Category: cloud computing

Pricing out an alternate reality for Salesforce-LinkedIn

Brenon Daly

Contact: Brenon Daly

An enterprise software giant trumpets its acquisition of an online site that has collected millions of profiles of business professionals that it plans to use to make its applications ‘smarter’ and its users more productive. We’re talking about Microsoft’s blockbuster purchase of LinkedIn this week, right? Actually, we’re not.

Instead, we’re going back about a half-dozen years – and shaving several zeros off the price tag – to look at Salesforce’s $142m pickup of Jigsaw Data in April 2010. Jigsaw, which built a sort of business directory from crowdsourced information, isn’t exactly comparable to LinkedIn because it mostly lacked LinkedIn’s networking component and because the ultimate source of information for the profiles differed at the two sites. However, the rationale for the two deals lines up almost identically, and the division that Salesforce created on the back of the Jigsaw buy (Data.com) runs under the tagline that could be lifted directly from LinkedIn: ‘The right business connection is just a click away.’

We were thinking back on Jigsaw’s acquisition – which, at the time, stood as the largest transaction by Salesforce – as reports emerged that the SaaS giant had been bidding for LinkedIn, but ultimately came up short against Microsoft. Our first reaction: Of course Benioff & Co. had been in the frame. After all, the two high-profile companies have been increasingly going after each other, with Salesforce adding a social network function (The Corner) to the directory business at Data.com and LinkedIn launching its CRM product (Sales Navigator). And, not to be cynical, even if it didn’t want to buy LinkedIn outright, why wouldn’t Salesforce use the due-diligence process to gain a little competitive intelligence about its rival?

As we thought more about Salesforce’s M&A, we started penciling out an alternate scenario from the spring of 2010, one in which the company passed on Jigsaw and instead went right to the top, acquiring LinkedIn. To be clear, this requires us to make a fair number of assumptions as we revise history with a rather broad brush. Further, our ‘what might have been’ look glosses over huge potential snags, such as the fact that Salesforce only had $1.7bn in cash at the time, and leaves out the whole issue of integrating LinkedIn.

Nonetheless, with all of those disclaimers about our bit of blue-sky thinking, here’s the bottom line on the hypothetical Salesforce-LinkedIn pairing at the turn of the decade: It probably could have gotten done at one-third the cost that Microsoft says it will pay. To put a number on it, we calculate that Salesforce could have spent roughly $9bn for LinkedIn back in 2010, rather than the $26bn that Microsoft is handing over.

Our back-of-the envelope math is, admittedly, based on relatively selective metrics. But here are the basics: At the time of the Jigsaw deal (April 2010), fast-growing LinkedIn had about $200m in sales and 150 million total members. If we apply the roughly $60 per member that Microsoft paid for LinkedIn ($26bn/433 million members = $60/member), then LinkedIn’s 150 million members would have been valued at $9bn. (Incidentally, that valuation exactly matches LinkedIn’s closing-day market cap on its IPO a year later, in May 2011.)

On the other hand, if we use a revenue multiple, the hypothetical valuation of a much-smaller LinkedIn drops significantly. Microsoft paid about 8x trailing sales, which would give the 2010-vintage LinkedIn, with its $200m in sales, a valuation of just $1.6bn. (We would add that other valuation metrics using net income or EBITDA don’t make much sense because LinkedIn was basically breaking even at the time, throwing off only a few tens of millions of dollars in cash.)

However, LinkedIn would certainly have commanded a double-digit price-to-sales multiple because it was doubling revenue every year at the time. (LinkedIn finished 2010 with $243m in revenue and 2011 with over $500m in sales, while Salesforce was increasing revenue only about 20%, although it was north of $1bn at the time.) By any metric, LinkedIn would have garnered a platinum bid from Salesforce in our hypothetical pairing, as surely as it got one from Microsoft. But on an absolute basis, the CRM giant would have gotten a bargain compared to Microsoft.

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Big Yellow tries on a Blue Coat

Brenon Daly

Contact: Brenon Daly

Announcing the second-largest information security transaction in history, Symantec says it will pay $4.7bn in cash for Blue Coat Systems. The single purchase eclipses the amount Big Yellow has spent, collectively, on all of its two dozen information security acquisitions over the past decade and a half, according to 451 Research’s M&A KnowledgeBase. Strategically, the proposed pairing is essentially a large-scale combination of Symantec’s endpoint security with Blue Coat’s Web defense, an M&A trend that has mostly featured deals valued in the tens of millions of dollars, rather than billions of dollars.

The transaction will further boost Symantec’s standing as the largest independent security vendor. On a GAAP basis, the combined company would have sales of about $4.2bn. (For perspective, that’s twice the size of McAfee at the time of its sale to Intel in 2010.) Blue Coat recorded GAAP revenue of $599m in its latest fiscal year. However, because of accounting regulations, that figure excludes a fair amount of deferred revenue. In its IPO paperwork, Blue Coat offered a non-GAAP ‘adjusted revenue’ figure that included the written-off deferred revenue totaling $775m in its latest fiscal year. By either measure, Blue Coat would bump up the combined company’s top line by about 20%.

For Symantec, however, bigger has not necessarily proven to be better. Big Yellow only recently cleaved off its Veritas division, unwinding a decade-long effort to pair security with storage that ultimately failed to produce returns. Yet even on the other side of the tumultuous separation, revenue at Symantec shrank in its previous fiscal year by 9%, with the company forecasting that the contraction would continue in the current fiscal year. The instability has also played out in the corner office, with Symantec having run through three CEOs in the past four years. (Note: Symantec currently doesn’t have a permanent chief executive, although as part of the agreement, current Blue Coat CEO Greg Clark will take the top job at the combined company after the deal closes, which is expected by September. In that way, there’s also a bit of an ‘acq-hire’ aspect to the multibillion-dollar pairing.)

