Cloudflare signals new push into mobile 

Contact: Scott Denne

Positioned near the top of one budding corner of the CDN market, Cloudflare is angling to take a share of another with the purchase of Neumob. Its latest deal, a departure from Cloudflare’s mostly infosec M&A in the past, gets the Internet performance-optimization vendor software to bolster the performance of mobile apps.

Offering a service that protects and accelerates websites has made Cloudflare into a business with more than $170m in venture capital and annual revenue in the same neighborhood (subscribers to 451 Research’s M&A KnowledgeBase Premium can access a detailed profile of the company). Its security capabilities have pushed it near the top of the fastest-growing segment of the CDN market, defending against distributed denial-of-service (DDoS) attacks.

According to 451 Research’s VotE: Information Security survey, 38% of respondents planning to implement an anti-DDoS service were considering Cloudflare, second only to Akamai, which scored less than three percentage points higher. 451 Research’s Market Monitor service projects that this portion of the CDN market will expand by 40% this year, so it’s understandable that two of Cloudflare’s three previous acquisitions would fortify its security features.

In Neumob, it’s picking up a company whose software analyzes the signal available to a mobile device and adjusts the API calls to make the most of that signal. Although terms weren’t disclosed, it’s likely a modest-sized deal given that Cloudflare plans to shut down the service and integrate the software with its own. Neumob had about 20 employees and had raised $11m in funding. While such mobile acceleration targets have drawn strategic interest, most, like Neumob, were acquired at an early stage. Last year, privately held Instart Logic purchased Kwicr and Salesforce nabbed Twin Prime, a pair of startups with similar amounts of funding as Neumob.

Still, a decade since the birth of the smartphone, mobile app acceleration remains a pressing problem. In a survey by 451 Research’s VoCUL earlier this year, 47% and 44% of businesses told us it was ‘very important’ to provide their customers with mobile apps for customer service and shopping, respectively. At the same time, consumers’ gluttonous appetite for mobile apps shows no sign of abating. In a separate VoCUL study in the second quarter, 15.6% of consumers said they had downloaded six or more apps on their smartphone in the last month, a slight increase from the same survey done a year earlier.

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Verizon set to shake up CDN market with proposed EdgeCast buy

Contact: Scott Denne Jim Davis

Verizon picks up EdgeCast Networks in a move that’s likely to shuffle market share and partnership arrangements in the CDN space. The deal will likely alter Verizon’s current partnership with Akamai, the largest CDN vendor.

We estimate the enterprise value of the transaction at $395m, making it the largest acquisition of a CDN company and valuing EdgeCast at about 2.9x the $135m annual revenue that it expects to have by the close of 2013. The deal values EdgeCast slightly below the 4.8x that Akamai fetches and roughly in line with the 3.1x median for CDN purchases in the past decade, according to The 451 M&A KnowledgeBase.

Akamai gets about one-fifth of its revenue from resellers. While it’s not clear how much of that comes from Verizon, it is clear that it will lose some revenue when that partnership ends. Despite that, this could be an opportunity for Akamai or other CDNs to land additional carrier partnerships as telcos that resell EdgeCast, including Deutsche Telekom and TELUS, may not be comfortable reselling a Verizon service – not to mention the multi-tenant datacenter providers that partner with EdgeCast and also compete with Verizon’s Terremark.

Getting into the CDN business brings Verizon another source of revenue to help offset its declining fixed-line revenue, a need that’s driven most of its M&A spending in the past couple of years as it has bought companies such as Terremark for $1.4bn, CloudSwitch for an estimated $80m and fleet management vendor Hughes Telematics for $612m. And that’s in addition to the $130bn it paid for the 45% of Verizon Wireless that it didn’t already own.

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

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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MediaMath strikes twice in Akamai deal

Contact: Ben Kolada, Tejas Venkatesh

Marketing analytics startup MediaMath and CDN giant Akamai have engaged in a two-pronged deal that should help accelerate MediaMath’s already astounding growth rate. MediaMath is acquiring Akamai’s Advertising Decision Solutions assets and data cooperative, and is gaining exclusive access to Akamai’s pixel-free technology, which tracks online user behavior without using tracking pixels.

Adding to its already successful TerminalOne platform, MediaMath is picking up Akamai’s advertising data management platform and opt-in data-sharing cooperative. MediaMath says the assets will help its advertiser clients better profile audiences and predict audience behavior.

Terms of the transaction also provide MediaMath with multiyear, exclusive access to Akamai’s pixel-free technology. The traditional method for advertisers to collect user data has been to install tracking pixels on users’ computers when they access websites. However, Akamai’s pixel-free technology bypasses that strategy. Since Akamai has access to a significant portion of Web traffic through its content delivery and site acceleration services, it can directly observe user behavior. Its pixel-free technology leverages its content delivery roots to track user online behavior without the need to install tracking pixels.

