Category: M&A

Will Microsoft and Nokia make for a ringing success?

Brenon Daly

Contact: Brenon Daly

In an acquisition that effectively formalizes a partnership of two and a half years, Microsoft plans to hand over $5bn for Nokia’s phone business. Additionally, it announced a $2.2bn agreement to license the Finnish company’s patents and mapping technology. Taken together, the moves mean that Microsoft – in its efforts to make the leap from the PC market to the much broader mobile world – has now tried all three of the corporate development strategies: buy, build and partner.

And yet so far, the results of that effort remain underwhelming. In an August survey by ChangeWave Research (a service of 451 Research) just 9% of corporate respondents indicated they planned to purchase a Windows Phone-powered device in the fourth quarter of this year. Microsoft’s ranking was dead last among the mobile OS providers. Even BlackBerry, which is fading dramatically, drew a level of support that was three times higher than Windows Phone.

Nor does the addition of Nokia, when the deal closes early next year, appear likely to bump up Microsoft’s standing among corporate mobile-device buyers. Just 7% of respondents to the ChangeWave survey indicated they planned to buy a Nokia device in Q4. That was the lowest standing among the six specific vendors included in the ChangeWave survey.

Obviously, Microsoft’s purchase and license agreements with Nokia extend far beyond the immediate timeframe covered in the ChangeWave survey. But even as we look ahead a year or more, we don’t necessarily see the transaction doing much to establish Microsoft as more than a distant fourth-placed mobile OS vendor.

For starters, there’s Microsoft’s mixed record on hardware, including its recent $900m write-off because it hasn’t sold anywhere near as many Surface tablets as it expected. And even when we look at precedent transactions where software companies have reached for hardware vendors (even those with solid underlying IP), the returns have been low. One dramatic example from the enterprise world: Oracle has struggled to get out from under the billions of dollars of hardware that it inherited when it acquired Sun Microsystems.

Even more relevant to the Microsoft-Nokia transaction, Google hasn’t radically altered the fortunes of Motorola’s smartphones since it acquired that business in a deal that was announced two years ago and closed May 2012. Yes, the Android OS continues to gain momentum for all device makers. But specifically for Motorola, the percentage of corporate buyers who plan to purchase a Motorola device in the coming quarter has dropped almost uninterruptedly in the year that Google has owned the device maker, according to ChangeWave research.

 

A mixed picture for tech M&A in August

Brenon Daly

Contact: Brenon Daly

The value of tech M&A around the globe in August ticked higher by about one-quarter over the same month last summer, the fourth consecutive increase in year-over-year monthly spending. However, the slump in the number of deals continued in August. We have yet to see a single month in 2013 with more transactions announced than in the comparable month of 2012, leaving total deal flow down about 17% so far this year.

We tallied 260 acquisitions with an aggregate value of $13.2bn this month. (That compares with 285 deals worth $10.6bn in the same month last year.) August’s significant transactions included the largest purchases by Chinese search engine Baidu ($1.85bn for 91 Wireless Websoft) and the reconstituted AOL ($465m for Adap.tv). IBM also paid one of its highest-ever M&A multiples in its reach for Trusteer. (Subscribers to The 451 M&A KnowledgeBase can see our estimated terms for this transaction.)

The split picture in the M&A market mirrors the recent crosscurrents in the equity markets, which influence one another. All of the major US stock indexes declined in August, but are still higher by a mid-teens percentage since the beginning of the year. We would note that a number of previously active tech buyers that haven’t necessarily participated in the stock market’s double-digit percentage rally have been much less active shoppers so far this year. Oracle, VMware and BlackBerry are all examples of that.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Facebook focuses on mobile video

Scott Denne

Contact: Scott Denne

Having seemingly solved its earlier problems with mobile revenue, Facebook is turning its attention – and M&A activity – toward the next emerging media trend: social video.

