Category: M&A

Rocket Fuel ignites first acquisition

Scott Denne

Contact: Scott Denne

Rocket Fuel built a business on delivering advertisers more clicks for fewer dollars, launching its revenue growth well beyond most other ad tech companies. That growth, however, is decelerating as its lack of a software offering and perceptions of fraudulent clicks on its service caused it to lower its guidance and carved away one-third of its stock price this morning. Now it’s picking up [x+1] in a $230m bid to solve its underlying problem: beyond the results it delivers, Rocket Fuel has little hold on its customers.

The target’s core offering is a data management platform on which advertisers mix third-party data with audience data gathered from their campaigns. Managing marketing data for customers (rather than just promising cheap clicks) will help Rocket Fuel build a case for longer contracts with advertisers, as well as enable the company to apply its artificial intelligence to other marketing applications, such as website optimization.

Rocket Fuel will burn up $100m in cash and $130m in stock ($100m after today’s drop) for [x+1], with an estimated trailing revenue multiple of just below 3x. That’s quite a bit lower than what [x+1]’s peers, such as Aggregate Knowledge and BlueKai, have fetched – mainly because a significant portion of [x+1]’s revenue comes from low-margin media sales, rather than licenses of its data management platform.

We’ll have a more in-depth report on this deal in our next 451 Market Insight.

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Shaw nabs ViaWest for $1.2bn

Scott Denne

Contact: Scott Denne Kelly Morgan Michael Levy

Canadian cable company Shaw Communications swoops into the multi-tenant datacenter market with the $1.2bn acquisition of ViaWest. Shaw may be wading in later than its Canadian telco peers, but the deal brings it instant scale. In terms of enterprise value, this is the fifth-largest purchase of a managed services vendor, according to The 451 M&A KnowledgeBase.

The transaction ($830m in cash and the assumption of $370m in debt) values ViaWest at 17.4x its 2013 EBITDA of $69m – a higher multiple than GI Partners was rumored to have paid for Peak 10 (12x), or Rogers Communications paid for BLACKIRON Data last year (15x), but less than Cogeco’s multiple for PEER 1 (22x). RBC Capital Markets served as adviser for ViaWest (as well as for Peak10), while TD Securities advised Shaw.

ViaWest will provide the hosting and cloud expertise needed to layer services on top of Shaw’s new fiber and datacenter assets, including a recently unveiled datacenter in Calgary and ENMAX Envision, the bandwidth service it picked up last year for $222m.

The sale of ViaWest should generate a solid return for Oak Hill Capital Partners, which bought the company four years ago (see our estimates of that transaction here).

Subscribers to 451’s Market Insight Service can find a more detailed report on Shaw’s purchase here.

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RTL Group latest to jump into video ad fray

Scott Denne

Contact: Scott Denne

German broadcasting company RTL Group’s $144m pickup of SpotXchange pushes independent video ad exchanges to the brink of extinction. The programmatic video market is still in the early stages, but a series of acquisitions has left few independent players.

SpotXchange’s sale comes weeks after one of its closest competitors, LiveRail, was picked up by Facebook, and a year after AOL bought Adap.tv, the early leader in programmatic video exchanges. RTL is taking a 65% stake in the business (valuing the company at $221m), with an option to buy the rest plus a performance-based earnout. We believe SpotXchange has trailing revenue of $40-50m, which would give this deal a multiple that’s in line with those transactions.

This acquisition leaves BrightRoll as the only remaining independent video exchange with substantial scale, and that company (which is a combination of video ad network and exchange) is several times larger than SpotXchange in terms of revenue and would be an expensive purchase.

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Inphi’s marginal acquisition

Scott Denne

Contact: Scott Denne

Inphi picks up most of Cortina Systems for $126m in order to boost its profit margins. The purchase adds revenue but brings few opportunities for additional growth. Both companies make optical components for carrier networking devices and though there is little overlap in their product offerings (Inphi tends to target higher-speed applications), there is significant overlap in customers and little room for cross-selling.

