Category: M&A

Birch Communications blossoms with $323m Cbeyond acquisition

Scott Denne

Contact: Scott Denne

Birch Communications has moved out of tuck-in territory with its acquisition of Cbeyond, a network service provider that’s larger than Birch itself. Having existed in some form since 1996, Birch has grown through acquisitions, but most have been small customer or geographic expansions – nothing on the scale of its $323m purchase of Cbeyond.

The acquisition values Cbeyond at 0.7x its last 12 months revenue, and Birch expects the combined company to have about $700m in annual revenue, with Cbeyond contributing more than half the total. Prior to this deal, Birch had completed 21 acquisitions. Most of those were asset purchases, including the three deals it closed in 2013: Ernest Communications’ customers, Lightyear Network Solutions’ network and customer assets, and switching facilities in 10 states from Covista Communications.

In exchange for $323m, Birch gets a business that faces declining revenue in the face of shrinking margins and growing churn for its legacy network connectivity business. It also gets Cbeyond’s core mid-Atlantic network and the potential to expand deeper into cloud services – something Cbeyond had tried to do on its own, but the growth of that business couldn’t keep pace with the decline of its legacy offerings. Cbeyond’s annual revenue dropped 5% in 2013 to $463.4m, and it anticipated further declines, projecting 2014 revenue of $410m-430m.

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GlassHouse unloads US consulting biz

Scott Denne

Contact: Scott Denne

GlassHouse Technologies actively used acquisitions to scale up its storage-turned-cloud services business, but now it’s turning to divestitures as it scales back down. The company is selling its US consulting practice to Signature Technology Group in its fourth divestiture since taking its second shot at an IPO.

Founded in 2001 with the vision of building a vendor-agnostic storage consultancy, GlassHouse picked up 13 businesses between 2003 and 2009 for their expertise and for geographic expansion. The dealmaking helped grow the company’s top line, setting it up for a public offering; however, headwinds from the financial crisis prevented it from completing an IPO in 2009. GlassHouse tried once more in 2011 when growth picked up again and it expanded its scope from storage to cloud, but its balance sheet changed for the worse, prompting its auditor to express concern about the company’s ability to stay in business with $4m in cash and $100m debt. Once more, GlassHouse pulled its prospectus.

Since that time, GlassHouse sold subsidiaries in Israel and Turkey and divested two separate units to Signature Technology: first selling its customer support services division in November 2013, and now the US consulting practice. That leaves GlassHouse with a European consulting business, a systems integration unit and a managed services offering.

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Hexagon mining more M&A

Scott Denne

Contact: Scott Denne

Hexagon has shored up its position in the mining sector with the purchase of Mintec, a mine-planning software company. The deal is the fourth mine-focused acquisition in the last year for Hexagon, a maker of measurement, mapping and CAD software that’s picked up its pace of acquisitions lately.

The acquisition of Mintec, which we estimate has roughly $30-40m in annual revenue, comes a month after Hexagon’s reach for SAFEmine, a maker of fleet management sensors and software for the mining industry, and six months after it bought Devex, a Brazil-based maker of 3-D mine-visualization software. Over the last year, Hexagon has acquired six companies that were at least partially focused on the mining industry. Terms of the Mintec acquisition were not disclosed.

Those deals came amid a backdrop of consolidation in mining technology during the last two years. According to the 451 M&A KnowledgeBase, there have been 20 acquisitions of technology companies that serve the mining sector, worth a combined $5.58bn in disclosed value. The entire five-year period before that saw only 19 deals worth $287.7m.

Mintec is a typical deal for Hexagon, which has grown its business across several industrial markets through a combination of technology and geographic tuck-ins over the past decade. Its pace of deals slowed a bit while it digested the $2.1bn purchase of Intergraph in mid-2010. The company didn’t make a single acquisition in the year following that deal, only one in 2011, four in 2012 and then nine in 2013. Mintec is its second so far in 2014.

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IBM finds a bargain in Silverpop purchase

Brenon Daly

Contact: Brenon Daly

Fittingly enough for an acquisition to bolster its Smarter Commerce portfolio, IBM appears to have smartly picked up a bargain in its purchase of marketing automation (MA) vendor Silverpop. Big Blue didn’t release terms of the deal, but reports put the transaction value at roughly $250m-300m. Assuming that’s roughly accurate, it would value Silverpop at only about half the valuation that other significant MA providers have received in recent exits.

