Category: Private Equity

Windstream misses the message

Ben Kolada

Contact: Ben Kolada

As the telecom industry continues its buying spree, some firms are missing the bigger picture – hosting and datacenter services are the new growth channels for telcos. While CenturyLink and Verizon have each announced acquisitions in the growing datacenter services industry, Windstream Communications appears to be satisfied with consolidating telecom assets. The telco’s purchase of complementary competitive carrier PAETEC is its seventh telco rollup since its formation in 2006. And while PAETEC does provide a wealth of network assets, it contributes little in the way of revenue growth. For the price it’s paying for PAETEC, Windstream could have gobbled up a number of hosting properties at a fraction of the cost.

To be fair, Windstream’s PAETEC pickup does provide more than 50,000 high-revenue enterprise accounts and an expanded fiber footprint. But the target’s organic revenue has been flat in recent years, and growth this year is likely to come primarily as a result of the Cavalier Telephone buy it completed in late 2010. (We would also note that Cavalier’s revenue was in precipitous decline, due primarily to churn in its consumer division. Cavalier’s revenue dropped from $421m for full-year 2009 to an estimated $390m in trailing revenue at the time of its sale.)

Beyond fiber and enterprise accounts, Windstream is also interested in PAETEC’s datacenter services assets. And rightfully so, considering Windstream’s hosting assets could certainly use a boost. The company’s last pure M&A foray into the hosting sector was in November 2010, when it shelled out $310m for Hosted Solutions. That target only generated $51m in trailing sales, or about 1% of Windstream’s total revenue. But for the $2.2bn the telco is paying for PAETEC (including the assumption of debt), it could have easily expanded its hosting footprint in the US and abroad by acquiring both InterNap Network Services and Interxion. Applying a flat 20% equity premium to the pair would put their combined deal value at about $1.6bn on an enterprise value basis, or about three-quarters of PAETEC’s price.

InterNap’s time as a takeover target could be running out

Ben Kolada

Contact: Ben Kolada

If its past is any prediction of its future, hosting services provider InterNap Network Services could soon lose its position as the industry’s next takeover target. The Atlanta-based firm, which is set to release its second-quarter results, has seen flat sales for the past three years. This is in stark contrast to the hosting industry at large, which has historically grown in the double digits. Meanwhile, other firms are emerging as more desirable targets, pushing InterNap to the back of the buyout line.

Our colleagues at Tier1 Research have written that InterNap was a favored takeover target. However, the firm appears to have since lost its luster. Investors are becoming increasingly frustrated with its poor performance, particularly after first-quarter total revenue declined 6% year over year. And shareholders once again fear the worst – in the past month, shares of InterNap have lost more than one-tenth of their value.

As InterNap is lying stagnant, other firms are posting enviable growth rates, making them much more attractive acquisition candidates. We understand that privately held SoftLayer is gearing toward the public markets, though it could certainly be scooped up before filing its paperwork. SoftLayer surpassed InterNap’s revenue last year, and is projecting bottom-line growth of about 20% this year, to just shy of $350m. InterXion has been cited as a potential target, as well. The company is also enjoying double-digit growth rates, and would provide a large platform for any telco looking to expand its European hosting footprint.

We would note, however, that both InterXion and SoftLayer are considerably pricier properties. While InterNap currently sports a market cap of about $330m, InterXion is valued at nearly $1bn. And we estimate that SoftLayer, on its own, cost GI Partners some $450m. However, when including the other legs of the SoftLayer platform – Everyones Internet and The Planet – the full price to the buyout shop could exceed $600m. But InterXion’s and SoftLayer’s price tags won’t necessarily stand in the way of their sales. We would never have guessed that CenturyLink would have been able to afford Savvis, especially so soon after closing its $22bn Qwest purchase.

Emerging datacenter markets could see emerging M&A activity

Ben Kolada

Contact: Ben Kolada

With high utilization rates and an abundance of available targets in key North American multi-tenant datacenter (MTDC) markets, large acquirers could look to absorb smaller operators in their markets. A recent report by our colleagues at Tier1 Research notes that increasing utilization in the 14 markets under review could influence large acquirers to look to M&A to alleviate their own constraints. Further, acquirers should find several interested sellers, especially among the pool of smaller operators that have historically run into barriers preventing their own expansion.

The report highlights increasing utilization throughout our market set. While utilization in the top six North American markets is quite high, at over 80% despite continued incremental expansions, the 14 major markets analyzed on average also have a high utilization rate of approximately 79% for 2011. Increasing utilization could cause larger providers to look to M&A to keep pace with demand. And they wouldn’t have to look far. More than 170 MTDC providers operate in our market set, with an average of 19 providers operating in each of the markets that we analyzed.

