Author: Brenon Daly

Deals — not dollars — drive tech M&A in July

Brenon Daly

Contact: Brenon Daly

While tech acquirers weren’t especially ‘spendy’ last month, they certainly were busy. The number of tech, media and telecom (TMT) transactions announced in the just-completed month of July topped 420, a record level since at least the credit crisis, according to 451 Research’s M&A KnowledgeBase. Acquisitions last month by many of the major tech bellwethers – including Microsoft, Cisco, HP, IBM, Amazon and eBay – helped push deal volume about 40% higher than the average monthly total for the past three years.

It wasn’t just the big buyers, either. A number of smaller acquirers also stepped back into the market in July. Yahoo put up its first print of 2015 at the end of July, after inking 19 acquisitions last year. (The search giant had made 11 purchases by this time last year.) Additionally, Groupon, Callidus and Zillow all got on the board for the first time this year with July transactions. Meanwhile, both Time Inc and Accenture announced three deals last month.

The almost unprecedented activity translated into only marginal spending, however. Acquirers spent just $22.7bn on TMT transactions across the globe last month, according to the KnowledgeBase . While that roughly matches the average monthly spending for the post-recession period of 2010-14, it is the second-lowest monthly spending total for this year’s record romp, and is less than half the average value of deals announced monthly in the first half of 2015.

Of course, the July activity comes on the heels of record-setting spending in the April-June quarter. (See our full report on the blockbuster Q2, where the value of acquisitions announced hit an astounding $200bn, the highest quarterly level in 15 years.) While spending last month fell short of other recent months, it nonetheless keeps 2015 on track for a new post-bubble annual record. So far this year, TMT dealmakers have spent $345bn on transactions, just $70bn less than the record years of 2006 and 2007.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 358 $11bn
February 2015 335 $48bn
March 2015 339 $61bn
April 2015 364 $46bn
May 2015 303 $122bn
June 2015 372 $33bn
July 2015 420 $23bn

Source: 451 Research’s M&A KnowledgeBase

Rapid7 rapidly nears 10-digit valuation in IPO

Brenon Daly

Contact: Brenon Daly

Despite Wall Street being a fairly inhospitable place for recent tech IPOs, Rapid7 came to market Friday with a stunning debut. The vulnerability management vendor priced its 6.45-million-share offering at an above-range $16 each, with the stock surging to about $25 once it hit the Nasdaq. With roughly 38 million (undiluted) shares outstanding, Rapid7 is valued at $950m.

That’s a fairly strong valuation for a company that will only put up revenue of slightly more than $100m in 2015. Rapid7 generated revenue of $77m in 2014, an increase of 28%. It picked up its sales rate in the first quarter of 2015 to 41%. (Even if the company maintains that accelerated pace, however, it would still post just less than $110m in sales this year.) Further, Rapid7 does business in the old-fashioned license/maintenance model, rather than the subscription model that Wall Street favors. (See our preview of the IPO.)

Rapid7’s direct rival, Qualys, sells subscriptions only. It is about half again as big as Rapid7, tracking to a mid-20% growth rate that would result in almost $170m in revenue for 2015. (For what it’s worth, Qualys turns a profit while Rapid7 runs deeply in the red.) Wall Street values Qualys at $1.25bn, or 7.4x projected 2015 sales. That’s a full turn lower than the 8.6x projected 2015 sales that Wall Street is currently handing to Rapid7.

The premium valuation for Rapid7 stands out even more because virtually all of the other enterprise tech IPOs have all been discounted recently. The main reason: uncertainty on Wall Street. A just-published survey by ChangeWave Research, a service of 451 Research, found that more than half of the retail investors they surveyed are less confident about the direction of the US stock market than they were just in April. The 53% response, which tied a record for the survey, was six times higher than the percentage who said they were more confident about Wall Street. Keep in mind, too, that uncertainty tends to hit unknown, unproven companies – like IPOs – much harder than established tech names.

To see how that has pressured other newly listed companies, consider the two enterprise tech vendors to brave the IPO market in the US last quarter: Apigee and Xactly. Both have been roughed up on Wall Street, and are currently underwater. The muted reception extended to Sophos, the only other infosec provider to come public in 2015. That company, which listed on its home London Stock Exchange, accepted an extremely conservative value as it sold shares to the public for the first time. For some perspective, consider this: although Sophos is nearly five times larger than Rapid7, its market value only slightly exceeds Rapid7’s freshly printed valuation.

