Intuit’s ledger needs larger deals

Scott Denne

Contact: Scott Denne

Intuit has carved out an incumbent position for itself around its accounting software, and that’s a position it needs to leverage now while the competition is limited. The company is in an enviable position as a provider of software to small businesses, a market that has taken off in recent years as lower-recurring-cost SaaS products are easier to sell to cash-flow-conscious small businesses.

Most of Intuit’s recent acquisitions have been small. If it were to look to make bigger deals, it could, for example, use its payroll software businesses to help it get deeper into human resources with an add-on such as PeopleMatter, which provides software for managing hourly employees, or iCIMS, which offers a suite of cloud HR software for smaller businesses. Intuit has willingly spent heavily on M&A in the past, including its $423.5m purchase of marketing software vendor Demandforce in 2012.

Intuit has used the popularity of QuickBooks to spring into other corners of small business software, including payments, payroll and marketing. All of those have become solid businesses and are growing nicely, each in excess of 10% annually; however, competition has been limited in the small business sector. Now other firms – including Web hosting giant Go Daddy, marketing software company HubSpot and collaboration vendor Zoho – are making headway into the market. Today’s successful startups scale quickly, making internal innovation at Intuit an untimely choice. If the company doesn’t scoop up promising young companies soon, it could find itself with much more competition for deals and customers in the small business segment.

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HomeAway returns from its M&A vacation

Scott Denne

Contact: Scott Denne

Though HomeAway’s M&A activity initially slowed following its IPO two years ago, the vacation rental company has resumed its earlier pace, logging three deals in the past five months, including today’s acquisition of Stayz Group for $198m in cash.

Stayz, HomeAway’s largest purchase, amplifies a few of the vacation rental giant’s strategic projects. Stayz generates nearly all of its $23m in revenue (for the year ended June 30) by charging owners a per-booking fee, a business model that HomeAway itself only began extending to some of its websites last quarter. Also, Stayz is based in Australia, fitting well with HomeAway’s ambitions in Asia-Pacific. All three of its acquisitions since July have been of companies in that region, including Stayz, an operator of several vacation rental websites in Australia. Prior to those transactions, HomeAway had bought only one (European) company following its IPO in July 2011.

That pause was unusual for HomeAway, which began a dealmaking spree in November 2006 when it raised $100m from several venture firms and picked up VRBO.com for an estimated $120m. Between that acquisition and its IPO, it spent more than $138m buying nine other vacation rental websites (and one software firm) around the globe.

HomeAway’s largest deals

Date announced Target Deal value
December 4, 2013 Stayz Group $198m
March 3, 2010 BedandBreakfast.com $31.6m
February 4, 2009 Homelidays.com $45.4m
November 13, 2006 VRBO.com $120m*

Source: The 451 M&A KnowledgeBase *451 estimate

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Overseas shopping in November drives tech M&A to post-recession record

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in the just-completed month of November nearly doubled from the same month last year, as European shoppers went on an unusually big spending spree. However, the rest of the market was very quiet. The number of announced transactions last month sank to the lowest monthly level since the end of the recession.

Across the globe, the total value of tech deals announced last month came in at $23.3bn, slightly above the monthly average in 2013 but dramatically above the $12.2bn recorded in November 2012. Four of the five largest acquisitions announced last month involved targets based outside the US, including Germany’s Scout24 and Dutch software vendor UNIT4.

The surge in November spending means that 2013 will set a new record for the value of tech deals since the end of the recession. In the first 11 months of this year, buyers announced transactions worth an aggregate value of $222bn, higher than any other full-year total since the credit crisis knocked the economy into a tailspin from which is has only haltingly recovered.

The incomplete recovery shows up dramatically in the number of prints. Consider this: The number of announced transactions has declined, year over year, in every single month in 2013, leaving the total number of deals so far this year down 14% compared with last year. And deal flow is drying up even more. In November, buyers announced just 209 transactions – the lowest monthly total in four years and down nearly one-third from the level in November 2012.

Post-recession deal flow

Period Deal volume Deal value
January-October 2013 2,861 $222bn
January-October 2012 3,338 $163bn
January-October 2011 3,462 $204bn
January-October 2010 3,003 $173bn
January-October 2009 2,758 $137bn

Source: The 451 M&A KnowledgeBase

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Akamai doubles down on security with $370m acquisition of Prolexic

Scott Denne

Contact: Scott Denne

Akamai Technologies reaches for Prolexic Technologies in a $370m all-cash deal that’s a departure from the acquirer’s typical profile. Not only is it Akamai’s largest purchase to date, but Prolexic, a security vendor, doesn’t directly add new capabilities to the company’s core CDN offering.

That’s not to say the transaction isn’t complementary. Prolexic brings Akamai a platform it can use to offer security services – something that could help defend against the downward pricing pressure faced by CDN providers. Also, Prolexic focuses on defending datacenters against denial-of-service (DOS) attacks and has enterprise networking clients – an area where Akamai is trying to expand further and was the focus of its pickup of Velocius Networks, its only other acquisition this year.

