Author: Brenon Daly

Facebook saves faces with Instagram, at least for now

Brenon Daly

Contact: Brenon Daly

There wasn’t much to be wildly bullish about in Facebook’s initial financial report as a public company on July 26. At least that was the view on Wall Street, as shares of the social networking giant slumped around 10% to their lowest level since the mid-May IPO. The one bright spot, however, is the continued stunning growth of Instagram.

Just ahead of the financial release, Instagram indicated 80 million people are now using the photo-sharing application. That’s more than twice the number of users that Instagram had when Facebook announced the acquisition in April. Additionally, some four billion photos have been shared over Instagram.

Of course, it’s important to note that Facebook hasn’t actually closed the acquisition. Moreover, even when it does close, there won’t be much – if any – direct impact on Facebook’s financial statements from Instagram, which is free to use. (The payoff from mobile advertising, which was the primary driver for the acquisition, is some time off for Facebook.)

Not to be cynical, but we couldn’t help but think that there might be (just maybe) something going on behind the scenes around the timing of Instagram’s boastful release. Investors have a much more jaundiced view of CEO Mark Zuckerberg’s impetuous decisions – including his hasty agreement to drop $1bn on Instagram – now that they are losing money on him.

So perhaps it was important for Facebook to show that it is getting an early return on its largest-ever acquisition. That might have been even more important because social gaming company Zynga – whose fortunes are tied to Facebook in many ways – got pummeled on Wall Street after indicating people just aren’t into its games as much as they once were. One specific area of weakness that Zynga indicated: Draw Something, which Zynga picked up as part of its largest-ever acquisition.

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After setting sail for IPO, Avast changes its tack

Brenon Daly

Contact: Brenon Daly

In the half-year leading up to AVAST Software pulling its IPO paperwork on July 25, the market moved steadily against it. A number of high-profile consumer-focused offerings – and, importantly, their subsequent after-market trading – have burned a lot of investors, making them hesitant to buy shares of a security vendor selling entirely to consumers. Additionally, there’s the overhang about the health of Europe, where AVAST has its headquarters and where it still does half its business.

In terms of perception, it also didn’t help AVAST that the IPO of fellow European security software vendor AVG Technologies earlier this year has been a money-loser. AVG priced its shares at the low end of its expected range, and has been underwater since then. The stock is currently changing hands at about $10, one-third lower than where the company initially sold it.

Amid those bearish grumblings on Wall Street, business at AVAST also started to slow. After soaring along with 50% bookings growth in 2011, the pace in the first quarter dipped to 38%. Meanwhile, its margins also ticked lower this year compared with 2011.

Granted, both the revenue growth and the company’s incredibly rich margins are at levels that most companies could only aspire to reach. For instance, AVAST – a company that generates around $100m in bookings with just 207 employees – runs at around a 65% Free Cash Flow (FCF) margin. It currently nets more than $10m each quarter.

But we suspect that business model wouldn’t have gotten much appreciation on Wall Street – at least not initially. If AVAST had gone ahead and priced at the high end of its expected range, it would have debuted at about eight times trailing bookings and 13x trailing FCF. That’s hardly an outrageous valuation, particularly when compared to the rich multiples enterprise-focused vendors have drawn in their recent IPOs. To put a point on that, consider this: at around an $800m debut valuation, AVAST would be worth just one-fifth the amount of the most-recent security IPO, Palo Alto Networks.

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With new CEO at Symantec, is Big Yellow planning a big unwind?

Brenon Daly

Contact: Brenon Daly

Is Big Yellow planning to slim down? That’s the question that was echoing around Wall Street on June 25 after Symantec showed Enrique Salem the door following another lackluster quarterly performance.

Symantec reported fiscal Q1 revenue was essentially flat with the year-earlier period, as its storage and server management unit (the company’s largest single business) actually shrank in Q1. Even when the unit grows, it lags Symantec’s other main business of security. For the full previous fiscal year, the storage business increased just 4%, compared to a 20% rise in security sales.

That discrepancy – along with the fact that Symantec shares have lost about one-third of their value since the security company got into the storage business with its mid-2005 acquisition of Veritas – has prompted calls from investors to unwind Veritas. We understand Symantec has been exploring that option since Salem took the top spot three years ago. One of the more intriguing ideas we heard was Symantec swapping its storage business for the RSA unit at EMC. However, we gather the separation of the units, along with tax implications, made that too complicated.

Incoming CEO Steve Bennett, who has been chairman of Symantec for a year, has indicated that he will review Symantec’s portfolio. Wall Street, of course, read a fair amount into that, as well as the CEO changeover. One source noted that Bennett had overseen a handful of divestitures during his tenure as chief executive of Intuit, including shedding the construction management software unit and unwinding the company’s Blue Ocean acquisition. However, we would characterize those moves as a typical bit of corporate housecleaning – a far cry from the teardown that some investors are calling for at Symantec.

