Category: application software

Intuit pays up for SMB-focused Demandforce

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Intuit on Friday announced its largest M&A move in six years, acquiring SMB-focused marketing automation startup Demandforce for $423.5m. The deal, and Demandforce’s valuation, was primarily driven by the target’s market traction. The company, founded just in 2003, has amassed a customer roster of more than 35,000 SMBs. The transaction also demonstrates the accounting and tax giant’s desire to further penetrate this market with additional products and services – this is its first major play in marketing automation.

The Demandforce acquisition complements Intuit’s QuickBooks software and expands its offerings for SMBs. (We’d note that Intuit already offers a marketing management and productivity application called QuickBase, though that product is for enterprises.) Demandforce provides marketing automation SaaS and helps businesses maintain an online profile and better communicate with their customers. The company has grown considerably over its short lifetime. According to Inc.com’s annual survey of the fastest-growing companies, Demandforce generated $15.3m in revenue in 2010, up from $6.4m in 2009. Continuing that growth rate would put its 2011 revenue at roughly $25-30m.

Intuit is handing over $423.5m in cash for Demandforce, making this deal Intuit’s largest since it forked over $1.35bn for transaction processor Digital Insight in 2006. Demandforce’s growth certainly factored into its valuation. Assuming that Demandforce maintained historical growth rates, Intuit’s offer would value the target at a whopping 15-20 times trailing sales. If our initial estimates are correct, that valuation is double and even triple some precedent valuations. For example, in 2010, IBM bought Unica for 4.4x sales. Unica had flatlined during its final years as a public company, with revenue remaining in the $100m ballpark for the four years before its sale. The valuation is also double Teradata’s Aprimo acquisition, also announced in 2010. Teradata paid $525m for Aprimo, or 6.3x sales.

Spirent secures its testing platform with Mu

Brenon Daly

Contact: Brenon Daly, Eric Hanselman

A relatively infrequent shopper, Spirent Communications has picked up Mu Dynamics, adding security testing for applications to the company’s performance-testing portfolio. The deal, which is only the British company’s second acquisition in the past half-decade, was announced last week and closed Monday. Spirent paid $40m in cash for Mu, which is projected to contribute about $18m in sales next year. (We understand that talks got going only in December, with Duff & Phelps’ Pagemill Partners unit advising Mu.)

The purchase of Mu Dynamics should also help Spirent expand its market, both in terms of customers and products. Traditionally, Spirent has sold its performance analysis offering as a hardware-based platform to network equipment manufacturers that use it to test the performance of products before they launch them. (It primarily competes in this market with Ixia, although Spirent is much larger and more profitable than its rival.) With Mu, Spirent will get a software product that can be more quickly and easily deployed, even within corporate IT departments.

As more and more applications are run on virtualized infrastructure, the process of testing is adapting. Where hardware-based systems have traditionally been used in test environments, it’s much more difficult to connect them to the virtual and ‘cloudy’ application deployments that are predominating. Spirent’s move will give it tools to address these environments. Ixia has also developed product capabilities in this area. Software versions of testing products can also scale well to match the increased scaling demands placed on applications.

Additionally, Spirent obtains Mu Dynamic’s small – but potentially disruptive – cloud-based testing division called Blitz.io, which bumps up against startups such as SOASTA, Apica, AppDynamics, LoadStorm and other SaaS testing providers. Blitz.io already has some 15,000 users.

While both the performance and security of applications is important to increased cloud application adoption, security is turning out to be a far more significant factor. In a survey earlier this year, ChangeWave Research, a service of 451 Research, found that companies gave higher marks to the reliability of cloud apps than they did to the security of them. Further, of the companies that are not currently running cloud applications, one-third of them cited ‘security concerns’ as the reason they have passed so far. That was twice as high as any other concern voiced by the more than 1,500 respondents to our survey.

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

Splunk soars in rip-roaring IPO

Brenon Daly

Contact: Brenon Daly

In a rip-roaring debut, Splunk soared onto the public market Thursday in an IPO that created more than $3bn of market value for the data analytics vendor. That’s a heady, double-digit valuation for a company that’s likely to generate only about $200m in sales this year. (Just as we predicted in last week’s special IPO report, the company has captured the attention of Wall Street. Subscribers can click here to read what else we see coming in the IPO pipeline in the next few months, and how the offerings are likely to fare.)

But Splunk’s rich pricing simply reflects the tremendous opportunity that the company has in front of it. If the name ‘Splunk’ conjures up images of exploring a cave, or ‘spelunking,’ we might suggest that a more accurate way to view the company is one ready to run – and run quickly – into a wide-open greenfield.

