NetScout pleases investors, telco customers

Ben Kolada

Contact: Ben Kolada

NetScout Systems on Thursday found itself in the fortunate position of pleasing both investors and customers. The company reassured its investors by announcing better-than-expected revenue in its FY 2013 first quarter, and in a separate announcement, also reassured its telco customers with the tuck-in acquisition of certain of Accanto Systems’ service assurance assets.

On the financial front, NetScout reported that revenue came in at the high end of its previously reported guidance. The company generated $76.4m in its FY 2013 first quarter, a 21% increase over the year-ago period and above the $74.7m that analysts had been expecting on average. Net income for the quarter grew 109%, to $5m. Shares of NetScout were up 12% in midday trading.

Somewhat overshadowed by NetScout’s earnings call was the small tuck-in acquisition of certain of Accanto’s service assurance assets. Accanto provides service assurance products that enable telcos to monitor and manage the delivery of voice services over converged telecom networks. NetScout is purchasing Helsinki-headquartered Accanto’s Pantera hardware probes and middleware and session analysis applications assets, which are based in Modena, Italy.

Although the acquisition announcement was secondary to the earnings release, the deal is still welcome news to NetScout’s telco customers. NetScout claims that the intent of the deal is to extend its own nGenius Service Assurance product’s control plane and data plane monitoring capabilities. NetScout said in the press release announcing the transaction that Accanto’s assets will bolster nGenius Service Assurance’s support for NGN voice services, including IP multimedia subsystems, and add incremental support for legacy circuit-switched voice, including SIGTRAN and SS7.

The acquisition, which includes the assumption of approximately 35 Accanto employees, is expected to be EPS-neutral. Mooreland Partners advised Accanto on the sale, which is expected to close this month.

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VHS-era Autodesk stretches in acquisition of mobile video startup Socialcam

Brenon Daly

Contact: Brenon Daly

Autodesk is no Facebook, but the latest deal by the 30-year-old, battle-worn enterprise software vendor looked like it came from the M&A playbook of one of the new generation of tech buyers. In one of the oddest pairings of new and old, Autodesk, which belongs squarely in the VHS era, said it would hand over $60m for one-year-old Socialcam, a mobile video-sharing service that’s sort of an Instagram for videos. Even though the financial impact is muted (Autodesk has $1.5bn – enough to cover an Instagram and a half – in its treasury), the purchase of Socialcam is a huge stretch for the company.

For starters, there’s no clear way for Autodesk, which sells products primarily to engineers, to make money from consumer-focused Socialcam. While Autodesk touts the fact that Socialcam has been downloaded 16 million times, that doesn’t get Autodesk any closer to the $600m in revenue it has to put up every quarter. (Meanwhile, the deal will lower Autodesk’s earnings for the rest of the year, at least on a GAAP basis.) It’s EPS – rather than eyeballs – that’s the relevant financial metric for Autodesk.

Of course, it’s understandable that the explosive growth of Socialcam and other consumer-oriented companies looks tantalizing to Autodesk and other tech giants posting single-digit-percentage revenue increases. However, that M&A enthusiasm needs to be tempered by the fact that getting a return on an acquisition that doesn’t really fit into the existing business model can prove challenging. That’s particularly true with a company like Autodesk that can’t monetize the acquisition by just throwing a bunch of advertisements against the audience that an app like Socialcam has collected. Like we said, Autodesk is no Facebook.

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Mayer leaves M&A-happy Google for M&A-shy Yahoo

Brenon Daly

Contact: Brenon Daly

Well, we have to assume that Marissa Mayer knew what she was doing Monday when she abruptly jumped from Google to take the top job at Yahoo. But one thing we figure she won’t be doing at her new job (at least not right away) is deals. Beyond simply the typical ‘M&A freeze’ that comes with a new boss setting new strategies and processes, Google and Yahoo represent polar opposites when it comes to acquisitions.

