LifeLock buys an insurance policy

Brenon Daly

Contact: Brenon Daly

In its first-ever acquisition, LifeLock bought itself a bit of an insurance policy. The identity theft prevention player recently raised a big slug of money and handed it over for ID Analytics, an acquisition that we suspect was partly motivated by LifeLock’s plan to go public soon. How do we figure that?

On its own, LifeLock has built a powerful business since its founding in 2005. With more than two million registered users, the company recorded revenue of about $190m in 2011. LifeLock is known for its unapologetically brash marketing, including the full-page newspaper advertisements in which the company’s CEO tauntingly gives out his real social security number to any would-be identity thieves. (In the past, some of the company’s claims have landed LifeLock in hot water with regulators and consumer advocacy groups.)

Indeed, many critics have blasted LifeLock as little more than a marketing machine, one that chews through tens of millions of dollars each year to keep its consumer brand growing. With the acquisition of ID Analytics, however, some of that criticism has been knocked down. For starters, the purchase gets LifeLock into the enterprise business for the first time. (ID Analytics, which was founded 10 years ago, has 280 enterprise clients and will continue to operate as a stand-alone subsidiary following the acquisition.)

But perhaps more important than buying its way into a new market is the fact that LifeLock shored up some serious IP around identity risk management, compliance and credit analytics. Indeed, ID Analytics had been a key data provider to LifeLock since 2009. LifeLock likely paid roughly $150m (plus a bit of equity) for ID Analytics, which we understand was generating about $30m in sales. But that may be a small price for LifeLock to pay for being taken more seriously on Wall Street, if it does indeed go public.

A popping tech IPO market

Brenon Daly

Contact: Brenon Daly

If the overwhelmingly bullish equity market didn’t do much for M&A in the first months of 2012, it certainly gave a big boost to the companies looking to go public. Investors have handed out double-digit valuations to a number of IPO candidates so far this year, pushing several new offerings above the magical threshold of $1bn in market capitalization. That has sparked a rethink about exits by startups and their backers, who had been banking almost exclusively during the recession on selling their companies. (Overall, as we recently noted, spending on tech M&A in Q1 dropped to its lowest quarterly level in two years.)

A quick look at the list of Q1 offerings arguably shows a healthier period for tech IPOs than at any point in the past decade: Guidewire Software, which went public in January, has doubled since its debut and currently trades at a $1.5bn market value. ExactTarget has created even more market value since its March offering, which gave the company the largest capitalization of any SaaS company on its debut. Millennial Media nearly doubled during its March debut, valuing the mobile ad platform vendor at nearly $2bn. In late February, Bazaarvoice went public above its expected range and has risen steadily since then. The social commerce firm commands a valuation of $1.1bn, roughly 10 times the sales it recorded in 2011. Demandware trades at an even steeper multiple: Its $800m market cap works out to an eye-popping 14 times last year’s sales.

And, if anything, the current quarter should build on the momentum established by the IPO market at the start of the year. All investor eyes are looking ahead to the seminal offering from Facebook, which is reportedly set to take place next month. The social networking site, which filed its prospectus on February 1, is likely to start its life as a public company valued at about $100bn. That’s an astounding valuation for a company that earned $1bn on sales of $3.7bn in 2011.

While Facebook is pretty much a once-in-a-generation IPO, the buzz it generates will undoubtedly spread beyond the specific offering and even the consumer Internet sector. That will likely help entice more IPO candidates to put in their paperwork, as well as boost the fortunes of those that do make it to market.

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

M&A spending slump to start 2012

Brenon Daly

Contact: Brenon Daly

With Q1 set to wrap on Friday, M&A spending is on track for its lowest quarterly level in two years. The aggregate value of all tech transactions announced around the globe in the first three months of 2012 slipped to just $31bn, lower than both the previous quarter (Q4 2011) and the same quarter last year (Q1 2011).

The declining M&A activity comes as the overall economic environment has improved dramatically from 2011. For instance, there haven’t been emergency bailouts or historic downgrades of sovereign debt so far this year. Even Europe, which was the epicenter for much of the recent economic woes, is back growing again after actually contracting in the fourth quarter.

Reflecting that renewed optimism, the Nasdaq index has poked above 3,000 for first time since late 2000. During the quarter, the index recorded an almost uninterrupted ascent, gaining an astounding 19% since the start of the year. On top of the ever-increasing share price, most tech companies are continuing to stuff cash into their treasuries at a record rate.

