Author: Brenon Daly

Survey: What’s ahead in the M&A market?

Brenon Daly

Contact: Brenon Daly

To get a read on the increasingly difficult-to-read M&A market, 451 Research and Morrison & Foerster are once again teaming up to survey senior members of the dealmaking community. Our quick survey touches on overall M&A activity and valuations (both current and forecast levels), as well as a handful of specific questions on deal structure and process.

The survey is similar to the one we ran last spring, with a few changes to bring in more timely questions concerning the current economic and political climate. (Click here to see our late-April report on the previous M&A Leaders’ Survey from 451 Research / Morrison & Foerster.) If you are a senior member of the M&A community and would like to be part of the wisdom of the crowd, please take a moment to fill in the survey before we close it at the end of the day tomorrow. The survey can be found here.

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

Box goes for integrations, not acquisitions

Brenon Daly

Contact: Brenon Daly

Box hasn’t been a buyer. The enterprise file-sharing and collaboration startup has only inked one acquisition in its history, and that deal was done exactly three years ago. Meanwhile, the market is rapidly consolidating around it, with both big and small buyers rounding out their technology portfolios. Just this year alone, Box’s consumer market rival, Dropbox, has inked three purchases.

It’s not like Box can’t afford to go shopping. Earlier this summer, the startup pulled in $125m in fresh funding, bringing its total amount raised to $287m. But so far, it hasn’t put that toward M&A, preferring instead to partner with a wide swath of companies. Indeed, partnerships are a major theme at BoxWorks 2012, its ongoing annual customer conference. At the two-day event, Box announced partnerships with Proofpoint for data loss prevention and GoodData for analytic dashboards, along with other initiatives.

Part of what has kept Box out of the market is that it has sought to establish itself as an open, inclusive platform vendor. As part of that strategy, companies tend to favor integration ahead of acquisition.

But there comes a point for many companies when they need to own the technology outright. For cloud stalwart salesforce.com, that point came when the company hit its seventh year in business, which is where Box finds itself now. In the half-decade since then, salesforce.com has reeled off 26 deals that have taken it far beyond its core sales force automation product and helped create some $21bn of the company’s market value.

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

LifeLock takes its lumps in IPO

Brenon Daly

Contact: Brenon Daly

The post-IPO slide of LifeLock highlights yet another case of overinflated private market valuations. The identity theft prevention vendor has had a tough run since its debut on the NYSE on Wednesday. LifeLock priced at $9 per share, which was below its expected range, and has never traded above that level in the aftermarket. In mid-Thursday afternoon trading, shares were changing hands at about $8.10.

That decline has brought LifeLock shares to nearly the same level they were when the company sold equity more than two years ago. In May 2010, Industry Ventures paid $7.88 per preferred share of LifeLock in a series E round. That’s only a 3% discount to LifeLock’s current market price.

Obviously, both valuations are just ‘moment in time’ prices. And in this particular moment, consumer names in nearly all markets are out of favor on Wall Street. Recall that consumer Internet security provider AVAST Software pulled its IPO paperwork in late July after not being able to get a valuation it wanted.

As we look back on recent IPOs in the security market, we are reminded that where a company starts out isn’t necessarily where it ends up. For instance, enterprise security vendors Sourcefire and ArcSight both had underwhelming IPOs, trading underwater before going on a tear on Wall Street. In the end, ArcSight got taken off the board in September 2010 at four times its offering price. Meanwhile, Sourcefire is currently trading at three times the level at which it first sold shares to the public in early 2007, compared with a 30% return over that period for the Nasdaq.

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

A double-dip for tech M&A

Brenon Daly

Contact: Brenon Daly

Three-quarters of the way through 2012, tech M&A activity is looking a lot like recession-plagued 2009. Spending on deals around the globe so far this year has slid to just $115bn, a decline of more than one-third compared with the same period last year and 20% lower than Q1-Q3 2010. The dealmaking slump comes amid a solid bull market for equities, with the Nasdaq up some 20% so far this year.

Looking ahead, the rate for the first three quarters puts the full-year 2012 on track for about $150bn in total M&A spending. Assuming that pace holds, that would roughly match the level of 2009 and would represent less than half the amount spent on tech acquisitions in each year from 2005-08. (We’ll have a full report on Q3 M&A activity in tomorrow’s Daily 451.)

The disconnect between the M&A and stock markets, which historically have been tightly correlated, suggests that activity in one of the markets doesn’t necessarily reflect fundamentals. If we had to guess which one is less rooted in reality, we would probably start with the Nasdaq, which has been trading above 3,000 since early August. The tech-heavy index hasn’t been at that rarified level in 12 years.

And yet, the run has come even as corporate earnings rates have slowed, the European debt picture remains unresolved and the US economy faces huge uncertainty around both elections and the potential expiration of measures that have stimulated the economy in recent years (the so-called ‘fiscal cliff’).

