Motorola motors toward public-sector software and services

Contact: Scott Denne, Mark Fontecchio

Motorola continues to look to software and services to rescue its hardware business. The acquisition of Spillman Technologies is the latest in a string of such deals by the radio communications company, which has spent the past five years getting back to its legacy business in public safety through a spinoff and several divestitures. Those moves brought it relief from several price-sensitive commodity markets but left it in one with little growth – there aren’t a lot of new fire departments and police stations that have yet to invest in a radio system.

Acquiring Spillman Technologies, a developer of dispatch and records management software for police and fire agencies, gives Motorola a software offering to push into a sector where it’s entrenched. That’s similar to the rationale behind its two other recent software purchases: PublicEngines and Emergency CallWorks.

In addition to market maturity, weakness in foreign sales has also pushed down revenue for Motorola’s hardware products, yet its managed services business has grown. Its $1.2bn acquisition of Airwave Solutions in February drove 26% year-over-year growth in its services segment last quarter (organically, that unit grew in the low-single digits). While services still makes up less than half of its roughly $6bn topline, the combination of Motorola’s hardware and existing network management services along with Airwave’s network management business provides it a channel through which it can push new offerings and grab share in a market it already dominates. Motorola’s public-safety business is 10 times the size of Harris, its nearest competitor.

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Citrix stays tactical

Contact: Scott Denne

Citrix’s first acquisition of 2015 sets it up for another year of tactical M&A. Though up from 2013, we tracked just $65m in dealmaking by Citrix in 2014. Sanbolic, a 15-year-old company that brings software-defined storage into Citrix’s VDI stack, appears to be another tuck-in.

In 2012, Citrix announced $833m in acquisitions. That was its highest annual total on record, though it was hardly an outlier. Over the previous decade Citrix had been willing to invest in larger deals. Prior to that record-breaking year it had only dipped below $100m annually on three occasions – 2009, 2008 and 2004.

Citrix was growing revenue at a double-digit pace in 2012. Now that its core desktop business is maturing, growth has come down to mid-single digits in the most recent quarter, with license revenue declining at the same rate. Last year, management was open about the fact that M&A would likely be limited to tuck-ins, rather than strategic deals such as Zenprise and Bytemobile that got Citrix into ancillary markets. If Sanbolic is any indication, the company doesn’t plan to change that just yet.

Citrix M&A by year

Year Deals Deal Value
2014 4 $65m
2013 2 $11m
2012 6 $833m
2011 7 $354m
2010 4 $127m
2009 0 $0
2008 3 $27m

Source: The 451 M&A KnowledgeBase

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High ground for Hyland? Rumors swirl about billion-dollar exit

Contact: Brenon Daly

A half-dozen years after acquiring a majority stake in Hyland Software, Thoma Bravo is rumored to be looking at selling its chunk of the enterprise content management (ECM) vendor. And the deal – if there is one – won’t be cheap: the asking price for Hyland is thought to be about $1.2bn.

According to our understanding, that would value Hyland at more than 4x trailing sales and about 15x EBITDA. Those multiples are slightly richer than the current trading valuation of ECM giant Open Text. Although we should note that Open Text shares are currently trading at an all-time high, up some 50% since the beginning of the year.

The bull market for shares of rival Open Text has prompted speculation that Hyland, which is being advised by Goldman Sachs, is dual-tracking. After all, Hyland has already been down at least some of the road to the public market. The 22-year-old maker of the OnBase product put in its IPO paperwork back in May 2004, but pulled it a half-year later. (Currently, Hyland has roughly five times the revenue and number of employees it did when it put in its prospectus almost a decade ago.)

While Hyland could certainly opt for a trade-sale, an IPO might just prove more lucrative in the long run. Some software investors might pass on putting money into a license-based company, but Hyland certainly has characteristics that would nonetheless find some buyers on Wall Street. The pure-play ECM company puts up about 20% growth, primarily by focusing on specific vertical markets, most notably healthcare, higher education and financial services.

That position tends to be more defensible than broad, horizontal ECM offerings, which have come under threat from old rivals (SharePoint) as well as startups (Box). (My colleague Alan Pelz-Sharpe has noted that Hyland most often bumps into vendors that were consolidated during the previous round of ECM match-making, such as FileNet and Documentum.)

Cleveland, Ohio-based Hyland also benefits from strong customer support, and it has a reputation as a solid company with ‘Midwestern’ values, and a culture of an ‘honest day’s wage for an honest day’s work.’) The company boasts a 98% maintenance renewal rate among its nearly 12,000 customers.

Hyland’s approach stands out starkly to the approach taken by the much larger – and more mature – Open Text, which has dropped more than $2bn on a dozen deals over the past three years. It gobbled up a number of ECM vendors before expanding into adjacent markets such as business process management and data integration. Still, Open Text’s consolidation strategy hasn’t hurt it on Wall Street, which values the company at $5bn.

