An early frost chills tech M&A in October

Brenon Daly

Contact: Brenon Daly

After a rip-roaring summer that pushed tech M&A spending totals back to their highest levels since the end of the recession, an early frost chilled dealmaking in October. The aggregate value for tech, media and telecom transactions announced across the globe last month dropped to $11.2bn, just half the monthly average of 2013. Further, continuing the yearlong trend, the number of announced deals in October ticked lower, too.

The drop-off in spending in the just-completed month is even sharper when compared with October 2012. Last October saw an unusually large number of transactions valued at $1bn or more. The six mega-deals helped to boost spending in October 2012 to $32.7bn, three times higher than the spending this October. In comparison, last month we recorded only one transaction valued at more than $1bn. Somewhat unusually, the buyer in the largest acquisition in both last October and this October was the same: SoftBank. However, the Japanese telco dropped almost $20bn more on its deal last year (Sprint Nextel) than this year (Supercell).

Perhaps more of a concern than tech M&A spending, which is inherently lumpy, is the uninterrupted slide in deal volume. Once again, the number of announced transactions in October declined from the same month last year. That means that deal flow has dropped in every month so far in 2013. The net result: tech buyers have printed more than 400 – or almost 15% – fewer transactions so far this year than last year. In fact, the number of announced deals is tracking only slightly above the number announced in the recession year of 2009.

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Time is money

Ben Kolada

Contact: Ben Kolada

Novacap Technologies is selling Canadian hosting portfolio company iWeb Group to Internap Network Services for $145m, representing a quick – and solid – return for the Canadian private equity firm. Just two years ago, it took iWeb private for $69.6m (including the assumption of net debt).

Under Novacap, iWeb grew total revenue 50% while maintaining basically the same operating profit margin (only adjusted EBITDA was disclosed in iWeb’s sale to Internap). It also now serves 10,000 SMB customers in more than 100 countries. Though Novocap’s total ROI isn’t immediately clear, the firm undoubtedly did well on its two-year holding. Jefferies advised Internap, while Bank Street Group worked the sell-side.

On the flip side, for Internap, this deal highlights the interplay between two of the most important elements of any transaction: time and money. In this case, waiting longer to buy iWeb meant Internap ended up paying more for it, both on an absolute and relative basis. And Internap will end up paying for it longer: the company is taking on new debt to cover some of the cost of iWeb, which is twice as high as it was the last time the company was on the block.

iWeb’s rising valuation

Metric Sale to Novacap* Sale to Internap
Deal value $69.6m $145m
Price/sales 2.3x 3.3x
Price/EBITDA 9.3x 13.2x**

Source: The 451 M&A KnowledgeBase *Using enterprise value **Using adjusted EBITDA

Are the go-go days for tech M&A go-go-gone?

Brenon Daly

Contact: Brenon Daly

Twice a year, 451 Research and Morrison & Foerster survey many of the top tech dealmakers to get their views on the M&A market, both on current activity levels and valuation trends, as well as forecasts. (See our full report on our recent M&A Leaders’ Survey.) In this go-round, we decided to extend the outlook with a rather provocative question: will we ever see another boom time in tech M&A?

Specifically, we asked respondents to look ahead for the next half-decade and give us their best guess as to whether tech M&A spending would ever regain the levels of 2006 and 2007, years in which buyers handed over a total M&A consideration of about $450bn. (Yes, almost a half-trillion dollars worth of deals were announced in both those years.) Hitting that level would effectively mean doubling the total amount spent on tech deals around the world in each year since the end of the recession.

The answer? Roughly 40% of respondents said it would probably happen, while 30% said it probably won’t happen. The remaining 30% said it was ’50-50′ whether spending would get back to prerecession boom levels any time before 2018. (Again, for more on this question, as well as the outlook for M&A activity and valuations in 2014, see our full report.)

What is the likelihood that M&A spending will recover to prerecession levels?

Response Percent
Absolutely will not recover 2%
Probably will not recover 27%
50/50 chance will recover 31%
Probably will recover 35%
Absolutely will recover 5%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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Will Criteo be a have, or have-not, ad-tech IPO?

Scott Denne

Contact: Scott Denne

Ad-tech IPOs have had mixed results this year. While Wall Street has shown little inclination to get behind most ad networks, it’s been quick to reward high-growth companies with demonstrated technology chops. Which bucket will Criteo fall into when it starts trading?

Compare the 2x and 4x trailing revenue multiples given to YuMe and Tremor Video with the 11.6x given to Rocket Fuel. On the one hand, Criteo looks more like Rocket Fuel. The company posted $253m in revenue through the first half of 2013, up 72% from a year earlier. While that’s about half the rate Rocket Fuel grew, it is off a base that’s about twice as high.

