Author: Scott Denne

Selligent turns to HGGC to fund overseas expansion

Scott Denne

Contact: Scott Denne Matt Mullen

HGGC buys a majority stake in Selligent as the European marketing automation vendor aims to move into overseas markets. As part of the acquisition, HGGC will add capital to Selligent’s balance sheet, giving the company much-needed ammunition as it enters a crowded US market where it’s virtually unknown.

The company generates less than one-third of the revenue that publicly traded players in this space such as Marketo and HubSpot (which are more B2B-focused vendors) put up. It’s also facing competition from large enterprise software providers such as salesforce.com, Adobe and, most recently, NetSuite (with its acquisition of Bronto Software ), which have all invested hundreds of millions to carve out a lead in marketing automation.

Still, Selligent has several reasons to be optimistic about its expansion. The 25-year-old company has posted profitable growth for several years, it has a product portfolio that’s as deep as any of its competitors’ (as we discussed in a recent report), it has successfully moved into several European markets, and it managed a transition to a SaaS-based business without raising additional outside capital.

Jordan Edmiston Group advised Selligent on its sale.

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EMC’s core business no longer in sync with file sharing

Scott Denne

Contact: Alan Pelz-Sharpe Scott Denne

Storage giant EMC has announced that it is selling its enterprise file-sync/share (EFFS) product division, Syncplicity, to private equity (PE) firm Skyview Capital for an undisclosed amount. It’s the first PE deal in the EFSS world, and follows BlackBerry’s acquisition of WatchDox and the Box IPO. No doubt more deals are to come in this rapidly maturing sector.

Following the close of the transaction (expected later this month), EMC will retain a minority interest in the business it has owned for the past three years. Syncplicity was originally acquired by EMC at a price that seemed a bit expensive (see our estimate of that deal here ). Yet in the three short years since, Syncplicity has thrived within EMC. We estimate that its revenue has grown substantially during that period – in no small part due to EMC’s sales team (see our estimate of Syncplicity’s revenue here).

EMC already has multiple EFSS products, and this division, though doing well, wasn’t core to its overall business. So divesting it and gaining good hard cash in the process was logical. It is, however, a tough pill to swallow for the Syncplicity team, who had been given free rein to operate as a startup and did exceptionally well to make it one of the top players in its sector. Even so, EFSS is a small business for EMC and parting ways makes perfect sense.

We’ll have a more detailed report on this transaction in tomorrow’s 451 Market Insight.

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Splunk explores SIEM market with Metafor acquisition

Scott Denne

Contact: Scott Crawford Dan Raywood Scott Denne

Splunk has made its third acquisition with the pickup of anomaly-detection startup Metafor Software. With this deal, Splunk will add fewer than 15 employees to its roster. And, although terms of the deal haven’t been disclosed, the acquisition (like its previous purchases) is likely modest. Splunk paid $21m in its acquisition of Cloudmeter at the end of 2013, and $9m for BugSense earlier that year.

That doesn’t mean it can’t have an outsized impact on Splunk. The deal expands two related core functionalities into the portfolio (machine learning and anomaly detection), which will raise its profile among both IT operations management and security buyers keen to broaden and improve capabilities for detecting unexpected or malicious activity.

The acquisition raises the bar for competitors in both IT operations management and security. Challengers such as LogRhythm and AlienVault are reshaping the competitive landscape for SIEM incumbents such as HP ArcSight. Meanwhile, IBM has gained considerably from Q1Labs capabilities, which were originally differentiated through network flow-based anomaly detection. Improved SIEM performance was a good deal of the rationale behind McAfee’s (now part of Intel) 2011 acquisition of NitroSecurity. All in this space are further challenged today by a number of emerging security-analytics plays that expand capabilities in security information management performance and volume in a variety of ways.

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Comverse augments digital services portfolio with Acision purchase

Scott Denne

Contact:  Scott Denne Declan Lonergan

Comverse comes off the divestiture of its BSS division to make its largest – and only significant – acquisition in nine years. The mobile service systems vendor is paying $135m in cash, $75m in stock and a $35m earnout to acquire Acision. The deal carries an enterprise value of $367m – Comverse will take on $157m in Acision debt – and values the target at 1.9x trailing revenue.

The multiple is well below the median for software M&A, as Acision has struggled to diversify its business beyond SMS messaging. Comverse hasn’t been immune to those struggles. In fact, its business commands just 0.7x trailing revenue on the public markets. Comverse’s management anticipates that this deal will enable it to return to growth by 2017.

