Category: M&A

The ‘fiscal cliff’ hangover

Ben Kolada

Contact: Ben Kolada

Talks of a ‘fiscal cliff’ and potential changes in capital gains taxes spurred company executives and their bankers into action in the final hours of 2012. In a way, that anxiety spilled over into the beginning of this year when we saw a flurry of acquisition announcements in the first few weeks of January.

However, many of the announcements in early January were deals that closed in December. Throughout the month, we saw a continuation of the downward trend in deal volume. On the heels of a 6% decline in total deal volume for full-year 2012, the total number of transactions announced in January 2013 dropped 15% from the year-ago period. It was the fewest number of announcements in the first month of a year since the recession year of 2009.

Contributing to the slowdown in M&A activity is the fact that, according to the US Department of Commerce, the US GDP shrank 0.1% in the fourth quarter (though that number is subject to revision). Although many consider the dip a one-time slump due to declining government spending, much of the tech industry is struggling to find any growth.

In a survey conducted at the end of 2012 by ChangeWave Research, a service of 451 Research, 26% of respondents expected their IT spending to decline in the first quarter of 2013 – a full 10 percentage points higher than the level of respondents who projected increased IT spending in the quarter.

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On its way to (eventual) IPO, Alfresco does its first bit of M&A

Brenon Daly

Contact: Brenon Daly

In its first-ever acquisition, Alfresco Software has reached for an existing partner, WeWebU Software. The purchase of the 13-year-old German startup adds more management capabilities – specifically, a roles-based, configuration application framework – on top of Alfresco’s core ECM platform. In addition to customization, WeWebU should also enhance the mobile offering at Alfresco with its iOS-focused MobileWorkdesk front end.

The purchase comes as the open source company transitions from a founder-led, relatively low-profile business to one that’s eyeing the public market, at least down the road. As part of that change, just two weeks ago Alfresco appointed Doug Dennerline to the top job at the company.

A SaaS-veteran, Dennerline joins Alfresco as it finds itself competing on a new front. In addition to established ECM rivals such as EMC (Documentum), OpenText and, of course, Microsoft’s SharePoint, Alfresco is increasingly bumping into newer cloud-based startups, notably Dropbox and Box.

To combat that, Alfresco has shored up its platform with increased security and compliance to appeal to IT departments, as well as added a cloud offering of its own. Additionally, it has stressed that ECM is part of a larger business process – a function that should be made easier now with the addition of WeWebU’s configuration technology.

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Sierra Wireless sells AirCard business to NETGEAR for $138m

Contact: Tejas Venkatesh

NETGEAR is acquiring Sierra Wireless’ AirCard business for $138m in cash, adding external modems that it will sell to mobile network operators such as Sprint and AT&T. AirCard modems plug into PC Card slots or USB ports in laptops and other electronic devices to help them connect to the Internet through cell phone networks. NETGEAR will use its global distribution capabilities to increase sales of AirCard products in emerging markets, while allowing Sierra to focus on machine-to-machine (M2M) connectivity for the ‘Internet of things’ future.

The AirCard business generated revenue of $247m in 2012, giving the deal a valuation of 0.6x trailing sales. The ho-hum valuation reflects the low-margin profile of the business as well as declining sales. According to Sierra’s regulatory filings, the AirCard business has shrunk every year since 2008, when it generated revenue of $409m. However, most of the future growth lies in parts of the emerging markets, where cell phone networks are the only way to access the Internet, due to a lack of wired infrastructure.

In its conference call, Sierra made clear that it intends to deploy the proceeds from the sale toward M2M acquisitions. That is consistent with the direction of its previous M&A activity. In December 2008, Sierra acquired Wavecom for $277m for its GSM/GPRS, CDMA, EDGE and 3G Wireless CPUs. More recently, last June Sierra purchased Sagemcom’s M2M business for $56m, adding 2G, 3G, GPRS and EDGE wireless semiconductors.

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Making sense of j2’s Ziff Davis acquisition

Ben Kolada

Contact: Ben Kolada

At first glance, j2 Global’s acquisition of Ziff Davis Media seemed to be a stretch. However, upon further review of j2’s M&A strategy and recently released financial statements for Ziff Davis, the company actually meets many of j2’s requirements for its diversification acquisitions: Ziff Davis has a strong management team, operates in a fragmented market and, perhaps most importantly, is increasing revenue.

