Onapsis on the block?

Contact: Brenon Daly

Enterprise application security startup Onapsis quietly kicked off a sale process about a month ago, according to our understanding. Several sources have indicated that Onapsis, which focuses on hardening security for SAP implementations, has hired UBS to gauge interest among buyers. And while there undoubtedly will be acquisition interest in the startup, Onapsis may ultimately prove to be a bit of a tough sell. The reason? The most obvious buyers for the company don’t typically pay the type of valuations that Onapsis is thought to be asking.

In many cases, the heavy-duty SAP systems that Onapsis helps secure were implemented by one of the big consulting shops. So at least theoretically, it’s not a big leap to imagine one of these consultancies buying Onapsis and offering its platform, exclusively, to help safeguard these mission-critical systems and the data they generate. (Indeed, Onapsis already has partnerships with many of the big consulting firms, including KPMG, PWC, Accenture and others.) While that strategy may be sound, M&A always comes down to pricing. And that’s why we would think it’s probably more likely than not that eight-year-old Onapsis remains independent.

According to our understanding, Onapsis is looking to sell for roughly $200m, which would be twice the valuation of its September 2015 funding. The rumored ask works out to about 8x bookings in 2016 and 4.5x forecast bookings for this year. For a fast-growing SaaS startup, those aren’t particularly exorbitant multiples. Yet they may well price out any consulting shops, which have typically either picked up small pieces of specific infosec technology or just gobbled up security consultants. Any reach for Onapsis would require a consulting firm to pay a significantly richer price than the ‘tool’ or ‘body’ deals they have historically done.

Xactly exits

Contact: Brenon Daly

Two years after coming public, Xactly is headed private in a $564m buyout by Vista Equity Partners. The deal values shares of the sales compensation management vendor at nearly their highest-ever level, roughly twice the price at which Xactly sold them during its IPO. According to terms, Vista will pay $15.65 for each share of Xactly.

Xactly’s exit from Wall Street comes after a decidedly mixed run as a small-cap company. For the first year after its IPO, the stock struggled to gain much attention from investors. Shares lingered around their offer price, underperforming the market and, more notably, lagging the performance of direct rival Callidus Software. However, in the past year, as Xactly has posted solid mid-20% revenue growth, it gained some favor back on Wall Street. In the end, Vista is paying slightly more than 5x trailing sales for Xactly.

The valuation Vista is paying for Xactly offers an illuminating contrast to Callidus, which has pursued a much different strategy than Xactly. Although both companies got their start offering software to help businesses manage sales incentives, the much-older and much-larger Callidus has used a series of small acquisitions to expand into other areas of enterprise software, notably applications for various aspects of human resources and marketing automation. According to 451 Research’s M&A KnowledgeBase, Callidus has done seven small purchases since the start of 2014. For its part, Xactly has only bought one company in its history, the 2009 consolidation of rival Centive that essentially kept it in its existing market.

Although Xactly is getting a solid valuation in the proposed take-private, it’s worth noting that Callidus – at least partly due to its steady use of M&A – enjoys a premium to its younger rival with a narrower product portfolio. Even without any acquisition premium, Callidus trades at about 7x trailing sales. Callidus is roughly twice as big as Xactly, but has a market value that’s three times larger.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Dealing with the dragon

Contact: Brenon Daly

A little more than a year after a Chinese consortium acquired slumping printer maker Lexmark, the group has sold off the company’s software business to Thoma Bravo. The enterprise software unit had basically been for sale since the Chinese buyout group, which is led by a hardware-focused firm, closed its $2.5bn take-private of Lexmark. Although terms of the sale of the software division weren’t formally released, media reports put the price at $1.5bn.

Assuming that price is more or less accurate (we haven’t been able to independently verify it), the deal would stand as the largest inbound acquisition of a Chinese technology asset, according to 451 Research’s M&A KnowledgeBase. Obviously, there have been larger transactions involving Chinese targets. But all 16 of those deals listed in our M&A KnowledgeBase have seen fellow Chinese companies as the buyer. Overall, our data indicates that slightly more than half of all China-based tech vendors sell to Chinese acquirers, although the top end of the market is unanimously weighted toward domestic transactions.

Clearly, although owned by a Chinese group, the Lexmark software division is hardly a ‘Chinese company,’ in the sense of a domestically headquartered operation that does the majority of business in its home market. Lexmark had cobbled together its software unit from roughly a dozen acquisitions of enterprise software providers based in North America and Europe. (451 Research will have a full report later today on how the acquired software business will fit into Thoma Bravo’s portfolio and what impact the deal will have on the broader business process and content management markets.)

