How Do Price Changes Affect Consumer Perceptions?
By Kara FinnertyJun 1
I wrote most of this last year – in fact I wrote it in July last year. For some reason that I can’t remember, I decided not to publish, but given the acquisition of Radian6 last week it still seems relevant, so here goes…
Just as quickly as another competitor appears in this space, one of the existing Companies is snapped up. There’s a good list on Nathan Gilliatt’s site of all the deals in the sector. There have been 8 already in 2010 compared with 2 in 2009 – the needle has definitely moved this year. So why is this happening? Let’s look at a few of the potential reasons from the point of view of the SELLER as that’s what I’m somewhat qualified to do:
[nb, I’m the founder of Brandwatch and still hold a large, but not controlling, stake in the company]
1 Lack of cash / loss making businesses.
I don’t think so.
Even if they were losing money, I’m guessing that most of the acquired Companies have enough traction on the sales side to make it possible to raise the money they need to get to profitability. That was definitely the case with Sysomos and Scoutlabs as the prices quoted of $25+ million suggest.
2 Access to customers
Volume of leads isn’t a issue for us and as you can see from the Brandwatch analysis of online conversation for Brandwatch, Sysomos, Scout Labs and Radian6
Brandwatch is a long way behind the others in terms of buzz (our North American cousins are definitely strong on marketing). But as I say, we don’t have an issue with low volume of inquiries so I’m guessing the others don’t either. By the way the spikes are Sysomos’s announcement of their Audience product and the acquisition of Scout Labs by Lithium Technologies.
What about the quality of the new customers that an acquisition brings?
Does teaming up with a more established business help?
I’m not convinced.
We have a good number of FTSE 100 customers via our partner network. Being independent is important when building a partner network. For instance, my bet is that Meltwater’s strong sales team brought more customers to Techrigy than their own internal team did during the course of their partnership. But that partnership stopped soon after Alterian acquired Techrigy. Partner networks are extremely important. At least that’s our view here at Brandwatch.
Or to put it another way, broadening the range of available services from one organisation.
This makes more sense.
But I also have doubts about it. The main issue is the web has made integration so much easier. It allows us to stick to what we do best rather than get caught up in big bureaucratic organisations. It’s no coincidence that ALL the best social media analysis tools have been built by small independent, focused, creative, hungry businesses. We’re like teams of ninjas compared to big established businesses that are more like the Red Army. The future lies in discrete services loosely coupled – see the first paragraph in this excellent book from Michael Papazoglou.
4 Cashing in whilst the market is strong
See below for more on this.
Fast forward 8 months and BOOM – Salesforce pays $326m in cash and stock for Radian6 with another $14m going to the founders over the course of the next couple of years. Firstly, well done to Marcel, Dave, Amber and the team. I met Marcel in Boston last year at a social media monitoring conference and I can see why Radian has done so well – he’s a terrific CEO.
I was though, a little surprised by the timing. The market for online listening and engaging is growing and in my opinion there is potential for a $bn independent business in this sector. I’m pretty sure Marcel thinks that too and Radian is the market leader so they, at least as things stood last week, were in the box seat to get there first. So why did he/they sell?
Let’s start with the numbers…
From the press release, “Q2 FY12: The acquisition is expected to increase [Salesforce] revenues by approximately $5 million and to reduce non-GAAP EPS by approximately $0.08 in the quarter ending July 31, 2011.”
This means that Radian expects to turnover $5m from 1 May to 31 July 2011, whilst making a small loss. That’s NEXT quarter – this quarter is likely to be less – say $4m in revenue. Annualised we get to $16m. Now of course Radian is growing – reportedly at around 3x last year. Assuming that continues during 2011, revenue should be of the order of $30m.
So the price is 20x current revenue or ~11x projected revenue for 2011. That’s racy. As my father once said to me, when someone puts a big cheque in front of you Giles, it’s a brave man who says no. (Looking at this valuation, brave or maybe even foolish.)
Let’s also look at where R6 is going…
Salesforce is an extremely successful business. It’s worth about $18Bn and has doubled in the last year. That’s to say they have created $9bn of value in one year. Or, to put it in context, about 10% of the total cost of running the National Health Service in the UK….they are rocking it
Have a look at Google Finance – select 1y from zoom option.
This looks like a great company to join. It’s going to give Radian access to enormous resources, both technical and sales and although acquisitions don’t always work out, one would think that having active support from Salesforce is going to be a net good thing for Radian. Add the great price to this and the decision by Marcel and the team looks pretty sensible.
And what about from Salesforce’s point of view
It’s a no-brainer.
On the day of the announcement, the stock went up by $7 from $127 to $134 and it stayed there. That’s about $1Bn in value. So it’s clear, the market loves the deal. And it’s easy to see why. Have a look at this from Nathan Gilliatt. Nathan’s been following this space for a long time. If there is one, he is probably THE global expert on it.
What about Brandwatch? Are we going to follow suit, albeit at a smaller number (at least at the moment!). No, we’re not. As a colleague said to me last week, “now we’ve come this far, let’s swing for the fence”.
Furthermore, one of the things that sets US technology businesses apart from the rest of the world is that they are sometimes brave or foolish enough to say no to selling out, and carry on with their independent ambitions.
And you can see the effect of those decisions in the list of the NASDAQ 100. It’s time some of us in Europe learnt from this mind-set.