Author: Brenon Daly

Mindful — and major — M&A by Mindjet

Brenon Daly

Contact: Brenon Daly

In its first major acquisition, Mindjet has handed over just less than one-third of its equity for Spigit, a social and innovation-focused front end to its collaboration platform. The deal comes as 20-year-old Mindjet continues its evolution from a Windows-based ‘brainstorming’ license software vendor to a multi-OS, subscription-based platform. That transformation – accelerated by the addition of Spigit – makes it a whole lot more likely that Mindjet will be in a position to join the ranks of public companies in a year or two.

According to our understanding, fast-growing Spigit will bump up Mindjet’s top line by about one-third. (Subscribers to The 451 M&A KnowledgeBase can click here to see our specific revenue estimates for Spigit.) Importantly, all of Spigit’s revenue is subscription, which fits with Mindjet’s efforts to transition to a fully SaaS business. Mindjet basically stopped selling perpetual licenses last year and is tracking to finish 2013 with subscriptions accounting for about 70% of total revenue.

Initially backed by Warburg Pincus, Spigit got re-capped earlier this year with PICO Holdings taking a majority stake of the company. Collectively, Spigit shareholders will own 30% of the combined company, and its 100 employees will account for almost the same ratio of the combined company’s 400 employees. Arma Partners advised Spigit on the sale.

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Much more to do at Dell

Brenon Daly

Contact: Brenon Daly

After a tortuous, acrimonious and sometimes litigious seven-month process, Dell shareholders today approved the proposed $24.6bn take-private of the IT vendor. Now comes the hard part for the folks behind the third-largest tech leveraged buyout (LBO) in history: actually changing the trajectory at Dell.

We say that because the LBO doesn’t actually change much at the company. For the most part, the LBO is a financial event, rather than a strategic one. As a private company, Dell is simply going to continue plodding along its already planned transformation from ‘box maker’ to (ideally) a strategic supplier of IT products and services.

To be clear, however, this is not a new development at Dell. The handful of priorities that it has highlighted for its life as a private company – such as expanding its enterprise business, pushing further into emerging markets and redoubling its commitment to its sales channel – are all ones that it has put forward to shareholders since at least 2008. Dell would counter that its new ownership structure, with chief executive Michael Dell owning three-quarters of the company, will allow them to move quicker on that strategy.

That may be so, but we might suggest that it skims over the difficulties for any 110,000-employee company (public or private) to transform itself. After all, Dell has been steadily and consciously looking beyond its PC and laptop business for nearly the past half-decade, with limited success. In fiscal 2008, that segment contributed 61% of total Dell revenue, but that portion has only dropped to about 54% now.

And that’s despite spending more on M&A than it ever had in its history. Since 2006, the company has averaged about five acquisitions per year, according to The 451 M&A KnowledgeBase . Altogether, it has spent more than $12bn to get into new markets, including storage (EqualLogic, Compellent), services (Perot Systems), networking (Force10) and security (SonicWALL, SecureWorks). It’s also relevant to note for the soon-to-be-private Dell that shareholders footed the bill for that shopping spree.

Yet even as Dell has added all those new businesses – to say nothing of the collective billions of dollars in revenue from the acquired companies – it has not been able to grow. In fact, as the IT vendor gets set to step off the Nasdaq and go behind closed doors, it is going to be smaller and less profitable than it was before it kicked off its multibillion-dollar M&A program.

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Arbor reaches Down Under for network analytics startup

Brenon Daly

Contact: Brenon Daly

Three years after Arbor Networks sold itself to Danaher, the security company has announced its first transaction as part of the technology conglomerate. Arbor has picked up Packetloop, a bootstrapped, five-employee startup based in Sydney, Australia, that specializes in network security monitoring and analytics.

The addition of Packetloop takes Arbor far beyond its core offering and market, which, historically, has been selling DDoS detection products to service providers. While service providers still account for a majority of the company’s revenue, sales to enterprises now represent 40% of total revenue, and are growing faster than the service providers business.

The deal also fits into a growing trend of existing security vendors looking to add capabilities around data analytics and visualization, rather than using M&A strictly as a way to step into new infosec markets. Just last week, for instance, Click Security reached for fellow startup VisibleRisk, while earlier this summer, Proofpoint added an in-memory threat-scoring startup called Abaca Technology.

