Jul 14, 2013

M2M Acquisitions and the Price of Growth

The topic of acquisitions in the M2M market has featured in several company announcements and several of my discussions with industry players. In late June Avista Capital Partners completed its $253m acquisition of Telular Corporation, an M2M event monitoring and reporting service provider.

During the month of May, the CEO of Sierra Wireless was quizzed about his company’s acquisition intentions by financial analysts at a Global TMT Conference organised by Jefferies, an investment bank. Following its divestiture of a non-core business unit to focus on M2M, Sierra Wireless holds about $160m on its balance sheet. Of this, about $100m is being earmarked for M&A initiatives. So, what are some of the considerations that will determine how these funds might be deployed?

According to Sierra Wireless, the market for M2M modules is quite concentrated with the top 3 suppliers controlling about 70% of the market. There is a healthy level of competition which prevents any one company from commanding a price premium. As illustrated below, valuation metrics [1] based on price/sales ratios have also been rising as the modules business has consolidated over the past few years. Further acquisitions in this segment look financially less appealing. Niche acquisitions may, however, still be relevant as in the case of Telit’s capture of the GPS modules business of Navman Wireless in 2011.



This chart shows three categories of acquisition involving companies in the modules, platform and service provider segments of the M2M value chain. The modules business is characterized with low price/sales ratios. Sierra Wireless’s acquisition of Wavecom needs to be treated with caution as it coincided with a period of depressed sales when major economies were slowing down around the time of the Lehman Brothers financial sector collapse.

Revenues from platform businesses are more highly valued due to the potential to generate subscription-like recurring revenues from M2M connections. The price/sales metric rises even further for service provider businesses. It can be argued that Telular’s lower valuation ratio, relative to Wireless Logic, reflects the fact that Telular’s revenue mix is a combination of recurring subscription services and one-time hardware sales for new M2M applications. Not show in this chart is the over 8x metric that applies to Verizon’s acquisition of Hughes Telmatics, a platform and subscription management service provider.

At the Jefferies conference, Sierra Wireless’ CEO indicated that the embedded modules business generated gross margins of about 30%. In contrast, its Enterprise Solutions group (combining gateway routers and Cloud-based, application-enabling platform services) generated gross margins in the region of 50%. The latter segment was highlighted as the primary area of focus for future M&A activity.

Sierra Wireless faces an interesting challenge in implementing this strategy since it has to identify meaningful opportunities relative to three key dimensions

  • the needs of 11 target vertical markets [2] with potentially few cross-market commonalities
 
  • different business model choices – direct to enterprise, wholesale ‘white-label’ offering of integrated gateway and platform, an indirect approach to enterprises involving strategic partnering with mobile-operators and/or system integrators
 
  • geographic support capabilities in areas such as business development and technical sales support
The logical categories for M&A are in modules (as discussed above), intelligent gateways, cloud-based M2M application support services and bundling opportunities across these categories. Sierra Wireless also has a large Asian customer base which could be a determining factor if it wishes to solidify its position or intentionally diversify its geographic mix.

According to Sierra Wireless’ CEO, the general parameters governing any initiative are that it should demonstrate clear return metrics, align with the company’s M2M-focused strategy, enable growth synergies and target enterprise solutions which are at the higher end of the market.

There are many possibilities that fit this set of criteria. Setting aside the possibility of a modules-focused acquisition (since this falls at the lower end of the market with commensurately lower gross margins) then two promising ideas would take the form of:

  • a focused, OEM/ODM gateway acquisition in a promising vertical segment where there are benefits to be gained from cellular module integration and Sierra Wireless’ cloud platform management capabilities. This kind of bundled offering, which would need to be capable of being deployed quickly, would appeal to mobile-operator channel partners and enterprise M2M-adopters who are motivated by as short a time to market.
 