So there are plenty of resources – in the form of both market confidence and acquisition currency – to do transactions. And yet few companies are shopping, at least not for significant purchases. In Q1, we recorded just eight transactions valued at $1bn or more – compared with an average of 12 big-ticket deals announced in each quarter last year.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2012 882 $31bn
Q4 2011 874 $38bn
Q3 2011 955 $63bn
Q2 2011 952 $71bn
Q1 2011 914 $47bn

Source: The 451 M&A KnowledgeBase

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

Millennial Media doubles on debut

Ben Kolada

Contact: Ben Kolada

Taking advantage of the emerging market for mobile advertising, platform vendor Millennial Media leapt onto the public stage Thursday, creating nearly $2bn in market value in its debut on the New York Stock Exchange. The company priced its 10.2 million shares at $13 each – the high end of its proposed range. Shares traded at about twice that level in early afternoon. Millennial Media is trading under the symbol MM. Morgan Stanley, Goldman Sachs and Barclays led the offering, while Allen & Company and Stifel Nicolaus Weisel served as co-managers.

Millennial Media, which has nearly 75 million shares outstanding, currently garners a market cap of $1.9bn. That values the company at 18 times trailing sales, in the ballpark of where we estimate Quattro Wireless was valued in its sale to Apple, but about half the valuation we believe AdMob received from Google. Those two companies are Millennial’s primary rivals, although Millennial stakes its claim as the largest independent mobile ad platform provider.

Interest in advertising technology has been building throughout both the equity and M&A markets. Earlier this month, for instance, telco SingTel announced that it was acquiring Amobee for $321m. (We estimate the startup, which provides mobile ad campaign management software, garnered roughly 9x trailing sales in its purchase by the Singapore telco giant.) Meanwhile, the Adtech pipeline is far from dry, even after a recent slew of big-ticket exits. Earlier this month, advertising intelligence firm Exponential Interactive filed its paperwork to go public. The company, which plans to trade under the symbol EXPN, increased revenue 35% last year to $169m.

Acquisitions drive EnerNOC

Contact: Brenon Daly, Thejeswi Venkatesh

EnerNOC and Comverge both went public in 2007, barely a month apart from each other. Since then, however, the paths of the two energy demand response vendors have diverged dramatically. EnerNOC’s revenue has more than quadrupled from $61m in 2007 to $287m in 2011. Meanwhile, Comverge has plodded along, growing at less than half the rate of its rival. But the real problem with the company wasn’t its top line, but rather its liquidity position: Comverge was on the verge of breaching its debt covenants.

It was that shaky financial position that helped to push Comverge into a capitulation sale to H.I.G. Capital earlier this week. The buyout firm is paying just $49m, or $1.75 for each share. (That basically equals the trading price for Comverge over the past week but is a far cry from when the stock changed hands above $30 back in 2007.) H.I.G.’s offer values Comverge at a measly 0.4 times trailing sales. That’s about half the valuation that EnerNOC currently garners, and that’s after shares of the company have lost nearly two-thirds of their value over the past year or so.

So how did the rival firms end up in such different places after starting from a similar spot? Part of the answer may have to do with the M&A activity from each of the players. EnerNOC has spent more than $60m on four acquisitions over the past three years, while Comverge shied away from rolling the dice on M&A.

Select EnerNOC deals

Date Announced Target Deal value Focus
July 6, 2011 Energy Response $30.1m Demand-side response aggregation
January 26, 2011 M2M Communications $28.6m Wireless sensors for remote monitoring
March 24, 2010 SmallFoot $1.4m Demand control software

Source: The 451 M&A KnowledgeBase

Monitise pays out now for payoff later

Ben Kolada

Contact: Ben Kolada

Mobile banking and payments vendor Monitise made a big bet on Monday when it moved to consolidate its industry with the acquisition of startup Clairmail. At first glance, the deal should have set off alarms among Monitise’s investors. The all-stock transaction will significantly dilute Monitise’s shareholders, leaving them owning three-quarters of the combined company. However, its investors remained calm – Monitise’s share price closed down only 2%. Why? Although the deal is richly valued and dilutes Monitise’s shareholders, those same investors are all but assured of their own rich payoff eventually.