Nonetheless, this landmark transaction comes at a difficult time in US-Sino relationships. President Donald Trump has blasted the currency and trade policies of China, although he did tone down his criticism during last month’s meeting with his counterpart, Xi Jinping. Despite the apparent thaw, the relationship between the world’s two largest economies remains chilly. That’s having an impact on M&A, which is a form of ‘international trade’ of its own. In a survey last month of 150 tech M&A professionals, more than half of the respondents (55%) predicted that US acquisitions of Chinese companies would decline because of President Trump’s trade policies. Just 7% forecast an uptick, according to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster.

For a more in-depth look at the trends and concerns around doing deals in China, be sure to join our webinar, ‘The State of Tech M&A in China,’ on May 17 at 1:00pm EST. The webinar is open to everyone, and you can register here.


Jive talk leads to a deal

ContactBrenon Daly

Privately held software consolidator ESW Capital has continued its sweep through the ever-maturing business software market, paying a bargain price for faded enterprise communications vendor Jive Software. ESW, which serves as the family office of Trilogy Software founder Joe Liemandt, has notched more than 50 software acquisitions, mostly over the past decade. It typically acquires old-line software companies that, for one reason or another, find themselves out of step with their respective markets.

That’s certainly a description that could be applied to Jive, which was founded in 2001 and enjoyed a few bountiful days after its 2011 IPO, but has more recently found itself a bit of an orphan on Wall Street. It went public at $12 and shortly after the offering shares ran into the mid-$20s. However, the stock hasn’t been in the double digits for more than three years. As shares slumped, perhaps inevitably, acquisition rumors began surfacing around the company, with SAP and existing Jive partner Cisco named as potential buyers. (At that time, boutique bank Qatalyst Partners was rumored to be running the process. In the actual sale to ESW, Morgan Stanley, which led Jive’s 2011 IPO, is getting the print. On the other side, Atlas Technology Group advised ESW.)

Investors impatiently waited through several shifts in strategy at Jive, but recent moves hadn’t produced much growth at the company: Jive was a single-digit-percentage grower in both 2015 and 2016, while its customer count actually ticked slightly lower during that period. On the bottom line, Jive has always run in the red, although on the other side of last year’s restructuring, it has posted positive operating income.

Still, Jive’s struggles are reflected in ESW’s take-private offer. Terms call for the buyout firm to pay $5.25 for each of Jive’s roughly 79 million shares outstanding, for an announced equity value of $462m and an enterprise value of slightly more than $350m. Jive put up $204m in revenue, meaning it is being valued at just 1.7 times trailing sales in the deal, which is expected to close next month. That’s below any of the multiples paid by PE shops in erasing software vendors from US exchanges over the past year. According to 451 Research’s M&A KnowledgeBase, multiples paid in software take-privates since May 2016 have ranged from 2.3-7.9x trailing sales.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

An earthbound IPO for Cloudera

Contact: Brenon Daly 

Looking to extend the current bull run for enterprise software IPOs, Cloudera has taken the wraps off its prospectus and put itself on track to hit Wall Street in about a month. Assuming the debut follows that schedule, the heavily funded Hadoop vendor would be the third infrastructure software provider to come public in six weeks, following MuleSoft and Alteryx. Unlike the debuts of those two other software firms, however, Cloudera’s IPO will almost certainly be a down round.

Three years ago, when Cloudera’s quarterly revenue was less than half its current level, Intel acquired 22% of the company at a valuation of $4.1bn. Since then, both the company and other equity holders agreed that ‘quadra-unicorn’ valuation got a little ahead of itself and have priced Cloudera shares below Intel’s level of just less than $31 each. (In contrast, MuleSoft has more than doubled its final private market valuation on Wall Street.) Cloudera – along with its nine underwriters, led by Morgan Stanley, J.P. Morgan Securities and Allen & Co – should set the inaugural public market price for shares in about a month.

Because Wall Street likes to use a ‘known’ to help assign value to an ‘unknown,’ investors will look at Cloudera’s future trading valuation relative to the current trading valuation of fellow Hadoop provider Hortonworks. However, that comparison won’t particularly help Cloudera get any closer to its previous platinum valuation. Hortonworks currently has a market capitalization of just $650m, or 3.5x its 2016 revenue and 2.7x its forecast revenue for 2017.

The two Hadoop-focused companies actually line up fairly closely with one another, financially. Cloudera and Hortonworks hemorrhage money, largely because of huge outlays on sales and marketing. (Both firms spend roughly twice as much on sales and marketing as they do on R&D.) Cloudera is nearly one-third bigger than Hortonworks, recording $261m in sales in its most recent fiscal year compared with $184m for Hortonworks. Both are growing at about 50%.

