Category: cloud computing

SaaS giant salesforce.com thinks small

Brenon Daly

Contact: Brenon Daly

Just several months after putting money into Assistly in its second round of funding, salesforce.com decided Wednesday to pick up the whole startup for $50m. The purchase should help the SaaS giant extend its customer service offering, Service Cloud, to small businesses. Founded in 2009, Assistly had drawn in more than 1,000 customers, although not all of those are paying. (Salesforce.com declined to give a breakdown on paying vs. nonpaying customers, but indicated revenue at the startup was a tiny amount.)

The acquisition marks the third time salesforce.com has stepped into the M&A market to bolster its customer service product. Three years ago, it reached for InstraNet, a startup that was led by Alex Dayton, who continues in an executive role for the customer service offering at salesforce.com. A year ago, salesforce.com quietly added Activa Live. (Although terms weren’t disclosed, we suspect the bill for that purchase probably only ran in the single digits of millions of dollars.) The net result of those acquisitions – along with healthy organic growth – is that Service Cloud is now the largest single product outside salesforce.com’s core sales force automation product.

Additionally, salesforce.com says Assistly will be part of its upcoming launch of a ‘small business cloud’ product. In that, Assistly will be joining the collaboration offering that salesforce.com picked up with its acquisition of SMB-focused startup Manymoon in February. The reason for the new downmarket products is pretty clear when you remember that salesforce.com gets roughly one-third of its overall revenue from small businesses.

The emergence of convergence

Ben Kolada

Contact: Ben Kolada

The telecommunications and IT industries are increasingly converging, with Verizon Communications’ recent CloudSwitch acquisition perhaps the best example of a telco moving up the IT stack. But the CloudSwitch deal is just one example of a series of moves by telecom service providers to attack the $3bn cloud computing market. Other telcos – such as Interoute Communications with its recent Quantix buy – are merely gobbling up cloud vendors, and may be missing out on the industry’s full potential.

Somewhat IT ignorant, telecom service providers have understandably taken a cautious and hands-off approach to cloud computing. In fact, telcos that have announced the biggest deals so far have allowed their acquired properties to operate mostly autonomously, rather than fully integrate both companies in order to take advantage of their shared strengths.

To educate service providers on how to effectively move toward the cloud, tomorrow at 8am PST we will host a webinar titled ‘Telcos in the Cloud: Who’s Doing What With Whom, and Why?’ Antonio Piraino, vice president of Tier1 Research, will join me in discussing cloud strategies, partnerships and acquisitions that telcos are and should be employing to harness the cloud industry’s growth potential. Click here to register for this free one-hour webinar.

Buying and building at salesforce.com

Brenon Daly

Contact: Brenon Daly

At the rate Marc Benioff is going, we have to wonder how long it will be until he renames the company he founded. Or at the very least, shouldn’t Benioff, who founded salesforce.com in 1999 and continues to serve as the company’s CEO, be thinking about swapping the company’s current ticker (CRM) for something that captures the broad, all-encompassing vision for the ‘social enterprise’ that he laid out at last week’s Dreamforce?

After all, the company’s core sales force automation (SFA) product barely merited a mention at the conference. Instead, most of the attention was directed toward upgrades and expansions to the Chatter and Radian6 offerings, as well as moves to broaden its two main platform plays, Heroku and Force.com. As such, Dreamforce dramatically underscored just how much of salesforce.com’s future has been staked on its M&A program.

Of course, virtually all tech vendors use acquisitions to change the trajectory of their business, whether it’s a slight nudge in some new direction through a tactical purchase (Informatica comes to mind) or roll-the-dice-and-bet-the-company transformational transactions (Dell and, more painfully right now, Hewlett-Packard.) But hardly any other tech company (with the possible exception of VMware) has used M&A so consistently to expand beyond its original offering while still managing to preserve an acrophobia-inducing valuation.

