CenturyLink continues to make cloud plays with Tier 3 buy

Scott Denne

Contact: Scott Denne Al Sadowski

CenturyLink continues to look to M&A as it expands its cloud business, this time reaching for Tier 3, a provider of cloud management software that will enable the acquirer to offer a complete set of outsourced IT services – from hosting to enterprise cloud. Terms of the deal weren’t disclosed, though we understand Tier 3 is on track to have just north of $10m in annual revenue.

The wireline telecom vendor expanded into the hosting and managed services business with its acquisitions of Qwest Communications and Savvis in 2011. Last summer, CenturyLink bought AppFog, an early-stage PaaS provider, and now is complementing that with the purchase of Tier 3, enabling it to sell production-ready IaaS (an offering it developed internally but will now migrate to the target’s technology).

CenturyLink is looking for those expanded capabilities to stem recent losses in its datacenter division. In its most recent quarter, the managed services business shrunk by $5m to $342m due to the faster-than-expected loss of colocation customers from Qwest. CenturyLink also took a $1.1bn impairment charge on goodwill related to its datacenter group to account for some overzealous growth expectations. Even its managed services business is moving slower than the industry average, growing about 15%. We project managed services to grow 21% this year.

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Software’s haves and have-nots

Scott Denne

Contact: Scott Denne

Advent International said Monday that it will hand over $1.6bn for software provider UNIT4. The announcement, however, was almost lost in the hoopla surrounding the opening of Dreamforce, salesforce.com’s annual customer and developer lovefest. The two events – along with the buzz they generated, respectively – go a long way toward explaining the chasm between valuations for traditional enterprise software vendors and their SaaS counterparts.

Advent’s proposed take-private values the Dutch ERP vendor at 2.7x its trailing 12-month revenue. That’s a far cry from the rich 10.3x valuation that salesforce.com fetches on the public market. We’re not picking on UNIT4. In fact, it secured a slight premium to the median price-to-sales multiple of 2.1x in comparable purchases of software firms by PE shops. (On another – perhaps more relevant – measure, Advent is paying basically 14x EBITDA for UNIT4, right in line with precedent transactions.)

Like many other traditional software firms, 33-year-old UNIT4 hopes to transition its business to include more SaaS revenue – part of the motivation for going private. From 2011 to 2012, its (still small) SaaS business increased 25% and accounted for 10% of its sales. The reason for the messy and complicated transition to SaaS? Growth.

A recent survey by ChangeWave Research, a service of 451 Research, found that 32% of respondents plan to increase their SaaS spending over the next six months – that’s about twice as high as the percentage who forecast an increase in overall software spending. That trend is what has boosted shares of salesforce.com to roughly their all-time high, some 1,300% higher than where they came public in mid-2004. Salesforce.com is expected to report fiscal third-quarter sales growth of about 33% after the closing bell on Monday.

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Under Armour expands mobile community with MapMyFitness buy

Scott Denne

Contact: Scott Denne

The opportunity to build a community of customers is pushing non-technology companies toward mobile application businesses. The latest such deal, Under Armour’s $150m acquisition of MapMyFitness, shows the opportunity for consumer goods vendors to enter new markets – and expand current markets – by moving into mobile.

Under Armour is covering the entire purchase price in cash, though it hasn’t yet decided if the funds will come from its own balance sheet (it held $186m in cash and equivalents as of September 30), its revolving credit facility or a combination of the two. Allen & Co advised MapMyFitness on its sale, while Peter J. Solomon Company advised Under Armour.

While Under Armour already sells some wearable technology that monitors athletes, it lacks an online and mobile community, which traditional tangible goods suppliers are seeing as increasingly crucial to brand value and customer retention. MapMyFitness changes that. Founded in 2009, the company quickly grew to more than 20 million registered users. And unlike many other fitness applications, which offer little in the way of social networking, MapMyFitness provides a wide-reaching social network of fitness enthusiasts, as well as a directory of fitness events.

