Author: Scott Denne

Schneider hooks into prefab datacenter market with AST buy

Scott Denne

Contact: Andy Lawrence Daniel Bizo

Schneider Electric grows from pioneer to player in the modular datacenter business by acquiring AST Modular. Schneider was early in developing modules for components of datacenters (cooling, power, etc.), though it wasn’t until last year that it embraced fully functional modular datacenters such as AST’s as part of its strategy.

The deal, a small one for Schneider, won’t have much impact on its top line. Schneider had $31.5bn in 2012 sales ($4.9bn from its IT division), and 451 Research estimates AST’s annual revenue at $15m-25m. But it does bring Schneider an installed base of 450 datacenters (including emerging markets in EMEA and Latin America), important technology (notably AST’s cooling methods), a partnership with IBM and about 70 people.

The acquisition supports our thesis in a recent long-form report : while prefabricated datacenters began as a niche, serving as an alternative in areas where custom construction is challenging or cost-prohibitive, the technology is rapidly becoming a mainstream part of the datacenter business. The prefabricated modular datacenter market is expected to grow to $2.5bn in 2015 from $663m in 2012, according to that report.

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

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Survey shows Elliot’s argument for Riverbed buyout weaker than perceived

Scott Denne

Contact: Scott Denne

Elliott Management’s thesis on its proposed $3bn Riverbed buyout is potentially flawed. The activist hedge fund says Riverbed should do more to capitalize on its ‘stable’ position in the WAN market. However, a survey conducted by TheInfoPro, a service of 451 Research, indicates that Riverbed’s WAN business might not be as stable as Elliott would like.

When asked last year about plans for spending on Riverbed products and services (about three-quarters of which is generated by WAN offerings), 24% of Riverbed customers said they would spend less in 2014, compared with 18% who said they would spend more. That’s a particularly negative outlook considering only 5% of survey respondents said they would decrease spending on WAN services overall in 2014.

Another worrisome sign: 4% of Riverbed’s customers said they would consider replacing Riverbed with a competing product, while a year earlier the same percentage told us they ‘might’ consider such a move.

The survey is starting to show truth: revenue growth for Riverbed’s WAN products is already slowing. The WAN business saw 4% YOY growth last quarter, down from 6% growth in the previous quarter.

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Citrix nabs virtual app vendor Framehawk

Scott Denne

Contact: Scott Denne Michael Cote Chris Hazelton

Citrix picks up Framehawk just three months after Oracle took out Bitzer Mobile, which, like Framehawk, was developing products to enable enterprises to move their data and applications onto employees’ mobile devices. While there’s a real need for this service, the products have proved relatively simple for larger vendors to duplicate.

There’s a compelling story to tell around the need for such technology: the bring-your-own-device trend means employees are demanding access from devices of their choice, which puts pressure on IT to focus on controlling mobile apps and data directly, rather than just the device. Venture money has followed that story, with Framehawk having raised $16m and Bitzer landing $6m. And these types of app and data silo technologies have indeed become must-haves – so much so that the big enterprise mobile management players have built similar offerings, making it more difficult for the pure-play vendors to gain traction.

Citrix itself will not be offering Framehawk as a stand-alone product. Instead, it’s picking up the technology and engineering team with the aim of integrating it into XenApp and XenDesktop to improve their ability to operate across subpar wireless networking conditions. This makes sense, as delivering applications in methods like this (i.e., not installed locally on each desktop) is Citrix’s core business, and must be defended and evolved.

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Convergys diversifies customer base with $546m Stream Global buy

Scott Denne

Contact: Scott Denne

After two asset sales helped trim its fat, Convergys beefs up with the $546m acquisition of Stream Global Services, a rival in the customer management services and software market. Convergys gains much-needed customer diversification through the deal since today just three of its customers account for half of its total sales.

Telco-focused Convergys generated 48% of its revenue in 2012 from AT&T, Comcast and DirecTV. That concentration hasn’t changed meaningfully over the past three years. While Stream Global was facing similar concentration, it wasn’t as severe. The target focused on the tech sector, and saw just 28% of its 2012 sales come from its top three customers: Microsoft, Dell and Hewlett-Packard. After the transaction closes, Convergys’ top three clients will account for one-third of total revenue, the same portion they contributed prior to its divestitures.

The acquisition plays into two other strategic initiatives: increasing geographic reach (Stream Global has a large European business, whereas Convergys concentrates on US-based multinationals) and adding new capabilities such as the lead-generation technology that the target brings.

