BlackBerry’s strategy decrypted

Scott Denne

Contact: Scott Denne

In BlackBerry’s first purchase in more than two years, the struggling smartphone maker buys voice encryption vendor Secusmart, reflecting the importance of security in its turnaround strategy.

Secusmart develops technology for encrypted voice and data communications. The company’s German roots should appeal to BlackBerry’s customers in the region (Europe and the surrounding areas accounted for almost half of BlackBerry’s revenue and is declining at a faster rate than North American sales), where security, especially anti-eavesdropping security, is growing in importance.

Security was a key part of BlackBerry’s rise – its secure email servers helped it become the go-to device for mobile email. This acquisition, along with its CEO’s public statements (he said the words ‘secure’ or ‘security’ 20 times on the company’s last earnings call), demonstrate that BlackBerry is looking to build off of that reputation to recapture enterprise sales of its phones and mobility management software.

BlackBerry still has a foothold in the enterprise segment, but time is limited. According to ChangeWave Research, a service of 451 Research, BlackBerry phones are far more popular among IT buyers than the general public, with 20% of IT departments reporting that they plan to purchase BlackBerry phones in the next 90 days, down from 33% in the same survey a year earlier. A separate survey by ChangeWave shows that BlackBerry still remains a leader in MDM installations, but no buyers reported planned installations or evaluations of BlackBerry’s MDM products in the near future.

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Sold! Zillow buys fellow online real estate firm

Scott Denne

Contact: Scott Denne

Zillow’s acquisition of fellow Internet real estate company Trulia in a stock swap worth $3.5bn shows the premium a company gets by occupying the top spot in its market. Zillow is only slightly larger but is valued substantially higher in today’s deal, which pegs Zillow’s enterprise value at 31x TTM revenue and Trulia’s at 20x.

Both companies have similar revenue, costs and businesses: hosting real estate listings and selling advertising space and other services to real estate professionals. Zillow generated $224m in trailing revenue and grew 70% YoY in its last quarter, while Trulia posted $174m and grew 127% (a lot of that comes from its acquisition in 2013 of Market Leader, but even comparing Trulia’s 2013 growth, minus contributions from Market Leader, it clocks a few percentage points above Zillow).

Ahead of the deal announcement, the market valued Zillow at 18x and Trulia at half that. Zillow sees value in being the leader and by picking up its closest peer, it shows that it’s willing to spend to retain that spot.

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No M&A vacay for TripAdvisor

Scott Denne

Contact: Scott Denne

Consolidation among online travel vendors continues as TripAdvisor reaches for Viator in a $200m deal. The purchase of the vacation activities website extends an acquisitive streak for TripAdvisor, which has inked four transactions this year and 11 since a late-2011 spinoff from Expedia.

Aside from being TripAdvisor’s largest acquisition on record – in fact, the price paid for Viator, a 250-employee company, is the only deal value it has ever disclosed – the purchase looks like most of TripAdvisor’s others; the company has been rolling up hotel bookings and vacation research websites for years. With this transaction, TripAdvisor will have spent $350m on four acquisitions this year, compared with six purchases for $35m in all of last year.

TripAdvisor isn’t the only one ramping up its consolidation activity. Travel booking is among the most mature sectors of the Internet – for evidence, look no further than Priceline.com’s $2.6bn pickup of on-premises software provider OpenTable. According to The 451 M&A KnowledgeBase, there have been 41 acquisitions of companies with a disclosed and estimated value of $2.9bn in the travel vertical so far this year, compared with just 36 deals for $2.4bn in all of 2013.

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With one divestiture done, will Juniper cut the cord on Trapeze, too?

Brenon Daly

Contact: Brenon Daly

Having largely worked through an internal cleanup of its operations, Juniper Networks is now looking to shed some of those operations. The networking gear provider recently divested its Junos Pulse to private equity newcomer Siris Capital, pocketing an unexpectedly rich $250m for its mobile and network security division. With Junos Pulse off the books this quarter, we suspect that Juniper will now turn its attention to cutting the cord on Trapeze Networks.

