Category: application software

A SaaS-y deal

Brenon Daly

Contact: Brenon Daly

Given the rich premium that Wall Street awards to on-demand software companies, it’s no wonder that vendors still hawking software licenses are looking to get into the business of selling software as a service (Saas). Of course, there are many obstacles in making that transition, ranging from internal (how to compensate sales staff) to external (how to communicate to investors). As a result, most old-line software companies offer only a tiny bit of their products on-demand, if they do at all.

The few vendors that have seriously tried to transition to the on-demand model have used both organic and inorganic approaches. Concur Technologies largely stayed in-house to create a ‘for rent’ version of its expense account software. (Wall Street has rewarded the company with an eye-popping valuation of 5.5x trailing 12-month revenue.) Meanwhile, Ariba more than doubled the on-demand portion of its business when it spent $101m for SaaS supply chain vendor Procuri in September 2007.

We mention all this as a (long-winded) way of saying that we don’t understand why Callidus Software didn’t take home on-demand vendor Centive, which had been on the block for some months. Callidus has been selling its sales compensation management products as a service for about three years, with on-demand shoppers accounting for one-third of its 180 total customers. A year ago, it acquired a small SaaS vendor, Compensation Technologies, for $8.3m to bolster its transition efforts. One source indicated that publicly traded Callidus was initially interested in smaller rival Centive, but didn’t follow through. Instead, last week Centive and its estimated $10m in revenue went to fellow startup Xactly Corp in an all-equity consolidation play. Callidus making a run at Xactly probably won’t happen, for reasons both personal and financial.

For starters, Xactly is too expensive for Callidus, a money-losing company that holds some $39m in cash. An equity deal is probably off the table, given Callidus’ paltry valuation. Its enterprise value is just $46m, less than half the $105m in sales it likely recorded in 2008. (Callidus reports fourth-quarter earnings on Tuesday.) Beyond the money, there’s also the complicating factor that most of Xactly’s executives used to work at Callidus before setting off on their own with an eye to knocking out their former employer with their on-demand model. If indeed the two sides do ever start talking, we might suggest that a family therapist be on hand, in addition to the bankers and lawyers.

Mr. Fixit sells again

Brenon Daly

Contact: Brenon Daly

Known as a turnaround guy for most of his career, Joe Cowan didn’t actually have too much fixing up to do at his latest posting as chief executive of content management vendor Interwoven. After he took over Interwoven’s top post in early April 2007, the business hummed along with sales growth in the mid-teens and solid profitability. Under Cowan’s leadership, shares of Interwoven dropped just 9%, less than one-quarter the decline posted by the Nasdaq over that same period. And never mind the southbound performance of shares of rival Vignette.

Cowan’s work at Interwoven stands in sharp contrast to earlier postings at Baan and Manugistics, scandal-tainted companies with declining sales and heavy losses. However, the end result of most of his engagements has been the same: a sale of the company. As a testament to the difference in the relative health of the two most-recent exits that Cowan has helped broker, consider that Interwoven is getting valued at twice the price-to-sales multiple of Manugistics. Viewed another way, Interwoven sold for almost 19x EBITDA, compared to closer to 13x EBITDA for Manugistics. We understand that Cowan will be staying on at acquirer Autonomy Corp after the close of the deal, at least for a bit.

CEO Joe Cowan: A tale of two exits

Date Target Acquirer Deal value Price/TTM sales
April 2006 Manugistics JDA Software $211m 1.4x
January 2009 Interwoven Autonomy $775m 2.8x

Source: The 451 M&A KnowledgeBase

Barracuda bites again

Brenon Daly

Contact: Brenon Daly

A ravenous eater, Barracuda Networks has now gobbled up four companies in the past 14 months. (And that doesn’t even count the privately held security company’s unsolicited bid in May for publicly traded Sourcefire, the Snort vendor.) Barracuda’s latest bite is backup and recovery company Yosemite Technologies. The company will be lumped in with the technology Barracuda picked up in November 2008 when it bought another backup vendor, BitLeap.

As we have chronicled, Yosemite evolved from a tape-based backup vendor to a disk-based one, and then added technology for continuous data protection for notebooks and laptops with the acquisition of early-stage FileKeeper. We understand that Yosemite, under the leadership of storage veteran George Symons, had been investing heavily in commercializing the technology. However, we suspect that fully realizing the value of the FileKeeper technology would have likely required another round of funding, which is tough to come by these days.

Instead, Yosemite opted for a sale to Barracuda. Terms weren’t disclosed, but a Barracuda insider once characterized the company’s approach to M&A to us this way: ‘We don’t mind picking through the boneyard.’ Barracuda has already built a powerful distribution channel to SMBs, so it just wants more products to push through that. With data protection covered, where might Barracuda look next? Our bet is that it is still interested in WAN traffic optimization (WTO). As we have noted, Barracuda CFO David Faugno knows the market well, having served as the top numbers guy at WTO vendor Actona Technologies before its sale to Cisco.

