Author: Brenon Daly

No longer a faded garment, Blue Coat to hit the public market

Brenon Daly

Contact: Brenon Daly

More than four years after going private, Blue Coat is set to make a return to the public market. But the company that put in its IPO paperwork is very different from the one that beat a hasty retreat from Wall Street. The resurrected Blue Coat is cleaner, more stable and throws off more cash. And, most dramatically, it’s growing at a healthy mid-teens percentage rate, while the old version was shrinking. The reboot of Blue Coat, which has been accomplished under private equity (PE) ownership, will pay dividends as it makes its debut.

The original Blue Coat, which was founded 20 years ago, was a bit of a faded garment when its initial PE owner, Thoma Bravo, got its hands on it. As noted, revenue was declining as the company stumbled from its network performance origins into Web security, while not doing either particularly well. (451 Research surveys of customers at the time of Blue Coat’s leveraged buyout showed that respondents had a largely unfavorable view of the company, with many indicating they planned to cut their spending with it.) That corporate uncertainty was compounded by churn in the corner office, as three CEOs came and went in just the 18 months leading up to Blue Coat’s LBO.

The company is now squarely focused on network security, while also spending liberally to step into securing the cloud. This growth is crucial because the cloud has effectively expanded the perimeter of a network, and many legacy network-based security products – from some of Blue Coat’s contemporaries – have proven ineffective at addressing cloud and mobile use cases. That helps explain why the company has rung up a $400m bill for SaaS security, acquiring both Perspecsys and Elastica last year.

Blue Coat has taken these strategic steps while roughly tripling cash-flow generation and increasing revenue by about two-thirds. Some caveats, however, are needed when comparing the current financial performance at the company with its earlier numbers. In its prospectus, Blue Coat has put forward several non-GAAP measures as key metrics, including ‘adjusted revenue’ and ‘adjusted EBITDA.’ Although 451 Research relies on GAAP figures, there are compelling reasons – notably the deferred revenue write-downs, which are essentially an accounting exercise – that make it understandable why the company favors those nonstandard measures. With those disclaimers, Blue Coat reports adjusted revenue of $775m and adjusted EBITDA of $223m for its most recent fiscal year, which ended in April. Regardless of the measure, however, it’s fair to say that the new Blue Coat is a whole lot bigger and throws off more cash than it ever has before.

After much of the initial cleanup at Blue Coat was done under Thoma Bravo, the buyout shop sold the company to current owner Bain Capital last March. (As an aside, we would note that Thoma Bravo – despite having one of the biggest buyout portfolios in the tech industry – still hasn’t taken a portfolio company public.) Bain Capital paid $2.4bn, and looks certain to see its blue-hued portfolio company hit the market at north of $3bn.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

For tech M&A, it’s more of the same in May

Brenon Daly

Contact: Brenon Daly

Tech M&A spending appears to be settling into a new normal. In the just-completed month of May, total spending on tech, media and telecom transactions across the globe came in at $21.2bn, according to 451 Research’s M&A KnowledgeBase. That marks the fifth straight month that spending has totaled about $20bn, a level of consistency rarely seen in the generally lumpy tech M&A market. For comparison, in the January-May period in each of the past three years, the highest monthly spending has been at least twice the lowest monthly spending.

May also marked another month of consistency in terms of deal value being concentrated at the top end of the market. Last month, the three largest transactions accounted for half of the total spending, according to the M&A Knowledgebase. That has been true for every month so far in 2016 except February. May’s big-ticket deals included CSC’s purchase of Hewlett Packard Enterprise’s services arm, which stands as the largest divestiture of 2016; Bell Canada’s consolidation of Manitoba Telecom Services; and Vista Equity Partners’ buyout of Marketo, the second-largest take-private of 2016.

Assuming the relatively uniform monthly spending holds for the remaining seven months of 2016, the full-year value of tech deals would come in at about $275bn. That would be less than half of the amount spent in 2015, which represented a 15-year high in M&A, and basically match the level of 2013.

