Author: Brenon Daly

Dell looks to become ‘indelible’ IT vendor with EMC

Brenon Daly

Contact: Brenon Daly Simon Robinson

Announcing the largest tech deal since the Internet bubble burst, Dell plans to pay approximately $63.1bn for EMC. The debt-laden combination would create a sprawling IT giant with multibillion-dollar businesses in many of the primary enterprise technology markets, including storage, information security, IT services, servers and PCs. (For context, the combined Dell-EMC entity would be larger than Hewlett-Packard Enterprise (post-split), NetApp, Juniper Networks and Symantec combined.) Dell’s bold transformational transaction is not coming cheap, however. The company is valuing EMC significantly more richly than it valued itself when it went private two and a half years ago.

Further, Dell’s relatively pricey bulking up comes at a time when a number of rival enterprise IT vendors are slimming down. More to the point, several of these competitors are unwinding earlier blockbuster acquisitions they made in hopes of staying more relevant in a shifting IT market. The arrival of the public cloud has siphoned off billions of dollars that once flowed unimpeded to Dell, EMC and other first-generation technology firms. However, IT customers increasingly lack the appetite to buy, install and manage dozens of ‘piece parts’ and mold them into a cohesive whole. As a result, we can look at the combination of Dell and EMC as essential if the traditional IT model is to survive the onslaught from public cloud providers, most notably Amazon Web Services.

Though Dell has been on a path to build a ‘better together’ story for almost a decade, it clearly hasn’t been enough. In its effort to buy its way out of the commodity PC business, the company stitched together a patchwork of properties. However, the resulting ‘big picture’ has still not materialized. Dell has lacked a core focus point, as well as the heft and scale in any one market to dominate. Further, it has so far not sufficiently penetrated the large enterprise segment, or moved beyond its two longtime key verticals of healthcare and the public sector. Against this backdrop, it’s easy to see the attraction of EMC, which brings large enterprise credibility in storage, perhaps the industry’s most focused and effective sales operation and, in VMware, still one of the most strategic entities on the market.

EMC’s attractiveness also shows through in the valuation that Dell is paying, if not when viewed against the broader tech M&A market than certainly when put against Dell’s own worth. According to terms, Dell is paying 2.5x trailing sales and 11.5x trailing EBITDA for EMC. For comparison, in orchestrating the take-private of his namesake company, Michael Dell and his consortium paid just one-quarter the price-to-sales multiple of EMC and half the cash-flow multiple. Dell’s LBO, which stands as the third-largest private equity tech transaction in history, valued the company at just 0.5x trailing sales and 5.2x trailing EBITDA.

Look for a full report on the proposed Dell-EMC pairing later today on our website and in tomorrow’s 451 Market Insight.

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

In the red-hot SaaS SI market, which is the next shop looking to sell?

Brenon Daly

 

Contact: Brenon Daly

With IBM picking up Meteorix, we hear there’s another Workday-focused SI currently on the market. CPSG, a Dallas-based shop, is slightly bigger than Meteorix, as well as much more profitable, according to our understanding. And it’s seeking a much richer valuation on its exit.

CPSG posted $25m in revenue in 2014, and the company is reportedly forecasting $35-40m for full-year 2015. Unlike other software implementation firms, however, CPSG throws off a fair amount of cash. It should generate more than $10m of EBITDA this year.

The growth and cash flow at CPSG have the company and its advisers at Robert W. Baird & Co. looking for a top-dollar exit. Current second-round bids are coming in at roughly $140m. (For comparison, subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for the valuation IBM paid for Meteorix.)

Assuming CPSG does print, it would be the latest in a string of SaaS application implementation vendors to sell. Just in the past two months, we have seen three significant SIs snapped up by major service providers in a shopping spree that totals more than $600m. Moreover, these buyers are paying 2-3x their own valuations in their acquisitions, reflecting just how desperate they are to bulk up their practices in the fast-growing SaaS space.

