Author: Ben Kolada

Google adds zynamics to its security capabilities

Ben Kolada

Contact: Wendy Nather, Ben Kolada

Reverse engineering and code analysis vendor zynamics just announced that it is being acquired by Google for an undisclosed sum. Google has made other security plays before, with the largest being the $625m purchase of SaaS messaging security vendor Postini in July 2007, but this is its first reverse engineering deal. Google isn’t providing details on the rationale for the transaction, but we suspect that the target could be used for a number of purposes, including inspecting its ad streams for malware.

Bochum, Germany-based zynamics was founded as Sabre Security in 2004 by Thomas Dullien (aka Halvar Flake), who in 2007 was barred by the Transportation Security Administration from entry to the US as he attempted to travel to Las Vegas to present at the Black Hat conference. Google isn’t disclosing the deal terms, but when we covered zynamics back in 2008 we noted that it was profitable, with revenue of just over a half-million dollars. Google is retaining the entire zynamics team.

Google hasn’t divulged what it plans to do with zynamics’ IP and team, but given the target’s specialties, a pretty obvious use would be to check its hosted ads for malware, as well as improve detection of malware in the Android application market (given that Google just pulled 21 applications from the market today for security issues, this is an ongoing concern). We assume that Google will be using the zynamics assets to augment or replace what it’s presumably using today for these activities. But even in that case, Big G could have just licensed the software, which would mean that it plans to use the zynamics team and its talent to expand upon it for its own use – and since Google has such a wide footprint on the Internet, it’s a target-rich environment.

Midmarket and boutique banks bounce back

Ben Kolada

Contact: Ben Kolada, Adam Phipps

The US tech M&A advisory market regained a bit of its footing in 2010, and midmarket and boutique banks were the primary beneficiaries of the rise in activity. According to our 2010 Tech M&A Banking Review, midmarket banks took 15% of the total tech advisory market in 2010, up six percentage points from 2009. Turning to the boutiques, their sector also regained lost market share, due in part to the growing trend of boutiques co-advising on larger deals. Last year, the boutique banking sector accounted for 10% of the aggregate advised deal value, up from 6% in 2009.

But the boutiques’ bullish results should not spur too much optimism. In September 2010, we published a report in which we argued that declining sell-side mandates and the increasing number of boutique banks would force consolidation among boutiques. Indicators of this consolidation over the past couple of years include Morgan Keegan & Co’s pickup of Revolution Partners, Signal Hill’s acquisition of Updata Advisors, Pacific Growth Equities’ takeout of Wedbush Morgan Securities and Stifel Financial’s reach for Thomas Weisel Partners, among others.

With the boutique banking market still extremely competitive (some firms are even discounting their fees to get a print), some senior tech bankers expect that consolidation will continue in 2011. In our recent banking outlook survey, 45% of respondents anticipated an increase in acquisitions of boutiques by larger banks, while 46% predicted no change. Asked about the rate of failure in 2011 for boutiques, 44% of bankers forecasted that the number of failures would rise, while 38% expected no change.

Advisory market share, annual

Bank type 2010 2009 2008 2007
Boutique 10% 6% 11% 9%
Bulge Boutique 10% 11% 6% 9%
Full-service Midmarket 15% 9% 14% 15%
Bulge Bracket 66% 74% 69% 67%

Source: The 451 Group’s 2010 Tech M&A Banking Review

Match made in heaven?

Ben Kolada

Contact: Ben Kolada

As telcos look to stem losses in their business divisions and hosters look for partners to help them continue revenue growth, the two industries are increasingly merging together. The recent Terremark and NaviSite sales have already set a new record for dealmaking between these two sectors, eclipsing the nearly $1bn worth of deals that we saw in 2010. And unlike in other industries, where companies or assets may be acquired and then squandered, the strategic potential that telcos and hosters offer each other is too valuable to be wasted, and pairings between the two industries usually benefit both sides. (Click here to check out our longer report on this growing trend.)

Verizon’s Terremark purchase represents the most synergistic pairing that we’ve seen between these two industries. But the hosting sector in general can benefit from partnering with complementary telcos. Perhaps the greatest opportunity may actually be for regional and smaller telcos (which we loosely define as providers with revenue between $100-500m) to buy smaller hosters. The hosting market is still fragmented, particularly among smaller providers, and many of these firms are experiencing capital constraints that are preventing expansion. Regional and local telcos will be able to take advantage of this fragmentation and acquire small complementary hosting providers without spending too much money, since smaller providers tend to garner smaller valuations.

Benefits for hosting providers partnering with telcos:

  • Telcos often already have some level of existing Internet infrastructure services that can be complemented by purchasing providers to round out those offerings or expand geographically.
  • Telcos have access to capital to support continued growth.
  • Telcos have long histories of service provision for both large and small business.
  • Telcos have institutional knowledge with respect to offering multiple products and services simultaneously across more than one geography, often with widely varied requirements and expertise.