As mobile operators’ revenue from traditional voice, voicemail and SMS continues to decline, both Comverse and Acision have been pursuing strategies based on diversifying their own businesses to address the operators’ changing requirements. Acision has improved its competitiveness in mobile messaging while also steadily expanding into new areas such as white-label OTT apps and enterprise messaging. The fit with Comverse, which remains a leader in voicemail but is also expanding in digital services, should be good. Though there may be overlap in some operator accounts, the combined entity will be a strong and credible player in delivering a broad suite of communications and digital service products to operators in all major regions.

We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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Will 7 be the lucky number in latest security IPO?

Scott Denne

Contact: Scott Denne

Threat management vendor Rapid7 is heading toward its initial public offering with few financial metrics to excite prospective investors. The company posted $76.9m in revenue last year, representing 28% growth – only a hair lower than the 30% growth rate from a year earlier. While Wall Street welcomes predictability, not all revenue is created equal: low-margin professional services jumped 47% to $10.8m while product sales decelerated to 22% growth, accounting for 61% of total revenue.

The company posted a $32.6m loss in 2014 as its gross margins ticked down a few percentage points to 76% due to the rising costs of delivering services, while operating expenses grew at a faster rate than revenue. Particularly notable are Rapid7’s sales and marketing expenses, which jumped 54% – its largest increase in any of the past three years. Its most recent quarters are Rapid7’s silver lining: year-over-year revenue growth, both product and overall revenue, is accelerating in each of the past three quarters to finish up 41% in the first quarter of this year.

Qualys, a competing vulnerability management provider, is the best available comp for gauging Rapid7’s potential IPO valuation. Investors value that company at 9x trailing revenue. At that level, Rapid7 would post a $750m market cap. We believe, however, that the offering will price below that level. Qualys’ growth was a bit slower – 24% compared with Rapid7’s 28% – but off a baseline that’s nearly double the size. Qualys also hit that mark while scaling back sales and marketing spending as a percentage of its overall revenue and generating a $30.2m profit.

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Cisco prints second OpenStack deal

Scott Denne

Contact: Al Sadowski Jay Lyman Scott Denne

Cisco ups its stake in Piston Cloud Computing by converting its earlier investment into full ownership of the business. The OpenStack ecosystem has seen a number of $100m+ exits in the past 12 months, including Cisco’s own $149m acquisition of Metacloud. The space has also seen a few tuck-ins and modest exits, such as EMC’s Cloudscaling buy and the closure of heavily funded Nebula. Though terms of this deal weren’t disclosed (nor were they in IBM’s just-announced Blue Box Group purchase), consolidation in OpenStack has clearly begun and still has a long way to go. According to 451 Research’s Market Monitor report on OpenStack , 56 of the 76 vendors in this sector generated less than $5m in 2014 revenue.

OpenStack continues to gain momentum among enterprise IT leaders. Now five years old, the project has evolved into a top priority for many IT professionals and suppliers. Cisco’s purchase of Piston Cloud removes a competitor to its Metacloud-based offerings and adds rare OpenStack engineering talent and intellectual property. The acquisition probably saved Piston Cloud from turning out its own lights as the small firm likely found it difficult to compete with larger players with much more sales capacity.

The transaction highlights a couple of things about the current OpenStack market. First, there is still a demand for and dearth of OpenStack talent and expertise. Piston Cloud’s staff is among the most experienced supporting large enterprise OpenStack deployments, which Cisco – a gold sponsor of the OpenStack Foundation – is interested in driving and supporting. Second, the deal highlights how the market is still largely in a services and support phase, whereby enterprise and service-provider customers, even large ones, need intensive support deploying OpenStack. The transaction may also signal that the Metacloud acquisition and integration has been successful for Cisco and helped encourage it to pull the trigger on the Piston Cloud pickup.

We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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Fortinet gets (practically) free Wi-Fi

Scott Denne

Contact: Scott Denne

Fortinet has always been a bargain shopper, picking up IP assets and down-on-their-luck startups. The $44m acquisition of Wi-Fi company Meru Networks is Fortinet’s largest deal (by a factor of seven), and it hasn’t strayed from its M.O. The transaction values the publicly traded target at 0.4x trailing revenue – the lowest multiple on record for a Wi-Fi router vendor, according to 451 Research’s M&A Knowledgebase.

Meru posted a few years of growth leading up to its 2010 IPO, though it’s stalled since then, with annual revenue hovering at $90m-$105m. Meru’s stock is down more than 90% since its debut. Wall Street hasn’t been kind to Wi-Fi providers of late. Ruckus Wireless is down 16% and Aerohive 30% since they began trading in 2012 and 2014, respectively.

