Author: Brenon Daly

InfoSec startups wonder: why bother with Wall Street?

Brenon Daly

Contact: Brenon Daly

Why bother with Wall Street? An increasing number of tech startups – particularly those in the red-hot information security market – are saying ‘thanks, but no thanks’ to going public, and instead raising IPO-like rounds from private investors. So rather than an IPO for security startups being an ‘initial public offering,’ it stands for ‘inflated private offering.’

This trend toward big checks reached new heights this week with a $250m round raised by Tenable Network Security from Insight Venture Partners and Accel Partners. Yes, that’s right: a quarter-billion dollars in a single investment, with no SEC headaches, no public financial disclosure and very few stops on an abbreviated roadshow. If that kind of relatively hassle-free money is sloshing around the security landscape, why wouldn’t a company divert some of it to its own treasury?

And to be clear, that kind of money is available in infosec. So far this year, at least eight security startups have announced single rounds of funding that in years past would have only been available from Wall Street. In addition to this week’s whopper from Tenable, we also saw Illumio raise $100m in April, Zscaler raise $100m in early August, CloudFlare raise $110m in late September, Tanium raise $120m in early September, CrowdStrike raise $100m in mid-July and Okta and Netskope both raise $75m in early September.

Against this flurry of private-market fundings, we’ve seen just one infosec provider go public on US exchanges in 2015. In many ways, Rapid7’s decision to go ahead with its $100m IPO in June is almost endearingly recherché. But the out-of-step decision to go public also comes at a financial cost to Rapid7. Because of an inversion in conventional financing, the liquidity of Rapid7 shares and the transparency actually get discounted when compared with private-market fundings. Rapid7 isn’t even a unicorn, unlike the majority of still-private infosec startups that raised as much – if not more – than it did.

Classical economic theory holds that an imbalance such as this tends to correct over time. (The only open question is when, not if.) However, assuming we do return to a time when Wall Street is the primary – if not exclusive – source for, say, fundings of $100m or more, simply working through the existing backlog of infosec companies that have already done these big-money rounds in the private market could take several years. And, as we have seen in other markets that are temporarily distorted because of an overabundance of capital, working through that can be a painful process.

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

Webinar: What’s ahead for tech IPOs, M&A and all those unicorns?

Brenon Daly

Contact: Brenon Daly

After a record run for tech M&A, where do dealmakers see the market heading in the near term? Are they going to stay busy or catch their breath? And what do they expect to have to pay for startups in the transactions they make? What about the IPO market? And what’s going to happen to the ever-growing herd of unicorns over the next year?

For answers, join 451 Research and Morrison & Foerster on Thursday, November 12 at 10:00am PST for a webinar covering all of these topics and more. (Click here to register for the one-hour webinar.) We’ll be drawing on the findings from the latest M&A Leaders’ Survey from 451 Research and Morrison & Forester as well as highlighting trends in current market activity that have pushed spending on tech M&A to its highest level in 15 years. Already in 2015, buyers have shelled out more than a half-trillion dollars for deals they’ve announced. So the question remains: Where do we go from here?

Register now for a look at what’s behind the recent record and whether that will continue in 2016.

Unicorn outlook

Wrapping a ‘blue coat’ around SaaS apps

Brenon Daly

Contact: Brenon Daly

For the second time in about three months, 20-year-old infosec vendor Blue Coat has bought its way into the cloud, paying an astronomical multiple for cloud application control startup Elastica in a $280m deal. Paired with its recent purchase of Perspecsys, Blue Coat has rung up a $400m bill in building out an offering to help secure SaaS applications. That makes it the biggest buyer in this nascent market.

We view the pickups of Perspecsys and Elastica as a bit of a portfolio update and refresh ahead of what we expect to be an IPO for Blue Coat in early 2016. As one of the few large-scale infosec providers, Blue Coat has attracted acquisition interest in recent years. Before its take-private in late 2011, the company was rumored to have drawn a bid from HP. More recently, Raytheon was thought to be considering a run at Blue Coat before nabbing fellow PE-owned network security firm Websense instead. Earlier this year, Blue Coat’s original PE owner, Thoma Bravo, sold the company to Bain Capital. (Incidentally, Goldman Sachs worked Blue Coat’s LBO as well as the secondary transaction.)

