Large Vendors Continue Race For Security Offerings

August 31, 2010

Security vendors continue dissolving into larger technology platforms. This week, on the heels of Intel-McAfee, 3M and CA each announced acquisition plans in the space. 3M will acquire Cogent, a provider of biometric authentication systems for governments, law enforcement agencies, and commercial enterprises for approximately $943 million, while CA will buy Arcot Systems, a provider of advanced authentication and fraud prevention solutions, for $200 million.

Comparing multi-billion dollar market caps of acquirers like Intel ($100 billion) and 3M ($56 billion) with security targets Cogent ($963 million) and McAfee ($7.1 billion) — both of which are among the top IT security companies market-cap wise –  highlights the importance and benefits of scale in uncertain economic times, as well as the continuing attractiveness of security as a growth market.

Like many large companies recently, 3M and CA both have cash-rich balance sheets earning little-to-no interest (over $5.5 billion for Intel as of June 26, $3 billion for 3M as of June 30 and $2.6 billion for CA as of December 31). They also may be sensing a bottom in public market valuations, leading them to take advantage of prices that seem to discount future growth opportunities by scooping up smaller vendors and expanding their product lines. 3M recently said it plans to spend $2 billion on acquisitions this year, double its previous estimate, echoing increased activity amongst other buyers as well.

Customers are another key consolidation driver, seeking the simplicity and potential cost savings of going to fewer suppliers. IT providers that can offer a one-stop shop for consumers across the computing stock often find easier sell-through for their products with more cost effective customer support.

The recent rush of deals we’ve seen over the past few weeks is likely more than coincidence, presaging at least several more big security buyouts before the year is out. For example, companies such as L-1 Identity Solutions, another biometric company which put itself up for sale in March, said it should announce a buyer in the coming weeks.

[After the 3M/Cogent deal was announced, a law firm began investigating possible breaches of fiduciary duty by the company’s Board of Directors, implying Cogent may not have adequately shopped itself before entering the transaction.]

Large Security Sector Acquirers, 2010
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Epic McAfee Acquisition Paves The Way For More Consolidation

August 19, 2010

Intel agreed to acquire computer and software security company McAfee this morning in an epic example of consolidation of the IT markets. The transaction, which values McAfee at $7.68 billion, was rumored to be in the works for quite awhile and is yet another instance of the continuing convergence of traditional hardware and software providers.

As a component maker, Intel was a somewhat unexpected buyer for McAfee. Systems vendors such as Dell or HP would typically be viewed as more likely buyers. However, Intel did acquire Wind River last year, a provider of embedded and mobile software. The acquisition of McAfee gives Intel the ability to provider consumers with a one-stop shop for both hardware and security software. Statements by Intel CEO Paul Otellini note his beliefs that current security doesn’t fully address the revolution and expansion of computing devices, such as mobile, television, ATMs, etc. According to Otellini, security is the “third pillar of what people demand from all computing experiences.”

McAfee is one of the largest security technology companies in the world, with $2 billion in revenue in 2009 and steadily growing. Cyber security in particular, whether it be on computers or mobile devices, is a lucrative business as internet use continues to explode. McAfee also has an array of smartphone security software, through the recent acquisitions of Trust Digital and TenCube, which Intel can now boast.

The other security powerhouse, Symantec, is rumored to be next on the bidding block, and the McAfee/Intel transaction is no doubt paving the way. Another example is Juniper Networks’ July acquisition of sMobile, a software company focused solely on smart phone and tablet security solutions for the enterprise, service provider and consumer markets, as an expansion of its Junos software portfolio, which provides connectivity, security and acceleration to smart phones, tablets, netbooks and notebooks.

There is no doubt that the many different facets of IT are converging, from services and software, to hardware, mobile devices and the Internet. As these products become more and more interconnected, the idea of a “pure-play” vendor will mostly likely be a thing of the past. This deal in particular highlights the continued importance of security and will likely lead to further integration of security into the computing infrastructure, i.e. more security in chips. We expect to see a handful more of these mega-deal combinations through the end of this year and well into 2011.

