Author: Scott Denne

iPass roams away from managed Wi-Fi services business

Scott Denne

Contact: Peter Christy Scott Denne

As its core business of Wi-Fi roaming services grows, iPass plans to shed its managed network services division, which chalked up $33.2m in sales last year, down slightly from $33.4m the year before. We understand the company has already passed on an unsolicited offer from a private equity firm to buy its managed network services business, prompting it to hire Blackstone Group to run a broader effort to sell the division.

After a long sequence of revenue decline and profitless operation, iPass has been inching back toward growth. Since its beginnings as a dial-up access roaming service, the company has transitioned to include Wi-Fi , survived the brief over-exuberance around metro Wi-Fi, and then reengineered its roaming platform as Wi-Fi-only beginning around 2012. Revenue has declined as iPass phased out its legacy connectivity businesses, and the growth of its Wi-Fi services isn’t enough to offset the difference. Last year, the company posted $111.1m in revenue, down from $126.1m in 2012.

Its legacy connectivity business fell by $35.8m to $29.8 in 2013; however, the worst declines are likely behind it. The legacy business shrank sequentially by just $1m to $5m in the fourth quarter, while its Wi-Fi roaming business grew to $13m in the quarter, up from $9.1m a year earlier. Today, iPass has about $24m in cash and a sale of its managed network services business could double that amount.

We plan to cover the resurrection of public Wi-Fi access in a forthcoming 451 Spotlight.

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Aerohive buzzing toward IPO

Scott Denne

Contact: Scott Denne

Aerohive Networks, a maker of Wi-Fi equipment and software, has made its IPO filing public, setting it up to be the fastest-growing publicly traded Wi-Fi vendor. The company posted $89.6m in trailing revenue and while it has yet to declare its full 2013 performance, we estimate Aerohive’s revenue was roughly $100m for the year, giving it 50% year-over-year growth.

Its revenue is tilting toward SaaS sales, rather than equipment revenue alone, as it grows sales of its network management software. SaaS makes up less than 10% of Aerohive’s overall revenue; however, sales of its software are causing a spike in its deferred revenue, indicating that future revenue will be less lumpy than a typical networking equipment provider – something that should play well on Wall Street.

Aerohive’s growth comes as enterprises are moving wireless networking projects to the top of the queue. In surveys of enterprise IT buyers by TheInfoPro, a service of 451 Research, 25% of respondents said a wireless rollout or expansion was their top networking project during the second half of 2013 and first half of this year.

The best comparables for Aerohive are two of the publicly traded Wi-Fi vendors, Ruckus Wireless and Aruba Networks. Both are bigger companies with slower growth (Ruckus posted 17% year over year in its most recent quarter, while Aruba posted 11%) and enterprise valuations of 3x trailing revenue for Aruba and 3.6x for Ruckus. Aerohive’s superior growth rate and increasing SaaS revenue should give it a significant valuation boost, and we expect the company to be valued at 6-8x trailing revenue, or about $700m, when it comes to market.

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Paint it (Carbon) Black

Scott Denne

Contact: Scott Denne Adrian Sanabria

With the acquisition of Carbon Black, Bit9 continues to reinvent itself, moving beyond its roots in whitelisting and toward a holistic threat detection and prevention vendor. Founded in 2002 and venture-funded since 2004, Bit9 gained traction in financial sectors and niche products such as point-of-sale terminals and grew its revenue to about $45m last year, with the lion’s share of its growth coming in the past three or four years.

We understand the deal values Carbon Black at more than $40m – a nice number for a company with an impressive list of early customers and little revenue (it began selling products in earnest in May 2013). Carbon Black brings Bit9 endpoint sensors that go beyond detecting file events to monitor registry changes, network connections and binary executions, enabling Bit9 to move beyond prevention and into threat response.

In addition to shedding its whitelisting label, the acquisition will better position Bit9 to fend off an eventual FireEye endpoint offering that will likely result from its acquisition of Mandiant (Bit9 and FireEye are currently partners). It also improves its edge on endpoint competitors such as Invincea and Bromium that protect and remediate, but are limited in scope to the Web browser and some office applications.

Look for a more detailed report on this deal in tomorrow’s 451 Market Insight.

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FireEye sets sights on consolidation

Scott Denne

Contact: Scott Denne

Fresh off its $990m acquisition of Mandiant, FireEye positions itself for a security consolidation push. During last night’s earnings call, CEO Dave Dewalt laid out the case for the company to consolidate its products across several security categories. He argued that offerings in existing security groups, such as intrusion prevention and endpoint protection, are no longer effective and that FireEye would be well served to offer a fuller product portfolio to address those categories, rather than continuing to sell exclusively outside of well-established product lines.