The desire to build a live, interactive community reflects the rationale in other similar deals this year, such as Hasbro’s pickup of Backflip Studios, in which the toymaker cited the mobile gaming firm’s existing network of users as part of the motivation for the transaction, and Lonely Planet’s recent acquisition of TouristEye, which has the potential to greatly expand the reach and real-time information of the travel-book publisher’s existing Web community.

Purchases of mobile app developers by non-tech companies this year

Date announced Acquirer Acquirer sector Target Deal value
November 14, 2013 Under Armour Sporting goods MapMyFitness $150m
November 13, 2013 Lonely Planet Travel book publisher TouristEye Not disclosed
August 14, 2013 The Occasions Group Invitations and greeting cards Red Stamp Not disclosed
July 8, 2013 Hasbro Toymaker Backflip Studios $112m

Source: The 451 M&A KnowledgeBase

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In constant transition, Fiberlink sells to IBM

Scott Denne

Contact: Ben Kolada Scott Denne

Fiberlink Communications has been constantly evolving since its launch more than two decades ago. The company found its sweet spot in fast-growing, cloud-based mobile device management software, which has led to its sale to IBM.

Founded in 1991, Fiberlink spent most of its life building a VPN services business that it hoped would eventually hit $100m in sales, but its top line began to shrink as customers viewed those services as commodity. About six years ago, it began offering additional services for IT administrators to monitor and control mobile usage, eventually pivoting the company into the cloud-based enterprise mobile management business it has today.

According to sources, the pivot paid off handsomely – revenue for the cloud product, which launched in 2011, grew to account for about 40% of the $50m in sales the company generated last year. Fiberlink raised at least $84m in venture funding. Deutsche Bank Securities advised Fiberlink on its lengthy sale process (we first heard the company was for sale a year ago).

For IBM, the deal is the latest in a string of mobile acquisitions panning sectors from application development to fraud prevention. The purchase of Fiberlink gives Big Blue a SaaS-based service to complement its on-premises BigFix endpoint management software and a single offering for managing mobile devices and applications.

IBM’s most recent mobile deals

Date announced Target Sector
November 13, 2013 Fiberlink Communications Mobile device management
October 3, 2013 Xtify Mobile messaging
October 1, 2013 The Now Factory Mobile device analytics
August 15, 2013 Trusteer Anti-fraud
April 22, 2013 UrbanCode Software development tools

Source: The 451 M&A KnowledgeBase

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Trustwave’s latest deals bring revenue, not just product

Scott Denne

Contact: Scott Denne

Trustwave picks up Application Security Inc in a $25m stock deal that highlights the acquirer’s shifting M&A strategy since its aborted IPO attempt two years ago. With this transaction, like the purchase of M86 Security before it, Trustwave is grabbing a business with significant revenue, not just interesting products to roll into its MSSP division.

Like Trustwave, Application Security targets customers under pressure to comply with industry regulations like HIPAA and PCI, so pairing the two businesses together should create upsell opportunities. Application Security made a name for itself in the database security sector, but its growth was hindered by the small size of the market and aging investors with limited capacity to add to the company’s coffers – only one of its four venture investors has raised a fund since 2003 and its most recent round came in 2006.

Though smaller than anti-malware vendor M86, which Trustwave bought early last year (see our estimate of that deal here ), Application Security built a business that, we understand, reliably generated $20-25m in annual revenue, though little growth in the past few years. Still, that revenue will give about a 10% boost to Trustwave’s top line and strengthen its position for a potential IPO.

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DT makes $735m move into Eastern European B2B

Scott Denne

Contact: Scott Denne

Deutsche Telekom hands over $735m for GTS Central Europe in a deal that brings a geographically unique set of fiber and datacenter assets but little growth. The move plays into DT’s desire to build its B2B offerings that service a set of customers beyond its base of Germany-based multinational corporations.

