Author: Scott Denne

Box shares its financials

Scott Denne

Contact: Scott Denne

Investors haven’t balked recently at bidding up an enterprise tech IPO with massive growth and no profits in sight. Box, however, will test the appetite for that kind of stock more than most. The file-sharing provider has put up impressive growth numbers, doubling its revenue last year to $124m. The prior year it fell just short of tripling revenue. That growth has come at a cost. In the year ending January 31, Box had a net loss of $169m driven by $171m spent on sales and marketing.

Plowing revenue back into sales and marketing is fashionable lately, but few are doing it to the extent that Box does. At the time of their IPOs, SaaS companies Workday and ServiceNow, for example, were spending less than half of their revenue on sales and marketing while putting up similar growth rates. Box is trending toward becoming profitable – its costs grew at a slower rate than its revenue and every dollar it spent last year brought it $0.44 in revenue, up from $0.30 in 2011. However, improving margins have done little to stem the flow of cash out of the business; its negative free cash flow rose to $124m last year, up from $101m a year earlier. At those rates, it will take at least three or four years for Box to get near being profitable or cash-flow positive.

We would expect Box to be valued in the same neighborhood as Workday and ServiceNow’s IPOs, which each priced at 22x trailing revenue. That would put Box’s debut valuation at about $3bn, a step above the roughly $2bn valuation on its last venture round. Given Wall Street’s bullish reception of other enterprise SaaS vendors, Box should trade up from there.

We’ll have a longer report on Box’s IPO filing in our next 451 Market Insight.

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

Palo Alto Networks gets into endpoint game

Scott Denne

Contact: Adrian Sanabria Scott Denne

Palo Alto Networks buys into the endpoint security business with its $200m acquisition of early-stage vendor Cyvera. The deal moves the next-generation firewall provider into a new corner of the security market and mirrors other transactions by competitors that have also taken advantage of their rising stock prices to buy companies that can wring larger purchases from their customers.

Palo Alto will pay $112m in stock and $88m in cash for Cyvera when the deal closes. In exchange, it gets ownership of a service that protects endpoints by recognizing techniques used by hackers and preventing them from executing on endpoints. Cyvera, which has 55 employees and raised $13m in venture capital, isn’t expected to add notable billings or revenue to Palo Alto until later next year.

The deal is similar to FireEye’s $1bn acquisition of Mandiant earlier this year. In that transaction, FireEye, like Palo Alto, was aiming to extend itself beyond its focus on network security and into a larger total addressable market (TAM). While the price tag for Mandiant (which came with a large and lucrative consulting practice) was higher than Cyvera, the latter acquisition is more significant – with this deal, Palo Alto will immediately cover a larger swath of the security market.

We’ll have a longer report on this transaction in our next 451 Market Insight.

Security companies hunt larger TAM

Date announced Acquirer Target Rationale Deal value (stock portion)
March 24, 2014 Palo Alto Networks Cyvera Expanded into endpoint security $200m ($112m)
February 13, 2014 Bit9 Carbon Black Added network and forensic capabilities >$40m* (Not disclosed)
February 6, 2014 Imperva Skyfence Networks Brought cloud application control $60m ($57m)
January 2, 2014 FireEye Mandiant Obtained threat intelligence and nascent endpoint offering $989m ($889m)

Source: The 451 M&A KnowledgeBase *451 Research estimate

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

The man who unplugged Symantec’s M&A machine is gone

Scott Denne

Contact: Scott Denne

Symantec’s board has fired Steve Bennett, the CEO who brought the security vendor’s vigorous M&A practice to a halt. During his tenure, beginning in July 2012, Symantec bought just one company, compared with an average of four deals per year for the preceding decade.

Under Bennett’s watch, Symantec purchased only PasswordBank Technologies, an identity management firm that we estimate had $2m in annual revenue at the time. According to The 451 M&A KnowledgeBase, which tracks back to the start of 2002, the only other year Symantec acquired one or fewer companies was 2011, when it spent $410m on e-discovery vendor Clearwell Systems.

It’s hard to fault Symantec’s recent management for its M&A reluctance. The company built itself through acquisitions, but its biggest bet proved one of its worst. In 2004, it paid $13.5bn for storage software provider Veritas and every Symantec CEO since then has struggled with the legacy of that deal. Symantec’s current market cap, at $12.7bn, sits below what it paid for Veritas and it has taken nearly a decade to grow Veritas’ sales by just 25%.