Recent SaaS-focused SI M&A

Date announced Acquirer Target Description Deal value
August 11, 2015 CSC Fruition Partners ServiceNow SI See 451 Research estimate
September 15, 2015 Accenture Cloud Sherpas Salesforce, ServiceNow SI Not disclosed
September 28, 2015 IBM Meteorix Workday SI See 451 Research estimate

Source: 451 Research’s M&A KnowledgeBase

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As black swans darken summer sky, Q3 tech M&A gets grounded

Brenon Daly

Contact: Brenon Daly

Tech acquirers’ confidence eroded unmistakably in mid-August as equity markets around the world got routed, with some indexes tumbling hundreds of points in a single session. As the economic outlook dimmed around the globe, valuations for buyers and their holdings dropped as well. If the stock market uncertainty didn’t knock buyers out of the tech M&A market entirely, it at least caused them to scale back their acquisitions. Just seven of Q3’s largest 20 deals came after the mid-August turmoil, according to 451 Research’s M&A KnowledgeBase. Spending in the back half of the quarter fell 20% compared with the first half.

Slowed by the mid-quarter bear market, spending on tech, telecom and media (TMT) transactions across the globe in the July-September period totaled $81bn. Although that amount is a fairly representative quarterly total for 2013-14, it represents a dramatic slowdown from earlier this year. Q3 spending stands at less than half the level of M&A spending in Q2 and one-third lower than Q1, which kicked off 2015’s record run. On a comparative basis, the value of acquisitions in both Q1 and Q2 surged about 50% from the same quarters in 2014, while spending in the just-completed Q3 declined 21% compared with Q3 2014.

Viewed more expansively, the Q3 slowdown might have pushed back the date when spending in 2015 on TMT transactions sets a new post-bubble record, but the record will nonetheless fall this year. (Indeed, if this summer had simply continued the average monthly M&A spending we had seen in the first half of the year, 2015 would have already topped the recent record of $420bn set in the prelapsarian year of 2007.) As it stands, dealmakers have spent $407bn on TMT acquisitions so far this year, just a few big prints shy of the highest level of spending since 2000, according to 451 Research’s M&A KnowledgeBase.

See our full report on both M&A and IPO activity in Q3, as well as a look ahead to activity through the rest of 2015.

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

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2015 1,115 $81bn
Q2 2015 1,056 $205bn
Q1 2015 1,032 $120bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

Barracuda bite off bigger chunk of MSP market with Intronis

Brenon Daly

Contact: Dave Simpson Brenon Daly

In its largest acquisition to date, Barracuda Networks nabs Boston-based Intronis for $65m in cash, primarily to improve its position in the MSP space. Intronis, a hybrid cloud backup/recovery vendor with 100 employees, is not well-known as about 75% of its MSP customers white-label its services. But it has almost 2,000 MSP partners, compared with only 200 MSP partners (and 5,000 VARS) for Barracuda alone.

Barracuda has averaged about a deal per year over the past decade, most recently focusing its M&A on its storage business. However, the company has noted some recent weakness in the overall storage space, which is a smaller portion of Barracuda’s overall sales than its security business. Although Barracuda was already in the upper echelon of hybrid-cloud backup/recovery vendors, the Intronis buy should strengthen its position versus key competitors in the storage arena. Also, there is little overlap between the two vendors’ channel partners. Only 37 of Intronis’ top 200 partners are also Barracuda partners, and 90% of Intronis’ partners are not Barracuda partners.

We have for some time been predicting – even advocating – consolidation in the crowded market for online (cloud-based) backup and recovery. Barracuda’s purchase of Intronis is the first shoe to drop, and we anticipate further consolidation in this sector over the next year.

The deal is expected to close by the end of this calendar year. Needham & Company advised Intronis on its sale. Click here for a full report on this transaction.

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

After a time on NYSE, Solera is back in private hands

Brenon Daly

Contact: Brenon Daly

In a sort of private equity (PE) ‘homecoming,’ auto insurance software provider Solera Holdings plans to sell itself for $3.7bn in cash to buyout firm Vista Equity Partners. The net price for Solera, which has been a debt-fueled acquirer since its founding a decade ago, is pegged at $6.5bn by Vista.

Although it has been listed on the NYSE since 2007, Solera has PE-backed carve-out roots. The company has had a sometimes-contentious relationship with Wall Street. Investors have taken issue with how much Solera’s executives have paid themselves, in addition to a slumping stock price that had nearly been cut in half from its early 2014 highs to recent lows.

In part because of the prolonged slide in its shares, Solera said in August that it was exploring ‘strategic alternatives.’ Vista is offering $55.85 for each Solera share, with the deal expected to close by early 2016. Shares of Solera have ranged from $70 at the start of 2014 to $36 at the start of August.

