Author: Brenon Daly

FireEye eyes an IPO

Brenon Daly

Contact: Brenon Daly

Many tech IPO underwriters are spending this week trying to catch the eye of FireEye. The advanced anti-malware vendor is currently baking off for an offering later this year that will likely create the next publicly traded information security company valued at more than $1bn.

FireEye has been tracking to the public market for some time, making moves earlier this year – such as adding several executive heavyweights and raising a ‘top-off’ $50m round of funding – that indicated an IPO may be close at hand. Further, it has the financial profile that will undoubtedly find buyers on Wall Street. According to our understanding, FireEye generated some $130m in bookings in 2012, about double its bookings from the previous year.

The company, which has more than 1,000 customers, has made huge strides since it emerged from stealth in mid-2006. It has pivoted from its initial focus on the network access control market to botnets to a broader advanced anti-malware platform. Along the way it has raised some $95m in backing from investors including DAG Ventures, Goldman Sachs, Jafco Ventures, Juniper Networks, Norwest Venture Partners and Sequoia Capital, which incubated FireEye.

However fitful FireEye’s evolution has been, the company has drawn fans in the information security market. According to a late-2012 survey by TheInfoPro, a service of 451 Research, FireEye was ranked as the second ‘most exciting’ infosec company. It trailed only Palo Alto Networks, which went public last summer and currently commands a $3.5bn market capitalization.

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A big market for small IPOs

Brenon Daly

Contact: Brenon Daly

The IPO market is getting bigger by going smaller. Investors have shown they are ready to step in and buy shares of unprofitable companies that are still only generating revenue in the tens of millions of dollars. That has drawn a number of companies onto the IPO path that might have been termed ‘sub-scale’ in the recent past.

Consider the offerings – both planned and actual – from Rally Software Development, Marketo and ChannelAdvisor. All three companies finished 2012 with less than $60m in sales. Further, all three companies continue to run in the red – deeply in the red. (For instance, Marketo lost $34m in 2012 on sales of $58m. Rally doesn’t even turn an operating profit and ChannelAdvisor still runs at a negative ‘adjusted’ EBITDA.)

Not that the diminutive size or red ink hurt Rally on its Friday debut. The agile software development shop not only bumped up the size and price of its offering, but then shares, well, ‘rallied’ in the aftermarket. The stock changed hands at about $18 in mid-session trading, after pricing at $14 each.

When Rally set its range last week, we noted that the small-cap company wouldn’t necessarily be trading at the discount that typically gets assigned to that class of stocks. On a back-of-the-envelope (not fully diluted) basis, Rally has secured a valuation of roughly 6x trailing sales and 4x forward sales. With a healthy multiple like that, it’s small wonder that other small companies are lining up to hit Wall Street.

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An ‘affinity acquisition,’ as LANDesk picks up divested Shavlik division

Brenon Daly

Contact: Brenon Daly

As a company that has been cast off twice from its larger corporate owners, LANDesk Software might have a special affinity for its latest transaction: the acquisition of Shavlik Technologies, which is being cast off by VMware. The deal adds Shavlik’s technology for managing and securing physical and virtual environments to the systems management vendor’s portfolio. Inside VMware, Shavlik was known as VMware Protect; under LANDesk, the business is called Shavlik Protect.

LANDesk’s purchase effectively unwinds VMware’s acquisition of the security company in mid-2011. At the time, we estimated that the virtualization giant paid about 3x sales for Shavlik. We understand that today’s deal went off at a more representative multiple for divestitures. That said, Shavlik, which never took any outside funding, is known to generate healthy cash flow. (Subscribers to The 451 M&A KnowledgeBase can click on the following links to see our estimated revenue and price for both the original VMware-Shavlik transaction as well as today’s LANDesk-Shavlik pairing.)

The purchase of the carved-out business represents the third deal LANDesk has done since private equity (PE) firm Thoma Bravo carved the company itself out of Emerson Electric in August 2010. (That transaction came almost exactly eight years after another PE shop, Vector Capital, carved LANDesk out of Intel.) On the other side, VMware’s sale of Shavlik is its second divestiture announced in 2013, as the virtualization giant works through a previously announced restructuring.

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Low and slow is the tempo for tech deal flow

Brenon Daly

Contact: Brenon Daly

Even with a few blockbuster deals, we’re starting off 2013 at a low level in the tech M&A market. Not only did the number of first-quarter transactions sink to its lowest quarterly total in more than three years, but the deals that did get done went off at a lower median valuation. (See our full report on Q1 M&A activity.)

