Facebook IPO Matters for M&A and Capital Markets

February 2, 2012

Facebook’s prospective $5 billion IPO could have major ripple effects on technology M&A and the capital markets. IPOs have helped boost M&A markets in the past — for example by creating public, cash rich acquirers and driving defensive acquisitions by competitors. With Facebook’s IPO expected to be the largest ever in technology, the markets will likely be significantly and positively impacted.

For one thing, hundreds of millions of dollars that are expected to flow to Facebook’s earlier investors will be available for redeployment. The IPO could also help spur massive corporate capital spending, like the market witnessed in 1995 with Netscape’s IPO. Netscape made the Internet easier for people to use and brought about a new wave of supporting industries including web consultants and Web infrastructure providers. Facebook analogously has created a new industry based on social networking. Companies in the enterprise, such as Salesforce.com and BlackBaud, are investing in this technology, and social advertising, shopping and consulting firms are sprouting up as well. The success of the largest social media company in the world can only drive more investment in other social media areas.

The IPO will also support more robust internet valuations and whet risk-taking appetites, increasing the implied value of other internet properties. This should help to re-inflate investor confidence, as well as the stock market. Equally important, from Facebook on down, a market with more highly-valued and better-funded players should help raise tech hiring and, of course, M&A.

Since 2007, Facebook has picked up more than 20 companies (not including patent or domain name acquisitions), many of which have been tiny startups. There is little doubt that bigger and bolder deals are to come, countered by moves from Google, Apple, and the like.  Deals beget more deals.

Zuckerberg said in his letter to investors that “We think a more open and connected world will help create a stronger economy with more authentic businesses that build better products and services.” We think a solid showing from a Facebook IPO can help do much more than that.

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Posted by Signal Hill

Deal Focus: Twitter Acquires Dasient

January 27, 2012

Twitter announced this week that it acquired Dasient, an Internet security start-up focusing on anti-malware for large enterprises in the financial services, media, and online sectors. Dasient’s scanning software helps businesses identify and contain malware on the Web and is touted as an anti-malvertising service, which claims to protect advertising networks and publishers from malware. Deal value was not disclosed.

We wrote last summer about the increased focus on social media security and venture investments in the space. Since then, there have been four acquisitions of social media security vendors (including Dasient): Whisper Systems/Twitter, Unsubscribe.com/TrustedID and Garlik/Experian. These deals represent the first M&A activity Signal Hill has tracked in the area.

Dasient’s acquisition will allow Twitter to provide anti-malware technology to its ever-growing, real-time information network. Dasient’s technology will become part of Twitter’s revenue engineering team, which suggests its will most likely be used to identify malicious ads submitted through the company’s self-serve ad platform, Twitter’s latest attempt at increasing monetization. Three-year-old Dasient, which was founded by ex-Googlers, had raised $2 million in investments from Google Ventures, Floodgate and Radar Partners.

Twitter has had a number of issues over the years with scams and spam, and recently fell victim to a number of high-profile account hacks, including Fox News and Lady Gaga, and has been bulking up on its security offerings. In November, Twitter also acquired Whisper Systems, a provider of enterprise-grade security on Android devices. Its products included WhisperCore, a system which integrates with the underlying Android OS to protect everything on the phone, as well as TextSecure, which allows for secure texting by storing them in an encrypted database on your phone and the ability for encryption during transmission.

With the Dasient acquisition leading the way, we expect social security deal activity will accelerate this year as more social media leaders grow and ultimately decide to go public.

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Posted by Signal Hill

Social Media Security Focus To Grow

August 18, 2011

A number of innovative internet security companies recently began marketing suites of products designed to protect social media users. The phenomenon of social media is here to stay: from the growth in social advertising to social gaming, more and more users are continually engulfed in the online social experience. But with increased usage comes the necessity for greater security, especially for the enterprise.

Many corporate social media policies rely on simply blocking social media use altogether. This is quickly becoming a less viable option, however, as a growing number of companies and organizations rely on social media in their daily business tasks. For this reason, security vendors are stepping up and offering something more substantial solutions.

