Category: cloud computing

Cornerstone: the newest — and priciest — HCM vendor

Brenon Daly

Contact: Brenon Daly

So much for the ‘debut discount.’ Cornerstone OnDemand hit the market Thursday at an eye-popping valuation, going against the recent trend toward conservative pricing for new issues. The human capital management (HCM) vendor priced its shares at $13 each, above the indicated range of $9-11 each. (Goldman Sachs & Co and Barclays Capital are leading the IPO.) By early afternoon Thursday, the stock was changing hands at about $19.

The offering gives Cornerstone one of the richest valuations of any recent IPO. At $19 per share, the company’s market cap is roughly $900m. That’s 15 times trailing bookings (not sales) and likely in the neighborhood of 9x projected bookings. (Our math: Cornerstone reported 2010 bookings of $61m, up 74% from the previous year. Assuming that the growth rate comes down a smidge to 60-65% for 2011, that would put Cornerstone’s full-year bookings at $100m, give or take.)

Cornerstone’s valuation vastly outstrips what the market says rival Taleo is worth, and even puts it ahead of SuccessFactors, which had been the HCM industry’s ‘favorite child.’ (That’s been the view on Wall Street, anyway.) SuccessFactors, which went public in late 2007, currently garners a $2.7bn market cap, roughly 10.5x trailing bookings and about 8x projected 2011 bookings. We should note that both SuccessFactors and Taleo are about four times the size of their newest rival on the public market. But for now, both of them are looking up at Cornerstone.

The cloud expands overseas

Ben Kolada

Contact: Ben Kolada

Although the US hosting, cloud and colocation markets are still growing, cloud infrastructure providers are already expanding overseas. This international expansion is driven in part by enterprises demanding global cloud platforms, as well as the vendors’ desire to tap into emerging markets.

Verizon Communications’ Terremark Worldwide purchase seemingly set the stage for international expansion (although the telco was primarily attracted to Terremark’s cloud platform, the deal also provided Verizon with deeper penetration in Central and South America), and colocation and hosting providers soon followed suit. Shortly after the Terremark sale, Savvis announced a partnership in India with Bharti Airtel and claimed to be looking for similar partnerships in South America and China. Meanwhile, Savvis competitor Equinix has already moved into South America with the $127m pickup of Rio de Janeiro-based ALOG Data Centers. The company also has a presence in China with facilities in Hong Kong and through a partnership in Shanghai with Shanghai Data Solutions.

While international expansions will continue, we expect that the announcements will eventually turn from partnerships to outright acquisitions as cloud infrastructure providers look to get the most out of their investments. Equinix has already shown a willingness to make international deals, and we anticipate that the company will announce additional overseas transactions. The company could make further inroads in China by entering the Beijing market. My colleagues at Tier1 Research believe that large cities in China such as Beijing, Guangzhou, Shenzhen and Tianjin are underpopulated with datacenters and predict that these cities will see significant datacenter investment over the next five years.

Although the US hosting, cloud and colocation markets are still growing, cloud infrastructure providers are already expanding overseas. This international expansion is driven in part by enterprises demanding global cloud platforms, as well as the vendors’ desire to tap into emerging markets.

Verizon Communications’ Terremark Worldwide purchase seemingly set the stage for international expansion (although the telco was primarily attracted to Terremark’s cloud platform, the deal also provided Verizon with deeper penetration in Central and South America), and colocation and hosting providers soon followed suit. Shortly after the Terremark sale, Savvis announced a partnership in India with Bharti Airtel and claimed to be looking for similar partnerships in South America and China. Meanwhile, Savvis competitor Equinix has already moved into South America with the $127m pickup of Rio de Janeiro-based ALOG Data Centers. The company also has a presence in China with facilities in Hong Kong and through a partnership in Shanghai with Shanghai Data Solutions.

While international expansions will continue, we expect that the announcements will eventually turn from partnerships to outright acquisitions as cloud infrastructure providers look to get the most out of their investments. Equinix has already shown a willingness to make international deals, and we anticipate that the company will announce additional overseas transactions. The company could make further inroads in China by entering the Beijing market. My colleagues at Tier1 Research believe that large cities in China such as Beijing, Guangzhou, Shenzhen and Tianjin are underpopulated with datacenters and predict that these cities will see significant datacenter investment over the next five years.

