Tech M&A slumps to a start in 2011

Brenon Daly

Contact: Brenon Daly

January saw more tech deals than any single month of 2010, but M&A spending shows no sign of shaking off the slump it has been in for the past few months. The muted spending in the just-completed month marks the fifth straight month that the aggregate value for deals announced has come in only slightly above half of the monthly totals from last summer. And January is the lowest of the recent months.

We tallied some 308 deals in January, worth a total of just $11bn. That’s only slightly below the roughly $12bn monthly rate we’ve seen since last September, but it’s a far cry from the activity we recorded in the second quarter, where all Q2 months (April-June) topped $20bn in spending. (In terms of number of monthly transactions, deal volume ranged from basically 250-290 in 2010.)

In addition to the lower total value of deals, another troubling sign in January was the fact that spending was highly concentrated. The two largest transactions last month (Qualcomm’s purchase of Atheros Communications and Verizon’s acquisition of Terremark Worldwide) accounted for nearly half of all spending on deals announced in January. The 45% mark is higher than all but one of the previous four months, and notably above the 36% average for the September-December period.

Facebook dives into mobile

Contact: Jarrett Streebin

In its eighth acquisition in the last six months, Facebook picked up Seattle-based rel8tion. The startup is only nine months old and still in stealth mode, but it appears to be focused on targeted mobile advertising using location and demographics – data that Facebook has tons of. With 200 million active mobile users globally, and demographics and location on them all, the social media giant is ripe for an ad network of its own.

Facebook already has two location features rolled out, Deals and Places. In addition, it has existing infrastructure with carrier partnerships and mobile apps, including a recently launched app for feature phones that drastically expands its market. These features along with the amount of demographic data that Facebook has on its users could make for a very profitable ad network.

In the next year, we’ll likely see Facebook mobile ads roll out in full. This will provide stiff competition to those in the local deal space, such as Groupon and others. Facebook will also compete with display ad networks that advertise based on search and user check-in, such as Google Offers-AdMob, Where Inc, xAD and other hyper-local advertisers. With Facebook already owning a massive chunk of mobile users’ bandwidth, it appears likely to own a large chunk of the mobile ad and deals space, as well.

Verizon pays sky-high price for cloud provider Terremark

Ben Kolada

Contact: Ben Kolada

In a move to accelerate its cloud services, Verizon has announced that it is acquiring cloud and colocation provider Terremark for $1.4bn. As the largest pairing between a telco and a colocation provider, the deal is not only a landmark transaction for the telecommunications industry, but also a significant shift from the growing trend of telcos buying their way into the hosting and colocation sectors by acquiring pure colocation providers.

Verizon is paying $19 per share in cash, a 35% premium over Terremark’s closing price. On an equity value basis, the deal values the target at 4.4 times trailing sales and 18.6x trailing EBITDA. For comparison, the next-largest telco-colo pairing came in May 2010 when Cincinnati Bell bought pure colocation provider CyrusOne for $525m, or 9.1x trailing sales and 16.4x trailing EBITDA. Both Verizon and Terremark’s board of directors have unanimously approved the transaction, and Verizon expects to complete the deal by the end of the first quarter. Terremark’s management team will remain and will operate the company as a wholly owned but independent subsidiary of Verizon.

While earlier acquisitions in this sector were valued based on the growth potential of colocation services, Terremark garnered a higher valuation because of its cloud portfolio, as well as its international presence. During their conference call discussing the acquisition, executives from both companies highlighted the fact that Terremark’s long-term growth lies in its cloud and managed services. This segment provided half of Terremark’s total service revenue during the first six months of its fiscal 2011. Beyond cloud services, the acquisition is also a geographic fit, with Terremark providing Verizon an expanded presence in Latin America, and Verizon providing Terremark additional room to grow in both the US and Europe. As part of the integration, Terremark will assume operations for all of Verizon’s 220 datacenters. (We’ll have a full report on this deal in tonight’s Daily 451.)

After the transaction was announced, shares of competing cloud computing firms soared. While the sector calmed somewhat by midday, shares of Savvis held onto its 15% advance as Wall Street speculated that it might be the next hosting and services company to get snapped up. (Trading in Savvis was more than 10 times its daily average on Friday.) By revenue, the Chesterfield, Missouri-based firm is the largest provider of cloud and colocation services and already sports a $1.7bn market capitalization. As a result, the list of potential suitors is limited, but AT&T stands out as an obvious bidder for Savvis. Just as Savvis is the largest provider among cloud firms, AT&T is the largest provider among telcos and closed 2010 with $124bn in revenue and $1.4bn in cash in its coffers.