Deal flow in 2016

Month Deal volume Deal value
May 305 $21.2bn
April 335 $19.6bn
March 334 $23.3bn
February 319 $29.2bn
January 378 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Earnouts are on the outs

Brenon Daly

by Brenon Daly

At its most basic, an acquisition is just the end result of strategy and structure. The first part of the equation (strategy) tends to command most of the attention, while the structure of a transaction often gets dismissed as mere ‘paperwork.’ It’s a bit like a wedding. Most of us don’t celebrate the signing of a marriage certificate – a document that, like an acquisition agreement, is legally binding. No, the reason we get together to sappily toast the couple and awkwardly dance to ‘Brick House’ is to celebrate the idea of two people joyfully spending their lives together. In both marriage and M&A, the grand vision for the union is more emotionally satisfying than the nuts and bolts of the agreement.

Yet, terms matter. They not only shape specific deals and the ultimate return on those transactions, but also provide useful indicators about the broader market. Consider the case of earnouts, which are additional payments an acquirer makes if a target company hits certain milestones. Typically, as any dealmaker can tell you, earnouts are used to bridge valuation differences.

So, what to make of the fact that earnouts have fallen dramatically out of favor? According to 451 Research’s M&A KnowledgeBase, so far this year dealmakers have included the provision just half as often as the same period in each of the two previous years. Earnouts haven’t been used this sparingly since the recession year of 2009.

One possible reason for the sharp decline is that buyers no longer feel the need to stretch on valuation. That certainly came through in the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, where a record two-thirds of acquirers and their advisers predicted that private company acquisition valuations would be coming down for the remainder of 2016. And the fact that buyers no longer feel they need to include as many financial kickers as they once did to purchase the companies they want suggests that they have the upper hand in negotiations right now.

KB_earnouts

What do the ‘latent take-unders’ on Wall Street mean for startups?

Brenon Daly

by Brenon Daly

Either the acquirers of big tech companies on US exchanges are getting steals right now or Wall Street got duped last year. We say that because a majority of the public companies that have been acquired so far this year have signed off on deals – including takeover premiums – that value them at lower prices than they achieved on their own in 2015.

To put some numbers on the trend of latent ‘take-unders,’ we looked at the 13 tech vendors in 2016 that got erased from the NYSE or Nasdaq in deals valued at $500m or more, according to 451 Research’s M&A KnowledgeBase. In eight of the 13 transactions, companies sold for prices below their 52-week highs, with just five coming in above those levels. (We would note that while US equity indexes have whipped around a bit, they are basically flat over the past year.) Among the vendors that have tacitly agreed they are worth less now are TiVo, Polycom, Lexmark and Cvent.

Because of liquidity, public market valuations adjust far more quickly and visibly than private market valuations. We tend not to hear much about the ‘down-round’ sale of a startup. And yet, those discounted deals are coming, according to the recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster. A record two-thirds of the dealmakers (64%) we surveyed said private companies were likely to get sold for less during the remaining months of 2016 than they would have in the same period last year.

Startup valuation outlook

For tech M&A, April is another month further from the peak

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in April slumped to its lowest total in 15 months, as buyers either looked to pick up bargains or stepped out of the market altogether. The $18bn in total deal value recorded in 451 Research’s M&A KnowledgeBase for the just-completed month comes in at less than half the average monthly tally from last year’s record run, further lowering the post-peak levels we’ve already recorded so far in 2016.

Many of the transactions announced in April also indicated how acquirers have swung to ‘value’ – rather than ‘growth’ – buys amid a broad slowdown in tech, particularly among its old-line vendors. Both of last month’s largest acquisitions valued the targets, which were each founded around 1990, at just 1x trailing sales. (The paltry multiple for both Lexmark and Polycom reflects how the tech industry has left behind many of its sizable-but-shrinking pioneers.)