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The Mobile Payment Reality Gains Traction

August 18, 2010

With the advent of increasingly more capable mobile phones, payment tech, and more specifically, mobile payment technology, the stage is increasingly set for the market to take off. Recent research calls for global mobile payment transactions to rise to $1.13 trillion in 2014, a CAGR of 94.8%, with the total number of users increasing to 351.4 million, according to IE Market Research Corp.’s 3Q.2010 North America Mobile Payment Market Forecast, 2010 – 2014.

We’ve written previously that security concerns, among other things, could hinder the adoption rate of payment technology, but venture capital firms are continuing to fuel the fire. Already Q3 investments in the sector include $7.5 million in funds for WePay, a group payment platform; $12.1 million in funding for eWise, a provider of online payments and financial management services; and $8.5 million for Wave Crest Holdings, a provider of e-payment solutions. On the mobile front, Payfone, a mobile payment provider, recently raised $11 million in venture capital investments.

Game-changing mobile payment technology in the U.S. is still a year or two away, however, even with the continuing evolution of super-smartphones and exponential growth in mobile apps. some companies are starting to acknowledge mobile technology as a coming force: Zong and Google’s latest acquisition, Jambool, have begun making waves by monetizing digital currency for mobile and social games, but there is still no real front runner. One exception may be eBay’s old-reliable PayPal, which recently teamed up with Google to let Android phone users pay for apps using PayPal instead of credit cards or Google Checkout.

The sector’s best bet for a break-out hit in payment technology is the advent of near field communication (NFC), which is a short-range high frequency wireless communication technology which enables the exchange of data between devices over a distance of a few inches. NFC accounted for 14.9% of mobile payment transactions in 2009 and is expected to increase to 32.8% by 2014 or 35.6 billion transactions. Traditional credit card companies have attempted to spark this trend through NFC chips placed in cards and contactless payment kiosks, but adoption has been slow (only about 26% of U.S. consumers have contactless credit cards).

The right combination of reliable financial institution and intuitive software provider, however, could put the wheels in motion for a mobile phone innovation. Apple recently brought in Benjamin Vigier, formerly of mCommerce vendor mFoundry Inc., as product manager for mobile commerce. While no one knows the company’s exact plans yet, Apple has quite a few patents under its belt for NFC technology, suggesting mobile payments made through iTunes, mobile marketing campaigns, and even airline ticketing services could just around the corner.

Globally, the number of mobile payment users is expected to rise to over 1 billion in 2014 for a CAGR of 20.5%, however, the adoption curve is not expected to accelerate meaningfully until sometime between 2011 and 2013. Money transfers, mobile payments and NFC services are three of the top ten uses expected by mobile consumers over the next few years. Given this expected growth, we expect to see traditional credit card providers and consumer banks team up with e-payment innovators, such as Visa’s acquisition of CyberSource in April. A pick-up in M&A for payment technology by consumer banking institutions is likely, or at the very least, we will see them begin to forge partnerships with the strongest payment technology start-ups. One thing is for sure: now is the time for combinations to start happening if these firms want to be at the forefront of the impending payment revolution.

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Google Is Well Positioned For The Future

August 6, 2010
Don More

Don More, Partner

By: Don More

A recent Fortune article argued that “the search party is over” for Google and that the company is in need of finding a new way to pull in revenue. According to Fortune, Google’s search business is only expected to grow 15%-17% in the long-term (down from 30%-40% recently) and that poses a problem as more than 90% of revenue comes from this segment of the business. However, this author really is missing the plot line of Google’s story — Google makes gobs of money today and, through acquisitions and product development, is using it effectively to build dominance for the inevitable tomorrow.

The world’s #2 search engine is Google-owned YouTube, which handles more than two billion views a day with the average person watching 15 minutes of video per day. Partner ad revenue tripled in 2009, while the number of advertisers using display-ads on YouTube increased 10-fold over the past year. With this explosive growth, eventually ad spending will catch up with the amount of time people spend watching YouTube videos.