Large providers’ acquisition interest goes hand in glove with the difficulties that smaller operators are facing. Given the number of smaller datacenter providers in each market (from a single facility to a handful of facilities), the increasing utilization of built capacity, the continued lack of access to capital for the smaller datacenter providers to expand and the increasing demand for emerging major markets, several of the smaller companies in these markets make attractive acquisition targets for companies looking to expand into additional emerging major markets more quickly than by building.

International activity helps push cloud infrastructure M&A to new heights

Ben Kolada

Contact: Ben Kolada

Cloud infrastructure M&A activity set several records in the just-closed second quarter, due in large part to a rise in international dealmaking. We’ve been noticing a steady uptick in international M&A activity lately, as both foreign strategic acquirers and private equity (PE) firms look to consolidate fragmented sectors in their own backyard and abroad. While we noticed a diversity of deal flow in the first quarter, with companies being targeted in nine different countries, the majority of international M&A in Q2 focused on Canada- and UK-based companies. Targets based in those two countries accounted for about 70% of all foreign acquisitions.

For international deal flow, the most visible theme was consolidation in the Web hosting sectors in the UK. Iomart Group, Othello Technology Systems and Lloyds Development Capital each announced Web hosting deals in Q2. In fact, Web hosters accounted for all but one of the deals targeting a UK-based company. This news should be of particular interest to domain name registration and Web hosting giant The Go Daddy Group, which recently took an undisclosed investment by a group of private equity firms led by KKR. Go Daddy will use the newfound capital for international expansion, as well as product development, and we wouldn’t be surprised if it looked to M&A to grow its nascent European footprint.

International cloud infrastructure M&A

Period Acquisitions of non-US targets
Q2 2011 16
Q1 2011 11
Q4 2010 11
Q3 2010 6

Source: The 451 M&A KnowledgeBase

Big deals for single PE firms

Brenon Daly

Contact: Brenon Daly

In 2010, it was The Carlyle Group. So far in 2011, it’s Providence Equity Partners. These two private equity (PE) firms have the two largest non-club tech leveraged buyouts in each of the past two years. Recall that last October – on successive days, no less – Carlyle erased both CommScope and Syniverse Technologies from the public market in a pair of deals that cost the buyout shop $6.5bn. (Understandably, Carlyle has been fairly quiet since then, announcing only a pair of small transactions.)

Now, Providence has its own double-barrel deals that are on top of the standings. Somewhat unusually, both of the firm’s acquisitions came on the first day of a new quarter: On April 1, it announced the planned take-private of SRA International for $1.9bn, and then followed that up Friday with the $1.6bn buyout of Blackboard to start the third quarter.

PE activity since the Great Recession

Period Deal volume Deal value
Q3-Q4, 2009 62 $12.1bn
Q1-Q2, 2010 57 $10.7bn
Q3-Q4, 2010 76 $15.6bn
Q1-Q2, 2011 78 $11.9bn

Source: The 451 M&A KnowledgeBase

Going, going, gone: Go Daddy sells to KKR

Ben Kolada

After canceling a proposed IPO in 2006 and reportedly being on the block since late last year, The Go Daddy Group is now selling an undisclosed stake to private equity firms KKR, Silver Lake Partners and Technology Crossover Ventures. The deal is believed to be among the largest private equity investments in the Internet infrastructure industry, and continues an emerging trend of buyout shops acquiring mass-market hosters and repositioning them toward higher-end services.

Reportedly worth $2.25bn, the transaction lands squarely in second place among the largest PE investments in this industry. We note that the first-place prize goes to a group led by Silver Lake (and including KKR) in the $11.3bn take private of SunGard Data Systems in 2005. Silver Lake’s interest in the industry is increasing – the Go Daddy deal comes less than a year after the firm took a minority stake in a similar hoster, Brazil-based LocaWeb.

We expect that KKR and the other investors will focus on international expansion as well as investment in cloud services. Silver Lake’s stake in LocaWeb could be particularly useful. The Latin American hosting and colocation markets are seeing increasing interest (heavyweights Savvis and Equinix have each announced plans for the region). We wouldn’t be surprised if LocaWeb and Go Daddy ultimately became partners. Further, we’ve noticed that PE firms tend to refocus their mass-market hosting companies on more specialized, higher-end cloud services. LocaWeb’s cloud services could provide additional expansion opportunities for Go Daddy, which recently began a limited launch of its own cloud product. We’ll have a full report on the Go Daddy deal in tonight’s Daily 451.

A swoon in June for tech M&A

Brenon Daly

Contact: Brenon Daly

For the first two months of the second quarter, tech M&A spending flowed along at basically twice the monthly rate it had been reaching since last summer. The activity spanned virtually all sectors of technology, with chipmakers, storage vendors and telecom giants confidently and consistently throwing billions of dollars at deals in an effort to secure new growth. (Even a reluctant shopper like Microsoft got into the act.) It was like dealmakers had finally – and indelibly – moved past the Great Recession.

