Tapping online TV ad revenues

After running up an M&A bill of more than $10bn on advertising deals last year, Internet titans are now taking the wraps off some of the platforms built on those acquisitions. This week, for instance, Google struck a content distribution deal with Family Guy founder Seth MacFarlane. Google will distribute a new Internet-exclusive cartoon series using the AdSense platform it picked up through its $280m acquisition of Applied Semantics back in 2003. Additionally, Google launched its Google Affiliate Network, which is essentially a re-branding of DoubleClick’s affiliate marketing product, Performics.

Through the AdSense deal, Google will syndicate two-minute ‘webisodes’ with accompanying advertisements to thousands of demographically chosen websites. Of course, other sites already offer Web video streaming. However, few of them have found a way to offer the content in a profitable way. Consider the online TV network Hulu, a $100m joint venture of NBC and News Corp that streams videos from its stand-alone website. Although it consistently sells out its ad inventories, Hulu still struggles to get viewers to its site, much less run profitably.

One boost to the flagging revenue outlook for this market may well come from online video advertising markets, particularly mobile video markets. While the top players, including Google, keep busy monetizing on previous acquisitions, we expect the scores of smaller players to get snapped up. Among those that might find themselves on a shopping list: VC-backed Qik, which streams live TV and video to mobile phones and enables users to upload content to social networking websites; a similar startup, Myframe’s Flixwagon, which has partnered with MTV Israel; and finally, decentral.tv’s Kyte.tv, based in San Francisco, is streaming video on the iPhone. If any of the big online advertising platforms want to go wireless, we expect they will probably take a close look at one or more of these startups.

Selected Google online advertising deals

Date announced Target Deal value Company description
April 13, 2007 DoubleClick $3.1bn Online advertising and marketing services
April 23, 2003 Applied Semantics $281m Online advertising and analytics platform

Source: The 451 M&A KnowledgeBase

M&A cycles in France

Brenon Daly

 Our colleague Matt Aslett recently hit on an incredibly creative and entertaining series of posting on our sister blog CAOS Theory pegged to Euro 2008. He profiled the open source projects and policies in the 16 countries that took part in that soccer (errr, football) tournament. (A Brit, Aslett found himself with a fair amount of free time last month since his country didn’t qualify for the European championships.) Not only did Aslett review all the open source goings-on in the respective countries, he even had them square off against one another, as if they were on the soccer field (errr, football pitch). Eventually, he crowned France this year’s Open Source Champion.

We here at Inorganic Growth are decidedly less creative and industrious than our colleagues over at CAOS Theory. So, with that as back-drop, we try our own entry pegged to a major three-week sporting event in Europe: The Tour de France. The 2170-mile counter-clockwise trip around the country starts on Saturday in wind-swept Brittany. For the first time in 40 years, the Tour opens with a normal road stage rather than a ceremonial prologue. (It’s also the first time in about a decade that the defending champion will not be at the start, as cycling continues its lopsided fight against dopers and other cheats.)

When we punched up the numbers for French M&A in recent years, we have to say we were a bit shocked by how thin the peloton of deals has become recently. In the first half of 2008, we saw just 47 deals involving either French buyers or sellers, with total spending of just $1.2bn. That compares to 62 deals worth $7.8bn in the same period last year and 68 deals worth $18.4bn in the first half of 2006.

With that in mind, we decided not to award a yellow jersey, signifying a clear leader. Instead, we’ll got to the other end of the results and hand out an award for the ‘lanterne rouge’ – the designation for the last-place Tour de France rider. The winner of the ‘anti Yellow Jersey’: Alcatel’s $13.4bn purchase of Lucent. We put this deal, inked in April 2006, on top of the podium because the combination has destroyed more than $22bn of shareholder value in just two years. Felicitations, Alcatel-Lucent.

French deal flow

Period

Deal volume

Deal value

Jan.-June 2006

68

$18.4bn

Jan.-June 2007

62

$7.8bn

Jan.-June 2008

47

$1.2bn

 

Source: The 451 M&A KnowledgeBase

Microsoft makes meaningful buy

Since shelling out nearly $10bn in a year and a half to reinvent itself as an online contender, Microsoft, on July 1, confirmed reports of its purchase of online search and natural language vendor Powerset. Microsoft aims to add Powerset’s Web search linguists, engineers and technology to its Live Search division. On the heels of its $1.2bn purchase of enterprise text analytics giant FAST Search and Transfer in January, Microsoft inked this much smaller deal to enhance its consumer Web search.