Technology content provider Ziff Davis Media was a powerhouse in its time, but it struggled as consumers moved from print to digital media. Total revenue at the company declined from $300m in 2001 to $76m in 2007, when more than half of its revenue was still coming from print advertising.

Ziff Davis filed for bankruptcy in 2008, and was subsequently carved up in four transactions. The Ziff Davis chunk being acquired by j2 is owned by CEO Vivek Shah and Great Hill Partners. Shah, a digital publishing veteran with experience at Time Inc and the Fortune/Money Group, and his team helped turn around ailing Ziff Davis, bump up revenue and return it to profitability.

J2 released financial statements this week for Ziff Davis that show the company is in growth mode. Unaudited results for the nine months ended September 30 show revenue increased 70% over the prior year to $32m. In the 12 months ended September 30, the company generated almost $45m in revenue, with nearly $8m in EBITDA.

For anyone interested in what goes on in The 451 M&A KnowledgeBase, we’ve updated our merger record for j2’s acquisition of Ziff Davis and made it available for free. Click here to view the record.

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MediaMath strikes twice in Akamai deal

Ben Kolada

Contact: Ben Kolada, Tejas Venkatesh

Marketing analytics startup MediaMath and CDN giant Akamai have engaged in a two-pronged deal that should help accelerate MediaMath’s already astounding growth rate. MediaMath is acquiring Akamai’s Advertising Decision Solutions assets and data cooperative, and is gaining exclusive access to Akamai’s pixel-free technology, which tracks online user behavior without using tracking pixels.

Adding to its already successful TerminalOne platform, MediaMath is picking up Akamai’s advertising data management platform and opt-in data-sharing cooperative. MediaMath says the assets will help its advertiser clients better profile audiences and predict audience behavior.

Terms of the transaction also provide MediaMath with multiyear, exclusive access to Akamai’s pixel-free technology. The traditional method for advertisers to collect user data has been to install tracking pixels on users’ computers when they access websites. However, Akamai’s pixel-free technology bypasses that strategy. Since Akamai has access to a significant portion of Web traffic through its content delivery and site acceleration services, it can directly observe user behavior. Its pixel-free technology leverages its content delivery roots to track user online behavior without the need to install tracking pixels.

We’d note that even before the addition of Akamai’s assets, MediaMath had done quite well for itself. With primarily organic growth, the company, founded in 2007, grew revenue last year to $180m, more than double the $78m it recorded in 2011.

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Cisco acquires Israeli startup Intucell for $475m

Contact: Tejas Venkatesh

Cisco Systems has announced the acquisition of Israeli startup Intucell, paying $475m in cash and retention-based incentives for the startup’s self-optimizing network software. The deal is consistent with Cisco’s recent direction, in which it wants to provide more valuable offerings to service providers in addition to basic networking capability. The networking giant is paying a handsome multiple for the five-year-old target. (Subscribers to The 451 M&A KnowledgeBase can click here to see our official estimate on terms of the transaction.) The exit is a big moneymaker for Bessemer Venture Partners, which provided $6m in funding for almost half of Intucell’s equity.

Intucell’s software helps carriers optimize their networks in real time by analyzing data from cellular grids. Using operational support systems data, it can detect when a cell tower is overloaded and loop in assistance from nearby towers, thereby responding to unpredictable mobile traffic and improving network quality. AT&T was an early Intucell customer.

Cisco’s last three acquisitions have been aimed at service providers. In November, it bought Cariden Technologies for $141m, adding capacity-planning and management tools for IP and optical networks. And in December, Cisco followed up with the purchase of Broadhop for its policy control and service management technology.

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Violin does a bit of portfolio roundout ahead of expected IPO

Brenon Daly

Contact: Simon Robinson, Brenon Daly

Violin Memory has made a technology-and-talent play, adding GridIron Systems in what’s likely to be the last bit of portfolio roundout before the flash-based storage specialist goes public. The purchase of GridIron is part of Violin’s strategy to maximize its addressable market in the emerging solid-state storage space, and specifically allows it to accelerate the performance of applications residing on existing SAN storage systems at large enterprises and service providers.