Investors are taking notice of the need for social media security: just this week social media compliance software provider SocialWare raised $7 million in venture funding led by Morgan Stanley Expansion Capital, bringing its total to $12 million for the year. Other firms, including Wedge Networks and Websense, are bulking up their offerings and marketing them specifically as security solutions for social media users. In June, Wedge announced it was expanding its “deep content inspection” network gateway approach to monitor real-time traffic for malicious threats, such as something that appears to be from a trusted Facebook friend. Websense similarly offers two social media products: Defensio, which secures against threats that target a user’s own social media pages (such as on Facebook or a blog), and its TRITON solutions, which protect against incoming threats from social sites a user may visit.

Government entities are also increasingly at risk of social media attacks. A recent report [PDF] by the Government Accountability Office found that nearly all major federal agencies are now using Facebook, Twitter and YouTube to provide information about agency activities and to interact with the public. In that vein, Cyveillance announced in June that government agencies can now utilize its Social Engineering Protection Appliance (SEPA), which uses Email Intent Analysis, real-time URL and link analysis, as well as high value target, protection to help keep users from falling victim to attacks.

Social media is expected to become a much bigger part of enterprise operations, according to Gartner, with social networking services acting as the primary means of interpersonal communications in 20% of businesses by 2014. As social media continues to grow, more attention will fall on these security threats. Smaller security providers focused on social media will be prime targets for future acquirers. These could include established security vendors looking to differentiate and remain current, as well as social networks looking to gain points with users concerned with safety.

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Posted by Signal Hill

Virtual Economy and Social Networking Currencies Bring In Real Cash

November 23, 2009
VC’s funnel money into virtual currencies: A signal of M&A potential?

Social networking’s explosive growth is driving interest in opportunities to monetize with sale of virtual goods and services. This is recently evidenced by Electronic Arts’ $300 million acquisition of Playfish, a U.K. social game developer focused on selling to Facebook members. A recent study estimated that the virtual goods and currency market will reach $1.8 billion this year, with a startling 12% of Americans having bought a virtual item at some point in the last 12 months. All that spending is helping social networks and games bring in real-world revenue. As an example, teen social network MyYearbook reached profitability earlier this year after launching its virtual currency LunchMoney, which now accounts for nearly one-third of the company’s $1 million in monthly revenues.

Though M&A activity in the sector has only just begun, there remains ample opportunity for game developers and social networks (such as PayPal, Facebook and MySpace) to gain a new source of revenue through acquisitions of established and even start-up virtual currency providers. In August, Live Gamer purchased virtual economy data platform provider Twofish and, back in April, Playspan announced it would acquire Spare Change Payments, a start-up focusing on micro-transactions for social networking applications (deal values not disclosed).

Not surprisingly, venture capital firms are funneling real funds into virtual products and currency opportunities. PlaySpan raised $16.8 million in 2008 from Easton Capital Group, Menlo Ventures, Novel TMT Ventures, and STIC, while Offerpal Media secured $15 million from D. E. Shaw Ventures in February. Jambool, a virtual currency startup, announced it raised $5 million in August from Madrona Venture Group and Bay Partners. gWallet, a San Francisco-based provider of virtual currency, announced at the end of September that it was also looking to raise about $10 million and social gaming company Zynga most recently brought in $15 million in a new round of VC investments.

While some social gaming developers, such as Zynga, have caught a bad rap in the news recently (many games make their money off of trading in-game virtual currency for advertising offers — some of which are more beneficial to consumers than others), there is no doubt that social networkers are paying big bucks for virtual cash and the trend is likely to continue. As the economy continues to rebound and consumers loosen their purse strings, we expect there will be even more virtual cash flowing, leading to more spending by VCs and a spark for more M&A in the social networking realm.

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Posted by Signal Hill

AOL Costs Time Warner Billions, But Is There M&A Potential On The Horizon?

November 18, 2009
Can AOL gain back its value through social media?

Time Warner is planning to part ways with AOL at the beginning of December, nine long years after the companies merged and basically nothing came of it. Time Warner shareholders will receive one AOL share for every 11 shares of Time Warner, valuing the company at around $3.5 billion, or about $100 billion less than Time Warner paid in 2000. Now the question remains: what role will AOL play in the future? As AOL cuts costs and staff to create a leaner, more shareholder friendly entity (it announced this morning that it would cut one-third of its workforce to save about $300 million), the company could find itself freeing up some cash that would potentially enable it to make some smaller, strategic acquisitions to get it back in the game.