Source: Tier1 Research

Cisco adds Inlet to its video puzzle

Ben Kolada

Contact: Ben Kolada, Jim Davis

Cisco recently announced that it is acquiring video encoding provider Inlet Technologies for $95m in cash. The deal is the latest addition to Cisco’s ongoing strategy of helping service providers such as Telstra build content delivery networks that can serve video to TVs, PCs and mobile devices for pay TV services.

Cisco has picked up a lot of video-related technology over the years. Despite its networking expertise, video is a notoriously difficult beast to tame, and even more so when dealing with video over less-predictable public IP networks. Cisco bought V-Bits in 1999 for $129m to add video-processing gear to its repertoire, but stopped production in 2002. In 2000, Cisco spent $369m to acquire PixStream for its video headend gear for IPTV systems, but then closed the operation four months later when the stock market bubble burst.

When it got serious about gaining expertise in video, Cisco spent $6.9bn in 2005 on Scientific-Atlanta, a major equipment supplier to the cable industry. In 2006 Cisco acquired UB Video, a Canadian firm focused on developing MPEG-4 AVC software for use in encoding and decoding equipment. Later that year it also bought video-on-demand (VOD) software specialist Arroyo Video, whose products formed the basis of VOD servers sold to cable and IPTV providers. In acquiring Inlet, Cisco picks up an established player in the market for video encoding equipment used to ready video for delivery over multiple delivery mechanisms. Inlet’s encoding systems have two strengths: one is that they are powerful enough to do high-quality live streaming over IP networks, the other is that the gear is built for adaptive bit-rate streaming, which is becoming a favored method for delivering video to mobile devices.

Inlet reportedly recorded $7.6m in revenue in 2009 and claims to have doubled sales last year. Assuming that the company closed 2010 with $15m in revenue, Cisco’s $95m offer would value Inlet at 6.3 times trailing sales. While that multiple is more than twice as high as the average for all tech transactions, it’s actually slightly less than similarly sized video encoding competitor On2 Technologies received from Google last year. On2’s investors balked at Google’s original $106m offer, which valued the target at 6.1x sales, but later settled for a revised bid of $132m, or 7.5 times sales. (Click here for my colleague Jim Davis’ full report on the Inlet transaction.)

KIT buys in bulk

Ben Kolada

Contact: Ben Kolada

No stranger to inorganic growth, video asset management provider KIT digital just announced three acquisitions worth $77m. The company’s recent dealmaking brings its total M&A spending to $151m since 2006 – a hefty sum considering that KIT currently sports just a $350m market cap. While similarly sized firms might stop for a breather, KIT plans to announce another large purchase by the end of the quarter.

KIT has bought KickApps, Kyte and Kewego as it continues to consolidate the video asset management market and add social media to its platform. Kyte, the least expensive of the three targets, will provide KIT with mobile video content delivery while Paris-based Kewego provides a video distribution software platform for internal communications to enterprises in the EMEA region. KickApps, arguably the most valuable of the acquired assets, provides social media software for interactive video to enterprises. (A side note: KickApps is betting the farm on the role that social media will play in KIT’s evolving business – the company’s equity holders took their $45m payout entirely in KIT digital stock.)

As if announcing three acquisitions at once isn’t enough, the company claims to be on track to close another large transaction by the end of the quarter. KIT wouldn’t comment on who its next target would be, and the video asset management market is still too fragmented to tell which companies are on KIT’s radar. But we expect that the new target will continue KIT’s M&A strategy of buying companies for geographic expansion, entry into new verticals and complementary technology. KIT will pay for its new property out of the proceeds from its recently closed IPO, which netted $103m.

KIT’s triple play

Date closed Target Deal value Target adviser Acquirer adviser
January 28, 2011 KickApps $44.7m America’s Growth Capital Janney Montgomery Scott
January 26, 2011 Kewego $26.7m Not disclosed No adviser used
January 25, 2011 Kyte $5.7m GrowthPoint Technology Partners No adviser used

Source: The 451 M&A KnowledgeBase

Time Warner Cable picks up NaviSite; is InterNap next?

Ben Kolada

Contact: Ben Kolada

In the second telco-hosting rollup in less than a week, Time Warner Cable is acquiring NaviSite for $230m in cash. This is TWC’s first foray into enterprise hosting and cloud computing services, and marks the end of a tumultuous year for NaviSite that included defending itself from an unsolicited take-private and continuously retooling its business toward enterprise-class services.