The company, which has already garnered 3,700 customers across a broad number of industries, makes the pitch that any company with large amounts of data is a potential customer. Splunk’s core offering is a search product that helps users make sense of the ever-increasing volumes of data, much of it machine-generated.

After it got going in 2003, Splunk had most of its use cases around IT operations and security. However, the company has expanded its product to also cover application performance management, online customer experience monitoring, marketing and beyond.

Originally, Splunk’s seven underwriters set a range of $8-10 for each share, but then ended up pricing at double that level at $17 each. In the aftermarket, the stock nearly doubled again, changing hands in the low $30s in mid-Thursday trading on the Nasdaq. (It trades under the ticker SPLK.)

A final interesting little market anecdote about the offering: With roughly 100 million shares outstanding, Splunk is starting its life as a public company at almost exactly the same amount ($3.3bn) that Hyperion Solutions finished its life as a public company. Splunk’s current CEO Godfrey Sullivan was previously CEO at Hyperion, which sold to Oracle five years ago.

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

Marketo buys into social marketing with Crowd Factory

Brenon Daly1 Comment

Contact: Brenon Daly

Announcing its first-ever acquisition, Marketo said Wednesday that it is picking up Crowd Factory. The deal adds Crowd Factory’s social campaign management technology to Marketo’s marketing automation platform, expanding the distribution of marketing pitches to social channels such as Facebook pages and Twitter.

Although terms weren’t disclosed, we imagine that this was a small technology tuck-in. As we understand it, Crowd Factory was planning on raising a new round of financing of about $10m, but instead took the offer from Marketo. (Crowd Factory had already raised money from Storm Ventures, Hummer Winblad Venture Partners and Peninsula Ventures.) Our understanding is that Crowd Factory generated a little more than $1m in 2011 (with just two sales people) and was planning on tripling revenue this year.

For Marketo, this purchase rounds out its platform, adding cross-channel capabilities as well as bringing analytics to measure returns on the sharing of social campaigns, such as sweepstakes pages. The technology additions should help the company compete in the red-hot marketing automation space, which has seen significant moves by rivals recently. ExactTarget went public last month, creating some $1.6bn in market capitalization, while Eloqua has been on file since last summer. We could certainly envision Marketo following with an IPO of its own, but probably not until it tops $50m in revenue next year.

Software AG feels the need for speed in latest acquistion

Brenon Daly

by Brenon Daly

Moving to bolster its middleware messaging technology, Software AG said Monday that it would pick up London-based my-Channels. The acquisition of 13-year-old my-Channels, which is probably best known for its Nirvana product used in foreign currency trading, will provide technology to the German BPM giant that will allow customers to stream data to a variety of sources. Software AG plans to release the first product integrated with the newly acquired Nirvana technology before the end of the year, although the technology will be interoperable with its webMethods suite shortly.

The purchase by Software AG, which is its first deal in almost a year, has a few echoes with an acquisition Informatica did almost two years ago. Like my-Channels, 29West focused on high-volume, low-latency messaging for financial services firms. Informatica indicated that it paid about $40m for 29West, which we suspect is more than Software AG paid for my-Channels. However, according to our understanding, 29West had almost three times the revenue of the UK-based startup

IBM reaches into the app layer for Varicent

Brenon Daly

Contact: Brenon Daly

IBM has mostly stayed away from acquiring application vendors, reaching instead for companies that typically either bolster its sprawling Global Services division or infrastructure software business, particularly in the management layer. Big Blue stepped a bit out of its regular acquisition area on Friday with the purchase of sales performance management (SPM) vendor Varicent Software. IBM is adding Varicent, which helps companies manage quotas and incentives for sales agents, into its Smarter Analytics division.

Although IBM didn’t disclose terms of the deal, we estimate that nine-year-old Varicent was generating about $35m in sales, give or take a few dollars. That would make it less than half the size of its publicly traded SPM rival, Callidus Software, which increased revenue 18% in 2011 to $84m. Callidus currently trades at slightly north of 3 times trailing sales. Slapping that multiple on Varicent gives a price in the neighborhood of $100m, which is probably a reasonable starting point for valuation.

Of course, Callidus’ current valuation doesn’t reflect any acquisition premium that an acquirer would have to pay. Also, we would probably make the case that Callidus has a more valuable revenue stream, given that more than half of its revenue comes from subscriptions. (Last year, Callidus reported that SaaS revenue hit $45m of the $84m in total sales. More importantly, the subscription business grew twice as fast as the company’s overall revenue.) Varicent was more of a traditional software provider, with license and maintenance plus a bit of consulting. Finally, one other SPM vendor to keep an eye on is Xactly. We understand that company, which has raised roughly $70m in venture backing, may be looking to go public in 2013.

