Author: Ben Kolada

Persistence may not pay off for Vodafone

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

After three deadline extensions and interest from competitor Tata Communications, Vodafone Group announced on Monday its latest attempt to acquire Cable & Wireless Worldwide (CWW). Vodafone is offering £1bn, or approximately $1.7bn, to buy CWW. However, its offer has already hit a roadblock. CWW’s largest shareholder, Orbis, which owns 19% of the company, has rejected the bid on the grounds that it undervalues CWW. Vodafone initially expressed interest in acquiring CWW on February 13.

Orbis’ argument does hold some ground. Although Vodafone’s offer represents a 92% per-share premium to when the deal was originally announced, it still values CWW below some precedent transactions. Vodafone is valuing CWW at half times revenue and just 2.7x EBITDA for the 12 months ending September 30, 2011. In comparison, US cable company Knology recently sold to WideOpenWest for 2.8x sales and 8x EBITDA, while SureWest Communications was valued at 2.2x revenue and 6.8x EBITDA in its sale to Consolidated Communications in February. For more business-focused comparisons, PAETEC was valued at 1.3x sales and 8.4x EBITDA in its sale to Windstream Communications in August 2011. Level 3 Communications paid 1.1x revenue and 7.3x EBITDA for Global Crossing in April 2011.

Given the strategic significance of this deal to Vodafone, we expect that the company could appease Orbis with a higher bid. We’ve previously written that 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. The UK wireless operator will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. Throughout the wireless industry, cellular operators are increasingly feeling their networks squeezed as users consume more and more high-bandwidth data. Further, with £7.7bn ($12bn) of cash and marketable securities in its treasury, Vodafone could certainly afford a higher offer.

Citrix consolidates collaboration

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

In its third collaboration deal in the past 18 months, Citrix Systems said Wednesday that it will acquire small Copenhagen-based startup Podio. The target provides team collaboration SaaS for SMBs, apparently mostly through a ‘freemium’ model. Its product is used for project management, social information sharing, sales lead management and employee recruitment management. It also provides related Apple iPhone and Google Android applications. But Citrix isn’t the only company consolidating in the collaboration market – its Podio buy comes at a time of record interest in this sector.

While there are many collaboration vendors in the market, Podio has a different approach – it enables users to create their own applications to carry out specific tasks. This allows teams to tweak the platform to cater to their specific needs. Citrix will integrate Podio into its GoTo cloud services suite, making it easy for existing customers to adopt the platform. Podio already integrates with Dropbox, Google Docs and Box.

Citrix isn’t disclosing terms of the acquisition, but we suspect that the three-year-old firm probably generated less than $5m in revenue. Podio claims tens of thousands of customers in 170 different countries, but the majority of them are likely only using its free product. If our revenue assumption is correct, then this deal should be considered more of ‘tech and talent’ play than anything else. Citrix traditionally pays above-average valuations, but we doubt that it paid more for Podio than the $54.2m it forked over in its last collaboration acquisition – ShareFile. The 27-employee firm had raised a total of $4.6m from Sunstone Capital, CEO Tommy Ahlers and private investors Thomas Madsen-Mygdal and Ulrik Jensen.

Beyond Citrix’s recent consolidation, the collaboration market is seeing increasing interest overall. The 451 M&A KnowledgeBase shows 79 collaboration acquisitions in 2011 – nearly double the volume in 2010 and an all-time record. Throughout the collaboration sector, some of the most notable transactions since the beginning of 2011 include Yammer buying oneDrum (announced just today), salesforce.com reaching for Manymoon and Dimdim, Citrix competitor VMware acquiring Socialcast and SlideRocket, and Jive Software picking up OffiSync (click on the links for disclosed and estimated valuations). Jive itself made its own splash in social collaboration when it went public in December. The company hit the Nasdaq at $850m and has since seen its market cap balloon to nearly $1.6bn, or 14 times projected 2012 revenue.