Another explanation for the muted shareholder response is that the transaction only seems overvalued on the surface. It is actually fairly valued by several metrics. Monitise’s £109m ($173m) offer values Clairmail at 9.3 times trailing sales, a smidgen below its own current 10x enterprise value (Monitise held $68m in net cash at the end of 2011, while Clairmail had $5m). Further, Monitise is also obtaining more valuable customers. Clairmail had 48 banking customers generating a total of $18m in revenue last year, or about $375,000 per customer. Monitise, meanwhile, had more than 250 customers, each of which generated an average of less than $150,000 in annual revenue. And because of Clairmail’s growth rate (its revenue jumped 90% in 2011), its price-to-projected-sales valuation is certain to be much lower. Further placating investors, Monitise is forecasting continued heady growth. The combined company, which would have generated $56m in revenue in 2011 on a pro forma basis, is projecting 2012 total revenue close to $100m.

There’s certainly no reason for alarm among the acquirer’s investors, considering valuations across the mobile payments industry are already high and the potential for Monitise itself to one day find a fruitful takeover offer. In July, eBay announced that it was buying Zong for $240m. And in June, Visa announced that it was buying Fundamo for $110m, or about 11x estimated trailing sales. The latter deal is of particular note, given the growing relationship between Visa and Monitise. Following the Fundamo buy, will Visa make a larger play in mobile payments, perhaps by acquiring Monitise? The two companies are already partners – Visa Europe made a $38m investment in Monitise in October, the two companies equally share a joint venture in India and Visa Europe president and CEO Peter Ayliffe sits on Monitise’s board. And as of February 28, Visa and Visa Europe combined owned 21% of Monitise’s equity.

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

NEC converges on business support systems

Contact: Thejeswi Venkatesh

Close on the heels of its announced restructuring, NEC has inked the biggest acquisition in its history. Taking advantage of a strong yen, the Japanese tech giant said last week that it will acquire Convergys’ information management division for $449m. In some ways, the dramatic overhaul at NEC was overdue. But that does not mean the nearly half-billion-dollar bet is certain to pay off.

The company is rolling the dice on M&A as its core business continues to shrink. In recent years, revenue at NEC has dropped about one-third, sliding from ¥4,652bn($41.4bn) in 2007 to ¥3,100bn($40.1bn) in 2011. When the company announced a drastic restructuring in January, it indicated that it would refocus on the IT services, carrier network and social infrastructure sectors. While the latest acquisition bolsters NEC’s IT services division, it is picking up a business that hasn’t done too well under its previous ownership.

According to public filings, sales at Convergys’ information management business unit slid from $723m in 2007 to $329m in 2011. The decline came even as Convergys spent more than $80m over the past three years trying to resurrect the division. All of this underlines the difficulties that NEC, which has precious little experience with acquisition and integration, faces in getting a return on its purchase of Convergys’ castoff business.

On Assignment pays up to bolster IT staffing practice

Contact: Brian Satterfield

In a move designed to bolster its presence in the IT staffing sector, hybrid staffing services provider On Assignment made the largest-ever acquisition in the sector earlier this week when it purchased Apex Systems for $600m in cash and stock. The transaction was also one of the largest credits ever for Wells Fargo Securities, which advised Apex on the sale. Meanwhile Moelis & Company, which got its second $500m-plus print in as many days, worked the buy side of the deal.

Richmond, Virginia-based Apex was an attractive acquisition target for On Assignment both for its growing revenue as well as its sheer size in taking on the larger players in the sector that also handle both traditional and IT staffing duties. Apex, which posted a record $705m in revenue in 2011, more than doubles On Assignment’s total revenue to $1.3bn. (On its own, On Assignment wasn’t expecting to top $1bn in sales until 2015.) Apex had a compound annual revenue growth rate of 30% over the past 12 years and has recovered well from the recession, nearly doubling its own revenue since 2009.

On Assignment claims that the transaction makes it the second-largest IT staffing firm in the US, helping the company to keep its technology practice competitive with some of its much bigger rivals. One such competitor, Adecco, brought in $2.2bn from its IT division alone in 2011, about eight times more than On Assignment’s IT staffing business generated. Apex’s revenue more than triples On Assignment’s IT revenue and helps narrow what had once been a huge gulf between the two rivals. And the company didn’t blow the bank to get the bulk: On Assignment paid 0.9 times trailing sales for Apex, or roughly the same multiple it shelled out when it made its only other M&A move, 2007’s purchase of Oxford Global Resources.