Google is also monetizing YouTube through its video rentals, which it rolled out at the beginning of 2010. The growth of mobile video (and eventually mobile broadcasting) is exponential and Google’s AdMob acquisition will enable it to monetize this better than anyone. It can be expected that there will be a convergence of all forms of media advertising at some point in the near future.

Google is also positioning itself in a number of other areas that can supplement and eventually tie into their search/advertising strategy seamlessly. Google’s Android mobile operating system and their app store have an amazing growth ramp with nothing to stop it except Apple. New data from the Nielsen Company shows that new smartphone subscribers choosing Google phones accounted for 27% of U.S. smartphone sales, pushing past Apple’s 23% share. In addition to that, Google’s online office apps are a real business with millions of customers — Salesforce.com’s CEO Marc Benioff will no doubt be challenged by this.

The search giant is also getting deeper into destinations/content, with its solid Google Maps product (although Yahoo claims that’s Google’s weakness), and particularly its recent $700 million acquisition of travel search firm ITA Software – yet somehow the Fortune author fails to mention this.

Google innovates and experiments incessantly, and their traffic lets them constantly test things. They own unfathomable amounts of data they can use in so many ways, and the company’s position as a logical on-ramp and analytical hub, as well as the center of a real time buy-sell ad exchange, is undisputable. Google’s massive presence, cash flow and market cap enable it to buy anyone they need to, and — pick when — that includes other Internet powerhouses such as Facebook. Google has moved well beyond its flagship search product and with its recent acquisition pace of at least one per month, the company is well positioned to continue to be a force in the industry for many years to come.

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Updata Advisors Merges with Signal Hill

August 3, 2010

Signal Hill Capital Group LLC (“Signal Hill”), an investment banking firm focused on small and mid-cap growth companies in the Technology, Media, Telecommunications, Education, Business and Healthcare Services and Insurance sectors, announced today the completion of its merger with Updata Advisors, Inc., a leading advisory firm focused exclusively on Information Technology. The combined firm, to be called Signal Hill, will blend Signal Hill’s history of advising a blue-chip roster of leading growth companies with Updata’s 23-year history, distinguished by over 400 transactions completed for many of the world’s top technology companies. The firm will continue to be headquartered in Baltimore, and will have offices in Nashville, Tenn., New York, Reston, Va. and San Francisco.

For more information, visit our website.

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Updata Advisors Publishes IT M&A Review Q2 2010

July 20, 2010

Updata Advisors has published its Q2 2010 Information Technology M&A Review.

The IT M&A market gained momentum through the second quarter of 2010, as many of our tracked metrics grew by more than 50% year-over-year. Total enterprise value and median deal size reached their highest point in more than two years, and even with recent equity market weaknesses, the month of June logged the highest volume of M&A transactions over the past six months.

The Q2 2010 IT M&A Review takes a deeper look at the M&A deal metrics and selected transactions within each of Updata’s sectors including Enterprise Application Software, Internet, IT Security, Business Services, Financial Technology and Infrastructure Software.

Click Here to access a PDF of the Q2 2010 Information Technology M&A Review.

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Technology Venture Investments Jump In Q2

July 19, 2010

The overall U.S. venture capital market rebounded in the second quarter, with increases of 34% and 22% for dollars invested and number of deals, respectively, according to the National Venture Capital Association. VC investments in Software, Internet and IT Services also flourished in Q2. The software sector accounted for 229 transactions — the most since 2007 — representing a 43% increase over Q1, and brought in $1 billion in investments in Q2, a 43% increase over the previous quarter. Internet-specific companies saw a 25% increase in deals, although dollars invested stayed flat, while IT Services witnessed a 28% increase in dollars invested.

Some of the largest investments of the quarter included Digital Sky Technologies’ $135 million investment in social buying site Groupon, and Elevation Partners’ $120 million investment in social networking giant Facebook. Social/mobile gaming companies also raked in large sums including Playdom ($33 million); Booyah ($20 million); and Foursquare ($20 million). Private shopping sites HauteLook and Gilt brought in large sums as well in Q2, at $31 million and $35 million, respectively.

