Author: Scott Denne

Global Payments processes $3.8bn Heartland buy

Scott Denne

Contact: Jordan McKee Scott Denne

Global Payments’ $3.8bn pickup of Heartland Payment Systems has far-reaching implications for the payment-processing ecosystem. The combined entity will be firmly situated as a top-five player (by transaction volume) with a strong story to tell around integrated payments in the SMB sector. Market forces including downward margin pressure, technology innovation and heightened competition are guiding the hands of payment processors toward integrated payments, driving deals such as Vantiv’s $1.7bn purchase of Mercury Payment Systems in May 2014.

With an eye to the future, investors and competitors alike should closely monitor the integration process. Mergers in this space have been met with difficulty in the past, and Heartland and Global Payments will be no exception due to disparate distribution models and core processing platforms. A likely outcome could be that both organizations move forward with minimal integration, operating at arm’s length. It will also be important to closely monitor the status of Heartland’s executive team after the transaction closes. Heartland CEO Robert Carr is a thought leader in the payment-processing space and his departure would be a major loss to both organizations.

This is the largest tech acquisition in Global Payments’ history. Prior to today’s deal, the company had printed five purchases since 2012, all for $100-420m, to add online payments, payment software and other tech offerings to its portfolio. In the nine years prior, Global Payments had inked just six transactions, only two of which crested $100m. Global Payments’ reach for Heartland values the business at 19.1x trailing EBITDA – nearly identical to the level the acquirer itself was trading ahead of the announcement.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Sophos rides the endpoint-network convergence wave with SurfRight deal

Scott Denne

Contact: Scott Denne Eric Ogren

Sophos has made its first acquisition as a public company with a $32m deal for endpoint security player SurfRight. The purchase adds behavioral endpoint threat detection to its current drive to unify its network- and endpoint-security products. Sophos recently launched its XG Firewall, a product that aims to share data between its cloud endpoint products and its network-security products, in order to synchronize security strategies.

Sophos has picked up a few endpoint-security companies since becoming a semi-frequent acquirer in 2011, although it hasn’t spent much more than $10m on past deals. Advanced endpoint detection, such as the signatureless variety championed by SurfRight, doesn’t come cheaply. In recent years, we’ve seen Palo Alto Networks pay $200m for Cyvera and F5 Networks spend $92m for Versafe – both targets were putting up modest revenue at the time.

Several security companies are looking to merge endpoint and network security into a single offering. That’s something that Sophos hopes will be particularly appealing to its base of midsize customers, most of which have limited capabilities to deploy multiple security point solutions.

One of the hallmarks of a behavioral endpoint security approach is that you don’t have to know all the gory details of an attack to know that one program should not be manipulating the memory of another. The ability to detect memory-oriented threats, such as those commonly introduced by browsers, without reliance on signatures is a key technology that Sophos is acquiring along with the rest of SurfRight. After integration with its Heartbeat features, Sophos will have an enhanced early-warning capability to coordinate endpoint and network responses to advanced threats.

Holland Corporate Finance advised SurfRight on the transaction. Look for a full report on this deal in tomorrow’s 451 Market Insight Service.

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Atlassian debut pushes past private valuation

Scott Denne

Contact: Scott Denne

Atlassian debuts on Wall Street with a first-day pop and strong valuation. A 30% jump from its IPO price makes the SaaS vendor one of the few venture-backed companies to go public this year at a premium to its private-market valuation. Atlassian boasts a market cap of $5.6bn in current trading, compared with a $3.5bn valuation in a private round last year.

The offering feeds Wall Street’s nearly insatiable appetite for growth, with Atlassian boosting revenue 50% to $353m in the year leading up to its IPO. More importantly, the Australia-based collaboration software provider appeals to investors with more discriminating tastes. Atlassian has been in business since 2002 and spent the vast majority of that time as a bootstrapped company. Accordingly, it’s posted a profit in each of the past 10 years as it spends less than 20% of revenue on sales and marketing. Altogether, Atlassian is certainly not the typical fare that’s served up by venture capitalists.

While Atlassian’s profitable growth was a factor in today’s valuation, the lesson isn’t that Wall Street demands black ink from companies before they will buy. (Unprofitable SaaS vendors Workday and ServiceNow both trade at similar multiples to Atlassian.) Instead, when it comes to IPOs, public market investors are seeking the ‘next big thing’ rather than a speculative roll of the dice. Atlassian has more than doubled revenue over the past two years to a level where it is generating more quarterly revenue ($101m in the quarter ended in September) than some other recent IPO candidates post in an entire year.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA .

ClearSaleing has been anything but for eBay Enterprise

Scott Denne

Contact: Scott Denne

Recently divested eBay Enterprise sheds another asset as the former e-commerce unit of eBay sells ClearSaleing, its advertising attribution business, to Impact Radius. This is the second divestiture from eBay Enterprise since it was acquired by a syndicate of private equity firms in July. Last month, it sold its CRM division to Zeta Interactive.