GTS has both fiber networks and datacenters across multiple countries in Eastern and Central Europe, making it the region’s only multi-country, multi-tenant datacenter business, according to a 451 Research report. That reach is valuable to the German telecom giant because it needs fixed-line networks and datacenters to go along with its wireless-only services in the region, especially in countries such as the Czech Republic and Poland.

GTS’s Slovakia operations, where DT already has fixed-line network assets, are not included in the deal. The portion of the business that is going to DT posted $459m in revenue and EBITDA of $115m last year.

Despite its geographic reach in its home market, GTS hasn’t grown since its acquisition by a consortium of private equity investors in 2008. The year before that transaction, it reported $587m in revenue – a mark it hasn’t hit since, which DT attributes to tight regulations and difficult economic conditions in Europe. Last year, GTS as a whole, including its Slovakia operations, reported $511m in revenue and EBITDA of $136m.

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LivingSocial moves $260m worth of product in its biggest sale

Scott Denne

Contact: Scott Denne

In an unusual divestiture among close competitors, LivingSocial sells its Korean Ticket Monster business to Groupon for $260m. Looking past the surprising development that LivingSocial will shortly own about $160m in stock (the rest is cash) of a rival, the transaction shows the companies’ paths diverging as the daily deals market cools down.

Sales at both businesses soared in the early days of flash sales and have since stalled as the novelty of the concept faded. To bounce back, LivingSocial, whose revenue was down this quarter for the first time (its financial performance is made public in Amazon’s filings, as the company has a 31% stake in LivingSocial), is expanding its role as a marketing partner for merchants, while Groupon is taking a different tack by moving into physical goods.

Ticket Monster fits well with the new Groupon – more than half of the Korean company’s business is physical goods. Last quarter, physical goods sales at Groupon set a record, accounting for more than one-third of the company’s $595m in revenue. While the new strategy has enabled Groupon to grow revenue as its daily deals business shrinks, its profits have taken a hit – margins on its physical goods are 10% compared with 86% from its merchant business. That’s OK for Groupon, which has $1.1bn in cash on hand, but it’s a less appealing strategy for LivingSocial, which is still private, unprofitable and raised another $110m from investors earlier this year. Following this transaction, physical goods will be less than 10% of LivingSocial’s business.

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Today NYSE, tomorrow NBC

Scott Denne

Contact: Scott Denne

Twitter harbors ambitions of being a force in both online video and traditional television. Now that the distraction of an IPO is behind it, we expect the company to focus its dealmaking efforts on video advertising technology.

Twitter’s audience isn’t growing as fast as it once was, and to ensure that its revenue growth rate doesn’t slow, it needs to squeeze more revenue from its audience. That was the rationale behind picking up MoPub, which will help Twitter build programmatic features into its own platform and serve as a gateway to the mobile ad market. A video ad firm would enable it to monetize Vine, extend into the growing online video ad space and, most important, grab a piece of the TV ad sector (which still dwarfs the entire digital ad market) by bringing those dollars into its own platform and helping spread them to other places on the Internet by enabling advertisers to follow an audience beyond the living room.

Talent and technology have been the guideposts for Twitter’s past acquisitions, and there’s no reason to think that would change. (The same principles shape the company’s organic growth, as it spends a whopping 40% of its revenue on R&D.) Along those lines, potential targets that would be a good fit are BrightRoll, TubeMogul or even a smaller, emerging video ad provider.

While much of BrightRoll’s business comes from its video ad network, it also operates a video ad exchange, which is similar to what MoPub does in the mobile market. We understand the business has about $240m in annual revenue, so it would be a big bite. TubeMogul sits on the other side of the ad tech table, selling a platform to advertisers to distribute video ads across real-time exchanges, making it a potential complement to MoPub. In addition, it doesn’t come with the ad network baggage, making it a more attractive target for Twitter. TubeMogul also has substantial revenue of its own, bringing in $54m last year and likely well over $100m this year, all with profit margins that are far above the norm in ad tech, according to our sources.

