Category: application software

At long last, Open Text makes a BPM play

Brenon Daly

Contact:  Brenon Daly

More than a year and a half ago, we noted that Metastorm was looking to buy its way into some adjacent markets such as risk and compliance or perhaps collaboration. The planned shopping trip would have come after the business process management (BPM) provider pulled its IPO paperwork. At the time, however, we wondered if the would-be IPO candidate might not head to the other exit: a trade sale.

Specifically, we floated the single name of Open Text, which we noted had consolidated much of its core enterprise content management (ECM) market but still appeared to be losing deals to rival vendors with more robust BPM offerings. However, we thought that valuation might make it tough to bridge the bid/ask spread between the two sides. In most of its dozen deals over the past decade, Open Text has paid somewhere in the range of 0.5-1.5 times trailing sales for its acquisitions. That’s true for its most visible purchases, including deals that saw it gobble up rival ECM firms Hummingbird in August 2006 and Vignette in May 2009, as well as add image capture software maker Captaris in September 2008.

As it turns out, valuation didn’t necessarily snag Open Text’s significant acquisition to bolster its BPM credentials. The company said late last week that it will hand over $182m in cash for Metastorm. In a conference call, Open Text indicated that Metastorm was generating $70-75m in sales, implying a valuation of about 2.5x sales for the BPM provider. That’s a fair bit richer than the valuation that the Canadian consolidator has paid in the past. However, we suspect that guidance assumes a bit of revenue write-downs and (perhaps) a bit of sandbagging. The reason? Metastorm said in mid-2009 that it was above that level of revenue in 2008 and targeting $90m in 2009. In its IPO filing, Metastorm reported $60m in sales for 2007.

SolarWinds looks to shine in other markets

Brenon Daly

Contact: Brenon Daly

Having built a billion-dollar market cap through a cheap and easy offering for network management, SolarWinds is looking to take that approach to new markets through small acquisitions. Exactly a year ago, the company picked up Tek-Tools to add storage management to its portfolio, and now it steps fully into application performance management (APM) and virtualization management with its reach for Hyper9. SolarWinds is handing over $23m in cash for Hyper9, with terms also providing for a possible $7m earnout.

The addition of the small Austin, Texas-based startup, which had only about $2m in sales, gives SolarWinds its first stand-alone virtualization offering as well as a shoring up its APM product. (In the past, SolarWinds had a much less robust APM offering as a module to its flagship Orion product.) The moves also brings the company into more direct competition with management giants such as Hewlett-Packard, CA Technologies and Quest Software, among others.

In terms of competition, we would note with some irony that in a recent technology bakeoff that a nationwide grocery chain held for a monitoring product, Hyper9 got the nod ahead of SolarWinds, among other vendors. (See the full details in our User Deployment Report). So maybe part of the thinking at SolarWinds for the deal was if you can’t beat them, buy them

Everything is bigger at Big Blue

Brenon Daly

Contact: Brenon Daly

Sometimes, we forget why IBM is called Big Blue. The giant just reported $100bn in sales for 2010, making it more than twice the size of Cisco Systems and almost four times the size of Oracle. (Just on its own, IBM’s software portfolio is larger than all of Oracle, not to mention the fact that IBM’s software operations are vastly more profitable than Oracle.) IBM’s current valuation is big, too, with shares currently changing hands at their highest levels ever.

And, as we listened to the company discuss its recent financial results, we were reminded that it has a big appetite for deals. It dropped a cool $6bn on acquisitions last year, with half of that coming in just the fourth quarter. Just in the last year, IBM took two public companies off the board (Netezza, Unica), gobbled up another two companies that could have been looking for an IPO (Initiate Systems, BigFix), and was even on the buyside of an unusual $1.4bn divestiture (AT&T shedding Sterling Commerce). Of course, it’s easy to write those big checks when the company generated more than $16bn in free cash flow in 2010.

Adobe backs up Omniture buy with more SaaS

Brenon Daly

Contact: Kathleen Reidy

Continuing to show its interest in the online marketing realm, Adobe has announced that it will buy SaaS startup Demdex for an undisclosed sum. Demdex was founded in 2008 with the goal of capturing behavioral data across websites to help advertisers better segment and target ads. It had raised $7.5m in seed and series A rounds from Shasta Ventures, First Round Capital and Genacast Ventures.

This is the first deal Adobe has done explicitly in support of Omniture, which it acquired for $1.8bn in September 2009. It certainly seems like a transaction Omniture would have done, since it had been an active acquirer itself as an independent. (The company announced four purchases in 2007 alone.) Demdex will join other technologies from Touch Clarity, Offermatica, Visual Sciences and Mercado Software in the Omniture portfolio, which is now dubbed the ‘Adobe Online Marketing Suite, powered by Omniture.’ Omniture was also Adobe’s first big SaaS buy so Demdex brings it another SaaS offering, as well.