From another view, the deal is similar to Akamai’s past M&A strategy of snagging competitors before they can do too much damage. This was the case with its $268m acquisition of Cotendo, which it bought during a contentious patent battle. At about $50m in projected revenue this year, Prolexic is about the same size as Akamai’s own security business, which, like Prolexic, focuses on DOS attacks. We’ll have a longer report on this transaction in tomorrow’s 451 Market Insight.

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Acxiom looks to sell its $271m datacenter biz, according to sources

Scott Denne

Contact: Scott Denne

Acxiom has spent the last two years separating a fragmented set of services into discrete units and sharpening its focus around the largest portion of its business: marketing data and technology services. Now sources tell us it may take the next step in separating those units by selling its IT infrastructure services business, a unit that accounts for about a quarter of the company’s revenue.

Its IT infrastructure business, which includes mainframe, server hosting and cloud infrastructure services, generated $271m in revenue over the last 12 months. The division’s sales have been shrinking as it lost customers and faced pricing pressure. Revenue is down from its most recent fiscal year (ending in March), when it brought in $275m, and from FY 2012, when it logged $292m. But the unit is becoming more profitable. In the most recent quarter, operating profit rose to $12m from $9m a year ago, with operating profit margins increasing from 12% to 18%. Acxiom’s IT infrastructure business recorded $89m in EBITDA in its last fiscal year.

Acxiom already sold off several of its other business units, including its background-screening business in early 2012 for $74m. The company’s divestitures are part of a plan to make its three separate business units – marketing data, IT services and other services – operationally independent. Axciom even separated its internal IT functions from its IT services business, likely in preparation for a sale.

Based on recent acquisition valuations, Axciom’s IT infrastructure business could fetch a price as high as $600m. Hosting companies landed a median valuation of 9.4x EBITDA in the last few years, but Acxiom’s assets will likely sell for less. Telecommunications companies have paid the highest multiples so far, but those buyers may be put off by the mainframe portion of the business, or at least value that portion significantly less. The unit’s improving profit margin make it attractive to private equity firms or sponsored companies, which have paid a median 6.8x EBITDA since 2010, according to the 451 M&A KnowledgeBase.

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High ground for Hyland? Rumors swirl about billion-dollar exit

Brenon Daly

Contact: Brenon Daly

A half-dozen years after acquiring a majority stake in Hyland Software, Thoma Bravo is rumored to be looking at selling its chunk of the enterprise content management (ECM) vendor. And the deal – if there is one – won’t be cheap: the asking price for Hyland is thought to be about $1.2bn.

According to our understanding, that would value Hyland at more than 4x trailing sales and about 15x EBITDA. Those multiples are slightly richer than the current trading valuation of ECM giant Open Text. Although we should note that Open Text shares are currently trading at an all-time high, up some 50% since the beginning of the year.

The bull market for shares of rival Open Text has prompted speculation that Hyland, which is being advised by Goldman Sachs, is dual-tracking. After all, Hyland has already been down at least some of the road to the public market. The 22-year-old maker of the OnBase product put in its IPO paperwork back in May 2004, but pulled it a half-year later. (Currently, Hyland has roughly five times the revenue and number of employees it did when it put in its prospectus almost a decade ago.)

While Hyland could certainly opt for a trade-sale, an IPO might just prove more lucrative in the long run. Some software investors might pass on putting money into a license-based company, but Hyland certainly has characteristics that would nonetheless find some buyers on Wall Street. The pure-play ECM company puts up about 20% growth, primarily by focusing on specific vertical markets, most notably healthcare, higher education and financial services.

That position tends to be more defensible than broad, horizontal ECM offerings, which have come under threat from old rivals (SharePoint) as well as startups (Box). (My colleague Alan Pelz-Sharpe has noted that Hyland most often bumps into vendors that were consolidated during the previous round of ECM match-making, such as FileNet and Documentum.)

Cleveland, Ohio-based Hyland also benefits from strong customer support, and it has a reputation as a solid company with ‘Midwestern’ values, and a culture of an ‘honest day’s wage for an honest day’s work.’) The company boasts a 98% maintenance renewal rate among its nearly 12,000 customers.

Hyland’s approach stands out starkly to the approach taken by the much larger – and more mature – Open Text, which has dropped more than $2bn on a dozen deals over the past three years. It gobbled up a number of ECM vendors before expanding into adjacent markets such as business process management and data integration. Still, Open Text’s consolidation strategy hasn’t hurt it on Wall Street, which values the company at $5bn.

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Turnaround at Harris capped off in sale to Nielsen

Scott Denne

Contact: Scott Denne

Harris Interactive has lost revenue, added a few new products and made only subtle changes to its income statement since launching a turnaround effort in 2011. Despite few changes, the stock is up dramatically since then, and today it found a buyer in Nielsen, which plans to purchase the polling and market research firm for about $117m.

Harris Interactive’s stock, which at one point was close to being delisted, is up 2.5 times since bringing on new management in June 2011. Its revenue has declined to $140m, from $164m in 2011. The main change at the company has been to interest investors in its stock, which it has done by posting predictable results, slowing the pace of declining revenue (some of the decline came from getting rid of its lowest-margin services) and trimming expenses just enough to tip it back to profitability.