Within that revenue, both Cloudera and Hortonworks wrap a not-insignificant amount of professional services around their product, which weighs on their margins and, consequently, their valuations. Both are consciously shifting their revenue mix. Cloudera is further along in moving toward a ‘product’ company, with professional services accounting for 23% of revenue in its latest fiscal year compared with 32% for Hortonworks. That progress is also reflected in the fact that Cloudera’s gross margins are several percentage points higher than those at Hortonworks, although both are still low compared with pure software providers. (For instance, MuleSoft, which also has a professional services component, has gross margins in the mid-70% range, about seven percentage points higher than Cloudera.)

With its larger size and more-efficient model, Cloudera will undoubtedly command a premium to Hortonworks. (That will come as a relief to Cloudera because if Wall Street simply valued the company at the same multiple of trailing sales it gives Hortonworks, Cloudera wouldn’t even be a unicorn.) We’re pretty sure Cloudera will come to market with a ‘three-comma’ valuation, but it won’t be near the $4bn valuation Intel slapped on it. Perhaps Cloudera can grow into that one day, but it certainly won’t start out there.

ServiceNow adds some smarts to the platform with DxContinuum

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

Machine learning and the M&A machine

Contact: Brenon Daly

Coming off a 60% increase in the number of machine-learning-related transactions last year, the trend of adding ‘smarts’ to technology looks likely to drive even more deals in 2017. Senior investment bankers picked machine learning as the top M&A theme for the coming year in last month’s 451 Research Tech Banking Outlook Survey, with more than eight out of 10 respondents (82%) predicting an uptick in activity. That outlook for machine learning outpaced the view in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

One of the reasons why machine learning (and the related – but broader – theme of artificial intelligence) is expected to figure into so many transactions is that the technology is broadly applicable. Basically, any company that is looking to make its products more efficient – which, in turn, makes the users of those products more efficient – could be viewed as a potential acquirer of machine-learning technology. (To be clear, our view of machine learning is that the technology is a subset of artificial intelligence, focused on using algorithms that learn and improve without being explicitly programmed to do so. For a more in-depth look at the AI/ML market, see our recent sector overview led by my colleague Nick Patience.)

Certainly, machine learning appears to be an almost foundational technology when we consider the broad pool of buyers. Just in the past year, acquirers as diverse as Ford Motor, Salesforce, Intel and GE Digital have all announced machine-learning-related transactions, according to the M&A KnowledgeBase. Those deals have been part of a surge of M&A that saw buyers announce as many machine-learning-themed purchases in 2016 as they did from 2002-14, according to the M&A KnowledgeBase.

It’s win or go home for Oracle and its bid for NetSuite

Contact: Brenon Daly

Just like this year’s World Series, there’s a dramatic win-or-go-home contest playing out in the tech M&A market. The showdown pits the ever-acquisitive Oracle against one of Wall Street’s biggest investors. The stakes? The fate of the largest SaaS acquisition ever proposed.

At midnight tonight, Oracle’s massive $9.5bn bid for NetSuite will effectively expire. In the original offer three months ago, Oracle said it will pay $109 for each of the nearly 87 million (fully diluted) shares of NetSuite, valuing the subscription-based ERP vendor at $9.5bn. That wasn’t enough for NetSuite’s second-largest shareholder, T. Rowe Price. Instead, the institutional investor suggested that Oracle pay $133 for each NetSuite share, adding $2bn to the (hypothetical) price tag.

Oracle has declined to top its own bid. Nor will it adjust the other major variable in negotiations: time. (Oracle has already extended the deal’s deadline once, and says it won’t do it again.) In an unusually public display of brinkmanship in M&A, Oracle has said it will walk away from its $9.5bn bid if enough shareholders don’t sign off on its ‘best and final offer.’ As things stand, shareholder support is far below the required level, largely because of T. Rowe’s opposition.

Does T. Rowe have a case that Oracle is shortchanging NetSuite shareholders with a discount bid? Or is the investment firm greedily hoping to fatten its return on NetSuite by baiting Oracle to spend more money? If we look at the proposed valuation for NetSuite, it’s hardly a low-ball offer. On the basis of enterprise value, Oracle’s current bid values NetSuite at 11.1x trailing sales. That’s solidly ahead of the average M&A multiple of 10.3x trailing sales for other large-scale horizontal SaaS providers, according to 451 Research’s M&A KnowledgeBase. (For the record, T. Rowe’s proposed valuation of $11.6bn for NetSuite roughly equates to 13.7x trailing sales – a full turn higher than any other major SaaS transaction.)

With the two sides appearing unwilling to budge, NetSuite will likely return to its status as a stand-alone software firm. If that is indeed the case, NetSuite will probably have to get used to that status. The roughly 40% stake of NetSuite held by Oracle chairman Larry Ellison serves as a powerful deterrent to any other would-be bidder, which was one of the points T. Rowe raised in its rejection of the deal. Assuming 18-year-old NetSuite stands once again on its own, the first order of business will be to pick up growth again. (Although there’s still the small matter of a $300m termination fee in the transaction.) In its Q3, NetSuite reported that revenue increased just 26%, down from 30% in the first half of the year and 33% for the full-year 2015.