  • a technology oriented acquisition to enhance the capabilities of its cloud platform capability in line with emerging, enterprise customer needs. Example areas include application security services, functions related to service level guarantees, and support for (big) data analytics. The merits of differentiated platform functionality would help Sierra Wireless counter the competitive challenge and bolster the confidence of buyers working with large-providers of existing connectivity management platforms.
Like its main module competitors, Gemalto [3] and Telit [4], Sierra Wireless could also move more aggressively into the M2M support-services business and build-up its stream of recurring revenues. While it has experience of this segment through its Airvantage business (acquired through Wavecomm’s acquisition of Anyware Technologies in 2008) there would be risks in terms of new capabilities to achieve critical market-share; the different nature of this business line is revealed in the higher price/sales acquisition metrics as shown above. There is also the challenge of competing with larger platform-alliance groups that are beginning to shape the industry.

Ultimately, Sierra Wireless might not pursue acquisitions aggressively since it retains significant operating capacity to grow organically. Sierra Wireless’ fiscal prudence could equally well lead a more aggressive share buy-back strategy.


[1] Price/sales metric is used here to illustrate industry trends. It is not the only metric that should be used for valuation purposes. 

[2] Sierra Wireless’ CEO made reference to 11 verticals in which the company operates. Among these, the following five have been prioritized: automotive, networking (enterprise and back-up solutions), energy, smart metering and transportation (fleet and after-market) 

[3] In 2011 Gemalto (formerly Cinterion) acquired Sensor Logic, a U.S. based M2M platform services provider. 

[4] Telit has teamed up with Telefónica, which has an internally developed M2M services platform in addition to one that is accessible through Telefónica’s partnership with Jasper Wireless. Telit also recently announced a $44m financing transaction to pursue development of its own platform. Beyond platform services, Telit has also extending its business higher up the value chain by offering value-added-services directly to small- and medium-enterprises (SMEs) through the launch of m2mAir and its 2013 acquisition of Crossbridge in the U.S.A.

9 comments:

  1. On 27 Jan 2014, Sierra Wireless announced its intention to acquire In Motion Technology (Vancouver) for US$21m in cash.

    In Motion offers a complete solution comprising in-vehicle mobile routers with an advanced security system and a management and application platform.

    During 2013, In Motion generated US$15m in revenues and a gross margin of 50%.

    In the context of the price benchmarks illustrated above, the acquisition works out at 1.3x sales which is close to the intersection of module and platform companies.

    ReplyDelete
  2. On 23 July 2014, PTC announced that it had signed a definitive agreement to acquire privately-held Axeda Corporation for approximately $170 million in cash.

    The acquisition is expected to add $25 million to $30 million of revenue in FY'15.

    In the context of the price benchmarks illustrated above, the acquisition works out at just over 6x sales which is less than the 10x multiplier that applied to the PTC/ThingWorx acquisition.

    http://www.axeda.com/about/news/ptc-acquire-axeda-expand-internet-things-technology-portfolio

    ReplyDelete
  3. 16 Oct 2014 update

    Qualcomm has just announced plans to acquire the Bluetooth pioneer CSR. According to a Financial Times report, this values CSR at GBP1.56Bn. Based on the FT's estimate of GBP521m in trailing 12 month revenues, the acquisition valuation is about 3x.

    Relative to the valuation profile in the illustration above, this suggests that there is greater perceived value from CSR's scale and its potential to capitalize on edge-devices in the IoT market.

    ReplyDelete
  4. 29 Dec 2014 update

    Sierra Wireless recently announced the acquisition of Maingate (based in Sweden) for US$90m.

    Here is a summary of the acquisition from a press release:

    Maingate provides managed M2M connectivity and information management services to more than 500 customers across Europe, reaching a subscriber base of more than 500,000 connected devices. With a strong base of recurring revenue, Maingate expects 2014 revenue of over US $19 million and earnings before interest, taxes, depreciation, and amortization (EBITDA) of US $6 million. Sierra Wireless expects the transaction to be immediately accretive to earnings.