The downtick was particularly pronounced at the top end of the market, which stands out all the more because of the record levels for the US equity markets. For the 50 largest transactions announced so far in 2013, as listed in The 451 M&A KnowledgeBase, we calculated the median price-to-trailing-sales valuation at just 1.9x. That’s a full turn lower than the full-year 2012 ratio and just half the level we saw in the prerecession year of 2007.

A number of low-value deals have been putting pressure on the overall multiple. For example, the proposed buyout of Dell is valuing the PC maker at just 0.4x trailing sales. Even a combination of a higher bid, which is possible, and shrinking sales at Dell, which appears inevitable, won’t change the multiple much.

Additionally, a steady stream of low-value divestitures has also contributed. United Business Media, Checkpoint Systems, Sierra Wireless, Harmonic and TeleNav are among the tech firms that have sold off parts of their business in divestitures valued at less than 1x trailing sales so far in 2013.

Valuations of significant* tech transactions

Year Equity value-to-sales ratio
Q1 2013 1.9x
2012 2.9x
2011 3.2x
2010 3.4x
2009 2.6x
2008 2.4x
2007 3.8x

Source: The 451 M&A KnowledgeBase *Median multiple in 50 largest acquisitions, by equity value, in each of the periods.

IntraLinks finally gets to use its deal room

Brenon Daly

Contact: Brenon Daly

Although IntraLinks is well-known for its ‘virtual deal rooms,’ the company itself hasn’t spent much time in them. That changed on Thursday. After being out of the market for more than a decade, IntraLinks announced a double-barreled deal, picking up two online deal-sourcing platforms, MergerID and PE-Nexus. (And yes, the company did use its own deal room to run the process.)

The addition of the two sourcing platforms makes sense as a way to increase the number of transactions that get executed in IntraLinks’ core deal room. In fact, the company had added sourcing and networking features around the end of 2011, but had only attracted a few hundred users. MergerID and PE-Nexus dramatically increase the number of potential participants, with the two firms having attracted, collectively, some 5,000 firms representing about 7,200 total users.

Further, the two platforms serve very different markets. MergerID – divested by the FT Group’s Mergermarket division – focuses on midmarket deals, primarily in Europe and Asia. Meanwhile, PE-Nexus (as its name implies) largely targets US private equity shops from its Florida headquarters. IntraLinks has indicated that it will pick up 11 employees from the two firms, and we understand that very little revenue will be added from the two subscription-based services.

More broadly, IntraLinks’ move fits with the strategy and recent performance of its business. The M&A unit, which represented 42% of total revenue in 2012, was the only one of the company’s three divisions to post growth last year. The 9% increase in its M&A-related revenue in 2012 helped bump up the overall top line at IntraLinks during what was – by design – a year of stabilization and investment.

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Tableau’s IPO ‘book’ is tech’s next bestseller

Brenon Daly

Contact: Brenon Daly

The prospectus a company files with the SEC in order to go public is nothing more than a book. And like other books, some of them languish on the shelves, collecting dust. Most attract only a little interest, with a handful of curious readers cracking open the covers. But every once in a while, a book so compelling comes along that it literally flies off the shelves. Readers can’t wait to get their hands on it.

Tableau Software, which revealed its IPO paperwork on Tuesday afternoon, is the tech industry’s next bestseller.

The data-visualization vendor had been expected to put in its prospectus about now. If anything, however, the anticipation has increased for Tableau’s offering because of the financials in its filing. The company doubled revenue in 2012 to $127.7m. Last year’s growth rate is notably higher than the mid-80% range Tableau put up in the two previous years, even though it is operating on a much larger revenue base. Its sales in 2012 were nearly 10 times higher than in 2008.

And unlike other hyper-growth tech vendors, Tableau turns a profit. Even on a GAAP basis, the company has been in the black since 2010. It has an accumulated deficit of just $1.5m. That’s pocket change compared with most other IPO wannabes, some of which have burned through tens of millions of dollars – or even more than $100m – to make it to the public market.

When Tableau does hit the market in about a month, we figure it will command a valuation of roughly $2bn. That would put it, rightfully so, on the same shelf as the bestselling IPOs from 2012: Workday, Splunk, Palo Alto Networks and ServiceNow. On average, those companies trade at about 20x trailing sales.

