Category: cloud computing

Juniper back in the market — and how

Brenon Daly

Contact: Brenon Daly

Just nine months after Juniper Networks picked up a small stake in Altor Networks through the startup’s second round of funding, the networking giant decided Monday to take home the whole thing. Juniper will hand over $95m in cash for the rest of the virtual firewall vendor. (Altor had raised around $16m in backing, including the undisclosed investment from Juniper.) At the time of the investment, Juniper said it planned to develop an ‘even closer’ relationship with Altor, its primary virtualization security partner. See our full report on the deal.

The purchase of Altor stands as Juniper’s fifth acquisition this year, and brings its M&A spending to almost $400m so far in 2010. That’s fairly remarkable activity, considering that Juniper had been out of the market for a half-decade. And with the exception of its recent pickup of Trapeze Networks, Juniper’s buys have been big bets on small companies. The networking giant has paid $70m-100m each for Ankeena Networks, SMobile Systems and Altor – and we gather that all three of the target companies were running in the single digits of millions of dollars.

Recent Juniper acquisitions

Date Target Deal value Rationale
December 6, 2010 Altor Networks $95m Virtualization security
November 18, 2010 Blackwave (assets) Not disclosed Internet video content delivery
November 16, 2010 Trapeze Networks $152m Wireless LAN infrastructure
July 27, 2010 SMobile Systems $70m Mobile device security
April 8, 2010 Ankeena Networks $69m Online media content delivery

Source: The 451 M&A KnowledgeBase

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.

Blue-sky thinking on a bidding war for Isilon

Brenon Daly

Contact: Brenon Daly

Based on the two previous multibillion-dollar deals in the storage industry, we should be bracing for a bidding war around Isilon Systems. Recall that Data Domain last year and 3PAR this summer each attracted after-the-fact suitors that drove up the price on both by more than a few dollars. But in the case of Isilon, we don’t actually see the process going to a public auction.

For starters, there’s the not-insignificant matter of the buy-in bid, which currently values Isilon more richly (on a price-to-sales ratio) than either Data Domain or 3PAR. (As we note in our full report on EMC’s planned purchase, Isilon is being taken off the market at its highest-ever price, roughly five times the level where the company started the year and roughly twice where it traded just three months ago.)

Setting aside Isilon’s acrophobia-inducing valuation, which company could we imagine putting in a topping bid? Admittedly, that requires a rather vivid imagination, but one name we could come up with is Dell. (My colleague, Henry Baltazar, looked at Isilon and other potential targets for Dell in a recent report.) The company has already demonstrated a willingness to spend big to build out its storage portfolio, taking home EqualLogic three years ago and making an unsuccessful run at 3PAR this summer. (If nothing else, Dell’s effort to land 3PAR signaled that the tech giant doesn’t appear content to simply continue its long-term reliance on EMC for storage business. We suspect that marriage of convenience may well be on the rocks.)

Not that we necessarily expect it to happen, but Isilon would nonetheless bring Dell a fast-growing storage vendor (roughly 60% revenue growth for 2010) and a solid roster of more than 1,500 customers, which is roughly twice the number it would have picked up with 3PAR.

Granted, there would be some overlap with the NAS technology Dell obtained with Exanet earlier this year. But Isilon would significantly enhance that, as well as fit well with Dell’s more recent storage purchase, Ocarina Networks. (Isilon and Ocarina actually had a partnership, putting Ocarina’s digital image de-duplication technology in front of Isilon. That’s particularly useful for storage requirements for media and entertainment companies, which account for one-third of revenue at Isilon.) Again, we highly doubt that Dell plans to start a bidding war for Isilon. But it’s enough to get us thinking.

The rich valuation of integration

Brenon Daly

Contact: Brenon Daly

A lot of attention (and the accompanying financial rewards) around data management has tended to pile up in security, storage, analytics and other well-known market segments. Rather quietly but consistently, data integration has joined the list of richly valued markets as customers use these offering to get at the massive stores of information that run their businesses. The premium valuation is showing up both on Wall Street and, just recently, in M&A, too.

Take the case of Informatica. Shares of the data-integration provider have nearly doubled over the past year, and currently fetch their highest price in a decade. Informatica currently trades at a $3.8bn market capitalization, a rather rich six times its projected 2010 sales of $640m. The company has always stressed that part of its value has been in its independence among the software giants, but Informatica has nonetheless attracted M&A speculation in the past.

Those highly valued (and highly visible) public market vendors have helped drive up the valuation of smaller data-integration startups. For instance, we estimate that IBM paid about $200m for Cast Iron Systems, which we understand was running at about $30m in sales. And just last week, Dell reached for Boomi in a deal that valued the company at more than twice that multiple. (Subscribers can see our full report, which includes our estimates on the revenue as well as the price of Boomi.)

Windstream makes hosting splash among private equity waves

Ben Kolada

Contact: Ben Kolada

Windstream Communications bought into business services once again, this time picking up managed hosting, colocation and cloud computing provider Hosted Solutions. The deal is the first hosting play for Windstream, and shows that private equity buyers aren’t the only ones shopping in the sector.

