Author: Brenon Daly

Packet Design picked up by PE shop with networking know-how

Brenon Daly

Contact: Brenon Daly, Peter Christy

Adding a second company to its portfolio, private equity (PE) firm Lone Rock Technology Group has picked up network analytics firm Packet Design. The acquisition of Packet Design brings the Austin, Texas-based PE shop much closer to its roots in networking than its other investment, business process automation vendor iGrafx.

Lone Rock was cofounded by Joel Trammel, who spent a decade as head of network flow monitor NetQoS before selling that business to CA Technologies for $200m in September 2009. A number of former NetQoS executives are now working at Packet Design, including the company’s newly appointed CEO Scott Sherwood, who ran sales at NetQoS. Packet Design was advised in the process by Mooreland Partners, while Northside Advisors worked the buyside. (Subscribers to The 451 M&A KnowledgeBase can click here for the full record on the transaction, including our proprietary estimate on the terms of the deal.)

In its decade in business, Packet Design pulled in about $65m in equity and debt backing. Like many other startups, however, it was heavy on technical expertise but light on business acumen. Packet Design sold elegant technical tools to a few of the most complex network operators but never truly expanded into much larger markets. The company has about 200 customers and, according to our understanding, roughly $10m in sales.

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byThe Free Dictionary: With the use or help of; through: We came by the back road. →

Springtime stirrings in tech IPO market

Brenon Daly

Contact: Brenon Daly

With US equity markets hitting all-time highs and volatility sinking to post-recession lows, Wall Street appears ready to embrace new issues. Even the fitful offering of smart grid vendor Silver Spring Networks, which had been collecting dust as the company’s revenue declined over the past year, found buyers earlier this week. However, few observers would put Silver Spring forward as a ‘tech’ IPO, much less an offering that should necessarily be emulated.

But we won’t have to wait long for a bellwether for the sector. Both Model N and Marin Software are expected to price their IPOs next week, a pair of offerings that could create a cool $1bn in market value. And coming behind those debutants are a host of companies hoping to hit the market this summer, including Violin Memory, SilkRoad Technology and Tableau Software. (Of the trio, data-visualization provider Tableau looks to be the next ‘hot’ enterprise IPO, and will almost assuredly command a double-digit valuation when it begins trading.)

The rumored offerings by all three of those enterprise tech vendors have come through a so-called ‘confidential filing,’ a recent regulatory change by the SEC that allows companies to put in their IPO paperwork – and work through the inevitable revisions – without disclosing the filing until they are ready to hit their roadshow. Most companies are opting to file on the quiet – but not all of them. Somewhat confusingly, for instance, Marketo publicly announced that it had privately filed. And earlier this week, agile development shop Rally Software Development put in its paperwork for all the world to see.

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An unhappy anniversary for Vocus

Brenon Daly

Contact: Brenon Daly

It’s been exactly a year since Vocus rolled the dice on its largest-ever acquisition, and in the view of Wall Street the company has come up snake eyes. The February 2012 purchase of iContact, which nearly cleaned out Vocus’ treasury and caused a bit of acquisition indigestion, spooked investors. Since the deal, shares of the marketing software vendor have been nearly cut in half.

The decline has left the company a relative bargain in a market that has seen platinum valuations, both in terms of trading multiples and M&A valuations. Vocus garners a market cap of $285m, or just 1.4x its projected revenue of about $200m in 2013. That paltry valuation comes despite an accelerating bookings rate of roughly 20% forecasted for this year, about $25m of free cash flow generation and a reengineered suite of offerings serving a neglected segment of the market (midsized enterprises).

The last point is a key one for Vocus, which went public in 2005 as a single-product company. In its initial years, Vocus sold to PR firms, primarily helping them distribute their releases. In 2011, the company began expanding its portfolio, both through internal development and M&A. It acquired two small companies that year that brought technology around marketing on Facebook and Twitter. By the end of 2011, it had integrated those deals along with internal efforts into a single marketing platform.

Early sales for the integrated suite were encouraging for Vocus, reflecting the fact that marketing automation requires a number of offerings. (Many other players in this space – including ExactTarget, Marketo and Constant Contact – have all used M&A to build out a suite.) It then reached for iContact to add the outbound marketing piece of technology.

The acquisition, which bumped up Vocus’ revenue by about one-third overnight, required a fair amount of integration. Vocus says that work is behind it, and it can focus on selling its marketing suite. Assuming the company does hit its guidance of 20% bookings growth this year, it will mark the first time since 2008 that it has grown at that rate. Of course, Vocus was only generating about one-third the amount of sales then that it expects this year. And even then, Vocus shares traded higher than they do today.

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Marketo looks to the market

Brenon Daly

Contact: Brenon Daly

Looking to join a recent run of well-received marketing automation IPOs, Marketo said Tuesday that it has filed its prospectus. Like most other recent would-be debutants, Marketo took advantage of regulatory changes and has filed its paperwork confidentially. Somewhat unusually, however, it did note its IPO filing on its website.

