VMware dials up Desktone

Contact: Scott Denne

VMware picks up desktops-as-a-service company Desktone as the virtualization pioneer faces a slowdown in its core business. As we noted earlier, VMware’s software licenses grew by only $20m through the first half of the year, well below the $200m pace it set for itself for 2013, and this deal indicates that it’s looking toward services to partially offset that lost growth.

While VMware’s last few deals have been aimed at extending its core infrastructure technologies into related areas such as networking, storage and systems management, the acquisition of Desktone, along with the release of vCloud Hybrid Service earlier this year, show VMware emphasizing its ambitions to be a cloud services vendor, not just a cloud tools provider.

Desktone was funded with $29m in venture capital across two rounds, with the most recent coming it 2010. That same year the company brought in a new CEO, Peter McKay, and changed its business model to offering the virtual desktop service directly to customers – going from a business with almost zero sales to one that now has about 150 direct and service-provider customers and anticipates hitting profitability this year. (We’ll have a more detailed report on this transaction in our next 451 Market Insight.)

Our own estimates of the virtual desktop market put it at $3.8bn this year and growing at 21.9% annually. By our own back-of-the-envelope calculations, Desktone will likely account for roughly $10-$14m of that market this year.

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Perficient doubles down on salesforce.com expertise

Contact: Scott Denne

Perficient reaches for salesforce.com expertise for the second time in as many deals with the $21.5m purchase of CoreMatrix Systems. In addition to having a similar rationale as its last purchase, the transaction matches the typical profile of Perficient acquisitions.

CoreMatrix provides consulting on and implementation of cloud software, with a focus on software from salesforce.com. This is similar to Clear Task, which Perficient bought in May for $7.9m in a deal that valued the target at roughly 1x trailing 12-month revenue, the median multiple for Perficient’s acquisitions. The acquirer values CoreMatrix, with about $15m in annual sales, slightly above that level. Both transactions came with an earnout that could add about 50% to the deal value – $10m more for CoreMatrix and up to $3.7m more for Clear Task.

As we noted when we covered Perficient’s last salesforce.com-related acquisition , CRM made up only 6% of the company’s revenue in 2012 and because that category of software continues to attract budget, it’s no surprise that Perficient is angling for a bigger piece of that market. In a survey in July, 17% of IT managers were planning to increase their spending on CRM in the coming quarter, making it one of the few categories of IT where more respondents expected spending to go up, according to ChangeWave Research, a service of 451 Research.

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Pegasystems tunes into mobile apps with Antenna buy

Contact: Scott Denne Carl Lehmann

Pegasystems has scooped up Antenna Software, a mobile application development vendor that has struggled to compete with the plethora of free and cheap tools for building mobile apps. Launched 15 years ago, Antenna provides software for building, running and managing mobile apps. The business model was to sell the development tools and provide runtime services for free. As the mobile app economy exploded, the company found it increasingly difficult to sell proprietary tools to developers. We estimate that Antenna had less than $40m in sales last year, slightly down from a year earlier.

The deal provides Pegasystems with native mobile development capabilities and several new features, including an enterprise app store and device management. That enables Pegasystems to expand its market to mobile-first customers and gives it a better framework to expand its existing customers into mobile. We view this as an opportunistic acquisition by Pegasystems, which has now only done three deals in the past decade even as its core BPM sector has seen a lot of M&A – both for consolidation and into adjacent markets.

Morgan Stanley advised Antenna and Bridge Street Advisors banked Pegasystems. Incidentally, those same banks played the same roles in Pegasystems’ last deal, its $162m acquisition of CRM vendor Chordiant in March 2010. In that purchase, Pegasystems paid slightly more than 2x trailing sales. (That’s based on equity value for Chordiant, which had slightly more than $50m of net cash.) Although Pegasystems didn’t release terms of its Antenna buy, we would estimate the multiple in the same sort of range as Chordiant’s valuation.

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Vonage dials up a discount in $130m purchase of Vocalocity

Contact: Scott Denne

Vonage picks up Vocalocity for $130m in a sizeable and relatively safe bet to turn around a declining business. It’s a big bite for Vonage, which will be borrowing heavily to fund the deal. But at least Vonage is getting a discount on its purchase of the business VoIP provider: Vocalocity is valued at less than half the level of its competitors on the public markets.

Vocalocity posted $28m in revenue for the first half of the year, up 39% from the same period a year ago. While that growth is faster (due partially to starting at a smaller base) than its larger public rivals 8×8 and RingCentral, its valuation is lower. According to our quick math, Vonage is valuing Vocalocity at just about 2.5x trailing 12-month sales. Meanwhile, RingCentral currently boasts a 7.7x trailing sales valuation, while 8×8 pencils in at 6.7x.

