What Happened in M&A This Year and What We Might Expect in the Near Future

COVER STORY

What Happened in M&A This Year and What We Might Expect in the Near Future

By Paula Bernier, Executive Editor, TMC  |  December 26, 2013

This year finished with a bang in terms of M&A activity, with deals like Verizon’s (News - Alert) $130 billion buyout of Vodafone and Softbank’s $21.6 billion investment in Sprint raising the stakes. But perhaps the most talked about 2013 acquisition in tech was Microsoft’s $7.2 billion acquisition of Nokia’s device business.

“It's encouraging to note that even with the sluggish pace of economic recovery and continued concerns over Washington’s fiscal crisis, very few surveyed individuals expect a slowdown in M&A activity in coming months, and most see a good chance of recovery to pre-recession levels within five years," said Morrison & Foerster’s Robert Townsend, co-chair of the firm’s Global M&A practice. “While deal volume remains at a relatively low level, a number of high-profile, high-priced acquisitions have occurred this year that suggest large corporations are again willing to turn to M&A to address fundamental competitive challenges.”

The number of tech transactions in the third quarter increased 97 percent over the second quarter, according to PricewaterhouseCoopers, which said the average deal value increased to $440 million, up from $253 million in the first quarter and $433 million in the second quarter of 2013. The deal value in the third quarter – during which eight transactions in excess of $1 billion closed – totaled $27.7 billion, doubling that of the second quarter, PwC reported.

“After a struggling start in the first of half of 2013, the third quarter demonstrated robust growth in both volume and value of closed deals, to put technology M&A on an upward trajectory toward a strong finish to 2013,” said Rob Fisher, PwC’s U.S. technology industry deals leader. “Additionally, there were a significant number of large deals announced during the quarter. Private equity funds are increasingly active in the technology sector, and with growth a constant focus for technology businesses, we anticipate the abundance of cash at home and overseas held by corporate acquirers to spur deals in the months and quarters to come.”

Microsoft & Nokia

Although it’s the smallest of the three combinations mentioned above, Microsoft’s move to snap up partner Nokia generated a lot of industry commentary – and several INTERNET TELEPHONY most important acquisition of 2013 nominations.

Announced in early September, and receiving DoJ approval in early December, the deal gives Microsoft substantially all of Nokia’s Devices & Services business, the ability to license Nokia’s patents, and the license and use Nokia’s mapping services.

“Without a doubt the most noteworthy acquisition of 2013 is Microsoft's play

with Nokia,” said Karl Dahlin, director of strategic partnerships at VCI-Group. “We all know mobile communication has a big future and this allows Microsoft to keep up with Google and Apple in this important space, not to mention bailing Nokia out of a difficult situation. Win win.”

Michael Stanford, an entrepreneur and strategist in VoIP and a monthly columnist for INTERNET TELEPHONY magazine, sees it a different way.

“The most noteworthy acquisition was Microsoft's acquistion of Nokia's devices and services businesses, because it marked some kind of end for the non-smartphone market,” he said. “Nokia's phone software has always been user-hostile; this is only an irritant on phones that don't do much, but now that the phone business is pretty much synonymous with the smartphone business, Nokia's capitulation to Windows had some business-strategy sense: get the software from someone who knows how to do software right.”

The problem is that Microsoft is not necessarily that company, Stanford added. But it went with that option, he said, because its other choices – being an Android me-too player or sticking with Symbian – were perhaps even more bleak.

"Microsoft acquires Nokia sounded great at first, because Nokia has a gold-plated intellectual property portfolio, and Microsoft already gleans substantial license fees from every copy of Android,” said Stanford. “So that's Microsoft consolidating a strength, right? No, because Microsoft didn't buy Nokia. It bought half of Nokia, and that half didn't include the intellectual property trove. But maybe Microsoft didn't need the Nokia patents, since it seems to be doing better with its Nortel patents than Google is with its Motorola ones.

     

“So maybe it wasn't such a bad business proposition, since Microsoft can't come up with anything else to do with its cash pile, and it got a license to all the Nokia IP plus $15 billion in annual revenues for $7 billion,” he said, “and there are plenty of people to fire (synergies in business-speak) to get the profit margins up.”

Softbank & Sprint

The second most commonly cited M&A move of 2013 in INTERNET TELEPHONY’s pundit interviews was Softbank’s deal with Sprint. Completed July 10, this effort involved Softbank investing $21.6 billion for a 78 percent share of the service provider.

“There is a lot of industry restructuring going on which is the mega-trend,” said Peter Bernstein, TMCnet senior editor and a long-time industry analyst and telecom employee. “Put feet to the fire, the Softbank acquisition of Sprint probably is No. 1, although Microsoft getting the handset business of Nokia is right up there since it means Microsoft still has a chance in the mobile device market.”

Clearly, someone was going to step forward to claim Sprint sooner or later. Indeed, the Softbank move followed a bidding war between Dish and Softbank for Sprint.

Japan-based tech powerhouse Softbank has also made a few other interesting investments lately, including taking a controlling stake in Miami-based wireless distributor Brightstar Corp. for $1.26 billion, and forging a $1.5 billion joint venture with mobile game producer Supercell Oy.

Verizon & Vodafone

This year also saw wireless service providers Verizon and Vodafone sever ties as the former ponied up $130 billion to acquire Vodafone’s share in the companies’ 14-year-old joint venture. This reportedly marked the third largest corporate deal in history.

