Author: Brenon Daly

‘One HP’? Not any longer

Brenon Daly

Contact: Brenon Daly

In the largest-ever corporate overhaul of a tech company, Hewlett-Packard said Monday that it will split its business in half. The 75-year-old company, which had recently marketed itself under the tagline ‘One HP,’ will separate its broad enterprise IT portfolio from its printer and PC unit within a year. Each of the two stand-alone businesses (Hewlett-Packard Enterprise and HP Inc.) will be roughly the size of rival Dell, booking more than $50bn of sales annually.

Increasing those sales, even under the new structure, will be challenging. In discussing the planned separation, HP executives emphasized that the move comes at the end of a three-year ‘fix and rebuild’ phase at the company. During that time, HP’s top line has shrunk more than 10%. It has already laid off 36,000 employees, and said Monday that the final number of employee cuts may reach as high as 55,000. And HP has virtually unplugged its M&A machine, even as rivals such as IBM and Cisco continue to buy their way into new, faster-growth markets.

Through the first three quarters of its current fiscal year, HP has flatlined. The company indicated that will continue into its next fiscal year, which starts in November. While HP didn’t offer specific growth rate targets or forecasts for the stand-alone companies – once they get on the other side of the hugely disruptive separation – executives noted that the two businesses would be more ‘nimble’ and ‘responsive’ than they would be together.

That may well be, but the two businesses will also be burdened by higher costs individually than they currently face. ‘Dis-synergies’ such as higher supply and distribution costs, as well as supporting two full corporate structures, will shrink cash flow, which has been the key metric for Wall Street’s evaluation of HP’s mature business. Still, HP will throw off several billion dollars of free cash flow.

Some of that cash appears to be earmarked for M&A, although spending there will be a distant afterthought behind dividends and share repurchases. (And HP executives were quick to add that any deals would be ‘return-driven’ and ‘disciplined.’) But even stepping back into the market for acquisitions represents a dramatic shift at HP. After all, it was a series of poor acquisitions – most notably Autonomy but also services giant EDS – that partially forced the prolonged restructuring that culminated in this planned separation.

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IPO = Interminable Private Offerings

Brenon Daly

Contact: Brenon Daly

For one pair of money-burning companies, IPO no longer stands for Initial Public Offering – instead, it’s Interminable Private Offerings. Unable to graduate to Wall Street, both Box and Good Technology have retreated, returning hat in hand to the ranks of late-stage investors for their next round of life-sustaining capital.

Good Technology, a mobile management software consolidator that has never come close to turning a profit, drew in another $80m on Wednesday. That comes almost three months after collaboration software vendor Box – a startup that spends more on sales and marketing than it takes in as revenue – pulled in $150m. (Tellingly, Box’s latest round was reportedly done at a flat valuation.)

Taken together, Good Technology and Box have now raised more than $800m in funding from private sources. In comparison, Good Technology had hoped to raise $100m from public investors, while Box plans a $150m offering, scaled back from an original $250m.

The new fundings are a clear setback to both Good Technology and Box, which have been on file to go public since May and March, respectively. Further, it may well give pause to other companies that were looking to Wall Street to subsidize their free-spending ways. After all, an S-1 is an expensive, time-consuming and very revealing bit of paperwork.

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As growth flatlines, TIBCO taps out

Brenon Daly

Contact: Brenon Daly

Announcing the largest tech take-private in 16 months, Vista Equity Partners said it will acquire middleware and analytics software vendor TIBCO Software for about $4.3bn. The leveraged buyout (LBO) comes after the one-time highflier spent the previous several months exploring ‘strategic alternatives.’ Even though the LBO values TIBCO at a market multiple of some 4x trailing sales, the exit price is less than TIBCO fetched on its own this time last year. That reflects the difficulty the company has had in finding any growth recently.

Private equity (PE) firm Vista will pay $24 for each of the roughly 165 million TIBCO shares outstanding. At more than $4bn, TIBCO stands as the largest-ever purchase for Vista, more than twice the size of any check the PE firm has written in the past.