The social networking giant has already shown that it can shift its business to meet emerging trends. When it went public less than 18 months ago, practically none of its revenue came from mobile. In Facebook’s most recent quarter, its mobile advertising products brought in 41% of its total ad revenue. More than a little of the growth can be tied to its rapid-fire acquisition program. After spending $1bn on photo-sharing app Instagram, Facebook has pursued a strategy of smaller deals to shore up its mobile technology and team, including its purchases of facial-recognition company Face.com and location-based app maker Glancee.

Its latest addition to the mobile business is Luma, a two-year-old startup based in Palo Alto, California. Facebook had hinted that a deal like this was a possibility. In its most recent earnings call, CEO Mark Zuckerberg said that Instagram’s newly launched video-sharing capabilities were in need of technology to stabilize the amateur videos on the app. That technology is at Luma’s core.

Acquisitions have always been a big part of Facebook’s business plan, but it has spent relatively little money in picking up new businesses, aside from its $1bn purchase of Instagram in 2012. Excluding that deal, Facebook spent $155m buying about 26 companies in 2011 and 2012. Through the first half of this year, the company has spent $246m on six transactions.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

A ‘betwixt and between’ VMware opens the doors at VMworld

Brenon Daly

Contact: Brenon Daly

Even though it’s only 15 years old, VMware is beginning to look decidedly middle-aged. The virtualization kingpin, which opens its annual users’ conference today, is no longer the flashy young startup that was nearly doubling sales each year in the middle part of the previous decade. Nor is it (by any means) a tech dinosaur, defensively trying to protect its past successes while knowing full well that its best days are behind it.

Instead, VMware finds itself betwixt and between. And fittingly for a company in an indistinct period of its life, there’s uncertainty around its business. That is cascading through not only the operations of the company, but also its very identity. As it kicks off VMworld in San Francisco, VMware is still working through a restructuring, which, among other things, has seen it cut 800 jobs and divest a handful of businesses so far this year.

As one illuminating example of the uncertainty around VMware and its business, consider the company’s license sales, which are the lifeblood of any software firm. Back in the beginning of the year, VMware projected roughly 10% license growth for 2013. Off a 2012 base of about $2bn in license sales, that would imply roughly $200m of new VMware licenses sold this year. Through the first two quarters of the year, VMware has added a grand total of just $20m in additional license revenue.

The problems from the vendor’s flatlining software sales are exacerbated by the fact that it has whiffed on a few of the businesses that it acquired with the hopes of spurring growth in new markets. Misguided acquisitions such as Zimbra and SlideRocket took VMware further away from supplying technology to power datacenters and into the hotly contested consumer application market. VMware has sold off both of those businesses, along with three other divestitures so far in 2013. On the other side, it has bought only one company this year.

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Bye-bye Ballmer

Brenon Daly

Contact: Brenon Daly

Lost in the schadenfreude and snark that has accompanied Steve Ballmer’s decision to leave the top spot at Microsoft within a year is one undeniable piece of his legacy: No other tech CEO has accumulated as many assets in key markets as Ballmer.

In addition to the fat-margin franchises that Ballmer inherited, he steered the company on an M&A program that built up offerings around growth markets such as mobility, cloud infrastructure, data warehousing, online communications, digital advertising, collaboration and beyond. During Ballmer’s 13 years running the software giant, Microsoft dropped more than $25bn on its acquisitions.

Of course, there have been M&A missteps. The company has endured big write-offs (aQuantive), gotten burned by targets with dubious accounting (FAST Search & Transfer), drastically overpaid on other acquisitions (Skype), and has seen the period for returns on deals drag beyond a decade (Great Plains Software, Navision).

But in the end, Microsoft has at least brought together a basket of offerings, built on in-house and acquired technology, that makes it relevant in today’s tech market. Want proof of that? Microsoft is actually increasing sales. Granted, it’s only about 5% growth, but at least Microsoft is growing. The same can’t be said for IBM or Oracle or Intel or Dell or Hewlett-Packard. (Oh yeah, and Microsoft is growing while also throwing $20bn to the bottom line each year.)

