In a clear sign that mobile advertising has grown up, Google spent a whopping $750m in stock on Monday to pick up San Mateo, California-based AdMob in what we hear was a contested process. This transaction goes a long way toward securing control of mobile display advertising for Google and comes just days after the launch of Android 2.0. Although we’ve been projecting dealmaking in the mobile advertising market for quite some time, we’re nonetheless floored by the rich valuation for AdMob, a three-year-old startup that’s raised just shy of $50m. We estimate that the 140-person firm pulled in about $20m in gross revenue in 2008 and was on track to double that figure this year (we surmise that this translates to roughly $20m on a net revenue basis).

The double-digit valuation for AdMob reminds us more than a little bit of the high-multiple online advertising deals that we saw in 2007. Viewed in that context, Google’s purchase of AdMob stands as the third-largest ‘new media’ advertising purchase since 2002. Of course, like many of those transactions, this was not based on revenue, but instead on technology and market extension, which is consistent with Google’s strategy of acquiring big into core adjacencies.

Looking forward, AdMob’s top-dollar exit is sure to have a number of rival mobile advertising startups excited. One competitor that’s preparing to raise an additional sizable round of funding quipped at the near-perfect timing of this transaction. This is an industry that has seen its ups and downs over the past few years. When we first wrote about AdMob back in May it was in the backdrop of fire sales and failed rounds of funding. If nothing else, this deal will dramatically change that.

Microsoft has been actively playing catch-up to Google in advertising and search, and is sure to follow it onto the mobile device. As are many other niche advertising shoppers such as Yahoo, Nokia, AdKnowledge, Adobe-Omniture and traditional media conglomerates such as Cox. AOL has already made its move, reaching for Third Screen Media two years ago. (We would note that AOL’s $105m purchase of Third Screen is a rare case of that company actually being ahead of the market.)

Startups that could benefit from this increasing focus on the sector include AdMarvel, Amobee, InMobi, and Velti’s Ad Infuse. However, we suspect that some of the major advances – and consequently the most promising targets – are likely to come from players that are just now getting started, with fresh and profitable approaches to location-based mobile advertising.

Some recent mobile advertising deals

Source: The 451 M&A KnowledgeBase *451 Group estimate

It looks like acquisitive IAC/InterActiveCorp could be gearing up to undo its largest buy ever, Ask.com. At least Barry Diller’s opening remarks during IAC’s conference call last week seem to indicate a desire to explore the possibility. The New York City-based Internet media company has successfully expanded into a content giant by snapping up dozens of Internet properties. IAC has inked 36 deals worth more than $4.5bn since 2002. Many of those purchases have been tiny (Airfarewatchdog.com, for instance), but IAC did make a significant pickup when it handed over $1.85bn for Ask.com in March 2005.

However, we suspect that Ask.com hasn’t delivered the kind of returns that IAC had hoped for, since the search engine remains far behind Yahoo, Microsoft and Google in terms of usage. Still, with roughly 4% of US search market share, Ask.com would be a significant addition to any acquirer in the competitive scale-driven space, where every percentage point counts.

Though we won’t rule out a financial buyout, which would have more than a few echoes of the just-closed Skype carve-out, we think a strategic buyer for Ask.com makes more sense. Two obvious suitors spring to mind: Google and Microsoft. Although Google recently made its intentions for more acquisitions known and even signaled a willingness to do large deals again, we do not think it is likely to pick up Ask.com. Rather than make a consolidation play, we expect Google to continue to snare startups to offer additional services to existing users, while also bolstering its recent moves into new markets such as online video and mobile communications.

On the other hand, Microsoft has displayed a willingness to spend a lot of money in its game of catch-up with Google. With an acquisition of Ask.com coupled with its impending Yahoo deal, Microsoft could come very close to capturing one-third of all search traffic. While that would undoubtedly help Microsoft, a divestiture of Ask.com could also benefit IAC. Granted, it would mean slicing its revenue roughly in half, but IAC would have a cleaner story to tell Wall Street. And it could use some help in that area. Investors give a paltry valuation to the cash-heavy company, valuing the business at less than one times sales on the basis of enterprise value. IAC sports a $2.6bn market capitalization, but holds $1.8bn in cash.