According to our understanding, Silverpop put up about $80m in sales last year. However, several industry sources have indicated that the Atlanta-based startup was only growing at about 10-15%. Other similar-sized MA firms are vastly outstripping that rate. For instance, Marketo boosted its top line almost 70% in 2013, and we estimate that HubSpot was right in that neighborhood, too. More broadly, a recent report from 451 Research’s MarketMonitor service forecasted 22% CAGR for the overall MA industry over the next four years.

Silverpop’s sluggish growth would appear to have put pressure on its valuation, with IBM paying 3-4x trailing sales for the company. Meanwhile, rivals such as Oracle, Adobe and salesforce.com have paid multiples ranging from roughly 6-10x trailing sales. Overall, the shopping spree has topped $7bn in spending for MA vendors.

Select marketing automation deals

Date announced Acquirer Target Price to sales ratio Deal value
December 20, 2013 Oracle Responsys 7.7x $1.6bn
June 27, 2013 Adobe Systems Neolane 8.6x* $600m
June 4, 2013 salesforce.com ExactTarget 7.6x $2.5bn
December 20, 2012 Oracle Eloqua 9.7x $956m
April 27, 2012 Intuit Demandforce 11.4x* $423.5m
December 22, 2010 Teradata Aprimo 6.3x $525m
August 13, 2010 IBM Unica 4.4x $523m

Source: The 451 M&A KnowledgeBase *451 Research estimate

Trust-busters push BazaarVoice to unplug PowerReviews

Brenon Daly

Contact: Brenon Daly

As industry consolidation goes, Bazaarvoice’s mid-2012 purchase of rival PowerReviews was definitely a small-scale move. The deal only added a little more than $10m – or a boost of about 10% – to the top line at Bazaarvoice, a consumer reviews site that had just gone public at the start of 2012. And while the two startups regularly beat up on each other, they were arguably facing much more formidable competition from rating-and-review offerings that were often baked into the websites of many of the largest and most-active online retailers.

In other words, there was little to suggest that the proposed $152m cash-and-equity transaction would even register any antitrust attention, much less any trustbusting. And yet, on Tuesday afternoon, Bazaarvoice bowed under the pressure of a lawsuit brought a year ago by the US Department of Justice and essentially unwound that acquisition. Bazaarvoice plans to divest PowerReviews to small Chicago-based vendor Viewpoints Network.

Viewpoints has raised just $5m in funding since its founding in 2006 and told us that it won’t need to raise more to cover the purchase of PowerReviews. That suggests Bazaarvoice is recouping only a fraction of the $152m that it paid for PowerReviews two years ago. Viewpoints currently has 20 employees and, post-acquisition, will have about three times that number. Further, it will substantially boost its revenue when it buys PowerReviews, which we estimate is running at about $10m in revenue.

Of course, that assumes the planned acquisition goes through. (Expectations are that the deal will close before the end of July.) At this point, only a letter of intent has been signed between the parties. It still needs to be finalized, and then regulators have to approve the latest purchase of PowerReviews. As we have seen, regulatory clearance is not always a given.

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GTCR gets into marketing software with Vocus buy

Scott Denne

Contact: Scott Denne

GTCR jumps into the pricey marketing software industry with a value play. The private equity firm will pay $446.5m in a take-private of Vocus, a public relations and marketing software provider. The deal gives Vocus an enterprise value of $413m, or 2.2x its last 12 months revenue, well below where others in this space have traded hands lately.

At 2.2x, the acquisition is the second-lowest multiple we’ve seen for a marketing software company in the past 24 months. According to The 451 M&A KnowledgeBase , the median multiple for marketing software deals in that period is 7.7x, reflecting the double-digit growth and promising prospects of many vendors in the marketing space. Vocus, on the other hand, has had little growth and doesn’t expect that to change this year.

The company has struggled to grow since it launched a suite of marketing products and acquired email marketing vendor iContact in early 2012. The market reacted negatively to that transaction, pushing its stock price below $20 per share, where it has remained as Vocus has been unable to leverage that deal to grow its business. (GTCR will pay $18 per share; Vocus closed at $12.18 before the deal was announced.)