Wall Street confidence July 2015

A parade of big prints pushes Q2 tech M&A spending to record level

Brenon Daly

Contact: Brenon Daly

Blockbuster transactions in the cable, semiconductor and networking equipment industries helped push Q2 spending on tech, media and telecom (TMT) acquisitions to its highest quarterly level in 15 years. In the just-completed quarter, the value of TMT deals across the globe topped an astounding $196bn. That shattered the previous quarterly record and is actually higher than three of the six full-year totals we’ve recorded in 451 Research’s M&A KnowledgeBase since the recent recession ended.

The record Q2 spending rate, which accelerated from an already strong Q1, was boosted by the largest-ever tech deal (Avago’s $37bn purchase of Broadcom) as well as the second-largest telecom transaction since 2002 (Charter Communications’ $57bn rebound deal for Time Warner Cable). On their own, either of those transactions would have been considered a reasonable amount of spending for a full quarter in recent years. Instead, the pair simply led an unprecedented parade of big-ticket deals announced from April to June. The 22 prints in Q2 valued at $1bn or more included eight transactions worth at least $4bn and four worth more than $15bn. All four of the largest deals announced so far in 2015 have come since April.

Taken together, M&A spending in the first two quarters of 2015 hit a high-water mark of $316bn. Although it’s highly unlikely that deal flow will continue linearly at its current record rate, it’s worth noting that spending on TMT for the full year is on pace for an almost unimaginable $630bn. For a bit of perspective, that would be a full $200bn more than the highest annual total since the Internet bubble burst in 2000. 451 Research will have a full report on recent M&A activity, as well as the IPO market, on Monday.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2015 1,018 $196bn
Q1 2015 1,027 $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

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Cisco closes in on OpenDNS

Brenon Daly

Contact: Brenon Daly

In its third-largest IT security acquisition, Cisco will pay $635m in cash for OpenDNS to shore up its threat-detection and -prevention portfolio. The deal comes a year after the networking giant participated in the 10-year-old startup’s series C funding round. (The $35m investment announced last May brought the total amount raised by OpenDNS to $51m.)

The purchase continues Cisco’s practice of paying rich multiples as it shops in information security. According to 451 Research’s M&A KnowledgeBase , Cisco has now acquired 18 security companies in the past decade and a half, mostly smaller startups. (All but three of those transactions cost the networking giant less than $200m.) We would note that although Cisco’s security business generates less than 5% of its total revenue, infosec acquisitions have accounted for 16% of the company’s overall M&A activity since 2002.

In its other large infosec purchases, Cisco paid $2.7bn, or nearly 11x trailing sales, for Sourcefire and $830m for IronPort Systems, which works out to slightly more than 8x trailing revenue. OpenDNS generated about $40m in trailing bookings and was on pace to double annual bookings to roughly $60m for full-year 2015.

That would mean Cisco is paying about 15x trailing bookings for fast-growing OpenDNS. Obviously, the price-to-revenue multiple for OpenDNS would be higher than that, likely falling in the neighborhood of twice the valuation that Cisco paid in its two other significant infosec deals. The valuation of the network security vendor stands out even more considering the recent focus in the IT security industry on endpoint protection, which has resulted in valuations there being pushed to historically high levels. Cisco expects to close the pickup of OpenDNS by the end of its first fiscal quarter, which wraps in October.

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

In a time of sky-high infosec valuations, Sophos goes for down-to-earth debut

Brenon Daly

Contact: Brenon Daly

The tech IPO market is so quiet these days that even those companies that do manage to go public do it understatedly. Consider the almost under-the-radar offering from Sophos, a giant in the infosec market that nonetheless raised a relatively small $125m on the London Stock Exchange (LSE) last Friday. Compared with the noisy funding events we’re accustomed to seeing in this current frothy investment environment, the Sophos IPO was almost refreshingly reserved.

Sophos has been around for 30 years, which makes it positively middle-aged relative to many flashy startups that still haven’t seen the ink dry on their business plans. Also, Sophos was born and raised in the UK, several time zones – and even more distant culturally – from the epicenter of tech hype in Silicon Valley. To illustrate, Sophos spends less than 40% of its revenue on sales and marketing, about half the level of some US-based IT firms (e.g., Apigee, Box) that have also come public in 2015.