More broadly, four of the 10 largest deals went off at less than 2x trailing sales, according to the M&A KnowledgeBase. Also putting pressure on overall multiples were greying companies divesting businesses that they decided not to support at a time when growth is difficult to find. CA Technologies, Teradata, HP Inc and Vodafone all punted businesses last month. The only real above-market valuations among April’s big prints were awarded to more recently founded SaaS providers, with Cvent getting 8x trailing sales in its take-private and Textura garnering more than 7x revenue in its sale to Oracle.

With four months now in the books, overall spending on M&A around the globe stands at just $90bn. That puts 2016 roughly on track for a full-year total of about $270m, which would be less than half the amount in 2015 and one-third lower than 2014. That lower level certainly squares with the results of our recent survey of dealmakers, in which a record number said they would be less active in the M&A market for the rest of the year. (See the full report on the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.)

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Survey: After years of big plans and big buys, tech acquirers signal a slowdown

Brenon Daly

After pushing M&A spending to a 15-year high last year, a record number of tech acquirers have indicated that they will be stepping out of the market in 2016. For the first time in the four-year history of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number saying they would be cutting back on their shopping. That’s a significant deterioration in M&A sentiment compared with past surveys, which, on average, have seen more than four times as many respondents project an increase than a decrease.

In our late-April survey, fully one-third (33%) of respondents said they would be slowing their acquisition activity over the next six months, compared with just 38% who reported that they would be accelerating their M&A program. Taken together, the responses mark the most bearish tone ever from our respondents, who represent many of the most well-known buyers in the tech industry as well as their advisers. In our previous surveys, the average forecast has been overwhelming bullish, with more than half of respondents (55%) anticipating an acceleration in activity and only 13% saying the opposite. (Subscribers to 451 Research can see our full analysis of the M&A Leaders’ Survey.)

 

2016 MA outlook

The SecureWorks IPO: delayed, downsized and discounted

Brenon Daly

by Brenon Daly

So much for the comeback of the tech IPO market. Although SecureWorks did manage to make it public on Friday, the managed security service provider – along with its 17 underwriting banks – had to trim both the size and price of its offering to get investors interested. In afternoon trading on the Nasdaq exchange, SecureWorks shares were changing hands around its offer price of $14, which is lower than the range it laid out earlier.

Recent enterprise tech IPOs*

Company Date of offering
Box, Inc Jan. 23, 2015
GoDaddy April 1, 2015
Apigee April 24, 2015
Xactly June 26, 2015
Rapid7 July 17, 2015
Pure Storage Oct. 7, 2015
Mimecast Nov. 20, 2015
Atlassian Dec. 10, 2015
SecureWorks April 22, 2016

*Includes Nasdaq and NYSE listings only

SecureWorks’ underwhelming debut comes as the first enterprise tech offering since Atlassian hit the market in December. In the intervening months, concerns about slowing economic growth have swept through the world’s equity markets. Here in the US, the Nasdaq Composite Index dropped 15% in the first six weeks of this year. During that bear market, tech companies prudently opted not to continue with their offerings, much as a ship captain would not choose to set sail in stormy seas.

However, by late April, as SecureWorks launched its delayed offering, the storm had mostly passed. The Nasdaq has recovered its losses from earlier in the year, and Wall Street was no longer shaky ground. An April survey of individual investors by ChangeWave (a subsidiary of 451 Research) showed a dramatic turnaround in sentiment: Only one-third of respondents to our April survey said they were ‘less confident’ in the stock market than they were three months ago. That was just half the level at the start of 2016, and the lowest reading in more than a year. On the other hand, almost one-quarter of the respondents indicated they are feeling ‘more confident’ in Wall Street, which was the most-bullish reading we’ve had in three years.

So SecureWorks wasn’t necessarily heading out into stormy weather. Yet it still had to give up a fair amount to get public, which doesn’t seem to make much sense. (And Wall Street is nothing if not rational and judicious.) Sure, the company is unprofitable. But red ink has never stopped investors from buying, even when a company counts its revenue in the tens of millions of dollars but its net losses in the hundreds of millions of dollars. (For the record, SecureWorks is nowhere near that level, having lost $72m on revenue of $340m in its most-recent fiscal year, which ended in January.)