Subscribers to 451 Research can see our report on this deal – including valuation, market context and integration outlook – on our website later today and in tomorrow’s 451 Market Insight.

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

Survey: the already weak tech IPO market looks even weaker in 2016

Brenon Daly

Contact: Brenon Daly

Despite 2015 being one of the weakest markets for tech IPOs in recent years, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster don’t expect a rebound in 2016. (See our full report on the survey.) In fact, more than four out of 10 (43%) forecast a further slowdown in public offerings next year, compared with three out of ten (29%) expecting a pickup in IPO activity. That’s a direct reversal of the already weak sentiment from the previous survey just last April.

By our count, only a half dozen enterprise tech companies have come to market on US exchanges so far this year. More alarmingly, the companies that have made it public in 2015 have continued to get roughed up on Wall Street. Half of this year’s debutants (Box, Apigee and Xactly) are currently trading below the valuations that venture investors put on them. (Similarly, Good Technology abandoned its yearlong effort to go public and instead took a relatively low-multiple sale in September that valued it at less than private-market investors had in previous funding rounds.)

With the IPO market likely to be an unwelcoming place in 2016, a dispiritingly painful reception could be waiting for those late-stage companies aiming to raise capital once again in the private market rather than on Wall Street, according to our survey respondents. A staggering seven out of 10 anticipate that the valuations of late-stage funding will decline next year, compared with just 5% who project up-rounds. Another way to view the incredibly bearish forecast from our survey respondents is that for every one person from the tech M&A community who expects the privately held high-fliers to continuing soaring to higher valuations, 14 respondents predict gravity to set in.

See our full report on the survey results, which includes the outlook for IPOs as well as a near-term forecast for M&A activity and valuations.

IPO market outlook

Survey date Forecast increase Stay the same Forecast decline
October 2015 29% 28% 43%
April 2015 41% 32% 27%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

The end of a bull run in tech M&A?

Brenon Daly

Contact: Brenon Daly

After sprinting at a record rate of M&A spending in 2015, tech dealmakers and investment bankers are planning to catch their breath. In the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster, a record low percentage of respondents forecasted an uptick in their acquisition activity over the next six months, while a record high number predicted a decrease.

Overall in the latest edition of the survey, the bulls were only slightly less bullish, while the bears were dramatically more bearish. The 44% of tech acquirers projecting an acceleration in M&A is only a handful of points below the previous low-water mark, but the 24% indicating a slowdown is more than twice the average negative forecast over the previous seven surveys.

Now in its eighth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster has now registered two ‘outlier’ results – one on the upside, back in spring 2014, and in the current survey, one on the downside. Back in our April 2014 survey, a record 72% of respondents forecasted an acceleration in M&A activity. That clear indication by the main tech buyers and their advisers to get busier did indeed come through in the prints. In the six quarters since that record forecast, the average quarterly spending on tech M&A stands at $120bn, almost exactly twice the average quarterly spending in the preceding six quarters, according to 451 Research’s M&A KnowledgeBase.

In our just-completed survey, we now have a similar – though inverse – significant deviation in responses. Recall that one-quarter of respondents predicted a decline in M&A activity through next spring, which is by far the highest level we’ve ever seen. The wisdom of the crowd, which comes through in our survey results, more or less accurately anticipated the start of a bull run in tech M&A a year and a half ago. In the latest survey, the crowd’s sentiment appears to have swung in the other direction. We’ll have a full report on the latest M&A Leaders’ Survey from 451 Research and Morrison & Foerster on our website later today and in tomorrow’s 451 Market Insight.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
October 2015 44% 32% 24%
April 2015 61% 30% 9%
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Securing an IPO pipeline

Brenon Daly

Contact: Brenon Daly

As we saw in the recent lackluster debut of Pure Storage, there isn’t much demand on Wall Street for new offerings. The fast-growing storage startup became only the fifth enterprise tech vendor to go public in 2015. Virtually all of the tech IPOs, including Pure Storage, have broken issue, often falling below the valuation they achieved as private companies, when they were smaller and more speculative investments. However, there is one exception to the generally dismal tech IPO market: information security.

Consider the standout offering from Rapid7 . Since debuting three months ago, the threat-detection provider has not only delivered a tidy return to its earlier investors, but has also traded relatively strongly in the aftermarket. And it is doing all that while maintaining a rather rich valuation. Investors value Rapid7 at about $840m, roughly 8x the $100m or so in sales this year that the company will put up.