Citrix’s collaboration acquisitions

Date announced Target Collaboration sector Deal value
April 11, 2012 Podio Team collaboration Not disclosed
October 13, 2011 Novel Labs (aka ShareFile) File sharing & team collaboration $54.2m
December 17, 2010 Netviewer AG Web conferencing $115m

Source: 451 Research M&A KnowledgeBase; Click on the links for disclosed and estimated valuations

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Millennial Media doubles on debut

Ben Kolada

Contact: Ben Kolada

Taking advantage of the emerging market for mobile advertising, platform vendor Millennial Media leapt onto the public stage Thursday, creating nearly $2bn in market value in its debut on the New York Stock Exchange. The company priced its 10.2 million shares at $13 each – the high end of its proposed range. Shares traded at about twice that level in early afternoon. Millennial Media is trading under the symbol MM. Morgan Stanley, Goldman Sachs and Barclays led the offering, while Allen & Company and Stifel Nicolaus Weisel served as co-managers.

Millennial Media, which has nearly 75 million shares outstanding, currently garners a market cap of $1.9bn. That values the company at 18 times trailing sales, in the ballpark of where we estimate Quattro Wireless was valued in its sale to Apple, but about half the valuation we believe AdMob received from Google. Those two companies are Millennial’s primary rivals, although Millennial stakes its claim as the largest independent mobile ad platform provider.

Interest in advertising technology has been building throughout both the equity and M&A markets. Earlier this month, for instance, telco SingTel announced that it was acquiring Amobee for $321m. (We estimate the startup, which provides mobile ad campaign management software, garnered roughly 9x trailing sales in its purchase by the Singapore telco giant.) Meanwhile, the Adtech pipeline is far from dry, even after a recent slew of big-ticket exits. Earlier this month, advertising intelligence firm Exponential Interactive filed its paperwork to go public. The company, which plans to trade under the symbol EXPN, increased revenue 35% last year to $169m.

Monitise pays out now for payoff later

Ben Kolada

Contact: Ben Kolada

Mobile banking and payments vendor Monitise made a big bet on Monday when it moved to consolidate its industry with the acquisition of startup Clairmail. At first glance, the deal should have set off alarms among Monitise’s investors. The all-stock transaction will significantly dilute Monitise’s shareholders, leaving them owning three-quarters of the combined company. However, its investors remained calm – Monitise’s share price closed down only 2%. Why? Although the deal is richly valued and dilutes Monitise’s shareholders, those same investors are all but assured of their own rich payoff eventually.

Another explanation for the muted shareholder response is that the transaction only seems overvalued on the surface. It is actually fairly valued by several metrics. Monitise’s £109m ($173m) offer values Clairmail at 9.3 times trailing sales, a smidgen below its own current 10x enterprise value (Monitise held $68m in net cash at the end of 2011, while Clairmail had $5m). Further, Monitise is also obtaining more valuable customers. Clairmail had 48 banking customers generating a total of $18m in revenue last year, or about $375,000 per customer. Monitise, meanwhile, had more than 250 customers, each of which generated an average of less than $150,000 in annual revenue. And because of Clairmail’s growth rate (its revenue jumped 90% in 2011), its price-to-projected-sales valuation is certain to be much lower. Further placating investors, Monitise is forecasting continued heady growth. The combined company, which would have generated $56m in revenue in 2011 on a pro forma basis, is projecting 2012 total revenue close to $100m.

There’s certainly no reason for alarm among the acquirer’s investors, considering valuations across the mobile payments industry are already high and the potential for Monitise itself to one day find a fruitful takeover offer. In July, eBay announced that it was buying Zong for $240m. And in June, Visa announced that it was buying Fundamo for $110m, or about 11x estimated trailing sales. The latter deal is of particular note, given the growing relationship between Visa and Monitise. Following the Fundamo buy, will Visa make a larger play in mobile payments, perhaps by acquiring Monitise? The two companies are already partners – Visa Europe made a $38m investment in Monitise in October, the two companies equally share a joint venture in India and Visa Europe president and CEO Peter Ayliffe sits on Monitise’s board. And as of February 28, Visa and Visa Europe combined owned 21% of Monitise’s equity.

For more real-time information on tech M&A, follow us on Twitter: @MAKnowledgebase.

