Category: M&A

Mobile gaming missteps loom in Facebook’s Oculus buy

Scott Denne

Contact: Scott Denne

Facebook’s $2bn purchase of virtual reality vendor Oculus VR, like every billion-dollar Facebook deal, is a bit of a head-scratcher at first glance. The overlap between virtual reality and social networking isn’t obvious, and virtual reality has a long way to travel to go from gaming-focused prototypes to a mainstream computing platform. But Facebook is, in part, a gaming provider and that’s what’s driving this transaction, despite the company’s breathless comments about a future with virtual classrooms and courtside seats for all.

At the time of its IPO in May 2012, gaming was Facebook’s fastest-growing business, but, unlike its core advertising business, gaming revenue failed to make the transition to mobile devices. The quarter before the company went public, revenue from its payments business (derived mostly from taking a cut of fees paid to game developers) doubled from a year earlier to $186m, accounting for 18% of its total revenue. In the most recent quarter, as many of Facebook’s users have migrated away from PCs, its payments (i.e., gaming) business revenue dropped 6% and was less than 10% of its overall revenue.

It’s tough to choke down Facebook’s vision of virtual reality as the future of social networking – its rapid transition to mobile shows that most people are finding PCs too cumbersome, so it’s unlikely that they’ll don headgear to interact with friends. However, the deal gives Facebook a front-row seat to a platform that stands a good chance of being the future of gaming. That level of access and influence during virtual reality’s early days will help Facebook avoid a repeat of its whiff on mobile gaming.

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Palo Alto Networks gets into endpoint game

Scott Denne

Contact: Adrian Sanabria Scott Denne

Palo Alto Networks buys into the endpoint security business with its $200m acquisition of early-stage vendor Cyvera. The deal moves the next-generation firewall provider into a new corner of the security market and mirrors other transactions by competitors that have also taken advantage of their rising stock prices to buy companies that can wring larger purchases from their customers.

Palo Alto will pay $112m in stock and $88m in cash for Cyvera when the deal closes. In exchange, it gets ownership of a service that protects endpoints by recognizing techniques used by hackers and preventing them from executing on endpoints. Cyvera, which has 55 employees and raised $13m in venture capital, isn’t expected to add notable billings or revenue to Palo Alto until later next year.

The deal is similar to FireEye’s $1bn acquisition of Mandiant earlier this year. In that transaction, FireEye, like Palo Alto, was aiming to extend itself beyond its focus on network security and into a larger total addressable market (TAM). While the price tag for Mandiant (which came with a large and lucrative consulting practice) was higher than Cyvera, the latter acquisition is more significant – with this deal, Palo Alto will immediately cover a larger swath of the security market.

We’ll have a longer report on this transaction in our next 451 Market Insight.

Security companies hunt larger TAM

Date announced Acquirer Target Rationale Deal value (stock portion)
March 24, 2014 Palo Alto Networks Cyvera Expanded into endpoint security $200m ($112m)
February 13, 2014 Bit9 Carbon Black Added network and forensic capabilities >$40m* (Not disclosed)
February 6, 2014 Imperva Skyfence Networks Brought cloud application control $60m ($57m)
January 2, 2014 FireEye Mandiant Obtained threat intelligence and nascent endpoint offering $989m ($889m)

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

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The man who unplugged Symantec’s M&A machine is gone

Scott Denne

Contact: Scott Denne

Symantec’s board has fired Steve Bennett, the CEO who brought the security vendor’s vigorous M&A practice to a halt. During his tenure, beginning in July 2012, Symantec bought just one company, compared with an average of four deals per year for the preceding decade.

Under Bennett’s watch, Symantec purchased only PasswordBank Technologies, an identity management firm that we estimate had $2m in annual revenue at the time. According to The 451 M&A KnowledgeBase, which tracks back to the start of 2002, the only other year Symantec acquired one or fewer companies was 2011, when it spent $410m on e-discovery vendor Clearwell Systems.

It’s hard to fault Symantec’s recent management for its M&A reluctance. The company built itself through acquisitions, but its biggest bet proved one of its worst. In 2004, it paid $13.5bn for storage software provider Veritas and every Symantec CEO since then has struggled with the legacy of that deal. Symantec’s current market cap, at $12.7bn, sits below what it paid for Veritas and it has taken nearly a decade to grow Veritas’ sales by just 25%.

Regardless of the failure of the Veritas buy, Symantec has been increasingly inactive as its competitors grabbed seats in several markets. Take security event and infrastructure management. Surveys of security customers by TheInfoPro, a service of 451 Research, show that Symantec ranked third in that category in mid-2011, shortly after HP spent $1.65bn on market leader ArcSight. Subsequent deals by IBM (Q1 Labs) and McAfee (NitroSecurity) pushed Symantec further down in the rankings.

