Cloud calling: With latest deal, BroadSoft aims to entice enterprises to cloud UC

Scott Denne

Contact: Scott Denne

The transition to consumer VoIP and other Internet Protocol communications is well under way, though at the largest enterprises the market for IP-based communications still has plenty of room to grow. Capturing more of that opportunity led BroadSoft to today’s purchase of Transera, a maker of call-center software and analytics. BroadSoft sells software and SaaS that enables telcos to replace their customers’ hardware-based PBX systems with IP-based unified communications services. By expanding its call-center offering, BroadSoft hopes to make its software more appealing to the largest consumers of communications services.

BroadSoft is a frequent acquirer of modest-sized companies. Since the start of 2015, it has inked four acquisitions of such firms to expand internationally and add new products to its portfolio. It hasn’t spent more than $40m in cash annually on M&A in each of the past few years. The pickup of Transera seems to be a similar scale – BroadSoft expects the target to add $7- 8m in revenue for 2016 and to be mildly dilutive to earnings.

As businesses march toward more hosted and IP-based communications systems, vendors and service providers in this space are looking for ways to differentiate beyond basic phone services and give larger organizations a more compelling reason than cost to embrace cloud communications. That was the rationale behind RingCentral’s reach for collaboration platform Glip last year, as well as BroadSoft’s own internal collaboration effort, Project Tempo. Moving beyond calls and call routing has also spurred a push for greater call-center capabilities, a move that’s been reflected in deals from BroadSoft’s rivals: ShoreTel closed the acquisition of Corvisa earlier this year to expand its presence in this sector and 8×8 snagged a pair of call-center companies last year.

For BroadSoft, offering improved call-center analytics isn’t just about winning cloud communications business from competitors – it’s also about getting large businesses onto the cloud to begin with. According to one of 451 Research’s Voice of the Enterprise surveys , 81% of IT departments that had recently deployed unified communications (voice, video and messaging) did so on-premises. That was the highest level of on-premises deployments of any application category in the survey and suggests to us that BroadSoft and its peers will need to find more applications that are unique to the cloud if it wants to entice the largest companies onto it (55% of the respondents to the survey come from enterprises with more than 10,000 employees).

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Amid Super Bowl fever, the sports business needs to take its medicine

Scott Denne

Contact: Scott Denne

Super Bowl ad prices continue to rise each year, and that masks the symptoms of the sporting world’s concussion. Sports had previously blocked television audiences from completely heading to the sidelines in favor of video on demand, video games and other forms of media; no longer is that the case. Yet networks continue to increase investments in sports – the NFL just sold a package of Thursday Night Football games next fall for $450m, up from $300m last season. This comes during an exodus of subscribers from the sports-industry’s flagship network, ESPN. And as networks, teams and leagues look for ways to stanch the losses, we expect to see increasing investment in technologies that enable them to keep those audiences.

Time may not be on their side (always good news for bankers). Our surveys suggest acceleration in linear TV’s declining audiences. Only 35% of respondents to one of our 2015 consumer surveys reported seeing a TV ad in the previous week. In a separate survey, 8.4% said they had altogether canceled their traditional TV service, while another 16.7% said they are ‘somewhat’ or ‘very’ likely to cancel within the next six months – the highest level to date on both figures.

Increasing fan engagement was the logic behind the heavy investments into daily fantasy sports. The two leading companies in that space – FanDuel and DraftKings – raised more than $700m combined, much of it from networks, sports leagues and team owners. Although those bets don’t look set to pay off, the lure of free cash isn’t the only way to keep fans interested. We recommend the sports industry’s heavy hitters start acquiring and investing in areas that are beginning to change how fans interact with sports.

The first is the technology and talent that power mobile apps. Buying and developing apps gives teams, leagues and networks a direct link to their fans today. Broadcast signals and ticket stubs don’t generate data. Apps do, and having such data will ultimately make their audiences more valuable, and help them find ways to grow and keep them. The second area is in emerging categories of virtual and augmented reality. Madison Square Garden Company, owners of the New York Knicks and Rangers, has already made two venture investments in virtual reality – NextVR (along with Comcast) and Jaunt (alongside Disney). A ringside seat to the growth of these technologies would help sports grow within the next generation of media, rather than succumbing to it, as might happen within the current one.

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Yahoo-dini: magical thinking continues at Yahoo

Scott Denne

Contact: Scott Denne

Yahoo’s leadership still doesn’t understand the business that the company is in. Overshadowed by the news – not really news at this point – that Yahoo’s core business is for sale, Tuesday’s earnings call showed that management believes it can grow a position at the center of people’s digital lives. Yahoo’s new strategic plan (and its old one as well) is to invest in mobile, social and video. Instead of navigating these trends, Yahoo has tried to lead them with heavy investments in product development at the expense of its core business. Yahoo is not a hub of ‘discovery’ in people’s digital lives, as its CEO envisions it – it is a media business and should be run as a media business.

