Author: Brenon Daly

GFI may face IPO headwinds

Brenon Daly

Contact: Brenon Daly

Undeterred by a chilly reception to similar firms, GFI Software has put in its paperwork for a $100m IPO. The company, which is based in Luxembourg, sells a variety of infrastructure and collaboration services to the SMB market. GFI was originally founded in 1992 as an e-fax software vendor, and has steadily built out its portfolio through internal expansion and a handful of acquisitions.

However, it is still primarily known for its security offerings, with that product line accounting for about 60% of total revenue in 2010. Since then, the company has been rapidly expanding into other areas, most notably collaboration. In its prospectus, GFI said collaboration now generates almost one-third of all revenue.

Still, Wall Street may well put GFI into the bucket of ‘European IT security vendor.’ If that’s the case, it could hurt the company’s debut, because investors haven’t backed IPOs from other infosec firms from across the Atlantic. AVG Technologies, for instance, has never traded above its offer price since coming public in February. And AVAST Software had to pull its IPO paperwork in July.

Additionally, there are some concerns with GFI itself. The company’s growth rate has cooled so far this year, with revenue ticking up just 27% in the first half of 2012 after increasing 46% in 2011. (The falloff in billings growth has been even sharper.) Further, GFI is not profitable and has not been generating as much cash as it had been.

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Tech M&A spending doubles in October

Brenon Daly

Contact: Brenon Daly

Boosted by the largest technology deal in more than a half-decade, spending on tech M&A around the globe more than doubled in October from the previous year.

The whopper deal, of course, was Softbank’s $20bn purchase of a majority stake in Sprint Nextel, which accounted for nearly two-thirds of last month’s spending. Without that one transaction – the largest tech deal since Alltel went private in a $27.5bn buyout in mid-2007 – the total spending would have come in basically where it has in October in each of the past three years.

Overall, acquirers spent $32.6bn on 285 transactions in October, compared with $14.5bn spent on 342 deals in October 2011. The 125% spike in aggregate deal value in October marks only the third month in 2012 where spending has increased, year over year.

In addition to the blockbuster telco transaction, noteworthy deals last month included ASML Holding’s $2.5bn purchase of Cymer, a transaction that featured a 70% premium; the $1.6bn take-private of Ancestry.com; and Riverbed Technology’s $1bn acquisition of OPNET Technologies, a gamble on portfolio expansion that Wall Street didn’t particularly like.

Even with those big-ticket deals in October, however, M&A spending in the first 10 months of 2012 is running one-quarter lower than where it was in 2011.

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RedPrairie makes a land grab, spends $2bn on SCM rival JDA Software

Brenon Daly

Contact: Brenon Daly

Not only did RedPrairie not make it public, but now the supply chain management vendor is erasing a fairly big name off the market. The private equity-backed consolidator, which filed for an IPO three years ago, said Thursday that it is paying roughly $2bn for rival JDA Software. It would be about the third-largest software deal of 2012, according to The 451 M&A KnowledgeBase.

RedPrairie had the misfortune to put in its IPO paperwork right as the world’s economy slid into the worst recession in a generation. That showed up in the company’s financials, with overall revenue declining 12% in the first three quarters of 2009, according to its SEC filing. On the other side, RedPrairie put up roughly $15m in ‘adjusted’ EBITDA each quarter, so it wasn’t too surprising when it got flipped from buyout shop Francisco Partners to fellow buyout shop New Mountain Capital rather than go public.

Since New Mountain picked up RedPrairie two-and-a-half years ago, it has rolled up a half-dozen other companies. JDA Software is, by far, the largest acquisition. Under terms, New Mountain will hand over $45 for each share of JDA Software. That’s the highest-ever price for the company and about five times the split-adjusted price it first sold shares to the public, back in 1996.

The transaction, which is expected to close before the end of the year, values JDA Software at nearly 3 times sales and roughly 16x trailing EBITDA. (At least according to JDA Software’s calculation of $122m in EBITDA, on an unadjusted basis for Q3 2011-Q3 2012.) For comparison, we understand that RedPrairie traded at closer to 2x sales and about 9x EBITDA back in February 2010, although terms weren’t officially released.

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Riverbed looks to extend to application management with OPNET acquisition

Brenon Daly1 Comment

Contact: Brenon Daly

Looking to extend its network performance optimization business into application management, Riverbed Technology said Monday, October 29, that it will spend $1bn in cash and stock for OPNET. Riverbed will roll OPNET into its nascent Cascade business line, offering deeper application monitoring and end-user experience to its existing network-focused product portfolio.

While there certainly is a logical extension between the network and the applications that run on it, the transaction brings a number of risks to Riverbed. For starters, it is by far Riverbed’s largest acquisition – almost ten times bigger than its second-largest deal. While Riverbed said the OPNET transaction is expected to close this year, it indicated the financial ‘synergies’ probably wouldn’t show up until 2014.

