Author: Brenon Daly

Dell adds UTM vendor, but not the one we thought

Brenon Daly

Contact: Brenon Daly

Just days after we reported rumors that Dell was looking to acquire a unified threat management (UTM) vendor, the tech giant did indeed reach for one. However, it wasn’t the one we indicated. Dell said Tuesday that it will be picking up SonicWALL, less than two years after the security company went private in a $717m deal sponsored by Thoma Bravo.

The market chatter last week had Dell adding UTM rival Fortinet. However, even on a rough, back-of-the-envelope basis, a purchase of Fortinet would likely cost Dell at least four times as much as it probably paid for SonicWALL. Early indications are that Dell paid slightly more than $1bn for SonicWALL, while Fortinet garners a market valuation of $4.3bn, and that’s without an acquisition premium.

Dell didn’t release the price for SonicWALL, although it did note that the company generated $260m in trailing sales. The guidance would appear to indicate that SonicWALL was posting rather muted growth. When it went private, SonicWALL said it would do about $230m in sales in 2010. That would imply that SonicWALL only grew 13% in 2011, less than half the 33% rate put up by Fortinet last year. (Further, Fortinet is generating that growth off a significantly higher revenue base, and will top a half-billion dollars in sales this year.)

But in many ways, SonicWALL is a better fit inside the Dell portfolio than Fortinet. For starters, SonicWALL targets SMBs, where Dell traditionally focuses as well. (Although with recent releases, Dell has announced its aspirations for an enterprise foothold.) Both companies go to market largely through the channel, and even share some partners. Dell has actually been reselling SonicWALL for a decade. We’ll have a full report on this deal in tonight’s Daily 451.

Survey: Business looking up for startups

Brenon Daly

Contact: Brenon Daly

Even though M&A activity so far this year has remained rather muted, startups are still seeing a trade sale as the likely exit for their business. In a survey that Montgomery & Co released at its ninth annual technology conference last week, a full three-quarters (73%) of the startups indicated that a sale of their business was the ‘most likely exit path.’ That was more than 10 times the percentage of respondents (7%) who said an IPO was the ‘most likely’ outcome.

The responses, which came from a selection of the 180 companies that presented during the two-day Montgomery conference, also indicated that business is picking up. Six out of 10 (61%) predicted a significant improvement in business in the first half of this year compared with the back half of 2011. A further 25% projected moderate improvement. When it came to putting a number on that, nearly half (48%) the respondents said they expected sales to at least double in 2012.

However, whether that bullishness comes through in the prices these startups ultimately fetch in trade sales is less certain. In our survey last December of corporate developer executives – the main buyers of these startups – nearly four out of 10 (39%) indicated that they expected the M&A valuation of startups to decline in 2012. That level was actually slightly higher than the percentage who forecasted an increase – the first time that has happened in three years.

These differing views between the buyers and sellers in the tech market are creating a valuation gap, which goes some distance toward explaining why M&A spending so far this year is running only slightly more than half the level it was at the same time last year. In all five years of our survey, corporate development executives have highlighted the ‘bid/ask spread’ as the single biggest M&A pain point for them.

Who will shop during Quest’s ‘go shop’?

Brenon Daly

Contact: Brenon Daly

After more than two decades as a public company, Quest Software said Friday that it was planning to go private in a $2bn management buyout (MBO) with participation from Insight Venture Partners. The deal isn’t unexpected, as the old-line software vendor has a financial profile that (arguably) is more at home in a private equity (PE) portfolio than on the Nasdaq: a company that grows at a modest 10% clip (led by its services business), does a handful of acquisitions every year, and is headed by a CEO who owns about one-third of the equity.

Under terms, the MBO group will offer $23 for each of the remaining shares not currently held by chief executive Vinny Smith. (As is standard in these transactions, Smith will roll over his equity into the newly owned entity once the deal closes.) Quest has about 90 million shares outstanding, so the equity value of the proposed transaction is roughly $2bn. On a net basis, the company carries about $200m in cash, giving Quest an enterprise value of roughly $1.8bn.

That means the MBO group is offering 2.1 times Quest’s 2011 revenue of $857m and 1.9x its forecasted revenue of about $940m in 2012. Or looked at from a financial buyers’ vantage point: Quest is being valued at 3.5x trailing services revenue. (The proposed buyout would be the largest purchase of a software company by a PE firm since the equity markets melted down and credit markets tightened up last August.)