Even old-line Blue Coat Systems caught the trend, paying an uncharacteristically rich multiple for Solera Networks. In fact, much of the network forensic capabilities that Packetloop offers are directly competitive with Solera, which was acquired just three months ago in what we understand was a highly competitive process.

Will Microsoft and Nokia make for a ringing success?

Brenon Daly

Contact: Brenon Daly

In an acquisition that effectively formalizes a partnership of two and a half years, Microsoft plans to hand over $5bn for Nokia’s phone business. Additionally, it announced a $2.2bn agreement to license the Finnish company’s patents and mapping technology. Taken together, the moves mean that Microsoft – in its efforts to make the leap from the PC market to the much broader mobile world – has now tried all three of the corporate development strategies: buy, build and partner.

And yet so far, the results of that effort remain underwhelming. In an August survey by ChangeWave Research (a service of 451 Research) just 9% of corporate respondents indicated they planned to purchase a Windows Phone-powered device in the fourth quarter of this year. Microsoft’s ranking was dead last among the mobile OS providers. Even BlackBerry, which is fading dramatically, drew a level of support that was three times higher than Windows Phone.

Nor does the addition of Nokia, when the deal closes early next year, appear likely to bump up Microsoft’s standing among corporate mobile-device buyers. Just 7% of respondents to the ChangeWave survey indicated they planned to buy a Nokia device in Q4. That was the lowest standing among the six specific vendors included in the ChangeWave survey.

Obviously, Microsoft’s purchase and license agreements with Nokia extend far beyond the immediate timeframe covered in the ChangeWave survey. But even as we look ahead a year or more, we don’t necessarily see the transaction doing much to establish Microsoft as more than a distant fourth-placed mobile OS vendor.

For starters, there’s Microsoft’s mixed record on hardware, including its recent $900m write-off because it hasn’t sold anywhere near as many Surface tablets as it expected. And even when we look at precedent transactions where software companies have reached for hardware vendors (even those with solid underlying IP), the returns have been low. One dramatic example from the enterprise world: Oracle has struggled to get out from under the billions of dollars of hardware that it inherited when it acquired Sun Microsystems.

Even more relevant to the Microsoft-Nokia transaction, Google hasn’t radically altered the fortunes of Motorola’s smartphones since it acquired that business in a deal that was announced two years ago and closed May 2012. Yes, the Android OS continues to gain momentum for all device makers. But specifically for Motorola, the percentage of corporate buyers who plan to purchase a Motorola device in the coming quarter has dropped almost uninterruptedly in the year that Google has owned the device maker, according to ChangeWave research.

 

A mixed picture for tech M&A in August

Brenon Daly

Contact: Brenon Daly

The value of tech M&A around the globe in August ticked higher by about one-quarter over the same month last summer, the fourth consecutive increase in year-over-year monthly spending. However, the slump in the number of deals continued in August. We have yet to see a single month in 2013 with more transactions announced than in the comparable month of 2012, leaving total deal flow down about 17% so far this year.

We tallied 260 acquisitions with an aggregate value of $13.2bn this month. (That compares with 285 deals worth $10.6bn in the same month last year.) August’s significant transactions included the largest purchases by Chinese search engine Baidu ($1.85bn for 91 Wireless Websoft) and the reconstituted AOL ($465m for Adap.tv). IBM also paid one of its highest-ever M&A multiples in its reach for Trusteer. (Subscribers to The 451 M&A KnowledgeBase can see our estimated terms for this transaction.)

The split picture in the M&A market mirrors the recent crosscurrents in the equity markets, which influence one another. All of the major US stock indexes declined in August, but are still higher by a mid-teens percentage since the beginning of the year. We would note that a number of previously active tech buyers that haven’t necessarily participated in the stock market’s double-digit percentage rally have been much less active shoppers so far this year. Oracle, VMware and BlackBerry are all examples of that.

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

How will Violin play on Wall Street?

Brenon Daly

Contact: Brenon Daly Tim Stammers

In what would be the first IPO from the storage sector in two years, Violin Memory’s prospectus is out for all the world to see. (We indicated last week that the S1 was on its way.) What people are mostly seeing in the paperwork, however, is red ink – and lots of it.