Algorithmic attribution recently led Convertro, Adometry and MarketShare to substantial exits. Though ClearSaleing was far earlier to market than those companies, it has floundered since 2011 under the ownership of GSI Commerce (which was later acquired by eBay). Impact Radius offers a number of products for tracking marketing data and performance, including an attribution offering. With this deal, it adds algorithmic capabilities that enable it to forecast and model the combined impact of marketing and advertising spend across multiple channels.

Although algorithmic attribution has generated a great deal of interest, there are a number of roadblocks to the technology gaining widespread acceptance. The first is the technical challenge of gathering all of the necessary price and performance data across channels and linking those together via a combination of definitive and probabilistic linkages. The second is the cultural challenge of getting an entire marketing organization onboard with a new set of metrics – metrics that have potentially negative consequences for marketing divisions that were happy to gauge their success on narrow metrics such as last-click attribution and demographic reach.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Managing valuation isn’t just for Square(s)

Scott Denne

Contact: Scott Denne

By mismanaging valuation expectations, Square’s management risks turning what would otherwise be an immense success into a spectacle. Its IPO priced well below the valuations it garnered as a private company, which should lead to plenty of schadenfreude aimed at Square and fellow ‘unicorns’ that let valuations get ahead of reality.

That being said, it’s important to note that Square has accomplished something amazing. The company has shown that design and innovation can challenge even the most stodgy and mature markets – point-of-sale systems, in this case. In the span of five years it grew revenue from nothing to $1bn annually – uncommon growth by any measure. And from a financial and strategy standpoint, the company appears well positioned for continued – if slower – growth as it scales.

Unfortunately for Square, having gotten ahead of itself on valuation creates substantial problems. The company priced below its initial range of $9-11 per share and though it’s up above $13.50 in early trading, its market cap sits at $4.4bn compared with $6bn in a private funding a year ago. Recruiting and retaining executives will now become more difficult. And Square has introduced a narrative of hubris, failure and miscalculation into what had been an unadulterated success story.

Ideally, an IPO should be nothing more than a capital-raising event. In reality, it’s a major milestone that, for good reason, is often compared with a wedding – it should only be about the marriage, though in reality more money is spent on ensuring that the guests have the right perception of the marriage. Guests at Square’s wedding today just found out that the bride (management) and groom (public markets) have a fundamentally different view about where this marriage is heading.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Atlassian’s growth and profit likely to hold up on Wall Street

Scott Denne

Contact: Scott Denne

Atlassian brings investors an unfamiliar pairing: profitability and growth. The Australia-based maker of software for managing developer teams recently unveiled its IPO prospectus, which shows the company posted $353m in trailing 12-month revenue, up 50% from a year earlier. And that has come without the massive hit to profitability that most other software vendors have hoped investors would overlook.

The company posted a $7m profit in its last fiscal year (ending in June), driven down from $19m a year earlier by increased costs in marketing and product development. Atlassian spends far less – about 20% of revenue – toward sales than peers such as Workday and ServiceNow, which put up between one-third and half of revenue toward sales and marketing. The most recent two years marked Atlassian’s ninth and tenth consecutive years of profitability.

Atlassian appears far more stable than many of the recent crop of tech IPOs for whom the public markets seemed more like a last resort than an exit. The company consistently sees its sequential topline grow about 10% each quarter and annual revenue growth has actually accelerated a bit in the past few quarters. The stability comes from a shift toward more subscription revenue, which now generates 27% of sales, up from 19% two years ago. Licensing revenue and maintenance make up most of the remaining total, while sales from its third-party app marketplace doubled last year to $16m, contributing to the acceleration of revenue.

In a secondary stock sale last year, investors valued Atlassian at roughly $3.5bn. It should have little difficulty shooting past that mark in its debut. We’d expect the company to be valued at about $5bn, or 15x trailing revenue – the same level as Workday and ServiceNow, two larger SaaS providers with similar growth rates and no sign of profits.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

SMB focus is the only Constant in Endurance’s latest deal

Scott Denne

Contact: Scott Denne Liam Eagle

Endurance International pushes its M&A efforts into a new bracket with the $1.1bn purchase of email marketer Constant Contact. Endurance has printed dozens of acquisitions since its founding, though nothing of this magnitude: since 2002, its median deal size was only $44.9m across 13 transactions, according to 451 Research’s M&A KnowledgeBase. It’s not just the size of the deal, though – Endurance is also departing from the past in terms of strategy.

Previously, the company focused exclusively on obtaining customers by bolting on other Web hosting vendors. With Constant Contact, it’s adding a new set of services to sell to its existing base – as well as indicating to the market that there’s a larger universe of acquisitions that it can now consider.

Constant Contact’s sale comes at the tail end of a flurry of email marketing M&A earlier this decade – and at a decidedly lower multiple than most. At the high end of outcomes, ExactTarget and Responsys were able to land enterprise valuations above 7x trailing revenue, whereas Constant Contact is fetching just 2.6x.

Growth accounts for some of the difference in valuations. ExactTarget and Responsys were putting up quarters of 37% and 26% year-over-year growth, respectively, prior to their exits, while Constant Contact is coming off a quarter of 13% growth. Also, SMB-focused firms like Constant Contact tend to garner conservative valuations. In its sale to Vocus in 2012, iContact, a smaller SMB email marketer, landed just 3.5x TTM revenue after a year of 25% topline growth.

