#AcquiringForGrowth

Scott Denne

Contact: Ben Kolada Scott Denne

Twitter is ramping up its M&A program in what appears to be an attempt to buy faster growth. The company made its much-anticipated IPO paperwork public on Thursday and while the numbers are impressive, their acceleration is slowing. To offset the slowdown in its organic business, Twitter is doing more deals than ever before – and bigger ones at that. Its two largest deals, according to our understanding, have both been announced this year, collectively accounting for probably about three-quarters of all the money Twitter has spent on its M&A program. Further, 2013 has been its most active dealmaking year, and we still have one quarter to go.

From what was likely very little revenue in 2009, Twitter’s top line has hockey-sticked to $316.9m last year. That’s nearly 300% growth year over year and more than 11x what it recorded just two years earlier.

But as the company reaches a larger revenue base, its growth rate is beginning to slow. Annualizing Twitter’s first-half results would put its projected 2013 sales at just north of $500m. While it may not be fair to annualize six months of results for such a fast-growing company, we still don’t think its 2013 revenue will top $650m, which would be about twice its sales from last year. (We’d also note that Twitter’s year-over-year quarterly revenue growth rate has been declining since Q3 2012.)

Further, growth in Twitter’s total number of users and their level of engagement is slowing. In the US, which accounts for three-quarters of its advertising revenue, the average number of times that users engaged with Twitter was up only 1% from the previous quarter while the number of monthly users was up just 2%. Compare that with a year ago when those same metrics posted 11% and 9% quarterly growth, respectively.

Given the need for more advertising revenue on a slowing user base, we expect Twitter to increase its volume and value of acquisitions. One area the company could move into is digital video advertising, where the rates are higher than mobile or display. Twitter has already announced a product that enables television advertisers to follow an audience from a TV show to Twitter. That could become a more powerful proposition to both advertisers and content providers if Twitter could expand that capability to other parts of the digital world.

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Barracuda sets up for an IPO that should go swimmingly

Brenon Daly

Contact: Brenon Daly

The holdout is over for Barracuda Networks. After a decade of steady expansion behind closed doors, the closely held information security (infosec) vendor is now set to step onto the public market. And it will be a big step by a big company: At about a quarter-billion dollars in revenue this fiscal year, Barracuda is roughly twice as large as other infosec firms that have come public recently.

Barracuda shipped its first product – a firewall – back in 2003. It has used a half-dozen or so acquisitions since 2006 to move into other infosec markets, as well as expand into storage. The company’s core security business represents about two-thirds of overall revenue, with the remaining revenue coming from its faster-growing storage business. It sells primarily to SMBs, having rung up some 150,000 customers.

Barracuda’s planned offering comes at time when Wall Street is particularly bullish on infosec IPOs. Most notably, FireEye doubled in its debut last month on its way to creating almost $5bn in market value. That’s a head-spinning valuation for a company that will do about $150m in sales this year.

But we wouldn’t necessarily hold out FireEye, with its triple-digit growth rates and enterprise focus, as a comparable offering to Barracuda. Instead, we might look back to the IPO four years ago from another appliance-based, multiproduct infosec provider, Fortinet.

Although that company is about twice as big as Barracuda, it is growing at just half the rate of Barracuda. Currently trading at about the midpoint of its 52-week range, Fortinet is valued at roughly $3.5bn, or about 6x this year’s sales. Putting that multiple on Barracuda, we come up with a rough valuation of about $1.5bn for the company. That’s probably a baseline valuation for Barracuda as it hits the market.

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Experian’s $310m reach for 41st Parameter continues high multiples in antifraud

Scott Denne

Contact: Scott Denne

In spending $310m to purchase antifraud vendor 41st Parameter, Experian is paying a healthy 14.1x trailing 12-month revenue. It’s the latest in a recent string of high-value deals in the fraud-protection market, but even at that multiple it’s the lowest of the three recent transactions in this sector. In August, IBM spent an estimated $900m on Trusteer, valuing the company at 25.7x revenue. That doesn’t come close to the multiple that F5 Networks paid for Versafe last month. (Subscribers can click on the following links for more details on the Trusteer and Versafe acquisitions.)

Part of the reason for the high valuations is the trend toward rising valuations of security firms in general as security grabs an increasing portion of IT budgets. Another reason is a maturation of the market, especially the device-identification end of antifraud where 41st Parameter plays. That company and its competitors have been around for about a decade and are now starting to hit their stride: 41st Parameter had roughly $22m in trailing 12-month revenue at the time of its sale, while rivals Iovation and ThreatMetrix have nearly identical revenue as 41st Parameter.

Annual value-to-revenue multiples on security deals

Year Median multiple
2013 5.25
2012 2
2011 3.6
2010 3.5

Source: The 451 M&A KnowledgeBase

Now that those companies have proven that there’s a real business in helping banks, retailers and other businesses identify fraudulent transactions, we’d expect to see more deals happen in this space. 41st Parameter and its peers have had acquisition interest from a variety of vendors – not just traditional security providers, but also banking technology businesses and cloud services companies. This type of technology fits into the product portfolio of any company that enables businesses to connect with consumers.