If SecureWorks’ so-so IPO wasn’t entirely due to the broad market or the company, maybe it had something to do with the offering itself. The basics of the SecureWorks IPO could be summarized like this: An established tech company acquires a fast-growing startup, then spins off a minority stake of a class of equity that effectively gives shareholders no voice in the direction or outcome at the company. That’s virtually the same structure as the VMware IPO, which hasn’t necessarily been kind to the company’s minority shareholders.

CW wall street April 2016

What happened to Alphabet’s M&A bets?

Brenon Daly

Contact: Brenon Daly

As part of an effort to provide more strategic focus as well as financial transparency, Google reorganized and renamed itself Alphabet last October. In the half-year since that change, the company has lived up to the ‘alpha’ part of its new moniker, handily outperforming the Nasdaq, which is flat for the period. But when it comes to ‘bet,’ it hasn’t been placing nearly as many M&A wagers as it used to.

So far in 2016, the once-prolific buyer has announced just two acquisitions, according to 451 Research’s M&A KnowledgeBase. That’s down substantially from the average of six purchases that Google/Alphabet has announced during the same period in each of the years over the past half-decade. (Nor do we expect this year’s totals to be bumped up by Google buying Yahoo, as has been rumored. That pairing would roughly be the sporting world’s equivalent of the Golden State Warriors nabbing the Los Angeles Lakers.)

The ‘alpha’ part of Alphabet is, of course, the Google Internet business, which includes the money-minting search engine, YouTube, Android and other digital units. This division generates virtually all of the overall company’s revenue and is the primary reason why Alphabet is the second-most-valuable tech vendor in the world, with a market cap of over a half-trillion dollars. For more on the company’s progress in dominating the digital world, tune in on Thursday for its Q1 financial report and forecast.

Google/Alphabet M&A

Period Number of announced transactions
January 1-April 18, 2016 2
January 1-April 18, 2015 6
January 1-April 18, 2014 8
January 1-April 18, 2013 4
January 1-April 18, 2012 4
January 1-April 18, 2011 8

Source: 451 Research’s M&A KnowledgeBase

Will Zuora play in Peoria?

Brenon Daly

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

CallidusCloud’s accretive acquisitions

Brenon Daly

Contact: Brenon Daly

With the $4m purchase of assets from ViewCentral, CallidusCloud has added on to one of its first add-on businesses. The company, which started life 20 years ago selling sales compensation management software, has used a bakers’ dozen deals since 2010 to expand its portfolio into software for employee hiring, marketing automation and on-the-job training. ViewCentral brings billing and payment technology to CallidusCloud’s learning management offering, a product that has its roots in the mid-2011 acquisition of Litmos.

By themselves, the small transactions, which have cost the company an average of just $5m a pop, aren’t all that significant. But collectively, they have expanded the market for CallidusCloud and given it the opportunity to increase high-margin revenue by selling additional products. (In 2015, the company said it did more than 80 multi-product deals.) CallidusCloud’s strategy of inorganic growth also stands in sharp contrast to rival Xactly, which has stayed out of the M&A market as it has maintained its focus on selling its core sales compensation management offering. (See our recent report on Xactly’s strategy and market position.)

Obviously, the M&A activity at the two companies isn’t the sole difference between CallidusCloud and Xactly, any more than it fully accounts for the relative valuation discrepancy between them. Still, it is worth considering how the acquisition-based portfolio expansion has paid off for CallidusCloud, at least in its standing on Wall Street. CallidusCloud currently garners twice the valuation of its smaller rival. (CallidusCloud trades at about $930m, or 4.4x times 2016 projected sales of $212m, compared with Xactly, which trades at $215m, or 2.3x times this year’s projected sales of $95m.) Further, since it came public last June, Xactly has shed about one-fifth of its value, while CallidusCloud shares are slightly in the green over that period.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.