Nokia nabs Alcatel-Lucent in latest massive telecom deal

Scott Denne

Contact: Brian Partridge

Nokia has acquired Alcatel-Lucent for $16.5bn. The deal brings together former rivals and changes the competitive landscape for the next generation of converged broadband telecom infrastructure. We also think it could incite a new wave of dealmaking among telecom infrastructure suppliers, most notably Ericsson.

The all-stock transaction, expected to close in the first half of next year, will create a combined company with top or near-top market share in several categories, including LTE, fixed broadband infrastructure, IP routing, subscriber data management and customer experience management. Both companies have aggressively pursued SDN/NFV competencies, with Alcatel-Lucent strong in SDN and Nokia being a leader in early implementations of NFV.

Traditional fixed and mobile voice telephony services have steadily declined. Demand for fixed and mobile broadband Internet services has helped fill the gap, but massive network traffic increases have driven incremental revenue growth for operators. These market dynamics have created an environment where bundled fixed voice, broadband and video ‘triple play’ and mobile ‘quad play’ services are imperative to maintain operator profitability and customer stickiness – but they require architectural convergence (to IP networks) to efficiently support them. Against this industry backdrop, Nokia and Alcatel-Lucent bring several complementary assets to the table that will position the new company well to serve traditional customers (telcos) as well as create some new opportunities to sell to large enterprises and Internet vendors.

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IBM attempts to heal with healthcare

Scott Denne

Contact: Mark Fontecchio

IBM adds two healthcare analytics software firms – Phytel and Explorys – to its portfolio. Last year, Big Blue said it would invest $1bn in Watson to expand its cognitive computing platform beyond beating Ken Jennings on Jeopardy! and better commercialize the technology. The investment was to focus on sectors where cognitive computing could have commercial success – among financial services, retail and others, IBM cited healthcare.

Phytel’s software analyzes patient data, integrating with providers’ electronic health record systems with the main goal of preventing hospital readmissions. The other deal is for Explorys, which integrates healthcare data from various sources and analyzes patient and provider information. Both will administer technologies to IBM’s Watson Health Cloud, which includes partners such as Apple and Johnson & Johnson and will allow doctors, researchers and insurance companies to dive into a massive trove of anonymized personal healthcare data.

Big Blue’s sickly revenue dropped 6% last year, and it sees the healthcare vertical as a way to help heal its top line. Hemorrhaging hardware sales and steady services declines leave software as the best opportunity for IBM to get out of intensive care, and healthcare is a good bet – according to ChangeWave Research’s recent corporate quarterly survey, healthcare is one of two sectors (IT software and services is the other) expected to see the most spending increases this year. Healthcare tech M&A is also humming along in 2015, on pace to stay even with last year’s volume after a 64% increase over 2013, according to 451 Research’s M&A KnowledgeBase.

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451 Research’s M&A KnowledgeBase tutorial: Finding venture-backed exits

Scott Denne

Contact: Adam Phipps

We recently noted the imbalanced market for selling VC-backed companies with valuations over $1bn. 451 Research’s M&A KnowledgeBase can be used to identify those deals where the target (or even the acquirer) is venture-backed. Searches can be further refined by venture firm – a search of Accel Partners, for example, shows that firm having a strong start to 2015 by exiting investments in lynda.com and MyFitnessPal. Use our saved search of YTD venture exits, and also watch this short tutorial about finding venture capital information in the KnowledgeBase.

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

LinkedIn hooks its largest deal

Scott Denne

Contact: Scott Denne

Though the acquisition of lynda.com is far larger than any of LinkedIn’s other purchases, it’s picking up an asset that shouldn’t be a drag on its financial performance and one that plays in a market where the company is comfortable. At $1.5bn (which includes $720m in stock), the deal is more than 8x the size of its Bizo buy, its previously largest transaction at $175m. Bizo, by comparison, was a complex (though we think smart) acquisition that brought LinkedIn into the ad network business and involved a significant change to the target’s low-margin business model.

Both LinkedIn and lynda.com have about 70% gross margins, both spend 35% of revenue on sales and marketing, and lynda.com has EBITDA margins in the 5-10% range, just under LinkedIn, which has posted a smidge over 10% in each of the past two years. However, at 20% year over year, lynda.com’s growth is a bit behind LinkedIn’s 45%. At 10x trailing revenue – a full three turns below LinkedIn’s own valuation – the deal looks like a bargain.

With today’s move, LinkedIn is obviously seeking more than matching financial performance. With lynda.com, LinkedIn has an opportunity to boost that 20% growth by marketing educational videos and courses to relevant customers on its network, and it increases its presence in higher education (higher ed and government account for half of lynda.com’s business), which is an important segment for LinkedIn as it looks to snag future professionals at an early stage in their careers. Also, when it integrates lynda.com’s educational materials, LinkedIn will get a better view into what its users want to do, not just what they do today.