With an enterprise value of more than $6bn, the Solera take-private would be the second-largest PE transaction of 2015. However, the proposed transaction stands as the largest LBO of a vertical market software vendor, according to 451 Research’s M&A KnowledgeBase . Typically, PE shops buy software ‘platform’ companies that serve large numbers of customers across a variety of sectors. In recent years, horizontal software companies, such as Compuware, Informatica, BMC Software, TIBCO and others, have landed in PE portfolios.

The planned take-private of Solera continues a recent surge in PE spending. So far this year, buyout shops have announced transactions valued at $37.3bn, according to 451 Research’s M&A KnowledgeBase. That’s up about two-thirds from the same period in 2014, and twice the spending over the same time in 2012. It only trails the January-September level in 2013, which was skewed by the $25bn LBO of Dell.

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

Where does the tech M&A market go from here?

Brenon Daly

Contact: Brenon Daly

In both August 2015 and August 2011, concerns about slowing global economies knocked stock markets around the world into a tailspin, while also ratcheting up volatility. Intuitively, we would assume that both conditions, which introduce more variance and uncertainty, would make it more difficult to do deals. But is that actually the case? And if so, what can the whipsawing markets from four years ago tell us about how M&A activity might play out for the rest of 2015?

To get a sense, we split 2011 into a ‘pre-turmoil’ period of January through August, and then a ‘post-turmoil’ period of September through December (which is roughly the same four-month block that remains in 2015). When we ran the numbers in 451 Research’s M&A KnowledgeBase, we got a pretty clear picture of acquisition activity in the two periods of 2011: the M&A market never got back on track after the summer upheaval.

Through the first eight months of 2011, dealmakers averaged $22.3bn in spending on tech, media and telecom (TMT) transactions each month. For the remaining four months of 2011, average spending dropped about 40% to just $13.6bn per month. Further, it wasn’t just a case of where a deal or two in the front half of the year skewed the total. Instead, it was pretty even spending on significant transactions. There were eight separate acquisitions announced in the first eight months of 2011 valued at more than $4bn, while not a single deal that size hit the tape in the last four months of the year.

We have noted how the black swans have already befouled the M&A market in the short term. (Spending on TMT transactions dropped a staggering 80% in the second half of August, according to the KnowledgeBase.) If past is precedent, the rest of 2015 won’t be as bad as that, but it also won’t be anywhere near as good as it has been. A 40% decline – like we saw at the close of 2011 – would mean each of the remaining months would come in at roughly $30bn in average monthly spending, compared with the monthly average since the start of 2015 of nearly $50bn.

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

Microsoft adds Adallom

Brenon Daly

Contact: Adrian Sanabria Brenon Daly

Continuing its accelerated shopping spree, Microsoft has reached for infosec startup Adallom. Although terms weren’t released, reports from newspapers in Israel, where Adallom has its roots, peg the price at $250m-320m. Assuming those reports are reasonably accurate, the acquisition would be larger than our understanding of the Aorato buy last November. Aorato stands as Microsoft’s most recent security purchase, and the technology will run alongside the just-acquired technology from fellow Israeli company Adallom.

The Adallom pickup fills a gap between cloud-based IAM and third party SaaS products, allowing Microsoft customers to add much broader control over user authorization and activity within internal (Office 365) and third-party SaaS applications such as Salesforce, Workday and Google Apps. This extension of user permissions and directory services creates a layer of monitoring and control not previously possible in the traditional enterprise. Also, with Office 365 as one of the most popular services for vendors such as Adallom to enhance, Microsoft now has the opportunity to offer much greater control, visibility and security to existing customers.

Microsoft’s purchase of Adallom is the tech giant’s twelfth transaction of 2015, which is twice as many as it has averaged in the same period each year over the past half-decade. Moreover, virtually all of the companies that Microsoft has snagged this year have been relatively small startups. (All but one of the startups acquired in 2015 has raised $50m or less in total funding.) In years past, Microsoft has typically announced a 10-digit deal (e.g., Nokia devices, Yammer, Skype) along with the technology tuck-ins. Of course, that shift to smaller targets might have something to do with the billion-dollar write-downs Microsoft has made on several of its larger acquisitions inked under previous CEO Steve Ballmer.