Vocus finished 2013 with $186.9m in revenue, only $6.5m more than the combined revenue of iContact and Vocus for 2012 and well below the $200m it initially projected for the year – projections that were regularly adjusted down to reflect weaker than expected performance for both its PR and marketing software. For 2014, the company anticipates revenue to shrink by about $4m amid declining sales of iContact and some of its other point products, as well as a flatlining of its PR software business.

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What’s behind door number two? An IPO

Brenon Daly

Contact: Brenon Daly

For tech startups considering the two possible exits so far this year, an IPO is clearly door number two. Sure, there’s plenty of money to be made in taking a company public. And the valuations that Wall Street is handing out for recent debutants – notably the double-digit multiple for Varonis Systems and a solid 6x trailing sales for A10 Networks – are far from paltry. But there hasn’t been anything that comes close to a ‘WhatsApp’ in the IPO market so far this year.

Granted, the $19bn sale of the five-year-old mobile messaging startup is something of an anomalous event, so we will go ahead and set aside that transaction. But even leaving out the largest-ever sale of a VC-backed vendor, there were still three other sales of VC-funded firms in the first quarter that went off at more than $1bn. When we look at the other exit, we would note that not a single tech firm that went public in the first three months of 2014 created more than $1bn of market value.

Further, as we skim down the list in The 451 M&A KnowledgeBase of VC-backed startups that have opted for a trade sale so far this year, it’s hard not to see that IPOs – despite all of the talk about how the JOBS Act has made it easy to go public and a ‘record’ Q1 – have fallen out of favor.

Consider Mandiant, a 10-year-old information security provider running at more than $100m in bookings. Last summer, the company indicated to us that it was looking to raise one round of late-stage capital and then go public in 2015. Instead, it sold to FireEye for just under $1bn, mostly in the acquirer’s own freshly printed stock. Elsewhere, AirWatch garnered some 15x bookings in its $1.5bn sale to VMware, a valuation that rival MobileIron is unlikely to trade at – not initially, anyway – when it comes public later this year.

And even down in the mid-cap market, Coverity gave up on its long-held plan to go public, selling instead to one of its customers, Synopsys. From our perspective, Coverity certainly looked like a reasonable candidate to be a public company: it had little pressure to sell (having taken in just one round of funding and sitting on about $25m) and was growing at a 20-30% clip while nearing $100m in sales. Instead, it sold for $375m, valuing itself at 4.7x trailing sales. That’s about a turn higher than the broader tech M&A multiple, but lower than what Wall Street typically hands out for companies sharing Coverity’s profile.

But the IPO, which has always enjoyed a sort of premium standing among most VCs and executives, appears on the cusp of reclaiming its top-ranked position. At least two enterprise tech vendors are currently on file for what will almost certainly be hot offerings. Both Arista Networks and Box will undoubtedly be ‘billion-dollar babies’ when they come to market in early summer. You can read more about both the recent M&A market, which is clipping along at a record level currently, as well as the outlook for IPOs in our Q1 M&A report published earlier this week.

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New dawn for M&A at Morningstar

Scott Denne

Contact: Scott Denne

Investment data and software company Morningstar makes its first purchase since 2010, reaching for ByAllAccounts, a data aggregation vendor. The deal supports Morningstar’s financial advisory software business by giving it technology that enables advisers to aggregate their clients’ portfolio performance data across asset classes.

In the years leading up to (and shortly after) the financial crisis, Morningstar picked off about four companies a year and inked 24 acquisitions between 2006 and 2010. While its revenue bounced back from pre-crisis levels by the end of 2010, it hasn’t put up the 25%-plus annual growth that it enjoyed for several years before that. Acquisitions weren’t the only reason for its higher growth back then (even its organic growth tended to be higher than it is today), but they did help.

The purchase of ByAllAccounts complements one of Morningstar’s underperforming units: software sales to financial advisers and wealth managers. While it’s the company’s second-largest business unit – accounting for 13.3% of its $698m in total revenue last year – its growth has been considerably slower than its institutional data business. With $93m in revenue, sales to financial advisers only grew 8% in each of the past two years, while the institutional data business grew 12% and 11% in those years.

