Category: cloud computing

salesforce.com goes for a GroupSwim

Brenon Daly

Contact: Brenon Daly, China Martens

Almost two months ago, we noted that several sources had indicated that salesforce.com may have reached outside its own walls for a little help in getting its Chatter product out the door. (Salesforce.com showed off Chatter, an enterprise collaboration product, at its Dreamforce conference in November, although it is not yet available.) The official company line at the time was that Chatter was developed in-house, which is consistent for acquisition-averse salesforce.com. The vendor has done just six deals – all of them tiny – in the decade that it has been in business.

In recent days, it has surfaced that salesforce.com did indeed acquire a startup. A visit to the homepage of GroupSwim indicates that the company ‘is now part of salesforce.com.’ We have followed GroupSwim since mid-2008, with my colleague Kathleen Reidy initially writing that the startup’s pairing of semantic analysis with content sharing/collaboration appeared to be a promising approach in a rather crowded market. When we last visited with GroupSwim a year ago, the 15-employee firm claimed 30 customers. It was still living off angel money.

In contrast to the rather meager financial situation at GroupSwim, salesforce.com is closing in on an all-time price for its shares. (Current market capitalization: $8.6bn, which works out to a triple-digit P/E ratio on a trailing basis.) And the on-demand giant just priced $500m in a convertible note offering that will bring its total holdings of cash and marketable securities to $1.5bn. With such a rich treasury, salesforce.com could likely buy hundreds more startups like GroupSwim. Or maybe it’s thinking of something bigger?

Microsoft (officially) pals up with Opalis

Brenon Daly

Contact: Brenon Daly

Two months after we first indicated that Microsoft was interested in Opalis Software, the software giant has indeed acquired the runbook automation (RBA) vendor. No terms were disclosed, but when we talked with sources in mid-October, the price being kicked around was $60m. Opalis was thought to be running at about $10m in revenue. We understand that Cowen Group banked Toronto-based Opalis.

The deal, now that it is official, comes after other fellow RBA startups were snapped up. In March 2007, Opsware (now part of Hewlett-Packard) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. As that wave of consolidation swept through the RBA market, Opalis positioned itself as an independent alternative to the offerings from the system management giants. That said, the vendor had been drawing closer to Microsoft. In late April, the two companies announced a joint technology agreement that saw, among other things, Opalis integrated into Microsoft’s System Center Operations Manager 2007 and System Center Virtual Machine Manager 2008 consoles.

M&A ‘chatter’ around salesforce.com

Brenon Daly

Contact: Brenon Daly, China Martens

Official word from salesforce.com is that its recently announced Chatter product was developed in-house. And that would certainly be in keeping with the company’s history of staying away from M&A. Since it opened its doors a decade ago, salesforce.com has done just five tiny deals. The vendor certainly has one of the lowest ratios of total M&A spending (probably around $70m) to market capitalization ($7.7bn) of any of the big software vendors.

Nonetheless, there was some chatter (if you’ll pardon the pun) that salesforce.com may have acquired some technology from a small startup to shore up the recommendation engine portion of Chatter, a collaboration/social networking offering that’s slated to come out next year. The M&A speculation centered on a startup that perhaps provided some natural-language search capability. We would note that a small shopping trip by salesforce.com – if, indeed, there was one – to get some social networking/natural-language technology wouldn’t be without precedent. Rival CRM vendor RightNow tucked in HiveLive, which had just 25 customers, in a $6m deal last summer.

Whether or not salesforce.com went shopping for part of Chatter, it’s worth pointing out that the firm has used M&A as a way to go after Microsoft’s SharePoint in the past. In early 2007, the company picked up Koral, an early-stage content management startup that salesforce.com had effectively been incubating. (And on a smaller scale, several months after that, it quietly acquired a tiny social networking startup, CrispyNews.)

However, we’re guessing that those purchases, particularly the Koral deal, haven’t generated the returns that salesforce.com might have hoped. The vendor originally said that Salesforce Content – an add-on, extra-cost module based partly on Koral – could do to SharePoint (among other document management offerings) what salesforce.com did to Siebel in CRM. That hasn’t come close to happening. In fact, salesforce.com just announced that Content will be available free of charge to all customers.

Patient Smith Micro is big on M&A

-Contact: Thomas Rasmussen, Chris Hazelton

Up until the credit crisis knocked the economy into a recession, mobile software company Smith Micro Software had been a fairly active acquirer. The Aliso Viejo, California-based firm closed five deals worth $93m in 2007 alone. However, as the economy slid into a tailspin, Smith Micro pretty much stepped out of the market. Last year, it announced only a pair of tuck-in acquisitions, which we estimate cost just $3m total.