IAC’s historic acquisitions and divestitures, 2002 - present

Source: The 451 M&A KnowledgeBase

As liquidity events go, the just-announced sale of Kana Software is shaping up to be a pretty dry one for most shareholders. The customer service automation vendor said on Tuesday that it plans to sell its operating business to buyout group Accel-KKR for $49m and retain the publicly listed shell of a company as an acquisition vehicle. The proceeds from the sale of the business will flow to what essentially amounts to a special-purpose acquisition company, or SPAC, rather than long-suffering Kana shareholders. Shares of Kana have barely moved since the announcement, holding steady at around $0.75 each.

From our view, the structure of the deal reflects a creativity born out of necessity. Essentially, the challenge that shaped the sale process at Kana, which has been playing out for several years, was how to realize value for a decidedly mediocre operating business, while at the same time preserve the value of the tax advantages accrued from having burned money ($4.3bn and counting) since the company opened its doors. (The sole ‘asset’ at the SPAC, besides access to the capital markets, is the $400m in credits to offset taxes on any profit generated at whatever company it does acquire.) While the deal goes some distance toward satisfying both goals, several disgruntled shareholders have charged that it doesn’t go far enough.

For starters, the shareholders point out that if the carve-out goes through, as is expected within three months, they will have nothing to show for the sale of ‘their’ company. Instead, their future returns will be determined by an unknown group that may – or may not – buy some yet-to-determined business. (So much for the Wall Street maxim of investing in management and markets.) Particularly galling to those shareholders stuck holding illiquid Bulletin Board equity is that two of the largest owners of Kana (hedge funds KVO Capital Management and Nightwatch Capital Management, which also has a board seat) got to exit their investments at an above-market price of $0.95 per share, with the possible addition of another $0.10 for each share on top of that.

Kana would probably counter that shareholders who don’t want to roll their ownership of the company into a SPAC are free to sell their shares. And we have little doubt that the vendor exhausted every opportunity to get some value from the business, since we know that the process has been grinding along fitfully for years. In the end, though, we can’t help but view the less-than-ideal transaction as a fittingly imperfect ending to a thoroughly flawed company. Or more precisely, a thoroughly flawed public company. Red ink-stained Kana went public in 1999 on less than $5m in aggregate sales, but within a year of the offering had topped $1,000 per share on a split-adjusted basis. As shareholders now argue about dimes on the firm’s Bulletin Board-listed stock, the end of Kana just seems pathetic.

Dassault Systèmes’ $600m purchase of IBM’s CATIA product lifecycle management (PLM) sales and client support operations on Tuesday is the latest twist in a complex, 30-year relationship between the two companies. Dassault, founded in 1981, inherited the rights to CATIA, one of the first 3-D computer-aided design (CAD) packages, from its aerospace parent Avions Marcel Dassault (now Dassault Aviation). Then in 1992, Dassault bought the rights to the other pioneering CAD package, CADAM, from IBM. It set about combining the two, and continued to jointly market the product set with Big Blue.

Now it seems that Dassault wants more control over its business. Through the deal, which is expected to close during the first half of next year, it gains access to 1,000 more clients and around $700m in annual sales. The transaction is expected to boost earnings in the first year. (Dassault plans to speak more about the financial impact of the deal during its third-quarter earnings call on Thursday.)

The partnership will continue with IBM in the services role, but should enable Dassault to simplify its contracts with very large customers such as Ford Motor and Boeing, which until now had to negotiate with both vendors. The scope of CAD software has evolved over the years from core engineering and complex product design into collaborative PLM focused on business processes, workflows and the supply chain. However, Big Blue didn’t have the agreements in place to sell the full set of Dassault tools. The result was that more big firms were dealing directly with Dassault. A side effect is that both companies will be more able to work with other partners: Dassault with Hewlett-Packard, for instance, and IBM with other PLM providers such as Siemens PLM Software and PTC.

The deal is the biggest in Dassault’s history, though it has spent heavily in the past on industry consolidation, most notably through the acquisitions of MatrixOne (March 2006, $408m), ABAQUS (May 2005, $413m) and SolidWorks (June 1997, $310m). Other vendors have also been buying up big chunks of the PLM market. Siemens inked the sector’s largest deal in January 2007, spending $3.5bn on UGS, while Oracle handed over $495m for Agile Software in May 2007. The PLM shop that appears to be left behind is PTC, which despite spending more than $600m on 11 purchases of its own since 2004 is now much smaller than either Siemens or Dassault and is under pressure from moves into PLM by mainstream enterprise software houses such as Oracle and SAP. Several market sources indicated that PTC has retained Goldman Sachs to advise it on a possible sale.

