salesforce.com goes back to CRM

Scott Denne

Contact: Scott Denne

salesforce.com retrenches in its latest acquisition – the $390m purchase of CRM vendor RelateIQ. Unlike past acquisitions that brought salesforce.com into new territories such as marketing (Buddy Media and ExactTarget) or mobile software development (Heroku), this deal takes out a small, fast-growing rival. Part of the reason why salesforce.com is looking closer to its core business with this transaction is likely because of the limited success it’s had in buying beyond CRM (which we covered in a recent report).

Though dwarfed in size by salesforce.com, RelateIQ was growing quickly. The 100-person company had only about 20 employees a year ago and recently scaled up its fundraising by landing a $40m series C round less than a year after the general release of its product. Though certainly generating less than $10m in revenue, we understand that RelateIQ had gained traction among SMBs, particularly in financial verticals, which played no small role in the $255m post-money valuation on its last round.

While the move is at least partially defensive, we would not be surprised to see salesforce.com play this one very aggressively, possibly even giving away a free version of RelateIQ to scoop up a bigger portion of the SMB market. Or even using RelateIQ’s interface and technology to tie together marketing and sales apps across its suite.

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Security Innovation brightens training portfolio with Safelight

Scott Denne

Contact: Wendy Nather

As long as there are carbon-based life forms in the system, there will be a need for security awareness education. Security Innovation has spent several years enhancing its application-based security training, but now is expanding into general security training products by acquiring Safelight Security. Terms of the all-cash deal were not disclosed, and neither side used an adviser.

The two companies started talking about teaming up in late 2013. Safelight had last raised funding in 2011, garnering just under $1m from angel investors, and it needed more financing to ride the wave of demand for infosec awareness training. From the Security Innovation side, the deal is an opportunity to take out a likeminded competitor, pick up senior security talent (always in short supply), and collect Safelight’s customer base (since the two were rivals, there’s little overlap). While both sides had plenty of training content, Safelight’s was cast more in the mold of awareness marketing campaigns, including ‘themed collateral’ such as posters, YouTube-style short videos, tip sheets and infographics to go along with the computer-based training.

Both Safelight and Security Innovation have been around for a long time, but security training is gaining fresh interest as newcomers like PhishMe, Wombat Security and KnowBe4 join the scene. Security Compass remains a competitor, as does Denim Group, which still produces its ThreadStrong training videos. The combination of Security Innovation and Safelight is probably big enough to take on Cigital, SANS Institute and FishNet Security.

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

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Could [x+1] equal 3?

Scott Denne

Contact: Scott Denne

[x+1] looks set to be the next audience data manager to find a buyer. We understand that the company is nearing the end of a sale process that will likely value it above $200m.

Founded in 1999, [x+1] has been through its share of strategic shifts and name changes (Poindexter Systems, Ru4.com), though its core technology – predictive optimization for digital advertising – has been fairly consistent. Today, its core product is a data management platform (DMP) built around its optimization engine that provides marketers with a central repository to mix first-party audience data with third-party data and sync multiple marketing and advertising applications together.

Owning a DMP is an attractive option for enterprise software companies looking to deepen their marketing portfolios (Oracle and Adobe have already made moves here). One important difference, however, between [x+1] and other independent DMPs (which we profiled in a recent report) is that most of its revenue comes from customers purchasing slots for digital ads through its system. The low margins that come with media buying could make an enterprise software vendor uncomfortable with owning [x+1] or, at least, lower the multiple such a buyer would be willing to pay.

More likely, [x+1] will go to an ad-tech firm that already has similar margins and is eager to expand into other parts of the marketing stack. Rocket Fuel and Criteo would be at the top of the list as both, like [x+1], have price optimization at the core of their offering and both are flush after IPOs last year.

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For tech M&A, fortune favors the bold

Brenon Daly

Contact: Brenon Daly

So far in 2014, the top end of the tech M&A market has been a little barren for the buyout barons. In fact, there’s been only one private equity-backed deal among the 20 largest transactions this year, according to The 451 M&A KnowledgeBase. For comparison, in 2013, three of the 10 largest acquisitions involved PE shops.

In most years, financial acquirers generally account for roughly one out of every five dollars spent on tech M&A. But this year, the buyout shops are increasingly finding themselves elbowed aside by corporate shoppers. These newly confident strategic acquirers are (for the most part) enjoying lofty valuations on Wall Street, while also rolling around in the richest treasuries they’ve ever had. (And the debt market stands ready and willing to fund bigger acquisitions, if companies want to draw on that.)

We often say that to do deals, all that’s required is currency and confidence. Both are plentiful for most corporate buyers, which is helping to put overall spending on tech, media and telecom (TMT) transactions on track for record levels. (See our full report on TMT dealmaking in Q2 and the outlook for the rest of 2014.)