We suspect Smith Micro may be looking to return to a quicker M&A pace. Last month, it announced its second-largest deal, picking up Mountain View, California-based Core Mobility for $18.5m. (We understand the two sides discussed a deal back in 2007, but couldn’t get together on price.) Smith Micro will hand over $10m in cash and cover the rest of the Core Mobility purchase in stock, which will hardly limit its ability to do future deals. The debt-free company, with a market cap of $340m, claimed $44m in cash and short-term investments (at least before announcing the Core Mobility purchase). Moreover, it recently filed a shelf offering intended to fatten its treasury toward additional deals. At current prices, the four million-share offering will effectively double Smith Micro’s cash on hand. So where might it be looking to shop?

The Core Mobility acquisition reached into a new market segment. But we believe any significant future deal would see the company aiming to bolster its core mobile enterprise VPN offerings. That is where it shopped before putting the breaks on its M&A program in late 2007, when it picked up PCTEL’s mobility assets and Ecutel Systems. Potential targets include Norwegian Birdstep Technology, Swedish Columbitech, Seattle-based NetMotion Wireless and Canadian vendor ipUnplugged.

Although all four would make excellent tuck-in acquisitions, we view publicly traded Birdstep as a particularly good fit for Smith Micro. The Norwegian company has trailing revenue of about $18m, which would be a not-insignificant boost to Smith Micro’s revenue. But more importantly, acquiring cash-burning Birdstep would provide a much-needed foot in the door to the Nordic/European markets to help Smith Micro expand beyond the Americas, which currently accounts for more than 90% of revenue. Birdstep can likely be had at a discount too, as the company currently sports a market cap of about $30m, a mere one-fifth of its 2007 levels. Patience might be the operative word for Smith Micro’s M&A strategy, and it looks like it’s paying off.

Smith Micro’s historical M&A

Period Number of acquisitions Total deal value
2009 YTD 1 $18.5m
2008 2 $2-3m*
2007 5 $93m

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

Equinix continues datacenter consolidation

Brenon Daly

Contact: Brenon Daly, Dan Golding

Two years ago, Equinix went shopping to expand its business across the Atlantic, paying $555m in cash for London-based IXEurope. The deal, which required a topping bid from Equinix to get closed, created the first truly global carrier-neutral colocation player. Now, Equinix is looking to consolidate its home US market. The company said on Wednesday it is planning to pay $689m (80% in stock, 20% in cash) for Switch & Data Facilities Company.

The acquisition, which is expected to close in the first quarter of 2010, would bolster Equinix’s presence in several key markets, as noted by my colleagues at Tier 1 Research. Among the most valuable additions would be Switch & Data facilities serving financial institutions in Manhattan and North Bergen, New Jersey, as well as Switch & Data’s facility in Palo Alto, California, which is a major point of West Coast Internet interconnection.

Combining Equinix and Switch & Data produces a datacenter provider with revenue of just about $1bn, putting it ahead of rivals Savvis and Terremark. From our perspective, we would add that Equinix also garners a premium valuation compared to those remaining providers. In fact, its valuation lines up only slightly lower than the multiple it is paying for Switch & Data, even with the 34% premium on top of the previous closing price of Switch & Data shares. Equinix’s bid values Switch & Data at 17 times trailing EBITDA, compared to 14 times trailing EBITDA at Equinix. In terms of 2010 estimates, both the current valuation of Equinix and the takeout valuation of Switch & Data come in at about 9.5 times projected EBITDA.

Microsoft pals up with Opalis?

Brenon Daly

Contact: Brenon Daly, William Fellows

Having already seen a trio of notable runbook automation (RBA) startups get snapped up by major tech players, we’re now hearing buzz about another pairing. Word is that Microsoft has snagged Opalis Software for about $60m, according to both financial and industry sources. Opalis, which has raised $25m in venture backing, is thought to be running at about $10m in revenue – a much higher level than its rivals at the time of their acquisitions. Current CEO Todd DeLaughter is the former head of Hewlett-Packard’s OpenView division.

The rumored deal comes more than two years after a pair of high-multiple RBA pickups put the focus on the sector, and a year since the industry’s most-recent significant transaction. In March 2007, Opsware (now part of HP) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. Both iConclude and RealOps had only just started to produce any revenue at the time of their respective purchases. And exactly a year ago, CA Inc reached for Optinuity, which we understand was also generating sales in the low single digits of million of dollars.