Endurance International’s largest deals since 2002

Date announced Target Description Deal value
November 2, 2015 Constant Contact SMB marketing apps $1.1bn
July 13, 2012 HostGator Web hosting $299.8m
September 9, 2013 Directi Web Technology Web hosting $105m
July 22, 2011 Dotster Web hosting $62.9m

Source: 451 Research’s M&A KnowledgeBase

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TV ecosystem turns to M&A as viewers change channels

Scott Denne

Contact: Scott Denne

Television’s unassailable position at the top of the media pyramid is under assault. Audience attention shifting to digital media and advertisers following suit are bearing down on TV revenue, just as they’ve decimated print and radio. The largest slice of the advertising industry will be up for grabs in the next few years as big-budget brand advertisers seek new ways to reach the mass scale of audiences that are becoming increasingly rare on television.

Networks have long struggled with the sting of flat advertising revenue. For Viacom and Disney, two of the country’s largest programmers, you have to go back to 2011 to find a year where ad revenue posted anywhere near double-digit growth. An unexpected subscriber exodus from ESPN this summer left Disney with a rough Q2 earnings report and caused a major selloff in media stocks. And as viewers continue to drift from traditional TV, the networks and the cable companies that distribute their content are turning to M&A to hold onto their ad revenue – at Viacom and Disney alone, there’s $13bn in annual revenue at stake (much more if you include carriage fees and licensing sales).

The cable operators have been actively scooping up tech assets to help grow revenue through this transition. The major networks, however, have been relatively muted and their efforts so far are insufficient to stem the flow of billions of ad dollars into other channels. As the infrastructure for reaching audiences changes, they risk becoming disintermediated as advertisers seek ways to reach audiences without a large-scale media buy directly from the networks.

We recently published our full outlook for M&A as the networks and service providers that make up the traditional TV ecosystem look to adapt to the growth of digital video. Subscribers to 451 Research’s Market Insight Service can access it here.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Mimecast sets stage for IPO

Scott Denne

Contact: Scott Denne

Mimecast’s business is best described in the same language as the enterprise email systems it has grown up managing: reliable, but not very exciting. The 12-year-old provider of archiving, management and security of business email is prepping for an IPO, and the prospectus published in pursuit of that shows a company that, at least for the last few years, has put up steady numbers.

For its most recent fiscal year (ended March 31, 2015), Mimecast posted $116m in revenue, up 31% from the year before and just one percentage point higher than its growth during the previous period. Gross margins in 2014 came in at 68% – the same level as the previous two years – and operating expenses as a percentage of overall revenue have ticked down 10 percentage points in each of the last two years, helping the company trend toward profitability.

What has fluctuated is foreign currency. Nearly two-thirds of Mimecast’s revenue comes from currencies other than the US dollar. In 2014 that brought it a $5m gain, pushing it slightly into the black. The previous year, currency changes led to a $5m expense, contributing to a $16m loss.

When it comes to the valuation the company might fetch, we look at Proofpoint as the best indicator of where Mimecast might trade. The quasi-competitor posts similar gross margins and a similar growth rate to Mimecast, and is valued at 10x trailing revenue. Even though Proofpoint has far steeper losses, its growth is coming off a revenue base that’s about twice Mimecast’s, and it has built up a fair amount of goodwill (and a 4x increase in its share price in the three-and-a-half years since its IPO) with investors through a series of positive revenue announcements and upward adjustments of revenue guidance. Given those factors, we would expect Mimecast to price below the 10x mark by a few turns, likely in the 5-7x trailing revenue range.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

IBM’s object lesson

Scott Denne

Contact: Scott Denne

IBM snags object storage specialist Cleversafe for a foothold in an increasingly important niche in enterprise storage. Despite its age and size – founded in 2004 and with 210 employees – the target was still a relatively early company. As we recently noted, Cleversafe had taken the long view of the object storage opportunity – that it would take 100 engineers at least five years and more than $100m in funding, which it raised, to have a viable product. In that time, the vendor rewrote its core stack twice and deployments were just starting to take off.

Object storage itself isn’t new, but the opportunity is gaining traction with the growth of cloud computing. As more businesses and people look to store large, infrequently accessed files such as videos, pictures and backups, object storage provides a better alternative to SAN and NAS systems and is becoming a key component of cloud storage services. And it’s worth noting that it’s IBM’s cloud group, not its storage unit, that is leading today’s deal.

Prior to this transaction, IBM seemed on the fence about the opportunities in object storage. Now that it’s taken out one of the pioneers of next-generation object storage, it will set off speculation that others will follow suit. Last year Red Hat shelled out $175m for Inktank and earlier this year Hitachi Data Systems paid $264m for Amplidata. And there are still plenty of potential targets left, including Cloudian, DataDirect Networks, SwiftStack and Scality, which recently partnered with Dell.

We’ll have a more detailed report on this acquisition in a forthcoming 451 Market Insight.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.