Author: Ben Kolada

salesforce.com ‘acq-hires’ Microsoft talent by acquiring Thinkfuse

Ben Kolada

Contact: Ben Kolada

Taking a page from the playbooks of Google and Facebook, salesforce.com is ‘acq-hiring’ Microsoft-nurtured talent. The CRM giant announced on Tuesday the tiny acquisition of team collaboration SaaS startup Thinkfuse. The target immediately ceased operations and terminated its service, suggesting this was more of an acq-hire than anything else. Through the deal, salesforce.com gets its hands on about five employees, three of whom have had software engineering experience at Microsoft, according to their LinkedIn profiles.

Although three of the four acquisitions salesforce.com has announced this year (including Thinkfuse) have been tiny transactions, this small trend likely doesn’t represent a shift in M&A strategy. The company has a history of buying young firms, primarily for technology tuck-ins. According to The 451 M&A KnowledgeBase, the average time from when a company was founded to when it sold to salesforce.com is just under four years. What’s also notable, though, is that salesforce.com’s last team collaboration acquisition – Stypi, announced in May – was also a small acq-hire. However, the Stypi service is being maintained, at least for now.

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What’s a Smarsh to do?

Ben Kolada

Contact: Ben Kolada

Depending on which way the bidding goes for systems management vendor Quest Software, Smarsh’s future could change considerably. The compliance-focused archiving startup announced in February that it sold a majority of its equity to Quest, just three weeks before its newfound parent became the center of an ongoing bidding war. But one side’s plans for Quest post-close may not include Smarsh.

After the closing bell Tuesday, Vector Capital joined Insight Venture Partners and Quest’s management in announcing that they had increased their offer for Quest to $25.75 per share, for a total deal value of about $2.24bn by our calculations. The revised bid tops a competing offer from an unidentified suitor – widely believed to be Dell – that was announced last week.

While all eyes are on Quest at the moment, the continued bidding casts a shadow over who will ultimately own Smarsh. Right now, the company is seen as more of a Quest investment rather than an operating business unit.

If Insight and the rest ultimately win Quest, Smarsh could be considered just another portfolio company for the private equity firms. However, if that unidentified bidder is Dell, and Dell ultimately wins, Smarsh could soon be cast off, since Dell already offers archiving products competitive to Smarsh. In 2008, Dell acquired MessageOne – a direct rival to Smarsh – for a whopping $155m. Dell also has its own archive storage system, the DX platform, based on software OEMed from Caringo. (However, we’d note that neither of these initiatives seems to have gone too far yet.)

Rather than worry about would could happen in the future, Smarsh is keeping itself busy in the present. The company has announced two acquisitions in the past month. In May, Smarsh bought Web content-archiving vendor Perpetually.com and on Tuesday it announced the purchase of compliance-focused website hoster AdvisorSquare, which targets the finance vertical. The deals should ramp up the company’s growth rate for 2012 and 2013. We estimate that Smarsh generated $20m in revenue last year, or about 30% year-over-year top-line growth.

Timeline

Date Event
February 14, 2012 Quest Software acquires 60% stake in Smarsh.
March 9 Insight Venture Partners and Quest management offer to buy Quest for $2bn.
May 16 Smarsh picks up Perpetually.com.
June 14 Unidentified bidder offers approximately $2.22bn for Quest.
June 18 Smarsh acquires AdvisorSquare from Symantec.
June 19 Vector Capital joins Insight and Quest management to buy Quest for approximately $2.24bn.

Source: The 451 M&A KnowledgeBase

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Will hosting bankers follow the deal flow?

Ben Kolada

Contact: Ben Kolada

Acquisitions in the hosting and colocation sector, which dominated headlines in the first half of last year, have flatlined. Gone are the days of multiple nine- and 10-figure deals being done by telcos and buyout shops. PEER 1 Hosting’s NetBenefit acquisition, announced Wednesday, was welcome news for M&A advisers serving the hosting industry (particularly for Oakley Capital Corporate Finance, which banked NetBenefit), but as deal volume in the industry slows, some bankers are making the move to the SaaS sector.

Although valuations remain strong (PEER 1’s NetBenefit buy was done for 10 times EBITDA), deal sizes have shrunk. The median deal size so far this year is $34m, compared with about $50m in the year-ago period. Further, deal volume has flatlined. Annualizing year-to-date deal flow would mean that annual volume has plateaued from its peak in 2010. Volume may ultimately rise as private equity firms that announced hosting plays in the past few years look to exit those investments, and as US firms look overseas for deals. But investment bankers serving this industry aren’t content to wait.