As we wrote in our full report on the all-flash array (AFA) vendor, its filing and what it has to look forward to as a public company, Violin’s offering won’t appeal to everyone on Wall Street: It’s a relatively immature company, spending money at an unsustainable rate in a market that today represents only a tiny fraction of overall storage spending but is getting more competitive every day.

If we wanted to translate that into some actual numbers, we might offer this summary from the prospectus: Each quarter, Violin has been losing anywhere from $20m to as much as $35m to bring in $20-25m in revenue. (Altogether, Violin has run up an accumulated deficit of more than $250m since incorporating in 2005.)

The main reason for the deep losses at Violin is the fact that its product is expensive to make. (Gross margins run only in the low-40% range.) Once those costs are subtracted, there’s very little left over for operating costs. Yet that hasn’t slowed Violin’s spending on R&D or sales/marketing. For the past year, quarterly operational spending at Violin has run three times higher than its gross income.

While certainly staining the P&L sheet a blood red, Violin’s lavish spending has nonetheless helped establish it as the leader in the nascent AFA market. Storage professionals at major enterprises have tapped Violin as the most exciting privately held storage vendor, according to recent interviews by TheInfoPro, a service of 451 Research. Further, Violin has succeeded in converting that into sales momentum, with recent growth rates of about 70%. For more on Violin and the offering, see our full report.

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A ‘betwixt and between’ VMware opens the doors at VMworld

Brenon Daly

Contact: Brenon Daly

Even though it’s only 15 years old, VMware is beginning to look decidedly middle-aged. The virtualization kingpin, which opens its annual users’ conference today, is no longer the flashy young startup that was nearly doubling sales each year in the middle part of the previous decade. Nor is it (by any means) a tech dinosaur, defensively trying to protect its past successes while knowing full well that its best days are behind it.

Instead, VMware finds itself betwixt and between. And fittingly for a company in an indistinct period of its life, there’s uncertainty around its business. That is cascading through not only the operations of the company, but also its very identity. As it kicks off VMworld in San Francisco, VMware is still working through a restructuring, which, among other things, has seen it cut 800 jobs and divest a handful of businesses so far this year.

As one illuminating example of the uncertainty around VMware and its business, consider the company’s license sales, which are the lifeblood of any software firm. Back in the beginning of the year, VMware projected roughly 10% license growth for 2013. Off a 2012 base of about $2bn in license sales, that would imply roughly $200m of new VMware licenses sold this year. Through the first two quarters of the year, VMware has added a grand total of just $20m in additional license revenue.

The problems from the vendor’s flatlining software sales are exacerbated by the fact that it has whiffed on a few of the businesses that it acquired with the hopes of spurring growth in new markets. Misguided acquisitions such as Zimbra and SlideRocket took VMware further away from supplying technology to power datacenters and into the hotly contested consumer application market. VMware has sold off both of those businesses, along with three other divestitures so far in 2013. On the other side, it has bought only one company this year.

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Bye-bye Ballmer

Brenon Daly

Contact: Brenon Daly

Lost in the schadenfreude and snark that has accompanied Steve Ballmer’s decision to leave the top spot at Microsoft within a year is one undeniable piece of his legacy: No other tech CEO has accumulated as many assets in key markets as Ballmer.

In addition to the fat-margin franchises that Ballmer inherited, he steered the company on an M&A program that built up offerings around growth markets such as mobility, cloud infrastructure, data warehousing, online communications, digital advertising, collaboration and beyond. During Ballmer’s 13 years running the software giant, Microsoft dropped more than $25bn on its acquisitions.

Of course, there have been M&A missteps. The company has endured big write-offs (aQuantive), gotten burned by targets with dubious accounting (FAST Search & Transfer), drastically overpaid on other acquisitions (Skype), and has seen the period for returns on deals drag beyond a decade (Great Plains Software, Navision).

But in the end, Microsoft has at least brought together a basket of offerings, built on in-house and acquired technology, that makes it relevant in today’s tech market. Want proof of that? Microsoft is actually increasing sales. Granted, it’s only about 5% growth, but at least Microsoft is growing. The same can’t be said for IBM or Oracle or Intel or Dell or Hewlett-Packard. (Oh yeah, and Microsoft is growing while also throwing $20bn to the bottom line each year.)

