Reality check for mobile ad networks?

-Contact Thomas Rasmussen

Mobile advertising startup Ad Infuse received an infusion of reality last week. The vendor, which has raised $18m in venture backing, had to put itself up for sale after it was unable to secure follow-on funding this year. After being shopped around since last summer, Ad Infuse sold for scraps to UK-based mobile advertiser Velti. We estimate that Velti paid less than $1m for Ad Infuse, which we understand generated just $1.3m in revenue in 2008.

The distressed sale of Ad Infuse comes on the heels of SmartReply’s tiny all-equity purchase of mSnap, as well as several deals involving other niche advertising networks this year. Where does this leave the remaining mobile ad networks that we were bullish on last year as the logical next step of growth for online ad startups?

We suspect there is more VC portfolio cleanout coming, since there are still too many mobile ad startups. That’s not to say there aren’t a few firms that haven’t had some success. For instance, three-year-old mobile ad network AdMob, which has successfully ridden the coattails of Apple’s iPhone AppStore’s rise by providing a way for iPhone developers to monetize their users through ads, is currently at an estimated $30m run-rate. (AdMob has raised nearly $50m to date from Sequoia Capital, Accel Partners, Draper Fisher Jurvetson and Northgate Capital.) And on a smaller scale, AdMarvel is just getting started with what we can best describe as a mobile version of the popular video ad startup Adap.tv. It has raised just $8m to date and is in the process of closing a $10m follow-on round, something its competitor Ad Infuse was unable to accomplish.

Much like what we anticipate will eventually happen in the online video ad space, there will soon come a time when ad giants such as Google and Yahoo will have to buy their way into the mobile sector. In a rare sign of foresight, AOL is the only media behemoth with a sizable presence in the mobile ad vertical following its $105m acquisition of Third Screen Media in 2007.

IBM-Exeros: the wind-down and the bid-up

Brenon Daly

Contact: Brenon Daly

Even in the ongoing recession, the fundamental economic laws concerning supply and demand still haven’t been overturned. That’s at least one lesson we can draw from the recent sale of the assets of data discovery startup Exeros. Although terms weren’t disclosed, we believe IBM paid about $13m for Exeros. While that hardly seems like a blockbuster exit for a VC-backed startup that raised some $19m, we would note that the price is four times higher than the offer Exeros received from its first bidder.

As we understand the process, SAP offered just $3m for the assets. Exeros gambled and let the ‘no shop’ period expire on SAP’s bid and then successfully enticed IBM. (Big Blue will slot in the Exeros technology alongside a number of other tools in its Information Management portfolio.) One source added that IBM agreed to an earn-out that could take the final price up to $20m, potentially making Exeros’ backers whole on their investment.

Whatever IBM ends up handing over for Exeros, the target should probably consider any amount over SAP’s initial bid a windfall. The last time we spoke with Exeros (in mid-September, just before capitalism as we know it ended), the unprofitable startup said it was looking to raise a third round of funding that would carry it through to break-even status. Of course, we can all imagine how those fundraising conversations must have gone.

So instead of drawing down money, Exeros was wound down. However, the resulting transaction wasn’t like the dozens of scrap sales that we’ve seen in recent months, where a single buyer pushes the price down so low that the startup’s investors get just pennies on the dollar. With both SAP and IBM bidding, Exeros’ backers may well break even. And that’s not a bad return, given what they were facing.

That giant sucking sound on the US equity market

Brenon Daly

Contact: Brenon Daly

On the US equity markets Wednesday, it was one step forward, two steps back in terms of aggregate value of listed companies. As SolarWinds soared onto the NYSE, creating more than $800m of market value early in the day, Data Domain got picked up by storage rival NetApp. That deal, which is slated to close this summer, will erase some $1.75bn from the Nasdaq. That’s twice the amount added by SolarWinds.

Wednesday’s net outflow continues a long-running trend of a declining number of tech listings on the US public markets. Consider that since the last tech IPO (Rackspace’s offering on August 8, 2008), acquisitions of more than 50 US public companies have been announced. The total amount of market capitalization erased in those deals: $33bn. Considered another way, we would need 40 more SolarWinds-sized offerings to make up the deficit.