While hosting bankers aren’t yet giving up on their core industry, some are already transitioning to targeting the SaaS sector. For example, one of the hosting industry’s front-running investment banks, DH Capital, recently partnered with SaaS Capital, a specialized commercial lender serving the SaaS sector. They recently worked together with existing investors to secure $12m in subordinated debt financing for SaaS security firm Alert Logic.

More hosting-focused investment banks may look to make this move as well, since the leap from hosting to SaaS banking is shorter than many would think. Hosting and SaaS businesses have similar operating models, such as recurring revenue and server-centric, hosted products. One more reason for the transition: the number of SaaS transactions is twice that of hosting acquisitions.

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The Facebook effect

Ben Kolada

Contact: Ben Kolada

Facebook’s stratospheric growth has had a profound impact on technology entrepreneurship and exits. In addition to creating some $60bn of market value in its own recent IPO, the company has spawned an ecosystem of vendors hoping to further monetize its one billion customers. A myriad of startups have popped up over the years to help advertisers, marketers and brands manage and deliver their message across Facebook’s platform, which some bulls on the company consider something like a new operating system.

Several of these startups are finally starting to show material sales. As a result, the market overall is being targeted by tech titans looking to become advertising and marketing vendors of choice for agencies and brands. That has led to a dramatic rise in the volume of acquisitions of tech firms serving this segment. Last year set the record in both the volume and value of acquisitions.

Dealmaking this year, however, has already shattered that total spending record: The $3.6bn spent so far this year on social-related companies is already twice the 2011 total. The M&A is being driven by phenomenal growth rates in the social media market. As a proxy for that, consider Facebook’s monthly active user (MAU) count, which has grown at a compound annual growth rate of 132% from its founding in 2004 to 2011.

The social media sector’s growth is leading to top-dollar prices for hot startups. Buddy Media, probably the largest social media marketing platform vendor, increased revenue 250% last year. On Monday, salesforce.com officially announced that it is paying $689m for Buddy Media. Meanwhile, Google and Meebo made their pairing official: Google is reportedly paying $100m for the social networking and user engagement vendor. Oracle just paid an estimated $325m for social marketing provider Vitrue to gain capabilities competitive to what Buddy Media offers. (And the enterprise software giant tucked in Collective Intellect for social media monitoring on Tuesday.) And finally, even old-line vendor IBM has inked a high-priced deal in the market, likely paying north of $200m for social sentiment provider Tealeaf Technology last month.

Source: The 451 M&A KnowledgeBase *Includes transactions in social software, social networking and related categories.

CGI growing globally with acquisition of Logica

Ben Kolada

Contact: Ben Kolada

Consolidation in the IT services segment took a leap forward today, as Canadian systems integrator CGI Group announced that it would pay £1.7bn (about $2.7bn), or £2bn when including net debt, for British counterpart Logica. We’ve already written about IT services deals happening on a smaller scale in the US, but this transaction takes the cake as being the largest cross-border deal since NTT bought Dimension Data in July 2010 for $3.2bn.

Specific to CGI, this is its largest acquisition on record, and comes almost two years to the day after it announced its previous high-priced transaction, the nearly billion-dollar purchase of systems integrator Stanley Inc. The Stanley buy itself was a geographic play, meant to expand CGI’s footprint in the US. The rationale for today’s reach for Logica is no different.

CGI is buying Logica as a pure geographic move meant to diversify its revenue globally. Currently, CGI’s revenue is split about half and half between the US and Canada, with only 6% coming from Europe. Logica, on the other hand, generates almost no revenue from North American operations. Its revenue mix is heavily slanted toward Western Europe, with its top three markets by country being France, the UK and Sweden. If and when the deal closes, the combined company will have a presence in 43 countries. The transaction will also more than double CGI’s revenue, creating the sixth-largest IT services provider worldwide.

Diversification is so key to CGI’s strategy that it is tapping nearly every possible outlet to pay for its larger rival. CGI will issue 46.7 million subscription receipts (exchangeable into new Class A shares), secure a £1.25bn term loan from CIBC, National Bank of Canada and Toronto-Dominion Bank, and draw down £405m from its existing credit facility.

Although dilutive, CGI’s shareholders so far approve of the acquisition. Shares of the Canadian company, which trade on the NYSE, were up 12% at midday. Although the deal would seem to undervalue Logica by one metric, its shareholders have reason enough to approve of the acquisition. While the transaction values Logica at about half times sales (the two most recent billion-dollar-plus IT services acquisitions, both announced last year, were done for 1x sales), CGI’s offer represents a heady 60% premium to Logica’s closing share price on May 30, and a 50% premium over the average closing share price for the prior month. Bank of America Merrill Lynch advised Logica on the deal.