Just consider the role that acquired companies played in announcements around salesforce.com’s conference:

  • Chatter has been bolstered by the purchase of two firms (GroupSwim and Dimdim), as has Service Cloud (InStranet and Activa Live). Service Cloud is salesforce.com’s largest non-SFA product.
  • The Data.com product, which was launched at the show, goes back to the purchase of Jigsaw Data in April 2010. It was further bolstered last week through a partnership with company records provided by Dun & Bradstreet.
  • Heroku was acquired last December, and salesforce.com noted at the conference that the platform currently has triple the number of customer applications built on it than it did a year ago.
  • The social media monitoring capabilities that salesforce.com obtained with its acquisition of Radian6, which was announced in late March, are only starting to make their way into the products but are a key part of the ‘social enterprise’ that the company has described.

Altogether, salesforce.com noted that non-SFA offerings – in other words, products and technology that got significant boosts through acquired IP or engineers – accounted for a full 20% of second-quarter revenue. (That was the first time the company has broken out revenue for its new products.) Given that salesforce.com booked nearly $550m in Q2 revenue, that would imply non-SFA sales of about $110m. To be clear, very little of that amount has come directly from the acquired companies, all of which were still in their early days. Instead, it’s the net result of the ‘buy and build’ approach at salesforce.com.

Confab-ulous M&A at two cloud companies

Brenon Daly

Contact: Brenon Daly

Two of the most richly valued tech companies are each hosting annual get-togethers this week, and M&A is figuring into both of the confabs. VMware opened VMworld in Las Vegas on Monday, while saleforce.com followed a day later with Dreamforce in San Francisco. As these companies were getting ready to open the doors for the event, both announced that they had done acquisitions – with both deals coming in the security market.

VMware reached for PacketMotion, a startup that was able to capture who’s doing what on a network and whether they should be doing that at all. VMware indicated that the acquisition should allow its customers to automate security and compliance policies. For its part, salesforce.com added encryption vendor Navajo Systems. While terms weren’t announced on either transaction, we suspect that the price tags for both startups were in the low tens of millions of dollars. On the other side, we’d note that, collectively, VMware and saleforce.com are valued at north of $50bn.

Part of the tremendously rich valuation that both VMware and salesforce.com enjoy can be chalked up to the fact that each company is the sort of corporate representation for two key components of the whole cloud computing model: VMware for virtualization and salesforce.com for on-demand delivery of software and, more recently, infrastructure.

So it’s no surprise that these cloud stalwarts both recognized the need to shore up their cloud offerings by going out and buying security startups. After all, security remains probably the most important concern for broader adoption of cloud computing. In a recent survey, our sister organization ChangeWave Research asked both IT purchasers and users at companies to rate the security of current cloud offerings on a scale of 1 (very unsecure) to 10 (very secure). The median response was a distinctly middling 5.6. As a point of reference, the rating for cloud security was actually lower than the median rating for the reliability of cloud offerings, even after several high-profile outages at Amazon Web Services so far this year.

Verizon drives toward convergence with CloudSwitch buy

Ben Kolada

Contact: Ben Kolada, Antonio Piraino

True to its intentions of bolstering its cloud prowess and less than half a year after completing its Terremark Worldwide purchase, Verizon Communications has now acquired cloud onboarding provider CloudSwitch. The timing of the deal comes as a surprise – CloudSwitch was still in startup mode – but that only goes to show the strategic importance Verizon is placing on this technology. CloudSwitch provides a proprietary technology that helps Terremark onboard workloads from internal IT infrastructure to its cloud platform in a more seamless and non-reconfigurable way.

CloudSwitch is addressing the first hurdle faced by the cloud platform proposition – how does a company with an established IT practice even begin to consider transitioning to the cloud? ‘Bursting’ over to the cloud, and making it so that applications can shift seamlessly to the cloud without rewriting code, is a good start. Giving enterprise system administrators the ability to point and click through an entire datacenter migration project is highly attractive for operations staff to consider migrating to a cloud environment. Even though hybrid mixes of in-house and off-premises resources are expected to exist for quite some time, there is still a considerable opportunity for providers in the space.

My colleagues at Tier1 Research don’t believe that Verizon/Terremark is finished building on this enterprise cloud play. When it has developed the infrastructure (including onboarding and orchestration layers), they expect that it will continue to move further up the IT stack. And in this era of heavy M&A activity, there’s a fine line to be drawn between buying prior to proven maturity and possessing technology before your competition grabs it, making this a good investment for Verizon/Terremark.