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Zillow takes a big bite of the Big Apple, acquires StreetEasy

Contact: Brenon Daly

Looking to expand its offering in one of the most competitive real estate markets in the US, Zillow pays $50m in cash for New York City-focused StreetEasy. The deal, which should close this month or next, will be part of the company’s Marketplace portfolio, which generates about two-thirds of total revenue at Zillow. (The remaining revenue comes from display advertising and mortgage offerings, two businesses where Zillow has also used tuck-in acquisitions.)

Founded in 2006, StreetEasy provides both rental and for-sale listings in the New York City area. The company draws nearly 1.2 million unique visitors each month. (For comparison, Zillow attracted more than 61 million users in July, up from 37 million in July 2012.) StreetEasy is the largest of Zillow’s seven acquisitions, which have all come in the past two and a half years, according to The 451 M&A KnowledgeBase.

Fitting for a company that is growing at about 60%, Zillow recently told Wall Street that it will be increasingly reinvesting in its business. In the second quarter, Zillow lowered its EBITDA projection for the rest of the year, while bumping up its revenue forecast. (It now sees about $185m in sales for 2013, compared to a market capitalization of $3bn.)

Although Zillow holds roughly $170m in cash and short-term investments, the company also announced plans to sell 2.5 million new Class A shares. (Additionally, private equity firm Technology Crossover Ventures and company insiders have registered to sell another 2.5 million shares.) At current market prices, the secondary would add some $215m to Zillow’s treasury. Zillow priced its IPO at $20 per share in mid-2011, sold additional shares last September at about $40 each, and now trades at more than $80 each.

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The value of information

Contact: Ben Kolada

In its largest-ever acquisition, IHS is paying $1.4bn for Southfield, Michigan-based automotive data and information provider R.L. Polk & Co. Consumers may know the company better as the provider of the CARFAX vehicle information product. The deal is a significant move to grow a relatively young IHS division.

While IHS Automotive was launched just two years ago, Polk was founded in 1870, nearly four decades before Henry Ford’s first Model T hit the road. The company today provides online market research and a database of VINs for the automobile industry. Its Polk division accounts for about 40% of revenue. The remainder of revenue comes from its CARFAX division, which provides an online database of vehicle history information for used car dealers and consumers.

IHS claims growth potential was the rationale for this acquisition. Although Polk’s total annual revenue has only grown in the mid- to single-digit range, its CARFAX product has recorded ‘solid’ double-digit growth annually. Meanwhile, IHS says CARFAX is only 20-30% penetrated in the US. IHS also sees particular upside in international markets, where Polk currently generates just 12% of its sales.

IHS is paying $1.4bn (90% in cash and 10% in stock) for Polk, valuing the target at 3.5x its annual revenue and approximately 14x its adjusted EBITDA. (IHS disclosed that Polk generated adjusted EBITDA in the mid-20% range.) Evercore Partners advised Polk, while M. Klein and Company advised IHS.

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In ICE-NYSE deal, a shark swallows a whale

by Brenon Daly

For all of the talk about the disruptive forces that have reshaped the tech landscape through M&A, the changes – at least at the high end of the market – have been largely incremental. Just take a look at deal flow so far this year. We’ve seen a bit of big-ticket telco consolidation as well as a pair of multibillion-dollar take-privates, the largest of which would see the current CEO play a leading role in not only the transaction itself but also the operation of the company after the close. It’s hardly dramatic stuff.

Certainly, we would argue that not one of those deals comes anywhere close to the upheaval embodied by the IntercontinentalExchange’s (ICE) planned acquisition of NYSE Euronext. The deal, which was backed by NYSE shareholders today, may well be the ultimate example of a startup gobbling up an established vendor.

For starters, the roles in the transaction are flipped from what we would expect in a typical tech deal. (Indeed, the NYSE has been a busy buyer in recent years, expanding into electronic trading platforms and consolidating old-line exchanges both in the US and abroad via M&A.) Consider the fact that ICE is barely more than a decade old while the fabled NYSE traces its roots back to 1792. And while ICE is the buyer, it is less than half the size of the NYSE, or the ‘Big Board’ as it is known on Wall Street.

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Cash may be king, but Trulia ‘papers’ its big deal

Contact: Brenon Daly

Cash may be king when it comes to M&A, but the currency got dethroned in Trulia’s blockbuster acquisition yesterday. The real estate website is covering almost half of its $355m purchase of Market Leader with stock. Few deals rely that heavily on paper. In fact, stock has accounted for only about 20% of total disclosed consideration in tech transactions so far this year, according to The 451 M&A KnowledgeBase.

A look at the performance of Trulia shares since the company’s IPO last September offers some explanation as to the structure. Recently, the stock has been changing hands at about twice the level the company initially priced them at for the offering. On the acquisition announcement, however, Trulia stock dropped about 8% to $31.68. (One concern on Wall Street? The size of the transaction: Market Leader will add about 60% to Trulia’s top line when the deal closes, which is expected in the third quarter of this year.)