Select multibillion-dollar SaaS deals

Date announced Acquirer Target Deal value Price/trailing sales multiple
July 28, 2016 Oracle NetSuite $9.3bn 11.1x
September 18, 2014 SAP Concur $8.3bn 12.4x
May 22, 2012 SAP Ariba $4.5bn 8.6x
December 3, 2011 SAP SuccessFactors $3.6bn 11.7x
June 1, 2016 Salesforce Demandware $2.8bn 11x
June 4, 2013 Salesforce ExactTarget $2.5bn 7.6x

Source: 451 Research’s M&A KnowledgeBase

A public/private split in Apptio’s IPO

Contact: Brenon Daly

Apptio soared onto Wall Street in its debut, pricing its offering above the expected range and then jumping almost 50% in early Nasdaq trading. The IT spend management vendor raised $96m in its IPO, and nosed up toward the elevated status of a unicorn. However, in a clear sign of the frothiness of the late-stage funding market a few years ago, Apptio shares are currently trading only slightly above the price the institutional backers paid in the company’s last private-market round in May 2013.

That’s not to take anything away from Apptio, which created some $850m of market value in its offering. (Our math: Apptio has roughly 37 million shares outstanding, on an undiluted basis, and they were changing hands at about $23 each in midday trading under the ticker APTI.) That works out to a solid 5.4 times 2016 revenue, which we project at about $157m. (Last year and so far in the first half of 2016, Apptio has increased sales in the low-20% range. That growth rate, while still respectable, is about half the rate it had been growing. We suspect that deceleration, combined with uninterrupted red ink at the company, help explain why Wall Street didn’t receive Apptio more bullishly.)

In midday trading, Apptio’s share price was only slightly above the $22.69 per share that it sold shares to so-called ‘crossover investors’ Janus Capital Group and T. Rowe Price, among other investors, in its series E financing, according to the vendor’s prospectus. A relatively recent phenomenon, crossover investing has seen a number of deep-pocketed mutual funds shift some of their investment dollars to private companies in an effort to build an early position in a business they hope will come public and trade up from there.

However, given the glacial pace of tech IPOs in recent years as well as the overall deflation of the hype around unicorns, that strategy hasn’t proved particularly lucrative. In fact, many of the price adjustments that mutual funds have made on the private company holding have been markdowns.

But the institutional investors would counter that the short-term valuation of their portfolio matters less than the ultimate return. For the most part, we’ve seen conservative pricing of tech IPOs in 2016. (Twilio, for instance, has more than doubled since its IPO three months ago.) Apptio probably doesn’t have the growth rate to be as explosive in the aftermarket as Twilio, but it can still build value. That’s what investors – regardless of when they bought in – are banking on.

Recent enterprise tech IPOs*

Company Date of offering
Pure Storage October 7, 2015
Mimecast November 20, 2015
Atlassian December 10, 2015
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016
Apptio September 23, 2016

*Includes Nasdaq and NYSE listings only

Amdocs’ engaging trio of acquisitions

Contact: Sheryl Kingstone Scott Denne

Amdocs, the dominant provider of operational telecom software, stretches into customer engagement with a trio of uncharacteristic acquisitions. The telecom support systems giant must push beyond traditional operational and billing software (OSS/BSS) as the nature of customer service changes in the telecom industry.

The Israel-based company spent a combined $260m to acquire Brite:Bill, Pontis and Vindicia, enhancing its billing experience and customer engagement capabilities. Acquisitions have been a part of Amdocs’ legacy. However, three deals in a day in unusual. In fact, it’s been a decade since Amdocs inked three transactions in a single year.

It’s not just the number of new purchases that defies Amdocs’ M&A M.O. The vendor bought its way toward consolidating OSS/BSS, first pushing from BSS into OSS and then, more recently, doing deals to shore up its market share in that sector. Now Amdocs is looking to M&A for new capabilities to address the changing requirements of consumers. And there’s an urgent need to do that.

The increasing availability of digital communications and customer service has unleashed an abundance of new consumer demands. Telcos are no longer competing on price alone. Mobile, social and other digital channels are empowering customers to dictate the terms of engagement with their chosen service providers. That is forcing service providers to complement systems of record with systems of engagement that are agile and intelligent. According to our surveys, 76% of consumers prefer to use digital channels to avoid calling a customer service agent. Of those, 42% view that capability as a prerequisite for future loyalty.

Arma Partners advised Brite:Bill on its sale.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.