We’d note that even before the addition of Akamai’s assets, MediaMath had done quite well for itself. With primarily organic growth, the company, founded in 2007, grew revenue last year to $180m, more than double the $78m it recorded in 2011.

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Fortinet acquires CDN software startup XDN

Contact: Tejas Venkatesh

Unified threat management vendor Fortinet has acquired four-year-old startup XDN, adding software that is used for building and managing CDNs. The deal helps Fortinet closely tie its security and WAN optimization services with content acceleration software from XDN, thereby providing a distributed, cloud-based approach to adapt effectively to disruptive attack traffic.

Fortinet’s move comes as companies like Akamai have fortified their security lineups with cloud-based Web application firewall and other related services. Fortinet did not disclose terms of the deal. In fact, it was XDN that announced the transaction in a blog post, almost a month after my colleague Jim Davis wrote about the deal. XDN raised about $7m in funding from Storm Ventures and Canaan Partners. For a full report on the acquisition, click here.

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Shallow pool in mobile optimization becoming shallower

Contact: Ben Kolada

After Allot Communications dipped its toes into the pool of mobile optimization targets by acquiring small Ortiva Wireless, Citrix cannonballed with the acquisition of Bytemobile. These two deals significantly drained the already shallow pool of acquisition targets in this market. Interested buyers should dismiss the ‘don’t run when wet’ precaution, and jump in before there’s no water left.

Consumers are buying data-intensive devices in droves, and data consumption is exploding as a result. Because seamless data use is considered a right rather than a privilege these days, cell carriers unable to provide flawless transmission risk customer desertion. Tackling this concern, mobile operators are employing every option available to relieve their bandwidth bottlenecks, including relying on a new breed of mobile traffic optimization firms.

As these upstarts emerge as viable solutions, they’re becoming increasingly attractive acquisition targets both for the vendors that traditionally have served telcos, and for non-traditional vendors hoping to pull in cash-rich telco customers.

However, interested acquirers need to move fast. In a recent report, we identified 11 remaining vendors, ranging from pre-revenue firms to established midmarket players. But less than half of those vendors target mobile optimization as their core business. Click here to see who we think may be next in the buyout line.

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Google takes another swing at Office

Contact: Brenon Daly

Google has reached for the popular maker of mobile software suite Quickoffice, the fourth notable acquisition the company has made in its effort to take on Microsoft Office. Each of the purchases has given Google specific pieces of technology that have helped draw users away from Office, which stands as the dominant desktop productivity suite and has generated tens of billions of dollars of sales for Microsoft over the past two decades.

Looking to siphon off some of those incredibly high-margin sales, Google has scooped up startups offering online word processing (Upstartle with its Writely program), spreadsheet programs (iRows), as well as collaboration and sharing of Office documents (DocVerse). As it built on those deals over the past six years, Google has always pitched its offering – first in Google Docs, then in Google Apps and now in Google Drive – as a Web-based alternative to the largely desktop-based Office franchise. (Of course, Microsoft also offers a hosted, or cloud, version of its popular suite in the form of Office 365.)

With Quickoffice, Google is shoring up the technology around a productivity suite for the post-PC era, as Quickoffice is installed on more than 400 million devices. In addition to the broad user base, Google also gets some much-needed technology that should help iron out some of the wrinkles that can pop up when converting Microsoft Office documents to Google formats. Additionally, Quickoffice can run Office apps on the iPad, while Microsoft has yet to release an official version of Office for the rival tablet. (It is rumored to be working on one, however.)

While terms of the acquisition weren’t released, we would note that Quickoffice has a rather compelling business model, with an extremely low cost of customer acquisition. It gets paid by licensing its software suite to device makers and then generates business on top of that by upselling customers to subscription offerings. (We understand that ‘aftermarket’ business was running at about $5m a quarter recently.) Not bad for a business that was founded in 1996 inside the recently disappeared Palm Inc. For the record, Google has now acquired pieces of two wireless pioneers: Palm and Motorola Mobility.

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Equinix increasing inorganic growth, nabs ancotel

Contact: Ben Kolada, Thejeswi Venkatesh

In its latest geographic consolidation move, colocation giant Equinix announced on Wednesday the acquisition of Frankfurt-based ancotel. Although previously an atypical acquirer, the ancotel buy is Equinix’s second purchase this month, following the pickup of certain assets from Hong Kong-based Asia Tone for $230m. Equinix recently said its dealmaking isn’t done yet. At the Deutsche Bank Securities Media & Telecommunications Conference in February, the company said it plans to place more emphasis on M&A.