Exactly three years ago, we bluntly wrote that there was no reason for Kana Software to be a public company, at least in its current form. Kana’s performance in the intervening 1,000 days since we published that report did nothing to change our view. If anything, as the red ink continued to gush at Kana, we became even more convinced of the need for a sale of the customer support software vendor. The sale finally happened Tuesday, with Accel-KKR agreeing to pay $49m in cash for most of Kana.

We were hardly alone in our assessment that Kana – a money-burning, Bulletin Board-listed company that also had negative working capital – should be cleared off the exchange. As we noted earlier this summer, Kana’s largest shareholder also wanted something to change at the company. KVO Capital Management, which had owned some 8.5% of the company, was pushing earlier this summer to get a director on the Kana board. KVO, which declined to comment, has agreed to back the sale to the buyout group, according to the release.

After the turmoil in the credit market essentially knocked PE shops out of tech M&A for much of the past two years, we’re hearing various indications that buyouts may be coming back. We recently noted the rumor in the market that in the coming weeks PE firm Francisco Partners will ink in the paperwork for a public offering for one of its portfolio companies, RedPrairie. And bankers indicate financial buyers are once again looking to add to their portfolios, rather than just support their existing investments.

Meanwhile, on the other end of the PE lifecycle, there’s also some bullishness for buyout funds from limited partners, at least according to one source. Marlin Equity Partners is said to have recently raised a $450m third fund – and even had commitments for up to $600m. Los Angeles-based Marlin, which last raised a $300m fund two years ago, didn’t return a call.

Of course, we have to look at any rebound in the overall LBO market in context. Certainly, we have seen some notable purchases this year by Symphony Technology Group, Vista Equity Partners and Thoma Bravo – as well as, of course, the pending carve-out of Skype, which is being led by Silver Lake Partners. But even with all of that, the value of tech LBOs announced so far in 2009 is only $12bn – just half the $23bn announced in the same period last year. And forget about the time when the buyout barons accounted for more that one-quarter of all tech M&A spending; so far this year, the share of PE firms of overall deal flow is just 11%.

Up until the credit crisis knocked the economy into a recession, mobile software company Smith Micro Software had been a fairly active acquirer. The Aliso Viejo, California-based firm closed five deals worth $93m in 2007 alone. However, as the economy slid into a tailspin, Smith Micro pretty much stepped out of the market. Last year, it announced only a pair of tuck-in acquisitions, which we estimate cost just $3m total.

We suspect Smith Micro may be looking to return to a quicker M&A pace. Last month, it announced its second-largest deal, picking up Mountain View, California-based Core Mobility for $18.5m. (We understand the two sides discussed a deal back in 2007, but couldn’t get together on price.) Smith Micro will hand over $10m in cash and cover the rest of the Core Mobility purchase in stock, which will hardly limit its ability to do future deals. The debt-free company, with a market cap of $340m, claimed $44m in cash and short-term investments (at least before announcing the Core Mobility purchase). Moreover, it recently filed a shelf offering intended to fatten its treasury toward additional deals. At current prices, the four million-share offering will effectively double Smith Micro’s cash on hand. So where might it be looking to shop?

The Core Mobility acquisition reached into a new market segment. But we believe any significant future deal would see the company aiming to bolster its core mobile enterprise VPN offerings. That is where it shopped before putting the breaks on its M&A program in late 2007, when it picked up PCTEL’s mobility assets and Ecutel Systems. Potential targets include Norwegian Birdstep Technology, Swedish Columbitech, Seattle-based NetMotion Wireless and Canadian vendor ipUnplugged.

Although all four would make excellent tuck-in acquisitions, we view publicly traded Birdstep as a particularly good fit for Smith Micro. The Norwegian company has trailing revenue of about $18m, which would be a not-insignificant boost to Smith Micro’s revenue. But more importantly, acquiring cash-burning Birdstep would provide a much-needed foot in the door to the Nordic/European markets to help Smith Micro expand beyond the Americas, which currently accounts for more than 90% of revenue. Birdstep can likely be had at a discount too, as the company currently sports a market cap of about $30m, a mere one-fifth of its 2007 levels. Patience might be the operative word for Smith Micro’s M&A strategy, and it looks like it’s paying off.