What Cortina does have, says Inphi, is a stable business with gross margins in the high-60% range and $20m in quarterly revenue, compared with Inphi’s $33.9m in revenue last quarter and gross margins that are typically a few percentage points above 60%.

The deal brings Cortina’s investors, many of whom have been backing the company since 2001, close to an exit (Inphi isn’t buying the target’s digital home networking assets, which make up 15% of its business). Nearly all of Cortina’s growth came in 2006, when venture capitalists pumped $134m into the company to fund the acquisition of Intel’s networking components division. Cortina came close to an exit five years later when it filed for an IPO, but that never got out the door. The company logged less than $100m in revenue last year, compared with sales that hovered at about $140m annually in the first four years following the Intel deal.

Inphi doesn’t expect to return Cortina to growth. It anticipates that the target’s revenue will hold steady for the next four years as its carrier business tapers off and sales of datacenter networking components expand.

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BlackBerry’s strategy decrypted

Scott Denne

Contact: Scott Denne

In BlackBerry’s first purchase in more than two years, the struggling smartphone maker buys voice encryption vendor Secusmart, reflecting the importance of security in its turnaround strategy.

Secusmart develops technology for encrypted voice and data communications. The company’s German roots should appeal to BlackBerry’s customers in the region (Europe and the surrounding areas accounted for almost half of BlackBerry’s revenue and is declining at a faster rate than North American sales), where security, especially anti-eavesdropping security, is growing in importance.

Security was a key part of BlackBerry’s rise – its secure email servers helped it become the go-to device for mobile email. This acquisition, along with its CEO’s public statements (he said the words ‘secure’ or ‘security’ 20 times on the company’s last earnings call), demonstrate that BlackBerry is looking to build off of that reputation to recapture enterprise sales of its phones and mobility management software.

BlackBerry still has a foothold in the enterprise segment, but time is limited. According to ChangeWave Research, a service of 451 Research, BlackBerry phones are far more popular among IT buyers than the general public, with 20% of IT departments reporting that they plan to purchase BlackBerry phones in the next 90 days, down from 33% in the same survey a year earlier. A separate survey by ChangeWave shows that BlackBerry still remains a leader in MDM installations, but no buyers reported planned installations or evaluations of BlackBerry’s MDM products in the near future.

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Sold! Zillow buys fellow online real estate firm

Scott Denne

Contact: Scott Denne

Zillow’s acquisition of fellow Internet real estate company Trulia in a stock swap worth $3.5bn shows the premium a company gets by occupying the top spot in its market. Zillow is only slightly larger but is valued substantially higher in today’s deal, which pegs Zillow’s enterprise value at 31x TTM revenue and Trulia’s at 20x.

Both companies have similar revenue, costs and businesses: hosting real estate listings and selling advertising space and other services to real estate professionals. Zillow generated $224m in trailing revenue and grew 70% YoY in its last quarter, while Trulia posted $174m and grew 127% (a lot of that comes from its acquisition in 2013 of Market Leader, but even comparing Trulia’s 2013 growth, minus contributions from Market Leader, it clocks a few percentage points above Zillow).

Ahead of the deal announcement, the market valued Zillow at 18x and Trulia at half that. Zillow sees value in being the leader and by picking up its closest peer, it shows that it’s willing to spend to retain that spot.

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No M&A vacay for TripAdvisor

Scott Denne

Contact: Scott Denne

Consolidation among online travel vendors continues as TripAdvisor reaches for Viator in a $200m deal. The purchase of the vacation activities website extends an acquisitive streak for TripAdvisor, which has inked four transactions this year and 11 since a late-2011 spinoff from Expedia.

Aside from being TripAdvisor’s largest acquisition on record – in fact, the price paid for Viator, a 250-employee company, is the only deal value it has ever disclosed – the purchase looks like most of TripAdvisor’s others; the company has been rolling up hotel bookings and vacation research websites for years. With this transaction, TripAdvisor will have spent $350m on four acquisitions this year, compared with six purchases for $35m in all of last year.

