Category: cloud computing

A bidding war (of sorts) between the virtualization vendors

Brenon Daly

Contact: Brenon Daly

The tech industry has another bidding war. No, we’re not talking about the parrying over 3PAR or even the private equity shops slugging it out over Phoenix Technologies, a company that had largely been consigned to the corporate ash heap. Instead, we’re talking about the latest M&A moves by the virtuosos of virtualization, Citrix Systems and VMware.

Citrix opened the bidding with one deal earlier this week, putting its chips on virtualization management startup VMLogix. One day later, VMware matched the bid of one acquisition and then raised it another one. In a rare twin billing, VMware said it would be taking home both performance analytics startup Integrien as well as identity and access management vendor TriCipher. VMware’s two deals in a single day (do we call the amalgamated company ‘Trintegrien’?) brings its total number of acquisitions so far this year to five, after just one in all of last year. For its part, Citrix had been out of the market entirely since November 2008 before announcing the VMLogix purchase.

Of the three deals, the one that caught our eye was VMware’s pickup of Integrien. That might have been due to the astronomical multiple the startup garnered. We understand that the company, which was only running at about $2m in revenue, went for about $100m. Of course, looking at this transaction on a revenue multiple largely misses the point. Instead, as my colleague Dennis Callaghan notes in his report on the deal, the move makes VMware a legitimate contender in the IT performance management market and could hurt opportunities for other IT performance management vendors looking to sell into the vast VMware installed base.

The acquisition came just one day after Integrien released a special version of its flagship predictive root cause analysis software for VMware environments, so the two sides clearly knew each other. In fact, we gather that the two sides knew each other so well they negotiated directly, without an outside adviser. The VMware team was led on the Integrien deal by Alex Wang. Meanwhile, on the day’s other transaction, America’s Growth Capital advised TriCipher, while Jason Hurst, who recently joined VMware after a long stint as a software banker at Citigroup, led the buyside effort.

Google picks on the pipeline

Brenon Daly

Contact: Brenon Daly

As if the IPO process wasn’t already hard enough, candidates looking to go public have found a new obstacle: Google. For the second time in less than a year, the search giant has swung its considerable market heft against a would-be public company – likely trimming hundreds of millions of dollars in market cap from the IPO aspirants. That from a company with the informal motto of ‘Don’t be evil.’

Most recently, Google introduced Google Voice, an add-on to its Gmail offering that allows for free calls to anywhere in North America. If that sounds vaguely familiar, it’s because Skype has been in that business for about seven years now. On the back of that product, Skype filed its paperwork with the SEC earlier this month to go public, less than a year after being carved out of eBay. In the first half of 2010, Skype reported $406m in revenue, according to its S-1 filing.

And it isn’t like Google just stumbled on the idea of Google Voice as a ‘Skype killer,’ or however it thinks of the offering. From our vantage point, Google has set a deliberate course of M&A to acquire bits of useful technology and engineers for a VoIP offering. The company reached for Global IP Solutions in May after picking up On2 Technologies last year, a deal that required Google to top its initial bid. So Google clearly wanted to be in this market, and was willing to buy its way into it.

This bit of sharp-elbowed competition comes after Google made an even more drastic entrance last November into the turn-by-turn navigation market. Just two days before TeleNav, one of the largest mobile navigation vendors, put in its IPO paperwork, Google announced that it would be offering turn-by-turn directions. Although the service would be available on only a very limited number of devices, Google’s price was hard to beat. (It was free.) Granted, TeleNav has run into trouble (no pun intended) of a different sort since it listed on the Nasdaq. But the company seemed almost destined for difficulties after being born under a bad moon, thanks to Google.

A hoarse auctioneer for 3PAR?

Brenon Daly

Contact: Brenon Daly

The back-and-forth bidding for 3PAR moved higher again Friday, as the counteroffer to the counteroffer pushed the value of the high-end data storage vendor to $2bn. In the latest move, Hewlett-Packard lobbed a bid of $30 for each share of 3PAR, topping its offer from Thursday of $27 per share that had been matched by Dell. If 3PAR opts for HP’s bid, Dell has three days to come back with an offer of its own, according to terms. Dell, which opened the process 10 days ago with a bid of $18 per share, has already matched two efforts by HP to derail the deal.