The only other acquisition Adobe has made since buying Omniture was its $242.7m pickup of Day Software last July. There are certainly connections between Day’s on-premises Web content management products and Omniture’s SaaS Web analytics and online marketing tools, but Adobe had broader reasons for buying Day and so far, seems to position Day more alongside its on-premises content management product, Adobe LiveCycle.

What’s ultimate destination for Ultimate Software?

Brenon Daly

Contact: Brenon Daly

After 20 years in business, Ultimate Software may be looking for a new owner. The human capital management (HCM) vendor is rumored to have retained Lazard to shop the company, market sources have told us. The bank will run a narrow process, likely approaching about a half-dozen possible buyers rather than running a full auction, the sources added.

The decision by Ultimate to test the market comes as deal flow in the HCM sector has hit a record level. In 2010, we tallied some $2.4bn in spending on deals, slightly eclipsing the previous record of $2.1bn in 2007, according to The 451 M&A KnowledgeBase. Valuations across the space have been soaring, and Ultimate is no exception. This time last year, shares of the Weston, Florida-based company were changing hands at about $30 each. Now, they’re at $50 – an all-time high. That gives Ultimate a market value of $1.25bn, roughly 4.6 times projected 2011 sales of $270m.

Much of the gain can be chalked up to the company’s decision a few years ago to switch from selling software licenses to a subscription model. (It’s a move that has proved incredibly lucrative for other old-line software companies, as well. Shares of Concur Technologies, which underwent a similar shift in sales model a few years ago, have quadrupled over the past five years and are now valued at $2.8bn.) Ultimate stopped selling new software licenses in April 2009 and recurring revenue (made up of both subscription and maintenance revenue) is now more than three-quarters of total sales.

Teradata pays a tidy premium for Aprimo

Brenon Daly

Contact: Brenon Daly

Announcing its first major acquisition since it was spun off into a stand-alone company more than three years ago, Teradata said it will pay $525m in cash for Aprimo. The deal marks a significant bet by the data-warehousing giant on the application market. Specifically, Aprimo brings a marketing automation offering to run on top of Teradata’s existing business analytics offering. Aprimo products will continue to be marketed and sold under the company’s name once the transaction closes, which is expected in the first quarter.

According to a conference call discussing the acquisition, Aprimo is expected to generate about $80m in annual sales. (We understand that roughly $60m of that is recurring revenue.) That means Teradata is paying a healthy 6.5 times revenue for Aprimo. That’s slightly ahead of the valuation that IBM paid in its big marketing automation play four months ago. Big Blue handed over $523m in cash for Unica, valuing the publicly traded company at 4.8 times trailing revenue.

Part of Aprimo’s premium could likely be attributed to the fact that it was steadily moving its business from a license model to a subscription basis. In fact, Aprimo’s SaaS offering accounted for a majority of its revenue. IBM’s move was important in the Aprimo process, as we gather that Teradata and Aprimo started talking only after Big Blue had closed its acquisition.

BMC adds to automation capabilities

Brenon Daly

by Brenon Daly

BMC Software hopes its latest purchase will make life easier for database administrators (DBAs) and systems operations. The management giant on Friday picked up longtime partner GridApp Systems, adding the startup’s database automation offering to its broader automation and management portfolio. GridApp automates tasks such as database provisioning and patching – mundane and time-consuming chores for DBAs, but ones that are critical for security and compliance reasons. Additionally, it enhances BMC’s full-stack automation capabilities.

The importance of this technology was highlighted (in part, at least) by another acquisition earlier this year. In late August, Hewlett-Packard reached for Stratavia, a startup that had begun life as a database management vendor but expanded into application-layer automation as well. (Pacific Crest Securities advised Stratavia, while GrowthPoint Technology Partners banked GridApp.) Even if the technology in the two deals doesn’t line up exactly, we understand that the valuations are nearly identical. Both GridApp and Stratavia, which were small, nonetheless garnered a 10 times multiple.

Laying out a dual track for Conerstone

Brenon Daly

Contact: Brenon Daly

If current IPO candidate Cornerstone OnDemand is looking for a company to model itself on – at least in terms of the offering and after-market trading – it could do a lot worse than SuccessFactors. Both vendors sell human capital management (HCM) software, and both sell it on a subscription basis. Further, both companies were relatively small (sub-$40m in revenue) and running deeply in the red when they put in their paperwork. Not that it has mattered in the case of SuccessFactors. Shares in the company have tripled from the offer price, giving it an eye-popping market valuation of $2.3bn.