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

A pivot that pays off for ExactTarget

Brenon Daly

Contact: Brenon Daly

In the startup world, there are more pivots than in an NBA game. But often lost in this flurry of activity is that – at some point – changing the direction of the business needs to produce some actual value. (Otherwise, the pivoting just becomes pirouetting, as one of our VC friends recently quipped.) One of the most successful pivots we’ve seen recently came to light on Thursday, with the IPO of ExactTarget.

The online marketing vendor stormed onto the NYSE with a debut valuation of more than $1bn, and then surged from there. (The offering – led by J.P. Morgan Securities, Deutsche Bank Securities and Stifel Nicolaus Weisel – priced at an above-range $19 per share and then traded above $24 in early-afternoon session.) Followers of the IPO market will know that this was actually ExactTarget’s second run at an offering. It had been on file in 2008, before pulling the paperwork in mid-2009.

At roughly the same time that it took itself off the IPO track, ExactTarget dramatically changed its business. It went from selling a single product (email marketing) to a single slice of the market (SMB) to a full cross-channel marketing vendor serving companies of all sizes. The pivot had immediate consequences on its P&L sheet: ExactTarget went from running solidly in the black when it was on file four years ago to running deeply in the red now.

However, it’s a move that has paid off. Counter to the typical pattern, the growth rate at ExactTarget has actually accelerated as the company has gotten bigger. As it consciously increased its spending (particularly around sales and marketing), ExactTarget has taken its annual growth rate from 32% in 2009 to 41% in 2010 and then pushed that to 55% last year. And this is not some rinky-dink business. ExactTarget recorded $208m in sales in 2011. Another way to look at its growth: the $60m in revenue that ExactTarget did in Q4 2011 is more than it did in the full year when it was previously on file (2007 revenue was $48m).

With the benefit of hindsight, it’s probably a good thing that ExactTarget didn’t go public when it had initially hoped to. Three years ago, it was a sub-$100m revenue company, putting up a decent, but hardly spectacular, growth rate. Sure, it could have expanded the business as a public company, but the moves would have been far riskier and (almost certainly) slower because of the myopic scrutiny of Wall Street.

Instead, ExactTarget had the freedom behind closed doors to reposition its business to accelerate. The series of investments it chose to make have almost certainly meant the creation of several hundred million dollars of additional market value. In fact, on just a back-of-the-envelope calculation, ExactTarget’s debut has created more value than any other IPO of an on-demand vendor that we can think of. The company has some 66 million shares outstanding (or closer to 74 million fully distributed), so at a price of $19 each, ExactTarget was worth an astounding $1.25bn (or closer to $1.4bn fully distributed) before it even hit the aftermarket. In comparison, salesforce.com priced at a valuation of about $1.1bn in its 2004 IPO, based on the prospectus share count.

A barb-less Benioff? salesforce.com grows up

Brenon Daly

Contact: Brenon Daly

In just a half-year, it sounds like salesforce.com has done a fair amount of growing up. We were thinking that Thursday as the San Francisco-based company once again hosted an event in its hometown. But the tone was markedly different from the event it put together here last fall. Most notably, salesforce.com stopped throwing punches and started throwing hugs to other enterprise software vendors.

Rather than blasting Oracle as a ‘false cloud’ provider or taking swipes at SAP as a dinosaur, CEO Marc Benioff extended olive branches to those rivals. In his keynote, he talked about ‘coexisting’ with those companies, stressing the need for ‘deep integration’ between salesforce.com’s products and the widely deployed software. (But Benioff wouldn’t be Benioff if he didn’t put his own marketing spin on the relationship: he positions salesforce.com as the ‘social front office’ for rival existing back-office systems, such as general ledger apps.)

It was a rather dramatic change in tone, suggesting that salesforce.com is staking its claim as a full-fledged member of the fraternity of enterprise software vendors. The company certainly has the numbers to back up that claim: in its previous quarter, salesforce.com announced its first-ever nine-digit contract and is on track to generate close to $3bn in revenue this year. (And don’t forget that salesforce.com also sports a major-league market cap of $20.7bn.)

For their part, Benioff and other people at the company say that détente is in response to customers’ need for software vendors to work together. That’s certainly understandable as most companies run a mishmash of software from a variety of providers. But we might suggest that the tone also reflects a new reality that has only emerged on a grand scale since last fall: the division between the old-line license model and the emerging on-demand model is not as irreconcilable as once thought.