Venture firms also invested big money in non-social/Internet related deals. Palantir Technologies, which develops data analysis software, received a $90 million investment from The Founders Fund and Glynn Capital Management, while Castlight Health, a provider of web-based software for employee medical benefits and costs, raised $60 million from a number of investors including Maverick Capital and Oak Investment Partners. The security sector also brought in a number of larger investments including WiseKey, a maker of digital authentication and security software ($20 million); NetQin, a Beijing-based provider of mobile security solutions ($20 million); and TRUSTe, a provider of Internet privacy and safety seals to business websites ($12 million).

The significant increases in VC investments over the past three months mirrors the growth in M&A data Updata tracked in Q2 [see our upcoming Q2 2010 Review]. We expect venture firms to continue to funnel money into the technology sector, which will ultimately create more competition and a healthy M&A environment for the future.

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Desire For Global Reach Drives E-commerce M&A

July 9, 2010

Interest in the e-commerce sector is igniting, especially as more start-ups begin to hit the scene. A number recent deals involved well-established companies expanding their footprint into the global marketplace. The U.S. e-commerce market (businesses catering to buying and selling through the Internet), is estimated to reach $248 billion by 2014, and with areas such as Asia and Europe home to a majority of the world’s Internet users, there is no question why companies are pursuing this strategy.

Asian e-commerce firms in particular are expanding their reach into other economies. Japanese e-commerce giant Rakuten acquired French e-tailer PriceMinister for $245 million in June and U.S.-based online retail marketplace Buy.com for $250 million in May. Alibaba.com, a China-based e-commerce firm, also moved into U.S. territory with its acquisition of Vendio, an e-commerce services provider, at the end of June.

Latin America has been popular as well. In June, Groupon acquired Chilean deal site ClanDescuento and started new site ClubeUrbano in Brazil. And just last week, luxury products giant LVMH (Moët Hennessy Louis Vuitton) agreed to acquire a 70%, controlling stake in Sack’s, a Brazilian online retailer of fragrances, cosmetics and toiletries. Brazil has one of the fastest-growing economies in the world, with e-commerce growth of 30% year-over-year for Q1 2010. Latin America as a whole has the fastest growth rate in the world for Internet users, making up 8% of the global Internet audience. Latin American users also spend more time online, on average, than users across the globe, particularly with social networking sites due to their social culture.

With the increasing popularity of social buying and invite-only shopping sites, especially in the start-up world, there are dozens of possibilities for strategic M&A in the e-commerce space. We expect to see a continued interest in international reach, coming from both U.S. companies and abroad. The global economy may have its weaknesses, but consumer spending is still up quarter-over-quarter for Q2 compared to 2009. Companies that are able to exploit this situation will be the most sought-after properties in the marketplace.

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U.S. IPO Market Sees Growth, China Finds Solid Presence

June 30, 2010

IPO activity through the first six months of 2010 approached pre-recession levels of five and six years ago, with total new filings in the U.S. rising to 128 so far in 2010 from 15 during the same period of 2009, and priced IPOs rising to 62 from 14 in 2009. Within the technology sector, priced offerings rose correspondingly to 20 in 1H 2010 compared to six in 1H 2009, according to Updata’s IPO database*.

Recent IPOs that priced in the technology sector were spread across a number of subsectors including Enterprise Application Software, Internet, Mobile Technology and Financial Technology. While a majority priced at the low-end or below their estimated ranges, there were several exceptions: Financial Engines (FNGN), a technology platform for investment portfolio management (priced at $12, above the $9-$11 range), and SS&C Technologies (SSNC), a provider of financial management software (priced at $15, above the high end of the $13-$15 range). Calix, Meru Networks and MaxLinear, three others that priced above estimates, are all communication hardware-related companies.