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VMware’s new era with Nicira

Brenon Daly

Contact: Brenon Daly

Having built a business valued in the tens of billions of dollars by virtualizing computing, VMware is now using its largest-ever acquisition in an effort to bring virtualization to networking. VMware will hand over a total of $1.26bn for startup Nicira. It’s a significant gamble for VMware, both strategically and financially.

The purchase is more than three times the size of VMware’s next-largest acquisition, and is roughly equal to the amount the virtualization kingpin has spent on its entire M&A program since parent company EMC spun off a small stake in VMware a half-decade ago. (VMware will cover the cost of the purchase from its treasury. As of the end of June, it held $5.3bn in cash and short-term investments, and it has generated $2bn in free cash flow over the past year.)

VMware has positioned Nicira, a company that only recently emerged from stealth, as a key component of its effort to put software at the core of datacenters. VMware has done that with servers – and to some degree, storage as well – by using software to essentially commodify hardware. It’s an approach that appears to undermine a once-cozy relationship with networking partner Cisco Systems. Incidentally, shares of the switch and router giant are currently at their lowest level in about a year, and it announced another round of layoffs at almost exactly the same time that VMware announced its big networking acquisition.

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Dell’s hard drive into software

Brenon Daly

by Brenon Daly

Dell plans to more than triple the size of its software business in the coming years, underscoring the tech giant’s transition away from its origins as a box maker. The software division is currently running at around $1.5bn, and John Swainson, the recently appointed president of Dell Software, laid out a target of $5bn in sales for the unit. M&A will continue to help move the company toward that target, he added.

In many ways, the transition that Dell is going through is one that IBM has already been through. Indeed, Swainson and a number of other executives (Tom Kendra and Dave Johnson, among others) that are charged with building out Dell’s software portfolio helped do the same thing at Big Blue. Each of the three executives spent a quarter-century at IBM.

Dell has been a steady buyer of software, with all six of its acquisitions so far this year adding to the company’s software portfolio. The largest, of course, is the recently announced $2.5bn purchase of Quest Software, expected to close later this quarter. While that acquisition brought some much-needed heft to Dell’s software portfolio, Quest was viewed by many as a mixed bag of businesses, including some (such as data protection) that directly overlapped with existing Dell products.

For the software business, Swainson also set out the rather ambitious goal of growing it in the ‘mid-teen’ percentage range. Clearly, that was a long-range goal, one that implies a significant acceleration of existing business as well as a regular contribution from acquisitions. Still, the projection seems like a bit of a stretch. Consider that IBM – a model for Dell – has increased revenue in its software business just 2.5% so far this year.

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VHS-era Autodesk stretches in acquisition of mobile video startup Socialcam

Brenon Daly

Contact: Brenon Daly

Autodesk is no Facebook, but the latest deal by the 30-year-old, battle-worn enterprise software vendor looked like it came from the M&A playbook of one of the new generation of tech buyers. In one of the oddest pairings of new and old, Autodesk, which belongs squarely in the VHS era, said it would hand over $60m for one-year-old Socialcam, a mobile video-sharing service that’s sort of an Instagram for videos. Even though the financial impact is muted (Autodesk has $1.5bn – enough to cover an Instagram and a half – in its treasury), the purchase of Socialcam is a huge stretch for the company.

For starters, there’s no clear way for Autodesk, which sells products primarily to engineers, to make money from consumer-focused Socialcam. While Autodesk touts the fact that Socialcam has been downloaded 16 million times, that doesn’t get Autodesk any closer to the $600m in revenue it has to put up every quarter. (Meanwhile, the deal will lower Autodesk’s earnings for the rest of the year, at least on a GAAP basis.) It’s EPS – rather than eyeballs – that’s the relevant financial metric for Autodesk.

Of course, it’s understandable that the explosive growth of Socialcam and other consumer-oriented companies looks tantalizing to Autodesk and other tech giants posting single-digit-percentage revenue increases. However, that M&A enthusiasm needs to be tempered by the fact that getting a return on an acquisition that doesn’t really fit into the existing business model can prove challenging. That’s particularly true with a company like Autodesk that can’t monetize the acquisition by just throwing a bunch of advertisements against the audience that an app like Socialcam has collected. Like we said, Autodesk is no Facebook.

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Mayer leaves M&A-happy Google for M&A-shy Yahoo

Brenon Daly

Contact: Brenon Daly

Well, we have to assume that Marissa Mayer knew what she was doing Monday when she abruptly jumped from Google to take the top job at Yahoo. But one thing we figure she won’t be doing at her new job (at least not right away) is deals. Beyond simply the typical ‘M&A freeze’ that comes with a new boss setting new strategies and processes, Google and Yahoo represent polar opposites when it comes to acquisitions.