Yahoo, which is struggling to find its direction, has been out of the M&A market since last November, when it dropped $270m in cash on interclick. That’s eight months without an acquisition at the onetime Internet search kingpin. When it was healthier, Yahoo would typically do a half-dozen deals or so each year.

During that same eight-month span, Mayer’s now-former employer, Google, announced 11 transactions. And it isn’t just the rapid-fire pace of a deal every three weeks that’s remarkable. It’s also the far-flung variety of the transactions. Since last November, Google has done acquisitions around mobile technology, social networking, online advertising, Web application development and other areas.

And if Mayer needed any more reason to be cautious with M&A when she steps into the corner office at Yahoo, we might recall what happened the last time a high-profile CEO who was brought in to rescue a tech stalwart did a make-or-break acquisition. In many ways, Hewlett-Packard still hasn’t recovered since Leo Apotheker’s $11bn gamble on Autonomy Corp a little more than a year ago. All the more reason we don’t expect Yahoo to be doing big deals anytime soon.

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Gigamon eyes IPO even as a market stalls

Brenon Daly

Contact: Brenon Daly

Despite the crosscurrents in the IPO market, Gigamon has put in its paperwork for a planned $100m offering. The network traffic management vendor runs solidly in the black and has been increasing revenue at about a 50% clip in recent years. It finished 2011 with revenue of $68m and, assuming its growth rate continues, will wrap this year at roughly $100m. (Most of the revenue – between two-thirds and three-quarters of overall sales – comes from products, with associated services generating the remainder.)

Eight-year-old Gigamon competes with network heavyweights such as Cisco Systems and Juniper Networks, while a number of other companies have acquired technology that makes them rivals as well. Just in the past two months, Ixia paid $145m for Anue Systems while Danaher added VSS Monitoring. (Subscribers to 451 Research can see our full report on the transaction, including our estimate of the undisclosed terms.)

The proposed offering from Gigamon comes at a time when the IPO market is still struggling to find its footing: On the same day Gigamon put in its S-1, MobiTV withdrew its. And while the market should get a bit hotter this week with the expected debut of Palo Alto Networks, many investors are still underwater on their Facebook shares. The IPO of the fast-growing social networking firm was supposed to serve as a catalyst for the market, but instead deteriorated into a mishandled offering that has sparked lawsuits and losses.

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To remain relevant, Neopost acquires GMC Software

Contact: Thejeswi Venkatesh, Ben Kolada

In an attempt to remain relevant in the 21st century and beyond, French mailing and shipping systems provider Neopost announced on Thursday that it is acquiring its Swiss partner, GMC Software Technology. GMC provides customer communications management software that enables businesses to design and publish print and online marketing content as well as create and manage customer surveys.

By now, everyone knows that physical mail is a thing of the past. Consumers across the globe have turned to email and other digital communication methods. Unless Neopost modernizes its product line, it risks becoming obsolete. The GMC pickup is an attempt to remain relevant in a digital world. Right now, four of the five products Neopost lists on its website are postage meters, folder inserters, addressing systems and letter-opening systems. Not exactly futuristic products.

GMC’s software helps combine data from different databases to create customized communications for each customer in a dynamic manner. The software also helps measure and track customer responses to improve future communications. The Swiss company, which has had particular success in the banking and insurance verticals, generated revenue of about $45m last year (based on year-end exchange rates). The headcount-heavy firm employed 300, including 130 engineers.

Neopost hasn’t yet disclosed the price it is paying for GMC, but in the conference call discussing the transaction the company said it paid about 2 times revenue, and noted that the deal also includes a significant earnout based on aggressive revenue goals.

Healthy M&A activity in medical speech recognition and transcription

Ben Kolada

Contact: Ben Kolada

There’s seemingly been a burst in deal volume in the niche medical-focused speech recognition and transcription market lately. On Thursday, iMedX announced the acquisition of Electronic Medical Transcription Services (eMTS), capping off a growing line of acquisitions in this sector. Driving deal flow, among other things, is healthcare professionals’ increasing use of transcription and voice recognition systems and various legislation being passed that provides incentives for digital clinical documentation.