The rumored divestiture of Trapeze (if it indeed comes to pass) would unwind Juniper’s $152m purchase of the WLAN gear provider back in November 2010. (Ironically, Juniper picked up Trapeze when it was divested by Belden.) Although Belden actually turned a (slight) profit on its ownership of Trapeze, we doubt that Juniper will come out ahead on any divestiture because Trapeze has lost much of its standing in the WLAN market. (Even Juniper seems to have acknowledged this, inking a rather involved partnership with WLAN rival Aruba Networks last month.)

Juniper’s moves come as the 18-year-old company faces pressure from activist hedge funds to pick up its performance. (Juniper shares have basically flatlined over the past decade, and have underperformed rival Cisco Systems more recently.) So far, Juniper has focused its efforts on its cost structure, cutting more than 400 jobs over the past year and consolidating its real estate holdings, for instance.

Fittingly for a company under scrutiny from Wall Street gadflies, Juniper’s cost savings have been put toward ‘shareholder friendly’ expenses, such as funding an increased share buyback as well as a newly announced dividend program. We would add that Juniper’s cash, which totals almost $4bn on hand, isn’t going toward M&A. The company hasn’t announced an acquisition in 2014. As things stand now, given Juniper’s focus on its financial operations, we could well imagine that the company will be a net seller – rather than buyer – of businesses this year.

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Yahoo lands a Flurry of mobile data

Scott Denne

Contact: Scott Denne

Yahoo tops off its push into mobile apps by picking up Flurry, a vendor that offers an app analytics service and generates revenue through an ad network that leverages the data and publisher relationships from the service.

While Yahoo has been among the most acquisitive companies over the past few years, its purchases have been focused on expanding its mobile development team and its content. In fact, Yahoo hadn’t acquired any technology to help monetize content since the $270m pickup of interclick in late 2011. Though terms of the Flurry buy weren’t disclosed, various reports put it in the same neighborhood as that acquisition ($200m-300m).

Flurry’s business is operating a mobile ad network. Those companies rarely fetch high multiples because the business is precarious and driven by individual ad campaigns, rather than long-term subscriptions or licenses. Recently sold ad networks such as AdColony, Adconion and Jumptap have fetched 1.3-2.7x trailing 12-month revenue. In Flurry’s sale, however, we expect that the value of the target’s deep mobile audience data drove the multiple above that range.

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ACI reaches for Retail Decisions as fraud moves to new channels

Scott Denne

Contact: Scott Denne Jordan McKee

Payment-processing vendor ACI Worldwide preps for an uptick in fraud beyond the point of sale by picking up Retail Decisions for $205m. The acquisition is ACI’s priciest deal on record, following a general trend of higher multiples in the antifraud space.

Card-present point-of-sale fraud is expected to decrease in the US as credit card companies migrate to the EMV standard beginning in 2015, but fraud from card-not-present transactions, such as online and interactive-voice-response transactions, will likely grow. The trend has already played out in the UK and Canada, both of which have implemented the EMV standard. Retail Decisions’ expertise in e-commerce fraud detection and management will provide ACI and its merchant customers with an advantage as they go up against strong card-not-present headwinds in coming months.

ACI is willing to pay for that advantage. Prior to purchasing Retail Decisions at an enterprise multiple of about 4x revenue, the most ACI had paid was 2.1x in the $516m acquisition of S1 three years ago. Antifraud technologies have fetched high multiples over the past year in deals such as Experian’s purchase of 41st Parameter (14.1x), F5’s takeout of Versafe (43.9x) and IBM’s pickup of Trusteer (25.7x).

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Care.com squeezes into retail with Citrus Lane

Scott Denne

Contact: Scott Denne

Care.com expands into commerce with the $31m pickup of Citrus Lane, a gambit that’s meant to decrease the company’s reliance on a subscription service that’s increasingly expensive to fill with new members. Care.com’s service – a website that matches families with babysitters and other caregivers – has grown substantially in terms of memberships and revenue (up 40% YoY last quarter), but the amount of money the company spends on marketing to sustain that momentum is expanding faster.

In its last quarter, Care.com spent $20.5m on sales and marketing, or 81% of revenue, up from 71% a year ago, while the average paid membership lasts seven months. Adding a parenting-focused commerce company to its platform could leverage that marketing spending through new kinds of revenue from people who visit the website. Also, Citrus Lane sells monthly subscriptions for parenting gift boxes – adding that to its own subscription service could entice parents to stick with Care.com longer than seven months.