Nuance consolidates with Transcend acquisition

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Following a record dealmaking year for the speech recognition software vendor, Nuance Communications today announced the $313m acquisition of medical-focused rival Transcend Services. The deal is Nuance’s largest purchase since its last significant medical acquisition in April 2008, when it paid $363m for eScription. Nuance had earlier acquired Transcend competitor Webmedx for an undisclosed amount in July 2011. Each of these transactions bolsters Nuance’s healthcare division.

Nuance is handing over $29.50 per share in cash for Transcend, valuing the target’s equity at $313m (Transcend had no debt and about $13m in cash at the end of 2011, so the enterprise value is slightly lower at $300m). The per-share offer is a 40% premium to Transcend’s closing share price the day before the deal was announced and, with the exception of a brief uptick in July 2011, the highest price Transcend’s shares have seen since 1996. However, the valuation for the company is lower than a precedent transaction. Using enterprise value, Nuance is valuing Transcend at only 2.4x trailing sales. Meanwhile, its pickup of eScription, a SaaS provider of voice recognition and transcription services, was valued at a loftier 8.1x trailing sales. Some explanation for the discrepancy is the premium given to SaaS companies and difference in margins. EScription had an equally lofty operating margin of 39% compared with Transcend’s 16%. Further, Transcend’s SaaS platform was relatively nascent, having hit the market just last summer.

The Transcend buy follows a record year of dealmaking that saw Nuance announce eight transactions worth nearly $400m. But the buying spree may not be over, given the continuing consolidation in the transcription and voice recognition sector. Even MedQuist, a relatively infrequent acquirer and Transcend’s chief competitor, bought three companies in the past two years, including M*Modal for $130m in July 2011.

Security sector ripe for M&A

Ben Kolada

Contact: Ben Kolada

Thousands of security executives, bankers and investors descended on San Francisco last week for the annual RSA and America’s Growth Capital West Coast Information Security & Emerging Growth conferences. (Many of them also joined us at our executive-only breakfast last week.) Nearly 700 companies exhibited at the two conferences, and after speaking with many of these companies we walked away convinced that the number of M&A opportunities in enterprise security seem as large as ever.

Many of these companies saw explosive growth in 2011, and the forecasts are equally bullish for this year. One such company is network security analytics startup Solera Networks. Following RSA last year, we predicted that NetWitness would soon sell – we were right. This year, we expect NetWitness rival Solera to get some acquisition attention. We hear that the company generated just under $10m in sales last year, but is growing quickly. Although Solera’s current revenue is much smaller than what NetWitness generated in the year before its sale, we wouldn’t be surprised if its investors expect a comparable valuation. Including a recent $20m series D funding round secured in January, Solera’s investors have collectively put $51m into the company. NetWitness, on the other hand, had taken in just about $20m before its sale.

For more real-time information on tech M&A, follow us on Twitter: @MAKnowledgebase

In leap year, tech M&A falls

Ben Kolada

Contact: Ben Kolada

The extra business day in February did little to prop up tech M&A volume, as the number of deals announced last month dropped to one of the lowest levels seen in the past year. The 257 tech acquisitions we recorded in February was one-third less than January’s total and 17% less than the trailing 12-month average. Although it’s impossible to predict the volume and value of tech acquisitions, one explanation is the somewhat seasonality of the business. In eight of the past 10 years, we saw a rise in sequential January deal volume followed by a dip in February volume.

Even total spending came in below the annual average. While the total amount spent on tech acquisitions in February ($10bn) was more than double what we recorded in January, it was still about half the average of the trailing 12 months. However, February wasn’t a complete wash. On a positive note, many of the largest technology companies were active in M&A last month: Akamai picked up small front-end optimization startup Blaze Software, Apple bought Chomp, Cisco acquired Lightwire, its largest deal since Starent Networks in 2009, F5 Networks reached for Traffix Systems and Quest Software scooped up BlueFolder. Further, we recorded four billion-dollar transactions in February, compared with none the previous month.

Still, the sharp downturn in volume marks a stark contrast to what’s been happening in the equity markets. Last month, we wrote that behavior in the stock markets is one of the main influencers on big-ticket M&A, and that big-ticket deals set the tone for overall dealmaking. But while the Nasdaq composite index continued its steady rise, reaching its highest point since the stock market crashed in the early 2000s, tech M&A volume in February moved in the opposite direction.