The 451 Group picks up ‘voice of the consumer’

Brenon Daly

Contact:  Brenon Daly

For today’s deal, we move a little bit closer to home: The 451 Group announced today that it has acquired the assets of TheInfoPro, a New York-based advisory and research firm. Founded in 2002, TheInfoPro counts more than 100 organizations as clients and draws on extensive surveys of those IT buyers to get real-world perspectives and forecasts on IT innovation. Focus areas for TheInfoPro include security, storage, networks, servers as well as virtualization.

With the acquisition, TheInfoPro will become a division of The 451 Group, joining the New York City office. (Terms of the transaction weren’t disclosed.) The deal is the third significant purchase by The 451 Group in the past half-decade to expand our offerings around analyzing and advising our clients on the business of IT innovation

Cisco adds Inlet to its video puzzle

Ben Kolada

Contact: Ben Kolada, Jim Davis

Cisco recently announced that it is acquiring video encoding provider Inlet Technologies for $95m in cash. The deal is the latest addition to Cisco’s ongoing strategy of helping service providers such as Telstra build content delivery networks that can serve video to TVs, PCs and mobile devices for pay TV services.

Cisco has picked up a lot of video-related technology over the years. Despite its networking expertise, video is a notoriously difficult beast to tame, and even more so when dealing with video over less-predictable public IP networks. Cisco bought V-Bits in 1999 for $129m to add video-processing gear to its repertoire, but stopped production in 2002. In 2000, Cisco spent $369m to acquire PixStream for its video headend gear for IPTV systems, but then closed the operation four months later when the stock market bubble burst.

When it got serious about gaining expertise in video, Cisco spent $6.9bn in 2005 on Scientific-Atlanta, a major equipment supplier to the cable industry. In 2006 Cisco acquired UB Video, a Canadian firm focused on developing MPEG-4 AVC software for use in encoding and decoding equipment. Later that year it also bought video-on-demand (VOD) software specialist Arroyo Video, whose products formed the basis of VOD servers sold to cable and IPTV providers. In acquiring Inlet, Cisco picks up an established player in the market for video encoding equipment used to ready video for delivery over multiple delivery mechanisms. Inlet’s encoding systems have two strengths: one is that they are powerful enough to do high-quality live streaming over IP networks, the other is that the gear is built for adaptive bit-rate streaming, which is becoming a favored method for delivering video to mobile devices.

Inlet reportedly recorded $7.6m in revenue in 2009 and claims to have doubled sales last year. Assuming that the company closed 2010 with $15m in revenue, Cisco’s $95m offer would value Inlet at 6.3 times trailing sales. While that multiple is more than twice as high as the average for all tech transactions, it’s actually slightly less than similarly sized video encoding competitor On2 Technologies received from Google last year. On2’s investors balked at Google’s original $106m offer, which valued the target at 6.1x sales, but later settled for a revised bid of $132m, or 7.5 times sales. (Click here for my colleague Jim Davis’ full report on the Inlet transaction.)

A four-bagger for VMware

Brenon Daly

Contact: Brenon Daly

If the virtualization thing doesn’t work out for VMware, the company could always spin off a hedge fund. At least that’s what we’ve been thinking as Verizon Communications’ purchase of Terremark Worldwide appears set to close very soon. When the deal does wrap, VMware will walk away with a tidy windfall from a savvy bet that the virtualization kingpin made on the hosting provider back in mid-2009.

Recall that in May 2009, VMware picked up a 5% stake in Terremark for $20m, paying just $5 for each of the four million shares. According to terms, that block of equity will be worth $76m when it comes time to cash out to Verizon, which is paying $19 for each Terremark share. A four-bagger in just a year and a half is a return that might even make John Paulson envious. The gain on VMware’s investment in Terremark even outpaces the return of its own highflying stock, which has ‘only’ tripled in that time.

Time Warner Cable picks up NaviSite; is InterNap next?

Ben Kolada

Contact: Ben Kolada

In the second telco-hosting rollup in less than a week, Time Warner Cable is acquiring NaviSite for $230m in cash. This is TWC’s first foray into enterprise hosting and cloud computing services, and marks the end of a tumultuous year for NaviSite that included defending itself from an unsolicited take-private and continuously retooling its business toward enterprise-class services.