Yet even as Sophos runs a business that’s clipping along at nearly a half-billion dollars in revenue, it raised the same amount of money that some startups one-tenth its size have landed from private investors. Another way to look at it: The $125m that Sophos raised in its IPO is also less than half the amount collected by Etsy, which is smaller than Sophos, in its April IPO.

And Sophos is raising money at a very down-to-earth valuation, compared with some of the sky-high valuations garnered by both public and private infosec vendors. Sophos started life on the LSE at a market cap of about $1.6bn, roughly 3.5x its trailing sales of $447m. That’s a sharp discount to many of the infosec providers trading on the NYSE and Nasdaq. For example, Proofpoint, Qualys, FireEye and Imperva, among others, all trade at more than 10x trailing sales.

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

A steady Sophos now set to step on public stage

Brenon Daly

Contact: Brenon Daly

After an on-again, off-again march to the public market over the past decade, Sophos finally looks set to sell shares to the public for the first time. The 30-year-old, UK-based security vendor put in its paperwork last week for a $100m IPO on the London Stock Exchange (LSE). It was actually the second time the decidedly middle-aged Sophos filed to go public, and comes five years after it flirted with an IPO before selling a majority stake to Apax Partners instead.

During the half-decade in the private equity firm’s portfolio, Sophos has been a steady acquirer, picking up a company about every year. Its most recent deal, announced earlier this week, is the first time Sophos has acquired a cloud-based vendor. Sophos paid an undisclosed amount for email security and archiving startup Reflexion. The technology is expected to be integrated into Sophos Cloud later this year.

When Sophos does hit the LSE next month, we expect it to create a few billion dollars of market value. In its most recent fiscal year, which finished last March, Sophos increased revenue 18% to $447m. For comparison, Barracuda Networks – a diversified security provider that, like Sophos, serves the SMB market – posted an identical growth rate in its most recent fiscal year. (Although Sophos is growing off a revenue base that is more than half again as large as the $277m that Barracuda put up last year.) Since it went public in November 2013, Barracuda has doubled its market value to about $2bn.

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

A monster May for M&A

Brenon Daly

Contact: Brenon Daly

All three segments of tech, media and telecom (TMT) put up gigantic prints in May, pushing spending in the just-completed month to a level we’d typically see tallied over a half-year period in most post-recession years. The record monthly spending of $122bn was boosted by the largest-ever cable deal as well as the biggest pure tech transaction since the bubble burst. Both Charter Communications’ $56.7bn reach for Time Warner Cable and Avago Technologies’ $37bn purchase of Broadcom figure into the 10 largest TMT deals since 2002, according to 451 Research’s M&A KnowledgeBase

Undeniably, the two blockbuster prints dominated last month’s M&A, accounting for roughly three-quarters of the total spending. But even backing out those two acquisitions, spending came in at a robust $29bn, which is higher than the typical post-recession monthly average. More importantly, the activity spread to a broad number of markets, with billion-dollar-plus deals announced in May by hosting provider Equinix, ambitious telco Verizon and even EMC, which has found itself under scrutiny by activist shareholders, among others.

Last month’s astonishing level of spending – the only time in the past 13 years that monthly spending has topped $100bn – pushes total receipts for TMT M&A this year to $286m. That means that in just five months so far in 2015, acquirers have already spent more money on deals than they did for the entire year for every single year except one from 2009-14, according to the KnowledgeBase.

The one surprise from May, however, is the relatively shallow flow of deals. We tallied only 270 transactions, which stands as the lowest total for May since 2009. That’s down about 20% from the average of the preceding four months of 2015, and marks the first time in more than three years that we’ve seen a month-over-month decline in the number of prints.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 357 $11bn
February 2015 332 $48bn
March 2015 336 $61bn
April 2015 358 $44bn
May 2015 270 $122bn

Source: 451 Research’s M&A KnowledgeBase

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

Webinar: 451 Research and Morrison & Foerster M&A Leaders’ Survey

Brenon Daly

Contact: Brenon Daly

Even as tech dealmaking clips along at a post-bubble record rate in 2015, the overwhelming view from the M&A Leaders’ Survey from 451 Research and Morrison & Foerster is that business is expected to get even more brisk as the year progresses. To find out more about the forecast, as well as how the survey sentiment maps to both the current M&A market and current M&A practices, join 451 Research and Morrison & Foerster on Tuesday, May 19 at 1pm EST (10am PST) for an information-packed webinar. Click here to register.