Further, the formerly debt-free company will take on debt and issue new equity to cover its purchase of OPNET. According to terms, Riverbed will pay $43 for each OPNET share, composed of $36.55 in cash, and the rest in Riverbed equity. That means Riverbed will have to issue seven million shares and take out a $500m term loan.

Beyond the financial impact, there are also questions about the business it is acquiring. Riverbed is focused on the application performance management (APM) portion of OPNET, but that business only accounts for about half of the company’s overall sales. The other half is network performance management (NPM), which is what Riverbed already sells.

Riverbed highlighted the fact that OPNET’s APM business is growing at more than 30%. However, because of the sluggish growth in the company’s legacy NPM business, OPNET’s overall revenue is only increasing in the mid-teens. (In the first two quarters of its current fiscal year, OPNET has bumped up the top line only 11%.) That’s an acute concern for Riverbed, which will only grow in the mid-teens in 2012 – half the level it expanded at in 2011.

‘Dual track’ an empty threat as IPO window closes

Brenon Daly

Contact: Brenon Daly

If not shut, the tech IPO window is too narrow for most would-be debutants to get through right now. It’s been two full weeks since Workday soared onto the market in one of the hottest offerings in recent times. But since that IPO, there’s been nothing but crickets in the tech sector.

Perhaps that shouldn’t be surprising, given that the equity market has ticked lower while volatility has ticked higher over the past two weeks. In any case, the IPO drought certainly isn’t surprising to any of the respondents of the semiannual M&A Leaders’ Survey, which we sent out earlier this month and wrote up earlier this week.

Of the dozen reasons why deals aren’t getting done, survey respondents ranked ‘competition from IPOs’ dead last. (Not only that, the response also showed the single biggest decline since our earlier survey in April.) Fully seven out of 10 respondents said the IPO market isn’t really having an impact on M&A activity, up from 51% who said that back in April.

Competitive impact of IPO market on M&A

Survey period Strong Neutral Weak
April 2012 24% 25% 49%
October 2012 12% 18% 70%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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Survey indicates economic concerns clouding deals

Brenon Daly

Contact: Brenon Daly

Even more than pricing, the uncertain economic outlook is getting in the way of closing deals, according to a survey by 451 Research and Morrison & Foerster of more than 300 executives, corporate development officials, lawyers/bankers and other M&A figures. More than seven out of 10 respondents indicated the uncertainty is the primary reason that M&A spending is running essentially where it was in the recession-plagued year of 2009, snapping two straight years of higher spending on deals. See our full report on the survey.

In the survey – which was sent out in early October, after the close of the third quarter – fully seven out of 10 (71%) respondents said the questionable outlook for growth in the US was a ‘strong’ contributor to the sluggish M&A market. Another way to look at it: Six times as many people (71% vs. 12%) said the precariousness of the US economy is crimping deal flow compared with those that saw no impact. Market forecasters predict third-quarter revenue for S&P 500 companies will actually come in lower than Q3 2011 levels, which would be the first year-on-year sales decline in three years.

Those concerns about growth appear justified, since many of the bellwether tech vendors reported results for the third quarter. For instance, a slump in third-quarter sales at Intel is almost certain to leave revenue for 2012 below the level from last year.

The chip giant followed up a 5.5% decline in sales during the July-September period with a forecast for a scant 1% revenue increase in the final quarter of this year. Against that backdrop of anemic sales, Intel has scaled back its M&A program. In the first half of 2012, Intel announced a half-dozen transactions, including four of them with disclosed values of more than $100m. Since midyear, it has done just three small purchases.

Similarly, Citrix – which has lost nearly one-quarter of its market value since mid-2012 – has done just one small purchase since then. In the first half of 2012, Citrix announced four acquisitions valued, collectively, at more than $500m. For more on activity and forecasts for the M&A market, see our full report on the survey.

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Marketo in the market?

Brenon Daly

Contact: Brenon Daly

Although a couple of marketing automation vendors have, collectively, generated $2bn of market value in two recent richly priced IPOs, the next significant exit in the sector may be a trade sale. Marketo is rumored to be checking the market to gauge interest from buyers. High on that list of interested suitors, according to several sources, is Oracle.

A sale of Marketo, if it happens, would reverse the expected path of the six-year-old company. It doubled sales in 2011 and, we understand, will roughly double sales again this year to about $55m. That rapid growth helped push the company’s valuation in a round of funding in 2011 to about $500m, according to sources.

Obviously, a buyer would have to top that level to take home Marketo. In addition to Oracle, other companies that may have taken a look include salesforce.com and Intuit, market participants say. Some of the interest may have been spurred by ExactTarget’s recent purchase of Pardot.

Still, price may prove a snag for any acquisition of Marketo. Wall Street has given a warm embrace to two of Marketo’s rivals that have come public in the past six months or so. ExactTarget currently trades at about $1.5bn, or 5.3 times 2012 projected sales, while Eloqua garners a market capitalization of $650m, or 7.1 times this year’s sales. Of course, Marketo is growing much faster than either of its larger rivals.

