after completing its Terremark Worldwide purchase, Verizon Communications has now acquired cloud onboarding provider CloudSwitch. The timing of the deal comes as a surprise – CloudSwitch was still in startup mode – but that only goes to show the strategic importance Verizon is placing on this technology. CloudSwitch provides a proprietary technology that helps Terremark onboard workloads from internal IT infrastructure to its cloud platform in a more seamless and non-reconfigurable way.

CloudSwitch is addressing the first hurdle faced by the cloud platform proposition – how does a company with an established IT practice even begin to consider transitioning to the cloud? ‘Bursting’ over to the cloud, and making it so that applications can shift seamlessly to the cloud without rewriting code, is a good start. Giving enterprise system administrators the ability to point and click through an entire datacenter migration project is highly attractive for operations staff to consider migrating to a cloud environment. Even though hybrid mixes of in-house and off-premises resources are expected to exist for quite some time, there is still a considerable opportunity for providers in the space.

My colleagues at Tier1 Research don’t believe that Verizon/Terremark is finished building on this enterprise cloud play. When it has developed the infrastructure (including onboarding and orchestration layers), they expect that it will continue to move further up the IT stack. And in this era of heavy M&A activity, there’s a fine line to be drawn between buying prior to proven maturity and possessing technology before your competition grabs it, making this a good investment for Verizon/Terremark.

Are Internet infrastructure exits interconnected?

Ben Kolada

Contact: Ben Kolada

Providing further proof that it’s a tough time to be on the market, much less come to market, GI Partners has opted to sell its Telx investment rather than battle through an IPO. The company’s sale to ABRY Partners and Berkshire Partners closes the books (at least for now) on a proposed public offering that Telx initially filed back in March 2010. And we wouldn’t be surprised if Telx’s sale caused other IPO candidates in the industry to rethink their entry onto the public stage as well.

Terms weren’t disclosed, but we understand that Telx caught a fairly high valuation that would have provided a more immediate – and lucrative – return than an IPO. Although the Internet infrastructure industry showed resilience throughout the recession, consistently growing revenue, that hasn’t always been the case when it comes to the public markets. Chinese datacenter operator 21Vianet Group, for example, closed its first trading day on the Nasdaq with a market cap of $1bn. However, since then its shares have lost 40% of their value. (We note, however, that the success of 21Vianet’s IPO was due in part to success from other Chinese IPOs, as well as buyout speculation in the industry.)

Just as the Internet infrastructure market focuses on interconnection, we suspect that its participants’ exits are also interconnected. We feel that Telx’s recent sale to ABRY Partners and Berkshire Partners could cause the industry’s other IPO candidates to pause before hitting the public markets. Our colleagues at Tier1 Research maintain a list of the Internet infrastructure industry’s potential IPO candidates. Although speculation surrounds such fast-growing firms as SoftLayer Technologies, Peak 10, Zimory and Next Generation Data, an IPO for these players may be pushed to the back burner, at least for the foreseeable future.

In Network Solutions’ sale, General Atlantic gets a bit of both exits

Ben Kolada

Contact: Ben Kolada

Web.com is acquiring Web hosting and domain name registration vendor Network Solutions in a deal valued at $756m, including the assumption of debt. And we expect that Network Solutions’ owner couldn’t be more relieved. With flat revenue and customer attrition in recent years, Network Solutions’ private equity owner, General Atlantic (GA), wasn’t likely to find much interest for the portfolio company on Wall Street.

However, GA structured the transaction in such a way that – at least for now – it is enjoying a good day on the stock market. Terms of the deal call for just over a quarter of Network Solutions’ price to be covered by Web.com shares. (That will leave GA and other Network Solutions’ shareholders owning 37% of the combined company.) Web.com initially valued that chunk of equity at about $150m. On Thursday afternoon, the value of the 18 million Web.com shares heading to GA and other owners had soared closer to $200m. The reason? Wall Street liked the acquisition as well as Web.com’s second-quarter financial results. (We’ll have a full report on this transaction in tonight’s Daily 451 and 451 TechDealmaker sendouts.)

Windstream misses the message

Ben Kolada

Contact: Ben Kolada

As the telecom industry continues its buying spree, some firms are missing the bigger picture – hosting and datacenter services are the new growth channels for telcos. While CenturyLink and Verizon have each announced acquisitions in the growing datacenter services industry, Windstream Communications appears to be satisfied with consolidating telecom assets. The telco’s purchase of complementary competitive carrier PAETEC is its seventh telco rollup since its formation in 2006. And while PAETEC does provide a wealth of network assets, it contributes little in the way of revenue growth. For the price it’s paying for PAETEC, Windstream could have gobbled up a number of hosting properties at a fraction of the cost.

To be fair, Windstream’s PAETEC pickup does provide more than 50,000 high-revenue enterprise accounts and an expanded fiber footprint. But the target’s organic revenue has been flat in recent years, and growth this year is likely to come primarily as a result of the Cavalier Telephone buy it completed in late 2010. (We would also note that Cavalier’s revenue was in precipitous decline, due primarily to churn in its consumer division. Cavalier’s revenue dropped from $421m for full-year 2009 to an estimated $390m in trailing revenue at the time of its sale.)

Beyond fiber and enterprise accounts, Windstream is also interested in PAETEC’s datacenter services assets. And rightfully so, considering Windstream’s hosting assets could certainly use a boost. The company’s last pure M&A foray into the hosting sector was in November 2010, when it shelled out $310m for Hosted Solutions. That target only generated $51m in trailing sales, or about 1% of Windstream’s total revenue. But for the $2.2bn the telco is paying for PAETEC (including the assumption of debt), it could have easily expanded its hosting footprint in the US and abroad by acquiring both InterNap Network Services and Interxion. Applying a flat 20% equity premium to the pair would put their combined deal value at about $1.6bn on an enterprise value basis, or about three-quarters of PAETEC’s price.

Taking care of unfinished business, Oracle snares InQuira

Ben Kolada

Contact: Ben Kolada

Oracle scratched a lingering itch recently, as it announced that it is acquiring knowledge management and customer service automation vendor InQuira for an undisclosed amount. The announcement comes nearly three years to the day after Oracle was stinted by salesforce.com in its attempt to scoop up InQuira rival InStranet. And although terms of the deal weren’t disclosed, we suspect that the database giant paid up for its expansion in this sector.

As usual, Oracle hasn’t disclosed terms of the transaction. Nearly all precedent deals in this sector have fallen in the range of $30-50m. However, InQuira could have broken this benchmark since the company was growing and was more mature than its acquired rivals. InQuira has expanded from about 135 employees serving 50 customers when we last covered the firm in 2008 to more than 85 customers today, with a headcount surpassing 200. Assuming its average deal size has remained somewhat constant, we would roughly place the company’s trailing revenue in the ballpark of $55-65m. Based on precedent valuations (comparable transactions have been valued at 1.3-1.8 times trailing sales) and our loose estimates of the company’s revenue, Oracle could have paid about $100m for InQuira. In comparison, salesforce.com forked over just $32m for InStranet in 2008.

Privately held InQuira offers integrated applications for Web self-service, knowledge management and agent-assisted support by bringing together intelligent retrieval, content management, collaboration and analytics. The acquisition, which is expect to close in the fall, will become the core of Oracle’s Fusion CRM product line.