As is pretty much always the case when would-be buyers with deep pockets go against each other, the price of the target company moves higher. (It’s fundamental supply-and-demand economics, after all.) Yet in the case of 3PAR, we’re not talking bids that are sweetened with a teaspoon or two of sugar – we’re talking cups of the stuff. (To recap the investment banks that are helping to advise their clients on how much sugar to dole out: Qatalyst Partners is banking 3PAR, while Credit Suisse Securities is banking Dell and JP Morgan Securities is banking HP.)

The latest offer values 3PAR at basically $830m higher than the opening takeout valuation, which was already the highest the storage company had ever seen. (In fact, Wall Street valued 3PAR at less than $800m before all this bidding started. Shares had basically bounced around $10 each for most of the year.) HP’s offer gives 3PAR an equity valuation of $2bn, two-thirds higher than Dell’s initial bid that gave it a $1.25bn equity valuation. For those wondering about the ‘price discipline’ at the two suitors, we would note that the going rate for 3PAR is now 10 times trailing sales.

A clear return and ‘cloudy’ outlook for Tripwire’s only deal

Brenon Daly

Contact: Brenon Daly

Exactly a year ago, Tripwire made its first and only acquisition in its 14-year history, picking up the assets of Activeworx. The tiny startup added log management technology to Tripwire, an IT configuration and compliance vendor. The deal itself, which only set Tripwire back about $3m, was a fittingly quiet purchase of a company that had lived a pretty quiet life. On Thursday, Tripwire took that technology to the cloud.

Although Tripwire actually closed its pickup of Activeworx last August, it only began talking about its log management offering, which is based on the acquisition, earlier this year. It also only began selling its log management offering earlier this year. As it was rolling out the offering, we noted that the log management market looked awfully crowded. But so far, Tripwire appears to be getting a solid return on its Activeworx buy. From a standing start, Tripwire’s Log Center business has generated about $2m of license sales in the first two quarters of 2010. (And to be clear, that’s GAAP revenue, as listed in the company’s latest amendment to its S-1 filed with the SEC, not some loosey-goosey figure that has been rounded way up.)

Granted, the Log Center contribution is still a small slice of the $18m in total licenses it has sold over the same period, and an even smaller portion of the $40m it tallied as total first-half 2010 revenue. But for a new product introduction, that’s a strong start out of the gate. And today, Tripwire announced a partnership with Terremark through which the datacenter provider will now be offering Log Center to its clients. The on-demand compliance and security arrangement between the two companies marks the first cloud offering from Tripwire.

Having its inaugural acquisition already producing revenue at a strong clip, we suspect that Tripwire will look to return to the market. The only question in our mind is what corporate structure Tripwire will have when it goes shopping again. Will it remain a privately held company, or will it see through its IPO filing and join the ranks of the Nasdaq-listed companies? Or will it – as we have speculated in the past – get snapped up by a larger vendor? From what we’re hearing now, however, a Tripwire trade sale is looking less likely than earlier in the summer. From our perspective, two of the companies that would head any list of likely buyers for Tripwire (McAfee and Hewlett-Packard) have their own M&A events to sort through right now.

Why wouldn’t HP jump the McAfee bid instead?

Brenon Daly

Contact: Brenon Daly

If we had to guess about Hewlett-Packard making an uncharacteristic move and jumping an announced transaction, we would have thought the company would go after McAfee rather than 3PAR. After all, HP has a giant hole in its security portfolio (we might describe it as a ‘McAfee-sized’ hole), while it’s already pretty well covered on the storage side, even if much of its offering is a bit long in the tooth.

Yet that isn’t the way it’s playing out. The recently decapitated company offered $1.7bn earlier this week for 3PAR, adding roughly $410m, or 33%, to the proposed price of the high-end storage vendor. Meanwhile, McAfee’s planned $7.8bn sale to Intel, announced last week, continues to track to a close before the end of the year. (We would note that McAfee is being valued at 3.4 times trailing sales, exactly half the level of 3PAR following HP’s bumped bid, which took the valuation to 7.6x trailing sales.)

HP’s topping bid for 3PAR appears to be a fairly defensive move. For starters, there’s the matter that 3PAR would overlap more than a little bit with its existing core storage offering called StorageWorks Enterprise Virtual Array. Betting on an acquired property to replace – or at the very least, refresh – the heart of a company’s current offering is a risky proposal. On top of that, 3PAR would require a new architecture, rather than just running on top of HP’s existing hardware like its other software-based storage acquisitions (PolyServe, IBRIX and Lefthand Networks).