The price Criteo pays for inventory – the empty slots where it puts its customers’ ads – could hamper its valuation. That cost is now 60% of revenue, up slightly from 56% a year earlier, and enough of a change to tip the profitable company into the red this year for the first time in at least three years.

Ad networks like Criteo and Rocket Fuel compete by offering customers the lowest prices for a desired outcome (typically, clicks on an ad). To offer lower prices, they can either build technology to lower their media spending without lowering the click-through rates, or they can swallow smaller profit margins on each ad campaign. Criteo’s rising media costs suggest it’s moving toward the latter camp, perhaps because its technological advancements may not be keeping up with competitors’ price cuts. Rocket Fuel, by comparison, is seeing its media costs shrink steadily, to 45% of revenue so far this year, from 51% in 2011.

Criteo last adjusted its proposed price range up to between $27 and $29 per share, which would give it a valuation of about $1.5bn, or 3x its last 12 months of revenue, were it to set a price at the midpoint of that range. When it becomes available to public investors, we anticipate the company will trade with a valuation multiple between 6x and 7x its trailing sales – higher than most ad-tech companies, but lower than Rocket Fuel – giving it a valuation between $2.8bn and $3.2bn.

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NTT Com doubles its US M&A activity with two new deals

Scott Denne

Contact: Scott Denne Kelly Morgan

NTT Communications jumps into the US hosting market with two of the biggest purchases in its history, paying $525m for networking services company Virtela Technology Services and $350m for an 80% stake in RagingWire, a Sacramento, California-based datacenter vendor. NTT Com’s strategy is all about providing infrastructure and services, and these deals feed both aspects.

The Japanese telecom giant first revved up its US dealmaking with the $8m pickup of a former Harley-Davidson datacenter just over a year ago; it followed that up with the acquisition in June of Solutionary, a managed security services provider generating about $50m in annual sales. Virtela gives NTT Com an expanded networking services portfolio, both in the US and abroad, complementing its organic efforts to offer SDN capabilities.

NTT Com is paying an exceptionally high multiple to buy RagingWire, filling a notable gap in its infrastructure portfolio. Not only is the $350m it’s handing over the second-highest amount (behind Virtela) that NTT Com has ever disclosed paying for a company, at 5.1x RagingWire’s annual sales it’s the highest multiple for any US hosting firm since Verizon’s takeout of Terremark two and a half years ago. (The median value for such deals over the past 24 months is 2.1x.) DH Capital advised RagingWire on its sale.

Prior to this transaction, NTT Com had four datacenters in the US. Most were older, nearly full and certainly not as well-known or high-quality as RagingWire. RagingWire comes out of the deal with strong financial backing, a deeper portfolio of managed services and a large roster of potential customers, all while retaining an element of independence as it will operate its own brand under the guidance of its existing management team and founders.

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Who has designs on Planview?

Brenon Daly

by Brenon Daly

Old-line project and portfolio management (PPM) vendor Planview may be getting new owners soon. The 24-year-old company is rumored to be close to wrapping up a sale process, which has been led by Lazard. The buyer is likely to be a private equity (PE) shop, although one tech company is also apparently taking a long look. No final price has been struck, but Planview will likely trade in the neighborhood of $200m, according to our understanding.

The rumored price would value Planview at roughly 3x trailing sales. That’s exactly the valuation of the last significant transaction in the PPM market. In August 2012, Thoma Bravo paid $990m, or about 3x trailing sales, for Deltek, a government-focused PPM provider. PE firms have been fairly active in the PPM sector, with Parallax Capital Partners and Vista Equity Partners, among others, having inked acquisitions.

In terms of strategic acquirers, Planview probably has the closest relationship with SAP, primarily through a long-standing association with Business Objects. And don’t forget, too, that rival Oracle has already snapped up a large privately held PPM vendor, adding Primavera Software five years ago. Although terms weren’t disclosed in that deal, we estimate that Oracle handed over roughly $350m for PE-backed Primavera.

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PROS announces first acquisition in its 28-year history

Scott Denne

Contact: Scott Denne

PROS Holdings is paying $36m for configure, price and quote (CPQ) sales automation vendor Cameleon Software, adding fuel to an already steady growth rate. The deal, PROS’s first in its 28-year history, should boost the company’s top line by providing new cross-selling opportunities and expanding its presence in Europe.

Using an enterprise value of $33m, Cameleon is being valued at 2.2x trailing sales, a bargain compared with the 7.3x valuation PROS is currently sporting. Cameleon’s shares are being valued 45% higher than their 90-day average trading price.

PROS, which makes software that helps determine the optimal price to charge each customer for a given product, grew revenue 22% last year, to $118m. That follows a record-setting 36% growth rate in 2011. Cameleon is much smaller, but still saw sales rise 29% last year to $14m.