Convergys disclosed the deal’s enterprise value at $820m, which would give Stream Global an equity value of $546m after backing out its debt load. It’s paying for the purchase with $400m from its balance sheet and the remainder by tapping new and existing debt facilities, leaving Convergys with about $200m in cash and $600 in debt (including what it will take on from Stream Global).

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Verint’s $514m purchase of KANA opens lines beyond the call center

Scott Denne

Contact: Scott Denne

In its biggest deal in almost seven years, Verint has expanded its ability to analyze customer interactions beyond the call center, spending $514m for KANA Software. While the deal is strategically sound – and a bit of a bargain – it will add to an already heavy debt load.

With the purchase, Verint adds KANA’s messaging, social, and email analytics to its own speech and text analytics, in the hope that customers will be drawn to its ability to integrate customer sentiment data across multiple channels, such as traditional call centers, social media and online chats. It’s an area that’s been neglected by its rivals, so the deal gives Verint’s product suite a leg up. Also, the two companies have already integrated their technologies at the request of some common customers, so some of the technical risk is gone from the deal.

KANA, which started in the call center and spent the last few years buying up companies to bring it new capabilities, expects to bring in $140-150m in revenue and more than $40m in EBITDA during 2014, up from $53m trailing revenue and negative EBITDA leading up to its take-private deal in late 2009. That means Verint gets the company for about 3.5x projected revenue, which is about standard for software acquisitions, but still about a full point above Verint’s own projected-sales valuation.

The deal makes strategic sense for Verint by giving it exposure to an area its rivals have neglected; however, it’s not without risks. It’s paying $100m of its own cash, or about three quarters worth of free cash flow and more than one-third of what’s on its balance sheet. Already a bit debt-heavy, the $414m in loans Verint will use to finance the remainder of the deal will raise its debt/equity ratio from 1.08x last quarter to 1.69x.

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PTC bets on Internet of Things trend to stay ahead of its customers’ wants

Scott Denne

Contact: Scott Denne

With its manufacturing and industrial customers early adopters of the Internet of Things (IoT) trend, PTC is making a big bet to stay ahead of the market by acquiring ThingWorx for $112m.

IoT pioneers envision a day when everything, from fork to forklift, is connected to the Internet. Even if that never comes to pass, the industrial equipment makers that compose PTC’s core audience are already early adopters, and account for most sales of ThingWorx’s software, which enables developers to build apps into connected devices.

Integrating that technology creates an opportunity for PTC to increase sales of its own service-lifecycle and product-lifecycle management offerings, and to get in front of the IoT trend that its manufacturing and industrial customers are starting to use. PTC has previously said it expects IoT to change how products in those industries are designed and serviced.

The acquisition is a lofty bet on a nascent market. Excluding earnout, PTC is valuing ThingWorx at 11.2x projected sales. The final valuation could be even higher, since PTC is on the hook for an $18m earnout, which could raise the final price to $130m. As a side note on the market’s infancy, a text search for ‘Internet of Things’ in our M&A KnowledgeBase returns just 28 merger records, with the earliest coming from January 2010.

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A tale of two disk strategies

Scott Denne

Contact: Scott Denne

While its competitor Western Digital aims to be the dominant player in flash, Seagate Technology sets itself up to profit from its privileged position as one part of a duopoly in the hard-disk drive market. The two different strategies are playing out in their respective M&A activity, including Seagate’s announcement today that it will buy Xyratex, a struggling maker of hard-disk capital equipment and enterprise storage modules, for $374m in its only acquisition of 2013.

All of Seagate’s recent deals (about one per year) build on a strategy of bolstering its position in the hard-disk drive market in anticipation that growing capacity needs among enterprises will continue to drive a growth in hard-disk sales that will more than offset declining PC sales. (Look for a two-part Impact Report in early 2014 for our take on Seagate’s strategy.)

That’s not to say that Seagate has completely ignored the flash market. In the last quarter it sold more than $100m in flash and hybrid disk products (or about 2% of its revenue). Earlier in the year it invested $40m in Virident, and we understand that it also bid to buy the company, but its offer came up about 10% short of the $685m that Western Digital’s HGST business ultimately paid. However, we gather that Seagate wasn’t interested in bidding for flash-caching providers that were picked up by other disk makers, such as FlashSoft, acquired by SanDisk, or VeloBit, acquired by Western Digital.