From our perspective, one of the main challenges for Microsoft’s next CEO will be realizing a return on all of its previous dealmaking. Ballmer’s M&A program has put the pieces in place, but for the most part, they have been underutilized. It’s time for an execution-focused chief executive to wring more value out of the enviable collections of assets that Microsoft has already acquired.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Nuance’s not-so-nuanced response to Icahn

Brenon Daly

Contact: Brenon Daly

Even though Nuance Communications is a company that does a lot of buying, the serial shopper has made it clear that it doesn’t want to be on the other side of a transaction. The speech recognition vendor, which has spent more than $1bn on a dozen deals over the past two years, announced earlier this week that it would be putting a ‘shareholder rights plan’ in place by the end of the month. The defensive measure (also known as a ‘poison pill’) effectively scotches any unwanted M&A approaches.

In other words, exactly the type of unwanted approach the company is likely to get from its largest shareholder, who has a history of making unwanted M&A approaches to tech companies. Carl Ichan has steadily snapped up Nuance stock. His stake, according to the most recent SEC filing, is now a mountainous 51 million shares, or 16% of the company.

With Icahn unlikely to play the role of spoiler in the planned Dell LBO, we suspect that he’ll have more time to spend on his other activist investments very soon. Probably on the top of his hit list is Nuance, as the company has already put up subpar numbers in two quarters this year. Nuance stock is down about 15% in 2013.

Unlike Ichan’s earlier stirrings against BEA Systems or Lawson Software, however, there isn’t an obvious single acquirer for Nuance. The reason stems largely from the fact that the Burlington, Massachusetts-based company has four separate business units. (Collectively, those divisions should produce about $1.7bn in annual sales when Nuance wraps its fiscal year at the end of next month.)

Instead, we could imagine that Icahn might push for a breakup of Nuance, arguing that the value of the individual units – on their own – is higher than the current $7.4bn enterprise value of the company. After all, Icahn has experience in that sort of agitation too, having helped spur a breakup of tech giant Motorola at the beginning of 2011.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Welsh Carson cleans up cap table for IPO-bound Alert Logic

Brenon Daly

Contact: Brenon Daly

In its first major move into IT security, buyout firm Welsh, Carson, Anderson & Stowe has acquired a majority stake in SaaS security vendor Alert Logic. The deal substantially cleans up the capital table at 11-year-old Alert Logic, which has drawn backing from six firms since its series A in 2005, including at least two shops that are designated as early-stage investors. As is typical for these late-stage growth investments by private equity (PE) firms, we would expect the next major capital event for Alert Logic to be an IPO.

Closer at hand, having a single, deep-pocketed owner should help Alert Logic take on its next opportunity for growth: international expansion. Currently only about 230, or 10%, of Alert Logic’s total customers are outside its home US market. The Houston-based company doesn’t have any direct sales outside the US.

International expansion for cloud-based companies like Alert Logic can be expensive because not only do they have to hire sales and marketing staff, they may also have to open in-country datacenters, depending on data residency laws. With $20bn in total capital, Welsh Carson can write those checks. (While Welsh Carson doesn’t currently hold any information security vendors in its portfolio, we would note that the PE firm is well-versed in the service-provider market, where Alert Logic does the majority of its business. The PE shop has put money into both Savvis and Peak 10.)

Alert Logic’s streamlined ownership also should help smooth the way for an IPO, although an offering may not come until 2015. The company finished 2012 with GAAP revenue of $30m and will likely bump that to nearly $45m in 2013. Assuming that growth rate roughly holds, Alert Logic could do $60-65m in sales in 2014. (Keep in mind, too, that Alert Logic is a subscription business, so revenue lags bookings.)