Deep-pocketed acquirers could bid up capacity-planning valuations

Ben Kolada

Contact: Ben Kolada

In a recent report, my colleague Rachel Chalmers discusses opportunities for some of the largest IT firms to fill holes in infrastructure management capacity planning through M&A. However, if bidding increases for the remaining startups in this sector, valuations could rise above the current estimated $100m record set by VMware’s Integrien acquisition.

Capacity planning is similar to performance monitoring. However, monitoring can only tell you what happened in the past, or at best, what’s happening now. Capacity planning requires you to have some idea of what will happen in the future. We’ve seen some dealmaking in this sector already, with each of the primary precedent transactions being valued well above the market average. However, many of the remaining potential acquirers have very deep pockets and intense bidding by this group for the decreasing pool of available targets could elevate valuations. Chalmers’ report cites Oracle, HP, IBM and Microsoft as still missing some capacity-planning capabilities – these four firms have a combined $100bn in cash and cash equivalents in their war chests. Click here for the full report, which includes current market valuations and details some of the most likely acquisition candidates.

Shakeout looming in MDM sector?

Ben Kolada

Contact: Ben Kolada

The crowded mobile device management (MDM) sector is likely to see a shakeout in the near future. By one account, there are already more than 80 firms vying for space in the growing MDM market. As the sector’s more notable vendors increasingly advance ahead of the competition, we expect laggard firms will either shutter their doors or be picked off one by one in small bolt-on technology acquisitions. But as the sector narrows, the future may shine brighter for firms that are making names for themselves.

As the smartphone and tablet take more overall computing share from laptops and desktops, the need for MDM will accelerate. Increasing adoption of tablets, in particular, is driving MDM demand. According to a report by ChangeWave Research, the survey arm of 451 Research, 23% of respondents said they plan on purchasing tablets for their employees in the first quarter of 2012, up from just 5% in the fourth quarter of 2010.

As the largest acquirers continue to consolidate the software stack, we expect to see them move into the MDM market. IBM has already announced a couple such acquisitions, picking up BigFix in July 2010 for an estimated $400m and Worklight in January for an estimated $70m. Dell and BMC are also expected to be eyeing this market, and would likely look at the frontrunners – firms like AirWatch, BoxTone, Good Technology, MobileIron and Zenprise, to name a few – as their top acquisition choices. But these firms aren’t likely to be had for cheap. We’ve already heard rumors that one of them is looking for a $400m-plus exit, and that another was previously in the sights of a $250m deal. Meanwhile, valuations will likely rise as these vendors continue growing. In 2011, Zenprise tripled its headcount, while MobileIron doubled its employee base. AirWatch’s headcount hit 400 last year, and it expects to double that this year.

Few targets left in FEO, but are there any buyers?

Ben Kolada

Contact: Ben Kolada

In the past year, networking vendors have acquired many of the independent front-end optimization (FEO) startups, further narrowing the field in this already niche sector. In fact, there are only a few notable independents left. But is this really a race to consolidate the market, or are acquirers simply adding these capabilities to their portfolios by picking up properties at fairly cheap prices?

FEO focuses on getting a browser to display content more quickly, as opposed to dynamic site acceleration and other services that use network optimization to speed content delivery. For the most part, the FEO segment has been made up of a handful of startups. However, consolidation in the past year took three of these companies out of the buyout line. In May 2011, AcceloWeb sold to Limelight Networks for $12m and two months later Aptimize sold to Riverbed for $17m. Terms weren’t disclosed on Blaze Software’s recent sale to Akamai, but we’re hearing that the price was in the ballpark of $10-20m. That leaves Strangeloop Networks as one of the last companies standing, and its fate is basically secured. After the Blaze deal severed Strangeloop’s partnership with Akamai, the company is likely to find an eventual exit in a sale to remaining partner Level 3 Communications.

Firms interested in entering this sector shouldn’t fret over potentially losing Strangeloop to a competitor. Instead, they should actually reconsider their entry into the FEO market. FEO providers, both past and present, have done little to validate the space. According to our understanding, Aptimize was the largest of the acquired vendors, and its revenue was only in the low single-digit millions. The fact that each target sold for no more than $20m further suggests that the market isn’t yet living up to expectations.