Windstream is paying $310m in cash for Hosted Solutions, which posted $52m in trailing sales. The deal values Hosted Solutions at 12.7x its trailing EBITDA, and more than double the price that ABRY Partners paid for the company in April 2008. Hosted Solutions employs 125, and Windstream initially plans to retain the majority of those employees, though we expect there will be some corporate turnover as part of the integration.

Although telcos have gone shopping for colocation and hosting companies this year (with the most notable deal being CyrusOne’s sale to Cincinnati Bell), private equity firms have dominated the headlines. We recorded 10 hosting and colocation deals this year with deal values of at least $100m. Of this group, half of the targets went to private equity buyers, and four of those deals involved the target company simply jumping from one PE portfolio to another. Further, buyout shops, including firms both in the US and abroad, accounted for nearly half (46%) of the total spending for these 10 deals.

Top 10 hosting and colocation deals of 2010

Buyer category Number of acquisitions Percent of total spending
Private equity 5 46%
Hosting/colocation 3 32%
Telecommunications 2 22%
Total spending $3.8bn

Source: The 451 M&A KnowledgeBase

Take two for SunGard Availability Services

Ben Kolada

Contact: Ben Kolada

SunGard recently disclosed that it is taking a second look at divesting its Availability Services (AS) division. The company first attempted to shed the AS segment in 2004, but the move was canceled when SunGard was acquired by a consortium of private equity firms. The unit contributes slightly more than one-quarter of SunGard’s total revenue, and, like the rest of SunGard’s business lines, has seen a decline in sales. However, the AS division has proven more resilient than the remainder of SunGard’s businesses; the revenue of those three units combined has dropped nearly 8% in the first nine months of this year, compared to the same period last year.

Meanwhile, sales at the company’s AS division fell only about 3%, due in part to declining demand for disaster recovery (DR) services. If cut free, we expect that the independent SunGard AS could focus on and invest in its managed hosting, cloud and colocation businesses, which, over time, would more than offset losses from its traditional DR services. In particular, the division’s managed hosting services have considerable room to grow, as we project that global revenue for that segment will increase 20.8% in 2011.

SunGard AS is already investing in cloud and managed hosting services, as well as refining its geographic focus. We recently wrote about the division extending the capability of its cloud computing platform to provide an enterprise cloud service, and noted the appointment of Andrew Stern, former CEO of managed hosting provider USi, to its chief executive seat. As part of its geographic realignment, the company sold its South African operations two years ago and acquired Irish managed hosting provider Hosting 365 this past March.

The thin air around Isilon

Brenon Daly

Contact: Brenon Daly

Regardless of the fact that Isilon Systems hasn’t traded on anything remotely connected to its underlying financial performance for a long time, the NAS vendor nonetheless reported third-quarter results earlier today. As these things go, it was a strong report: sales up 77% and a solid profit, reversing a year-ago loss.

The results pushed shares up about a buck to $28 each in mid-Thursday trading. That continues a run that has seen the stock nearly quadrupled so far this year, giving the storage company a mind-blowing valuation of nearly $1.8bn. The third-quarter report notwithstanding, much of that run has been spurred by acquisition speculation, with EMC reportedly in exclusive talks to acquire Isilon.

To understand how detached Isilon’s valuation is from reality, consider this: For every dollar of earnings that Isilon is projected to bring in this year, investors are valuing that at $100. That’s right, a single greenback is worth almost 100 times that amount to Isilon’s market cap. Through the first three quarters of the year, Isilon posted GAAP net income of $7m. Even assuming that the company has a blowout fourth quarter, full-year 2010 earnings are still likely to come in below $20m. Meanwhile, its equity value continues to creep toward $2bn.

Even on a more conventional measure, Isilon’s valuation ratio is still highly inflated: For every dollar in sales the company brings in, investors are valuing that at $10. At an equity value of $1.8bn, Isilon is currently trading at 10 times current-year revenue, and almost eight times next year’s revenue. Keep in mind, too, that those valuations don’t take into account any acquisition premium that would undoubtedly figure into the deal. Every dollar that a bid comes in above Isilon’s current market price adds more than $75m to the company’s price tag. That’s assuming, of course, that a bid comes.

To scale or not to scale

Ben Kolada

Contact: Ben Kolada, Brenon Daly

For businesses that both had ‘scale’ in their name, neither MaxiScale nor ParaScale got very big. Nor did they get very big exits in their recent sales. In the crowded cloud storage market – dominated by multibillion-dollar incumbents IBM, EMC and HP – startups have only a short time to prove themselves to potential customers. We suspect that both MaxiScale and ParaScale shared similar fates because VCs are becoming quicker to pull the plug on storage investments that aren’t lining up customers.

That’s particularly true for MaxiScale, which we covered a year ago as it emerged from stealth. While ParaScale chalked up some customer wins, rumors have it that MaxiScale was unable to actually generate any revenue from its product. The bleak outlook forced the company to sell its assets last week to Overland Storage at what we expect was a fraction of the $25m that investors poured into the firm. We doubt that Overland paid much more than $5m for the acquired MaxiScale assets.