Still, Trulia garners a market cap of about $890m, or an eye-popping 13 times 2012 revenue of $68m. We would note – on the same measure of equity value to last year’s sales – that Trulia is paying only 8x revenue for Market Leader. That bit of valuation disparity may also figure into why Trulia was so keen to put its (relatively richly) priced paper to work in M&A.

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Checking the pulse of health IT

Contact: Ben Kolada

Healthcare IT is alive and well, as evidenced by the emergence of new consumer technologies, exceptionally high valuations and investments by some of the largest old-line technology vendors. New regulations, advances in sensor technologies and ‘big data’ analytics are driving many aspects of this market for both consumers and enterprises.

New devices that track fitness, sleep and other personal health metrics are driving adoption of healthcare IT by consumers. Nearly every new wearable technology product being introduced offers some health-monitoring component. The consumer healthcare IT market is already moving from hopeful hype to valuable reality, with Jawbone recently reportedly paying more than $100m for BodyMedia. BodyMedia is Jawbone’s third acquisition; all were announced this year and all focused on healthcare.

For enterprises, Cerner’s $50m acquisition (excluding $19m earnout potential) of bootstrapped employee healthcare management software vendor PureWellness shows the variety of businesses that can make money in enterprise healthcare IT. And consolidation in the health information exchange (HIE) sector continues to go off for about 10x sales. Meanwhile, ad-supported electronic health record (EHR) startup Practice Fusion is widely expected to be considering an IPO soon. The company’s growth is attributed in large part by government initiatives incentivizing medical practices to adopt EHRs.

As for investments, Oracle recently participated in the $45m second tranche of Proteus Digital Health’s series F financing (which brought the round’s total to $62.5m). Proteus offers an ingestible sensor, used by patients to monitor internal health and by clinicians to monitor clinical trialists’ drug dosing. The plummeting cost of genome sequencing has led to a rise of big-data bioinformatics startups hoping to help make sense of the mountains of genetic data. Startups such as Bina and Spiral Genetics have recently raised capital from traditional VC firms.

Undressing demand for wearable technologies

Contact: Ben Kolada

Still in the fad phase, wearable technology is gaining market interest, driven by new devices being introduced both by tech companies and old-school consumer goods firms. The advent of these new Internet-connected form factors, such as ‘smartwatches,’ fitness and health devices, will spur the creation of new application markets in the technology industry.

Demand for wearable technology is specifically being seen in interest for an Apple iWatch, a smartwatch that many expect will be released later this year. According to a recent report by ChangeWave Research, a service of 451 Research, prerelease demand for the iWatch already matches what the iPad and Intel Mac saw before their respective debuts.

The likely launch of the iWatch and overall emergence of new wearable technology devices, such as Google’s Glass, Nike’s FuelBand, Jawbone’s UP and various devices from Fitbit, will create new markets in application software. For example, there’s already an investment syndicate, called Glass Collective, made up of VC firms Google Ventures, Andreessen Horowitz and Kleiner Perkins Caufield & Byers, that are ready to fund companies building new ways to use Google’s Glass device.

Our senior mobile analyst, Chris Hazelton, believes these devices will create extremely tight bonds between users, the cloud and very likely new technology players. For example, unlike smartphone and tablet apps that are used infrequently or once and discarded, Google Glass apps will be persistent, following and advising a user throughout their day.

If you already own a wearable tech device, or are planning to buy one, let us know what you think of this sector and which applications you think will become most valuable. You can tweet us@451TechMnA or contact us anonymously.

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IntraLinks finally gets to use its deal room

Contact: Brenon Daly

Although IntraLinks is well-known for its ‘virtual deal rooms,’ the company itself hasn’t spent much time in them. That changed on Thursday. After being out of the market for more than a decade, IntraLinks announced a double-barreled deal, picking up two online deal-sourcing platforms, MergerID and PE-Nexus. (And yes, the company did use its own deal room to run the process.)

The addition of the two sourcing platforms makes sense as a way to increase the number of transactions that get executed in IntraLinks’ core deal room. In fact, the company had added sourcing and networking features around the end of 2011, but had only attracted a few hundred users. MergerID and PE-Nexus dramatically increase the number of potential participants, with the two firms having attracted, collectively, some 5,000 firms representing about 7,200 total users.

Further, the two platforms serve very different markets. MergerID – divested by the FT Group’s Mergermarket division – focuses on midmarket deals, primarily in Europe and Asia. Meanwhile, PE-Nexus (as its name implies) largely targets US private equity shops from its Florida headquarters. IntraLinks has indicated that it will pick up 11 employees from the two firms, and we understand that very little revenue will be added from the two subscription-based services.

More broadly, IntraLinks’ move fits with the strategy and recent performance of its business. The M&A unit, which represented 42% of total revenue in 2012, was the only one of the company’s three divisions to post growth last year. The 9% increase in its M&A-related revenue in 2012 helped bump up the overall top line at IntraLinks during what was – by design – a year of stabilization and investment.

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