The purchase of Cameleon brings PROS technology that helps customers/vendors automate the process of getting the right products and right information to prospective clients. (It is similar to what Oracle obtains with its recent purchase of BigMachines .) Cameleon, based in France, also brings PROS a larger European operation. Though PROS is growing overall, its European revenue shrank slightly in its most recent quarter.

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Friends are friends, but business is business

Scott Denne

Contact: Ben Kolada Scott Denne

Oracle is either adding depth or distance to its partnership with salesforce.com by acquiring BigMachines, yet another salesforce.com-integrated startup. The two software giants have had a difficult relationship, most visibly with salesforce.com CEO Marc Benioff being ‘uninvited’ from Oracle OpenWorld two years ago. But the companies seemed to have worked out their differences this year, announcing a nine-year product integration partnership in June. Oracle’s recent dealmaking, however, could undermine some of that reconciliation.

Terms haven’t been disclosed in Oracle’s acquisition of configure, price and quote sales automation SaaS vendor BigMachines. We estimate that the company generated $60m in trailing sales, or about twice the revenue it recorded in the year before its recapitalization by Vista Equity Partners and JMI Equity.

BigMachines is the second salesforce.com partner Oracle has purchased in the past week. On October 17, Oracle bought content marketing SaaS provider Compendium, but the stakes and price are certainly much larger for this deal (subscribers to The 451 M&A KnowledgeBase can see our estimated price and revenue for the Compendium buy here).

BigMachines integrated its price and quoting optimization software into salesforce.com’s core CRM offering in 2010 (it was also an Oracle partner) and salesforce.com became an investor in the company in 2012. (As an investor, salesforce.com almost certainly had right of first refusal on Big Machines.) Compendium – which was founded by one of the founders of ExactTarget, the marketing software company that salesforce.com picked up for $2.5bn earlier this year – integrated its content marketing software into ExactTarget’s offering as well as a rival marketing automation offering from Eloqua, which Oracle acquired a year ago.

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Microsemi’s all about the margin

Scott Denne

Contact: Scott Denne

In picking up Symmetricom for $310m in cash ($230m in enterprise value), Microsemi is taking on a company whose margins are a far cry from its own goals. The semiconductor company has been fruitlessly chasing a self-imposed target of 60% profit margins and 30% operating margins.

Although adding a new element to an already challenging margin target, the deal will be accretive to its earnings per share.

Microsemi posted a 57% profit margin in its most recent quarter, although its operating margin of 10% is much farther away from its goal. Symmetricom reported a 45% profit margin and a negative operating margin. That makes this deal a bigger challenge than Zarlink, its last big purchase, whose margins were just a few points shy of Microsemi’s. Despite that, management claims Symmetricom will be running at its 60/30 target within 12 months of the deal’s close.

As it has in past acquisitions, Microsemi will prune legacy Symmetricom assets worth $10-15m in sales in order to give the target more favorable operating and profit margins. With this deal, Microsemi looks to add to its communications and defense businesses by picking up an asset that will, eventually, have a similar margin profile to itself.

Microsemi employed the same strategy in its acquisition of Zarlink in late 2011. With that deal, Microsemi planned to immediately chop 20% of Zarlink’s revenue-generating assets.

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PE shops taking home tech companies that are old and in the way on Wall Street

Brenon Daly

Contact: Brenon Daly

More and more, the portfolios of private equity (PE) firms are looking like retirement homes for the ever-maturing tech industry. Consider Marlin Equity Partners’ proposed $891m take-private of Tellabs, announced this morning. The company has been hawking its networking equipment gear since 1975, and has seen its share of ups and down over the past four decades in business. Tellabs currently finds itself in one of those protracted ‘downs,’ having shrunk for three straight years. The leveraged buyout (LBO) reflects that, with Marlin valuing Tellabs, net of its substantial cash holding, at just 0.4x trailing sales.

By our count, the Tellabs take-private is the ninth tech LBO valued at more than $300m announced so far this year. (To be clear, that’s equity value for a full business, and excludes any pickups of businesses divested by public companies.) On average, the companies that have been erased recently from the public market by PE firms were founded in 1990. The ‘youngest’ company was founded in 1998, exactly the same year Google incorporated itself.

Looking more closely at the list of this year’s 10 take-privates, we would note that only one company actually managed to get an above-market valuation. (That would be Vista Equity Partners’ $644m acquisition of Greenway Medical Technologies, which went off at 4.7x trailing sales.) Four other companies said goodbye to Wall Street at 1x sales or lower. On average, the significant LBOs of 2013 have gotten done at a median valuation of 2.1x trailing sales, a full turn lower than the broad market multiple for the 50-largest transactions of 3x trailing sales.

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