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Ensighten eyes tag management market with TagMan buy

Scott Denne

Contact: Scott Denne

Ensighten picks up TagMan to bring additional customers and technology to its offering for tag management, a space that’s seen little M&A activity. The deal brings Ensighten a smaller competitor, but one that does about two-thirds of its business in Europe, giving it an opportunity for international expansion. The combined company will have less than 200 people. Petsky Prunier advised TagMan on its sale.

Tag management vendors have been a tough sell – TagMan was on the market for about a year and Search Discovery’s Satellite technology, which sold to Adobe last summer, saw little interest from potential acquirers beyond Adobe. Most large marketing software firms have already built or bought tag management technology to go with their own apps and view tag management as a feature.

Ensighten, which just closed a $40m venture round in January, and competitors like Tealium and BrightTag aim to build tag management systems that make it easier for marketing products from different vendors to share data. The market for stand-alone tag management software is still nascent, likely less than $50m in annual sales. While big software companies are focused on selling their own applications, they’re unlikely to put a premium valuation on a platform that would enable customers to integrate marketing apps from competitors. Deals in this space will remain small for the foreseeable future.

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Vodafone continues consolidation in Europe with Ono acquisition

Scott Denne

Contact: Scott Denne

Vodafone picks up its second cable company in a year, spending $10bn on a cash- and debt-free basis on Spain’s Grupo Corporativo Ono amid an uptick of telecom consolidation in Western Europe. The deal has similarities to Vodafone’s $10.2bn purchase in June of Germany’s Kabel Deutschland.

Both transactions get Vodafone deeper into markets where it already offers some services, such as mobile and Internet access. However, the rationale for the two deals is different. While both add to the top line, the chance to grow revenue seems to be front and center in the Ono buy, where Vodafone sees an opportunity to market wireless services to the target’s customers and take share from Telefonica, which powers Ono’s existing mobile service, by transitioning those customers to Vodafone’s network. With the Kabel purchase, much of the logic for the deal came in the opportunity to lower costs by migrating Vodafone DSL customers in Germany onto Kabel’s coaxial network.

Vodafone’s move comes during a period of extraordinary consolidation of large telcos in Western Europe. So far this year, three telcos in that region have sold for more than $500m (including today’s announcement), for a total of $19.2bn of M&A. In all of last year there were four such transactions, combining for $32.2bn. In the preceding five years combined, such deals totaled only $22.2bn, according to The 451 M&A KnowledgeBase.

The hunt for additional revenue growth and cost savings comes as prices for wireless services in Europe are declining, and will continue to decline. The pricing pressure will amplify the need for further consolidation. In its most recent quarter, Vodafone’s own revenue fell 3.6% from a year earlier to $15.1bn, a drop that its management attributed to stiffer price competition. In Spain in particular, Vodafone’s revenue declined 14% due to increased competition from services offering combined wireless and wireline packages. Yankee Group, a unit of The 451 Group, anticipates that price squeeze in Europe will continue.

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Renaissance teaches lesson in the value of SaaS

Scott Denne

Contact: Scott Denne

A bet on Renaissance Learning’s transition to SaaS has paid off for Permira Funds. The private equity firm bought the educational software company for $455m in late 2011. Today, Hellman & Friedman announced that it is buying the business for $1.1bn.

When the sale to Permira closed, Renaissance Learning was in the early stages of transitioning its business to a SaaS model, moving away from the hardware and installed software sales that dominated its early years (the company was founded in 1986). In its last quarter before that, its SaaS sales rose 22% from a year earlier to $14.8m, accounting for 41% of its total revenue – and growing.

The Permira buyout was done at 3.3x trailing revenue ($133.5m at the time), well below the 5.1x median multiple that SaaS vendors fetched over the past 12 months, according to The 451 M&A KnowledgeBase. While it is unclear how Renaissance Learning’s SaaS revenue has grown since its sale to Permira, it is clear that its SaaS business helped it get a higher valuation this time around.

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Serena’s sinking software revenue

Scott Denne

Contact: Ben Kolada Scott Denne

HGGC’s purchase of Serena Software ends a challenging holding period for Silver Lake Partners, the buyout shop that took the application lifecycle management vendor private eight years ago today. Initially hampered by the 2008 financial crisis, the company’s inability to evolve its portfolio to today’s Web, mobile and cloud environments contributed to its decline. Toward the end of its time under Silver Lake, Serena was basically a maintenance shop.