Whether Cornerstone will enjoy an equally remarkable run as a public company remains to be seen. (The company, which initially filed in September, would probably be looking at pricing in the first half of next year.) But in a recent report, we wonder if Cornerstone will even make it to the Nasdaq at all. The reason? The M&A market for HCM vendors has been hot lately. Spending on deals in the market so far this year is running at three times the level of both 2008 and 2009. And valuations, for the most part, continue to come in at above-market multiples.

In the report, we speculate on two potential buyers: one that’s obvious (ADP) and one that’s more of a stretch (salesforce.com). Cornerstone has some traits that would clearly appeal to both, as well as some that make a trade sale to either would-be acquirer less likely. ADP, which has already purchased a half-dozen HCM providers, currently has a five-year reselling agreement with Cornerstone, and even holds rights to some warrants in the startup. However, a closer reading of Cornerstone’s prospectus indicates that the early returns from that reselling arrangement haven’t been encouraging, with the two sides feuding over whether or not ADP has hit the agreed-upon sales targets and is, therefore, entitled to warrants that could be worth several million dollars.

Unlike ADP, which has a demonstrated interest in and appetite for HCM deals, salesforce.com is a much more speculative buyer for Cornerstone. But it’s a pairing that is perhaps not as farfetched as it might seem. After all, salesforce.com has long said that it wants to be relevant to all employees at a business, not just to those in sales. Buying Cornerstone would immediately give salesforce.com a high-profile presence in the HCM market, opening up an opportunity that far exceeds its core CRM market. Of course, a major acquisition like this would go against the direction that salesforce.com has taken as an open, all-inclusive platform provider.

Tech M&A slumps toward the year-end

Brenon Daly

Contact: Brenon Daly

Tech M&A appears to be heading toward a quiet end to the year, with November marking the third straight month of declining spending on deals. The slump puts the value of deals announced in the just-completed month at about half the level we were recording in the months earlier this summer. Overall, we tallied 252 deals worth $11.2bn. (And as a side note to the total, we would highlight the fact that the spending in November was highly concentrated. A trio of deals – EMC’s purchase of Isilon, the Novell buyout and Oracle’s reach for Art Technology Group – accounted for nearly half the value of all transactions announced last month.)

It’s not just that November slipped when compared to other months this year. The paltry $11.2bn in aggregate M&A value is just one-third the level recorded in November 2009, and is even lower than the total in November 2008, when the economy was in the grips of the worst economic recession in 70 years. In fact, spending for the just-completed November is coming in at about half the average level for the month over the past four years.

As to what this means for tech M&A in 2011, we’re turning to the people who will be striking the deals next year. In the next day or two, we’ll be sending out our annual survey for corporate development executives and tech investment bankers. The surveys cover forecasts for M&A activity, as well as valuations. Anyone interested in filling out the survey (a quick, painless and confidential process), just email me and I’ll send along the appropriate survey. For those who receive the survey in their inboxes soon, we would appreciate 5-10 minutes of your time to get your views on where the M&A market is heading next year.

SAP’s ‘dilutive’ deal and larger M&A implications

Brenon Daly

by Brenon Daly, China Martens

The jury’s decision to order SAP to pay $1.3bn to Oracle for stealing software and support material stands as the largest award for the theft of IP in the software industry. (As one banker deadpanned: “I think the TomorrowNow acquisition is dilutive.”) But the implications of the three-week trial extend far beyond the monetary settlement, as whopping as it is. From our perspective, the key part of the courtroom drama has been just how deeply the pair has relied on M&A to radically overhaul their businesses.

A half-decade ago, SAP figured that one of the easiest ways to hurt Oracle was to spend $10m for TomorrowNow (TN). Back in January 2005, the rationale for the TN deal made sense: buy a way of potentially siphoning off some of the rich maintenance stream that Oracle collects for supporting its ERP and CRM software. That was a key concern for SAP at the time, because it was still primarily hawking rival ERP and CRM products. The German giant had largely stayed out of the M&A market, preferring just to acquire small pieces of technology.

That changed dramatically three years ago, when SAP reached for Business Objects – its first major move beyond its core market. It stretched even further this summer with the $5.8bn purchase of Sybase. That acquisition brought SAP into several emerging markets, including mobile applications and some very promising in-memory analytics technology. The deal also represented a long-term shot at Oracle, as SAP now has a database to sell against Oracle rather than simply standing back and watching most of its ERP and CRM software run on Oracle, which has roughly half the database market.

If anything, Oracle has changed itself even more dramatically since then through acquisitions. It certainly has done a lot of them, announcing some 66 deals valued at a total of more than $30bn since SAP announced its tiny pickup of TN. Oracle has consolidated broad swaths of the software industry, including CRM, product lifecycle management, middleware, content management, as well as making a push into a handful of key vertical markets. Add to that Oracle is now in the hardware business, selling servers and storage along with other new businesses it picked up with its purchase of Sun Microsystems.