From our perspective, one of the main challenges for Microsoft’s next CEO will be realizing a return on all of its previous dealmaking. Ballmer’s M&A program has put the pieces in place, but for the most part, they have been underutilized. It’s time for an execution-focused chief executive to wring more value out of the enviable collections of assets that Microsoft has already acquired.

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

Nuance’s not-so-nuanced response to Icahn

Brenon Daly

Contact: Brenon Daly

Even though Nuance Communications is a company that does a lot of buying, the serial shopper has made it clear that it doesn’t want to be on the other side of a transaction. The speech recognition vendor, which has spent more than $1bn on a dozen deals over the past two years, announced earlier this week that it would be putting a ‘shareholder rights plan’ in place by the end of the month. The defensive measure (also known as a ‘poison pill’) effectively scotches any unwanted M&A approaches.

In other words, exactly the type of unwanted approach the company is likely to get from its largest shareholder, who has a history of making unwanted M&A approaches to tech companies. Carl Ichan has steadily snapped up Nuance stock. His stake, according to the most recent SEC filing, is now a mountainous 51 million shares, or 16% of the company.

With Icahn unlikely to play the role of spoiler in the planned Dell LBO, we suspect that he’ll have more time to spend on his other activist investments very soon. Probably on the top of his hit list is Nuance, as the company has already put up subpar numbers in two quarters this year. Nuance stock is down about 15% in 2013.

Unlike Ichan’s earlier stirrings against BEA Systems or Lawson Software, however, there isn’t an obvious single acquirer for Nuance. The reason stems largely from the fact that the Burlington, Massachusetts-based company has four separate business units. (Collectively, those divisions should produce about $1.7bn in annual sales when Nuance wraps its fiscal year at the end of next month.)

Instead, we could imagine that Icahn might push for a breakup of Nuance, arguing that the value of the individual units – on their own – is higher than the current $7.4bn enterprise value of the company. After all, Icahn has experience in that sort of agitation too, having helped spur a breakup of tech giant Motorola at the beginning of 2011.

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Violin set to play on the big stage, with IPO imminent

Brenon Daly

-by Brenon Daly

After a fitful past few quarters, Violin Memory is ready to play on the big stage. The all-flash array provider is set to reveal its IPO paperwork later this week, according to sources. Our understanding is that the offering itself will take place in about a month, with Violin likely to be valued at just under $1bn at debut. Assuming it does go public, Violin would be the first significant enterprise storage IPO in two years.

The initial valuation is a bit lower than the $1.5bn we penciled out for Violin last October when we first reported that the company was set for an IPO. Two factors are weighing on that – one inside the company and one outside. In terms of macro-level influences, there’s been a recent trend toward conservative pricing for IPOs, at least at debut, as uncertainty and volatility has increased on Wall Street.

Still, fast-growing companies have traded substantially higher in the aftermarket, and we would expect Violin to follow suit. The reason? Violin’s torrid growth rate. According to our understanding, Violin is tracking to increase sales about 80% in the current fiscal year, ending next January. We gather that Violin put up roughly $75m in sales in the previous fiscal year, and is projecting about $135m for its current fiscal year.

The heady growth hasn’t come without a stumble or two. Several sources have indicated that the company’s sales in the second half of last year came in much lighter than expected, in part because Hewlett-Packard stopped reselling Violin. But at least some of the lumpiness that Violin had been experiencing has been smoothed by new sales arrangements and new products.

For instance, my colleague Tim Stammers recently wrote an in-depth look at Violin’s partnership with Toshiba, which is also an investor in Violin, to start selling PCIe flash cards . Although the expansion into what’s likely to be a commodity market doesn’t alleviate all of the concerns around the inherent lumpiness of Violin’s big-ticket arrays, it does at least add a new revenue stream.

And in terms of its core product, Violin does have the advantage that it has created a fair amount of buzz with the audience that matters. A recent survey by TheInfoPro, a service of 451 Research, interviewed more than 260 storage professionals at major enterprises and asked them to name which vendor they found ‘exciting.’ Violin came in as the top-ranked privately held storage company, with twice the mentions of other high-flying startups such as Nimble Storage and Pure Storage.

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