To cover its largest acquisition, Vonage is paying $105m in cash ($30m from its treasury and drawing $75m from its revolver), along with $25m in stock. Even though the new paper dilutes existing shareholders, Wall Street backed the purchase. Vonage’s long-suffering shares jumped 15% on the deal, hitting their highest level in more than two years.

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Amid federal shutdown, CACI spends $820m on defense consulting firm Six3

Contact: Scott Denne

The federal shutdown and looming debt-ceiling battle isn’t slowing down CACI International’s appetite for M&A. The government contractor and frequent acquirer is paying $820m, its largest purchase, for tech-enabled security and signal intelligence services vendor Six3 Systems.

A major selling point for Six3 was its expertise in cybersecurity, which currently accounts for about one-fifth of its $437m trailing sales. Its top-line growth certainly helped as well. The company, which was backed by private equity firm GTCR, experienced a 19% compound annual growth rate over the past five years.

The transaction brings CACI new technology capabilities that significantly expand its addressable market. That, and the fact that Six3 will tack on at least 5% to its earnings next year, made CACI willing to dig deep for this one. The deal value is almost twice the $415m that CACI paid for its second-largest acquisition, the purchase of American Management Systems’ defense group in 2004, and nearly 20x the size of its median acquisition price over the past decade-plus.

Further emphasizing Six3’s value, CACI is paying more than double the valuation that the typical IT services shop receives. The deal values Six3 at 1.9x trailing sales. CACI itself currently sports an enterprise valuation of just under half-times sales. Bank of America Merrill Lynch advised CACI, while Goldman Sachs and J.P. Morgan Securities teamed up on the sell side.

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Wall Street skeptical of SolarWinds’ hot air

Contact: Scott Denne Ben Kolada

A few rocky quarters aren’t going to get in the way of SolarWinds’ dealmaking as the network monitoring company pays $103m in cash for Confio in its second-largest deal to date. The timing is particularly noteworthy, given that SolarWinds issued revenue guidance below analysts’ expectations in each of the last two quarters and experienced blowback following its last acquisition.

SolarWinds’ stock is down 41% since the first of those two guidance announcements. Yesterday’s deal announcement sent it down another 3% as of midday. That’s better than the reaction it got from its last deal – the $120m purchase of N-able in May that chopped 12%, some $400m, from the company’s market value. (To be fair, the reception for N-able was due in part to the target operating a different business model in a different market than SolarWinds.)

However, analysts were comforted somewhat yesterday, as SolarWinds’ management hinted at a return to smaller tuck-ins rather than big ticket M&A. Excluding Confio and N-Able, SolarWinds’ median M&A deal size is $21.5m.

SolarWinds is valuing Confio at 6.9x last year’s booked revenue (we’ll have a longer report on the rationale for this deal in our next Daily 451). However, the valuation for its actual trailing revenue is a smidgen higher. (Click here to see our estimate of Confio’s trailing sales.) ArchPoint Partners advised SolarWinds on its sale.

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Time Warner and Zayo light up this year’s fiber optics M&A

Contact: Scott Denne Michael Levy

Two acquisitions announced today – Time Warner Cable’s $600m cash purchase of DukeNet Communications and Zayo Group’s pickup of FiberLink – put 2013 on pace to be the most-active year for fiber-optic network deals by volume. There have been 10 transactions in North America so far this year, which already matches the two highest-volume years on record.

After a lull in fiber optics M&A after the dot-com bubble, each of the last three years have logged at least eight acquisitions in this market. The uptick comes from telcos’ desire for more fiber connections to datacenters, colocation facilities and cellular networks as consumer traffic, such as streaming video, is making up a larger and growing portion of the Internet.

Despite the rise in activity this year, the total amount spent on such deals – $912m so far in 2013 – is down from last year when $2.21bn had been spent by this point, with almost all of it coming from Zayo’s $2.2bn purchase of AboveNet. The difference in price reflects that most of the largest assets in the North American fiber market have already been scooped up, with only regional providers like Cross River Fiber and Fibertech Networks remaining. For that reason, we don’t expect too many more large transactions in this space and anticipate the overall pace of deals to begin ticking downward.

