Author: Brenon Daly

Tech IPO market looks to next week’s triple-header

Brenon Daly

Contact: Brenon Daly

Although the US equity market has been a bit choppy over the past week or so, shares are still generally inching higher. Sure, it hasn’t necessarily been the uninterrupted ascent of the Nasdaq that we saw in the first quarter, which recorded the strongest start to a year in two decades. But the sentiment – despite renewed concerns about the economies of Europe as well as the quality of some Q1 results, which will begin trickling in over the coming weeks – has been bullish. That goes double for the newest entrants into the equity markets, IPOs.

We have already highlighted the warm reception that Wall Street has given the companies that have come to market so far this year. We expect that to continue next week, which is shaping up to the busiest week in tech underwriting in a long time. Splunk, Infoblox and Proofpoint are all scheduled to price their offerings next week. (The trio set preliminary ranges earlier this week. A fourth tech company, Envivio, also set its range this week but will likely be heading out later in the month.) Of the IPOs on the calendar, Splunk is all but certain to capture a disproportionate amount of attention as it steps onto Wall Street.

Splunk, which plans to trade under the ticker SPLK on the Nasdaq, will almost certainly be valued at more than $1bn on its debut. (This week, it set the range for its 13.5 million shares at $8-10 each, although we suspect that the actual price will be north of that range.) Splunk finished its most recent fiscal year (ending January 31) with $121m in sales, an 83% increase over the previous year. The growth rate for the second half of the year actually accelerated at the company, so it will hit the market with a lot of momentum. (And with four bulge-bracket bookrunners, Splunk’s performance will be trumpeted loudly across Wall Street.)

We’ll have an in-depth look at Splunk and next week’s other two IPO candidates in tonight’s Daily 451. Additionally, the report will look ahead to what’s coming in the pipeline after this trio hits the market. If anything, the second round of IPOs this year will be even hotter than this current round. Look for the special IPO report tonight.

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

Palo Alto puts in its paperwork

Brenon Daly

Contact: Brenon Daly, Thejeswi Venkatesh

Long rumored to be an IPO candidate, Palo Alto Networks has finally filed its paperwork for a $175m offering. The application-level firewall security vendor has put up astonishing growth in recent quarters, but unlike other early-stage companies, Palo Alto has been running in the black recently. But the real story – and one that will certainly draw interest on Wall Street – is Palo Alto’s astonishing growth. From essentially a standing start in 2007, the company has racked up more than 6,650 customers.

On the top line, Palo Alto has grown tenfold since 2009, recording sales of $185m over the past four quarters. In its most recent quarter, which ended January 31, the company more than doubled sales to $57m. While Palo Alto is obviously just getting started, it’s nonetheless worth considering how the startup is growing relative to the firewall industry’s stalwart, Check Point Software. That vendor, which crossed over the $1bn mark in 2010, expanded revenue about 13% last year.

Off a revenue base that’s counted in the billions of dollars, Check Point’s growth rate is actually fairly impressive. To put that another way, Check Point generated an additional $149m in revenue in 2011, which is less than Palo Alto generated but a level that’s still respectable. (And we should note that Check Point increases sales at a level of profitability that most other tech companies can only envy: For every dollar it books as sales, more than 40 cents of that drops straight to the bottom line.)

Wall Street certainly is bullish on Check Point, having driven the company’s shares to their highest level in 11 years. It currently garners a market cap of $12.8bn, a full 10 times trailing sales. We would expect Palo Alto to at least trade at that multiple when it comes to market later this summer. That could put its valuation above $2bn. Not a bad bit of value creation for a company that raised just $65m in venture backing. Greylock Partners and Sequoia Partners are Palo Alto’s biggest shareholders, with each firm owning 22% of the startup.

Dell picks up the pace

Brenon Daly

Contact: Brenon Daly

As a relative latecomer to the M&A market, Dell is making up for lost time. The company on Thursday announced its third acquisition of the week, reaching for Vancouver-based Make Technologies. Both Make and Clerity Solutions, which Dell picked up on Tuesday, produce migration software and will be slotted into the services division. Dell’s other purchase of the week was thin-client technology vendor Wyse Technology.

The recent frenetic M&A activity by the Austin, Texas-based company represents a dramatic reversal from its historic practice. For the first 30 years of its life, Dell rarely acquired anything. It only really started its M&A program in mid-2007 – a point by which many rivals already had consolidated broad patches of the tech landscape. While Dell sat out of the market, IBM, for instance, had already purchased more than 60 companies, buying its way into storage, document management, security and other areas. In the same period, Oracle gobbled up some 40 companies.