TWC, the second-largest cable operator in the US, is paying $5.50 per share, representing a 33% premium over the closing price on February 1. Including the assumption of cash and debt, TWC’s offer gives NaviSite an enterprise value of $277m, or 2.1 times trailing sales and 10.8x trailing EBITDA. While the offer is roughly in line with broad market valuation, it is far below what Terremark received from Verizon. In that deal, announced just last Friday, the target was valued at 5.8x trailing sales and 24.7x trailing EBITDA. Of course, we might argue that Terremark deserves its premium, since it is much healthier and larger than NaviSite. Terremark has 16 datacenters (compared to NaviSite’s 10) spread across a large international footprint, a robust and growing cloud platform and more than twice the sales of NaviSite.

While NaviSite is set to be acquired at a lower valuation than Terremark, TWC’s bid represents a level NaviSite hasn’t seen on its own since late 2007. Further, it’s substantially above the offer that NaviSite attracted just a half-year ago. In July 2010, Atlantic Investors, which already owned one-third of NaviSite’s equity, made an unsolicited offer for the remaining shares of the company. Atlantic Investors’ bid of $3.05 per share valued NaviSite overall at $128m. Time showed that NaviSite was right in rejecting that offer, which isn’t always the case in these unsolicited bids. After spurning the offer, the company continued in its dogged determination to become an enterprise-class hosting provider throughout 2010 and divested some $74m in non-core assets to get there.

After NaviSite’s sale, speculation is intensifying about which hoster will be acquired next. We’ve written before that Savvis is an obvious target, and Rackspace is the constant focus of acquisition speculation. We might add Internap Network Services to that list. The Atlanta-based company’s shares are up 6% in mid-Wednesday trading, continuing a run since the Terremark announcement on January 27. One reason we might point to a trade sale for Internap is that the chief executive has done it before. In January 2009, the company appointed a new CEO, Eric Cooney, who has a history of growing companies and leading them to successful sales. He was previously CEO of Tandberg, which was acquired by Ericsson for $1.4bn in 2007. Since Cooney’s appointment, Internap’s shares have climbed 170%, giving the company a market cap of slightly more than $400m. Look for a full report on TWC’s pickup of NaviSite in tonight’s Daily 451.

Verizon pays sky-high price for cloud provider Terremark

Ben Kolada

Contact: Ben Kolada

In a move to accelerate its cloud services, Verizon has announced that it is acquiring cloud and colocation provider Terremark for $1.4bn. As the largest pairing between a telco and a colocation provider, the deal is not only a landmark transaction for the telecommunications industry, but also a significant shift from the growing trend of telcos buying their way into the hosting and colocation sectors by acquiring pure colocation providers.

Verizon is paying $19 per share in cash, a 35% premium over Terremark’s closing price. On an equity value basis, the deal values the target at 4.4 times trailing sales and 18.6x trailing EBITDA. For comparison, the next-largest telco-colo pairing came in May 2010 when Cincinnati Bell bought pure colocation provider CyrusOne for $525m, or 9.1x trailing sales and 16.4x trailing EBITDA. Both Verizon and Terremark’s board of directors have unanimously approved the transaction, and Verizon expects to complete the deal by the end of the first quarter. Terremark’s management team will remain and will operate the company as a wholly owned but independent subsidiary of Verizon.

While earlier acquisitions in this sector were valued based on the growth potential of colocation services, Terremark garnered a higher valuation because of its cloud portfolio, as well as its international presence. During their conference call discussing the acquisition, executives from both companies highlighted the fact that Terremark’s long-term growth lies in its cloud and managed services. This segment provided half of Terremark’s total service revenue during the first six months of its fiscal 2011. Beyond cloud services, the acquisition is also a geographic fit, with Terremark providing Verizon an expanded presence in Latin America, and Verizon providing Terremark additional room to grow in both the US and Europe. As part of the integration, Terremark will assume operations for all of Verizon’s 220 datacenters. (We’ll have a full report on this deal in tonight’s Daily 451.)

After the transaction was announced, shares of competing cloud computing firms soared. While the sector calmed somewhat by midday, shares of Savvis held onto its 15% advance as Wall Street speculated that it might be the next hosting and services company to get snapped up. (Trading in Savvis was more than 10 times its daily average on Friday.) By revenue, the Chesterfield, Missouri-based firm is the largest provider of cloud and colocation services and already sports a $1.7bn market capitalization. As a result, the list of potential suitors is limited, but AT&T stands out as an obvious bidder for Savvis. Just as Savvis is the largest provider among cloud firms, AT&T is the largest provider among telcos and closed 2010 with $124bn in revenue and $1.4bn in cash in its coffers.

Telco and colo: a marriage of necessity

Ben Kolada

Contact: Ben Kolada

Telcos and colocation providers are increasingly coming together in a marriage of necessity. Telcos’ own traditional wireline services are in a state of decline from which they will not recover. Meanwhile, colocation providers are growing rapidly, but need a footprint the size of their larger telco peers to continue such expansion. As a result, cross-sector M&A is on the rise, but we wonder if the marriages may someday end in separation.