Wall Street has already indicated that the offer, representing a 19% premium, isn’t rich enough. (The stock was trading through the bid on Friday afternoon, changing hands at nearly a dollar higher.) Last summer, even without the takeout premium, shares traded above the price the MBO group is offering. Perhaps anticipating that, the MBO has a 60-day ‘go-shop’ period where Quest and its advisers can actively canvass the market for a higher offer. If they secure a superior bid in that two-month window, Quest would be on the hook for a 2% breakup fee, compared with a 3% fee after that time.

Is Dell looking to fortify its security business with Fortinet?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

Long rumored as an acquisition candidate, Fortinet found itself at the center of M&A speculation again on Thursday. The buzz was making the rounds, with the unified threat management (UTM) vendor paired with the increasingly acquisitive Dell. Fortinet shares currently trade about twice the level they came public at back in November 2009, with a market cap of $4.1bn.

Even a standard one-third premium on Fortinet’s current trading value would put the price in the neighborhood of $5.5bn. That would make this (still rumored) transaction the second-largest deal in the information security market, trailing only Intel’s $7.68bn purchase of McAfee. (McAfee garnered a roughly 60% premium.) Fortinet recorded sales of $433m in 2011 and will likely generate about $520m in revenue this year, so the company would almost certainly pull in a double-digit multiple.

Fortinet was founded by Ken Xie – who, along with his brother, still owns a significant chunk of the business – who already has a multibillion-dollar security exit. He sold his company NetScreen Technologies to Juniper Networks for $4bn in equity back in 2004. In the past, Fortinet has attracted attention from Dell, Cisco Systems and IBM, among other tech giants.

A pairing with Dell would make a great deal of sense. Foremost, Dell has a tremendous product distribution channel that could push along Fortinet’s appliances. More broadly, it would also fit well with Dell’s previous significant security acquisition, SecureWorks. Fortinet would boost the SecureWorks’ portfolio and make for easy management of those offerings.

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

For Vocus, a costly step into a new market

Brenon Daly

Contact: Brenon Daly

Even though Vocus got pummeled on Wall Street Wednesday after it announced the largest acquisition in the company’s history, the rationale for the purchase of iContact is fairly sound. (As it announced its Q4 results, Vocus also said it would basically be cleaning out its treasury to cover the iContact purchase. The deal helped to push shares of the PR management software vendor down 40% to their lowest level since early 2009.)

But adding iContact to the Vocus portfolio at least gets the company into the faster-growing market of email marketing. Consider the relative growth rates on the two sides of the deal: Vocus increased revenue 19% to $115m in 2011, while iContact’s sales grew 25%. Granted, iContact is growing off a smaller base, but a quick look around the rest of the industry also shows that email marketing is outstripping Vocus’ core business.

For instance, Emailvision, which is only slightly smaller than Vocus, grew 55% to $90m in sales last year. (The European email marketing vendor went private in mid-2010.) Meanwhile, ExactTarget and Constant Contact outgrew Vocus in 2011, even though they are nearly twice as big. In fact, ExactTarget posted a stunning 54% growth rate last year, which pushed sales to $207m. We understand that snappy rate is likely to come up next week as ExactTarget gets ready to hit the public market. ExactTarget filed its IPO paperwork only late last November.

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

A harsh focus on Vocus

Brenon Daly

Contact:  Brenon Daly

Investors erased more than one-third of the market value of Vocus on Wednesday after the on-demand PR management software provider announced the largest deal in its history. Vocus said Tuesday evening that it will hand over $179m in cash and stock for iContact, a transaction that will add email capabilities to Vocus’ marketing suite. The purchase of iContact, which effectively cleans out the treasury at Vocus, is more than three times larger than all of the company’s previous acquisitions combined.

One way to look at the deal: Vocus effectively paid twice for the transaction. In addition to the $179m in consideration it will hand over to iContact’s backers, Vocus also gave up another $170m on the Nasdaq. The stock, which has ranged from the low teens to the low 30s over the past year, changed hands at about $14 on Wednesday.

Dell uses M&A (again) to go it alone in storage

Brenon Daly

Contact: Brenon Daly

Dell’s reach for AppAssure Software continues the tech giant’s trend of using M&A to reduce its reliance on outside vendors for its $2bn storage business. Most notably, the purchase of Compellent two years ago – following its unsuccessful effort to land 3PAR – reduced Dell’s long-standing partnership with storage powerhouse EMC. In a similar vein, Dell’s acquisition Friday morning of AppAssure is likely to trim its business with data-protection specialist CommVault. (Dell is CommVault’s largest OEM partner, accounting for roughly 20% of that company’s total revenue.)