Trustwave surfing toward an IPO?

Brenon Daly

Contact: Brenon Daly

After two IT security companies put in their IPO paperwork last summer, we’re hearing that Trustwave is almost certain to be the first filer in 2011. The PCI-compliance vendor is currently baking off, with the selection of bankers expected to be complete next week. The actual prospectus would likely be filed around April and the offering would hit later this year, according to several sources.

If the filing goes ahead as planned, Chicago-based Trustwave would join both SafeNet and Tripwire as security providers looking to join the ranks of public security companies. (Or in the case of SafeNet, rejoin the ranks of public security companies.) Our understanding is that Trustwave finished 2010 with roughly $125m in sales, and continues to generate cash. Depending on the timing of the offering, the vendor would likely come to market with a valuation in the neighborhood of a half-billion dollars, according to our quick, back-of-the-envelope math.

Founded in 1995, Trustwave has expanded far beyond its original focus on PCI auditing and remediation, largely through M&A. It has acquired seven companies in the past three years, most of them small firms that, for the most part, were having a tough go of it on their own. Trustwave then adds the acquired technology on top of its Linux platform (TrustOS) and offers it to customers either through an on-premises product or a managed service. All in, Trustwave counts some two million customers.

Telco and colo: a marriage of necessity

Ben Kolada

Contact: Ben Kolada

Telcos and colocation providers are increasingly coming together in a marriage of necessity. Telcos’ own traditional wireline services are in a state of decline from which they will not recover. Meanwhile, colocation providers are growing rapidly, but need a footprint the size of their larger telco peers to continue such expansion. As a result, cross-sector M&A is on the rise, but we wonder if the marriages may someday end in separation.

Case in point: GTS Central Europe. The Warsaw-based communications provider recently began investing in colocation services to offset losses in its own core business. Although 2010 year-end numbers are not yet available, the company’s revenue is expected to take a slight dip, from €384.5m ($551m) recorded in 2009 to about €380m ($500m) for year-end 2010. To offset losses, GTS began looking for growth channels, and subsequently threw its weight behind datacenter services. Last year, the company announced several datacenter completions and expansions, as well as two datacenter-related acquisitions. In June, the company picked up Interware, which operates two facilities in Budapest, and earlier this week it announced that it is acquiring Prague-based single-site colocation provider SITEL Data Center. (We’ll have a full report on the SITEL purchase in tonight’s Daily 451.)

However, following the SITEL buy, GTS is now spinning off its datacenter business into a new entity named CE Colo. Financial terms of the spinoff haven’t been disclosed, but we would expect GTS to maintain some interest in CE Colo, perhaps even a controlling stake. No other telecom operators have yet followed this strategy, and it’s still too early to tell if any ever will – most of the landmark telco-colo transactions we’ve seen so far were announced just last year. But if the revenues in both sectors continue their current trajectories, spinoffs like CE Colo may someday become the norm.

Comings, goings and growings in the data-warehousing market

Brenon Daly

Contact: Brenon Daly, Matt Aslett

Over the past two and a half years, tech giants such as Microsoft, IBM and EMC have all inked major data-warehousing (DW) acquisitions, running up a collective bill of some $2.5bn. All that time, Hewlett-Packard stayed out of the shopping spree, opting to develop its own DW offering in-house. On Monday, HP conceded that those efforts haven’t generated the return that it was looking for, and indicated that it would phase out sales of its Neoview product.

HP is expected to continue its DW-related partnerships, including a recently announced accord with Microsoft to deliver four new data appliances. On its own, however, HP wasn’t able to capture much business in the fast-growing DW market, in part because the company approached it as a services play. (My colleague Matt Aslett noted some of the struggles HP was having with Neoview in a recent report, where he indicated that if HP was serious about DW it should have either reached for Netezza or made the big move for Teradata.) It couldn’t have helped Neoview, either, that it was so closely associated with former CEO Mark Hurd, who is being erased as quickly as possible from HP since his unceremonious departure last summer.

HP’s shift away from directly focusing on the DW market comes as Teradata enjoys its richest-ever valuation. (Shares of Teradata, which is the largest and most-visible DW vendor, have jumped about 60% over the past year, giving the company a $7.7bn valuation.) We’re also hearing that Teradata may be looking to do a deal of its own. Having just closed its purchase of Aprimo to get into the business application market, the buzz is that Teradata will shift its M&A focus back to its basic business, perhaps picking up additional analytics and other DW technology.