CEO Marissa Mayer isn’t responsible for bringing this magical thinking to Yahoo. The board’s decision to hire an executive whose most significant experience came in managing product development betrayed their thinking that new offerings were the solution to Yahoo’s predicament. True to that belief, the company has launched a lot of new products and made a big bet on social with the $1.1bn reach for Tumblr, which fell short of its revenue targets and is being mostly written down. The introduction of native advertising that melds display with search (Yahoo Gemini) has been more successful. Unfortunately, new products were a solution to the wrong problem.

Yahoo’s legacy banner ad and search revenue plummeted in the past few years, close to $500m annually. Overall, Yahoo’s revenue stands right where it did in 2012, just shy of $5bn, with operating expenses at a similar level. Mayer treats the decline of legacy revenue as an unavoidable fate, saying in the earnings call that Yahoo’s choice was to cut the business entirely or ‘weather’ the slow decline. Had the board installed a CEO with turnaround experience, display wouldn’t have been written off as a forgone conclusion.

Display advertising, particularly the direct-sold banner ads that Yahoo specializes in, isn’t a major growth business. Yet it doesn’t need to evaporate. A few well-timed acquisitions of programmatic buying and selling platforms could position Yahoo for growth in programmatic display. It’s not an unthinkable strategy: a series of such deals enabled AOL to parlay its display-ad-dependent business into a $4.4bn sale to Verizon last year. Yahoo smartly picked up video ad network BrightRoll at the end of 2015 (an asset that contributed most of its revenue growth last year), though such a transaction should have been done earlier and before the company had invested in developing a media buying platform in-house as that offering became immediately redundant.

Aside from an awareness of the need to trim costs, Yahoo’s new strategic plan isn’t that different from its old one. Most disturbing is its plan to invest in mobile search. Even if Yahoo were able to gain ground on Google – an unlikely prospect – it’s extremely uncertain how consumers will ultimately use mobile search as that space continues to evolve. And however it evolves, Apple and Google, with their ability to control the mobile OS, are clearly in the pole position.

Rather than running the business they wish they had, Yahoo’s leadership should run the business they have. And that means maximizing media revenue and building up the company’s cash (it’s about $1bn poorer than it was three years ago) so it can strategically acquire its way into industry shifts, rather than spending to create them.

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Tech M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

With the world economy shuddering and global equity market sliding, 2016 is starting out in rough shape. That’s also crimping deal flow so far this year, with January spending on tech acquisitions just half the average monthly level from last year. To get a sense of what’s happening now in the M&A market and what we expect for the rest of the year, join us on Wednesday, February 3 at 1:00pm EST (10am PST) for our annual Tech M&A Outlook webinar. You can register here.

The hour-long webinar will start with a look back at the record-breaking year of 2015 to highlight some of the trends that helped push tech M&A spending to its highest level since the Internet bubble burst. What had buyers spending freely last year – including 83 transactions valued at more than $1bn – and what has happened to that confidence so far this year? That lack of confidence has also kept any startups from coming public so far in 2016, the first time that has happened since the credit crisis. What does the rest of the year look like for tech IPOs, and which companies might look to debut despite the inhospitable market?

Join the Tech M&A Outlook webinar for views from some of 451 Research’s 100+ analysts and what they expect to be driving deals in key sectors, including the Internet of Things, mobility and security. Register here.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

For tech M&A, 2016 is more so-so than go-go

Brenon Daly

Contact: Brenon Daly

At the start of 2016, this year looks a lot more so-so than go-go for tech M&A. Spending on global tech, media and telecom acquisitions in the just-completed month of January exactly matched the middling monthly average registered from 2010-14, just before spending soared in 2015 to its highest level in a decade and a half. Compared with last year’s record, the value of January deals reached just half the average monthly spending in 2015. (See our full report on last year’s astounding M&A activity.)

Across the globe, acquirers spent just $20.7bn on 365 transactions in January, according to 451 Research’s M&A KnowledgeBase. (It’s worth noting that while the value of January acquisitions dropped by half vs. the average month in 2015, deal volume in January exactly matched last year’s monthly average.) One reason for the weak start for M&A in 2016 is the drubbing the equity markets have taken so far this year. The Nasdaq plummeted 8% in January, the worst monthly performance for the index in a half-decade.

Amid the index’s decline last month, a number of tech vendors got roughed up as they reported lackluster fourth-quarter results and projected a slowing 2016. (Think about Intel’s datacenter business in Q4 growing at just half the rate it grew in Q1-Q3, or Apple reporting flat iPhone sales for the first time in that product’s history.) The uncertainty basically knocked out any of the more speculative, high-multiple transactions from the top end of the M&A market. For instance, the average valuation of the four largest deals in January was less than 2x trailing sales.