Founded in 2006, Powerset released its Web search technology earlier this year. In partnership with Xerox’s PARC (Palo Alto Research Center), the San Francisco startup, which has raised some $12.5m in funding, has been developing search software that reads online text and discerns semantics as well syntax. So far, Powerset’s semantic technology has been publicly tested only on Wikipedia and fellow open source encyclopedia Freebase, both of which have a solid structure that Powerset leverages. The company has also been in talks with major publishing companies about an ad-supported service it has in the works.

With Powerset having been sold to an established technology company to realize its plans, we wonder what that will mean for the rest of the semantic technology companies. Currently, the poster child of the market is Radar Networks, which is backed by $18m in VC. It is developing a semantic social networking application, Twine, which is still in private beta and due to be released this fall. There’s also New York-based semantic search engine Hakia, also in private beta, which has landed over $20m in funding. However, if Powerset, which was often referred to as ‘the next Google,’ got picked up for just $100m (as the rumors have it), then what’s the exit picture for the two remaining rivals, both of which have raised more money than Powerset? Maybe we need to Google the answer.

Selected Microsoft search acquisitions

Date announced Target Deal value Target description
July 1, 2008 Powerset $100m (reported) Semantic Web search engine
January 8, 2008 Fast Search and Transfer $1.2bn Enterprise search software

Source: The 451 M&A KnowledgeBase

M&A goes MIA in Q2

Brenon Daly1 Comment

With the second quarter wrapped up, we’ve been busy tallying the deal flow from the period. As you might guess, M&A levels for the past three months mirror the dour economic climate. The quick numbers: Overall tech M&A fell 40% in the second quarter, year-over-year, dragged down by private equity players that have been knocked out of the market by the credit market turmoil. The total shopping bill of $148bn is a sharp decline from the $241bn in the same period last year, putting it only slightly above the $122bn recorded in the second quarter of 2006.

A number of trends shaped M&A in the quarter, including the continued use of bear hugs to pressure reluctant sellers, the frozen IPO market and the rise of consolidation deals. Of course, the single largest crimp on deal-making in the second quarter was the utter disappearance of tech buyouts. The value of tech LBOs in the second quarter fell more than 90% compared to the same period last year, when credit was flowing freely. In the just-completed quarter, we recorded some $7bn worth of tech buyouts, down from $85bn in the year-ago period. Looked at another way, LBOs accounted for just 5% of all tech M&A spending in the second quarter, after representing a full one-third of total spending in the same period last year.

Deal flow breakdown

Quarter PE deal value Corp. deal value Total deal value
Q2 2006 $13bn $109bn $122bn
Q2 2007 $85bn $156bn $241bn
Q2 2008 $7bn $141bn $148bn

Source: The 451 M&A KnowledgeBase

Bear market mauls debutants

Brenon Daly

The talking heads at the Nasdaq and the New York Stock Exchange generally define a bear market as a 20% decline from the index’s highs. And, as anyone who picked up a weekend newspaper knows, the markets have officially slumped into bear territory since peaking last fall.

Of course, an index is made up of individual stocks, with some getting more roughed up than others. Oracle has basically traded flat since the Nasdaq meltdown began last October; Microsoft has matched the index’s decline; and VMware has been hammered, plunging nearly three times the Nasdaq decline over the same period. (Another way to look at the meltdown in shares of VMware: At its peak, VMware stock was worth roughly the same amount as a barrel of oil at current prices. Now, you’d have to pony up nearly three shares of VMware to trade for that same barrel of oil.)

With investors not willing to take a chance on shares of existing companies, what chance do the shares of largely unknown and entirely untested IPO candidates have? The short answer is ‘zilch.’ Actually, it’s somewhat of an academic question as there hasn’t been a VC-backed IPO since ArcSight floated on the Nasdaq four months ago. (As we’ve written in the past, we wouldn’t be surprised to see ArcSight get gobbled up, with Hewlett-Packard a logical buyer, in our view.)

With the IPO window closed, corporate acquirers have even more leverage in negotiations. (In other words, don’t expect transactions going off at a double-digit price-to-sales multiple, like IPO candidate EqualLogic got from Dell last November.) We’ve already seen Initiate Systems scrap its proposed offering and go hat-in-hand to a gaggle of investors. Meanwhile, a handful of other S-1s from other companies are gathering dust at the SEC. And we hardly expect any movement during the third quarter. Given the parched IPO market and corporate acquirers in the doldrums, it’s going to be a long, hot summer for a few of these IPO candidates.