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

After dating, InfoVista marries the girl from Ipanema

Brenon Daly

Contact: Brenon Daly

Announcing its third – and largest – acquisition since its take-private in 2011, InfoVista has paid an undisclosed amount for Ipanema Technologies. The deal between the two France-based companies, which had an existing technology partnership, extends InfoVista’s core network performance management to the applications that run on them. Founded in 1999, Ipanema is primarily known for its WAN optimization offering.

The purchase also brings InfoVista, which does virtually all of its sales directly, Ipanema’s sales channel. Ipanema goes to market primarily through more than 50 partners, including many of the large Western European communication service providers such as Telefónica and BT. Altogether, it serves some 750 enterprise customers. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for Ipanema’s revenue here.) We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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Growth gets a premium at soon-to-be-private Informatica

Brenon Daly

Contact: Brenon Daly

A buyout group is taking Informatica private for $5.3bn, a full $1bn more than the middleware vendor’s primary rival got in its LBO just a half-year earlier. Private equity (PE) shop Permira, along with Canada Pension Plan Investment Board, says it will pay $48.75 in cash for each share of Informatica, or $5.3bn in total. That’s the highest price for the stock in two years but only a slight closing premium for Informatica, which had been under pressure from a hedge fund to sell. The deal is expected to close by Q3 2015.

At an equity value of $5.3bn, Informatica is the largest company to be erased from a US exchange by a PE firm since BMC went private in May 2013 for $6.9bn. More importantly, Informatica is getting a much richer sendoff than either comparable multibillion-dollar enterprise software LBOs or, more specifically, the take-private of rival TIBCO.

Debt-free Informatica’s cash holding of $722m lowers the enterprise value of the proposed transaction to $4.6bn. That works out to 4.4x Informatica’s trailing revenue. For comparison, other significant recent software LBOs have gone off at least a full turn lower (Compuware at 3.1x trailing sales, BMC at 3.2x), while TIBCO garnered 3.8x in its take-private by Vista Equity Partners last September. (Informatica is also getting a richer valuation than the other relevant – if a bit dated – middleware deal: Ascential Software, which was only one-quarter the size of TIBCO and Informatica, got 3.6x in its sale to IBM in 2005.)

What did Informatica do to get a premium, relative to other software hawkers, from its buyout buyers? In a word: growth. While virtually all of the other software providers that have gone private recently have struggled to bump up their top line, Informatica has posted mid-teens-percentage revenue growth over the past half-decade. (The company cracked $1bn in sales in 2014, a significant step up from the $650m it posted in 2010.) Yet even with sales increasing, Informatica still drew the attention – and agitation – of activist hedge fund Elliott Management.

Significant middleware transactions

Date announced Acquirer Target Deal value Enterprise value/trailing sales valuation
April 7, 2015 Permira, Canada Pension Plan Investment Board Informatica $5.3bn 4.4x
September 29, 2014 Vista Equity Partners TIBCO $4.2bn 3.8x
March 14, 2005 IBM Ascential Software $1.1bn 3.6x

Source: 451 Research’s M&A KnowledgeBase

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An imbalance in the market for unicorns

Brenon Daly

Contact: Brenon Daly

The herd of unicorns gets bigger every day. But as the supply of these startups valued at more than $1bn continues to swell, we can’t help but note that on the other side of the equation, the demand isn’t really keeping pace, at least not outside a handful of elite investors. For the most part, the broader market hasn’t opened the exits for these unicorns to realize the value that’s being lavished on them.

So far this year, for instance, we haven’t seen any sales of VC-backed startups for more than about a half-billion dollars, according to 451 Research’s M&A KnowledgeBase. Further, in a 451 Research survey last December, four out of 10 (42%) corporate M&A executives told us they expect the M&A valuations for privately held companies to actually decline in 2015 compared with their valuations last year. That was the most bearish forecast for exit values of startups from their would-be buyers since the recession year of 2009.

Meanwhile, the IPO market isn’t particularly rewarding these days, either. Box – a unicorn that had been a darling of the late-stage investment community through nearly a dozen rounds of funding – hasn’t created any additional value as a NYSE-listed company than it did as a private company. (And based on the fact that an astounding 40% of Box’s shares are sold short, Wall Street is very clearly betting that its flat-lined valuation is still too high.)

Despite the recent muted returns for VCs, unicorns continue to get fed. For instance, Slack, a collaboration tool that’s less than two years old, has reportedly doubled its valuation since previously notching a $1.2bn price in an October funding.

Obviously, we’re looking at an extremely short exit period of just the first quarter of 2015. And we’re conscious that in most cases, investors are placing bets today that they hope will pay off maybe a half-decade from now. But for right now, when we look at both ends of the market for highly valued startups, we can see how you buy a unicorn but we wonder how you go about selling it.