Although Marketo didn’t reveal its financials, we understand that the company has doubled revenue in each of the past three years: $14m in 2010, $30m in 2011 and about $55m in 2012. Marketo has raised some $107m from five different VC firms since 2006.

Last summer, rumors were swirling that Oracle might be looking to acquire Marketo. Instead, the acquisitive software giant reached for Eloqua, paying almost $1bn for that marketing automation vendor. (Meanwhile, we hear that other large enterprise software companies – notably, SAP, Intuit and salesforce.com – continue to sniff around the marketing automation market.)

Assuming Marketo goes ahead with its offering, it will join ExactTarget and Eloqua as IPOs from the sector. (Although, as noted, Eloqua got snapped up just four months after its offering.) As one indication of Wall Street’s bullish view on marketing automation, consider that ExactTarget trades at $1.5bn value on sales of about $300m.

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Tableau tees up an IPO

Brenon Daly2 Comments

Contact: Brenon Daly

After a pair of tech companies publicly announced their intent to hit the market late last week, we understand that a high-profile private company is coming up right behind them. Tableau Software is rumored to have quietly filed its IPO paperwork under the JOBS Act, according to a number of sources. It’s the first step toward an offering that could value the data-visualization company in the neighborhood of $2bn.

Founded a decade ago, Tableau has grown quickly and steadily as customers snap up its software that helps makes sense of the ever-increasing levels of data. According to our understanding, Tableau was running at less than $10m in 2007, but finished last year at about $110m in sales. The company, which has raised only $15m in venture backing, has also been generating cash in recent years even as it scales its business.

In addition to its stunning growth, Tableau has a number of other characteristics that should play well on Wall Street. It has a larger rival, QlikTech, that enjoys a healthy valuation of 6x trailing sales, even as it grows roughly 20%, or about one-quarter the rate of Tableau. (QlikTech recently forecasted sales for 2013 of roughly $470m, nearly three times Tableau’s expected sales this year.) Further, Tableau is likely to have broad support in the investor community thanks to its long list of rumored underwriters: Goldman Sachs, J.P. Morgan Securities, Morgan Stanley and Credit Suisse, among other banks.

By filing under the recently passed JOBS Act, Tableau can put in a prospectus without publicly revealing it has done so. Assuming the offering goes according to plan, Tableau would likely announce the filing in the next few months and then go on its roadshow. We expect the company to be well received in that process, and it is likely to join the richly valued quartet of enterprise vendors that went public in 2012: Workday, ServiceNow, Palo Alto Networks and Splunk. The cheapest of those four companies trades at 13x trailing sales.

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IPO drought lifts, as Marin Software and Model N reveal their paperwork

Brenon Daly

by Brenon Daly

Both Marin Software and Model N revealed their IPO paperwork Wednesday evening, setting the pair up to be the first new technology companies to come to market since mid-November. Both planned offerings have a $75m cover raise, and given the new regulations around IPOs, won’t actually hit the market until mid-March at the earliest. But at least the end to the recent IPO drought is (apparently) near.

Although they share the same filing date, the two companies are very different. Model N sells revenue management software, primarily to the life sciences industry although it has also expanded to tech vendors recently. Model N, which is almost twice as old as Marin Software, sells both perpetual licenses and a subscription product. License sales and related maintenance account for the majority of Model N’s revenue, which totaled $89m in 2012. J.P. Morgan Securities and Deutsche Bank Securities are leading the offering.

Founded in 2006, Marin Software only really began selling its subscription-based digital advertising platform in 2009. Since then, the company has been growing quickly. Through the first nine months of 2012, it recorded $43m in sales, up 72% from the same period in 2011. Marin Software’s revenue retention rate has topped 100% in each of the past two years. Bookrunners are Goldman Sachs & Co and Deutsche Bank.

With the different vintages, business models and markets, Model N and Marin Software will undoubtedly appeal to different investor classes on Wall Street. Along with that, they will undoubtedly garner different valuations. Loosely, we figure Model N will debut at about a $400m valuation and Marin Software may come out at roughly $600m. After the dry spell that we’ve seen in the IPO market recently, $1bn or so of value creation from the two companies will be a welcome development in Silicon Valley.

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In tech M&A, it’s go big or go home

Brenon Daly

Contact: Brenon Daly

Tech buyers aren’t actually doing much buying so far this year, but when they close the deals, they have been big purchases. At least that’s the early read on deal flow so far in 2013. To put some numbers on the activity: Through the first five weeks of this year, the number of announced transactions by tech buyers around the globe was running about 15% lower than the comparable level in either 2011 or 2012.

However, the total spending from January 1-February 8 hit a whopping $55bn, which is higher than we would typically see for an entire quarter. Indeed, the year-to-date total is 2.5 times higher than the $22bn recorded for the same five-week period in the two previous years combined.