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Tech buyers play defense, push Q3 tech M&A spending to near record

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in the just-completed third quarter edged toward a post-recession record, as buyers announced more blockbuster transactions than they have in any quarter since the credit crisis ended. This summer’s combination of slowing growth rates and rising interest rates lent an urgency to big bets from a number of tech giants that might have otherwise let deals slip away from them. In the July-September period, we tallied a post-recession record of 15 transactions valued at more than $1bn. That means that almost half of the 10-digit deals announced so far in 2013 were printed just in the past three months.

The surge in big-ticket transactions helped push aggregate Q3 spending to just under the highest quarterly levels since the end of the recession. Overall, buyers spent $71.8bn on 800 purchases of tech, telco and Internet companies around the globe in Q3, according to The 451 M&A KnowledgeBase. That boosted M&A spending levels in just the first three quarters of 2013 higher than full-year levels in both 2010 and 2012. Further, 2013 is tracking to basically match 2011 as the highest amount of annual spending on tech acquisitions since the credit crisis.

Yet, even as spending neared record levels, the tech industry showed its age. Deal flow in the July-September period featured big moves – large-scale, cost-driven consolidations as well as significant divestitures – that come in a maturing industry. Many of the biggest prints in the quarter appeared to be ‘defensive’ deals, which also came through in the below-market multiples paid in eight of the 10 largest Q3 transactions.

Meanwhile, on the other side of the M&A spectrum, we would note that not a single VC-backed startup sold for more than $1bn this summer. Further, just one VC portfolio company (Tumblr) has hit that threshold in 2013, compared with four startups that pocketed 10-digit exits in 2012.

Another sign of the ‘graying’ of tech is that there are fewer buyers and less activity in the market. The number of deals announced so far this year is tracking to its lowest level since the depth of the recession. The number of transactions announced in the past three months has dropped 13% compared with the same period in 2012. The decline continues a slide that we have seen all year long. In fact, spending in every single month in 2013 has been lower than the corresponding month in 2012. A full report on Q3 M&A activity and valuations will be available for subscribers on the 451 Research website tomorrow.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2013 800 $72bn
Q2 2013 751 $46bn
Q1 2013 785 $64bn
Q4 2012 851 $64bn
Q3 2012 912 $39bn
Q2 2012 916 $44bn
Q1 2012 918 $34bn
Q4 2011 904 $44bn
Q3 2011 969 $64bn
Q2 2011 980 $76bn
Q1 2011 919 $45bn

Source: The 451 M&A KnowledgeBase

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A round trip for Active Network shares

Ben Kolada

Contact: Ben Kolada

After a little more than two years of trading on the NYSE, registration and events management software vendor Active Network is leaving the public eye in a $1bn take-private by Vista Equity Partners. The deal carries a fairly paltry valuation, and only returns the company’s share price to basically the same level where it sold them in the IPO. And that was when Active Network’s revenue was roughly one-quarter smaller than it is today.

Vista is paying $14.50 per share in cash for Active Network, valuing the company’s equity at $1.05bn. Including the assumption of cash and capital lease obligations, the deal values Active Network at 2.1x trailing sales. For comparison, the company’s much smaller competitor Cvent is currently valued much higher at $1.4bn, or 14.5x trailing revenue. Citi Capital Markets advised Active Network, while Bank of America Merrill Lynch advised Vista Equity Partners.

We’d argue that the subpar valuation is the combination of meager growth and an inability to meet financial expectations. Wall Street expects Active Network to grow revenue 8.5% this year, to about $455m. Although that’s from a much larger base, it’s still a fraction of the 30% growth analysts expect Cvent to record. Further, financial expectations for Active Network are far from certain, given that the company has repeatedly issued results below its own estimates.

In a roundabout way of acknowledging the company’s public troubles, Vista took a charitable view of the per-share premium, noting that its offer is 111% above the average year-to-date closing price for Active Network. A more grounded view, however, shows the offer only matches Active Network’s $15 IPO price in May 2011, and represents a more common 27% premium to its closing share price Friday.

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Shareholder interests play second fiddle to Violin’s management

Scott Denne

Contact: Scott Denne

Violin Memory isn’t ready to be a public company by almost any measure: it has less than three years of sales, lumpy growth and is hemorrhaging money. Despite all that, Violin pushed out an offering in time to meet a deadline that almost guarantees a solid return for its management. Its chief executive, Don Basile, gets a grant of 1.25 million shares ($10m at the IPO price) if the company has its offering before the end of this month – a highly unusual deal for an emerging tech firm.

Other members of management have similar, but smaller, arrangements. COO Dixon Doll Jr. receives $5.4m worth of stock at the IPO price and CFO Cory Sindelar gets about $1.7m. We’d note that these numbers have been revised downward from an August version of its prospectus, which had management receiving double the number of shares.