Although losing money, the company was able to shift its operating profile enough to become profitable, but hardly the sort of changes one would expect given the growth in its stock price. As a percentage of revenue, the cost of services ticked down slightly to 62% last quarter from 66% before its most recent turnaround effort began, and its sales and administrative expenses dropped just three percentage points to 31%. It posted $1.3m in profit last quarter, its fifth consecutive quarter of profitability.

While management was successful in more than doubling Harris’ share price, the shrinking company was never going to find a stellar exit. That’s apparent in Nielsen’s $2-per-share offer, which comes in slightly below recent closing prices for Harris’ shares. On an enterprise value basis, the deal values Harris at 0.7x trailing sales and 9.1x trailing EBITDA. When the turnaround began, Harris was valued at less than 0.3x trailing sales.

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The world’s smallest Violin

Scott Denne

Contact: Scott Denne Tim Stammers

Before its IPO paperwork was made public, Violin Memory was expected to be the next enterprise tech knockout. The sensationalism subsided, however, when the company’s financials became public and potential investors noticed it was bleeding cash. Now, after its first-ever quarterly conference call showed worse-than-expected results, Violin is obviously in need of a tune-up.

The flash storage vendor reported past and future revenue numbers below what the Street was expecting. In the just-closed quarter, the company put up $28m in sales, below what analysts were anticipating, and projects revenue of just $30-32m in the fourth quarter – nearly 40% less than the $43m benchmark analysts were forecasting. Violin’s shares plummeted 50% on the news, erasing more than $200m in market value.

Management blames a slowdown in federal spending for the weak results – the company began the quarter tracking toward $10m in federal revenue and finished with just $2m. While blaming the federal government, which accounted for about one-fifth of its sales last year, is convenient, it’s not the only problem. Based on its projections for next quarter, Violin isn’t expecting much growth in other verticals, either, and tempered expectations for its PCIe product, saying revenue from that would only be about $1m.

Violin was early to the all-flash market. Now that the space is quite contentious, the absence of certain core technologies exposes the company’s weakness against rivals that had more time to build table-stakes storage functions such as de-duplication, compression, snapshots and thin provisioning. Violin’s focus should be on promoting the products that other all-flash providers don’t have, including its Windows-powered server incorporating flash and its GridIron-originated caching appliance.

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Trimble bucks tech M&A trends

Scott Denne

Contact: Scott Denne

Bucking the overall tech M&A landscape, Trimble Navigation continues its steady M&A program with the acquisition of 3-D structural engineering software provider CSC. With this transaction and the seven others it’s done this year, Trimble goes against the grain of two notable M&A trends: declining deal volume and increased spending.

Trimble, which provides a variety of industry-specific software and systems, has announced eight deals so far this year, on par with the number of acquisitions it announced in each of the previous two years. Each individual transaction has been too small to necessitate disclosing the price paid, and CSC is no exception. The target posted just $15.5m in revenue for the year ending March 2012 (according to public filings of one of its British investors), up from $12.7m in 2007, the year ISIS Equity Partners led a $39m management buyout of the business.

Through the first three quarters of the year, Trimble spent $200m buying companies, down from $355m in the same period last year. In 2012 it spent $728m on nine companies (including a single $335m purchase), and in 2011 it spent $760m (including $489m on one deal), with the same number of disclosed acquisitions. The declining spending bucks the trend that we’re seeing throughout tech M&A, as the value of announced deals is up 33% so far this year from the year-ago period.

Tech M&A volume and value, year-over-year comparisons

Year Volume Volume percent change Value Value percent change
2013 (YTD) 2,811 -14% $214.55bn 33%
2012 (YTD) 3,265 -4% $161.6bn -20%
2011 (YTD) 3,397 $200.82bn

Source: The 451 M&A KnowledgeBase

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Bankrate boosts insurance biz with recent deals

Scott Denne

Contact: Scott Denne

Though Bankrate’s dealmaking has slowed since its 2011 IPO, its recent acquisitions, including its latest purchase of LeadKarma, have been focused on a single strategic initiative – shifting from a quantity- to a quality-based approach to selling sales leads to insurance companies.

LeadKarma furthers this strategy by bringing search engine marketing savvy to Bankrate (as well as about $3m in quarterly revenue, according to the acquirer). Bankrate runs a variety of websites with financial content (Bankrate.com, CreditCards.com, CarInsuranceQuotes.com, etc.) and generates cash mainly by selling leads to credit card and insurance firms. Its lead-generation business accounted for nearly three-quarters ($89m) of its $121m in revenue last quarter. Until recently, Bankrate had a volume-based approach to selling insurance leads, but it has been in the process of moving to lower-volume and higher-quality leads.

The company made a similar move toward quality in 2010, picking up CreditCards.com for $143m to grow the size of its credit card lead-generation business and focusing on performance-based pricing for credit card leads. Bankrate’s last two purchases before LeadKarma (InsWeb in 2011 and InsuranceAgents.com last year) also focused on improving the quality of its insurance leads. The insurance portion of the business grew 30% sequentially in the most recent quarter, following a few down quarters as a result of the strategy shift.

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