Barracuda’s deals

Date Target Rationale
September 2007 NetContinuum Web application security
November 2008 BitLeap Backup and recovery
November 2008 3SP SSL VPNs
January 2009 Yosemite Technologies Backup, data protection

Source: The 451 M&A KnowledgeBase

Salesforce.com’s service play

Brenon Daly

Contact: Brenon Daly

Heading into Thursday‘s luncheon hosted by Salesforce.com, there was a fair amount of speculation that the software-as-a-service (SaaS) stalwart would be using the event to announce a new acquisition. The company employed the same setup to disclose its purchase of tiny content management startup Koral in April 2007. The rumors turned out to be off the mark a bit, as the luncheon instead focused on Salesforce.com’s rollout of a new customer service offering. There is a link to M&A, however. The offering unveiled, Service Cloud, got a substantial boost when the company picked up privately held InStranet last August.

InStranet stands as Salesforce.com’s largest acquisition in its 10-year history, but one insider told us the deal almost didn’t happen. Salesforce.com paid $31.5m for InStranet, which we understand was about twice the amount of sales the French company booked in the year leading up to the transaction. But Salesforce.com wasn’t the first bidder for InStranet, according to one source. SAP had moved pretty far along during M&A discussions with InStranet before Salesforce.com entered the picture. Marc Benioff’s buyers buttoned up the purchase in just three months, the source added.

And then there were five: Salesforce.com’s acquisition history

Announced Target Deal value Target description
August 2008 InStranet $31.5m Customer service automation
October 2007 CrispyNews Not disclosed Community news, website development
April 2007 Koral $7m* Web content management
August 2006 Kieden Not disclosed Search engine marketing management
April 2006 Sendia $15m Wireless application developer

Source: The 451 M&A KnowledgeBase *451 Group estimate

Hey, big spender?

Brenon Daly

Contact: Brenon Daly

Given all the economic uncertainty, companies have made it clear that they’re not in the market for any big deals. (In our annual survey of corporate development officials, they indicated that they were least likely to pursue ‘transformative’ deals in 2009.) To put some numbers around that sentiment, we contrasted the shopping tab of four well-known tech companies in 2008 with the previous year’s tally.

The quartet we selected (IBM, SAP, Microsoft and Nokia) all announced the largest deals in their respective histories in 2007 so we naturally expected some drop-off in spending. But we were amazed at the steepness of the plunge. In 2007, the four companies announced 40 transactions with an aggregate value of $29.2bn. Last year, that dropped to 34 deals worth a paltry $4.7bn. (In fact, each of the firms inked a single transaction in 2007 that was worth more than 2008’s collective total.) And it’s not like they don’t have the resources to continue shopping. Over the past four quarters, IBM, SAP, Microsoft and Nokia have collectively generated an astounding $45bn in cash-flow operations.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

In addition to getting insight into what corporate development officials plan to buy in the coming year, our annual survey also asked which company they thought made the smartest acquisition during the previous year. (See our full report on the survey.) So which company gets the coveted Golden Tombstone for 2008? Hewlett-Packard, for its $13.9bn purchase of EDS in May.

However, in handing out this peer-voted accolade, we hope that HP doesn’t stumble after stepping up to the dais to accept it, as happened to last year’s winner. (Maybe this is a variation of the ‘Sports Illustrated cover jinx,’ which is a surprisingly accurate predictor of which team is about to hit an inexplicable – and intractable – slump.) Our 2007 Golden Tombstone went to Citrix for its $500m pickup of XenSource.

Although Citrix had promised big things for the virtualization startup, it is coming up short. When the ink had just dried on the acquisition, Citrix talked about $50m (or even higher, privately) of 2008 revenue from the startup, which had no sales to speak of when it sold. Now, it looks like XenDesktop and XenServer will actually contribute about $25m for the year. Granted, the startup XenSource and the 46-year-old EDS are at opposite ends of the corporate lifecycle, and the strategies that drove the deals are completely different. Still, we’re a superstitious bunch, particularly when we’ve already had so much bad luck on the market.

CA back in M&A

Brenon Daly

Contact: Brenon Daly

It turns out that there is some shopping going on out on Long Island, after all. Back in September, we noted that CA Inc had been out of the market for two years and that some bankers weren’t ‘bothering with the trip’ out to the company’s headquarters. (On a recent call with CA’s corporate development team, which has added four members since the start of the year, one participant good-naturedly tweaked us that he had to end our call to catch a meeting a meeting with a banker.)

Since our original piece, the company has done a lot more than just meet with bankers or ‘book read.’ It has closed three deals and has others in ‘various stages.’ (One note about the M&A pause: CA skipped a period of high-priced deals, and will undoubtedly find that it will get more bang for its buck in the current environment and into next year. In our recent survey of corporate development officials, nine out of 10 said private company valuations are going to come down in 2009.)