To help make sense of what’s happening now in the tech M&A market, as well as the outlook for the rest of 2016, be sure to attend our webinar on Wednesday, February 3 at 10am PST. The hour-long Tech M&A Outlook webinar features forecasts for both acquisition activity and valuations, in addition to providing specific outlooks for a handful of key tech sectors – including Internet of Things, mobility and information security – that we expect to be particularly active in the coming year. You can register here.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

IBM’s Resource-ful push into the CMO office

Scott Denne

Contact: Scott Denne

IBM’s acquisitions of Unica and Silverpop basically bookended a series of deals earlier this decade when enterprise software vendors rushed for marketing applications to push to the CMO suite. That’s what makes today’s reach for digital ad agency Resource/Ammirati surprising: Big Blue shows that its strategy for winning the CMO is shifting toward services and away from software.

Resource/Ammirati is among the largest independent ad agencies to mix creative services with digital marketing. It will join IBM Interactive Experience, the digital marketing services unit that Big Blue created in 2014 by blending its existing digital agency with researchers from its customer experience lab. The addition of Resource/Ammirati brings additional digital marketing expertise and, more importantly, a creative ad agency that develops marketing strategies and ad campaigns across online and offline media, having developed TV campaigns for Labatt Breweries and Birchbox, built mobile apps for Sherwin-Williams and designed Procter & Gamble’s e-commerce platform.

In marketing software, IBM has a set of loosely related marketing apps and seems to have rightly recognized that being half-heartedly committed to building a full marketing stack isn’t going to win the day. In IT, where IBM’s strength lies, buyers have a standard set of needs and a standard set of hardware and applications to fill those needs. Marketing is more complex. New categories and channels of customer engagement appear all the time and the best marketers are constantly making adjustments and running tests to optimize performance. Building a software stack to keep up is challenging – services are more flexible.

IBM’s move into digital marketing and agency services lessens the competition with enterprise software firms, though it invites competition from other IT service providers as well as the incumbents in the CMO suite: large agency holding companies. For its part, the latter group has become more active in nabbing IT-related services. In just the past two days, we’ve seen a couple of ad agencies purchase mobile development shops (WPP’s acquisition of ArcTouch and St. Ives’ reach for The App Business). And let’s not forget Publicis Groupe’s $3.7bn pickup of Web development firm Sapient, among other deals with a technology flare.

While IBM has a massive services business beyond marketing, it hasn’t been a careful steward of those assets of late. Last quarter, continuing a trend from 2015, Big Blue’s services revenue declined 11%, a faster rate than its software business.

Jordan Edmiston Group advised Resource/Ammirati on its sale.

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Cannella nabs MPH as TV ads become digitally measured

Scott Denne

Contact: Scott Denne

Cannella Response Television (CRT) is aiming to capitalize on the increasing need for digital metrics in TV advertising by reaching for Media Properties Holdings (MPH). The target is best known for its REVShare business, which partners with local and regional broadcasters and service providers to package and resell television inventory on a cost-per-action (CPA) basis.

Though the coming programmatic TV (i.e., television that is bought in an automated fashion and closer to real time) generates more excitement and headlines, there’s an intermediate step underway and MPH’s inventory relationships put it in a position to capitalize. It will be many years before there’s a watershed shift of television ad sales into programmatic. Despite that, there is an increasing number of younger, digitally native brands that are expanding their TV buys. As they do so, they’re looking for firm ROI metrics to measure the impact of ad spending, rather than loose measures of reach and demographics. That’s benefiting inventory sources like MPH, attribution vendors and media buying agencies with a history in direct-response advertising.

Buying MPH gives CRT a bridge into that world. Today CRT mostly develops and distributes infomercials. Owning MPH will allow it to offer short-form ads to its base of direct-response clients and attract some younger brands seeking direct-response specialists. While MPH’s inventory partnerships could enable CRT to be a player in the eventual move toward programmatic TV, it will take a substantial investment to get there. MPH has developed some analytics capabilities to enable it to price inventory on a CPA basis, though its greatest asset is its partnerships, not its tech.

Petsky Prunier advised MPH on its sale.

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With digital marketing divestments aplenty, opportunities arise

Scott Denne

Contact: Matt Mullen

For the first half of this decade, the rise of digital marketing technology in the go-to-market strategies of many of the largest global software vendors has been difficult to ignore. Yet in the second half of 2015, there were several indicators that the progress of these transitions toward digital marketing was not uniformly successful, and several large players announced that they were looking to divest their digital marketing divisions – a sign of retrenchment as they protect their core business by shedding underperforming units that failed to generate hoped-for revenue.

In August, as part of the HP split, the company decided to put its marketing optimization business in HP Inc, among its PC and printing operations. The rest of its software organization emerged at Hewlett Packard Enterprise. That same month, Intuit announced that it wanted to sell Demandforce, which it acquired for $424m in 2012. That came to fruition earlier this month, with Internet Brands as the acquirer. Other firms looking to sell their digital marketing assets include Teradata and SDL.