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

Rally Software prices itself out of ‘purgatory’

Brenon Daly

Contact: Brenon Daly

It appears that Wall Street is ready to play small ball in the IPO market. Rally Software Development has set the range for its upcoming offering, which will land it squarely in the realm of small-cap stocks. The agile software development shop put its expected pricing at $11-13. Assuming Rally does come to market at that level, it will debut at a valuation of less than $300m.

Typically, companies that garner valuations in the low hundreds of millions of dollars on the market get overlooked by most institutional investors. Without big-money buyers on Wall Street, small-cap companies often trade at a discount to their larger brethren. (Some executives of smaller companies, frustrated by the valuation disparity, jokingly describe their place on Wall Street as ‘purgatory.’)

However, it doesn’t appear that Rally will necessarily be starting life at a discount. The company generated some $57m of revenue in the year that ended in January, meaning it will likely be trading at about 5-6x trailing sales and maybe 4x this year’s sales. (Rally has increased sales roughly 39% in each of the past two years. Assuming that rate ticks down slightly this year, the company could still put up about $75m of sales.)

Clearly, Rally – along with its five underwriters, led by Deutsche Bank Securities and Piper Jaffray – has done a good job telling its story to investors. And it certainly doesn’t hurt that both the broader equity markets are at all-time highs and the tech IPO market has been rewarding new issues. Both of the two previous tech IPOs (Marin Software and Model N) priced above their expected ranges and have traded up in the aftermarket.

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

Feast or famine for tech M&A

Brenon Daly

Contact: Brenon Daly

It was feast or famine for tech dealmakers in the first three months of the year. In the first half of the just-completed Q1, M&A spending surged to record levels, driven primarily by the two blockbuster deals announced so far this year: the proposed $24.4bn leveraged buyout of Dell and Liberty Global’s $16bn reach for UK communications provider Virgin Media Group. (Collectively, those two transactions basically equal the typical spending level for a full quarter in 2012.)

But after those early February acquisitions hit the tape, deal flow dried up dramatically. That was particularly true at the top end of the market. In the back half of Q1, we tallied only two transactions valued at more than $1bn, compared with eight 10-digit deals in the first half of Q1.

Overall, the mixed market saw the buyers spend $63bn on 768 deals in the January-March period. That essentially matched the spending from the final quarter of last year, as well as the two summer quarters in 2011. But unlike those earlier periods, Q1 deal value was dominated by the two transactions, which accounted for nearly two-thirds of the total quarterly spending.

In addition to the spending concentration, we would note another sign of weakness during the period. The 768 deals announced in Q1 represents a 16% decline from the same quarter in both 2012 and 2011. In fact, Q1 deal volume slumped to its lowest total since Q3 2009.

2013 activity, month by month

Period Deal volume Deal value % change in spending vs. same month, 2012
March 2013 219 $4.4bn Down 76%
February 2013 246 $47.6bn Up 296%
January 2013 303 $10.7bn Up 155%

Source: The 451 M&A KnowledgeBase

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Checkpoint’s deeply discounted divestiture

Brenon Daly

Contact: Brenon Daly

In one of the more financially lopsided divestitures we’ve seen in some time, Checkpoint Systems says it will be pocketing just $5.4m for its North American CheckView business, which is being picked up by buyout shop Platinum Equity. The electronic security unit generated roughly $77m of revenue in 2012, although it did run slightly in the red.

Following a review of its businesses last year, Checkpoint set aside CheckView as a discontinued operation and broke out some of the division’s financials. (We confirmed that Platinum will be acquiring the whole CheckView unit.) At the time of the sale, CheckView employed some 225 people.

Checkpoint’s divestiture comes as the latest bit of portfolio pruning by tech companies so far this year. Similar moves include Oracle shedding the Lustre business it obtained with its acquisition of Sun Microsystems to Xyratex in mid-February and Microsoft, which had already written down much of its aQuantive acquisition, flipping the Atlas Advertiser Suite to Facebook a month ago.

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

The gains — and declines — in the tech IPO market

Brenon Daly

Contact: Brenon Daly

After a four-month drought, the enterprise tech IPO market saw its first new debutants warmly welcomed onto Wall Street this week. Both Model N and Marin Software priced above their expected ranges and traded higher in the aftermarket. Collectively, the two offerings created almost $1bn in market value.

While the strong debuts by Model N and Marin Software may help draw other companies – and their underwriters – to the public market, the IPO market is still running behind where it was at this time last year. In the first three months of 2012, we saw five enterprise tech vendors go public, including ExactTarget, Demandware and last year’s unexpected top-performing offering, Guidewire Software. Altogether, the class of early 2012 is now valued at about $5.5bn on the public markets.

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