The surge in spending is being led by a flurry of big-ticket purchases. So far in 2013, we have tallied eight transactions valued at more than $1bn, up from just one in the same period in 2012 and four in 2011. Topping this year’s list, of course, is the proposed $24.4bn buyout of Dell, which stands as the largest announced tech deal since mid-2007. Also of note, Liberty Global reached across the Atlantic for Virgin Media Group in a $16bn acquisition and Oracle announced the $2bn purchase of networking vendor Acme Packet.

As is evidenced by those transactions, however, the activity at the top end of the market is hardly what we would call precedent-setting. (The Dell buyout – with the cash and equity participation of a company founder, plus a $2bn loan from Microsoft – is hardly a model for other take-privates.) Below those mega-deals, we aren’t seeing many signs of strength in activity that could sustain a recovery in tech M&A for the full year. Keep in mind, too, that we’re coming out of 2012, a year where we saw the value of tech transactions drop 20% from 2011 to end even slightly below the level of 2010.

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salesforce.com ‘connects’ with EntropySoft

Brenon Daly

Contact: Matt Mullen

Announcing its first acquisition in five months, salesforce.com has reached across the Atlantic for Paris-based startup EntropySoft. The eight-year-old target had raised just $3.5m in a single round of funding. EntropySoft produces perhaps the most complete set of enterprise system connectors in the marketplace. These bits of technology allow the interoperability of data between management platforms, and have found their way into many Web content management, enterprise content management and enterprise search platforms.

While connectors will never be seen as ‘sexy’ technology, they are a fundamental underpinning of many integration strategies for vendors and provide a stable income for those that create and maintain them. So why would salesforce.com, a company that will put up about $3bn in revenue this year, want a stable if unexciting income stream? The truth is that it doesn’t.

What it wants, from our view, is EntropySoft’s technology. Specifically, salesforce.com wants the ability to make greater inroads toward positioning CRM as the single repository for enterprise information. Having the predominant connectivity stack as part of its toolkit makes that process simpler. It allows, for example, much easier exposition of content from legacy systems to the CRM repository and the platform that salesforce.com has built atop it with Force.com and Site.com.

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Silver Lake’s two very different elephants

Brenon Daly

Contact: Brenon Daly

Silver Lake has placed its bet, and it’s a big one. As noted, the planned $24.4bn take-private of Dell is the largest tech leveraged buyout (LBO) since the end of the recession. It’s also twice the price of Silver Lake’s previous mega-LBO, the $11.3bn club deal for SunGard Data Systems.

As we look at the two mammoth transactions, they don’t line up very closely at all. For starters, they belong to different eras: SunGard was an early, prelapsarian private equity (PE) transaction, while Dell comes as the credit markets have only recently returned to health after the worst economic recession in several generations.

Further, the two companies find themselves exiting the public market with very different outlooks for their business. SunGard has been riding the steady trend of business services, while Dell has been taking steps to catch emerging trends but still relies on PC sales for more than half its revenue.

The separation between the pair of companies is clear when we look at their financials: Unlike Dell, SunGard was growing at the time of its LBO, not to mention the fact that it ran at a 28% EBITDA margin compared with about 8% at Dell. (SunGard also got valued at twice the price-to-EBITDA multiple that terms give to Dell.)

Finally, we would note that since the Silver Lake-led LBO, SunGard has acquired some 45 companies. The steady M&A, along with organic growth, has seen SunGard bump its top line from about $3bn when it went private eight years ago to about $4.5bn now. We highly doubt that Dell will put up that kind of performance, at least not right away. There’s a lot of work to do at Dell.

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Once indelibly on the market, Dell looks to go private

Brenon Daly

Contact: Brenon Daly

In the third-largest tech leveraged buyout (LBO), Dell will end a quarter century as a public company in a $24bn take-private led by Silver Lake Partners. The private equity firm will be joined by Michael Dell, who is maintaining a significant minority stake in the company that he will continue to lead once it goes private. The LBO comes after Dell has struggled for much of the past half-decade to recast its business away from the rapidly diminishing PC market.

As part of that shift, Michael Dell returned as CEO to his namesake firm in early 2007 and (somewhat belatedly) began an M&A spree that eventually totaled some 20 transactions with a tab of $10bn. The acquisitions got Dell into virtually every part of the tech landscape, including IT services (Perot Systems), security (SecureWorks, SonicWALL), networking (Force10 Networks), storage (Compellent, AppAssure) and infrastructure software (Quest Software).

However, the acquisitions and other strategic shifts that Dell has made have yet to show up in the company’s financials. Dell, which just wrapped its fiscal year, is likely to post revenue that’s nearly 10% lower than the previous year. The company’s operating income has dropped by about one-third.

Since Michael Dell returned to the corner office six years ago, shares of the company have lost about half their value. Rightly or wrongly, Wall Street still views Dell – which gets half its revenue from PC sales – as a low-value ‘box maker’ rather than a strategic supplier of IT products and services. In the end, Dell is exiting the market at just one-quarter the value it once commanded.

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