Projected change in private company M&A valuations

Period Increase Stay the same Decrease
December 2014 for 2015 29% 29% 42%
December 2013 for 2014 29% 55% 16%
December 2012 for 2013 28% 39% 33%
December 2011 for 2012 35% 26% 39%
December 2010 for 2011 71% 20% 9%
December 2009 for 2010 58% 36% 6%
December 2008 for 2009 4% 9% 87%
December 2007 for 2008 39% 28% 33%

Source: 451 Research Tech Corporate Development Outlook Survey

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For tech M&A, 2015 picks up where 2014’s record level left off

Brenon Daly

Contact: Brenon Daly

Despite an ice-cold start to 2015, tech dealmakers came roaring back into the market in early spring, putting spending on tech deals in the just-completed Q1 only slightly behind last year’s record rate. In the first three months of 2015, the total value of deals in the tech, media and telecom (TMT) market around the globe hit $119bn. That’s the third-highest quarterly spending total since the recent recession ended, and puts 2015 nearly on track with the free-spending M&A levels from last year, according to 451 Research’s M&A KnowledgeBase.

At more than twice the average quarterly spending over the past half-decade, the Q1 total of $119bn comes in only a few big prints away from the $128bn we recorded in Q1 2014. (See our full report on Q1 2014 M&A.) Last year’s opening quarter stands as the highest quarterly spending level since 2002, and launched 2014 on its way to the most M&A money spent in a year since the Internet bubble popped in 2000. (See our full 2015 M&A Outlook .) And so far in 2015, there isn’t much of a drop-off from 2014. Annualized, the first three months of this year would put the total value of all TMT deals in 2015 solidly above $400bn – a level it has only breached three times in the past 13 years. (See our full report on Q1 2015 M&A.)

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2015 1,000 $119bn
Q4 2014 1,028 $65bn
Q3 2014 1,047 $102bn
Q2 2014 1,005 $149bn
Q1 2014 844 $128bn
Q4 2013 787 $59bn
Q3 2013 859 $81bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn

Source: The 451 M&A KnowledgeBase

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What does Matomy’s MobFox say?

Scott Denne

Contact:Scott Denne

Matomy Media Group has spent the past eight years buying a portfolio of performance advertising products across multiple formats and categories. Its recent focus has been on mobile, an area where we expect it to continue to build and buy, given the immense growth in that segment of digital advertising, matched with the fact that mobile is bleeding into every part of its advertising business.

The Israel-based company often takes a one-and-done approach when it buys its way into a new advertising channel. And while it got into mobile apps with the acquisition of MobFox late in 2014, we expect that the company will still actively seek deals in the space that augment MobFox’s in-app banner and video ad exchange. Matomy posted 23% sales growth in 2014, and an increase in mobile capabilities could propel that further. 451 Research’s Market Monitor projects that the global mobile ad sector will grow 52.6% to $28.7bn this year on its way to $51.6bn by 2018.

Subscriber’s to 451Research’s Market Insight Service can access a detailed report on Matomy Media.

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

Lexmark doubles down on software

Brenon Daly

Contact: Brenon Daly

A half-decade into a software shopping spree, Lexmark has announced its largest consolidation, dropping $1bn on Kofax. The price roughly equals the total amount the company has spent on a dozen software firms since it established a software platform with the $280m purchase of Perceptive Software in May 2010. (Lexmark still refers to its software unit, which generated slightly less than a dime of every dollar of overall sales last year, as ‘Perceptive Software.’)

The Kofax buy, which is slated to close next quarter, would essentially double Lexmark’s software business. In 2014, that division generated $313m of sales, a touch more than the amount Kofax put up. However, the vast majority of Lexmark’s growth in software has come through M&A. On an organic basis, Lexmark has indicated that software revenue increased just 3% last year. For its part, Kofax has been growing at about twice that rate, although that has also been boosted by acquisitions. (Kofax announced four deals over the past two years.) Still, both companies are lagging the roughly 10% overall growth rates in the ECM and BPM markets that they serve.

At $1bn enterprise value, Lexmark is valuing Kofax at about 3.3x trailing sales. That’s exactly the multiple it paid for Perceptive but a full turn higher than its other significant deal, the $264m pickup of ReadSoft last May. To pay for its baker’s dozen of software transactions, Lexmark has funneled off cash from its legacy printer business. It plans to cover about $700m of the purchase of Bermuda-domiciled Kofax with offshore cash and borrow the remaining $300m at slightly more than a 1% rate. Goldman Sachs & Co advised Lexmark, while Lazard banked Kofax.

Like other hardware – and specifically, printer – providers, Lexmark has looked to buy its way out of that declining and low-margin market. (Its software business runs at a gross margin in the high-60% range, a full 30 basis points higher than the rest of the company.) Lexmark has been relatively focused in its M&A, targeting two core markets, while HP, for instance, has bought across a broad swath of the enterprise software sector, including application and data management, information security and datacenter technology. However, the Kofax acquisition is much larger and broader than any business Lexmark has nabbed so far.

We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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