As that wave of consolidation swept through the RBA market, Opalis positioned itself as an independent alternative to the offerings from the system management giants. Of course, that would be lost if the company does indeed end up belonging to the Redmond behemoth. It wouldn’t be surprising if Microsoft does announce the deal. We understand that the company had a preliminary look or two at Optinuity before that startup sold to CA a year ago. More significantly, Microsoft and Opalis announced in late April a joint technology agreement that saw, among other things, Opalis integrated into Microsoft’s System Center Operations Manager 2007 and System Center Virtual Machine Manager 2008 consoles.

What’s next for billionaire Twitter?

-Contact Thomas Rasmussen

At a time when the social networking bubble is quickly deflating, micro-blogging startup Twitter seems to be living in an alternative universe. We are, of course, referring to the much-publicized $1bn valuation the San Francisco-based company received in a recent round of funding. The rich funding dwarfs even the kinds of valuations we saw during the height of the short-lived social networking bubble last year. And it’s pretty difficult to justify Twitter’s valuation based on its financial performance, since the money-burning startup has absolutely no revenue to speak of, nor a clear plan of how to change that. It seems the entire valuation is predicated on the impressive user growth it has experienced over the past year, as well as the charismatic founders’ wild dreams of ‘changing the way the world communicates.’ That’s pretty thin, particularly when compared to LinkedIn’s funding last year at a similar valuation. That round, which was done at a time when the social networking fad was near its peak, nonetheless had some financial results to support it. Reid Hoffman’s startup was profitable on what we understand was about $100m in revenue and a proven and lucrative business model.

The interesting development from this latest funding is that it makes a sale of Twitter less likely, we would argue. This may be fine with the founders, who have drawn in some $150m for the company and will (presumably) look to the public market to repay those investments at some point in the future. But without any revenue to speak of at this point, any offering from Twitter is a long way off. Also, an IPO by Twitter in the future hangs on successful offerings from Facebook and LinkedIn, which are far more likely to go public before Twitter. If both of those social media bellwethers enjoy strong offerings, and Twitter actually starts to make money off its fast-growing base of users, then a multibillion-dollar exit – in the form of an IPO – might not be farfetched. But we should add that there are a lot of ‘ifs’ included in that scenario.

An offering looks all the more likely for Twitter because the field of potential acquirers has gotten significantly slimmer, since not many would-be acquirers have deep-enough pockets to pay for a premium on the startups’ already premium valuation. As we know from Twitter’s own embarrassing leak of some internal documents, Microsoft, Yahoo, Google and Facebook have all shown an interest in the startup at one point or another. But we’re not sure any of those companies would really be ready to do a 10-digit deal for a firm that’s still promising – rather than posting – financial results. Moreover, we wonder if any of the four would-be buyers even need Twitter. Yahoo and Microsoft seem focused on other parts of their business. Meanwhile, Google is hard at work on Google Wave, and Facebook appears to have moved on already with its much-cheaper acquisition of Twitter competitor FriendFeed in August.

Recent high-profile social networking valuations (based on last known valuation event)

Date Company Valuation/exit value Revenue Revenue to value multiple
September 2009 Twitter $1bn $0* N/A
Summer 2009 Facebook $8bn $500m* 16x*
June 2008 LinkedIn $1bn $100m* 10x*
May 2008 Plaxo $150m* (acquisition by Comcast) $10m* 15x*
March 2008 Bebo $850m (acquisition by AOL) $20m* 42.5x*
July 2005 MySpace/Intermix $580m (acquisition by NewsCorp) $90m 6.5x
December 2005 FriendsReunited $208m (acquisition by ITV; divested to Brightsolid in $42m fire sale in August 2009) $20* 10x*

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

Will Adobe-Omniture marriage prompt online video M&A?

-Contact Thomas Rasmussen, Jim Davis

When Adobe Systems and Omniture announced the details and rationale behind their $1.8bn tie-up in mid-September, some interesting items emerged. Highlighted was the obvious benefit from a combination of Adobe’s popular Flash video platform and Omniture’s analytics capabilities. As the Web analytics market has become more saturated, Omniture has recently been expanding into higher-margin niches such as online video analytics. Combining online video content management with analytics is an area in which some early startups have carved out a profitable niche over the past few years as video has finally started to move to the Web.

However, if the newly bulked-up Adobe truly moves into the space – as we suspect the company will – it will undoubtedly present an enormous challenge to an industry previously dominated by a few well-funded startups. As a consequence of other larger players wanting to get a piece of the booming sector and startups being more inclined to strengthen their position, we believe consolidation in the market is inevitable. With that as our premise, who might be buying, and who are the potential prime targets?