Regardless of the failure of the Veritas buy, Symantec has been increasingly inactive as its competitors grabbed seats in several markets. Take security event and infrastructure management. Surveys of security customers by TheInfoPro, a service of 451 Research, show that Symantec ranked third in that category in mid-2011, shortly after HP spent $1.65bn on market leader ArcSight. Subsequent deals by IBM (Q1 Labs) and McAfee (NitroSecurity) pushed Symantec further down in the rankings.

sym11 sym12

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

Ensighten eyes tag management market with TagMan buy

Scott Denne

Contact: Scott Denne

Ensighten picks up TagMan to bring additional customers and technology to its offering for tag management, a space that’s seen little M&A activity. The deal brings Ensighten a smaller competitor, but one that does about two-thirds of its business in Europe, giving it an opportunity for international expansion. The combined company will have less than 200 people. Petsky Prunier advised TagMan on its sale.

Tag management vendors have been a tough sell – TagMan was on the market for about a year and Search Discovery’s Satellite technology, which sold to Adobe last summer, saw little interest from potential acquirers beyond Adobe. Most large marketing software firms have already built or bought tag management technology to go with their own apps and view tag management as a feature.

Ensighten, which just closed a $40m venture round in January, and competitors like Tealium and BrightTag aim to build tag management systems that make it easier for marketing products from different vendors to share data. The market for stand-alone tag management software is still nascent, likely less than $50m in annual sales. While big software companies are focused on selling their own applications, they’re unlikely to put a premium valuation on a platform that would enable customers to integrate marketing apps from competitors. Deals in this space will remain small for the foreseeable future.

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

Cenzic finds second act at Trustwave

Scott Denne

Contact: Wendy Nather Scott Denne

Trustwave continues to add compliance offerings to its managed security service with the acquisition of Cenzic. The deal brings application security testing to Trustwave, which added database monitoring to its portfolio in a transaction late last year.

Cenzic fits the profile of a typical Trustwave purchase. It’s a company whose sales have plateaued with a niche product that will play better as part of a larger suite of services. We estimate that Cenzic clocked several years of $5-10m in annual revenue and $10m in trailing revenue, while competitors including Veracode and WhiteHat Security have grown faster. Cenzic is as well-known for its security testing as its patent litigation – it reached cross-licensing agreements with HP (WebInspect) and IBM (Watchfire), and forged settlements with NT OBJECTives and WhiteHat.

Terms of the deal weren’t disclosed, but most of Trustwave’s transactions have been valued at 1-2x trailing revenue. We’d expect this one was too, given that Cenzic was a motivated seller that had been in the market for some time.

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

Vodafone continues consolidation in Europe with Ono acquisition

Scott Denne

Contact: Scott Denne

Vodafone picks up its second cable company in a year, spending $10bn on a cash- and debt-free basis on Spain’s Grupo Corporativo Ono amid an uptick of telecom consolidation in Western Europe. The deal has similarities to Vodafone’s $10.2bn purchase in June of Germany’s Kabel Deutschland.

Both transactions get Vodafone deeper into markets where it already offers some services, such as mobile and Internet access. However, the rationale for the two deals is different. While both add to the top line, the chance to grow revenue seems to be front and center in the Ono buy, where Vodafone sees an opportunity to market wireless services to the target’s customers and take share from Telefonica, which powers Ono’s existing mobile service, by transitioning those customers to Vodafone’s network. With the Kabel purchase, much of the logic for the deal came in the opportunity to lower costs by migrating Vodafone DSL customers in Germany onto Kabel’s coaxial network.

Vodafone’s move comes during a period of extraordinary consolidation of large telcos in Western Europe. So far this year, three telcos in that region have sold for more than $500m (including today’s announcement), for a total of $19.2bn of M&A. In all of last year there were four such transactions, combining for $32.2bn. In the preceding five years combined, such deals totaled only $22.2bn, according to The 451 M&A KnowledgeBase.

The hunt for additional revenue growth and cost savings comes as prices for wireless services in Europe are declining, and will continue to decline. The pricing pressure will amplify the need for further consolidation. In its most recent quarter, Vodafone’s own revenue fell 3.6% from a year earlier to $15.1bn, a drop that its management attributed to stiffer price competition. In Spain in particular, Vodafone’s revenue declined 14% due to increased competition from services offering combined wireless and wireline packages. Yankee Group, a unit of The 451 Group, anticipates that price squeeze in Europe will continue.

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

Renaissance teaches lesson in the value of SaaS

Scott Denne

Contact: Scott Denne

A bet on Renaissance Learning’s transition to SaaS has paid off for Permira Funds. The private equity firm bought the educational software company for $455m in late 2011. Today, Hellman & Friedman announced that it is buying the business for $1.1bn.