The return to shopping is part of CA’s announced intent to add 1-2% of revenue through acquisitions over the year. (On a current $4.1bn revenue base, that works out to $40-$80m of sales at acquired companies.) CA will likely be talking about that – along with other financial matters – during its annual meeting with Wall Street analysts on Friday.

CA’s return to the market

Date Target Target sector
November 13, 2008 Eurekify Identity & access management
October 15, 2008 Optinuity Infrastructure management
October 7, 2008 IDFocus Identity & access management

Source: The 451 M&A KnowledgeBase

GRC=Get Ready for Consolidation

Brenon Daly

Contact: Brenon Daly

After a pretty thin stretch of deals in the governance, risk and compliance (GRC) market, Thomson Reuters reached for startup Paisley Consulting last week. The deal comes after the two companies partnered for a year, but not in the conventional manner. Rather than the big company reselling the startup’s wares, Paisley actually resold Thomson’s tax and auditing product, Checkpoint. The two companies also had a fair number of joint customers.

We understand that Paisley wasn’t really looking for a deal. Founded in 1995, Paisley is still run – and was majority owned – by its founding husband-and-wife team of Tim and Stacey (née Paisley) Welu. (The pair will continue to run the business after the acquisition.) The Minneapolis–based company took only one round of outside money, a $10m slug in 2003 from Insight Venture Partners. Despite its beginnings, Paisley was no mom-and-pop shop. We understand the company is set to finish 2008 with sales of more than $40m.

The Thomson-Paisley pairing comes after several large software companies, which would be the most conventional buyers of GRC startups, inked deals of their own. Oracle stayed close to home, and grabbed existing GRC partner LogicalApps last year, while SAP made a big play for Virsa Systems in mid-2006. (As a side note on SAP’s move, we would mention that longtime Oracle executive Ray Lane sat on Virsa’s board and helped broker the initial partnership that led to the purchase.)

With Paisley gone, there are still a few high-profile GRC vendors in the market. BWise, which has its roots in the Netherlands, has a strong presence in Europe; OpenPages, which started life as a content management vendor before focusing on GRC; and a company that’s not unlike Paisley, Archer Technologies, which my colleague Paul Roberts recently profiled. We understand that both BWise and Archer, which is about half the size of Paisley, have been talking with potential suitors throughout the year. However, a month ago, Archer sold a 40% stake of the company to Bain Capital Ventures, which likely takes it off the block for now.

Actuate: A bit or the whole thing?

Brenon Daly

Contact: Brenon Daly

It turns out that Actuate may have some competition for its own stock. A month ago, the enterprise reporting veteran announced plans to buy back some $60m worth of its own equity, at $3.15-3.40 per share (Jefferies & Co. is running the process). Under those terms, the buyback would have removed up to 19 million shares from a base of about 65.5 million.

However, since Actuate revealed the tender offer on November 5, the markets have continued to plummet, with the Nasdaq slumping almost 20%. Accordingly, Actuate trimmed the price it was willing to pay for its own shares to $2.20-2.60 each. On Thursday, it bumped up the range to $3.00-3.50. What prompted the boost? Was it a holiday gift from the company to its shareholders, who have seen their stock drop nearly 70% over the past year?

As it happens, Actuate raised the price of the planned buyback because an unnamed party offered $3.50 per share for the whole company. Actuate’s board said the unsolicited proposal, which would value the company at nearly $230m, is not in shareholders’ ‘best interests.’ While it’s uncertain how the mysterious unsolicited offer and the tender offer will play out, it seems pretty clear that one way or another, some Actuate shares are going to come off the board.

‘Lighter’ M&A at Nuance

Brenon Daly

Since former rivals Nuance Communications and Scansoft welded themselves together three years ago, the combined company has been shopping at a furious rate. In 2007, the speech-recognition vendor inked seven acquisitions. So far this year, it has spent some $640m on three acquisitions. (That doesn’t count an unsolicited offer for Zi Corp.) The company has used its purchases to focus on specific products for the healthcare market, bolster its mobile offering and expand into Europe.

However, don’t expect Nuance to continue shopping. The company told Wall Street on Monday that its current fiscal year will be ‘lighter’ in terms of M&A, with small deals serving narrow focuses. Cash will be currency for any purchase, since Nuance said it is ‘unlikely’ to use equity in a deal and the debt market is currently closed.

Nuance generated some $196m in cash from operations in the just-completed fiscal year, and had $262m in cash and equivalents at the end of September. However, it also carts around $895m in long-term debt going back to its earlier shopping spree, which has attracted a number of bears to Nuance. At various points over the past year, investors have sold as many as 35 million shares of Nuance short. That’s roughly equivalent to the amount of Nuance shares that typically change hands in more than 10 days of trading, although the number of shares sold short has been declining in recent months.