All in all, looking to derail Dell’s offer for 3PAR appears to be at odds with much of HP’s previous strategy and rationale around storage. And while it pursues that deal (cost what it may), HP passes on McAfee, a one-of-a-kind security asset that would instantly make it much more competitive with IBM, EMC and Cisco Systems. If HP has sincere aspirations about outfitting the next generation of datacenters, we might suggest that it needs to actually own its intellectual property (IP) for security.

So far, however, HP has been content with just OEM arrangements to cover itself for security. (Notably, it has extracted a fairly one-sided agreement with Symantec for consumer anti-malware protection.) And even though buying McAfee would mean an unraveling of a number of those arrangements, we would note that reality isn’t preventing HP from making its bid for 3PAR. Remember that HP currently has an OEM arrangement with Hitachi Data Systems for a high-end offering like 3PAR. Yet it’s prepared to pay – and pay a lot of money – to own the IP itself. Couldn’t the same rationale be used for McAfee?

Dell’s not-so-identical twin storage deals

Brenon Daly

Contact: Brenon Daly

From an investment banking perspective, both EqualLogic and 3PAR started out and finished their lives in much the same way. The two storage vendors filed to go public within a week of one another back in August 2007, and – pending the close of 3PAR’s sale – both will end up inside Dell. Yet while the final destination is the same, the two vendors’ not-so-parallel tracks to Round Rock, Texas, underscore the fact that the tech M&A market, as well as the capital markets, still have a long way to go to recover from the Credit Crisis.

Consider this: In the sale announced Monday, 3PAR garnered just half the multiple that fellow storage vendor EqualLogic got in its sale to the same buyer, at least based on one key metric. 3PAR sold for 5.6 times trailing sales, while EqualLogic went for 12x trailing sales. We would chalk up the eye-popping premium for EqualLogic mostly to the fact that Dell had to effectively outbid the public market to prevent the company from going public. More to the point, Dell had to outbid a bull market, as the Nasdaq had tacked on 20% in the year leading up to its purchase of EqualLogic in November 2007.

As any company – including 3PAR and Dell – can attest, the bull market ended abruptly and painfully just days after the EqualLogic trade sale. So now we’re left with a market where Dell can offer the highest-ever price for 3PAR shares (representing a staggering 87% premium) and still get a ‘half-off discount’ on valuation compared to its earlier billion-dollar storage deal. But then Dell knows all about discounts over that time period. The company’s market cap has been cut in half (to $25bn from $50bn) from the day it announced its EqualLogic acquisition to Monday’s announcement of the 3PAR purchase.

RainStor, the structured data retention and compression startup that recently renamed itself from Clearpace, has raised $7.5m in series B funding. The round brought in two new investors – Storm Ventures and data integration software specialist Informatica (which licenses RainStor’s technology as part of its Applimation data archive suit <!– /* Font Definitions */ @font-face {font-family:”Cambria Math”; panose-1:2 4 5 3 5 4 6 3 2 4; mso-font-charset:0; mso-generic-font-family:roman; mso-font-pitch:variable; mso-font-signature:-1610611985 1107304683 0 0 159 0;} @font-face {font-family:Calibri; panose-1:2 15 5 2 2 2 4 3 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:-1610611985 1073750139 0 0 159 0;} @font-face {font-family:Verdana; panose-1:2 11 6 4 3 5 4 4 2 4; mso-font-charset:0; mso-generic-font-family:swiss; mso-font-pitch:variable; mso-font-signature:536871559 0 0 0 415 0;} /* Style Definitions */ p.MsoNormal, li.MsoNormal, div.MsoNormal {mso-style-unhide:no; mso-style-qformat:yes; mso-style-parent:””; margin:0in; margin-bottom:.0001pt; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”,”serif”; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin;} a:link, span.MsoHyperlink {mso-style-noshow:yes; mso-style-priority:99; color:blue; mso-text-animation:none; text-decoration:none; text-underline:none; text-decoration:none; text-line-through:none;} a:visited, span.MsoHyperlinkFollowed {mso-style-noshow:yes; mso-style-priority:99; color:purple; mso-themecolor:followedhyperlink; text-decoration:underline; text-underline:single;} p.bodytxt02, li.bodytxt02, div.bodytxt02 {mso-style-name:body_txt_02; mso-style-unhide:no; mso-margin-top-alt:auto; margin-right:0in; mso-margin-bottom-alt:auto; margin-left:0in; mso-pagination:widow-orphan; font-size:12.0pt; font-family:”Times New Roman”,”serif”; mso-fareast-font-family:Calibri; mso-fareast-theme-font:minor-latin;} .MsoChpDefault {mso-style-type:export-only; mso-default-props:yes; font-size:10.0pt; mso-ansi-font-size:10.0pt; mso-bidi-font-size:10.0pt;} @page WordSection1 {size:8.5in 11.0in; margin:1.0in 1.0in 1.0in 1.0in; mso-header-margin:.5in; mso-footer-margin:.5in; mso-paper-source:0;} div.WordSection1 {page:WordSection1;} –>
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by Brenon Daly