The purchase of Xyratex strengthens Seagate’s supply chain with the addition of more in-house manufacturing and testing products, as well as expands its footprint in the enterprise beyond disk drives as it will now be a supplier of storage modules and clustered storage gear for HPC markets. In valuing Xyratex at 0.3x trailing sales, Seagate assigns a multiple that’s in line with its previous two deals — drive maker LaCie (0.4x in May 2012) and Samsung’s hard drive business (0.4x in April 2011).

While Seagate seeks relative bargains on assets that can improve its position in a market that’s increasingly obsessed with costs, its main rival Western Digital has pursued more cutting-edge and expensive technologies. It has spent more than $1bn this year purchasing flash technologies, most notably Virident, which cost it 12.9x projected annual revenue.

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Oracle’s email marketing acquisition looks like spam

Scott Denne

Contact: Scott Denne Matt Mullen

Oracle spends $1.6bn ($1.5bn net of cash acquired) on email marketing company Responsys – a hefty price tag for an asset that brings few new capabilities to the company.

Much of the technology Oracle is buying duplicates what it already has from its acquisition of Eloqua, which it bought exactly a year ago to be the centerpiece of its marketing efforts. So in that regard, this deal is essentially an expensive tuck-in. Oracle values Responsys at 7.7x TTM revenue – just a click higher than ExactTarget fetched in its sale to salesforce.com, and that transaction was meant to be the CRM vendor’s marketing centerpiece.

Further, Responsys also generates a meaningful portion – 30% – of its revenue from professional marketing services. Nixing the services business would give Responsys a straight price-to-product valuation of 11.3x sales.

The deal isn’t completely without merit, however. Responsys does give Oracle business-to-consumer marketing expertise and a functional, if not differentiated, email marketing product that it didn’t get with Eloqua. And Responsys also posted 26% year-over-year growth in the first nine months of the year, but its $194m in trailing sales is hardly enough to boost Oracle’s stagnating software revenue.

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Blue Coat plays in sandbox with Norman Shark

Scott Denne

Contact: Scott Denne Wendy Nather

After coming up empty in its efforts to secure funding, Norman Shark opts for an acquisition by Blue Coat. Many venture capitalists question whether sandboxing technology, which isolates suspicious code before it can execute on an endpoint, can sustain a large independent business, especially in a market where they’ll run up against FireEye’s freewheeling sales and marketing spending.

Fellow sandboxing vendor Invincea was able to pull together a $16m series C funding round this week, an effort that took up most of this year. Bromium had better luck with its $40m series C round, which we understand came with a $380m valuation.

We gather that Norman Shark anticipated revenue of $5m in 2012 while it was seeking capital for the business, though it’s not clear if it met or surpassed that goal. The purchase of the 50-person company is likely far smaller than Blue Coat’s recent acquisitions of Solera Networks (451 M&A KnowledgeBase subscribers can click here for our estimated valuation on that deal) and Crossbeam Systems (click here for estimate). We’d also note that this transaction is the second sandboxing acquisition announced this week, after Invincea said Monday that it had scooped up Sandboxie sometime earlier this year.

Broadly speaking, there’s demand among security providers to add new ‘advanced malware detection’ capabilities, which include sandboxing and behavioral analysis, as a way to compensate for what antivirus is missing. FireEye raised awareness of this new breed by going public in September, though malware analysis M&A activity had been going on for a while.

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Hostway hopes to rekindle growth with Littlejohn LBO

Scott Denne

Contact: Scott Denne Liam Eagle

Hostway’s sale to private equity firm Littlejohn & Co. comes in the middle of the company’s transition from traditional shared hosting toward cloud and managed services. That transition, which began in 2010, makes it a good match for Littlejohn, which has little experience in tech, but plenty in complex situations like this one.

Though terms of the deal were not disclosed, we hear Littlejohn paid roughly 7x EBITDA for Chicago-based Hostway (subscribers to The 451 M&A KnowledgeBase can see our full valuation estimate, including price, here ). That’s just under the median 8x that hosting and managed service providers have fetched this year, according to our database. The lower multiple reflects the challenges that remain for Hostway: it doesn’t have the scale of larger cloud or managed service vendors, nor does it have the high-touch services of larger hosting suppliers, and customers are increasingly opting for one or the other.

With Littlejohn’s fresh capital, Hostway can start growing the business again. While it has exceeded $100m in annual revenue (relatively rarified air in the hosting business), it dipped below that mark in the past several years as it backed off some of its international efforts. That, mixed with some customer attrition, has caused revenue to drop to about $60m in the trailing 12 months. Cowen and Co. served as financial adviser to Littlejohn, while DH Capital banked Hostway.

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