Case in point: GTS Central Europe. The Warsaw-based communications provider recently began investing in colocation services to offset losses in its own core business. Although 2010 year-end numbers are not yet available, the company’s revenue is expected to take a slight dip, from €384.5m ($551m) recorded in 2009 to about €380m ($500m) for year-end 2010. To offset losses, GTS began looking for growth channels, and subsequently threw its weight behind datacenter services. Last year, the company announced several datacenter completions and expansions, as well as two datacenter-related acquisitions. In June, the company picked up Interware, which operates two facilities in Budapest, and earlier this week it announced that it is acquiring Prague-based single-site colocation provider SITEL Data Center. (We’ll have a full report on the SITEL purchase in tonight’s Daily 451.)

However, following the SITEL buy, GTS is now spinning off its datacenter business into a new entity named CE Colo. Financial terms of the spinoff haven’t been disclosed, but we would expect GTS to maintain some interest in CE Colo, perhaps even a controlling stake. No other telecom operators have yet followed this strategy, and it’s still too early to tell if any ever will – most of the landmark telco-colo transactions we’ve seen so far were announced just last year. But if the revenues in both sectors continue their current trajectories, spinoffs like CE Colo may someday become the norm.

Continued M&A activity in hosting sector expected in 2011

Ben Kolada

Contact: Ben Kolada, Aleetalynn Schenesky-Stronge

The past year set several records for M&A in the hosting and managed services sectors. Industry players, including fellow companies, private equity (PE) firms and telecom carriers, announced a total of 102 deals, eclipsing the previous record set in 2006. The aggregate value of last year’s transactions hit $4.8bn. True, records set in 2010 were partially the result of pent-up demand from the Credit Crisis, but we wouldn’t call the year a fluke. In fact, we expect that 2011 will continue the upward trajectory.

In 2010, we saw record acquisitions of all flavors. In terms of deal size, at an estimated $450m, SoftLayer Technologies’ sale to GI Partners and SoftLayer’s management topped our list of PE purchases of hosting providers. Buyout shops were also active internationally, with both Lloyds Banking Group and Montagu Private Equity each inking deals. Meanwhile, telecom providers were particularly active last year. Telco incumbent Cincinnati Bell announced the largest telecom-colocation transaction on record, and notable mention goes to Windstream Communications for its $310m pickup of Hosted Solutions. Meanwhile, wholesale datacenter provider Digital Realty Trust inked the sector’s largest acquisition of the year (in fact, the largest colocation transaction we’ve ever recorded), paying $725m for Rockwood Capital’s 365 Main portfolio.

On the macroeconomic side, we expect M&A in the hosting and managed services industries in 2011 to be driven by the following: enterprises converting capex to opex through IT outsourcing, increasing acceptance of outsourcing since that model successfully solved internal IT constraints; improving access to capital, allowing providers to continue to expand and innovate in order to meet market demands; and investment for growth, whether that be directly through M&A, via funding provided by PE, or both. On the microeconomic side, M&A will be predominately driven by consolidation and rollup to achieve scale, amass customer bases and add complementary infrastructure and service lines in order to create and expand new service offerings. Click here to see our full review of 2010 and our predictions for 2011.

More than just Chatter at salesforce.com

Ben Kolada

Contact: Ben Kolada, Kathleen Reidy

Fresh from closing its $249m acquisition of Ruby developer Heroku, salesforce.com recently announced, and closed, its purchase of Web-conferencing startup Dimdim for $31m. The Lowell, Massachusetts-based target provided a cloud-based open source Web-conferencing service for businesses, and with this deal salesforce.com now claims 60,000 Chatter users, though with its ‘freemium’ model we suspect that only a fraction of these are paying customers.

Salesforce.com paid $31m in cash for Dimdim, which had raised a total of $8.4m from venture investors Draper Richards, Index Ventures and Nexus Venture Partners. Per salesforce.com’s conference call, Dimdim has 75 employees spread throughout its offices in Lowell and Hyderabad, India. Although the target’s annual revenue wasn’t disclosed, we estimate that it closed 2010 with about $2m in revenue.

Like salesforce.com’s previous collaboration pickup – GroupSwim, in December 2009 – Dimdim’s services will be shut down, and its capabilities will be rolled into Chatter, salesforce.com’s social collaboration software service that first launched in 2009. As my colleague Kathleen Reidy notes (click here to see her full report on the acquisition), as evidenced by the almost immediate shutdown of the Dimdim service, salesforce.com isn’t interested in the pure Web-conferencing market. Salesforce.com will honor contracts with Dimdim’s existing customers, though these will not be eligible for renewal, and it has terminated Dimdim’s free service. Dimdim also had an open source distribution and while this is still available, it won’t see any further updates. Instead, Dimdim will provide features to Chatter, which is also incorporating semantic analysis technology from GroupSwim.