An acquisition of Meru was not unexpected (the company had retained Deutsche Bank Securities late last year as an adviser to pursue a sale or merger of the company); however, Fortinet as the acquirer was certainly not expected. Meru’s recent announcement of 802.11ac Wave 2 products as well as its new cloud-managed service for MSPs were targeted as much at potential suitors looking to fill in roadmap gaps as customers. This transaction arrives too late to capitalize on the 2015 E-Rate spending cycle, and it’s still uncertain if the internal networking funding will continue into 2016 and beyond. Regardless, this was an inexpensive pickup of key technologies, IP and talent in a growing market.

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Size matters: Charter acquires Time Warner

Scott Denne

Contact: Kenji Yonemoto Rich Karpinski

Charter Communications’ purchase of Time Warner Cable for $56.7bn and its recent acquisition of Bright House Networks for $10.4bn are both about taking its traditional cable/fixed broadband business to the next level by scaling a national player (and the latest with a cutthroat CEO in cable legend John Malone). The move also cuts off an aggressive competitor at the pass, as France-based Altice last week made an offer for US-based cable operator Suddenlink Communications and floated the idea of going after Time Warner itself.

The key will be finding the right mix of traditional cable service, broadband-fueling OTT and content deals flowing across each and every access medium. In all of these endeavors, scale helps tremendously – as AT&T is pursuing with its $48.5bn DIRECTV buy, Verizon with its aggressive OTT video plans and $4.4bn AOL pickup, and Comcast with… well, Comcast looks like it’s going to need its own second act (with perhaps a landscape-changing mobile merger being just the ticket, though we’ll leave that conjecture for another day).

Will this latest telecom deal get done? The impact will certainly be more ‘pro-competitive.’ With today’s purchase, Charter will grow to 24 million subscribers, compared with Comcast’s 27 million – making this acquisition a much different proposition than the ‘big getting bigger’ via the abandoned Comcast-Time Warner combination.

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With its IT divestiture, Acxiom is all about marketing

Scott Denne

Contact: Scott Denne

Acxiom pulls the trigger on a divestiture that was three years in the making. The marketing data services company has sold its IT services business to a consortium of private equity investors for $140m in cash upfront. Though IT services is no longer a fit for Acxiom’s growth strategy, the length of time and the complexity of the deal speak to some lingering alignments between its current focus and its soon-to-be-former IT services business.

In addition to the upfront cash, Charlesbank Capital Partners and M/C Partners are on the hook for an additional $50m earnout over the next three to five years, based on customer retention and EBITDA milestones. Acxiom will also take a 5% share of the profits of the new company once the paid-in capital has been returned. Acxiom will continue to own three of the datacenters from the IT business, which will pay their former parent for colocation, while Acxiom will pay for managed services from those three facilities, which still house portions of its marketing data division.

The unit generated $215m in trailing revenue and $86m in EBITDA for the previous fiscal year (EBITDA figures for more recent periods haven’t been published yet). That puts it below the multiples we typically see in a managed services acquisition. A perfect comp for this transaction, however, is tough to find. For one, it’s a divestiture, and those usually trade lower – and roughly in line with the revenue multiple on this deal. Also, there’s the fact that Acxiom is holding three of the datacenters, on top of the earnout and profit-sharing agreements. Finally, mainframes are a substantial component of this business, which is, obviously, not typical in today’s managed services transactions.

CEO Scott Howe and his team have spent nearly four years reshaping Acxiom into a digital marketing and data services provider from its roots in offline marketing data. Part of that involved splitting up the back end of the IT services business, as well as making several divestitures. It also inked its largest acquisition, last year’s $310m purchase of LiveRamp, which brought it technology that enables online and offline data matching, bringing new relevancy to its legacy offline marketing data business. With today’s divestiture, Acxiom’s entire revenue now comes from marketing data and services.

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ADAM could be next DAM deal

Scott Denne

Contact: Matt Mullen

We noted back in February that the market for specialist digital asset management (DAM) platforms was beginning to heat up as organizations were starting to reach the limitations of lightweight and embedded alternatives that had been ‘good enough’ for their current needs.

Of the DAM vendors we specifically looked at earlier this year, MediaBeacon has already been scooped up – in March by packaging provider Esko – and there are indications that ADAM Software could be next in line to be acquired, but by whom?

We expect that a purchase of ADAM Software will be concluded in the next year, with the likely buyer being one with existing experience with the platform and its subsequent implementations. ADAM is far from the only show in town – there are numerous small and probably much cheaper firms that could be acquired – but its strong product focus and revenue base (with virtually zero dependence on income from services) make it a very attractive target.

Subscribers to our Market Insight Service can click here to see a detailed report on ADAM, including potential suitors.

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