But it’s a different story so far this year. With five deals notched already in 2012, Dell has more transactions than IBM and Oracle combined. The contrast is even sharper with Dell’s nemesis Hewlett-Packard, which has yet to print a deal in 2012. In fact, just looking at the acquisitions that Dell has inked recently, many of them appear designed to bolster offerings where Dell goes up against its reeling rival, such as networking, security and storage.

Dell deals

Year Number of transactions
2012, YTD 5
2011 3
2010 7
2009 4
2008 1
2007 6
2006 2
2005 0

Source: The 451 M&A KnowledgeBase

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

HomeAway finds its way back into the market

Brenon Daly

Contact: Brenon Daly

As a private company, HomeAway was a steady buyer. Founded in 2005, the vacation rental website had notched 11 transactions through last year. When it went public last June, the company raised $216m. With the new cash – not to mention shares that, at least initially, were richly valued – HomeAway had plenty of resources to continue its shopping. But that’s not the way it played out for the consolidator.

The company only stepped back into the M&A market earlier this week, reaching for Top Rural, a Madrid-based site that offers vacation rentals in small towns and the countryside in Europe. (The purchase comes roughly 11 months since HomeAway’s previous acquisition, the second-longest M&A dry spell at the company.) What’s more, it’s a rather small step back into the market. HomeAway, which held some $184m in cash and short-term investments at the end of December, is handing over just $19m for Top Rural.

With Top Rural, HomeAway returns to an acquisition strategy it has frequently used: geographic expansion. The Austin, Texas-based company has reached for similar rental sites in Australia, Brazil, France and the UK. (Currently, HomeAway has listings in some 168 countries.) In its other international shopping trips, HomeAway has paid between $2m and $45m for the sites.

LifeLock buys an insurance policy

Brenon Daly

Contact: Brenon Daly

In its first-ever acquisition, LifeLock bought itself a bit of an insurance policy. The identity theft prevention player recently raised a big slug of money and handed it over for ID Analytics, an acquisition that we suspect was partly motivated by LifeLock’s plan to go public soon. How do we figure that?

On its own, LifeLock has built a powerful business since its founding in 2005. With more than two million registered users, the company recorded revenue of about $190m in 2011. LifeLock is known for its unapologetically brash marketing, including the full-page newspaper advertisements in which the company’s CEO tauntingly gives out his real social security number to any would-be identity thieves. (In the past, some of the company’s claims have landed LifeLock in hot water with regulators and consumer advocacy groups.)

Indeed, many critics have blasted LifeLock as little more than a marketing machine, one that chews through tens of millions of dollars each year to keep its consumer brand growing. With the acquisition of ID Analytics, however, some of that criticism has been knocked down. For starters, the purchase gets LifeLock into the enterprise business for the first time. (ID Analytics, which was founded 10 years ago, has 280 enterprise clients and will continue to operate as a stand-alone subsidiary following the acquisition.)

But perhaps more important than buying its way into a new market is the fact that LifeLock shored up some serious IP around identity risk management, compliance and credit analytics. Indeed, ID Analytics had been a key data provider to LifeLock since 2009. LifeLock likely paid roughly $150m (plus a bit of equity) for ID Analytics, which we understand was generating about $30m in sales. But that may be a small price for LifeLock to pay for being taken more seriously on Wall Street, if it does indeed go public.

A popping tech IPO market

Brenon Daly

Contact: Brenon Daly

If the overwhelmingly bullish equity market didn’t do much for M&A in the first months of 2012, it certainly gave a big boost to the companies looking to go public. Investors have handed out double-digit valuations to a number of IPO candidates so far this year, pushing several new offerings above the magical threshold of $1bn in market capitalization. That has sparked a rethink about exits by startups and their backers, who had been banking almost exclusively during the recession on selling their companies. (Overall, as we recently noted, spending on tech M&A in Q1 dropped to its lowest quarterly level in two years.)

A quick look at the list of Q1 offerings arguably shows a healthier period for tech IPOs than at any point in the past decade: Guidewire Software, which went public in January, has doubled since its debut and currently trades at a $1.5bn market value. ExactTarget has created even more market value since its March offering, which gave the company the largest capitalization of any SaaS company on its debut. Millennial Media nearly doubled during its March debut, valuing the mobile ad platform vendor at nearly $2bn. In late February, Bazaarvoice went public above its expected range and has risen steadily since then. The social commerce firm commands a valuation of $1.1bn, roughly 10 times the sales it recorded in 2011. Demandware trades at an even steeper multiple: Its $800m market cap works out to an eye-popping 14 times last year’s sales.