Proofpoint buys Fortiva, expands into email archiving

After a courtship that lasted the better part of a year, on-demand security provider Proofpoint finally picked up software-as-a-service email archiving startup Fortiva this week. Based on similar transactions and industry buzz, we estimate this tuck-in acquisition cost Proofpoint somewhere in the neighborhood of $70m. Fortiva, which has 45 employees, was running at about $15-20m in revenue from about 200 enterprise customers. This marks a solid exit for the company’s venture backers, Cargill Ventures, Ventures West and McLean Watson Capital, which only pumped $8m into Fortiva.

The interesting question sparked by this transaction is what’s next for Proofpoint, which is now up to 250 employees. Though some have suggested the company has now effectively dressed itself up as an acquisition target, we believe otherwise. We think an IPO will represent the next major milestone for the company. (In wrap-up of April’s RSA conference, we said as much, adding that an acquisition by Proofpoint was likely in the next few months.)

Proofpoint has drawn in some $86m in funding since its inception in 2002, including a $28m round in February, even though it was running at close to breakeven. With more than 1,600 customers, bookings are up 70% on a year-over-year basis for 2008. The growth comes despite stiff competition. Google, Cisco and Autonomy Corp made a big push into the market last year with their respective acquisitions of Postini, IronPort Systems and Zantaz.

Yet, Proofpoint has held its own against these larger vendors, even recruiting a few high-ranking employees from Postini, we’ve heard. Speaking of hiring at Proofpoint, we would also highlight last year’s move to bring Paul Auvil on board as CFO. Auvil served as the top numbers guy at VMware, guiding that company from the tens of millions of dollars in revenue to hundreds of millions of dollars. Of course, that company never made it fully public. We have a feeling Auvil may yet have a chance to be CFO at a public company, given the direction of Proofpoint.

Select on-demand security deals

Announced Acquirer Target Deal value Target revenue
July 9, 2007 Google Postini $625m $70m*
July 3, 2007 Autonomy Zantaz $375m Not available
May 14, 2007 Verizon Business Cybertrust $450m* $225m*
April 26, 2007 Websense SurfControl $400m $220m
Jan. 4, 2007 Cisco IronPort $830m $100m*
May 19, 2004 Symantec Brightmail $370m $26m

Source: The 451 M&A KnowledgeBase, * official 451 Group estimates

Fire-eating Barracuda

Brenon Daly

While not a done deal, Barracuda Networks’ new bid of $8.25 for each share of Sourcefire seems to be closer to the level the market was valuing the Snort shop. Nearly a month ago, the aptly named Barracuda swarmed Sourcefire with an unsolicited bid of $7.50 per share, which worked out to an equity value of $186m for the company. At the time, we called it a ‘floor bid’ – one that the privately held company would likely have to raise. The new offer adds $19m to Sourcefire’s price tag.

That bump appears to be enough for Sourcefire shareholders. (However, the company itself is still holding out for more.) After spending all of the time trading above Barracuda’s initial offer price, Sourcefire shares on Wednesday afternoon were trading in line with the newly raised bid of $8.25. The stock gained 46 cents, or 6%, to $8.11 in mid-afternoon trading.

Since the market has signed off on this deal, we thought we’d note a final curiosity about the proposed transaction: Sourcefire didn’t hire a banker. A company representative said last week that it ‘periodically consults’ with financial advisers but didn’t have any specific bank retained. (We contacted the company again on Wednesday for an update, but we didn’t hear back.)

Sourcefire is actually the second company targeted in an unsolicited offer that is going it alone. Mentor Graphics also told us it didn’t have a banker to help it fight off the ‘bear hug’ from Cadence Design Systems last week. And it wasn’t like the bid was just sprung on Mentor. The two companies had been talking since April, with Cadence advised by Deutsche Bank Securities. However, a representative said it was planning to hire one. (If history is any guide, Mentor will likely be calling Goldman Sachs, given that bank’s legacy of work for companies on the defensive.) Just add the lack of mandates to the growing list of problems for bankers, at least for those who haven’t already been laid off in the recent downturn.

National (in)security

Brenon Daly

With Sourcefire likely to get gobbled up shortly by a hungry Barracuda Networks, we couldn’t help but flashback to the earlier attempt by Check Point Software Technologies to acquire the Snort vendor. (For those of you keeping score at home: Yes, Check Point’s offer more than two years ago valued Sourcefire higher than Barracuda’s current bid.) We mention the stillborn deal because there are echoes of Check Point-Sourcefire in a current proposed pairing.