Is the IPO window open again?

Brenon Daly

Contact: Brenon Daly

With SolarWinds debuting on the public market Wednesday and OpenTable set to follow shortly, some observers have suggested these offerings mark a return of the IPO market. While it’s always healthy to have new issues, particularly after months and months without a technology IPO, we think it’s a bit overly optimistic to say either offering will kick off an IPO market like we had even two years ago. Certainly, there will be a handful of companies that make it out the window. But we don’t expect there to be a flood of new offerings.

That’s particularly true if we look at the astonishing numbers put up by SolarWinds. We doubt many other IPO hopefuls were able to generate anywhere near the $6m in net income in the first quarter that the network management software vendor recorded. In fact, we’re fairly certain that some companies thinking about putting in an S-1 won’t even generate as much profit in all of 2009 as SolarWinds did in one of the toughest economic quarters in recent history. Wall Street appears ready to reward the black numbers at SolarWinds. The company priced its offering at $12.50 per share, ahead of the initial range. With some 64.2 million shares outstanding, SolarWinds started life on the NYSE with a valuation of $803m, although it moved up above $900m in early trading Wednesday.

Nonetheless, the rich valuation at SolarWinds (8.6x 2008 sales) may well encourage a few companies to dust off their IPO paperwork and update numbers. One obvious candidate: NetQoS, a fellow Austin, Texas-based networking software company. (We noted last year that the company had done a bit of ‘portfolio round-out’ ahead of what we expected would be an IPO this year.) And Nimsoft is undoubtedly cheering for a warm reception for SolarWinds. Nimsoft offers essentially the same technology as SolarWinds but targets the midmarket, while SolarWinds sells primarily to small businesses. (Nimsoft was in the market earlier this week, picking up assets from Cittio to bolster its network monitoring product.) Since Nimsoft has only about half the revenue of SolarWinds, it’s probably a bit early for the vendor to plan a prospectus. Nonetheless, it’s always helpful to have a strong, richly valued comparable public company when considering an IPO.

One less obvious – but more intriguing – vendor that could be drawn out by a well-received SolarWinds offering is Barracuda Networks. Both firms have the same models of high-volume sales of software to small businesses, and both are currently running at over $100m in annual revenue. Barracuda is tight with its financials, but word is that the company is closer to $150m in sales right now. Even if it doesn’t have the same rich margins that SolarWinds enjoys, Barracuda would almost certainly be worth more than $1bn on the market.

Metastorm in the market in a big way

Brenon Daly

Contact: Brenon Daly

If Metastorm does re-paper an S-1, it will be a much larger company than the one that filed for an IPO last year. (The business process management (BPM) vendor put in its paperwork in mid-May and then pulled it in mid-September.) The growth will come both organically and from acquisition, CEO Bob Farrell said Monday during a presentation at the JMP Securities Research Conference.

In terms of organic growth, Farrell projected that the company would ring up about $90m in revenue this year, up from about $77m in 2008. Additionally, Farrell said he expected to add to the company’s top line with a shopping trip. We understand Metastorm has three term sheets out for possible acquisitions, with one possibly closing in the summer. One of the potential deals could double the company’s revenue. Farrell said his company has considered outside funding for a purchase, which is how it covered its 2007 acquisition of Proforma.

In terms of target markets, Metastorm is looking in several areas, including risk and compliance, collaboration and document management. In terms of possible BPM-document management transactions, we would note that we recently heard of deal flow going the other way. Open Text, having consolidated much of the content management market, said it may well look to buy its way into the BPM market.

Just how far has the CDP market fallen?

Brenon Daly

by Brenon Daly, Henry Baltazar

In the days before the big storage vendors turned continuous data protection (CDP) into a feature rather than a stand-alone product, investors in CDP startups could still make decent returns. Both Kashya and Topio raised about $20m in VC backing, and ended up exiting for eight times that amount. Kashya sold to EMC for $153m in cash in May 2006 while Topio, which wisely blended CDP with heterogeneous replication in its offerings, went to NetApp for $160m in cash a half-year later. (Of the two deals, NetApp-Topio has been the underwhelming transaction. NetApp recently shuttered the SnapMirror for Open Systems product line that it picked up with Topio.)