Yahoo, which is struggling to find its direction, has been out of the M&A market since last November, when it dropped $270m in cash on interclick. That’s eight months without an acquisition at the onetime Internet search kingpin. When it was healthier, Yahoo would typically do a half-dozen deals or so each year.

During that same eight-month span, Mayer’s now-former employer, Google, announced 11 transactions. And it isn’t just the rapid-fire pace of a deal every three weeks that’s remarkable. It’s also the far-flung variety of the transactions. Since last November, Google has done acquisitions around mobile technology, social networking, online advertising, Web application development and other areas.

And if Mayer needed any more reason to be cautious with M&A when she steps into the corner office at Yahoo, we might recall what happened the last time a high-profile CEO who was brought in to rescue a tech stalwart did a make-or-break acquisition. In many ways, Hewlett-Packard still hasn’t recovered since Leo Apotheker’s $11bn gamble on Autonomy Corp a little more than a year ago. All the more reason we don’t expect Yahoo to be doing big deals anytime soon.

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Gigamon eyes IPO even as a market stalls

Brenon Daly

Contact: Brenon Daly

Despite the crosscurrents in the IPO market, Gigamon has put in its paperwork for a planned $100m offering. The network traffic management vendor runs solidly in the black and has been increasing revenue at about a 50% clip in recent years. It finished 2011 with revenue of $68m and, assuming its growth rate continues, will wrap this year at roughly $100m. (Most of the revenue – between two-thirds and three-quarters of overall sales – comes from products, with associated services generating the remainder.)

Eight-year-old Gigamon competes with network heavyweights such as Cisco Systems and Juniper Networks, while a number of other companies have acquired technology that makes them rivals as well. Just in the past two months, Ixia paid $145m for Anue Systems while Danaher added VSS Monitoring. (Subscribers to 451 Research can see our full report on the transaction, including our estimate of the undisclosed terms.)

The proposed offering from Gigamon comes at a time when the IPO market is still struggling to find its footing: On the same day Gigamon put in its S-1, MobiTV withdrew its. And while the market should get a bit hotter this week with the expected debut of Palo Alto Networks, many investors are still underwater on their Facebook shares. The IPO of the fast-growing social networking firm was supposed to serve as a catalyst for the market, but instead deteriorated into a mishandled offering that has sparked lawsuits and losses.

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A tale of two IPO markets as Palo Alto Networks and Kayak hit the road

Brenon Daly

Contact: Brenon Daly

To understand the relative health of consumer and enterprise IPOs in the aftermath of the Facebook offering, consider the rather stark contrast between KAYAK.com and Palo Alto Networks. Both technology vendors set terms for next week’s debuts on Monday, but only enterprise-focused Palo Alto can expect to run with the bulls.

For starters, take a look at the gestation period for each of the offerings. Palo Alto set its range in only its third amendment to its S-1, which it filed just three months ago. (For the record, Palo Alto plans to sell 6.2 million shares at $34-37 each). In contrast, KAYAK’s paperwork has a lot of dust on it. The online travel site originally filed in November 2010 and set its range in its 12th update to its S-1. (For its part, KAYAK intends to sell 3.5 million shares at $22-25 each.)

But the contrast will come out even more sharply in terms of valuation. Although the companies are roughly the same size (Palo Alto did $220m in trailing 12-month (TTM) revenue, compared with $245m in TTM revenue for KAYAK), Palo Alto is more than doubling sales each quarter while KAYAK is posting growth in the mid-30% range.

Wall Street always awards fast-growing companies a premium, but the gap between these two offerings is substantial. Assuming both Palo Alto and KAYAK come to market at the high end of their expected price ranges, the security vendor will begin life with a market cap of about $2.5bn while the online travel site will start life as a public company at a valuation of roughly $1bn. That means Palo Alto will be valued at more than 11 times TTM sales, while KAYAK will garner just 4x TTM sales.

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M&A fireworks to start July

Brenon Daly

-Contact: Brenon Daly

Although total tech M&A spending in the first half of 2012 is down one-third from the previous year, the third quarter has started with a bang. Even with the midweek holiday, the opening week of the new quarter has seen unusually strong deal flow, with several big-name buyers sealing gigantic deals. For instance, Dell’s (apparent) winning bid for Quest Software would be the company’s largest transaction in almost three years while Micron Technology’s move to consolidate bankrupt DRAM provider Elpida Memory is twice as big as any deal the chip vendor has done in the past.

Boosted by this pair of multibillion-dollar transactions, the aggregate value of acquisitions announced so far in July has topped $8.7bn. To put that into perspective, that compares to just $13.8bn for the entire month of July in 2011. So although it is early, spending this month is well on its way to exceeding the level from last July. Provided M&A activity continues tracking that way for the month, July would mark only the second time in 2012 that individual monthly totals have topped the level from the same month of 2011. (See our full Q2 report for more on the state of the M&A market.)

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%

Source: The 451 M&A KnowledgeBase

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