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All Covered covering the US

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

IT services shop All Covered has been on a steady M&A tear over the past year. Since its sale to Japanese consumer electronics giant Konica Minolta, announced in January 2011, All Covered has acquired nine complementary vendors throughout the United States. It’s expected to continue acquiring, but could see increased competition for its desired targets if M&A interest in this sector continues to rise.

All Covered is now the US expansion platform for Konica Minolta’s Business Services division. With funding from Konica Minolta (which has earmarked $500m for its Business Services group), the company has bought several IT services shops primarily for geographic expansion. Its dealmaking has expanded All Covered, which is based in Redwood City, California, into nine different states. So far, it’s taken a buckshot approach, casting a wide range rather than focusing on single market penetration. No two of its acquisitions have been in the same state.

However, its rapid M&A pace may slow if the IT systems integrator and professional services sector continues to attract interested acquirers, and if bidding competition increases as a result. M&A interest in this sector has risen dramatically since the bottom of the recession. According to The 451 M&A KnowledgeBase, deal volume in this sector last year nearly eclipsed the previous record set in 2006. (We’d note that while the majority of acquisitions are of systems integrators and IT professional services shops, purchases of email marketing and website design firms in particular are on the rise.)

Meanwhile, consolidation among IT services firms isn’t the only strategy playing out. Acquirers from all corners of the IT industry, as well as some non-tech shops, have made plays in this sector.

Acquisitions of IT services vendors

Year Deal volume
2011 633
2010 581
2009 478
2008 421
2007 577
2006 652

Source: The 451 M&A KnowledgeBase

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EMC buys Syncplicity for mobile file sharing in the enterprise

Ben Kolada1 Comment

Contact: Ben Kolada, Simon Robinson

EMC on Tuesday announced that it is taking another swing at backup and file synchronization. However, this time the company is aiming primarily at mobile users in the enterprise. EMC is acquiring four-year-old startup Syncplicity, which provides file-sharing and storage software as a service that enables synchronization to and from computers, mobile devices and online services.

In announcing the acquisition, EMC noted that it chose Syncplicity over the competition because Syncplicity is focused on the enterprise segment, while most other competitors are still targeting consumers. (EMC had previously tried its hand at the consumer backup market. In 2007, it paid $76m for online storage startup Mozy, but has since handed over much of the responsibility for those assets to VMware.) Like so many of its rivals, Syncplicity started in the consumer space but turned its attention toward enterprises in the past year or so. The company now claims about 200,000 users, including roughly 50,000 businesses.

We’d also note that the deal was driven by EMC’s Information Intelligence Group (i.e., Documentum), which makes sense from a collaboration/workflow/app space, but it does have the potential to cause some internal conflicts. For example, the EMC Atmos team is working closely with Oxygen Cloud, and VMware has Horizon/Octopus.

EMC isn’t disclosing terms of the acquisition, but we were recently told that Syncplicity is still in its early days and is nowhere near the size of competitor ShareFile, which sold to Citrix last year. ShareFile had nearly double Syncplicity’s headcount, and generated an estimated $12m in revenue during the year leading up to its sale. Citrix paid $54m for ShareFile, and is now using the target’s technology in its recently updated CloudGateway 2 product for mobile app management and file sharing. We’ll have a longer report on EMC’s Syncplicity buy later this week.

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Equinix increasing inorganic growth, nabs ancotel

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In its latest geographic consolidation move, colocation giant Equinix announced on Wednesday the acquisition of Frankfurt-based ancotel. Although previously an atypical acquirer, the ancotel buy is Equinix’s second purchase this month, following the pickup of certain assets from Hong Kong-based Asia Tone for $230m. Equinix recently said its dealmaking isn’t done yet. At the Deutsche Bank Securities Media & Telecommunications Conference in February, the company said it plans to place more emphasis on M&A.

Equinix didn’t disclose the price of the acquisition, but did say the valuation is in line with its projected 2012 adjusted EBITDA trading multiple. With a current enterprise value of $9.7bn, Equinix itself is valued at 11 times this year’s projected adjusted EBITDA. Assuming ancotel’s cost structure is similar to Equinix’s, we’d loosely estimate the deal value at $100-110m. Ancotel generated $21.4m in revenue in 2011, with a three-year CAGR north of 20%. The transaction adds a datacenter with 2,100 meters of capacity, 400 network customers, 200 new networks and 6,000 cross connects. Ancotel also has a presence in both London and Hong Kong.