When the sale to Permira closed, Renaissance Learning was in the early stages of transitioning its business to a SaaS model, moving away from the hardware and installed software sales that dominated its early years (the company was founded in 1986). In its last quarter before that, its SaaS sales rose 22% from a year earlier to $14.8m, accounting for 41% of its total revenue – and growing.

The Permira buyout was done at 3.3x trailing revenue ($133.5m at the time), well below the 5.1x median multiple that SaaS vendors fetched over the past 12 months, according to The 451 M&A KnowledgeBase. While it is unclear how Renaissance Learning’s SaaS revenue has grown since its sale to Permira, it is clear that its SaaS business helped it get a higher valuation this time around.

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

A10 counting down to IPO, sets price range

Scott Denne

Contact: Scott Denne

A10 Networks sets a price range of $13-15 per share, which would give it a market cap of $767-885m. At the midpoint of that range, A10 would be valued at 5.9x trailing revenue, a bit higher than the 5.5x granted to F5 Networks, its main competitor and leader in the application delivery controller market. A10’s revenue growth rate, most notably that of its product sales, has outpaced F5’s. While A10’s product sales grew 18% year over year in the most recent quarter, F5 expanded by 7%, the first quarter it has topped the 5% mark in more than a year.

The top line at the application delivery controller upstart grew a respectable 18% to $141m in 2013. Its net loss was $27m as it invested a larger portion of its revenue back into sales and marketing. The net loss was lower than the $90m it chalked up in 2012, but that year’s expenses were driven by a legal settlement, without which it would have had three straight profitable years starting with 2010.

At the current price range, the IPO will generate a solid return for Summit Partners. The private equity firm invested $80m in A10 last summer for stock that will be worth $132m at the midpoint of the proposed range.

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

Serena’s sinking software revenue

Scott Denne

Contact: Ben Kolada Scott Denne

HGGC’s purchase of Serena Software ends a challenging holding period for Silver Lake Partners, the buyout shop that took the application lifecycle management vendor private eight years ago today. Initially hampered by the 2008 financial crisis, the company’s inability to evolve its portfolio to today’s Web, mobile and cloud environments contributed to its decline. Toward the end of its time under Silver Lake, Serena was basically a maintenance shop.

Serena’s sales have shrunk from $251m in trailing revenue ahead of its take-private in 2006, to $184m in trailing sales today (the now-private company still files financials with the SEC). The largest decline came on the heels of the financial crisis, when its annual revenue dropped to $224m in the year ending January 31, 2010, from $260m a year earlier. When that crisis abated, Serena still faced declining use of mainframes (a significant revenue generator for the company), increasing use of open source software and developer-led purchases of application management products.

The company’s most recent filing period, the nine months ended October 31, shows it was becoming increasingly reliant on merely maintaining the use of its software for its customers, instead of selling new software licenses. For that period, license sales as a percent of revenue declined six percentage points, to 15% of total revenue, while its maintenance revenue increased eight percentage points, to 75% of total sales. Also under Silver Lake’s stewardship, Serena’s total debt load had nearly doubled to $410m.

Terms of the company’s sale to HGGC weren’t disclosed. Public reports peg the deal at $450m, about two-thirds less than it was taken private for. When looking at the company’s finances, that price is understandable.

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

Pre-IPO stock: an ‘earnout’ that can actually pay out

Scott Denne

Contact: Scott Denne

Investors in Coupons.com aren’t the only ones who stand to benefit from the 100% rise in its IPO today. The company’s M&A targets are set up for a big gain as well. Investors in Yub, a digital loyalty card vendor, have seen the value of their exit to Coupons.com triple in the span of two months.

Yub sold to Coupons.com in January for $10.1m in common stock (valued at $10.05 per share). As of this afternoon, Coupons.com trades at $32 per share, valuing the Yub stake at $32m. In fact, Yub’s backers, including Battery Ventures, Greylock Partners and QuestMark Partners, are seeing a bigger pop than investors that funded Coupons.com’s last round of private funding – a June 2011 series B at $13.73 per share.

There’s a downside to relying on the jump in a pre-IPO acquisition. In addition to being at the mercy of the public markets, shareholders have to sweat out a six-month lockup period before cashing out. The 11 companies acquired by Twitter in the year leading up to its IPO saw the value of their exits jump 2-4x since. MoPub, for example, sold for $350m in Twitter stock that’s now valued at $797m, which will make for some happy VCs (MoPub raised just $18m) if the price holds up for the next two months.

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