The two most-recent SaaS security providers to debut (Proofpoint and Qualys) both went public when their quarterly sales hit approximately $25m. (Proofpoint went public in April 2012, while Qualys followed suit last September. The two companies have market caps of $1bn and $600m, respectively.) However, we would note that although Alert Logic is smaller, it is growing twice as fast as Qualys and about half again as fast Proofpoint. Alert Logic has been clipping along at a 40-45% growth rate, compared with 20% at Qualys and 30% at Proofpoint.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Zillow takes a big bite of the Big Apple, acquires StreetEasy

Brenon Daly

Contact: Brenon Daly

Looking to expand its offering in one of the most competitive real estate markets in the US, Zillow pays $50m in cash for New York City-focused StreetEasy. The deal, which should close this month or next, will be part of the company’s Marketplace portfolio, which generates about two-thirds of total revenue at Zillow. (The remaining revenue comes from display advertising and mortgage offerings, two businesses where Zillow has also used tuck-in acquisitions.)

Founded in 2006, StreetEasy provides both rental and for-sale listings in the New York City area. The company draws nearly 1.2 million unique visitors each month. (For comparison, Zillow attracted more than 61 million users in July, up from 37 million in July 2012.) StreetEasy is the largest of Zillow’s seven acquisitions, which have all come in the past two and a half years, according to The 451 M&A KnowledgeBase.

Fitting for a company that is growing at about 60%, Zillow recently told Wall Street that it will be increasingly reinvesting in its business. In the second quarter, Zillow lowered its EBITDA projection for the rest of the year, while bumping up its revenue forecast. (It now sees about $185m in sales for 2013, compared to a market capitalization of $3bn.)

Although Zillow holds roughly $170m in cash and short-term investments, the company also announced plans to sell 2.5 million new Class A shares. (Additionally, private equity firm Technology Crossover Ventures and company insiders have registered to sell another 2.5 million shares.) At current market prices, the secondary would add some $215m to Zillow’s treasury. Zillow priced its IPO at $20 per share in mid-2011, sold additional shares last September at about $40 each, and now trades at more than $80 each.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

IBM puts its antifraud faith in Trusteer

Contact: Tejas Venkatesh

In its first security deal in two years, IBM reaches for financial antifraud and endpoint integrity software provider Trusteer. According to The 451 M&A KnowledgeBase, this is the highest-valued (on a price/sales basis) security acquisition for IBM, and should help further its already strong presence in the financial services vertical.

Terms of the transaction were not disclosed, but our sources corroborated the reported $800-1bn price range that IBM paid for the seven-year-old company. Using the midpoint of that range and our own verified revenue estimates gives the target a valuation far north of any of Big Blue’s other security deals. (Subscribers to the KnowledgeBase can view our estimates, including last year’s, trailing 12-month and projected revenue, here.)

Trusteer is known for providing lightweight fraud-prevention technology that scales en masse and provides an unobtrusive user experience. Having made its mark in the banking sector for end users, Trusteer recently launched an enterprise product in its foray into that market. From Trusteer’s perspective, having IBM as a parent will further accelerate its product’s adoption in the enterprise segment.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Millennial Media acquires Jumptap to consolidate mobile advertising

Contact: Tejas Venkatesh

In its largest acquisition by far, Millennial Media has announced the purchase of fellow mobile advertising firm Jumptap. Millennial will hand over 24.6 million of its shares and $12m in cash to Jumptap, valuing the target at $221m based on Millennial’s stock price close on Tuesday. The deal brings together the advertising networks of the two companies, which will now combine to form a larger network of ad properties to compete against Google.

Jumptap generated sales of $63.6m in 2012, including $10.5m from its telecom portal business, which it will shutter. Excluding that legacy business, Millennial is valuing Jumptap at 4.2x last year’s sales. For comparison, Millennial garners a valuation of 3.5x trailing sales on the public markets. On the other side, the transaction is a ho-hum exit for Jumptap’s investors – General Catalyst Partners, Redpoint Ventures and other firms – which collectively funneled roughly $120m into the nine-year-old company.

The deal comes even as Millennial reported a second-quarter earnings loss after the bell yesterday. The company also fell short of analyst expectations for its top line, reporting $57m in revenue versus the consensus estimate of $59m. As a result of the acquisition and its earnings report, Millennial’s stock plummeted more than 17% in early trading today. By midmorning, shares were changing hands at $7 per share, roughly half its IPO price of $13 in its March 2012 debut.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.