In a departure from its usual practice of making just one acquisition per year, Equinix recently indicated that it intends to use more M&A to fuel growth. The company already dominates the American colocation market, so future M&A activity will likely continue to be overseas. Equinix has a lofty goal of being in 50 markets in the long term, with immediate priorities being India and China. The company has also expressed interest in growing its presence in South Korea and Australia.

Equinix’s international M&A, past five years

Date announced Target Deal value Target headquarters
May 16, 2012 ancotel Not disclosed Frankfurt
May 1, 2012 Asia Tone (certain assets) $230m Hong Kong
February 15, 2011 ALOG Data Centers* $127m Rio de Janeiro
February 6, 2008 Virtu Secure Webservices $22.9m Enschede, Netherlands
June 28, 2007 IXEurope $555m London
January 10, 2007 VSNL International (Tokyo datacenter) $7.5m Tokyo

Source: The 451 M&A KnowledgeBase *90% stake

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Stick with what you know

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Some moves just don’t pan out as planned, such as basketball legend Michael Jordan playing baseball or actor Joaquin Phoenix attempting to become a rapper. While those moves may have dented personal pride, when companies make failed moves, it hits their bottom line. Videoconferencing giant Polycom is experiencing that pain today. The company announced on Friday that it is divesting its enterprise wireless communications assets for just $110m to Sun Capital Partners, or about half the price that it paid for the business five years ago.

Polycom entered the wireless communications market in 2007 when it paid $220m for then publicly traded SpectraLink – it’s largest-ever acquisition (today’s divestiture also includes the assets of Kirk Telecom, which SpectraLink acquired for $61m in 2005). While we had doubts, Polycom argued that its rationale for the deal was sound. Polycom thought it would be able to boost revenue by leveraging the two companies’ complementary sales channels as well as by merging their server-side software products into a single platform.

Polycom, however, wasn’t able to generate the revenue that it expected from the acquired assets. The SpectraLink and Kirk Telecom assets dwindled within their newfound parent, falling from $144m in revenue in 2006 to about half that, $94m, in 2011.

Not to pick on Polycom, but its SpectraLink divestiture is just the most recent reminder of the risks involved in attempting game-changing acquisitions. Companies use M&A to enter new markets all the time, and often fail. HP shuttered its Palm Inc business just one year after paying $1.4bn for the company. And in 2010, Yahoo divested its Zimbra collaboration assets for $100m, or less than one-third of the $350m that it paid for the company in 2007. Cisco attempted to move into the consumer video segment when it paid $590m for Pure Digital Technologies, maker of the Flip video camera, but shut down that division two years later.

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Intuit pays up for SMB-focused Demandforce

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Intuit on Friday announced its largest M&A move in six years, acquiring SMB-focused marketing automation startup Demandforce for $423.5m. The deal, and Demandforce’s valuation, was primarily driven by the target’s market traction. The company, founded just in 2003, has amassed a customer roster of more than 35,000 SMBs. The transaction also demonstrates the accounting and tax giant’s desire to further penetrate this market with additional products and services – this is its first major play in marketing automation.

The Demandforce acquisition complements Intuit’s QuickBooks software and expands its offerings for SMBs. (We’d note that Intuit already offers a marketing management and productivity application called QuickBase, though that product is for enterprises.) Demandforce provides marketing automation SaaS and helps businesses maintain an online profile and better communicate with their customers. The company has grown considerably over its short lifetime. According to Inc.com’s annual survey of the fastest-growing companies, Demandforce generated $15.3m in revenue in 2010, up from $6.4m in 2009. Continuing that growth rate would put its 2011 revenue at roughly $25-30m.

Intuit is handing over $423.5m in cash for Demandforce, making this deal Intuit’s largest since it forked over $1.35bn for transaction processor Digital Insight in 2006. Demandforce’s growth certainly factored into its valuation. Assuming that Demandforce maintained historical growth rates, Intuit’s offer would value the target at a whopping 15-20 times trailing sales. If our initial estimates are correct, that valuation is double and even triple some precedent valuations. For example, in 2010, IBM bought Unica for 4.4x sales. Unica had flatlined during its final years as a public company, with revenue remaining in the $100m ballpark for the four years before its sale. The valuation is also double Teradata’s Aprimo acquisition, also announced in 2010. Teradata paid $525m for Aprimo, or 6.3x sales.