“It was finally time for this relationship to change, and the alliance had outgrown its original intention and objectives,” said Mike Sapien, who is responsible for Ovum’s U.S. Enterprise Practice. “The two companies were both being hindered by this joint ownership, and now both companies can be free to go their own ways. I also think it was a true win for both companies. Joint ventures are always tricky and have a certain lifecyles, and this one has hit its end of life. When it was created, it was needed, and the relationship created one of the world's strongest wireless providers in the U.S. Most of these relationships don't succeed in any fashion and are usually unwound with both companies taking a huge write-off. Kudos to both sides on this great success that generates a new opportunity for both companies.”

Other Noteworthy Deals

Here’s a quick rundown of a few other noteworthy deals in the past year.

Oracle in February announced plans to buy session border controller pioneer Acme Packet for $1.7 billion. The company said it was a move to expand on its telecom strategy, which had some folks scratching their heads wondering “what telecom strategy?” But the worlds of telecom, data and IT have, of course, been on a collision course for some time now and remain on that track today. And SBCs, Oracle’s existing software, and data center expertise together can help address the industry’s move toward more software-based networking.

On a separate front, and indicating growing interest and activity in the automated sales and marketing space, the third quarter also saw Oracle buy both BigMachines and Compendium. BigMachines offers cloud-based solutions that enable sales people to more easily generate quotes and pricing for their customers. Compendium offers cloud-based capabilities that help companies create, monitor and promote their mobile and other online content. The tools and individuals from Compendium will be combined with the assets Oracle got through its recent acquisition of Eloqua, another cloud-based marketing automation outfit.

In addition to Acme Packet, another well-known name in telecom circles was acquired this year. In October, Tellabs was purchased by Marlin Equity Partners, which also recently snapped up NSN’s optical networks business and Sycamore Networks (News - Alert). Tellabs has been struggling lately, but its technology and expertise are a good match for the Marlin portfolio, according to Ovum.

“Globally Tellabs ranks twelfth in the optical networking market, ninth in service provider switching and routing, and seventh in PON,” said Ovum’s Ron Kline. “Overall Tellabs was the twelfth-ranked wireline equipment vendor in the second quarter of 2012 with a 2 percent share of the $40 billion market. At the end of 2010 Tellabs ranked eighth among all telecom wireline equipment suppliers, however revenues from optical networking and switching and routing products have been under pressure, dropping every quarter since, pushing annualized revenues down 49 percent to $637 million in the second quarter of 2013, from $1.25 billion in the fourth quarter of 2010.”

In October, VoIP services pioneer Vonage Holding Corp. completed the acquisition of Vocalocity Inc. for $130 million. And November saw cloud communications and collaboration solutions outfit 8x8 (News - Alert) move to acquire for $18.4 million privately-held Voicenet Solutions, a leading provider of cloud business telephony and communications services in the United Kingdom.

“As you all know, the hosted voice business is hot – hotter than a NYC sidewalk in July,” analyst Blair Pleasant (News - Alert) wrote in a September blog. “There are many service providers in this space, and the number keeps growing – it is well over 100 at this time. We’re expecting to see a big uptake in hosted communication services, with a great amount of the interest coming from SMBs, but also from larger companies.”

Aspect, Avaya and Genesys also have all made acquisitions this year in cloud entities in moves to bolster their cloud contact center offers. Genesys in February purchased Angel. Aspect followed suit a few months later, buying IVR outfit Voxeo, Omer Minkara, senior research analyst–contact center for Aberdeen, noted in a recent blog. And just last month Avaya bought a collaborative cloud and content center outfit called ITNavigator, a privately held business out of Israel that Minkara said is a pioneer in cloud, social media, reporting, and management solutions.

“It's clear that customers are moving toward the cloud for communication services, including for contact center capabilities,” Pleasant said. “Cloud solutions make a lot of sense for contact centers – it's easier to add staff and resources for seasonal and cyclical needs, makes it easier to enable at-home or remote workers, etc.”

According to Phil Edholm of PKE Consulting LLC, another noteworthy acquisition was this year was the purchase of VidTel by Fidelity Investments.

“While most acquisitions are based on technology, team or customers and have a strong link to the core products and technology of the acquiring company, this one is different,” he said. “Fidelity is not a technology powerhouse looking to fill gap or add some strength, so what is going on? However, Fidelity is all about money and relationships and video is poised to transform that arena.”

Next Up

So which companies are on the most-likely-to-be-acquired-next list?

Well, Research in Motion would certainly seem to be a top contender.

“The company is beyond the point of being able to resurrect itself, and its attractive customer base and portfolio of patents make it an attractive acquisition target,” said Craig Clausen, executive vice president and principal analyst at New Paradigm Resources Group Inc.

Marla Ellerman, a veteran of telecom marketing and publishing who is now organizer of the Mobile Payment Conference, which is co-located with ITEXPO next month, agreed.

“BlackBerry, just a quick look at the financials shows why,” she said. “Most likely, only parts of the company will be purchased by different companies, rather than BlackBerry being sold as a whole.”

Videoconferencing outfit Polycom is another one to watch, according to VCI-Group’s Dahlin.

“Polycom is a prime candidate for acquisition in the next 12 months,” he said. “They

are without a clear leader or strategy but have very good collaboration technology that would be a great addition to a larger UC portfolio.”

Frank Stinson (News - Alert), partner and senior analyst with IntelliCom Analytics, added: “There are several legacy enterprise voice providers either up for sale by their parent company or at least partially owned by private equity and at a point in the lifecycle of these investments where their owners may be looking for an exit strategy. Cisco’s continued strength in this space, combined with Microsoft’s current heavy push around Lync 2013, limits the growth prospects for the legacy players in the absence of some further consolidation.”




Edited by Cassandra Tucker
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