And, if anything, the current quarter should build on the momentum established by the IPO market at the start of the year. All investor eyes are looking ahead to the seminal offering from Facebook, which is reportedly set to take place next month. The social networking site, which filed its prospectus on February 1, is likely to start its life as a public company valued at about $100bn. That’s an astounding valuation for a company that earned $1bn on sales of $3.7bn in 2011.

While Facebook is pretty much a once-in-a-generation IPO, the buzz it generates will undoubtedly spread beyond the specific offering and even the consumer Internet sector. That will likely help entice more IPO candidates to put in their paperwork, as well as boost the fortunes of those that do make it to market.

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

M&A spending slump to start 2012

Brenon Daly

Contact: Brenon Daly

With Q1 set to wrap on Friday, M&A spending is on track for its lowest quarterly level in two years. The aggregate value of all tech transactions announced around the globe in the first three months of 2012 slipped to just $31bn, lower than both the previous quarter (Q4 2011) and the same quarter last year (Q1 2011).

The declining M&A activity comes as the overall economic environment has improved dramatically from 2011. For instance, there haven’t been emergency bailouts or historic downgrades of sovereign debt so far this year. Even Europe, which was the epicenter for much of the recent economic woes, is back growing again after actually contracting in the fourth quarter.

Reflecting that renewed optimism, the Nasdaq index has poked above 3,000 for first time since late 2000. During the quarter, the index recorded an almost uninterrupted ascent, gaining an astounding 19% since the start of the year. On top of the ever-increasing share price, most tech companies are continuing to stuff cash into their treasuries at a record rate.

So there are plenty of resources – in the form of both market confidence and acquisition currency – to do transactions. And yet few companies are shopping, at least not for significant purchases. In Q1, we recorded just eight transactions valued at $1bn or more – compared with an average of 12 big-ticket deals announced in each quarter last year.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2012 882 $31bn
Q4 2011 874 $38bn
Q3 2011 955 $63bn
Q2 2011 952 $71bn
Q1 2011 914 $47bn

Source: The 451 M&A KnowledgeBase

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

A pivot that pays off for ExactTarget

Brenon Daly

Contact: Brenon Daly

In the startup world, there are more pivots than in an NBA game. But often lost in this flurry of activity is that – at some point – changing the direction of the business needs to produce some actual value. (Otherwise, the pivoting just becomes pirouetting, as one of our VC friends recently quipped.) One of the most successful pivots we’ve seen recently came to light on Thursday, with the IPO of ExactTarget.

The online marketing vendor stormed onto the NYSE with a debut valuation of more than $1bn, and then surged from there. (The offering – led by J.P. Morgan Securities, Deutsche Bank Securities and Stifel Nicolaus Weisel – priced at an above-range $19 per share and then traded above $24 in early-afternoon session.) Followers of the IPO market will know that this was actually ExactTarget’s second run at an offering. It had been on file in 2008, before pulling the paperwork in mid-2009.

At roughly the same time that it took itself off the IPO track, ExactTarget dramatically changed its business. It went from selling a single product (email marketing) to a single slice of the market (SMB) to a full cross-channel marketing vendor serving companies of all sizes. The pivot had immediate consequences on its P&L sheet: ExactTarget went from running solidly in the black when it was on file four years ago to running deeply in the red now.

However, it’s a move that has paid off. Counter to the typical pattern, the growth rate at ExactTarget has actually accelerated as the company has gotten bigger. As it consciously increased its spending (particularly around sales and marketing), ExactTarget has taken its annual growth rate from 32% in 2009 to 41% in 2010 and then pushed that to 55% last year. And this is not some rinky-dink business. ExactTarget recorded $208m in sales in 2011. Another way to look at its growth: the $60m in revenue that ExactTarget did in Q4 2011 is more than it did in the full year when it was previously on file (2007 revenue was $48m).

With the benefit of hindsight, it’s probably a good thing that ExactTarget didn’t go public when it had initially hoped to. Three years ago, it was a sub-$100m revenue company, putting up a decent, but hardly spectacular, growth rate. Sure, it could have expanded the business as a public company, but the moves would have been far riskier and (almost certainly) slower because of the myopic scrutiny of Wall Street.

Instead, ExactTarget had the freedom behind closed doors to reposition its business to accelerate. The series of investments it chose to make have almost certainly meant the creation of several hundred million dollars of additional market value. In fact, on just a back-of-the-envelope calculation, ExactTarget’s debut has created more value than any other IPO of an on-demand vendor that we can think of. The company has some 66 million shares outstanding (or closer to 74 million fully distributed), so at a price of $19 each, ExactTarget was worth an astounding $1.25bn (or closer to $1.4bn fully distributed) before it even hit the aftermarket. In comparison, salesforce.com priced at a valuation of about $1.1bn in its 2004 IPO, based on the prospectus share count.