TWC, the second-largest cable operator in the US, is paying $5.50 per share, representing a 33% premium over the closing price on February 1. Including the assumption of cash and debt, TWC’s offer gives NaviSite an enterprise value of $277m, or 2.1 times trailing sales and 10.8x trailing EBITDA. While the offer is roughly in line with broad market valuation, it is far below what Terremark received from Verizon. In that deal, announced just last Friday, the target was valued at 5.8x trailing sales and 24.7x trailing EBITDA. Of course, we might argue that Terremark deserves its premium, since it is much healthier and larger than NaviSite. Terremark has 16 datacenters (compared to NaviSite’s 10) spread across a large international footprint, a robust and growing cloud platform and more than twice the sales of NaviSite.

While NaviSite is set to be acquired at a lower valuation than Terremark, TWC’s bid represents a level NaviSite hasn’t seen on its own since late 2007. Further, it’s substantially above the offer that NaviSite attracted just a half-year ago. In July 2010, Atlantic Investors, which already owned one-third of NaviSite’s equity, made an unsolicited offer for the remaining shares of the company. Atlantic Investors’ bid of $3.05 per share valued NaviSite overall at $128m. Time showed that NaviSite was right in rejecting that offer, which isn’t always the case in these unsolicited bids. After spurning the offer, the company continued in its dogged determination to become an enterprise-class hosting provider throughout 2010 and divested some $74m in non-core assets to get there.

After NaviSite’s sale, speculation is intensifying about which hoster will be acquired next. We’ve written before that Savvis is an obvious target, and Rackspace is the constant focus of acquisition speculation. We might add Internap Network Services to that list. The Atlanta-based company’s shares are up 6% in mid-Wednesday trading, continuing a run since the Terremark announcement on January 27. One reason we might point to a trade sale for Internap is that the chief executive has done it before. In January 2009, the company appointed a new CEO, Eric Cooney, who has a history of growing companies and leading them to successful sales. He was previously CEO of Tandberg, which was acquired by Ericsson for $1.4bn in 2007. Since Cooney’s appointment, Internap’s shares have climbed 170%, giving the company a market cap of slightly more than $400m. Look for a full report on TWC’s pickup of NaviSite in tonight’s Daily 451.

Verizon pays sky-high price for cloud provider Terremark

Ben Kolada

Contact: Ben Kolada

In a move to accelerate its cloud services, Verizon has announced that it is acquiring cloud and colocation provider Terremark for $1.4bn. As the largest pairing between a telco and a colocation provider, the deal is not only a landmark transaction for the telecommunications industry, but also a significant shift from the growing trend of telcos buying their way into the hosting and colocation sectors by acquiring pure colocation providers.

Verizon is paying $19 per share in cash, a 35% premium over Terremark’s closing price. On an equity value basis, the deal values the target at 4.4 times trailing sales and 18.6x trailing EBITDA. For comparison, the next-largest telco-colo pairing came in May 2010 when Cincinnati Bell bought pure colocation provider CyrusOne for $525m, or 9.1x trailing sales and 16.4x trailing EBITDA. Both Verizon and Terremark’s board of directors have unanimously approved the transaction, and Verizon expects to complete the deal by the end of the first quarter. Terremark’s management team will remain and will operate the company as a wholly owned but independent subsidiary of Verizon.

While earlier acquisitions in this sector were valued based on the growth potential of colocation services, Terremark garnered a higher valuation because of its cloud portfolio, as well as its international presence. During their conference call discussing the acquisition, executives from both companies highlighted the fact that Terremark’s long-term growth lies in its cloud and managed services. This segment provided half of Terremark’s total service revenue during the first six months of its fiscal 2011. Beyond cloud services, the acquisition is also a geographic fit, with Terremark providing Verizon an expanded presence in Latin America, and Verizon providing Terremark additional room to grow in both the US and Europe. As part of the integration, Terremark will assume operations for all of Verizon’s 220 datacenters. (We’ll have a full report on this deal in tonight’s Daily 451.)

After the transaction was announced, shares of competing cloud computing firms soared. While the sector calmed somewhat by midday, shares of Savvis held onto its 15% advance as Wall Street speculated that it might be the next hosting and services company to get snapped up. (Trading in Savvis was more than 10 times its daily average on Friday.) By revenue, the Chesterfield, Missouri-based firm is the largest provider of cloud and colocation services and already sports a $1.7bn market capitalization. As a result, the list of potential suitors is limited, but AT&T stands out as an obvious bidder for Savvis. Just as Savvis is the largest provider among cloud firms, AT&T is the largest provider among telcos and closed 2010 with $124bn in revenue and $1.4bn in cash in its coffers.