There’s no question that FireEye has the resources to pick up almost anything it wants. Even after Mandiant, the company still has $173m in cash on hand, it’s planning a secondary offering that could reach $700m and – as it showed with its stock-heavy purchase of Mandiant – its shares are valuable enough to be used for acquisitions (though its stock dipped 10% after the company gave weaker-than-expected guidance).

While Dewalt’s assessment of some of the existing security markets is not without bias, surveys by TheInfoPro, a service of 451 Research, paint a picture of a market in flux, with several new names popping up in our most recent security surveys. Multiple categories are now ripe for consolidation, with spending spread across a growing number of vendors. In advance malware response, for example, our surveys turned up 34 different firms, up from 25 the year before.

j2 returns to roots for recent deals

Scott Denne

Contact: Scott Denne

In its latest acquisitions, j2 Global is buying companies that support its original line of business: online fax services. Three out of the four deals it has announced this month, including FaxMate and Ozefax today, add product depth and geographic distribution to its fax business.

While this shows j2 hasn’t forgotten its roots (fax and related voice services account for roughly two-thirds of its $482m in trailing revenue), its latest streak has us wondering when it’s going to do more media deals. The company has been in the media business for about a year after acquiring Ziff Davis in late 2012 and it has seen it grow (organically and inorganically) to $32m in its most recent quarter. For comparison, Ziff Davis had only $44m in revenue the entire year before being acquired.

Despite that growth, j2 has only inked three media transactions out of a total of 10 since acquiring Ziff Davis. During its latest earnings call, the company said two of its most recent media purchases – IGN Entertainment and NetShelter Technology Media – are fully integrated and it now has available resources to add other media businesses that fit into its focus on tech, gaming and men’s media.

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Microchip’s super multiple for Supertex

Scott Denne

Contact: Scott Denne

Microchip Technology continues its acquisitive streak, reaching for Supertex in a $394m all-cash deal and paying an enterprise value-to-revenue multiple of 3.7x, placing it among the most expensive semiconductor transactions in recent memory. The deal puts a 35% premium on Friday’s Supertex share price and brings the stock to a level it hasn’t hit since late 2007.

As margins and growth around its core microcontroller business compress, Microchip has looked to M&A to bolster its growth, inking roughly two acquisitions per year since 2009, compared with four transactions altogether between 2002 and 2008. With the exception of its $939m reach for Standard Microsystems last year, Supertex is its largest purchase and comes at a relatively rich price. Semiconductor multiples have been depressed for years as more transactions are done with the aim of consolidation and cost-cutting. Over the past 24 months, only two comparable deals in this space have had higher multiples.

Supertex’s $65.9m in trailing revenue will do little for Microchip’s top line – it posts $1.87bn in trailing revenue. This deal gets Microchip exposure to several new markets, notably LED lighting. LEDs accounted for an expanding share of Supertex’s growing revenue, generating 18% of sales in the most recent quarter, up from 14% in 2013 and 10% in 2012.

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Stock-rich Imperva buys Skyfence for $60m

Scott Denne

Contact: Scott Denne

Imperva leverages its expensive stock to make its first major acquisition, picking up Skyfence Networks for $60m, consisting of just $2.8m in cash. Public markets value Imperva at 10x trailing revenue and its stock has more than doubled since its IPO in late 2011, outpacing the growth in its sales over that time. The deal is reminiscent of FireEye’s purchase in January of Mandiant. At $1bn, that transaction was far larger, though it was also about 90% stock and made possible by FireEye’s eye-popping valuation: 62.6x trailing revenue.

Imperva holds enough cash that it could have done the deal without a rich stock price, though it’s unlikely it would have. The purchase is small, though it is still more than 8x the free cash flow Imperva generated last year. Skyfence didn’t post any revenue and with Tomium Software’s mainframe security assets (the other acquisition Imperva has announced), Imperva will add $11m in operating expenses this year.

What Imperva is getting is a product that pads its strong position in the Web application firewall market. According to surveys by TheInfoPro , a service of 451 Research, Imperva is the second most implemented vendor in the space (behind F5), with 32% of customers reporting they intend to spend more on those products in 2014, up from just 24% in 2013.