At an enterprise value of $4.3bn, TIBCO is going private at roughly 4x its trailing sales of $1.1bn. (Both sales and profit have declined through the first three quarters of TIBCO’s current fiscal year.) The multiple is slightly richer than the 3.6x sales that rival Ascential got from IBM almost a decade ago. For more of a current comp, rival Informatica – which is only a smidge smaller than TIBCO, but is still growing at double-digit rate – trades at roughly $3.7bn market value. Subscribers: Look for our full report on the transaction later on 451 Research.

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With its IPO, Cyber-Ark floats on high water

Brenon Daly

Contact: Brenon Daly

It seems the record-setting Alibaba offering didn’t suck up all the IPO money on Wall Street after all. Although investors handed out a staggering $25bn to the Chinese e-commerce vendor last week, they stepped right back into the market to buy newly minted shares of Cyber-Ark on Thursday. And boy, did they buy.

Cyber-Ark, an Israel-based identity and access management (IAM) provider, sold 5.4 million shares at an above-range price of $16 each. Once free to trade, shares doubled. (In early afternoon trading under the ticker ‘CYBR’ the stock was changing hands at $32.20, having never dipped below $30 on its debut.) Cyber-Ark’s IPO stands as the first tech offering (aside from Alibaba) in some three months.

The strong demand for Cyber-Ark pushed it to a rather princely valuation. With roughly 30 million shares outstanding, the company’s market cap is nosing toward the magical $1bn mark. That stands out because Cyber-Ark, while profitable, will put up less than $100m in sales in 2014. Further, those sales are coming from old-fashioned license and support, rather than the more highly valued subscription delivery model. The company has been increasing revenue in the 30-40% range in recent quarters. (See our full report on Cyber-Ark’s filing.)

Cyber-Ark is particularly richly valued when compared with other IAM providers, in both the IPO and M&A markets. It trades at more than twice the current multiple of Imprivata, which went public three months ago and is currently under water. (Imprivata focuses entirely on the healthcare market, while Cyber-Ark counts more than 1,500 customers across a range of industries.) Meanwhile, earlier this month, direct rival BeyondTrust got flipped to another PE portfolio in a deal that we estimate went off at about 3x trailing sales.

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Concur is just the latest of SAP’s pricey plays in the cloud

Brenon Daly

Contact: Brenon Daly

Announcing the largest SaaS acquisition in history, SAP will pay $8.3bn for travel and expense management software provider Concur Technologies. The purchase comes as the German giant is on the hook for doubling its cloud revenue in 2015 – a corporate target that has driven SAP’s recent M&A.

In its 42-year history, SAP has announced seven acquisitions valued at $1bn or more, according to The 451 M&A KnowledgeBase . However, the five most recent deals have all been pickups of subscription-based software vendors. (SAP’s two consolidation plays for firms hawking software licenses came in 2007 and 2010, with Business Objects and Sybase, respectively.) The purchase of Concur is the Germany company’s largest acquisition, and the fifth-largest transaction in the software market overall.

More significantly, SAP is paying up as it tries to move to the cloud. Including the Concur buy, SAP has handed out a lavish multiple, on average, of 11x trailing revenue to its SaaS targets. (Obviously, revenue doesn’t fully reflect the economic value of multiyear contracts common at SaaS firms. But even on a more liberal measure of business activity such as bookings, SAP has paid double-digit multiples in its subscription-based acquisitions.)

The SaaS premium stands out even more when compared with the valuations SAP has paid for conventional license-based vendors. The purchases of both Business Objects and Sybase went off at slightly less than 5x trailing revenue, or half the average SaaS valuation. Further, SAP itself trades at less than half the valuation it has paid for its SaaS acquisitions.

SAP acquisitions, $1bn+

Date announced Target Software delivery model Deal value Price/revenue multiple
September 18, 2014 Concur Technologies Subscription $8.3bn 12.4
October 7, 2007 Business Objects License $6.8bn 4.7
May 12, 2010 Sybase License $6.1bn 4.8
May 22, 2012 Ariba Subscription $4.5bn 8.6
December 3, 2011 SuccessFactors Subscription $3.6bn 11.7
June 5, 2013 hybris Subscription $1.3bn 10.7*
March 26, 2014 Fieldglass Subscription $1bn* 11.8*

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

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At the Wall Street box office, Alibaba is a blockbuster

Brenon Daly

Contact: Brenon Daly

In Hollywood, a blockbuster debut that is expected to help support the release of other films around the same time is known as a ‘tentpole.’ And while that phenomenon may have also played out in the IPO business in the past, no one is expecting the Alibaba debut later this week to help prop up other offerings. Quite the opposite, in fact.

