Marketo Pegged as Next Cloud-Software Target: Real M&A

Marketo Inc. (MKTO), whose technology helps companies create and track online advertising campaigns, may be the next target in the biggest buying spree for Internet-based software makers since 2007.

Marketo has climbed 16 percent since Oracle Corp. agreed to buy Responsys (MKTG) Inc. for $1.5 billion last month, capping about $11 billion of deals announced in both the marketing and infrastructure software industries in 2013, according to data compiled by Bloomberg. Marketo, which helps clients such as Samsung Electronics Co. target customers more effectively, could lure technology companies seeking their own purchases to keep up with the consolidation, said Raymond James Financial Inc.

While the San Mateo, California-based company trades at a more expensive sales multiple than about 90 percent of U.S. peers, Marketo’s revenue is projected to grow more than twice as fast as the group over the next two years, data compiled by Bloomberg show. The $1.4 billion technology provider’s expansion prospects may make it worth the price for potential suitors such as SAP AG (SAP) or NetSuite Inc., said FBR & Co.

“Marketo is really the last standalone that’s left,” Daniel Ives, a New York-based analyst at FBR, said in a phone interview. “It’s like an arms race. Obviously Oracle made their move. The bigger tech players need to look into some of these hyper-growth areas in order to build up their product portfolio.”

Deal Speculation

When asked if Marketo would be amenable to a sale, Chief Executive Officer Phil Fernandez said in an e-mailed response yesterday that Oracle’s purchase of Responsys “only further validates that marketing technology is truly the next big software category.” Fernandez said in June that while Marketo could be sold at the right price, he is committed to keeping it independent.

Marketo provides cloud-based marketing automation software, technology which is delivered over the Internet and helps businesses tailor and measure the performance of their advertising campaigns.

Less than a month after Marketo’s initial public offering in May, rival ExactTarget Inc. agreed to sell itself to Salesforce.com Inc. for about $2.5 billion. Responsys, an e-mail marketing software provider, then agreed to a transaction with Oracle on Dec. 20, sending Marketo shares up as much as 16 percent that day.

Today, shares of Marketo climbed 8.4 percent to $41.22, the highest since the company’s IPO. It was the third-biggest gainer among 295 stocks in the Russell 2000 Technology Index.

The acquisition of Responsys probably renewed speculation that other companies in the industry such as Marketo may become targets as well, Patrick Walravens of JMP Group Inc. wrote in a Dec. 20 report.

Software Shift

Large technology companies are seeking to bolster cloud-based software offerings as their customers transition away from traditional on-site systems in favor of services that can be more easily updated and require less upfront costs, according to Jeff Houston of Barrington Research Associates Inc.

“They can’t change their business model overnight,” Houston, a Chicago-based analyst, said in a phone interview. “So what they’re doing is acquiring successful software-as-a-service businesses, and it helps with attrition.”

There were $10.7 billion of deals announced for Internet infrastructure software makers and e-marketing and information providers in 2013, the most in six years, according to data compiled by Bloomberg.

After Salesforce.com (CRM) and Oracle made acquisitions to expand their cloud-based offerings, other software providers will need to find deals of their own to keep up, said Terry Tillman, an Atlanta-based analyst at Raymond James.

In Demand

ExactTarget and Eloqua Inc., an e-marketing technology company that Oracle agreed to buy in 2012, had other potential suitors, according to regulatory filings. SAP and International Business Machines Corp. (IBM) looked at ExactTarget, people familiar with the matter said in June.

“In those two transactions, there was quite a bit of interest from large, traditional enterprise software companies,” Tillman said in a phone interview. “Those guys didn’t all get a chance to buy those assets. It’s not like they’re going to go away and not buy anything else.”

Marketo stands out as an appealing target because of its foothold in Internet-based marketing technology as more businesses devote advertising dollars to e-mail, mobile and social-media campaigns, Tillman said.

“It will be difficult for them to stay independent, and I mean that in a good way,” the analyst said. “Marketing software, there is definitely some hype around it, but there’s also validity to it being a really important category that enterprise software companies have to have. There will be plenty of people intrigued by them.”

‘Hyper-Growth’

SAP and NetSuite (N) would be logical bidders for Marketo, lured by the “hyper-growth” of its products, said Ives of FBR.

Marketo’s revenue is poised to rise 73 percent to $163 million in 2015 from a projected $94.3 million in 2013, according to company filings and analysts’ estimates compiled by Bloomberg.

That compares with a median growth rate of 29 percent over the same time period for U.S. software and computer services companies valued at more than $1 billion, according to data compiled by Bloomberg.

Jim Dever, a spokesman for Walldorf, Germany-based SAP, said the company doesn’t comment on speculation when asked whether it would be interested in buying Marketo. April Conyers, a representative for San Mateo, California-based NetSuite, said the company didn’t have a comment at this time.

Not Cheap

A takeover of Marketo would be expensive. The stock already trades at 15 times its projected revenue in the latest fiscal year, about double the multiple that Oracle paid for Responsys.

Even so, large technology companies seeking an entry into cloud-based marketing will likely be willing to pay up for Marketo, Ives said.

“It’s a high multiple but that’s the nature of the beast when you’re going down this path,” the analyst said. “Investors don’t really blink an eye because they’re really focused on putting more fuel in the engine. The stage is set for a lot more M&A in 2014.”

To contact the reporter on this story: Brooke Sutherland in New York at bsutherland7@bloomberg.net

To contact the editor responsible for this story: Sarah Rabil at srabil@bloomberg.net

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