InterNap’s time as a takeover target could be running out

Ben Kolada

Contact: Ben Kolada

If its past is any prediction of its future, hosting services provider InterNap Network Services could soon lose its position as the industry’s next takeover target. The Atlanta-based firm, which is set to release its second-quarter results, has seen flat sales for the past three years. This is in stark contrast to the hosting industry at large, which has historically grown in the double digits. Meanwhile, other firms are emerging as more desirable targets, pushing InterNap to the back of the buyout line.

Our colleagues at Tier1 Research have written that InterNap was a favored takeover target. However, the firm appears to have since lost its luster. Investors are becoming increasingly frustrated with its poor performance, particularly after first-quarter total revenue declined 6% year over year. And shareholders once again fear the worst – in the past month, shares of InterNap have lost more than one-tenth of their value.

As InterNap is lying stagnant, other firms are posting enviable growth rates, making them much more attractive acquisition candidates. We understand that privately held SoftLayer is gearing toward the public markets, though it could certainly be scooped up before filing its paperwork. SoftLayer surpassed InterNap’s revenue last year, and is projecting bottom-line growth of about 20% this year, to just shy of $350m. InterXion has been cited as a potential target, as well. The company is also enjoying double-digit growth rates, and would provide a large platform for any telco looking to expand its European hosting footprint.

We would note, however, that both InterXion and SoftLayer are considerably pricier properties. While InterNap currently sports a market cap of about $330m, InterXion is valued at nearly $1bn. And we estimate that SoftLayer, on its own, cost GI Partners some $450m. However, when including the other legs of the SoftLayer platform – Everyones Internet and The Planet – the full price to the buyout shop could exceed $600m. But InterXion’s and SoftLayer’s price tags won’t necessarily stand in the way of their sales. We would never have guessed that CenturyLink would have been able to afford Savvis, especially so soon after closing its $22bn Qwest purchase.

After CenturyLink-Savvis, telco consolidation will target the midmarket

Ben Kolada

Contact: Ben Kolada

CenturyLink’s Savvis acquisition, which closes today, is the largest telco-hosting deal on record, though we expect that it will be followed by a rise in smaller telco-hosting pairings. As the number of large hosting targets, which typically serve enterprises, continues to shrink, we anticipate that telcos that were unable to get their hands on prized enterprise properties will still look to enter this industry by consolidating the fragmented small and midsized hosting market.

Based on the most notable telco-hosting deals to date, Verizon’s Terremark buy and CenturyLink’s reach for Savvis, enterprises appear to be the primary market for large telcos looking to sell cloud services. However, we are noticing emerging interest from telcos looking to serve SMBs. Last month we saw Madrid-based telco Telefónica spend a reported $110m for cloud hoster acens Technologies, which serves more than 100,000 SMB customers throughout Spain. On a much smaller scale, in February local competitive carrier CornerStone Telephone announced that it was picking up consumer and SMB-focused Web hoster ActiveHost for an undisclosed amount.

We’ve written before that the greatest opportunity for telco-hoster combinations may actually be for regional and smaller telcos to buy smaller hosters. The hosting market is still fragmented, particularly among smaller providers, and many of these firms are experiencing capital constraints that are preventing expansion. Regional and local telcos will be able to take advantage of this fragmentation and acquire small complementary hosting providers without spending too much money, since smaller providers tend to garner smaller valuations, typically between 6-8 times last-quarter annualized EBITDA. However, if telco-hosting consolidation grows at this level, the acquired properties will most likely be colocation-focused, since most small hosting providers founded their business on colocation services.

International activity helps push cloud infrastructure M&A to new heights

Ben Kolada

Contact: Ben Kolada

Cloud infrastructure M&A activity set several records in the just-closed second quarter, due in large part to a rise in international dealmaking. We’ve been noticing a steady uptick in international M&A activity lately, as both foreign strategic acquirers and private equity (PE) firms look to consolidate fragmented sectors in their own backyard and abroad. While we noticed a diversity of deal flow in the first quarter, with companies being targeted in nine different countries, the majority of international M&A in Q2 focused on Canada- and UK-based companies. Targets based in those two countries accounted for about 70% of all foreign acquisitions.