As with any market that indicates demand, supply will look to satisfy that demand. We understand there are at least three information security firms currently on file and hoping to go public before the end of the year:

  • Veracode: The code-scanning startup is rumored to have picked J.P. Morgan Securities to lead its offering. We gather the company ran a dual-track process, but is now set to go public. It raised a late-stage round about a year ago, bringing its total to about $120m.
  • LogRhythm: The SIEM vendor has navigated through the consolidation that has thinned the number of sizable independent vendors to just a handful. An IPO from LogRhythm would come almost eight years after rival ArcSight went public.
  • SecureWorks: We noted in May that Dell’s managed security service division is looking at spinning off a minority stake of the company. The move would give SecureWorks currency to pick up other MSSPs, as well as (possibly) raise money for Dell as it looks to pay for the largest-ever tech acquisition.

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

Buyout barons pay up in big tech prints

Brenon Daly

Contact: Brenon Daly

Once again, the buyout barons are paying up in their big bets. The latest example of private equity (PE) largess came in the proposed SolarWinds take-private, with Silver Lake Partners and Thoma Bravo teaming up on a $4.5bn offer. That’s a fairly steep price for a company growing sales in the high teens to about $500m this year. On a cash-flow basis, SolarWinds is getting a vertigo-inducing valuation of 27x EBITDA.

While SolarWinds’ valuation is certainly richer than other significant PE deals, this year has nonetheless seen financial buyers ready to pay above-market prices. For instance, Informatica, which put up about $1bn in sales, went private earlier this year for more than $5bn. On a smaller scale, we understand that’s exactly the same valuation Thoma Bravo paid in its purchase of privately held healthcare analytics vendor MedeAnalytics.

Altogether, the PE shops involved in the 10 largest transactions in 2015 have paid an average of 3.4x trailing sales, according to 451 Research’s M&A KnowledgeBase . (To be clear, that’s based on the enterprise value of the targets.) For comparison, that’s a full turn higher than the average valuation for big PE prints over the previous three years. Of course, buyers in the previous years didn’t necessarily have to worry about an imminent raise of interest rates, which might be spurring some of the activity now.

Significant PE deal valuations, 2012-15*

Year Average enterprise value/sales ratio Select transactions
YTD 2015 3.4x SolarWinds LBO, Informatica LBO, Solera Holdings LBO
2014 2.9x TIBCO LBO, Riverbed LBO, Compuware LBO
2013 2x Dell LBO, BMC LBO, Active Network LBO
2012 2.4x Getty Images, Misys LBO, Ancestry.com LBO

Source: 451 Research’s M&A KnowledgeBase *Average enterprise value-to-sales ratio of the 10 largest transactions in each of the years

Can Dell safeguard the VMware ‘crown jewels’ in EMC acquisition?

Brenon Daly

Contact: Brenon Daly

In announcing the largest-ever tech transaction, both Dell and EMC repeatedly assured the market that VMware, which has consistently accounted for an outsized chunk of EMC’s overall valuation, would retain its status as ‘first among equals’ in the EMC federation. Roughly speaking, VMware generates only about one-quarter of EMC sales, but accounted for three-quarters of the EMC’s overall value before the acquisition. VMware was rightfully termed the ‘crown jewel’ of the landmark transaction.

However, despite those intentions, VMware has nonetheless lost some of its luster due to the pending acquisition, at least in two key constituencies. Both IT buyers and Wall Street investors are more than a little bearish on Dell owning the virtualization kingpin. Since the acquisition was announced, VMware’s market value has fallen by as much as $5bn. (That decline is also pulling down the overall value of the transaction because part of the consideration is in the form of tracking stock.) VMware shares have slumped to their lowest level since mid-2013.

To understand why Wall Street is selling the Dell-EMC deal, we have to look to the ultimate arbiters of value for any company: customers. And based on 451 Research’s survey of nearly 450 IT decision-makers, Dell has a lot of work to do to ease the concerns that it will mishandle EMC and its ‘crown jewel.’ In our survey, four of 10 IT pros who currently buy EMC products, but do not buy Dell products, gave the proposed acquisition a ‘thumbs down.’ That was almost three times higher than the percentage of pessimistic Dell-only customers. The main reason cited by EMC-only customers for their bearishness? They still view Dell as dealing in commodity technology. Obviously, with that perception, it’s going to be extremely challenging for Dell to hit its target of $1bn ‘revenue synergies’ through its EMC acquisition.