Recent Microsoft M&A activity

Period Number of announced transactions*
January 1 – September 8 2015 12
January 1 – September 8 2014 7
January 1 – September 8 2013 7
January 1 – September 8 2012 5
January 1 – September 8 2011 3
January 1 – September 8 2010 0

Source: 451 Research’s M&A KnowledgeBase *Excludes purchases of domain names and IP addresses

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Family drama at VMworld

Brenon Daly

Contact: Brenon Daly

Even before he talked products or markets, VMware CEO Pat Gelsinger kicked off his comments to Wall Streeters at his company’s annual conference with a moment of ‘family time.’ In this case, it was to defend the current corporate parentage, with EMC owning a super majority of VMware as part of a larger ‘EMC Federation.’

Gelsinger essentially said that the way things are now in the EMC family is the way they should be. He went on to knock down rumors that he was planning – or even considering – any changes in the current corporate structure, specifically singling out recent reports about a kind of fratricide by VMware in which his company would take over EMC. ‘Better together’ is the family motto.

Not everyone agrees, however. Some critics, such as the kind that buy small chunks of stock in a company and then try to tell it what to do, counter that the current structure actually inhibits growth in the family.

The activist hedge funds have a point, given that VMware stock has basically flatlined over the past five years while the S&P 500 Index has nearly doubled. (The underperformance stands out even more when we consider that a half-decade ago, VMware was running at less than $1bn in quarterly revenue. It now puts up more than $1.5bn in sales each quarter. There aren’t too many S&P 500 companies that are two-thirds bigger now than they were in 2011. Most, including EMC, have only slightly grown.)

Given that Elliott Associates, an activist hedge fund that has already successfully pushed to reshuffle EMC’s board of directors, effectively crashed the VMworld party, it’s not unreasonable to expect even more changes in the EMC Federation. (Remember, too, that the ‘standstill’ agreement between Elliott and EMC expires this month.) There may well be some family drama before the year is out.

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

Black swans roil tech M&A market

Brenon Daly

Contact: Brenon Daly

During the six-year bull run on Wall Street, corporate treasuries have been as flush with cash as executive offices have been flush with confidence. Put those two factors together and we have the makings of an M&A boom like the one that has put spending on tech acquisitions so far this year already twice as high as it was in the recession years.

Remove either of the crucial components of cash and confidence, however, and deals don’t get done. It’s hard to go shopping when your head is spinning with volatility and your guts are clenched in uncertainty. That hesitancy comes through clearly when we look at the prints for August.

In the first two weeks of the month, it was business as usual. Private equity shops and corporate buyers around the globe announced 172 tech, media and telecom (TMT) transactions with an aggregate value of $21.6bn, according to 451 Research’s M&A KnowledgeBase. In the two weeks that followed, as black swans flew above the equity markets around the world, dealmakers announced just 145 acquisitions worth $4.6bn. As uncertainty erased trillions of dollars of stock market capitalization over the past two weeks, spending on M&A plunged almost 80%.

Heavily skewed to the first half of the month, August spending totaled $26.2bn, which is roughly half the average amount for the previous seven months of 2015. Yet even with the mini-recession in tech M&A since mid-August, spending on 2015 deals overall is still tracking to its highest level since 2000. Through eight months of the year, dealmakers have announced transactions valued at about $375bn, roughly $45bn short of the $420bn recorded in 2007.

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

Wall Street confidence July 2015

 

 

 

LANDesk lands a new dashboard with Xtraction acquisition

Brenon Daly

Contact: Brenon Daly

In its first acquisition in almost a year, LANDesk picks up existing partner Xtraction Solutions in an effort to make data more visible for the systems management vendor’s clients. The two companies have been partners for more than a year, with a handful of joint customers using Xtraction’s dashboards. Although terms weren’t disclosed, we understand that LANDesk paid in the low tens of millions of dollars for Xtraction, which had only a dozen or so employees and no outside funding.

In addition to data visualization (think, ‘BI for IT operations’), the deal is also important because it expands the sources of data that can be represented. Most IT environments are a hodgepodge of technology from various vendors and vintages. Xtraction has 50 connectors built for many of the larger IT management providers, including HP, Microsoft, BMC and ServiceNow. Another area where LANDesk might look to expand Xtraction’s reporting technology is IT security, where dashboards are increasingly being used to help make sense of the streams of reports about the ever-expanding number of vulnerabilities faced by businesses.

Xtraction is the sixth purchase LANDesk has made since private equity firm Thoma Bravo carved out the systems management vendor from Emerson Electric five years ago. Since then, according to our understanding, LANDesk has added about $100m to its top line while nearly tripling its cash flow. The company says it has plenty of cash in treasury – not to mention a deep-pocketed owner in Thoma Bravo – to continue to add pieces to its IT management platform.

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