There’s no doubt AOL has fallen in market share when it comes to the most important areas recently — the company is at the bottom of the search pool (2.9% market share in October, compared to 3.9% at Ask.com, 18% at Yahoo, 9.9% at Bing and 65% at Google). Last quarter, AOL’s revenues sank 23% to $777 million, with the biggest drops in subscription revenues for its internet service (down 29%) and advertising (down 18%). AOL relies heavily on display advertising, for which social networks are now taking 20% of the profits. And adding insult to injury, search advertising has rebounded better than display, posing an even bigger problem for AOL’s revenue pool.

But there is a glimmer of hope for AOL. The former Internet giant still brings in a decent share of monthly visitors. AOL.com has held pretty steady at between 52-55 million unique visitors over the past year, about 3 million more than both Bing and Ask.com, according to Compete.com. And while it is still nearly 100 million visitors away from the traffic at sites such as Google and Yahoo (about 146 and 135 million visitors in October, respectively), AOL still has a solid user base that has the potential to make waves.

The company has not been shy when it comes to making social media acquisitions over the past few years either. Since 2007, AOL has acquired three social media companies, and most recently branched out into acquisitions of hyperlocal news providers. Although it appears none of these acquisitions have panned out, AOL’s traffic and properties could make it an attractive social media play – and acquisition target down the road. In the meantime, while big plays like Twitter and Facebook are likely out of the price-range for AOL, a growing number of social media and mobile startups have potential to re-stoke AOL’s growth, its biggest concern at the moment.

AOL Acquisitions Since 2007


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Posted by Signal Hill

Rapid Growth of Twitter, Social Media Creates New Security Risks, Opportunities

August 14, 2009

Popular social networking sites have recently been barraged by highly publicized security breaches over the past few weeks. Popular micro-blogging service Twitter has suffered three denial-of-service attacks in the past two weeks which completely shut down the site for a few hours to nearly a whole day. “Denial-of-service” attacks disrupt Web sites by utilizing millions of computers to overwhelm a particular site. Other social media sites, such as blog conglomerate Gawker Media and Facebook, have also been hit recently.

About 19% of all hacking incidents are attacks against social networks, according to web security firm Breach Security, making it the most targeted category of any kind in 1H 2009. In Twitter’s case, its first two recent attacks were believed to be targeting only one activist user, a Georgian professor posting about the war between Georgia and Russia. But the latest attack on Tuesday was not immediately linked to that user, and, to make matters worse, countermeasures put in place by NTT America (Twitter’s network provider) may have made the problem worse. Others say that Twitter’s vulnerability is due to its reliance on a single network provider and poor internal preparation. These attacks are the third major security breach on the service this year – the last occurred when a hacker gained access to employee email accounts and stole numerous documents (including business plans and employee information). In January, Twitter was forced to review its defenses after a number of high profile accounts were hijacked by hackers.

Twitter is one of the fastest growing sites on the Web today — with 72.5% of total users signing up for the service in the first six months of 2009, according to analytics firm Syosmos. Along with user growth has come hundreds of third-party Twitter applications that extend the functionality and accessibility of the platform. With this exploding popularity comes greater attention from hackers and more points of vulnerability.

Experts say Twitter, Facebook and others must, and will, get security right. Even though Twitter’s latest DoS attacks were only targeting one user, it shows the vulnerability of the entire business model. The concern is a boost for IT security vendors, which see the social networking community as a breeding ground for internet-based threats. “Social security” deal activity is heating up. Defensio, for example, a platform for blocking spam comments on blog sites, was acquired in January by Websense, a major Web, email and data security provider, Cyveilance, which monitors social media and other web sources for emerging threats, was acquired by QinetiQ North America earlier this year to boost its online data tracking capabilities.

These are early days for social media, so expect a lot more investment in and acquisitions of emerging security vendors focused on addressing the attendant risks.

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Posted by Signal Hill

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