Of all the concerns that are keeping corporate buyers out of the market right now, we suspect that the lackluster earnings outlook is the main reason. We expect to hear more about that in two weeks or so, when the third-quarter earnings season kicks off in earnest.

But as one indication of how the reports might go, consider that a recent survey by ChangeWave Research, a service of 451 Research, of more than 2,600 corporate employees indicated that one of every three (33%) predicted that Q3 sales at their company would come in below plan, compared with just one in five (19%) who projected that their company would top expectations. The percentage seeing sales at their companies falling short has risen steadily throughout 2012. On the other side, the percentage seeing stronger-than-expected sales in Q3 is at its lowest level since the summer of 2009.

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

A September slump for tech M&A

Brenon Daly

Contact: Brenon Daly

Summer is always a seasonally slow time for M&A. But this year, it’s like no one was even at their desks to do deals at all. With September wrapping up, spending on tech transactions around the globe is coming in at its second-lowest monthly total of 2012. Even compared with September 2011, it was quiet this month: Deal value dropped almost 40%, year-on-year, to just $5.8bn.

To put that paltry deal total into perspective, consider that earlier this year, Cisco dropped almost that much on a single transaction, handing over $5bn for British set-top box software provider NDS. Indeed, we tallied only one acquisition valued at more than $1bn in September, down from an average of about three 10-digit deals in each month so far in 2012. Altogether, the slump in September activity means that M&A spending has now dropped in seven of the nine months this year.

2012 monthly activity

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 266 $10.4bn Up 16%
March 292 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 291 $13.3bn Down 20%
July 336 $21.1bn Up 52%
August 277 $10.3bn Down 74%
September 266 $5.8bn Down 38%

Source: The 451 M&A KnowledgeBase

Qualys looks to transition from a product to a platform

Brenon Daly

Contact: Brenon Daly

As it gets set to hit the public market later this week, the question for Qualys is whether the on-demand security vendor can make the transition from a product to a platform. The 13-year-old company is known primarily for its vulnerability management offering, which will account for the vast majority of the $100m or so of bookings it will generate this year.

But Qualys is acutely aware of the fact that it won’t get a premium valuation if it doesn’t expand beyond that. The company has already helped its own cause with the early steps it has made in expanding its portfolio. It recently noted that revenue growth is outpacing customer growth. (In the first half of this year it bumped up its overall top line by 22%, about 5 percentage points higher than its growth rate in 2011.)

Qualys has a number of advantages as it attempts to pull off the transition. For starters, the company sells its service entirely on a subscription basis, which makes it easier – both commercially and in terms of technology architecture – to add additional security offerings. Besides its vulnerability management product, Qualys already offers five other products around compliance, Web application security and other areas.

That approach has drawn in nearly 6,000 customers for the company, providing a broad base to sell new products into. Yet, as Qualys highlighted during its roadshow, the company has only begun its cross-selling efforts. Currently, only one out of five customers uses more than one Qualys product.

The underwriters for Qualys, led by J.P. Morgan Securities and Credit Suisse Securities, are likely to be conservative in their initial pricing of what would be the fourth information security vendor to go public in the past year. As it stands, the range is set at $11-13 per share. We expect Qualys to actually price above that on Thursday and then likely move higher in the aftermarket, as the previous trio of enterprise security offerings have done. Even with the expected bump, Qualys will likely only create about $500m of market value. However, if the company can emerge as a true platform, that will be just the starting point.

Hitachi Data Systems reaches for Cofio

Brenon Daly

Contact: Dave Simpson

In a surprise move, Hitachi Data Systems has announced that it is acquiring Cofio Software, which specializes in data protection. In our last report on Cofio, we noted that the small startup differentiates itself from most other data-protection vendors in that it combines under a single code base a variety of functions, including backup and recovery, multitiered (source and target) data de-duplication, real-time replication, virtual and physical server backup, remote-office backup, bare-metal disaster recovery and continuous data protection.

Financial terms of the transaction were not disclosed. The target had received about $4m in funding, and we estimate that it had roughly 140 customers.

Prior to reaching for Cofio, HDS had relied primarily on a reseller partnership with CommVault for its data-protection strategy. As such, the HDS-Cofio pairing is similar to Dell’s pickup of data-protection specialist AppAssure Software earlier this year. (Dell also had – and still does – a reseller relationship with CommVault.)

We see HDS’s acquisition of a data-protection player as a move to attain its own IP at a time when backup and recovery are becoming increasingly important as IT organizations virtualize more and more mission-critical applications. According to 451 Research, the market for data protection and high availability for virtualized environments will grow at a 43% CAGR through 2014.