To understand why, think of Alibaba as Godzilla (the monster, not the movie). The Chinese e-commerce giant is looking to come to market – backed by no fewer than 20 investment banks – and create almost a Facebook-size valuation overnight. The sheer size of Alibaba’s record-setting offering of some 320 million shares at (currently) $68 each basically pushes other IPO candidates outside the awning of any Alibaba tentpole.

With Alibaba and its underwriters looking to place billions of dollars of equity, buyers are unlikely to step right back in to buy smaller-ticket tech IPOs. That means solid offerings that are in process, such as Cyber-Ark and HubSpot, may initially open a bit soft at the box office that is Wall Street.

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Did SAP exercise an an opportunistic option for OpTier?

Brenon Daly

-by Brenon Daly

Despite raising more than $100m in backing, OpTier quietly wound down this summer after a dozen years in business. Even more quietly, some of the assets from the formerly highly valued startup may have been snapped up on the cheap by SAP.

That’s according to several market sources, and an opportunistic purchase would certainly make sense. SAP licensed a fair amount of OpTier to monitor its cloud software internally, so it could have simply brought the technology in-house. Although a deal hasn’t been announced (much less terms for any transaction), we understand SAP paid $10-20m for much of OpTier’s IP.

Assuming our understanding is correct, it would mark a sharp comedown for OpTier. As recently as three years ago, the Israeli startup was reported to be seeking an exit of up to $300m in a process run by Morgan Stanley, which is also an investor in OpTier.

Although OpTier grew quickly through much of the past decade with its business transaction monitoring product, it was slow to step into the more valuable market of code-level application performance monitoring (APM). (See our 2012 report on the ‘pivot’ at OpTier .) For comparison, at least two APM startups founded after OpTier – AppDynamics and New Relic – are both valued in the neighborhood of $1bn and are expected to go public in 2015.

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Its IPO stuck, Box is no longer the upstart startup

Brenon Daly

Contact: Brenon Daly

This year’s Burning Man and BoxWorks have more in common than just a spot on the calendar. The two festivals have grown far beyond the original events, both in terms of scope and attendees. In fact, both the bacchanal in the desert and the Box user conference, in their own ways, have grown so much from their anti-establishment roots that they’ve now become part of the establishment. The onetime fringe events have gone mainstream.

While the Burners debate whether the festival ‘sold out’ its founding principles, the Boxers have posed a similarly existential question: What are we now?

Throughout its three-day conference for developers and customers, which wrapped Thursday, Box took great pains to show how much it has grown up in its nine years in business. For the first time ever, BoxWorks was held at an actual convention center (the same location Oracle will use later this month for its user conference and salesforce.com will use next month). And more than ever before, Box populated its panels and presentations at the event with big company representatives, consciously underscoring just how far it has come since its fabled ‘pivot’ away from the consumer business.

But the clearest indication of the change at Box came from the very top of the company. CEO Aaron Levie, who normally freewheels through speeches, sounded much more measured. The 20-something-year-old CEO dialed down his snark and couched some remarks in language that read like it came from an SEC filing. (Maybe filing an S-1 does that to a chief executive?)

As an example of this new business-like attitude, consider the shift in Box’s relationship with onetime nemesis Microsoft. At previous BoxWorks, Levie thrived by bashing Microsoft, positioning the company as a lumbering dinosaur that had been outflanked by the nimble startup, Box. And yet, one of the key features for Box that Levie played up during his keynote was the fact that Box now partially integrates into Office 365. (For the record: It’s in beta, and comes more than three years after Microsoft launched Office 365 and Levie blogged that Box ‘would love’ to connect with the offering.)

With Box likely to put up about $200m in sales this year, it’s clearly no longer a startup. But what was made equally clear at BoxWorks this year is that the company is no longer an upstart, either. It’s turning into another enterprise software vendor, whether it likes it or not.