Fiber-optic network acquisitions

Year Deals Total value
2013 (YTD) 10 $912m
2012 10 $4.35bn
2011 8 $353m
2010 10 $199m
2009 2 $96m
2008 7 $141m

Source: The 451 M&A KnowledgeBase

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#AcquiringForGrowth

Contact: Ben Kolada Scott Denne

Twitter is ramping up its M&A program in what appears to be an attempt to buy faster growth. The company made its much-anticipated IPO paperwork public on Thursday and while the numbers are impressive, their acceleration is slowing. To offset the slowdown in its organic business, Twitter is doing more deals than ever before – and bigger ones at that. Its two largest deals, according to our understanding, have both been announced this year, collectively accounting for probably about three-quarters of all the money Twitter has spent on its M&A program. Further, 2013 has been its most active dealmaking year, and we still have one quarter to go.

From what was likely very little revenue in 2009, Twitter’s top line has hockey-sticked to $316.9m last year. That’s nearly 300% growth year over year and more than 11x what it recorded just two years earlier.

But as the company reaches a larger revenue base, its growth rate is beginning to slow. Annualizing Twitter’s first-half results would put its projected 2013 sales at just north of $500m. While it may not be fair to annualize six months of results for such a fast-growing company, we still don’t think its 2013 revenue will top $650m, which would be about twice its sales from last year. (We’d also note that Twitter’s year-over-year quarterly revenue growth rate has been declining since Q3 2012.)

Further, growth in Twitter’s total number of users and their level of engagement is slowing. In the US, which accounts for three-quarters of its advertising revenue, the average number of times that users engaged with Twitter was up only 1% from the previous quarter while the number of monthly users was up just 2%. Compare that with a year ago when those same metrics posted 11% and 9% quarterly growth, respectively.

Given the need for more advertising revenue on a slowing user base, we expect Twitter to increase its volume and value of acquisitions. One area the company could move into is digital video advertising, where the rates are higher than mobile or display. Twitter has already announced a product that enables television advertisers to follow an audience from a TV show to Twitter. That could become a more powerful proposition to both advertisers and content providers if Twitter could expand that capability to other parts of the digital world.

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Experian’s $310m reach for 41st Parameter continues high multiples in antifraud

Contact: Scott Denne

In spending $310m to purchase antifraud vendor 41st Parameter, Experian is paying a healthy 14.1x trailing 12-month revenue. It’s the latest in a recent string of high-value deals in the fraud-protection market, but even at that multiple it’s the lowest of the three recent transactions in this sector. In August, IBM spent an estimated $900m on Trusteer, valuing the company at 25.7x revenue. That doesn’t come close to the multiple that F5 Networks paid for Versafe last month. (Subscribers can click on the following links for more details on the Trusteer and Versafe acquisitions.)

Part of the reason for the high valuations is the trend toward rising valuations of security firms in general as security grabs an increasing portion of IT budgets. Another reason is a maturation of the market, especially the device-identification end of antifraud where 41st Parameter plays. That company and its competitors have been around for about a decade and are now starting to hit their stride: 41st Parameter had roughly $22m in trailing 12-month revenue at the time of its sale, while rivals Iovation and ThreatMetrix have nearly identical revenue as 41st Parameter.

Annual value-to-revenue multiples on security deals

Year Median multiple
2013 5.25
2012 2
2011 3.6
2010 3.5

Source: The 451 M&A KnowledgeBase

Now that those companies have proven that there’s a real business in helping banks, retailers and other businesses identify fraudulent transactions, we’d expect to see more deals happen in this space. 41st Parameter and its peers have had acquisition interest from a variety of vendors – not just traditional security providers, but also banking technology businesses and cloud services companies. This type of technology fits into the product portfolio of any company that enables businesses to connect with consumers.

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Shareholder interests play second fiddle to Violin’s management

Contact: Scott Denne

Violin Memory isn’t ready to be a public company by almost any measure: it has less than three years of sales, lumpy growth and is hemorrhaging money. Despite all that, Violin pushed out an offering in time to meet a deadline that almost guarantees a solid return for its management. Its chief executive, Don Basile, gets a grant of 1.25 million shares ($10m at the IPO price) if the company has its offering before the end of this month – a highly unusual deal for an emerging tech firm.

Other members of management have similar, but smaller, arrangements. COO Dixon Doll Jr. receives $5.4m worth of stock at the IPO price and CFO Cory Sindelar gets about $1.7m. We’d note that these numbers have been revised downward from an August version of its prospectus, which had management receiving double the number of shares.

Violin priced at the low end of its range and began trading this morning. By midday, shares of the flash storage vendor were trading down 8% from its IPO price. It’s no surprise to us. In an earlier report, we noted that Violin was losing more money than it was bringing in and that its quarterly revenue growth suffered after losing an OEM deal with HP.

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