Serena’s sales have shrunk from $251m in trailing revenue ahead of its take-private in 2006, to $184m in trailing sales today (the now-private company still files financials with the SEC). The largest decline came on the heels of the financial crisis, when its annual revenue dropped to $224m in the year ending January 31, 2010, from $260m a year earlier. When that crisis abated, Serena still faced declining use of mainframes (a significant revenue generator for the company), increasing use of open source software and developer-led purchases of application management products.

The company’s most recent filing period, the nine months ended October 31, shows it was becoming increasingly reliant on merely maintaining the use of its software for its customers, instead of selling new software licenses. For that period, license sales as a percent of revenue declined six percentage points, to 15% of total revenue, while its maintenance revenue increased eight percentage points, to 75% of total sales. Also under Silver Lake’s stewardship, Serena’s total debt load had nearly doubled to $410m.

Terms of the company’s sale to HGGC weren’t disclosed. Public reports peg the deal at $450m, about two-thirds less than it was taken private for. When looking at the company’s finances, that price is understandable.

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Pre-IPO stock: an ‘earnout’ that can actually pay out

Scott Denne

Contact: Scott Denne

Investors in Coupons.com aren’t the only ones who stand to benefit from the 100% rise in its IPO today. The company’s M&A targets are set up for a big gain as well. Investors in Yub, a digital loyalty card vendor, have seen the value of their exit to Coupons.com triple in the span of two months.

Yub sold to Coupons.com in January for $10.1m in common stock (valued at $10.05 per share). As of this afternoon, Coupons.com trades at $32 per share, valuing the Yub stake at $32m. In fact, Yub’s backers, including Battery Ventures, Greylock Partners and QuestMark Partners, are seeing a bigger pop than investors that funded Coupons.com’s last round of private funding – a June 2011 series B at $13.73 per share.

There’s a downside to relying on the jump in a pre-IPO acquisition. In addition to being at the mercy of the public markets, shareholders have to sweat out a six-month lockup period before cashing out. The 11 companies acquired by Twitter in the year leading up to its IPO saw the value of their exits jump 2-4x since. MoPub, for example, sold for $350m in Twitter stock that’s now valued at $797m, which will make for some happy VCs (MoPub raised just $18m) if the price holds up for the next two months.

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Spotify could hear ad revenue with The Echo Nest

Scott Denne

Contact: Scott Denne

Spotify’s acquisition of The Echo Nest deals a blow to competitors and brings with it technology to help the company expand beyond its subscription-focused business model. The Echo Nest’s algorithms integrate user preferences, digital analysis of songs and context from around the Web to build playlists for online and mobile music apps.

Spotify was an early customer and now it’s going to own the service that powers personalized radio for its competitors, including iHeartRadio, MOG and Rdio. In addition to a potential poke in the eye of its rivals, the deal takes Spotify’s ad capabilities from rudimentary (homepage takeovers and banner ads) to targeted. The Echo Nest recently launched a service that enables advertisers to target audiences based on how and what they listen to.

Advertising is an increasingly viable method of supporting digital radio as mobile marketing takes off, and this deal gives Spotify the tools to expand those capabilities. For example, last quarter Pandora Media saw a 42% year-over-year jump in its mobile ad revenue per listening hour. As the mobile ad market grows and Pandora tunes its product offerings, it now gets more than half of its revenue from mobile ads – an area where Spotify doesn’t (yet) have a product.

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Mitel migrates to call-center software with OAISYS acquisition

Scott Denne

Contact: Scott Denne

Communications hardware and software vendor Mitel Networks has extended its call-center software portfolio by acquiring call-recording software provider OAISYS. This is Mitel’s second call-center-related acquisition in the past year, and follows a wave of consolidation in the sector.

Last summer, Mitel spent $20m on its OEM partner prairieFyre Software to get directly into the call-center software business. Before that purchase, its only call-center offering was automated call routing. OAISYS, with 50 employees, provides call-recording and quality assurance software and, like prairieFyre, has a long-standing OEM partnership with Mitel. OAISYS was founded in 1996 and is based in Tempe, Arizona.

Historically, Mitel has struggled to sell its products, with revenue ebbing and flowing for several years. The company is trying to change that by selling applications that complement its PBX software and hardware products, which are experiencing pricing pressure from competitors. (Mitel is also spending to increase its traditional business, picking up Aastra Technologies, its European counterpart, in a $375m deal last year). The OAISYS buy is an attempt to move deeper into call-center software, which is seeing increasing interest lately.

Mitel’s competitors have been active acquirers in the call-center market lately. In just the past two years, Verint purchased four call-center software vendors, including the $514m pickup of KANA in January. Enghouse Systems has done eight deals in that time, including one announced this week, and Genesys Telecommunications has bought seven companies since Permira carved the company out of Alcatel-Lucent in 2012.

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