Since those paydays, however, CDP valuations have plummeted. Symantec acquired assets of Revivio for an estimated $20m in November 2006, while Double-Take Software handed over just $8.3m for TimeSpring Software in late 2007. But even those deals seem rich when we consider BakBone Software’s recent reach for CDP startup Asempra Technologies. Under terms of the deal, BakBone is shelling out just $2.1m for Asempra, which had raised $36m from its backers. To add insult to injury, BakBone is paying for the acquisition mostly in equity, with $1.7m of the price tag covered by its illiquid, Pink Sheets-traded paper. We would note that Asempra’s owners are getting 3.8 million shares of BakBone, which typically only trade about 30,000 shares each session.

Select CDP transactions

Date Acquirer Target Price
May 2009 BakBone Software Asempra Technologies $2.1m
December 2007 Double-Take Software TimeSpring Software $8.3m
November 2006 Symantec Revivio $20m*
November 2006 NetApp Topio $160m
May 2006 EMC Kashya $153m
March 2006 Atempo Storactive Not disclosed

Source: The 451 M&A KnowledgeBase *451 Group estimate

Second-quarter M&A splurge

Email: Yulitza Peraza, Brenon Daly

With Friday marking the midpoint of the second quarter, we’d note that tech deal flow is once again picking up substantially. Over the past two years, the April-June quarter has seen more M&A activity than any other single quarter of the year. And this year, just halfway through the period, that trend seems to be accelerating after a historically slow start to 2009.

Since the beginning of April, we’ve tallied $22bn worth of tech transactions – nearly triple the amount of spending from the first three months of the year. (Viewed another way, the M&A spending over just the past six weeks represents 74% of money handed over so far this year in tech deals.) Nine of the 10 largest transactions announced so far in 2009 have come since April 1.

While it’s difficult to predict what the second half of this quarter will bring, we would nonetheless note that the second quarter has traditionally accounted for a disproportionately large chunk of annual spending. In 2007, second-quarter spending represented 44% of the annual total, with last year’s level coming in at 34%. We would attribute the increased activity in the second quarter to the fact that companies typically draw up annual M&A plans and budgets at the beginning of the year, and then go shopping after that. Also this year, we suspect the rebounding equity markets are giving buyers confidence to do deals, as well as planting the thought that perhaps the prices they pay may be headed up from here.

Quarterly spending

Period Deal value 2007 Deal value 2008 Deal value 2009
Q1 $64bn $49bn $8bn
Q2 $131bn $49bn $22bn
Q3 $41bn $26bn N/A
Q4 $64bn $19bn N/A

Source: The 451 M&A KnowledgeBase

Buying back stock, rather than buying up companies

Brenon Daly

Contact: Brenon Daly

For a risk-averse company like IBM, it’s always preferable to buy a known than an unknown. At least that’s one way to read its decision to pass on taking home Sun Microsystems at any cost and instead put its money toward repurchasing a slug of its own equity. The recently announced $3bn buyback works out to just under half the amount that Big Blue was reported to have been ready to hand over for Sun.

That’s a fundamentally sound – if conservative – allocation of capital for IBM, a dividend-paying member of the Dow Jones Industrial Average. Nonetheless, it didn’t stop Sun’s winning suitor, Oracle, from tweaking Big Blue, saying it only got involved after IBM ‘failed’ to close the deal. For the record, we would note that since the ‘failure,’ IBM shares have moved higher while Oracle stock is essentially flat with where it was when the acquirer announced its bid. Of course, that verdict is based on just three weeks of trading.