    Maingate's current owners will retain its Enterprise Solutions business so some adjustment has to be made to Maingate's revenue contribution to Sierra Wireless. Without factoring this adjustment, the $90m valuation corresponds to a revenue multiple of almost 4.75x which is at the service-provider end of the spectrum shown above.

    http://www.sierrawireless.com/Newsroom/newsreleases/2014/12-22-2014-Sierra_Wireless_expands_into_M2M_connectivity_services_with_acquisition_of_Wireless_Maingate.aspx

    ReplyDelete
  5. 24 June 2015 update

    Sierra Wireless to acquire MVNO, MobiquiThings

    VANCOUVER, British Columbia & SOPHIA ANTIPOLIS, France, Jun 23, 2015 (BUSINESS WIRE) -- Sierra Wireless SWIR, -0.40% (SW) and MobiquiThings, a leading mobile virtual network operator (“MVNO”) in Europe, today announced that Sierra Wireless has entered into a definitive agreement to acquire MobiquiThings. The transaction is expected to close in August 2015.

    Sierra Wireless has agreed to purchase all of the shares of MobiquiThings for €14 million in cash, plus a performance-based earnout formula that extends into 2017.

    In 2015, MobiquiThings is expected to generate revenue of approximately €3.0 million and breakeven Adjusted EBITDA (earnings before interest, taxes, depreciation and amortization).

    ReplyDelete
  6. 23 Dec 2015 Update

    PTC to Acquire Kepware, Will Extend Internet of Things Offering with Access to Industrial Automation Data

    PTC (NASDAQ: PTC) today announced it has signed a definitive agreement to acquire Kepware, a software development company that provides communications connectivity to industrial automation environments, for approximately $100 million, plus up to an additional $18 million based on achievement of certain strategic initiatives and financial results. Over the past 12 months, privately-held Kepware generated approximately $20 million in revenue.

    http://www.ptc.com/news/2015/ptc-to-acquire-kepware

    ReplyDelete
  7. 14 Nov 2016

    Belden makes $380 million takeover bid for Digi (and is rejected)

    Clayton-based Belden Inc. has submitted an all-cash takeover bid for Digi International Inc., a Minnesota-based maker of telecommunications equipment, valued at about $380 million.

    Belden, a provider of networking, connectivity and cable solutions, announced the details of the offer Friday after being turned down by Digi (Nasdaq: DGII). Belden said in a statement that it was disclosing the information to inform Digi's shareholders "of the opportunity to realize a significant premium and the compelling strategic fit inherent in a combination of the two companies."

    Digi reported 2015 net income of $6.6 million on revenue of $212.9 million.

    http://www.bizjournals.com/stlouis/news/2016/11/14/belden-makes-380-million-takeover-bid-for-digi.html

    ReplyDelete
  8. 14 Nov 2016 update

    Samsung to pay $8bn for US car tech group Harman

    Samsung Electronics has turbocharged its ambitions in automotives and smart car technology with the announcement of an $8bn deal for US parts supplier Harman International Industries.

    Samsung set up a team last year to look at ways of penetrating the auto industry. The move to become a supplier of smart car technology was seen as a natural fit, given the company’s established capabilities in mobile devices, display technology and semiconductors.

    Under the agreement, Samsung will acquire Harman for $112 a share in cash, a premium of 27.8 per cent to the target’s closing price on Friday. Harman shares were down 7 per cent this year ahead of the deal.

    The US-listed company is a global leader in connected car technology and is known for its high-end multimedia, navigation and visual display systems. Group sales were $7bn during the 12 months to October and its order backlog as of June was $24bn, the company said.

    https://www.ft.com/content/d22bb4e8-aa3b-11e6-809d-c9f98a0cf216

    ReplyDelete
  9. 3 April 2017 update

    SierraWireless announced the acquisition of substantially all of the assets of GlobalTop Technology’s Global Navigation Satellite System (GNSS) embedded module business for total cash consideration of approximately $3.2 million, subject to working capital adjustments.

    GlobalTop’s GNSS embedded module portfolio will become part of the Sierra Wireless OEM Solutions product line, and the GNSS staff from GlobalTop will join Sierra Wireless.

    GlobalTop’s GNSS products generated approximately $5.0 million U.S. in revenue during the last 12 months, and the business is approximately breakeven.

    http://finance.yahoo.com/news/sierra-wireless-acquires-gnss-embedded-110000915.html

    ReplyDelete