Carbonite looks upmarket with Zmanda buy

Brenon Daly

Contact: Brenon Daly

After organically attempting to build up its SMB backup business over the past two years, Carbonite decided it needed to do some shopping to accelerate that initiative. The consumer-focused company said Thursday that it will hand over $15m for backup and recovery vendor Zmanda. It is Carbonite’s first acquisition since it went public in mid-2011.

Carbonite’s push into the SMB market is crucial for its business, but it is a risky move for a company that sold exclusively to consumers for the first five years of its life. Carbonite only unveiled an SMB offering in 2010, and that business currently contributes only 15 cents of every dollar in bookings.

As it looks to move upmarket, Carbonite is also facing risks to its core business. The consumer backup market is a lot more cluttered and confused than it was when Carbonite launched in 2005. For instance, Dropbox – although not a full backup vendor by any means – only got going two years after Carbonite, but it has nonetheless drawn 50 million users who store files in that service. Privately held Dropbox doesn’t disclose its revenue but it is thought to be nearly three times bigger than Carbonite’s.

The acquisition of Zmanda also comes as Carbonite is working through recent changes in its basic business, such as introducing additional editions of its core backup offering and shifting around its advertising spending. (Advertising is Carbonite’s single biggest expense, typically consuming about half of the company’s revenue in any given quarter.)

Carbonite has, admittedly, tripped up on a few of those changes. After posting 43% sales growth in the first half of 2012, it lowered its forecasted revenue growth rate to just 34% growth for the back half of this year. (Carbonite, which is in the process of swapping out its CFO, reports Q3 results on October 25.) Shares of the company are currently changing hands at their lowest level since the IPO. Wall Street values the backup vendor, which will record sales of about $83m this year, at just $160m.

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Is Wall Street readying to play Violin?

Brenon Daly

Contact: Brenon Daly

Even as enterprise-focused IPOs have come back into fashion, one key sector of the IT stack has missed out on the recent parade of multibillion-dollar offerings: storage. Indeed, Wall Street has only really seen one new arrival from the enterprise storage market since a flurry of IPOs a half-decade ago that included Data Domain, Isilon, 3PAR and others. Of course, investors can’t buy shares in hardly any of the storage vendors that went public in 2007-2008 because they’ve pretty much all been snapped up by larger companies.

But there very well may be a new storage company coming to market shortly in what should be a hot offering. Violin Memory is rumored to have filed its IPO paperwork in a confidential filing with the SEC and plans to debut in early 2013. We understand that J.P. Morgan Securities, Deutsche Bank Securities, Bank of America Merrill Lynch and Barclays Capital will lead the planned $300m offering.

Market sources have indicated that the fast-growing flash array provider is targeting an initial valuation of more than $1.5bn, which would be twice the price of its latest funding round. It raised $50m in March. We understand that Violin will record about $125m in sales in the current year, which wraps at the end of January. That would be more than twice the revenue it recorded last year.

Assuming Violin does make it public in January, it would be the first significant enterprise storage offering since fellow solid-state storage startup Fusion-io hit the market in mid-2011. That company debuted at a $1.8bn valuation and has added another $1bn to its market capitalization since then.

The relative drought in storage IPOs stands out even more when we consider the fact that we’ve seen high-flying IPOs from nearly all the other sectors supplying the technology that keeps businesses running. In terms of application software, Workday debuted on Friday at a staggering $7.8bn, while the standout infrastructure software offering, Splunk, has created $3bn in market value since its April debut. Palo Alto Networks, an IT security vendor that went public three months ago, is currently valued at $4.2bn. Even the networking sector has a pair of players ready to hit the market shortly, with both Gigamon and Ruckus Wireless on file now.

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A highly remunerative Workday

Brenon Daly

Contact: Brenon Daly

Apparently, the third time is the charm for second-chancers. Workday became the third significant tech IPO in 2012 headed by executives who previously ran similar companies in the Internet 1.0 era. And while each of the other ‘redo’ companies (ServiceNow and Palo Alto Networks) have created more than $4bn of market value since their IPOs last summer, Workday soared past that level. In fact, on a fully diluted basis, the human capital management vendor is valued at more than the two other earlier IPOs combined.

In its offering, Workday priced its 22.8 million shares at $28 each, raising an eye-popping $638m. That’s a mountain of money, roughly three times more than most other ‘big’ tech IPOs raise. But that was just the start for the company, which was founded in 2005 by executives from PeopleSoft after that ERP veteran was acquired by Oracle.

Once trading began on Friday, the stock continued to move higher, changing hands at $47 late in the session. With about 160 million shares outstanding (on a non-diluted basis), Workday is being valued at $7.5bn. That works out to 30 times this year’s expected sales of about $250m. For an indication of just how rich that is, consider that PeopleSoft garnered just 4x sales when it was snapped up in 2005. Or another way to look at the price: Workday is commanding three-quarters of the valuation of PeopleSoft while only putting up one-tenth the sales of the first-generation version.

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