The emboldened corporate acquirer is probably best exemplified by Zebra Technologies and its mid-April reach for the enterprise business being spun off of Motorola Solutions. In years past, it wouldn’t have been uncommon for a divested business like this to land in a PE portfolio for a year or two of ‘rehabilitation’ before flipping back to a strategic buyer.

Instead, Zebra – an infrequent acquirer that had never spent more than $150m on a single transaction – decided to step in and buy the business directly. (Never mind the fact that Zebra has to borrow virtually all of the $3.45bn to cover the purchase, or the possible difficulties of integrating and operating a businesses that is about 2.5x the size of Zebra’s existing business.) And how has Wall Street reacted to the uncharacteristically bold dealmaking at Zebra? Shares have tacked on about 25% in value from pre-announcement levels and currently change hands at their highest-ever level.

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

Big money for little companies

Brenon Daly

Contact: Brenon Daly

With Wall Street continuing to look like forbidding territory to most IPO candidates, where are money-burning companies going to restock their treasury? Increasingly, hedge funds and mutual fund giants are providing, collectively, the hundreds of millions of dollars in financing that might have otherwise come through IPOs.

This, of course, isn’t an entirely new phenomenon. But we can’t recall a time that has seen more late-stage funding than the just-completed second quarter. Okta, Atlassian, New Relic, Pure Storage and others all drew in financing during the past three months from investment firms that have historically only purchased shares in public companies. In many ways, it’s a wonder that it took the recent chill in the IPO market to spur this ‘crossover’ activity to new levels. (We’ll have a full look at the recent IPO market – as well as the other exit, M&A – in our report on Q2 activity available later today on 451 Research.)

From the money managers’ perspective, these investments in private companies offer a bit of portfolio diversification, as well as the opportunity to outpace the returns of the broader equity market, which has registered a mid-single-digit percentage gain so far in 2014. And on the other side of the investment, the late-stage companies stand to receive tens of millions of dollars from a single investor without all the SEC rigmarole and other public company exposure.

Further, with billions of dollars to put to work, the mutual funds and hedge fund giants haven’t shown themselves to be as ‘price sensitive’ as other traditional late-stage funders. (The discrepancy between valuations of illiquid private shares and freely traded public stock stands out even more now, as new issues are being discounted heavily in order to make it public at all. For instance, Five9 stock has never even reached the minimum price the company and its underwriters thought it should be worth, and currently trades at just 3.5 times this year’s revenue. Meanwhile, MobileIron shares have dropped almost uninterruptedly since the company’s IPO, falling back to only slightly above their offer price. MobileIron is currently valued at only about half the level that a direct rival received when it sold earlier this year.)

Like life, markets are cyclical and IPOs will undoubtedly come back into favor on Wall Street at some point. But in the meantime, many late-stage companies are calling on the big-money investors to keep the lights on. We would include Box in that category. The high-profile company, which has been on file publicly since March, has found its path to the public market a rather rocky one. Having already raised more than $400m in backing, we could well imagine the money-burning collaboration software vendor crossing off an IPO (at least for now) and going back to a crossover investor for cash later this summer.

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Another quarter, another record for tech M&A

Brenon Daly

Contact: Brenon Daly

The greybeards got even busier in Q2. After a record start to 2014, old-line acquirers in the tech, media and telecommunications (TMT) markets spent even more on M&A in the just-completed second quarter. The aggregate value of all TMT transactions across the globe in Q2 totaled a post-recession record of $143bn, roughly three times the typical amount spent in recent quarters, according to The 451 M&A KnowledgeBase.

Telecom purchases dominated the spending totals for the April-June period, accounting for four of the five largest deals in Q2. Included in that tally is AT&T’s $49bn planned acquisition of DIRECTTV, which stands as the second-largest TMT transaction since 2002.

On the other side of the lifecycle, startups haven’t particularly figured into recent deal flow. There was just one early-stage company exit among the 20 largest Q2 acquisitions. (And frankly, with Beats Electronics running at more than $1bn in revenue and having raised $500m in funding, we’re not so sure the headphone maker would still be considered a startup.) For comparison, the sales of six startups made the list of the 20 largest deals of Q1 2014.

Overall, Q2 spending on M&A came in 13% higher than the level for TMT transactions in the first three months of this year. Taken together, the $270bn shelled out so far in 2014 exceeds the full-year spending totals for every year since 2008. Further, the frenetic activity puts 2014 on track to surpass an astonishing half-trillion dollars worth of TMT acquisitions this year.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2014 953 $143bn
Q1 2014 816 $127bn
Q4 2013 787 $59bn
Q3 2013 829 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $59bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn
Q4 2011 874 $38bn
Q3 2011 955 $63bn
Q2 2011 952 $71bn
Q1 2011 926 $45bn
Q4 2010 797 $41bn
Q3 2010 791 $50bn
Q2 2010 809 $66bn
Q1 2010 861 $30bn

Source: The 451 M&A KnowledgeBase

No earnout burnout this year

Scott Denne

Contact: Scott Denne

If the tech M&A boom ends tomorrow, at least the lawyers will stay busy. Earnouts hit $3.6bn on 92 deals so far this year, compared with $2.77bn on 126 acquisitions through all of last year. In some ways that’s to be expected – deal values are up this year, so earnout values are following. Indeed, similar to the way blockbuster telecom transactions are driving up overall deal values, the $1bn performance incentive on Altice’s $23.4bn takeout of wireless carrier SFR accounts for one-quarter of all the 2014 earnout value.