Morningstar is paying $28m for ByAllAccounts. And though it’s the company’s first transaction in a while, it’s a typical one for Morningstar. This acquisition is just a hair above its $19m median deal value, according to The 451 M&A KnowledgeBase. Morningstar has never been a big spender, having only cracked the $50m mark on three occasions and never done a deal above $60m.

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For tech M&A, the go-go days are going again

Brenon Daly

Contact: Brenon Daly

At least for the opening quarter of 2014, the go-go days are going again. Overall M&A spending in the tech, media and telecom (TMT) market set a record for the first three months of any year since the Internet bubble popped in 2000. Across the globe, the aggregate value of Q1 deals totaled $128bn, according to The 451 M&A KnowledgeBase. That puts 2014 on a run rate to hit an astonishing half-trillion dollars in M&A consideration for the full year.

Spending in the just-completed January-March period came in at roughly three times the level of a typical quarter in the years since the end of the recession. (On its own, the equity value of the proposed Comcast-Time Warner Cable transaction roughly equals the amount spent on all TMT deals in a typical post-recession quarter. But even backing out that mammoth transaction, Q1 spending would still stand as a post-recession quarterly record of $83bn.)

To indicate just how far Q1 stands out from the recent recession, consider this: total M&A spending in just Q1 2014 came in only 10% lower than the full year of 2009. So far this year, we’ve seen such blockbuster prints as the second-largest TMT transaction overall since 2002 (Comcast’s pending acquisition of Time Warner Cable), as well as the biggest price ever paid for a VC-backed startup (WhatsApp’s $19bn exit to Facebook).

While those two deals helped push M&A spending in Q1 to a new high-water mark, we saw solid activity across a number of submarkets that haven’t been busy since before the recession. Large-scale consolidation continued on a steady pace (Comcast-Time Warner Cable, plus several European telco transactions), but underneath that, the midmarket saw an above-average number of deals, with the median value surging to a post-recession record high. (Also, valuations of those midmarket transactions in Q1 basically matched the big-ticket deals, which hasn’t necessarily been the case in recent years.)

And finally, deal flow at the start of this year reflects an unprecedented level of youthful exuberance. Facebook, with its back-to-back purchases of WhatsApp and Oculus VR, obviously stands out. But we would add Google and FireEye to the list of acquirers that did uninhibited, speculative transactions so far in 2014. Look for our full report on Q1 M&A activity and valuations, plus our assessment of the current tech IPO market, in our next 451 Market Insight.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2014 816 $128bn
Q4 2013 787 $59bn
Q3 2013 829 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $59bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: The 451 M&A KnowledgeBase

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Lithium takes a dose of Klout

Scott Denne

Contact: Scott Denne Matt Mullen

Lithium Technologies reaches for Klout, a measurer of social media influence, in a deal that aims to boost the marketing capabilities of the acquirer’s social media SaaS suite. The price tag was widely reported as $200m. While we think that’s a bit off, the mostly stock transaction suggests that Lithium’s valuation is growing beyond its nearest public-market peer, Jive Software – a company that’s about double the size of Lithium and trades at a $550m market cap.

In recent years, Lithium has expanded beyond providing tools for online communities into other elements of enterprise-focused social media, including social marketing and customer support via its acquisition in 2012 of Social Dynamx – a service that should get a boost from Klout’s technology, which can be used to determine the priority of each discovered support case.

Behind this deal is, perhaps, a desire for Lithium to get more involved in the marketing data management business. Oracle and Adobe have both made moves in that area, purchasing BlueKai and Demdex, respectively. If Klout’s consumer business remains open and the combined companies can resolve some of the misgivings concerning accuracy around scoring and categorization, then its 500 million profiles should give it a head start in assembling a form of audience-building technology that could be built out from its existing technical assets.

We’ll have a more detailed look at this deal in our next 451 Market Insight.

Lithium Technologies’ acquisitions

Date announced Target Offering
March 27, 2014 Klout Social media analytics
October 9, 2012 Social Dynamx Social media customer service
May 11, 2010 Scout Labs Social media sentiment analysis
June 2, 2009 Keibi Content moderation

Source: The 451 M&A KnowledgeBase

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