Equinix didn’t disclose the price of the acquisition, but did say the valuation is in line with its projected 2012 adjusted EBITDA trading multiple. With a current enterprise value of $9.7bn, Equinix itself is valued at 11 times this year’s projected adjusted EBITDA. Assuming ancotel’s cost structure is similar to Equinix’s, we’d loosely estimate the deal value at $100-110m. Ancotel generated $21.4m in revenue in 2011, with a three-year CAGR north of 20%. The transaction adds a datacenter with 2,100 meters of capacity, 400 network customers, 200 new networks and 6,000 cross connects. Ancotel also has a presence in both London and Hong Kong.

In a departure from its usual practice of making just one acquisition per year, Equinix recently indicated that it intends to use more M&A to fuel growth. The company already dominates the American colocation market, so future M&A activity will likely continue to be overseas. Equinix has a lofty goal of being in 50 markets in the long term, with immediate priorities being India and China. The company has also expressed interest in growing its presence in South Korea and Australia.

Equinix’s international M&A, past five years

Date announced Target Deal value Target headquarters
May 16, 2012 ancotel Not disclosed Frankfurt
May 1, 2012 Asia Tone (certain assets) $230m Hong Kong
February 15, 2011 ALOG Data Centers* $127m Rio de Janeiro
February 6, 2008 Virtu Secure Webservices $22.9m Enschede, Netherlands
June 28, 2007 IXEurope $555m London
January 10, 2007 VSNL International (Tokyo datacenter) $7.5m Tokyo

Source: The 451 M&A KnowledgeBase *90% stake

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Few targets left in FEO, but are there any buyers?

Contact: Ben Kolada

In the past year, networking vendors have acquired many of the independent front-end optimization (FEO) startups, further narrowing the field in this already niche sector. In fact, there are only a few notable independents left. But is this really a race to consolidate the market, or are acquirers simply adding these capabilities to their portfolios by picking up properties at fairly cheap prices?

FEO focuses on getting a browser to display content more quickly, as opposed to dynamic site acceleration and other services that use network optimization to speed content delivery. For the most part, the FEO segment has been made up of a handful of startups. However, consolidation in the past year took three of these companies out of the buyout line. In May 2011, AcceloWeb sold to Limelight Networks for $12m and two months later Aptimize sold to Riverbed for $17m. Terms weren’t disclosed on Blaze Software’s recent sale to Akamai, but we’re hearing that the price was in the ballpark of $10-20m. That leaves Strangeloop Networks as one of the last companies standing, and its fate is basically secured. After the Blaze deal severed Strangeloop’s partnership with Akamai, the company is likely to find an eventual exit in a sale to remaining partner Level 3 Communications.

Firms interested in entering this sector shouldn’t fret over potentially losing Strangeloop to a competitor. Instead, they should actually reconsider their entry into the FEO market. FEO providers, both past and present, have done little to validate the space. According to our understanding, Aptimize was the largest of the acquired vendors, and its revenue was only in the low single-digit millions. The fact that each target sold for no more than $20m further suggests that the market isn’t yet living up to expectations.

Cloud deals arising from the fog

Contact: Ben Kolada

Going into the last day of the 9th Cloud Computing Expo, held in Santa Clara, California, we get the feeling that conference attendees will see an M&A shakeout within the next few years. To a degree, this dealmaking has already begun, with a small handful of exhibitors already having been scooped up, including a couple of firms that were acquired just last month. Meanwhile, the remaining vendors, most of whom are young startups, are scrapping to define and prove themselves for what they hope will someday be their own fruitful exits.

The cloud computing market is real and growing. My 451 Market Monitor colleagues, who have the tedious task of sizing the cloud market, estimate global cloud revenue (excluding SaaS) at $9.8 billion for 2011, with nearly 40% revenue growth expected in 2012. Many players in this sector have already taken note of its potential and acquirers’ interest, resulting in an increase in both deal sizes and deal volume for cloud vendors. According to The 451 M&A KnowledgeBase, so far this year a record 465 transactions claimed some aspect of cloud. That’s nearly double what we saw in the same period last year. (To be honest, many of these acquired companies are about as cloudy as snake oil, but there are real cloud deals being done. Platform Computing and Gluster, which both announced their sales last month, sold for an estimated combined deal value just shy of $450m.)

However, in terms of revenue, most of the cloud startups we spoke with haven’t yet really proven themselves commercially. But as these firms transition their focus from product development to marketing and sales, their growth will attract more and more suitors. And double-digit revenue isn’t exactly a requirement for a successful exit, as both the recent CloudSwitch and Cloud.com takeouts proved. Though we understand that none of these companies are looking to sell just yet, we wouldn’t be surprised if cloud-enablement providers such as OnApp, Abiquo and Nimbula are picked off one by one within the next few years. And we were reminded yet again that open source networking and routing vendor Vyatta could someday see a real offer from Dell, though the IT giant would likely face a competing bid from Cisco.