Then came the June swoon. Spending on tech deals in the final month of the quarter plummeted nearly two-thirds from the totals for both April and May. The value of transactions announced in June is running at just $9.6bn, the lowest level since February 2010. Of the 10 largest transactions announced in the past three months, only one came in June.

The dramatic decline in June derailed the recovery in the M&A market, leaving the spending totals in the just-completed second quarter below both the year-ago quarter and the first quarter of 2011. We’ll have a full report on second-quarter M&A activity – and what we expect for the remainder of the year – in tonight’s Daily 451 and 451 TechDealmaker sendouts.

2011 activity, month by month

Period Deal volume Deal value
June 2011 297 $9.6bn
May 2011 316 $26.5bn
April 2011 287 $26.5bn
March 2011 300 $63.7bn
February 2011 285 $10.3bn
January 2011 323 $11.7bn

Source: The 451 M&A KnowledgeBase

Bolting onto the PE platform

Brenon Daly

Contact: Brenon Daly

One of the knock-on effects of private equity (PE) spending hitting its highest level in three years in 2010 has been the emergence of bolt-on deals in 2011. Consider the recent M&A activity at Emailvision, an SMB-focused email marketing vendor. The company had been listed on the Euronext, although, candidly, European investors didn’t really appreciate Emailvision’s SaaS delivery model. So rather than stick around as an unloved public company, the firm sold a nearly 70% stake last summer to PE shop Francisco Partners. The transaction valued the overall company at around $109m.

Fast-forward less than a year since selling a majority stake, and Emailvision has already done one small deal as well as a more recent acquisition that it could have never pulled off without the deep pockets of its PE patron. Earlier this month, Emailvision closed its $40m pickup of smartFOCUS, which had been listed on the London Stock Exchange. The transaction added more than $20m to Emailvision’s revenue, which we understand should hit about $110m this year. (That would be nearly twice the level it was before it went private, with M&A boosting an already healthy 40% organic growth rate.) And the vendor may not be done buying. We gather that Emailvision may well announce another deal before the end of the year.

Intermedia ‘acq-hires’ Zlago

Ben Kolada

Contact: Ben Kolada

Less than three weeks after its own sale to private equity firm Oak Hill Capital Partners, mass-market hosting provider Intermedia has already inked its first acquisition, picking up complementary vendor Zlago. From our view, this deal looks like more of an ‘acq-hire’ than the typical bolt-on purchase that PE-backed hosting providers are known for. Overall, talent acquisitions are rare in the hosting industry, but this transaction is particularly notable given Zlago CEO’s past, and the impact he could have on Intermedia’s future M&A.

Talent certainly seems to be the primary driver for this deal. Indeed, Intermedia goes so far as to highlight Zlago’s ‘cloud expertise’ in the press release announcing the move. But while talent acquisitions throughout tech M&A tend to involve engineers, we wouldn’t be surprised if the talent that Zlago provides is more M&A-focused. Zlago CEO Michael Gold, who joins Intermedia as president, was previously CEO of cloud services vendor Sphera, which he led through to its sale to Parallels in September 2007. We expect that Intermedia and Oak Hill Capital will draw on Gold’s previous M&A experience to target higher-end cloud providers as it looks to grow through M&A.

We’ve noticed that PE firms tend to refocus their mass-market hosting companies on more specialized, higher-end cloud services. This strategy most recently generated champagne-popping returns for Nazca Capital, which maneuvered acens Technologies through its four-year ownership to higher-end cloud hosting services. That deal played out particularly well for Nazca, since we gather that acens’ sale to Telefónica provided the Spanish buyout shop with a greater than 100% return on committed capital. We’ll have a full report on the Zlago purchase in tomorrow’s Daily 451.

A little leads to a lot as Citi buys Ness

Brenon Daly

Contact: Brenon Daly

More than three years after buying a small stake in Ness Technologies from a fellow buyout shop, Citi Venture Capital International (CVCI) has offered some $307m in cash for all of the IT services vendor. The private equity arm of Citigroup initially picked up a 9.6% stake in Ness in early 2008 from Warburg Pincus, which funded the Israeli firm in 1999. Ness put some of that money to work in M&A, acquiring a dozen (mostly small) companies over the past decade.

Ness had been out of the market for the past year, however, as it was put in play by an unsolicited bid. (Jefferies & Company advised Ness on the sales process, along with the company’s longtime adviser Bank of America Merrill Lynch. Merrill was co-underwriter on Ness’ 2004 IPO.) We understand that Ness had attracted a fair amount of interest over two rounds of bidding, including a look from Vector Capital. CVCI’s offer of $7.75 per share represents the highest price for Ness stock since October 2008. (Interestingly, terms include a ‘no shop’ provision and a breakup fee of $8.35m, or a standard 2.7% of deal value.) CVCI expects to close the transaction within a half-year.