HDS’s Cofio buy, along with Dell’s acquisitions of AppAssure and, soon, Quest Software, leaves only one major storage vendor without its own IP in data protection: NetApp.

A new boss and new buys at Acronis

Brenon Daly

Contact: Brenon Daly

The new CEO at Acronis has brought a new M&A strategy to the backup and disaster recovery (DR) vendor. Although the company has plenty of cash – thanks to its mid-30% EBITDA margin – it hasn’t used that to go shopping in the past. And when Acronis has looked at deals, we understand that it has historically been more focused on consolidation or geographic expansion.

That has changed dramatically under CEO Alex Pinchev, who took the top spot at Acronis in January. According to our understanding, Pinchev drove the acquisition of GroupLogic, a company that wasn’t on the M&A list under Acronis’ previous regime. A source says that although Acronis arrived late in the process, it moved quickly to land GroupLogic.

The acquisition gets 10-year-old Acronis solidly into the fast-growing enterprise file-sharing and synchronization market. Acronis eventually plans to integrate GroupLogic’s product into its flagship DR and backup offering.

Granted, the deal won’t have much impact on Acronis’ financials right now. GroupLogic – like rival Syncplicity, which sold to EMC almost four months ago – was probably only generating $2-3m of share/synch revenue. That’s nothing to Acronis, which will sell about $150m of backup and DR this year. But the move does show a change in strategy at Acronis.

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

Qualys: a quality offering at a tough time

Brenon Daly

Contact: Brenon Daly

Continuing a run of enterprise-focused IT security IPOs, Qualys has set an initial range of $11-13 per share for its upcoming offering. The range would value the on-demand vulnerability management vendor a bit above $400m, a rather conservative valuation for a company that will record bookings of more than $100m this year. We understand that Qualys will price its offering in two weeks, and we wouldn’t at all be surprised to see it debut at a price in the mid-teens. J.P. Morgan Securities and Credit Suisse Securities are co-leading the offering.

The IPO of Qualys would mark the fourth enterprise IT security provider to hit the market in the past year, following Imperva, Proofpoint and Palo Alto Networks. That makes this particular slice of the tech landscape the most active – and most lucrative – area for IPOs. Collectively, the quartet – including the roughly half-billion-dollar initial market cap we project for Qualys at its debut – will have created about $6bn in market value.

Two-thirds of that amount comes from the wildly successful IPO of Palo Alto Networks. But we would note that Imperva and Proofpoint have been fairly well received on Wall Street, with both offerings trading above water. That stands in contrast to the loosely related consumer security companies and, even more broadly, the overall IPO market, which is highly skeptical of new offerings as a number of recent high-profile IPOs have turned out to be big money losers for investors.

For instance, shares of consumer Internet security provider AVG Technologies have broken issue and are currently changing hands at nearly their lowest level since the company debuted in February. AVG’s woeful performance contributed to the decision by AVAST Software, a similar consumer Internet security provider, to pull its IPO in late July.

Undoubtedly, the bearishness around the consumer security market is weighing on the offering from Qualys. However, we suspect that pressure will be relatively short-lived for Qualys, and the company will enjoy the same strong aftermarket performance of other recent enterprise security IPOs.

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

A vacation from M&A in August

Brenon Daly

Contact: Brenon Daly

Tech M&A slowed dramatically in August, plummeting to just one-quarter the amount registered in the same month last year and half the level of two years ago. With a total deal value of just $10.3bn, spending on tech transactions around the globe in August fell to its second-lowest monthly total of the year.

The weak August activity – coming as the Nasdaq Index moved consistently higher all month, ending with a 4.3% gain – continues the sluggish spending that we have seen throughout 2012. The value of announced deals has now dropped in six of the eight months so far this year. We would add that the falloff in August ($10.3bn worth of transactions in the just-completed month, down a whopping 74% from August 2011) was the sharpest of any month in 2012.

Buyers announced just two acquisitions valued at more than $1bn in August, down from five in July and an average of about three in the first half of 2012. The big-ticket purchases: The Carlyle Group’s $3.3bn acquisition of Getty Images and IBM’s $1.3bn reach for HCM vendor Kenexa.

Finally, we would note that private equity (PE) firms were unusually active in August. The Getty Images deal, which had PE firms on both sides of it, stands as the largest transaction of the month and the third-largest so far in 2012. Other PE deals last month included Thoma Bravo taking home Deltek, which was majority owned by a buyout firm; Trimble Navigation acquiring PE-backed TMW Systems; a secondary transaction for UC4 Software; and the pairing of two buyout-backed consolidators, with CDC Software rolling up Consona.

2012 monthly activity

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 266 $10.4bn Up 16%
March 292 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 298 $13.3bn Down 20%
July 336 $20.5bn Up 49%
August 276 $10.3bn Down 74%

Source: The 451 M&A KnowledgeBase

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