For international deal flow, the most visible theme was consolidation in the Web hosting sectors in the UK. Iomart Group, Othello Technology Systems and Lloyds Development Capital each announced Web hosting deals in Q2. In fact, Web hosters accounted for all but one of the deals targeting a UK-based company. This news should be of particular interest to domain name registration and Web hosting giant The Go Daddy Group, which recently took an undisclosed investment by a group of private equity firms led by KKR. Go Daddy will use the newfound capital for international expansion, as well as product development, and we wouldn’t be surprised if it looked to M&A to grow its nascent European footprint.

International cloud infrastructure M&A

Period Acquisitions of non-US targets
Q2 2011 16
Q1 2011 11
Q4 2010 11
Q3 2010 6

Source: The 451 M&A KnowledgeBase

Going, going, gone: Go Daddy sells to KKR

Ben Kolada

After canceling a proposed IPO in 2006 and reportedly being on the block since late last year, The Go Daddy Group is now selling an undisclosed stake to private equity firms KKR, Silver Lake Partners and Technology Crossover Ventures. The deal is believed to be among the largest private equity investments in the Internet infrastructure industry, and continues an emerging trend of buyout shops acquiring mass-market hosters and repositioning them toward higher-end services.

Reportedly worth $2.25bn, the transaction lands squarely in second place among the largest PE investments in this industry. We note that the first-place prize goes to a group led by Silver Lake (and including KKR) in the $11.3bn take private of SunGard Data Systems in 2005. Silver Lake’s interest in the industry is increasing – the Go Daddy deal comes less than a year after the firm took a minority stake in a similar hoster, Brazil-based LocaWeb.

We expect that KKR and the other investors will focus on international expansion as well as investment in cloud services. Silver Lake’s stake in LocaWeb could be particularly useful. The Latin American hosting and colocation markets are seeing increasing interest (heavyweights Savvis and Equinix have each announced plans for the region). We wouldn’t be surprised if LocaWeb and Go Daddy ultimately became partners. Further, we’ve noticed that PE firms tend to refocus their mass-market hosting companies on more specialized, higher-end cloud services. LocaWeb’s cloud services could provide additional expansion opportunities for Go Daddy, which recently began a limited launch of its own cloud product. We’ll have a full report on the Go Daddy deal in tonight’s Daily 451.

Intermedia ‘acq-hires’ Zlago

Ben Kolada

Contact: Ben Kolada

Less than three weeks after its own sale to private equity firm Oak Hill Capital Partners, mass-market hosting provider Intermedia has already inked its first acquisition, picking up complementary vendor Zlago. From our view, this deal looks like more of an ‘acq-hire’ than the typical bolt-on purchase that PE-backed hosting providers are known for. Overall, talent acquisitions are rare in the hosting industry, but this transaction is particularly notable given Zlago CEO’s past, and the impact he could have on Intermedia’s future M&A.

Talent certainly seems to be the primary driver for this deal. Indeed, Intermedia goes so far as to highlight Zlago’s ‘cloud expertise’ in the press release announcing the move. But while talent acquisitions throughout tech M&A tend to involve engineers, we wouldn’t be surprised if the talent that Zlago provides is more M&A-focused. Zlago CEO Michael Gold, who joins Intermedia as president, was previously CEO of cloud services vendor Sphera, which he led through to its sale to Parallels in September 2007. We expect that Intermedia and Oak Hill Capital will draw on Gold’s previous M&A experience to target higher-end cloud providers as it looks to grow through M&A.

We’ve noticed that PE firms tend to refocus their mass-market hosting companies on more specialized, higher-end cloud services. This strategy most recently generated champagne-popping returns for Nazca Capital, which maneuvered acens Technologies through its four-year ownership to higher-end cloud hosting services. That deal played out particularly well for Nazca, since we gather that acens’ sale to Telefónica provided the Spanish buyout shop with a greater than 100% return on committed capital. We’ll have a full report on the Zlago purchase in tomorrow’s Daily 451.