Terms weren’t revealed but we would expect that Dell paid more than $100m for AppAssure. (Whatever the amount, the deal almost certainly represents a sterling return for Bain Capital, which is AppAssure’s sole backer, having put just $6m into the five-year-old startup.) According to our understanding, AppAssure generated about $20m in 2011, triple the level from the previous year.

For comparison, CommVault stock currently trades near its all-time high. CommVault’s steady run has put the company’s valuation at an eye-popping $2.3bn, or nearly 6 times the expected $400m in revenue for its current fiscal year, which wraps up next month. Word of Dell’s purchase of rival AppAssure put some pressure on CommVault’s high-flying shares. On an otherwise bull-market day on Wall Street, CommVault stock dipped 4% on trading that was more than twice as heavy as average by early Friday afternoon. We’ll have a full report on this deal in tonight’s Daily 451.

Tangoe finds a European dance partner

Brenon Daly

Contact: Brenon Daly

Looking to increase its international business, Tangoe recently reached across the Atlantic for UK-based ttMobiles. The geographic expansion effort is a key initiative for Tangoe, which opened its European headquarters in Amsterdam less than a year ago. The company currently gets virtually all of its revenue from US-based customers, although a representative for Tangoe noted Wednesday that slightly more than one-quarter of the $16.8bn that flowed over its platform in the fourth quarter came internationally.

The purchase of ttMobiles is the third acquisition Tangoe has made since its IPO last summer. (And that’s on top of the five deals it inked as a private company.) Like most of its other acquisitions, the latest purchase by the communications lifecycle management vendor is a small one: Tangoe will hand over just $9m for ttMobiles. At the end of 2011, Tangoe was basically running at breakeven and had $43m in its treasury, mostly thanks to the IPO.

Tangoe expects ttMobiles to contribute $4.5m in revenue this year, meaning it is valued at basically 2 times projected sales. (For its part, Tangoe trades at more than 4x projected sales.) We understand that the company will continue to pursue deals that offer geographic expansion, as well as look to consolidate rivals to bulk up the number of customers it serves

A ‘logic’-al pairing as Alert Logic reaches for Amorlogic

Brenon Daly

Contact: Brenon Daly, Wendy Nather

In its first-ever acquisition, Alert Logic said Wednesday that it will hand over an undisclosed amount of cash and stock for Armorlogic. The purchase will bring application-layer security to the Houston-based MSSP. Up to now, Alert Logic has built its business on just two products: Threat Manager (a combination of vulnerability assessment, intrusion protection and other technologies) along with Log Manager.

That said, Alert Logic has built a tidy little business with its existing portfolio, finishing 2011 with sales of $21m, up slightly more than 40% over the previous year. It has accumulated more than 1,500 customers since setting up shop in 2002. Alert Logic indicated that it will cover part of the purchase by drawing on the $12.6m it raised in its series E funding round last April.

Although Armorlogic is small (only three employees and 70 customers), its Web application firewall (WAF) offering is selling into a hot market. As perhaps the cleanest proxy for the WAF sector, consider the princely valuation garnered by Imperva. Since its IPO last November, Imperva has steadily risen to a current market cap of about $750m. That’s almost 10 times the $78m in revenue it generated in 2011 and roughly seven times the revenue it’s likely to generate this year.

Let’s do two

Brenon Daly

Through the first six weeks of the year, tech acquirers have already announced more than 500 transactions, putting 2012 so far ahead of three of the previous four years in terms of the pace of M&A. If the current rate holds for the remainder of 2012 – granted, a big assumption in the lumpy, bumpy world of acquisitions – the total for the year would top 4,000 transactions for the first time since 2006.

We had an early indication that activity in 2012 could well pick up thanks to our December survey of corporate development executives. A key finding of our annual survey was that the percentage of corporate buyers who projected that they would be accelerating their M&A programs this year was four times higher than the level that expected to slow their shopping.

One reason why the number of tech transactions is running along at a robust clip so far in 2012 is the fact that an unprecedented number of companies are announcing ‘doubleheader deals.’ Just in February, seven companies have announced two acquisitions in the same day. Granted, most of these are small transactions, and the releases probably have more to do with marketing than strategy. But it’s nonetheless a new trend that’s adding to the deal flow in 2012.