Violin priced at the low end of its range and began trading this morning. By midday, shares of the flash storage vendor were trading down 8% from its IPO price. It’s no surprise to us. In an earlier report, we noted that Violin was losing more money than it was bringing in and that its quarterly revenue growth suffered after losing an OEM deal with HP.

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eBay adds Braintree to payments brain trust

Scott Denne

Contact: Scott Denne

eBay’s PayPal subsidiary is paying $800m for payments software provider Braintree Payment Solutions to advance its position in serving software and e-commerce businesses. Through organic growth, Braintree became the payments technology provider of choice for many high-growth e-commerce startups. Cementing its position was an inorganic move meant to help its customers tackle the growing adoption of mobile payments.

Braintree was specifically chosen to bring more software vendors, especially mobile software firms, to eBay’s PayPal business. Braintree specializes in providing payment processing for the newest generation of consumer Internet and SaaS companies. As those companies – such as Airbnb, LivingSocial, Uber and Fab.com – have grown, Braintree has grown with them. And as those companies became more mobile-focused, so too did Braintree, by acquiring mobile-wallet provider Venmo for a reported $26m last year.

Just as it has in its last two major payments purchases – the $240m reach for Zong in 2011 and the $820m pickup of Bill Me Later in 2008 – eBay is paying a mindful price for Braintree. While Braintree’s revenue isn’t disclosed, the company is still small – it processes less than one-tenth of PayPal’s total. Braintree’s platform processed $4bn in payments in 2011, netting the vendor $10m in revenue. Now, it’s on pace to process $12bn in annual payments. Keeping the ratio constant would likely put its revenue in the $30-40m range. If our rough math is correct, the deal would value Braintree at a whopping 20x sales.

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OANDA buys Currensee in copycat forex deal

Scott Denne

Contact: Scott Denne

OANDA is picking up Currensee Global, a company that enables foreign exchange (forex) traders to mimic the trades of other traders, in the third recent deal in the forex market. Increasing regulatory burdens are driving the latest spate of sector consolidation.

Regulations in Asia, the US and Europe, such as limitations on leverage, the Dodd-Frank Act’s implementation of ‘first in, first out’ policies and the looming ban on the use of credit cards, have made it cumbersome for smaller vendors in this market to expand. That’s left a lot of them seeking a larger suitor with greater resources capable of managing stringent compliance issues. OANDA and its two main rivals have been happy to help.

Recently, FXCM and GAIN Capital also reached for new businesses. FXCM on Monday announced that it has taken a majority stake in Faros Trading to help bolster its institutional business. And yesterday, GAIN Capital closed its $108m purchase of Global Futures & Forex. The deal, announced in April, was done to expand GAIN’s international reach. Terms of OANDA’s and FXCM’s transactions were not disclosed, but we believe the Currensee acquisition to be small as the company had 25 employees.

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Applied Materials reapplies cost-cutting M&A strategy

Contact: Tejas Venkatesh Scott Denne

In its biggest deal ever, Applied Materials is acquiring fellow chip manufacturing equipment vendor Tokyo Electron for $9.3bn in stock. The rationale for the transaction lines up closely with Applied’s cost-cutting motive in its $4.9bn purchase of Varian Semiconductor, and comes at a time when we expect limited revenue growth in the semiconductor equipment market.

In buying Tokyo Electron, Applied is projecting a $60m decrease in its quarterly operational expenses after a year and $120m by the third year following the close. Applied achieved similar (although smaller) results when it acquired Varian in the summer of 2011. Then Applied promised to shave $12m-16m off its quarterly expenses, and though it’s a quarter away from the deadline, its operating expenses came in at $556m last quarter – $14m lower than what Varian and Applied put up before the deal.

In a survey this month by ChangeWave Research, a service of 451 Research, 16% of semiconductor vendors indicated that their capital budgets would decrease for the next quarter, versus just 2% who expected an increase. That makes it an opportune time for Applied Materials to make a deal focused on cutting costs.

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Rogers doubles down on Canadian datacenter market

Scott Denne

Contact: Scott Denne Michael Levy

Canadian telecommunications company Rogers Communications seems to be on a datacenter M&A roll, buying Pivot Data Centres and Granite Networks today for a combined $158m. The deals are Rogers’ second and third datacenter acquisitions of the year. However, we don’t expect a fourth by year’s end.

Rogers is spending a combined $158m (C$161.5m) on two datacenter vendors – Pivot Data Centres for $151.5m and Granite Networks for $6.1m – which is on top of the $196m it already paid for BLACKIRON Data in April.

As Rogers and its peers have looked for new services to make up for lost landline revenue, the Canadian datacenter sector has undergone significant consolidation in the past two years, leaving few available premium assets in the market. With its reach for Pivot and Granite, Rogers buys two of the last ripe assets in Canada. Most of the remaining datacenter providers in Canada have aging infrastructure or small amounts of space.

The short supply in Canada seems to have driven up prices for hosted services companies. Consequently, we understand that the sale of Pivot was a competitive process, bringing out bids from other strategic, as well as financial, acquirers. We hear the company is being valued close to BLACKIRON, which Rogers bought for 15.1x 12 month-trailing EBITDA.

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