Smith Micro’s historical M&A

Source: The 451 M&A KnowledgeBase * official 451 Group estimate

Two years ago, Equinix went shopping to expand its business across the Atlantic, paying $555m in cash for London-based IXEurope. The deal, which required a topping bid from Equinix to get closed, created the first truly global carrier-neutral colocation player. Now, Equinix is looking to consolidate its home US market. The company said on Wednesday it is planning to pay $689m (80% in stock, 20% in cash) for Switch & Data Facilities Company.

The acquisition, which is expected to close in the first quarter of 2010, would bolster Equinix’s presence in several key markets, as noted by my colleagues at Tier 1 Research. Among the most valuable additions would be Switch & Data facilities serving financial institutions in Manhattan and North Bergen, New Jersey, as well as Switch & Data’s facility in Palo Alto, California, which is a major point of West Coast Internet interconnection.

Combining Equinix and Switch & Data produces a datacenter provider with revenue of just about $1bn, putting it ahead of rivals Savvis and Terremark. From our perspective, we would add that Equinix also garners a premium valuation compared to those remaining providers. In fact, its valuation lines up only slightly lower than the multiple it is paying for Switch & Data, even with the 34% premium on top of the previous closing price of Switch & Data shares. Equinix’s bid values Switch & Data at 17 times trailing EBITDA, compared to 14 times trailing EBITDA at Equinix. In terms of 2010 estimates, both the current valuation of Equinix and the takeout valuation of Switch & Data come in at about 9.5 times projected EBITDA.

With BMC Software reaching across the Atlantic this week for Tideway Systems, the Big Four systems management vendors are now four for four in terms of buying startups that do datacenter asset discovery and dependency mapping. The deal, which is the second acquisition by BMC in as many months, should help the company round out its datacenter management lineup. Although terms weren’t disclosed, we understand that BMC paid $30m for Tideway, which was running at about $15m in revenue. Tideway, which is based in London, had raised some $37.5m in backing, including a whopping $27m series C in April 2008.

Most of BMC’s other rivals had already inked deals in this market. In addition to the Big Four, other tech giants also picked up startups that had discovery and mapping technology. The deals started in mid-2004, when Mercury Interactive (now part of Hewlett-Packard) reached for Appilog. After that, a yearlong flurry of transactions starting in late 2005 saw pretty much all the big names make their play. IBM acquired Collation, Symantec reached for Relicore, EMC grabbed nLayers and CA Inc bought Cendura. Based on disclosed or estimated deal values, all the buyers during that period paid in the neighborhood of $50m for their respective discovery and mapping startups, roughly 40% more than we hear BMC handed over for Tideway. Look for a full report on the transaction in tonight’s MIS sendout.

Along with the rising equity markets, there’s a new flow of companies that are planning to file their IPO paperwork in the next few weeks. For instance, we know of two venture-backed mobile vendors that have picked underwriters and plan to put in their prospectuses shortly. And we’re willing to bet that the expected strong offering from Fortinet, which initially filed in early August and is likely to debut before Thanksgiving, will catch the eye of quite a few VCs who have sizeable security providers in their portfolios.

Altogether, it looks like a decent IPO pipeline for VCs, as long as the equity markets hold. But what about their brethren at PE firms? We’ve seen the buyout barons file to flip a few non-tech holdings back onto the market, and the big offering from Avago Technologies (the carve-out of Hewlett-Packard’s semiconductor business by Kohlberg Kravis Roberts and Silver Lake Partners) has been above water since it hit the Nasdaq in early August. But there are still a lot of PE firms with pretty full portfolios that would like to post a realized gain – as opposed to ‘paper gains’ – before going out and raising a new fund.

So which PE-backed company is likely to hit the public market? Several sources have indicated that RedPrairie, an inventory management software vendor owned by Francisco Partners, has selected bankers and plans to ink an S-1 in the coming weeks. Francisco acquired RedPrairie in mid-2005, 30 years after the company was founded. Since the buyout, RedPrairie has rolled up six other companies. In 2008, the firm generated almost $300m in revenue. That puts RedPrairie’s revenue in the same neighborhood as rivals i2 and Manhattan Associates, but below the sales of JDA Software and Epicor Software.