One such bill is the Health Information Technology for Economic and Clinical Health Act, also known as the HITECH Act, which became law in 2009. HITECH provides incentives for healthcare providers to use electronic health records, which store clinical data in a digital format.

Although the eMTS buy is likely quite small in the grand scheme of things, there is big M&A money being poured into medical speech recognition and transcription deals.

Earlier this month, One Equity Partners bet its money on this market when it announced that it was taking M*Modal private for $840m, or $1.1bn when including $260m of net debt. That transaction was announced almost exactly a year after M*Modal was acquired by rival MedQuist, which assumed the target’s name.

We’ve previously written that Nuance Communications, with its Nuance Healthcare unit, has been a major consolidator in this sector. In March, Nuance announced that it was paying $313m for medical-focused rival Transcend Services – its largest purchase since its last significant medical acquisition in April 2008, when it paid $363m for eScription. Nuance’s Healthcare division generated $583m in trailing sales as of March 31.

Recent select M&A in medical transcription and speech recognition

Date announced Acquirer Target Deal value
July 2, 2012 One Equity Partners M*Modal $840m
March 7, 2012 Nuance Communications Transcend Services $313.5m
August 15, 2011 Nuance Communications Loquendo $75m
July 14, 2011 Nuance Communications Webmedx Not disclosed
July 11, 2011 MedQuist M*Modal $130m

Source: The 451 M&A KnowledgeBase

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Avnet adds to Q3 M&A jump with three acquisitions

Contact: Brian Satterfield

Technology M&A deal volume in the beginning of the third quarter is far outpacing the year-ago period, with particular help coming from IT distribution giant Avnet Technology Solutions. The Phoenix-based firm has already announced three acquisitions this quarter. (Overall, Q3 volume through July 10 hit 119 deals worth $9.8bn, versus just 71 deals worth $6.7bn in the year-ago period.)

Continuing with an M&A strategy that it has employed frequently in the past, Avnet further extended its global IT distribution footprint last week by purchasing three foreign competitors.

The first couple of acquisitions Avnet announced – German IT distributors Magirus and Altron – bolstered the company’s European presence. Magirus and Altron give Avnet access to more than 6,500 customers in the region and mark the company’s third and fourth buys in Germany. After taking a brief break for the US’s Independence Day, Avnet returned to its international dealings last Thursday, reaching into Japan for 40-year-old semiconductor distributor Internix. Internix generated $260m in trailing revenue, making it one of the largest targets Avnet has ever acquired.

Inorganic international expansion is fairly typical among large IT distributors. Nearly all (80%) of the 26 IT distribution firms Avnet has acquired over the past decade have been headquartered overseas. Competitor Ingram Micro has also employed this approach in 11 of its 13 distribution acquisitions. However, we’d note that international expansion isn’t the only game being played. Ingram Micro’s biggest deal, which also came last week, wasn’t made in the interest of moving into new geographies. Ingram Micro announced on July 2 the priciest acquisition in the distribution sector in nearly four years when it paid $650m for Indianapolis-based BrightPoint in order to strengthen its mobile device offerings.

KANA Software sharpening M&A blade, acquires Ciboodle

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Contact: Thejeswi Venkatesh, Ben Kolada

Since being taken private by Accel-KKR in early 2010, KANA Software has revved its M&A engine. On Tuesday, KANA announced its fourth acquisition since its take-private, picking up call-center software veteran Ciboodle from Sword Group to bolster its agent desktop, business process management and social CRM capabilities. The Ciboodle buy is KANA’s latest deal as it inorganically moves to become a more robust platform for customer-centric support processes across channels and devices.