The deal resembles Care.com’s previous acquisition, the $45m reach for Breedlove & Associates, which added a payment-processing service to its platform. We expect Care.com to continue looking for businesses that it can stitch into its matching service. A parenting content play would be a powerful combination, as it would not only add revenue via advertising and lead-generation services, but could also help defray the expense of getting parents to the website in the first place.

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TubeMogul’s IPO getting fuzzy reception

Scott Denne

Contact: Scott Denne

TubeMogul has had a tough time finding reception on Wall Street. The company, which sells software and services to enable brands to advertise in online videos, cut the expected range of its IPO to $7-8 per share from $11-13, and its existing investors have informally committed to buy more than half of the $47m offering.

Some of the difficulty stems from the performance on its closest peers – Tremor Video and YuMe. Those video ad networks went public last summer and have seen their value drop 57% and 34%, respectively. TubeMogul is transitioning itself to a provider of software (41% of revenue last quarter), not just services (58%, down from 76% a year ago), giving it higher gross margins and potentially a higher valuation – at the midpoint of its range it would have a pro forma enterprise value of about 2.3x trailing revenue, double what YuMe and Tremor command.

Despite the potential for TV ad dollars – which currently account for about half of all ad spending – to move online, the transition is in its early days and while TubeMogul has managed to capture a chunk of the first phase (desktop video accounted for 95% of its revenue in each of the past two years), Wall Street may be wondering if it will be able to post the same growth (more than 2x YoY last quarter) selling ads into mobile devices, connected TVs and other emerging forms of video consumption.

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Two bubbles later, ZipRealty sells to Realogy

Scott Denne

Contact: Scott Denne

Having bounced from one bubble to the next, ZipRealty ends a decade-long run as a public company with the sale to Realogy Holdings for $166m. Founded in 1999, the Web-based real estate software firm caught both sides of the dot-com wave before riding the real estate boom to a 2004 IPO and the crash that followed.

ZipRealty came through the dot-com bubble relatively unscathed – it had some mild layoffs but continued to raise funding. Annual revenue rose consistently following the IPO from $60m in 2004 to double that amount in 2010 before cratering to $85m in 2011; it hasn’t returned to growth since.

With the purchase, Realogy obtains a software platform and lead generation services to spread across its real estate brands – including Coldwell Banker, Century 21 and others. Offering those technologies to its franchisees should help Realogy deflect inroads from marketing and lead generation upstarts like Trulia and Zillow. While ZipRealty has proven out its technology platform at the agencies it owns, it will be up to Realogy to demonstrate that there is an appetite among realtors to deploy the white-labeled version of ZipRealty’s lead generation, lead scoring and CRM services. (ZipRealty has sold a cobranded version since 2011, but didn’t make much progress and only posted about $2m in revenue last year through the effort.)

The deal is about more than just technology. Realogy expects to double the EBITDA generated by ZipRealty’s offices and agents (the biggest driver of the transaction) to $20m annually within three years and looks forward to getting $21m in value from ZipRealty’s net operating losses. GCA Savvian advised ZipRealty on the deal.

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Microsoft nabs InMage for hybrid DR

Scott Denne

Contact: Dave Simpson Scott Denne

Microsoft’s pickup of InMage Systems strengthens its hand against VMware in the increasingly important area of disaster recovery. Unlike VMware, Microsoft now supports virtually all enterprise platforms for disaster recovery, whereas VMware is limited to its own environments.

While there are other emerging companies with a focus on disaster recovery for virtual machines, Microsoft was drawn to InMage for the depth and maturity of the technology the vendor has built up in 15 years of operations, and InMage’s focus on hybrid clouds plays into Microsoft’s ambitions in the service-provider market, where it has gained some recent traction.

Today, VMware is Microsoft’s main rival on the disaster-recovery front, and we expect that it will begin to see more of Amazon, which has been busy adding business-continuity features to the AWS cloud, including a recent partnership with HotLink, which provides DR services for VMware environments by using AWS as the recovery infrastructure.

Subscribers to 451 Research’s Market Insight Service can click here for a detailed report on this transaction, including a profile of InMage, a look at its competition, and an estimate of its trailing revenue.

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