VMW rev 2010-15

Are customers buying the Dell-EMC deal?

Brenon Daly1 Comment

Contact: Brenon Daly

Michael Dell has had his say. Same with Joe Tucci. But are the customers of the Dell and EMC chief executives actually buying what the two companies are saying about the tech industry’s largest acquisition? Only one way to find out: ask them.

With the ink barely dry on the announcement of Dell’s record-breaking $63.1bn purchase of EMC, 451 Research’s Voice of the Enterprise surveyed almost 450 IT decision-makers to get their sense of what they liked about the transaction, what worried them and, most importantly, how the proposed combination would affect their IT spending. (See the executive summary of the survey results.)

Ultimately, the sentiment and intention voiced by customers – such as those we surveyed – will determine whether Dell-EMC builds itself into a true IT infrastructure and services powerhouse or, like so many other multibillion-dollar tech pairings, devolves into an unhappy, underperforming union. So what does the ‘buyside’ think about the deal?

  • Overall, three out of 10 respondents gave the mega-transaction a thumbs-up, compared with two out of 10 who voted it down. However, within that broad assessment, there was a clear division between the Dell and EMC camps. Dell-only customers (those that currently buy no products from EMC but do buy from Dell) were almost three times more likely to have a favorable view of the deal than EMC-only customers (40% vs. 15%).
  • Why are a plurality of EMC customers bearish about the company’s prospects inside Dell? For the most part, they still view Dell as dealing in commodity technology. More than four out of 10 EMC-only customers consider Dell primarily a PC supplier, and another 20% identify it as mainly a low-cost IT supplier.

As we look at the results of the survey, particularly the perception of Dell as a ‘box maker,’ we can’t help but think that some of the sharp divergence between the views of the two customer bases is attributable to the sharp divergence between the M&A programs at the two companies. To be blunt, Dell was late to the game, with a long-held institutional preference for organic development rather than inorganic expansion. In contrast, EMC liked to shop, spending more than $20bn on 100+ acquisitions over the past 15 years, according to 451 Research’s M&A KnowledgeBase.

In fact, by the time Dell (belatedly) got its M&A machine revving in mid-2007, EMC had already purchased many of the key components of its ‘federation’ business: Documentum, RSA and, of course, the crown jewel of VMware. One existential question – which, for the record, we didn’t ask our panel of IT buyers – was whether Dell would have even needed to buy EMC outright if it had picked up some of the other companies that were nabbed by EMC. Again, to see the responses to questions we did ask on the Dell-EMC combination, check out the executive summary.

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

Barrage of blockbusters pushes tech M&A spending to post-Bubble high

Brenon Daly

Contact: Brenon Daly

Fittingly for a year that has seen an unprecedented number of blockbuster transactions, Dell’s $63.1bn reach for EMC pushed 2015 into record territory for recent spending on tech, media and telecom (TMT) transactions. According to 451 Research’s M&A KnowledgeBase, acquirers around the globe have spent $475bn on TMT deals so far this year. That handily tops the previous full-year total of $420bn from 2007, which had marked the highest level of spending since the Internet bubble burst in 2000.

Overall, 2015 has seen two of the three largest TMT transactions recorded in the KnowledgeBase over the past 15 years. In addition to Dell’s planned purchase of EMC, this year also featured Charter Communications’ $56.7bn acquisition of Time Warner Cable in May. Other big prints in 2015 include Avago’s $37bn pickup of Broadcom in May (the semiconductor industry’s largest-ever consolidation) and $17bn deals from both Intel and Nokia.

So far in 2015 we’ve tallied 63 transactions valued at more than $1bn in the KnowledgeBase. That exactly matches the number of billion-dollar deals during the same period in the previous record year of 2007. However, there’s a lot more money attached to this year’s transactions. The median price for each of the big prints in 2015 is $2.5bn, compared with just $2bn for each deal in 2007. Skewed by these blockbuster TMT transactions, M&A spending is now tracking to about $600bn for the full year. That would shatter 2007’s previous record for spending by a full 40%.

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