More than just Chatter at salesforce.com

Ben Kolada

Contact: Ben Kolada, Kathleen Reidy

Fresh from closing its $249m acquisition of Ruby developer Heroku, salesforce.com recently announced, and closed, its purchase of Web-conferencing startup Dimdim for $31m. The Lowell, Massachusetts-based target provided a cloud-based open source Web-conferencing service for businesses, and with this deal salesforce.com now claims 60,000 Chatter users, though with its ‘freemium’ model we suspect that only a fraction of these are paying customers.

Salesforce.com paid $31m in cash for Dimdim, which had raised a total of $8.4m from venture investors Draper Richards, Index Ventures and Nexus Venture Partners. Per salesforce.com’s conference call, Dimdim has 75 employees spread throughout its offices in Lowell and Hyderabad, India. Although the target’s annual revenue wasn’t disclosed, we estimate that it closed 2010 with about $2m in revenue.

Like salesforce.com’s previous collaboration pickup – GroupSwim, in December 2009 – Dimdim’s services will be shut down, and its capabilities will be rolled into Chatter, salesforce.com’s social collaboration software service that first launched in 2009. As my colleague Kathleen Reidy notes (click here to see her full report on the acquisition), as evidenced by the almost immediate shutdown of the Dimdim service, salesforce.com isn’t interested in the pure Web-conferencing market. Salesforce.com will honor contracts with Dimdim’s existing customers, though these will not be eligible for renewal, and it has terminated Dimdim’s free service. Dimdim also had an open source distribution and while this is still available, it won’t see any further updates. Instead, Dimdim will provide features to Chatter, which is also incorporating semantic analysis technology from GroupSwim.

Sourcefire’s risky bet to re-spark its M&A program

Brenon Daly

Contact: Brenon Daly

As deals go, Sourcefire’s first acquisition hardly set the world on fire (if you will). Back in August 2007, the open source security vendor picked up the open source ClamAV project. The deal only set Sourcefire back $3.5m, but not much has been heard from the project since the acquisition. Undeterred, Sourcefire stepped back into the M&A market on Wednesday with an even larger – and (potentially) much more significant – transaction.

Sourcefire is paying $17m in cash for Immunet, a cloud-based anti-malware provider. (Immunet could also pocket a $4m earnout, which depends on the company hitting some product milestones, as well as a smidge of Sourcefire equity.) It’s still early days for Immunet, which raised just one round of funding and only started generating revenue last year. (The company claims some 750,000 users, but we suspect that the vast majority of those would be using Immunet Protect, which is available for free.)

There’s always a risk when a company reaches for an early-stage startup like Immunet, which has yet to really prove itself commercially. That risk is somewhat mitigated, however, by the fact that the two companies had worked together for almost a year, and all of the Immunet employees, including the founders, will be joining Sourcefire.

But, as my colleague Andrew Hay notes in his report, the deal brings a much bigger risk: Can Sourcefire, which is primarily focused on network security with its well-known Snort product, step into the endpoint security market without a stumble? How will it fare in selling antivirus against giant rivals that generate more revenue each quarter than Sourcefire has in its entire history? Sourcefire has fought through some tough setbacks in its history, including a broken sale to Check Point Software and breaking issue in its IPO. Now, with Immunet, it needs to show that it can actually pull off an acquisition.

The IPO pipeline just got even drier

Brenon Daly

Contact: Brenon Daly

Scratch another company off the list of potential IPO candidates for 2011. Managed security services provider (MSSP) SecureWorks got snapped up by Dell on Tuesday for what we understand was a table-clearing bid. (Subscribers can see our full report on the transaction, including our estimated price for SecureWorks.)

The trade sale comes two years after the MSSP was putting the final touches on its prospectus. That offering, which got derailed when the Credit Crisis knocked the equity markets for a loop, was set to be led by Merrill Lynch and Deutsche Bank. (Merrill Lynch, which got picked up by Bank of America later in 2008, got the print on the sale.) We understand that SecureWorks was getting ready to dust off the prospectus, update the numbers and (finally) get it on file with the SEC later this year.

Instead, Dell moved quickly to secure the deal, which will serve as the foundation for its security offering. We gather that talks only really got going after Thanksgiving, going exclusive almost immediately. And Dell had to pay up for that. Of course, Dell could consider its pickup of SecureWorks a bargain, compared to the last dual-track company it acquired. Recall that Dell paid an eye-popping $1.4bn, or 10 times trailing sales, for EqualLogic back in November 2007. The storage vendor, which had formally put in its prospectus, generated almost exactly the same amount of revenue as SecureWorks.