In our opinion, it is that realization that makes it more likely that Box will be sold or, at the least, be a more willing seller. In the consolidated, mature market of enterprise software – where a company like Microsoft puts up more revenue each day than Box does in a year – scale is an advantage. Despite all of its marketing spending and a more grownup user conference, Box still doesn’t have scale, and can likely only obtain that by getting acquired. So which company is likely to pick up Box? Hewlett-Packard is our top pick, followed by Cisco.

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VMware needs more ‘Know Limits’, less of ‘No Limits’

Brenon Daly

Contact: Brenon Daly

As VMware lowers the curtain Thursday on its annual gathering of customers and partners, we have a suggestion for planning VMworld 2015: come up with a better tagline than this year’s conference. The slogan ‘No Limits’ was inescapable at this week’s confab, graffitied onto walls and parroted by most VMware executives. Undoubtedly, the focus-grouped message was meant to convey the image of VMware standing as a central provider in an IT landscape of boundless resources, all flowing together seamlessly.

The reality, of course, is not quite so idyllic. (Just ask anyone at VMworld who has gone hand to hand in the past with some of the company’s management products, which have now been further complicated by being bundled together in vRealize Suite.) Enterprise technology is messy and prone to breaking down. The solution to that complexity isn’t to add more.

Rather than pushing the idea of No Limits, VMworld would have been more responsibly taglined ‘Know Limits.’ We acknowledge that our tweak on the slogan knocks some of the enthusiasm out of it. And when a company needs to come up with $1bn of net new revenue next year (taking the top line from basically $6bn in 2014 to $7bn in 2015), enthusiasm is a key selling point.

The kicker on VMware’s selection of No Limits as its central message to the 22,000 attendees of its annual confab is that the company should know that there are indeed limits to technology. In fact, at last year’s VMworld the company was only just dusting itself off after having hit some limits of its own. It found out, for instance, that it wasn’t an application software vendor, so it divested SlideRocket and Zimbra as part of a larger reorganization in the first half of 2013.

There’s no doubt that VMware is a far healthier company at this year’s VMworld than it was at last year’s event. (For the record, the 2013 VMworld tagline was ‘Defy Convention.’) We would argue that the company is healthier because it replaced its freewheeling, expansive operations with a more focused and disciplined approach to business. (In other words, VMware imposed some limits on itself.) Strategically, it pared down its portfolio and simplified it into three distinct offerings. The net result? VMware is growing 50% faster in the two quarters leading into this year’s VMworld than in the two quarters heading into last year’s confab.

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As HP looks to set back into M&A market, who’s on its short-list?

Brenon Daly

Contact: Brenon Daly

Now that Hewlett-Packard is once again growing organically, we’re hearing that the tech giant is looking to grow inorganically once again, too. Several market sources have indicated in recent days that HP has pursued a large network platform play, as well as a smaller round-out for its application security portfolio.

Before we look at the specifics of each rumor, it’s worth noting the fact that any acquisition would be a dramatic reversal from the company’s recent stance. Since its disastrous purchase of Autonomy in mid-2011, HP has stepped almost entirely out of the M&A market, announcing just a pair of small transactions. For comparison, IBM has inked more than 30 deals in the same three-year period, according to The 451 M&A KnowledgeBase.

So who is HP supposedly eyeing? Well, both Blue Coat Systems and WhiteHat Security would bring a dash of color to the company.

Of the two rumored deals, we think the larger one – Blue Coat – is less likely, if just because a more measured return to dealmaking after a three-year hiatus would probably play better among investors, who have bid HP shares up to a three-year high. Blue Coat, with its diverse networking and security product portfolio and headcount of more than 1,400, would also pose a number of integration challenges to a company that is still working through the last big transaction it did. Furthermore, it would likely cost HP more than $2bn.

More reasonably, WhiteHat would likely cost HP only about one-tenth that amount and would be a relatively low-risk expansion to the company’s existing portfolio by bolstering its security services. HP already offers application security, a portfolio built primarily via M&A. HP acquired Web app testing startup SPI Dynamics in June 2007, and then added Fortify Software in August 2010. Fortify, which had a relatively strong partnership with WhiteHat before its sale, stands as one of the few recent deals that HP has done that has actually generated the hoped-for returns.