What’s different this year is that earnouts are far more common on larger purchases. In acquisitions with an upfront payment of $50m or more, we see 29 deals with earnouts, already surpassing the full-year totals for each of the past two years, and well above the pace of 2011, when 39 transactions of $50m or more contained an earnout.

Also, the size of a typical earnout shrank dramatically this year to just 18% of the upfront deal value, down from 38%, 29% and 24% in each of the previous three years. The increased use of earnouts suggests that more buyers and sellers are far apart on price. The shrinking proportions of earnouts, however, shows that while buyers would like to use more performance-based incentives to defray M&A costs, it’s a seller’s market right now.

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

Monitise reaches into retail

Scott Denne

Contact: Scott Denne

Monitise expands its M&A profile with the pickup of Markco Media, a company that owns and operates two deals and discounts websites. Though this is the mobile banking vendor’s first move into retail, Monitise has been an active acquirer of payment providers as it has sought to expand the geographic reach and technological capabilities of its mobile payments service.

With the deal, Monitise aims to capitalize on Markco’s relationships with both retailers and consumers by getting more of both groups signed up on its mobile payments platform. The target also brings a team that will strengthen Monitise’s own deals service, where it enables banks to send targeted coupons to customers based on purchase activity.

While this is Monitise’s first M&A foray outside of finance, it’s bringing its old negotiating habits along with it. The $46m acquisition of Markco comes with a potential $47m more in performance-based incentives. Three of Monitise’s five acquisitions have come with earnouts that could double the deal value and a fourth purchase had an earnout that could reach two-thirds of the upfront price.

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

Audience senses opportunity in wearables

Scott Denne

Contact: Scott Denne

Audience takes a different angle to its customer concentration problem with the $41m purchase of Sensor Platforms. The rationale behind the acquisition is similar to Cirrus Logic’s $488m pickup of Wolfson Microelectronics in April – both audio component providers get the vast majority of their revenue from a single phone maker, and while Cirrus took out Wolfson to find more wiggle room in the cell phone sector (it hopes to upsell Wolfson’s low-end device makers), Audience’s M&A answer to the concentration conundrum is to find new markets.

Audience has wrestled with the downside of overreliance on a single vendor in the past. In mid-2012, Apple accounted for more than half of Audience’s revenue, but that number has steadily slipped since, reaching 5% last quarter as Apple opted not to use Audience’s technology in iPhone 5 models. That announcement in September 2012 carved 63% off of Audience’s stock price. Today, Audience’s growth has rebounded, but the stock hasn’t gotten back to its highs and 74% of sales come from Samsung. (Not coincidently, Apple accounted for about 80% of Cirrus’ business in 2013.)

Companies selling voice processors and other audio components for cell phones are boxed in. Smartphones are the fastest-growing segment of the market, but that market is dominated by two players. According to a March survey by ChangeWave Research, a service of 451 Research, 70% of people planning to buy a smartphone in the next 90 days planned to purchase an Apple or Samsung device – Motorola occupied third place with a whopping 3%.

In reaching for Sensor Platforms, Audience aims to crack into the market for wearable devices by integrating Sensor’s motion technology into its voice processors. It’s smart for Audience to snag a software firm with 20 employees that likely has a low burn rate, meaning there’s little downside to the deal aside from the upfront price. Today, however, there are no clear applications for a chip that combines voice processing with motion sensing in the wearables space (Sensor’s business is currently in phones), and Audience could remain vulnerable to the whims of a single OEM for several years.

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

Opera hits a high note

Scott Denne

Contact: Scott Denne

Opera Software departs from its measured mobile advertising M&A strategy with the $75m purchase of AdColony, which operates a mobile ad network for HD video ads. Opera has built a mobile ad business with $133m in trailing revenue, having spent only about $40m (excluding earnouts) on a half dozen companies, starting with the acquisition in January 2010 of AdMarvel for $8.3m.

This deal is very different. For one, a $75m upfront payment makes it Opera’s largest. And though the mobile software firm is no stranger to earnouts, it’s on the hook for as much as $275m more in cash and stock payments should AdColony hit its revenue and EBITDA targets. Unlike Opera’s previous targets, AdColony comes with substantial revenue: it finished 2013 with $53m in revenue, up from $11m in 2012, and is expected to contribute $170m to Opera’s 2015 top line (25% of total anticipated revenue).

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