That these companies’ adventures in digital marketing are almost over doesn’t suggest that the rush to establish businesses in this market was foolhardy. There remains an opportunity for the assets that are overtly (or covertly) up for sale right now to be refocused – perhaps alongside other complementary assets – most likely via an acquisition by a private equity shop with a vision to do so. 451 Research’s own data shows that the bulk of the digital marketing opportunity currently remains greenfield, ensuring that with the right combination of technical assets aligned with an astute go-to-market strategy, an active channel and agency partnerships, there’s every possibility of creating a successful business.

Look for a full report on this topic in a forthcoming 451 Market Insight.

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FireEye gazes into threat intel market

Scott Denne

Contact: Scott Denne Scott Crawford

FireEye acquires iSIGHT Partners as it seeks to differentiate its security platform among its high-end customers. The purchase expands FireEye’s presence in the threat intelligence market – an extremely fragmented space that caters to deep-pocketed customers due to the high cost of putting together threat intel.

Despite that narrow appeal, FireEye is bullish on the category. The $200m price tag is the highest we’ve seen for a pure-play threat intelligence firm (FireEye also included a $75m half-stock, half-cash earnout in the deal). That’s not to say there haven’t been notable transactions here. Last year, LookingGlass paid $35m for QinetiQ’s Cyveillance unit; Proofpoint nabbed Emerging Threats for $40m; and Cisco paid a bit more than that for ThreatGRID.

Multiples in threat intelligence transactions have varied. LookingGlass paid less than 2x trailing revenue for its acquisition, while Proofpoint likely paid closer to 10x – Emerging Threats had just 30 employees at the time of its exit. FireEye’s purchase values iSIGHT at 5x, making it the lowest multiple we’ve seen FireEye pay in its life as a public company. Considering that FireEye itself now trades at just over 3x, following a 67% decline in the past six months, its pickup of iSIGHT shows that it’s still willing to stretch a bit for a deal. Though maybe not as much as it did with its $1bn all-stock acquisition of Mandiant at the end of 2013.

Aside from the price tag, there are some parallels between today’s deal and the Mandiant buy. At the time of the earlier transaction, FireEye emphasized the complementary nature of automated insights gained via tech and the need for human research and response. The acquisition of iSIGHT extends that rationale and the target has already made an investment in integrating threat intelligence with technology.

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For now, VC is still flowing — but what happens when it doesn’t?

Brenon Daly

Contact: Brenon Daly

For the most part, the venture capital industry seems like it hasn’t changed the calendar and still thinks it’s the ‘up and to the right’ year of 2015. Firms are still writing checks for amounts that, until a few years ago, only came from public market – rather than private market – investors. (Datadog raising almost $100m earlier this week, for instance.) And, even though there have been only a smattering of successful $1bn VC-backed exits in recent years, firms are still bidding up funding rounds for startups, and continuing to create ‘unicorns.’ (Anaplan crossed that threshold in a round announced earlier this week.)

That is unlikely to continue in 2016, at least according to a majority of tech investment bankers, many of whom have worked on private and public fundraising. In our survey last month, more than half of the tech investment bankers forecast that venture funding will get tighter in 2016 than it was last year. That stands as the most bearish outlook since the recession, coming in twice the level of bankers that said VC dollars will be less available in our previous survey.

If indeed venture firms start keeping their money in their own bank accounts – rather than investing it in entrepreneurs – that could well put startups under pressure, resulting in slower growth rates and lower valuations for those that survive tighter times as well as dramatic flameouts for those that don’t. Not to be too ominous, but recall how business contracted in 2008-2009 when debt – which, like equity, is oxygen for many companies – was no longer widely and easily available.

Of course, quite a few VCs recognized how the broad economic recession during the credit crisis could weigh on the tech industry. (Sequoia Capital posted its famous ‘RIP: Good Times’ slides in October 2008 as a cautionary forecast for its portfolio companies.) Similarly, a few VCs have recently sounded off that valuations have gotten ahead of themselves and that startups need to watch their spending more closely.

But for the most part, that message of fiscal responsibility has only started to get through to executives and their backers. Most money-burning startups continue to run their businesses as if there’s an inexhaustible supply of money. Triple headcount in a year? Sure, if a company can find enough warm bodies. Spend three times more on sales and marketing than the revenue that effort brings in? No reason not to as long as companies are valued on growth. But at some point this year, startups will almost certainly have to make different decisions than they’ve made up to now.

Projected change in availability of VC funding for startups

Year More available The same Less available
December 2015 for 2016 7% 36% 57%
December 2014 for 2015 36% 40% 24%

Source: 451 Research Tech Investment Banker Survey

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