Violin didn’t disclose how much it paid for GridIron but we have heard from market sources that it wasn’t much money. As we understand it, GridIron was heading toward a wind-down and Violin is merely picking up some key IP and personnel from the company. The target’s website has only a skeletal list of executives, without a CEO or CFO. A year ago, GridIron indicated that it had some 50 employees, but Violin is expected to take on less than half that number. We’ll have a full report on the transaction in our next Daily 451.

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CyrusOne’s steady rise

Ben Kolada

Contact: Tejas Venkatesh, Ben Kolada

CyrusOne, the colocation bull that has now changed hands three times since 2007, debuted on the Nasdaq today with a valuation topping $1bn. The fast-growing company was spun off of Cincinnati Bell but is still majority owned (72%) by the regional telco. Shares popped during early trading, continuing the company’s history of creating considerable wealth for each of its owners.

The datacenter company, which is structured as a real estate investment trust, sold 16.5 million shares at $19 per share, higher than its previously guided $16-18 range. The IPO raised a total of $313.5m, though underwriters have an option to sell an additional 2.5 million shares. Shares jumped approximately 10% when they hit the Nasdaq and held the gains through midday trading. CyrusOne currently sports a market cap of about $1.3bn.

CyrusOne operates 24 facilities, primarily in the Ohio and Texas markets. The company offers colocation services aimed at enterprise-class customers requiring highly available facilities, engineered for dense power and reliability. Morgan Stanley and Bank of America Merrill Lynch were joint bookrunners for its IPO.

This is the third time shares of CyrusOne have traded hands since 2007. And in each transaction, its value has steadily climbed, creating considerable wealth for each of its owners.

CyrusOne’s rising valuation

Date Liquidity event Valuation
January 18, 2013 IPO $1.3bn
May 12, 2010 Sale to Cincinnati Bell $525m
July 11, 2007 Sale to ABRY Partners $130m

Source: The 451 M&A KnowledgeBase

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Telcos playing a new hosting game

Ben Kolada

Contact: Ben Kolada

Datacenter operator Digital Realty Trust on Wednesday announced that it paid $80m for a three-property portfolio of datacenters from French telco Bouygues Telecom. The deal could signal yet another robust year in Internet infrastructure M&A, but also shows that telcos are playing different strategic cards in the ongoing hosting game.

Last year set a record in Internet infrastructure M&A deal volume with 110 acquisitions announced, according to The 451 M&A KnowledgeBase. The record is particularly notable as it comes at a time when telcos are weighing alternative options to acquiring hosting properties. With the exception of NTT Communications, which announced three hosting acquisitions last year, telcos have largely been out of the M&A arena.

In fact, as evidenced by Bouygues’ divestiture, telcos are now considering strategies other than buying or owning high-growth hosting businesses. For example, the Digital Realty-Bouygues deal is structured as a sale-leaseback transaction, in which datacenter specialist Digital Realty will own the facilities but Bouygues will lease and operate them. Other telcos, such as Cincinnati Bell, have also decided to pass their hosting facilities on to vendors more versed in the business. Cincinnati Bell is spinning off its CyrusOne hosting unit into a publicly traded entity. CyrusOne will debut on the Nasdaq tomorrow, planning to sell 16.5 million shares $16-18 each.

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Fortinet acquires CDN software startup XDN

Contact: Tejas Venkatesh

Unified threat management vendor Fortinet has acquired four-year-old startup XDN, adding software that is used for building and managing CDNs. The deal helps Fortinet closely tie its security and WAN optimization services with content acceleration software from XDN, thereby providing a distributed, cloud-based approach to adapt effectively to disruptive attack traffic.

Fortinet’s move comes as companies like Akamai have fortified their security lineups with cloud-based Web application firewall and other related services. Fortinet did not disclose terms of the deal. In fact, it was XDN that announced the transaction in a blog post, almost a month after my colleague Jim Davis wrote about the deal. XDN raised about $7m in funding from Storm Ventures and Canaan Partners. For a full report on the acquisition, click here.

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