A pivot that pays off for ExactTarget

Brenon Daly

Contact: Brenon Daly

In the startup world, there are more pivots than in an NBA game. But often lost in this flurry of activity is that – at some point – changing the direction of the business needs to produce some actual value. (Otherwise, the pivoting just becomes pirouetting, as one of our VC friends recently quipped.) One of the most successful pivots we’ve seen recently came to light on Thursday, with the IPO of ExactTarget.

The online marketing vendor stormed onto the NYSE with a debut valuation of more than $1bn, and then surged from there. (The offering – led by J.P. Morgan Securities, Deutsche Bank Securities and Stifel Nicolaus Weisel – priced at an above-range $19 per share and then traded above $24 in early-afternoon session.) Followers of the IPO market will know that this was actually ExactTarget’s second run at an offering. It had been on file in 2008, before pulling the paperwork in mid-2009.

At roughly the same time that it took itself off the IPO track, ExactTarget dramatically changed its business. It went from selling a single product (email marketing) to a single slice of the market (SMB) to a full cross-channel marketing vendor serving companies of all sizes. The pivot had immediate consequences on its P&L sheet: ExactTarget went from running solidly in the black when it was on file four years ago to running deeply in the red now.

However, it’s a move that has paid off. Counter to the typical pattern, the growth rate at ExactTarget has actually accelerated as the company has gotten bigger. As it consciously increased its spending (particularly around sales and marketing), ExactTarget has taken its annual growth rate from 32% in 2009 to 41% in 2010 and then pushed that to 55% last year. And this is not some rinky-dink business. ExactTarget recorded $208m in sales in 2011. Another way to look at its growth: the $60m in revenue that ExactTarget did in Q4 2011 is more than it did in the full year when it was previously on file (2007 revenue was $48m).

With the benefit of hindsight, it’s probably a good thing that ExactTarget didn’t go public when it had initially hoped to. Three years ago, it was a sub-$100m revenue company, putting up a decent, but hardly spectacular, growth rate. Sure, it could have expanded the business as a public company, but the moves would have been far riskier and (almost certainly) slower because of the myopic scrutiny of Wall Street.

Instead, ExactTarget had the freedom behind closed doors to reposition its business to accelerate. The series of investments it chose to make have almost certainly meant the creation of several hundred million dollars of additional market value. In fact, on just a back-of-the-envelope calculation, ExactTarget’s debut has created more value than any other IPO of an on-demand vendor that we can think of. The company has some 66 million shares outstanding (or closer to 74 million fully distributed), so at a price of $19 each, ExactTarget was worth an astounding $1.25bn (or closer to $1.4bn fully distributed) before it even hit the aftermarket. In comparison, salesforce.com priced at a valuation of about $1.1bn in its 2004 IPO, based on the prospectus share count.

IT distributors take reverse logistics in-house via M&A

Contact: Brian Satterfield

In order to reduce their reliance on third-party providers of equipment refurbishing, recycling and disposal, some of the world’s largest IT product distributors have been turning to M&A to strengthen their own end-of-lifecycle capabilities.

In the past three years, product distributors have represented the buyers in nearly one-third of the transactions in the IT equipment and disposal sector. In the past few months alone, we’ve seen an uptick in this trend, with five deals since last December in what is usually a rather quiet area of tech M&A. In late February, Arrow Electronics purchased IT disposal and recycling firm Asset Recovery Corp, a little more than one month after acquiring a similar Austin, Texas-based company called TechTurn. In both cases, Arrow noted its need to bolster its capabilities in areas that are complementary to its primary business model.

Avnet, the world’s largest IT products distributor, also got in on the action with two recent lifecycle management-related acquisitions. On the final day of January, Avnet bought Platinum Equity-owned Canvas Systems, which has a strong refurbishing side business in addition to its primary distribution activities. And in mid-December, Avnet reached for ROUND2, a pure-play IT asset disposition company.

Still, not all well-known tech distributors have dipped their toes into M&A in the sector. Ingram Micro and SYNNEX, for example, have both been absent from the activity despite making relatively frequent buys into other sectors. One IT asset recovery company that has attracted some attention from big vendors in the past is Apto Solutions, an 11-year-old firm based in Atlanta.