Just since salesforce.com’s last event in San Francisco, SAP and Oracle have done landmark acquisitions of high-profile SaaS vendors, ones that were often mentioned in the same breath as salesforce.com. (The spending spree cost the old-line companies more than $7bn.) So if the old software guard – and even more importantly, their customers – figure they can work with SaaS providers, maybe it’s not too farfetched to imagine SAP and Oracle perhaps taking a run at salesforce.com in the future.

Bigger isn’t always better at Dell

Brenon Daly

Contact: Brenon Daly

Bigger is better, right? That is often the rationale used by tech heavyweights who write multibillion-dollar checks in their quest for ‘scale.’ Not so with Dell in its recent M&A activity. In each of the company’s acquisitions so far this year, Dell passed over large, publicly traded vendors that the company knew well in favor of much smaller (and much less pricey) rivals.

To add to its security portfolio, for instance, Dell on Tuesday reached for unified threat management (UTM) provider SonicWALL. While the acquisition brings a significant UTM business to Dell, the $260m in trailing revenue is much smaller than the $440m or so UTM giant Fortinet produced last year. But then, Dell only had to pay a reported 4.5 times trailing sales, compared with Fortinet’s current market valuation of 10x trailing sales. (In a rumor that turned out to be half right, we indicated last week that Dell might be looking to pick up Fortinet, in what would have been the second-most-expensive information security acquisition.)

Dell’s security purchase comes less than a month after the company used M&A to fill a long-standing blank spot in its storage portfolio: backup and recovery. In that transaction, too, Dell opted for a startup (AppAssure Software) rather than the major-league player in the market (CommVault). That decision was even more notable because Dell was CommVault’s largest OEM partner, accounting for some 20% of that company’s total revenue. CommVault shares currently change hands near their all-time highs, giving the vendor a market cap of $2.2bn. Dell didn’t release the price it paid for startup AppAssure, but it was likely one-tenth that amount.

We might contrast Dell’s shopping trips with fellow tech giant Hewlett-Packard. For example, when HP wanted to add a SIEM product to its portfolio in 2010, it passed on any number of small SIEM providers as it settled on kingpin ArcSight, which was running at about $200m in sales – or nearly four times the revenue of any of the smaller firms. Similarly, it paid a double-digit valuation last summer for Autonomy Corp. The purchase of Autonomy, which was the largest software deal in seven years, brought nearly $1bn of revenue from the enterprise content management vendor.

Of course, those two behemoths – and their respective M&A styles – did bump up against each other in the tussle over storage giant 3PAR in 2010. Recall that Dell planned to take home the company before HP jumped the bid. A public bidding war followed. After several rounds of back-and-forth bidding, Dell dropped out, leaving HP as the buyer for 3PAR. In the end, HP paid nearly twice as much as for 3PAR as Dell had planned to pay – the deal printed at $33 for each 3PAR share, compared with Dell’s opening offer of $18 per share.

Nuance consolidates with Transcend acquisition

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Following a record dealmaking year for the speech recognition software vendor, Nuance Communications today announced the $313m acquisition of medical-focused rival Transcend Services. The deal is Nuance’s largest purchase since its last significant medical acquisition in April 2008, when it paid $363m for eScription. Nuance had earlier acquired Transcend competitor Webmedx for an undisclosed amount in July 2011. Each of these transactions bolsters Nuance’s healthcare division.

Nuance is handing over $29.50 per share in cash for Transcend, valuing the target’s equity at $313m (Transcend had no debt and about $13m in cash at the end of 2011, so the enterprise value is slightly lower at $300m). The per-share offer is a 40% premium to Transcend’s closing share price the day before the deal was announced and, with the exception of a brief uptick in July 2011, the highest price Transcend’s shares have seen since 1996. However, the valuation for the company is lower than a precedent transaction. Using enterprise value, Nuance is valuing Transcend at only 2.4x trailing sales. Meanwhile, its pickup of eScription, a SaaS provider of voice recognition and transcription services, was valued at a loftier 8.1x trailing sales. Some explanation for the discrepancy is the premium given to SaaS companies and difference in margins. EScription had an equally lofty operating margin of 39% compared with Transcend’s 16%. Further, Transcend’s SaaS platform was relatively nascent, having hit the market just last summer.

The Transcend buy follows a record year of dealmaking that saw Nuance announce eight transactions worth nearly $400m. But the buying spree may not be over, given the continuing consolidation in the transcription and voice recognition sector. Even MedQuist, a relatively infrequent acquirer and Transcend’s chief competitor, bought three companies in the past two years, including M*Modal for $130m in July 2011.