A barb-less Benioff? salesforce.com grows up

Brenon Daly

Contact: Brenon Daly

In just a half-year, it sounds like salesforce.com has done a fair amount of growing up. We were thinking that Thursday as the San Francisco-based company once again hosted an event in its hometown. But the tone was markedly different from the event it put together here last fall. Most notably, salesforce.com stopped throwing punches and started throwing hugs to other enterprise software vendors.

Rather than blasting Oracle as a ‘false cloud’ provider or taking swipes at SAP as a dinosaur, CEO Marc Benioff extended olive branches to those rivals. In his keynote, he talked about ‘coexisting’ with those companies, stressing the need for ‘deep integration’ between salesforce.com’s products and the widely deployed software. (But Benioff wouldn’t be Benioff if he didn’t put his own marketing spin on the relationship: he positions salesforce.com as the ‘social front office’ for rival existing back-office systems, such as general ledger apps.)

It was a rather dramatic change in tone, suggesting that salesforce.com is staking its claim as a full-fledged member of the fraternity of enterprise software vendors. The company certainly has the numbers to back up that claim: in its previous quarter, salesforce.com announced its first-ever nine-digit contract and is on track to generate close to $3bn in revenue this year. (And don’t forget that salesforce.com also sports a major-league market cap of $20.7bn.)

For their part, Benioff and other people at the company say that détente is in response to customers’ need for software vendors to work together. That’s certainly understandable as most companies run a mishmash of software from a variety of providers. But we might suggest that the tone also reflects a new reality that has only emerged on a grand scale since last fall: the division between the old-line license model and the emerging on-demand model is not as irreconcilable as once thought.

Just since salesforce.com’s last event in San Francisco, SAP and Oracle have done landmark acquisitions of high-profile SaaS vendors, ones that were often mentioned in the same breath as salesforce.com. (The spending spree cost the old-line companies more than $7bn.) So if the old software guard – and even more importantly, their customers – figure they can work with SaaS providers, maybe it’s not too farfetched to imagine SAP and Oracle perhaps taking a run at salesforce.com in the future.

Bigger isn’t always better at Dell

Brenon Daly

Contact: Brenon Daly

Bigger is better, right? That is often the rationale used by tech heavyweights who write multibillion-dollar checks in their quest for ‘scale.’ Not so with Dell in its recent M&A activity. In each of the company’s acquisitions so far this year, Dell passed over large, publicly traded vendors that the company knew well in favor of much smaller (and much less pricey) rivals.

To add to its security portfolio, for instance, Dell on Tuesday reached for unified threat management (UTM) provider SonicWALL. While the acquisition brings a significant UTM business to Dell, the $260m in trailing revenue is much smaller than the $440m or so UTM giant Fortinet produced last year. But then, Dell only had to pay a reported 4.5 times trailing sales, compared with Fortinet’s current market valuation of 10x trailing sales. (In a rumor that turned out to be half right, we indicated last week that Dell might be looking to pick up Fortinet, in what would have been the second-most-expensive information security acquisition.)

Dell’s security purchase comes less than a month after the company used M&A to fill a long-standing blank spot in its storage portfolio: backup and recovery. In that transaction, too, Dell opted for a startup (AppAssure Software) rather than the major-league player in the market (CommVault). That decision was even more notable because Dell was CommVault’s largest OEM partner, accounting for some 20% of that company’s total revenue. CommVault shares currently change hands near their all-time highs, giving the vendor a market cap of $2.2bn. Dell didn’t release the price it paid for startup AppAssure, but it was likely one-tenth that amount.

We might contrast Dell’s shopping trips with fellow tech giant Hewlett-Packard. For example, when HP wanted to add a SIEM product to its portfolio in 2010, it passed on any number of small SIEM providers as it settled on kingpin ArcSight, which was running at about $200m in sales – or nearly four times the revenue of any of the smaller firms. Similarly, it paid a double-digit valuation last summer for Autonomy Corp. The purchase of Autonomy, which was the largest software deal in seven years, brought nearly $1bn of revenue from the enterprise content management vendor.

Of course, those two behemoths – and their respective M&A styles – did bump up against each other in the tussle over storage giant 3PAR in 2010. Recall that Dell planned to take home the company before HP jumped the bid. A public bidding war followed. After several rounds of back-and-forth bidding, Dell dropped out, leaving HP as the buyer for 3PAR. In the end, HP paid nearly twice as much as for 3PAR as Dell had planned to pay – the deal printed at $33 for each 3PAR share, compared with Dell’s opening offer of $18 per share.