There’s also a handful of emerging players that would likely require less of a capital commitment and could impact Twitter’s efforts in this space. For example, firms like Spongecell and Vungle would bring creative talent, as well as tech. Another possibility is StickyADS.tv, a Paris-based company that would bring Twitter video ad technology as well as a deeper presence in Europe, potentially helping it with low spending among advertisers outside the US.

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

Webinar: Tech M&A trends, valuations and more

Brenon Daly

Contact: Brenon Daly

For those of you not too busy trading freshly printed Twitter shares on Thursday, we invite you to join 451 Research and Morrison & Foerster for a webinar on the results of our semiannual M&A Leaders’ Survey. (451 Research clients can access our full report on the survey.) The webinar will be held at 10:00am PST (1:00pm EST), and you can register here.

Among other topics, we’ll be discussing both the near-term and longer-range M&A plans for many of the tech market’s top dealmakers. (For instance, we have views on whether or not we’ll see another boom in tech M&A – and what it would take to get there.) Additionally, Morrison & Foerster’s Co-Chair of Global M&A Practice, Rob Townsend, will offer insight from our survey topics around the growing trend of ‘acq-hires’ and, more broadly, HR issues that can come up in M&A.

And finally, going back to IPOs, we’ll have the forecast from our senior dealmakers about whether or not they expect to have to outbid the public market for the companies they want to buy over the next year. (Hint: The IPO market has never been more competitive, in their view.) Again, we’d love to have you join us tomorrow for what promises to be an insightful and useful webinar, which you can register for here.

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

Is the new (and improved?) BlackBerry ready to deals again?

Brenon Daly

Contact: Brenon Daly

After a sale process that was equal parts aspirational and delusional, BlackBerry has wrapped up its review of ‘strategic alternatives’ with a bit more money and a few new executives. It’s highly unlikely that combination – however well-intentioned – will do much to change the immediate trajectory at the Canadian company. A paltry 2% of customers who plan to buy a cell phone before the end of the year intend to pick up a BlackBerry, according to a September survey by ChangeWave Research, a service of 451 Research.

And candidly, there’s probably not much that can be done to change the final outcome at BlackBerry, which appears to be set for a long, slow grind toward oblivion. That’s at least one conclusion we would draw from the fact that all of the would-be buyers for the company passed on it. Even the kind-of/sort-of ‘stalking horse’ bid trotted off, with Fairfax Financial opting to limit its exposure to its largest holding by investing $1bn in BlackBerry rather than acquiring the whole thing.

One area where we may well see a change at BlackBerry, however, is in M&A. Understandably, the company hasn’t been a buyer as it has been trying to sell itself. The company hasn’t done an acquisition since March 2012, back when it was still known under its original name, Research in Motion.

But with BlackBerry getting a few more coins in its treasury from Fairfax, and an incoming CEO who has done some valuable acquisitions in the past, it could look to go shopping once again. (Don’t forget that BlackBerry’s new CEO, John Chen, picked up a handful of mobile technology companies when he was running fading database company Sybase. The mobile offerings were the primary asset that SAP wanted at Sybase when it paid $5.8bn for it back in 2010. At the time, SAP applications didn’t even run on the core Sybase database.)

Already the rumor-mill has been churning on a potential acquisition for BlackBerry: OpenPeak. Although all the upheaval at BlackBerry would appear to make any acquisition right now unlikely, this pairing would actually make a bit of sense. OpenPeak built BlackBerry’s Secure Work Space for iOS and Android, which was released in summer. The offering plays to the (sole) remaining strength at BlackBerry – mobile security and data management for IT departments – at the same time acknowledging that the overwhelming majority of devices coming into the enterprise are not BlackBerry-powered. Owning OpenPeak could advance both of those initiatives at BlackBerry.