From an investment banking perspective, both EqualLogic and 3PAR started out and finished their lives in much the same way. The two storage vendors filed to go public within a week of one another back in August 2007, and – pending the close of 3PAR’s sale – both will end up inside Dell. Yet while the final destination is the same, the two vendors’ not-so-parallel tracks to Round Rock, Texas, underscore the fact that the tech M&A market, as well as the capital markets, still have a long way to go to recover from the Credit Crisis.

Consider this: In the sale announced Monday, 3PAR garnered just half the multiple that fellow storage vendor EqualLogic got in its sale to the same buyer, at least based on one key metric. 3PAR sold for 5.6 times trailing sales, while EqualLogic went for 12x trailing sales. We would chalk up the eye-popping premium for EqualLogic mostly to the fact that Dell had to effectively outbid the public market to prevent the company from going public. More to the point, Dell had to outbid a bull market, as the Nasdaq had tacked on 20% in the year leading up to its purchase of EqualLogic in November 2007.

As any company – including 3PAR and Dell – can attest, the bull market ended abruptly and painfully just days after the EqualLogic trade sale. So now we’re left with a market where Dell can offer the highest-ever price for 3PAR shares (representing a staggering 87% premium) and still get a ‘half-off discount’ on valuation compared to its earlier billion-dollar storage deal. But then Dell knows all about discounts over that time period. The company’s market cap has been cut in half (to $25bn from $50bn) from the day it announced its EqualLogic acquisition to Monday’s announcement of the 3PAR purchase. e

NTT makes $3.2bn IT services play

Brenon Daly

Contact: John Abbott

Japanese telecommunications giant Nippon Telegraph and Telephone (NTT) has made a surprise offer for one of its existing partners, Dimension Data Holdings, an LSE- and Johannesburg Securities Exchange-listed IT services firm with roots in South Africa. This is an unusually large acquisition for a Japanese company, worth 120 pence per share, approximately £2.12bn ($3.2bn) in cash. That’s just over a 15 times EV/EBITDA multiple and 18x the closing share price before the announcement. (NTT has plenty of cash, with about $10bn on hand).

The Dimension Data board has recommended the offer and NTT has assurances from the directors and major shareholders Venfin DD Holdings and Allan Gray covering 52% of Dimension Data’s issued shares. The deal is expected to close by the end of October.

NTT cited the cloud computing opportunity as the main motivation behind the transaction. It brings to NTT specialist managed IT infrastructure and services capabilities that can now be rolled out on a global scale. NTT has its own managed network services, datacenters, system integration and mobile services, but Dimension Data adds to the development, operations and maintenance side of IT infrastructure, including network devices and servers running in customer sites. Geographically, NTT’s main strengths are in Asia, followed by Europe and the US; Dimension Data is strongest in Africa, the Middle East and Australia. NTT rival China Mobile has been making noises recently about investments in South Africa.

Dimension Data was founded in 1983 and listed on the JSE four years later. A series of acquisitions, including that of Plessey South Africa in 1998 and the European networking business of Comparex Holdings in 1999, helped it grow to over $2bn in revenue by 2003. (The deals have continued, with eight listed in The 451 M&A KnowledgeBase since 2004). At the end of fiscal 2009, revenue hit nearly $4bn and net profit was $135m. The company has 11,500 employees and more than 6,000 clients. JPMorgan Cazenove advised on the transaction for Dimension Data and Morgan Stanley for NTT.

Desktop virtualization could lead to real security deals

Brenon Daly

Contact: Brenon Daly, Steve Coplan

Despite virtualization sweeping datacenters and now serving as a cornerstone of cloud computing, virtualization security has largely been an afterthought. Few startups focused on this market are generating much revenue, and M&A activity has been muted, both in terms of deal flow and valuations.

For instance, VMware – the kingpin of virtualization, which sits on nearly $3bn in cash and has spent hundreds of millions of dollars on acquisitions in other markets – has made only tiny moves around security. It reached for Blue Lane Technologies in October 2008 for what we believe to be less than $10m. (Blue Lane was one of about 20 initial partners in VMware’s VMsafe, which was introduced in early 2008.) That purchase came almost a year after VMware added hypervisor security vendor Determina for an estimated $15m.