Among a slew of startups in the space, the two primary ones we think could be in play in this scenario are market leaders Move Networks and Brightcove. The two have each taken in roughly $90m in venture capital. It is worth noting that both Microsoft and Cisco are strategic investors in Move Networks, and we think the company would make a great fit for either one since both have a strong focus on video moving forward. Meanwhile, both IAC/InterActive and AOL are strategic investors in competitor Brightcove. While we don’t think AOL is in a position to make an acquisition like this now, we would not put it past IAC. Google with its more consumer-oriented YouTube makes a logical acquirer as well, particularly as a way to add a business-friendly enterprise offering.

And finally, we might put forward rich content delivery networks (CDNs) such as Akamai and Limelight Networks. These vendors have been buying their way into premium verticals recently to escape the rapid commoditization of their core business and would be wise to consider acquiring into the space. From the estimated $40m or so in revenue that we understand Brightcove brings in, a large part of that comes from reselling bandwidth through CDNs.

Increasing cloudiness

Brenon Daly

Contact: Brenon Daly

Just three weeks after VMware inked its company-defining acquisition of SpringSource, the virtualization kingpin is throwing the doors open on its annual VMworld conference today. (We can only hope that those attending the get-together found it smoother than those trying to access the conference through the website. For much of Monday morning, pages on the VMworld site were unavailable due to ‘temporary maintenance.’ With our tongue planted firmly in cheek, we might suggest that they need to add some additional server capacity.)

Although known primarily for its virtualization software, VMware’s purchase of SpringSource indicates that it sees much of its future growth coming from ‘cloud computing.’ To show just how serious the company is taking this, consider that VMware is spending roughly twice as much on SpringSource as it spent, collectively, in the dozen deals it had done before picking up the open source application development startup. The VMware-SpringSource transaction is also, we would argue, the most important cloud computing deal so far.

As a concept, cloud computing is a relatively new term, but one that has caught on strongly in the tech industry. Consider that a search of ‘cloud computing’ in our 451 M&A KnowledgeBase returns 36 deals already this year, up from just eight transactions in all of 2008. Before last year, there were no instances of the term in our M&A database, which has more than 20,000 technology deals going back to the beginning of 2001.

Of course, some of that can be chalked up to the fact that cloud computing is a pretty vague and sprawling term, covering everything from infrastructure management to storage to security to hosting and other areas. To help get some clarity around what can be an otherwise opaque topic, The 451 Group will be hosting its own conference on Thursday called ‘Cloud in Context.’ The half-day event in San Francisco will feature end users discussing working in the cloud, innovative startups and (for the first time ever) the release of our own estimates and projections for the cloud computing market. More details on ‘Cloud in Context’ can be found at the conference website.

VMware: a ‘table-clearing’ bid for the clouds

Brenon Daly

Contact: Brenon Daly

About a year and a half after Paul Maritz got picked up by EMC, the former Microsoft honcho has struck his signature deal for his new employers. When EMC reached for Pi Corp, which had yet to release a product, we figured the move was basically ‘HR by M&A.’ And that has turned out to be the case, as Maritz took over leadership of EMC’s virtualization subsidiary VMware in July 2008. He stepped into the top spot just as VMware’s once-torrid revenue growth had dwindled to a trickle. Sales at VMware rose 88% in 2007 and 42% in 2008, but are projected to inch up just 2% this year.

To help jumpstart VMware’s growth, Maritz looked to the clouds, pushing through the acquisition of SpringSource earlier this week. At roughly twice as much as VMware has spent on its previous dozen deals, the SpringSource buy is the virtualization kingpin’s largest purchase. It was also, as we understand it, a deal very much driven by Maritz. (Because the purchase topped $100m, it also had to be blessed by VMware’s parent, EMC. This indicates that Maritz enjoys a level of support at the Hopkinton, Massachusetts, HQ that probably wasn’t extended to his predecessor, VMware founder Diane Greene.)

As we have noted, no bankers were involved in negotiations and one source indicated that terms were hammered out directly by Maritz and his counterpart at SpringSource, Rod Johnson, in a scant three-and-a-half-week period. Not that there was much negotiating needed. As we understand it, Maritz approached Johnson with a ‘table-clearing’ offer of $400m. SpringSource didn’t contact any other potential buyers, and in fact, the five-year-old startup only weighed VMware’s bid against the possibility of going public in 2011. (Subscribers to the 451 M&A KnowledgeBase can click here to view our estimates on SpringSource’s revenue, both trailing and projected, as well as its valuation.)

However, the source added that getting to an IPO would have likely required another round of funding for SpringSource. The dilution that would come with another round, combined with the deep uncertainty about the direction of the equity markets, tipped SpringSource toward the trade sale. In the end, that decision – and how Maritz executes on his step into application virtualization – will go a long way toward shaping his legacy at VMware.