KANA’s acquisitions have focused on adding social capabilities to its platform and better serving the SMB market. In April 2011, the company bought social media monitoring company Overtone. KANA then integrated the target’s social analytics and infused key areas of its core platform with its own social CRM capabilities, resulting in a simple-to-use tool for support agents to identify issues or receive service requests via popular social networks. Last April, in an attempt to better serve the midmarket, KANA added more cloud clout by reaching for Trinicom. Arma Partners, which advised KANA on its acquisition of Lagan Technologies in October 2010, advised the company again on the Ciboodle purchase. We’ll have a longer report on KANA’s Ciboodle buy in tonight’s Daily 451.

KANA M&A since its take-private by Accel-KKR

Date announced Target Target abstract
July 10, 2012 Ciboodle Call-center software provider
April 24, 2012 Trinicom Customer service automation SaaS
April 5, 2011 Overtone Social media monitoring SaaS
October 6, 2010 Lagan Technologies Call-center software provider

Source: The 451 M&A KnowledgeBase

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A tale of two IPO markets as Palo Alto Networks and Kayak hit the road

Brenon Daly

Contact: Brenon Daly

To understand the relative health of consumer and enterprise IPOs in the aftermath of the Facebook offering, consider the rather stark contrast between KAYAK.com and Palo Alto Networks. Both technology vendors set terms for next week’s debuts on Monday, but only enterprise-focused Palo Alto can expect to run with the bulls.

For starters, take a look at the gestation period for each of the offerings. Palo Alto set its range in only its third amendment to its S-1, which it filed just three months ago. (For the record, Palo Alto plans to sell 6.2 million shares at $34-37 each). In contrast, KAYAK’s paperwork has a lot of dust on it. The online travel site originally filed in November 2010 and set its range in its 12th update to its S-1. (For its part, KAYAK intends to sell 3.5 million shares at $22-25 each.)

But the contrast will come out even more sharply in terms of valuation. Although the companies are roughly the same size (Palo Alto did $220m in trailing 12-month (TTM) revenue, compared with $245m in TTM revenue for KAYAK), Palo Alto is more than doubling sales each quarter while KAYAK is posting growth in the mid-30% range.

Wall Street always awards fast-growing companies a premium, but the gap between these two offerings is substantial. Assuming both Palo Alto and KAYAK come to market at the high end of their expected price ranges, the security vendor will begin life with a market cap of about $2.5bn while the online travel site will start life as a public company at a valuation of roughly $1bn. That means Palo Alto will be valued at more than 11 times TTM sales, while KAYAK will garner just 4x TTM sales.

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Cypress squeezes a bit hard in its bear hug

Contact:  Thejeswi Venkatesh, Ben Kolada

Having increased its offer to buy rival Ramtron International once already, Cypress Semiconductor may have to get ready to do so again. Ramtron’s board unanimously rejected Cypress’s latest bid of $2.68 per share, claiming the deal undervalued the company. Investors continue to agree with Ramtron. Shares of the Colorado Springs, Colorado-based company have consistently traded above Cypress’s unsolicited offer, closing at $3.08 Thursday. That’s about 15% higher than the raised bid.

Cypress’s new offer values Ramtron at 1.4 times trailing sales, only a smidgen above the 1.3 times valuation Ramtron received in Cypress’ initial bid. In comparison, Cypress’s revised offer is also far below its own valuation of about 2.2x trailing revenue.

If Cypress doesn’t come up with a topping bid, it risks losing Ramtron to a competitor. There are already other obvious suitors – most notably STMicroelectronics and Atmel – that have shown both the ability and willingness to make sizable acquisitions. STM ended the March quarter with $1.9bn in cash on its balance sheet while Atmel ended it with $299m. In February 2008, Atmel bought microcontroller designer Quantum Research Group for $88m while STM’s biggest deal to date was its purchase in April 2008 of NXP Semiconductors’ wireless semiconductor business for $1.5bn.