Five China-based technology companies issued American Depository Receipts (ADRs) over the past six months, three of which were Services businesses. Kingtone Wirelessinfo Solution Holdings (KONE), a provider of mobile enterprise solutions to business and government agencies in China, priced in mid-May at the low end of its projections and raised only $16 million, compared to the $30 million it originally expected when it filed in April. HiSoft, an IT oursourcing company in Beijing which debuted this morning, also raised less than the $111 million originally planned, as shares priced below the expected range at $10, bringing in $74 million. AutoNavi Holdings, a provider of digital map content and location-based navigation solutions in China, filed for a $99 million offering in June, while Camelot Information Systems, a Beijing-based provider of enterprise application services and financial industry IT services in China, which filed to raise $250 million. [Update: AutoNavi shares priced June 30 at the high end of their range, raising $108m.]

Even with the tech-heavy NASDAQ down nearly 7% over the past six months, newly priced technology IPOs have been able to hold on. Technology companies that debuted this year gained on average approximately 7% after their first day trading and were down only about 1.7% on average since they went public. This performance is far better than other sectors, such as Health Care and Energy, which saw losses on average of 14% and 16% respectively since their equities priced.

The ability to withstand equity market weaknesses, combined with significant growth in volume of IPO filings and pricings, are a sign that the technology sector is continuing to make strides. A healthy IPO market often mirrors the state of M&A, and Updata’s preliminary 1H 2010 data shows growth in M&A deal volume, median deal size and median revenue multiple compared to 1H 2009. There is a certain frailty in the current marketplace, but we believe IPO filings and pricings will continue at their current pace, and eventually boost the M&A market up towards even healthier levels.

*Updata’s IPO data includes Enterprise Application Software, Internet, IT Security, Business Services, Financial Technology, Infrastructure Software, Mobile, IT Healthcare, Semiconductors, Communication technology, CROs and research.

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In Hot Ad Market, Traditional Firms Make Buys

June 28, 2010

The Internet and mobile advertising analytics markets are on fire lately with one acquisition after another and venture capital funds continuing to pour in. We wrote in January that this sector of the market was ripe for growth. As the sector continues to blossom, many strategic combinations are beginning to occur — initially we witnessed these acquisitions and mergers between competing ad and analytic firms. However, over the past month, companies outside the traditional ad market, such as IBM and GSI Commerce, began buying up advertising and analytic properties to take advantage of the explosive growth and must-have technology.

On the M&A front, IBM agreed to acquire Coremetrics, a provider of web analytics software, while blogging software and services provider Six Apart acquired NaturalPath Media, an online advertising and media network. Earlier in June, Hearst agreed to pay $325 million for iCrossing, a search engine marketing firm, and GSI Commerce paid an estimated $40 million for FetchBack, an advertising startup specializing in retargeting.

There is no slow down of advertising and analytical start-ups bringing in venture capital cash either. Over the past few weeks VCs have poured more than $70 million into these companies including Marin Software, a provider of paid search management applications for advertisers and agencies; Brand.net, an online display and video advertising platform; and Apptera, a voice and visual mobile advertising network.

Recent statistics on the growth of Internet and mobile advertising are no doubt fueling the fire. Mobile marketing and advertising combined is expected to grow at 40% CAGR over the next five years. Although total online advertising is expected to reach $25 billion for the U.S. in 2010, estimates show only $3.8 billion will be spent on the U.S. mobile web (up from $2.6 billion in 2009). The growth year over year, as well as the large disparity between mobile spending and traditional online ad spend, provides plenty of hope for the sector that funds will be begin to be funneled more and more into the mobile space. The growth on the hardware end of the sector, with the advent of the iPad and increasingly computer-like smart phones, make this is a pretty wise bet. The adoption rate has been truly rapid, which is surprising even optimistic analyst outlooks from a year or two ago.

The explosive growth of the Internet and mobile advertising and analytics space shows no sign of slowing and we expect growth to continue in the space well into 2011. As the economy slowly continues to climb back in recovery, companies will again begin investing in advertising and these start-ups and ad firms will be well positioned to take advantage of what could be hearty revenue streams.

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