IBM isn’t the only firm spending cash on its own shares rather than the equity of other vendors. Citrix, which hasn’t announced an acquisition in more than a half-year, recently said it plans to buy back some $300m of stock. Even when Citrix does do deals these days, they tend to be tiny purchases. Since acquiring XenSource in August 2007, Citrix has made just four small technology plays. We would chalk that up to the fact that Wall Street has been underwhelmed with Citrix’s purchase of XenSource, its largest-ever deal. And that doesn’t appear likely to change. At last week’s Synergy 2009 conference, Citrix barely mentioned M&A.

Will OpenTable’s IPO lead to M&A?

-Email Thomas Rasmussen

Just three months after filing its initial IPO paperwork, OpenTable set the terms of its $46m offering last week. At the high point of the $12-14 range for its shares, the company would sport a valuation just shy of $300m, or about 6x trailing 12-month (TTM) revenue and 50x TTM EBITDA. For the past three years, OpenTable has grown revenue at a compound annual rate of about 43%. Despite skepticism about the IPO market and OpenTable’s prospects during a period when its primary customers (restaurants) are struggling, the online restaurant reservations service should debut on the Nasdaq under the ticker ‘OPEN’ in the next week or two. OpenTable’s offering comes as Solarwinds is also slated to go public, after its prospectus aged for more than a year.

OpenTable has not disclosed how it will allocate the funds that it will raise in its offering. However, we believe it might be gearing up to make its first foray into M&A. One indication: the presence of Allen & Co as one of OpenTable’s four underwriters. Sure it had a hand in Google’s IPO, but Allen & Co is certainly known more as a media banker than a tech underwriter. OpenTable’s offering is being led by Merrill Lynch, with ThinkEquity and Stifel Nicolaus also on the ticket.

If OpenTable were to shop, we suspect it could well look to bolster its international operations. Since 2004, the San Francisco-based company has sunk millions of dollars into expanding outside the US, but has little to show for it. Its international business, which is burning money, accounts for just 5% of total sales. (The vendor recently pulled out of Germany and France.) We see a parallel between what OpenTable has run into in its unsuccessful international expansion and the early woes that its rich Web services cousin eBay experienced in trying to translate its business outside of its home market. After struggling to address foreign markets by just expanding its existing online auction service, eBay has been picking up local foreign sites that fit the nuances of business and culture in those markets. Ebay has spent billions of dollars lately buying its way into foreign markets.

Sun’s Sparc still has future, Ellison insists

Brenon Daly

Contact: John Abbott

With Oracle likely just two months or so away from closing its $7.4bn acquisition of Sun Microsystems, speculation is now picking up about what parts of Sun’s technology portfolio will be dropped. (And make no mistake, cost-cutting is a major driver of this deal. Oracle has pledged to wring at least $1.5bn of operating profit from Sun in the first year that it owns the company.) But Oracle is currently working hard to counter suggestions that it won’t take on Sun’s core hardware business, and in particular, that it will give up on Sparc processor development. That’s not the case, CEO Larry Ellison insists. In fact, Oracle will increase investment in Sparc, Ellison says.

His argument is that, by designing hardware and software together to work as a system, it’s possible to avoid the low-margin trap of the commodity server business. Sparc is a key part of that, says Ellison. He adds that, as IBM has found, some system features are best done in silicon. That said, Oracle doesn’t plan to work on a Sparc-Solaris version of its Exadata database machine. Instead, it will keep the arrangements it has with Hewlett-Packard in place over its current systems activities for the Exadata database machine, which Ellison claims has been the most successful product introduction in Oracle’s 30-year history.

However, it’s still hard to believe that Oracle will make a long-term commitment to the continuing development of a proprietary RISC chip architecture. IBM’s Power and Intel’s Itanium are now the only other significant architectures: Power has been bolstered by some lucrative and high-volume gaming console contracts, while Itanium sales, driven almost exclusively by HP, have done little more than replace shipments of older HP architectures (such as Alpha, PA-RISC and NonStop) without any significant market growth. So how does Ellison see his way out of this? He plans to work in partnership with Fujitsu to add features to Sparc aimed at improving Oracle’s database performance. But reading between the lines, it’s possible that this could lead to handing over most or all of the ongoing development work for Sparc chips to Fujitsu. Provided, of course, the Japanese tech giant wants to take that on.