The transaction marks the first entry of an established security player into the cloud application control market, something we expect to see more of this year as there’s no shortage of emerging companies in this space and it’s complementary with next-generation firewalls (a case we laid out in our ‘2014 M&A Outlook – Enterprise Security’). With the rich multiples that public and private security vendors command these days, lots of stock could trade hands.

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Lowered guidance from 3D Systems could lead to fewer M&A prints

Scott Denne

Contact: Scott Denne

An updated and reduced earnings outlook from 3D Systems suggests the 3-D printing market is developing slower than anticipated, which could slow the recent streak of acquisitions in the space.

Due in part to higher-than-expected costs for its acquisitions and less consumer demand for its products, earnings will be about 13% lower in 2013 than the guidance it gave last quarter. The company says its bets on marketing, product development and acquisitions haven’t produced results as quickly as anticipated. It now expects revenue to be $513m-514m, just a hair below the midpoint of its earlier forecast.

As the most active acquirer in the space, any new caution from 3D Systems will slow 3-D printing deal flow. Since the start of its recent spree in 2011, 3D Systems has acquired 18 companies, including seven in the last 12 months. It’s not the only reason deals are up in 3-D printing: Overall, there have been 24 acquisitions in that time (including more than $1bn in spending from 3D Systems’ competitor Stratasys), and none in the nine years prior, according to analysis of the 451 M&A KnowledgeBase.

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No turning back from IPO for Rubicon

Scott Denne

Contact: Scott Denne

Ad-exchange operator Rubicon Project has filed its IPO, lining itself up to be the latest new ad-tech offering in the public markets. Even though that market has been volatile and, sometimes, unforgiving, we see an IPO as the most likely near-term exit for the company’s investors. Prices for all the recent ad-tech entrants are trending downward, with half down more than 20% from their debuts. Unlike those vendors, Rubicon is on the opposite side of the advertising business. It runs an exchange where publishers place ad inventory for real-time bidding by ad agencies and networks like Criteo and Rocket Fuel.

Rubicon also captures a larger share of ad spending through its ad exchange than any of its recently public peers; although, because it is an ad exchange, it keeps a smaller portion of that spending: about 15%, compared with about a 40% benchmark for buy-side ad businesses. Rocket Fuel and Criteo trade at roughly 9x and 3x trailing revenue, respectively. Given that Rubicon Project’s posted growth rates are half of what those companies boast, we’d expect it to begin trading somewhere between 5-7x its trailing revenue of $75m, giving it a market cap between $375m and $525m.

Although ad-tech offerings have been volatile – Rocket Fuel, for example, has seen its shares plummet 20% two times since its September IPO, followed by a move back into positive territory, and Criteo has seen similar patterns – the dearth of buyers makes an IPO the best potential for liquidity for Rubicon’s investors and employees. (We understand Rubicon was talking to investors last year about a secondary offering.) Owning an ad exchange is of little value to anyone except the largest Web publishers (Google, Yahoo, Twitter, etc.), and those companies have all built or bought one of their own.

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Microsoft makes cloud captain CEO; will he maintain a steady course?

Scott Denne

Contact: Scott Denne Michael Cote

Chatter about how Microsoft lost its way and spread itself too thin characterized the end of Steve Ballmer’s rein as CEO. Though the company is facing challenges from new competitors and two tectonic shifts in IT – mobile and cloud – that threaten a franchise built around the PC, Satya Nadella takes over as CEO while the company is still in a position of strength.

Microsoft posted 5% revenue growth in the past two years and sales of enterprise software, which make up more than half of its sales, grew faster at about 9% annually. The company already has promising assets that could enable it to maintain that growth. While it wasn’t the first to cloud computing, its base of Windows Server and Office users will give Microsoft an easier time than most in making the transition to cloud. And while Apple and Google currently have a lead among mobile developers, Microsoft still has a massive developer audience and was the company that invented the model of leveraging developers to grow a platform.

Given Nadella’s background in building Microsoft’s cloud and enterprise business, we expect future M&A to focus on ensuring that its enterprise offerings successfully transition to cloud. Microsoft has a history of taking a measured approach to expanding into new products – it’s rarely the first into any new market – and given that Nadella spent the past 22 years at the company, we don’t expect any drastic shifts in M&A strategy.

Microsoft itself often speaks to being a fast follower in technology, a stance that hasn’t been appreciated with the rapid CAGRs of iOS and Android. However, it is a strategic approach to be reckoned with when a technology has all but reached mainstream, such as mobile and tablets right now, and perhaps cloud.

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