The webinar will cover not only the forecast for acquisition activity for the next six months, but also what buyers expect to have to pay to cover their purchases and what strategies will be driving those deals. Additionally, Morrison & Foerster will provide real-world insight on some of the key findings around recent trends in structuring transactions and other practical M&A considerations. To register for the complimentary webinar, simply click here.

M&A activity forecast for the next six months

Survey date Increase Stay the same Decrease
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

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

Exclusive: An IPO in the works for Dell SecureWorks?

Brenon Daly

Contact: Brenon Daly

When Michael Dell pulled his company off the Nasdaq two years ago, he had very few good things to say about being a public business. Dell first listed his company back in 1988, but as its PC-dominated business fell out of favor among investors, he blasted the ‘short-term thinking’ of most money managers and engineered a $24bn take-private of his company. Now, it seems he’s looking to make a return trip to Wall Street, at least with a portion of his business.

Rumors are now swirling that Dell is planning to sell a minority stake in SecureWorks, a managed security service provider (MSSP) that Dell acquired in January 2011 for $612m. As we understand it, the plan is to sell about one-third of the SecureWorks division in an IPO later this year. We estimate revenue at SecureWorks at just under $300m, with the business running right about breakeven. Assuming it gets a valuation comparable to what has been handed out in recent MSSP transactions, SecureWorks could be valued at roughly $1bn.

Dell was rumored to be a bidder for Trustwave, an MSSP that sold to Singtel for $810m in April. (SecureWorks is roughly one-third larger than Trustwave.) Market sources have also suggested that Dell has looked at smaller regional MSSPs. Raising money through selling a minority stake to the public would give SecureWorks additional currency to pursue acquisitions.

MSSPs have been around in various forms since the late 1990s, but have recently come into favor amid a shortage of skilled infosec workers and IT security technology that hasn’t kept pace with threats. The market appears to have a fair amount of growth in front of it. In a recent study by The InfoPro, a service of 451 Research, slightly fewer than four out of 10 respondents indicated that they were currently using an MSSP.

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

Ciena expands SDN palette with $400m Cyan acquisition

Brenon Daly

Contact: Brenon Daly Jennifer Clark

After being out of the M&A market for more than a half-decade, Ciena has stepped back in with the equity-heavy $400m purchase of Cyan. Under terms, Ciena will hand over roughly $365m of its stock along with $44m in cash for fellow networking equipment and software vendor Cyan. (The purchase price includes $50m in convertible notes that Cyan sold last December.)

Cyan focuses on packet optical products, and its Blue Planet software is an SDN/NFV platform built to provide service orchestration, automation and SDN control in a multivendor network and to manage the lifecycle of virtualized services across datacenters and the WAN. Blue Planet contributed less than 10% to Cyan’s revenue in fiscal 2014, yet Ciena was attracted to the deal by the offering, which it thinks represents the next stage of multivendor management software.

Ciena’s bid values Cyan at $4.75 per share, which represents a 30% premium to the target’s previous closing price but is less than half the level of the company’s IPO just two years ago. Still, Cyan is getting a decent valuation, certainly compared with other recent networking transactions. Ciena indicated that its net cost for Cyan would be $335m, meaning it is effectively paying 3.3x the target’s 2014 revenue and roughly 2.4x projected 2015 revenue. In the sector’s recent blockbuster deal, Nokia has agreed to buy Alcatel-Lucent for $16.5bn in an all-stock transaction, valuing its French rival at basically 1x sales. (Of course, comparing that consolidation with the Ciena-Cyan pairing is a bit flawed, given that Cyan, while growing quickly, generates less revenue in a year than Alcatel-Lucent posts in two business days, on average.) Similarly, Ciena currently trades at essentially 1x sales.

Ciena expects the transaction to close before the end of its current fiscal year, which wraps in October. Morgan Stanley advised Ciena, while Jefferies banked Cyan. We’ll have a full report on this acquisition in tomorrow’s 451 Market Insight.

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