SolarWinds looks to shine in other markets

Brenon Daly

Contact: Brenon Daly

Having built a billion-dollar market cap through a cheap and easy offering for network management, SolarWinds is looking to take that approach to new markets through small acquisitions. Exactly a year ago, the company picked up Tek-Tools to add storage management to its portfolio, and now it steps fully into application performance management (APM) and virtualization management with its reach for Hyper9. SolarWinds is handing over $23m in cash for Hyper9, with terms also providing for a possible $7m earnout.

The addition of the small Austin, Texas-based startup, which had only about $2m in sales, gives SolarWinds its first stand-alone virtualization offering as well as a shoring up its APM product. (In the past, SolarWinds had a much less robust APM offering as a module to its flagship Orion product.) The moves also brings the company into more direct competition with management giants such as Hewlett-Packard, CA Technologies and Quest Software, among others.

In terms of competition, we would note with some irony that in a recent technology bakeoff that a nationwide grocery chain held for a monitoring product, Hyper9 got the nod ahead of SolarWinds, among other vendors. (See the full details in our User Deployment Report). So maybe part of the thinking at SolarWinds for the deal was if you can’t beat them, buy them

Kaspersky catches some cash

Brenon Daly

Contact: Brenon Daly

Add General Atlantic (GA) to the list of buyout firms that has picked up a stake in an information security vendor. The firm on Thursday acquired a 20% chunk of Russian antivirus software provider Kaspersky Lab for $200m, implying an overall valuation of $1bn. The deal marks the third significant investment by a private equity (PE) shop in a European anti-malware vendor in just the past six months.

GA also appears to have gotten a bargain in becoming the company’s second-largest shareholder. Kasperky’s $1bn valuation works out to about 2 times sales and 8-9x EBITDA, according to our understanding. For comparison, rival anti-malware vendor Sophos got more than 3x trailing sales when it sold a majority stake to Apax Partners last May. (And according to at least two sources, Kaspersky was targeting a valuation of ‘well north’ of $1bn when it was running the process, which took most of 2010.) The third recent antivirus deal was Summit Partners’ $100m investment in AVAST Software last August.

Everything is bigger at Big Blue

Brenon Daly

Contact: Brenon Daly

Sometimes, we forget why IBM is called Big Blue. The giant just reported $100bn in sales for 2010, making it more than twice the size of Cisco Systems and almost four times the size of Oracle. (Just on its own, IBM’s software portfolio is larger than all of Oracle, not to mention the fact that IBM’s software operations are vastly more profitable than Oracle.) IBM’s current valuation is big, too, with shares currently changing hands at their highest levels ever.

And, as we listened to the company discuss its recent financial results, we were reminded that it has a big appetite for deals. It dropped a cool $6bn on acquisitions last year, with half of that coming in just the fourth quarter. Just in the last year, IBM took two public companies off the board (Netezza, Unica), gobbled up another two companies that could have been looking for an IPO (Initiate Systems, BigFix), and was even on the buyside of an unusual $1.4bn divestiture (AT&T shedding Sterling Commerce). Of course, it’s easy to write those big checks when the company generated more than $16bn in free cash flow in 2010.

Adobe backs up Omniture buy with more SaaS

Brenon Daly

Contact: Kathleen Reidy

Continuing to show its interest in the online marketing realm, Adobe has announced that it will buy SaaS startup Demdex for an undisclosed sum. Demdex was founded in 2008 with the goal of capturing behavioral data across websites to help advertisers better segment and target ads. It had raised $7.5m in seed and series A rounds from Shasta Ventures, First Round Capital and Genacast Ventures.

This is the first deal Adobe has done explicitly in support of Omniture, which it acquired for $1.8bn in September 2009. It certainly seems like a transaction Omniture would have done, since it had been an active acquirer itself as an independent. (The company announced four purchases in 2007 alone.) Demdex will join other technologies from Touch Clarity, Offermatica, Visual Sciences and Mercado Software in the Omniture portfolio, which is now dubbed the ‘Adobe Online Marketing Suite, powered by Omniture.’ Omniture was also Adobe’s first big SaaS buy so Demdex brings it another SaaS offering, as well.

The only other acquisition Adobe has made since buying Omniture was its $242.7m pickup of Day Software last July. There are certainly connections between Day’s on-premises Web content management products and Omniture’s SaaS Web analytics and online marketing tools, but Adobe had broader reasons for buying Day and so far, seems to position Day more alongside its on-premises content management product, Adobe LiveCycle.