However, not all cloud storage startups are landing on the scrap heap. While MaxiScale and ParaScale were unable to secure lifeline funding, rival Caringo raised a fresh $5m round in July. In the past year, the company claims to have increased its customer count from 150 to more than 400, and is set on reaching profitability by the first half of next year. We don’t consider the firm an acquisition target just yet, but if it continues to do well, it could draw some interest down the road.

salesforce.com patches a hole in its Service Cloud

Brenon Daly

Contact: China Martens

For some time, we’ve been expecting salesforce.com to make a second purchase in the service automation space. It’s a market the SaaS CRM and development platform player took a major step into back in early 2009 following its $31.5m purchase of French knowledge base provider InStranet in August 2008. It now appears as though salesforce.com has indeed made another foray with the acquisition of enterprise live chat player Activa Live, a move the companies aren’t commenting on but have confirmed to several third parties.

Based in St. Clair Shores, Michigan, Activa Live’s customers include American Apparel, Best Buy, Dun & Bradstreet, Endeca, LexisNexis and Procter & Gamble. The startup already had tight integration with Salesforce CRM. Its rivals include other chat specialists such as Bold Software, LivePerson and Velaro as well as a host of service automation software players that provide live chat modules such as eGain Communications, Kana, Moxie Software (formerly known as nGenera), Parature and RightNow Technologies.

Salesforce.com has been steadily building out Service Cloud and has found turning on-premises InStranet SaaSy a time-consuming experience. It’s keen to substantially grow the business, and owning more service automation components should further that goal.

Activa Live is another of salesforce.com’s under-the-radar purchases, deals that it barely refers to in public or doesn’t acknowledge at all. Such transactions already include the acquisitions of Welsh business orchestration firm Informavores, semantic analysis player GroupSwim, and reportedly Canadian SaaS website building, managing and optimizing tools provider Sitemasher.

Salesforce.com is still sitting on a boatload of cash after raising $575m in a private placement at the start of the year, and has only inked one substantial deal in its history – the surprise $142m acquisition of data-as-a-service (DaaS) provider Jigsaw Data in April. We continue to puzzle over what larger transactions salesforce.com might set its cap at, and would now add business information provider Zoom Information to the list as being potentially complementary to the vendor’s Jigsaw buy. DaaS is another arena where salesforce.com hopes to make big bucks

Private equity goes back to the hosting table in a big way

Ben Kolada

Contact: Ben Kolada

So far this year, three private equity (PE) firms have each shelled out at least $400m for a hosting provider, making 2010 the most active year for big-ticket hosting deals for PE shops. And these firms are no novices. Welsh, Carson, Anderson & Stowe, GI Partners and Oak Hill Capital Partners have a combined $32bn in capital under management, and each has had previous experience in the hosting sector. The fact that they’re coming back to the hosting market – and paying relatively rich valuations to do so – is a hearty endorsement of the sector’s long-term growth potential.

In the most recent deal, Welsh Carson teamed up with Peak 10 management to buy the company from Seaport Capital and McCarthy Capital. Although terms of the transaction weren’t disclosed, we understand the buyout consortium paid just north of $400m for Peak 10, or about 12 times the company’s annualized 2010 EBITDA. For comparison, Savvis, in which Welsh has been invested since 1999, is currently trading at 5x annualized EBITDA.

In another management buyout, SoftLayer Technologies’ management announced in August that it was partnering with GI Partners to buy the dedicated hosting specialist from its angel investors. Again, terms weren’t disclosed, but we believe the deal valued SoftLayer at about 10x its annualized EBITDA, or about $450m. As my colleagues Philbert Shih and Aleetalynn Schenesky-Stronge noted, GI Partners is a well-known participant in the hosting and Internet infrastructure space, having invested in Digital Realty Trust and The Planet. GI Partners intends to combine The Planet and SoftLayer, with SoftLayer’s management left in charge. The combined company, which would have $270m in estimated revenue for 2010, could go public as early as next year.

SoftLayer was GI Partners’ second hosting play of the year. In April, the firm banded together with Oak Hill Capital and ViaWest’s management to buy the company from a consortium of PE investors. Oak Hill Capital was the lead investor, with GI Partners and management retaining minority stakes. We estimate the price of the deal at $420m, which works out to about 10x ViaWest’s cash flow. Oak Hill Capital isn’t new to the datacenter industry, having previously invested in TelecityGroup.

More PE moves could be in the works, as we’re aware of quite a few more properties for sale. If the flurry of M&A activity during the recent VMworld conference is any indication of what happens when a group of likeminded individuals gets together, our 2010 Hosting & Cloud Transformation Summit could lead to a number of hosting and Internet infrastructure deals. The conference opens today in Las Vegas and continues through Wednesday.

Select PE hosting deals in 2010

Date announced Acquirer Target Deal value
September 1 Welsh, Carson, Anderson & Stowe/Peak 10 management Peak 10 $400m*
August 4 GI Partners/SoftLayer Technologies management SoftLayer Technologies $450m*
April 20 Oak Hill Capital Partners/ViaWest management ViaWest $420m*

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