Recall that the deal got snagged because of US regulators’ concern about ‘sensitive’ technology (Sourcefire’s Snort intrusion prevention technology) falling into the hands of foreign companies (Check Point’s Israeli ownership). That concern – an overblown bit of nutty protectionism that doesn’t exist anywhere outside of Washington DC – is back at issue in the proposed pairing of Oregon-based identification card maker Digimarc and a French defense firm called Safran.

Earlier this week, Safran offered $300m in cash for Digimarc, hoping to trump a three-month-old agreement Digimarc had with US company L-1 Identity Solutions. (We looked at the deal, which represented a five-bagger for Digimarc, back in March.) L-1’s offer, which is half in stock and half in cash, is roughly worth $260m.

On word that Safran is now in the running, L-1 played the national security card, warning about the sinister threat posed by a French firm owning Digimarc’s ID card business. Safran’s bid would face scrutiny from the same regulatory agency that spiked Check Point’s planned purchase of Sourcefire, the Committee on Foreign Investment in the US. We think such regulatory meddling is misguided. But we certainly understand L-1’s move to wrap themselves in the flag to secure this deal. It’s a lot cheaper for them to hire a few well-connected lobbyists than actually raise their bid.

Less than zero?

Brenon Daly

The company once known as MathSoft has been cancelled out by the following equation: 1 – 0.5 – 0.5 = 0. The firm made its first subtraction in early 2001, with the divestiture of its core technical calculations software business. That was followed up last week with the sale of the remaining chunk of the company – which sold data analysis software under the name Insightful Corp – to Tibco for $25m. (Along the way, Insightful further whittled off a small sliver of its business, some search assets it sold to Hypertext Solutions, which now does business as Evri, for $3.7m last year.)

If the name MathSoft seems only vaguely familiar, it’s because the old-line firm hasn’t existed for seven years, at least not under its original name and original business. Founded in 1984, the Massachusetts-based company emerged as MathSoft two years later. And while it’s too soon to say whether Tibco’s tiny purchase of Insightful will pay dividends, the former had better hope the acquisition goes smoother than the last one involving Insightful’s CEO. Before running Insightful, Jeff Coombs headed up marketing at Acta Technology – a startup selling ETL technology that was snapped up by Business Objects in mid-2002 for $65m.

Actually, that deal ended up costing Business Objects a fair bit more, in both money and time. The reason? Just a week after the deal was inked, ETL powerhouse Informatica filed a patent infringement case against Acta. That worked its way through the courts for the following four and a half years, until a jury decided a year ago to award Informatica $25m in damages. Tibco, too, has had courtroom headaches from one of its deals, picking up a company that was later sued in the widespread lawsuit over share allocations of IPOs in the bubble era. So both the buyer and seller in this deal have firsthand experience with negative additions through acquisitions. 

Subtraction from MathSoft

Date Event Price
Jan. 2001 Divestiture of core education products division $7m
August 2007 Surviving company Insightful sells search assets $3.7m
June 2008 Insightful sells to Tibco $25m

Source: The 451 M&A KnowledgeBase

VeriSign’s yo-yo diet

Brenon Daly

We’ve noted several times in the past that former binge eater VeriSign has set itself on a fairly severe corporate diet. (Last November, we outlined VeriSign’s divestiture plan that could trim up to one-third of the company’s revenue.) Having already sold off three businesses so far in 2008, VeriSign is nearing a fourth divestiture, we hear.

At the America’s Growth Capital security conference in early April, we heard hallway chatter that VeriSign was deep into talks with a networking equipment vendor and a services shop about selling its managed security service provider (MSSP) business. Now, a source indicates that VeriSign has a letter of intent signed to shed its MSSP business. The acquirer isn’t immediately known, but we hear it’s a strategic, rather than financial, buyer. Given the recent moves by telcos to buy security service shops – for instance, Verizon Business’ purchase of Cybertrust a year ago and BT Group’s acquisition of Counterpane Internet Security in October 2006 – we could also imagine a phone company adding the MSSP business to its service offering.

Like any divorce, a divestiture tends to take longer and be more expensive than any of the parties imagined at the start. And we can only guess at the discount for VeriSign’s MSSP business. The divestiture would effectively unwind its $140m cash-and-stock acquisition of Guardent in December 2003. Ironically, VeriSign inked the Guardent purchase at a time when it was also dieting, having shed its domain name-registry business and other assets. Is this the corporate equivalent of yo-yo dieting? 

Coming and going at VeriSign

Year Acquisitions Divestitures
YTD 2008 0 3
2007 0 1
2006 8 1
2005 7 1

Source: The 451 M&A KnowledgeBase