TripAdvisor isn’t the only one ramping up its consolidation activity. Travel booking is among the most mature sectors of the Internet – for evidence, look no further than Priceline.com’s $2.6bn pickup of on-premises software provider OpenTable. According to The 451 M&A KnowledgeBase, there have been 41 acquisitions of companies with a disclosed and estimated value of $2.9bn in the travel vertical so far this year, compared with just 36 deals for $2.4bn in all of 2013.

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Yahoo lands a Flurry of mobile data

Scott Denne

Contact: Scott Denne

Yahoo tops off its push into mobile apps by picking up Flurry, a vendor that offers an app analytics service and generates revenue through an ad network that leverages the data and publisher relationships from the service.

While Yahoo has been among the most acquisitive companies over the past few years, its purchases have been focused on expanding its mobile development team and its content. In fact, Yahoo hadn’t acquired any technology to help monetize content since the $270m pickup of interclick in late 2011. Though terms of the Flurry buy weren’t disclosed, various reports put it in the same neighborhood as that acquisition ($200m-300m).

Flurry’s business is operating a mobile ad network. Those companies rarely fetch high multiples because the business is precarious and driven by individual ad campaigns, rather than long-term subscriptions or licenses. Recently sold ad networks such as AdColony, Adconion and Jumptap have fetched 1.3-2.7x trailing 12-month revenue. In Flurry’s sale, however, we expect that the value of the target’s deep mobile audience data drove the multiple above that range.

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ACI reaches for Retail Decisions as fraud moves to new channels

Scott Denne

Contact: Scott Denne Jordan McKee

Payment-processing vendor ACI Worldwide preps for an uptick in fraud beyond the point of sale by picking up Retail Decisions for $205m. The acquisition is ACI’s priciest deal on record, following a general trend of higher multiples in the antifraud space.

Card-present point-of-sale fraud is expected to decrease in the US as credit card companies migrate to the EMV standard beginning in 2015, but fraud from card-not-present transactions, such as online and interactive-voice-response transactions, will likely grow. The trend has already played out in the UK and Canada, both of which have implemented the EMV standard. Retail Decisions’ expertise in e-commerce fraud detection and management will provide ACI and its merchant customers with an advantage as they go up against strong card-not-present headwinds in coming months.

ACI is willing to pay for that advantage. Prior to purchasing Retail Decisions at an enterprise multiple of about 4x revenue, the most ACI had paid was 2.1x in the $516m acquisition of S1 three years ago. Antifraud technologies have fetched high multiples over the past year in deals such as Experian’s purchase of 41st Parameter (14.1x), F5’s takeout of Versafe (43.9x) and IBM’s pickup of Trusteer (25.7x).

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Care.com squeezes into retail with Citrus Lane

Scott Denne

Contact: Scott Denne

Care.com expands into commerce with the $31m pickup of Citrus Lane, a gambit that’s meant to decrease the company’s reliance on a subscription service that’s increasingly expensive to fill with new members. Care.com’s service – a website that matches families with babysitters and other caregivers – has grown substantially in terms of memberships and revenue (up 40% YoY last quarter), but the amount of money the company spends on marketing to sustain that momentum is expanding faster.

In its last quarter, Care.com spent $20.5m on sales and marketing, or 81% of revenue, up from 71% a year ago, while the average paid membership lasts seven months. Adding a parenting-focused commerce company to its platform could leverage that marketing spending through new kinds of revenue from people who visit the website. Also, Citrus Lane sells monthly subscriptions for parenting gift boxes – adding that to its own subscription service could entice parents to stick with Care.com longer than seven months.

The deal resembles Care.com’s previous acquisition, the $45m reach for Breedlove & Associates, which added a payment-processing service to its platform. We expect Care.com to continue looking for businesses that it can stitch into its matching service. A parenting content play would be a powerful combination, as it would not only add revenue via advertising and lead-generation services, but could also help defray the expense of getting parents to the website in the first place.

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