Things may be about to change. My colleague Steve Coplan has written in a new report that the rise of desktop virtualization is likely to make security much more of a central concern. But as he notes, it’s not immediately clear which companies will actually be providing the security – the virtualization vendors, security firms or perhaps even management software providers? He looks at the rationale for all three groups as acquirers, and even lays out a few scenarios in the report.

IBM analyses Coremetrics, makes a deal

Brenon Daly

Contact: Brenon Daly

We were close on our earlier rumor-mongering on Coremetrics, but tapped the wrong buyer. Four months ago, we heard that the Web analytics firms was in play and had retained Goldman Sachs to represent it. (And, indeed, Goldman did advise Coremetrics in the process.) On June 15, IBM said it was picking up Coremetrics for an undisclosed amount. Originally, we thought salesforce.com made the most sense as the buyer for Coremetrics.

It’s not hard to imagine that IBM’s desire for Coremetrics increased significantly after its two most-recent acquisitions, Sterling Commerce and Cast Iron Systems. For instance, Coremetrics would give much more insight into the activities on the business-to-business network that Big Blue picked up three weeks ago when it paid $1.4bn for Sterling Commerce. Coremetrics has some 2,100 customers.

Even with this deal done, we still think Coremetrics would have been a natural fit for salesforce.com, and would have given a significant boost to the company’s effort to diversify from its legacy sales force automation (SFA) business. Sales of that product still account for two-thirds of overall company revenue.

Salesforce.com recently indicated it was willing to go shopping to increase its non-SFA business, reaching for business directory provider Jigsaw Data. At $142m in cash, the price of Jigsaw was more than salesforce.com spent, collectively, on its previous seven acquisitions. Who knows, maybe salesforce.com will turn to fellow analytics firm Webtrends, which is owned by buyout shop Francisco Partners. Incidentally, one of Francisco’s founding partners, Sandy Robertson, serves on salesforce.com’s board of directors.

What’s new at Novell?

Brenon Daly2 Comments

Contact: Brenon Daly

Even though its shareholders aren’t overwhelmingly concerned with Novell’s financial numbers right now, the company will nonetheless be releasing results for its fiscal second quarter later Thursday afternoon. For what it’s worth, Wall Street expects earnings of about $0.07 per share on sales of $205m, representing year-over-year declines on both the top and bottom lines. (We should add that if Novell does manage to hit expectations, it will snap two straight quarters of earnings whiffs.)

But then Novell hasn’t traded on fundamentals for the past three months, ever since hedge fund Elliott Associates launched an unsolicited offer for the company. Novell, which is being advised by JP Morgan Securities, stiffed the bid, but did leave the door open to other ‘alternatives to enhance shareholder value.’ Since Elliott floated the offer, shares of Novell have basically changed hands at or above the $5.75-per-share bid.

As a decidedly mixed bag of businesses, Novell isn’t the cleanest match for any other company that might want to take it home. For that reason, most speculation around a possible buyer for Novell has centered on private equity firms. (The buyout shops are undoubtedly licking their chops at the prospect of picking up Novell’s $600m of maintenance and subscription revenue, not to mention the $1bn that sits in the company’s treasury.) However, we understand from a person familiar with the process that there are a handful of strategic buyers still interested in Novell.

If we were to put forward one potential suitor that could probably benefit more than any other company in picking up Novell’s broad portfolio of businesses, we might single out SAP. OK, we know it’ll never happen. (Never, ever.) But a hypothetical pairing certainly does go a long way toward filling a few notable gaps in SAP’s offering, while also making the German giant far more competitive with Oracle.

Consider this fact: some 70% of SAP apps that run on Linux run on Novell’s SUSE Linux Enterprise. Add in Novell’s additional technology around identity and access management, systems management, virtualization and other areas, and SAP’s stack suddenly looks a lot more competitive with Oracle’s stack. Again, an SAP-Novell deal will never happen, but the combination certainly does lend itself to some intriguing speculation.

Timeline: Novell in the crosshairs

Date Event Comment
March 2, 2010 Elliott Associates launches unsolicited bid of $5.75 per share for Novell The offer values Novell at a $2bn equity value but only a $1bn enterprise value
March 20, 2010 Novell rejects Elliott’s bid as ‘inadequate’ By our calculation, Elliott is valuing Novell at just 1.6 times its maintenance/subscription revenue

Source: The 451 Group