The move marks a rare case of a dual-tracking, with Symantec buying Blue Coat less than two weeks after the company revealed its IPO paperwork. And, as we look at Blue Coat’s valuation, we can’t help but think that Big Yellow had to outbid Wall Street to get this transaction done. Think about it this way: a little more than a year ago, current owner Bain Capital was able to purchase Blue Coat for $2.4bn – just half the price Symantec is paying. (Of course, last spring Symantec probably wasn’t in a position to do a major deal, as it was focused on the Veritas divestiture.)

At $4.7bn, Blue Coat is valued at 7.8x its trailing GAAP revenue of $600m. (Even if we view the transaction on the adjusted revenue of $775m, Symantec is paying 6x non-GAAP revenue. Continuing on those unorthodox financial measures, we would add that the acquisition values Blue Coat at slightly more than 20x trailing adjusted EBITDA.) Overall, those valuations are only slightly above the average of just under 7x trailing sales for information security deals valued at more than $1bn over the past 14 years, according to 451 Research’s M&A KnowledgeBase.

Largest information security transactions, 2002-16

Date announced Acquirer Target Deal value Deal valuation*
August 19, 2010 Intel McAfee $7.7bn 3.4x
June 12, 2016 Symantec Blue Coat Systems $4.7bn 7.8x
Feb 9, 2004 Juniper Networks Netscreen Technologies $4bn 14.3x
July 23, 2013 Cisco Systems Sourcefire $2.7bn 10.7x
March 10, 2015 Bain Capital Blue Coat Systems $2.4bn 3.8x

Source: 451 Research’s M&A KnowledgeBase *Price-to-trailing-sales multiple

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Vonage pushes further into business communications with Nexmo buy

Mark Fontecchio

Contact: Mark Fontecchio

Vonage pays $230m for Nexmo, which offers enterprise voice and text messaging APIs. The deal, Vonage’s largest in 451 Research’s M&A KnowledgeBase, pushes the VoIP provider further into the realm of unified business communications. Vonage has now spent about $600m on M&A in the past few years to pivot from a consumer-focused VoIP supplier into a business communications vendor. The gamble has paid off, with the company’s overall sales growing once again and its business revenue jumping exponentially.

Nexmo is Vonage’s biggest reach yet. Its previous nine-figure (or close to it) acquisitions – starting with Vocalocity in 2013, Telesphere Networks in 2014 and iCore Networks last year – involved business-focused VoIP providers, so Vonage stayed within its wheelhouse. With its cloud-based voice, messaging and chat APIs, Nexmo broadens Vonage’s horizons into business communications services, helping companies more easily embed voice and messaging services within their mobile apps. For that privilege, Vonage is paying a healthy multiple on Nexmo’s trailing 12-month revenue (see estimate here). The multiple is Vonage’s highest to date and one of the largest we’ve seen in mobile messaging and application development. Nexmo’s revenue is also growing at a fast 40% clip, according to Vonage.

Vonage’s overall sales grew 3% to $895m last year, but its business revenue more than doubled to $219m. Two years ago, the company had $8m in business revenue. Now its business revenue is higher than all of rival 8×8’s sales. By our math, at least three-fourths of that increase in business revenue came from its purchases of Telesphere, iCore and SimpleSignal. Meanwhile, its consumer revenue dropped 12% to $676m. Vonage’s challenge has been – and will continue to be – how quickly it can replace its disintegrating consumer revenue with business dollars, whether that be through continued M&A or more organic growth.

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What happened to Alphabet’s M&A bets?

Brenon Daly

Contact: Brenon Daly

As part of an effort to provide more strategic focus as well as financial transparency, Google reorganized and renamed itself Alphabet last October. In the half-year since that change, the company has lived up to the ‘alpha’ part of its new moniker, handily outperforming the Nasdaq, which is flat for the period. But when it comes to ‘bet,’ it hasn’t been placing nearly as many M&A wagers as it used to.

So far in 2016, the once-prolific buyer has announced just two acquisitions, according to 451 Research’s M&A KnowledgeBase. That’s down substantially from the average of six purchases that Google/Alphabet has announced during the same period in each of the years over the past half-decade. (Nor do we expect this year’s totals to be bumped up by Google buying Yahoo, as has been rumored. That pairing would roughly be the sporting world’s equivalent of the Golden State Warriors nabbing the Los Angeles Lakers.)

The ‘alpha’ part of Alphabet is, of course, the Google Internet business, which includes the money-minting search engine, YouTube, Android and other digital units. This division generates virtually all of the overall company’s revenue and is the primary reason why Alphabet is the second-most-valuable tech vendor in the world, with a market cap of over a half-trillion dollars. For more on the company’s progress in dominating the digital world, tune in on Thursday for its Q1 financial report and forecast.

Google/Alphabet M&A

Period Number of announced transactions
January 1-April 18, 2016 2
January 1-April 18, 2015 6
January 1-April 18, 2014 8
January 1-April 18, 2013 4
January 1-April 18, 2012 4
January 1-April 18, 2011 8

Source: 451 Research’s M&A KnowledgeBase

Will Zuora play in Peoria?

Brenon Daly

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

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CallidusCloud’s accretive acquisitions

Brenon Daly

Contact: Brenon Daly

With the $4m purchase of assets from ViewCentral, CallidusCloud has added on to one of its first add-on businesses. The company, which started life 20 years ago selling sales compensation management software, has used a bakers’ dozen deals since 2010 to expand its portfolio into software for employee hiring, marketing automation and on-the-job training. ViewCentral brings billing and payment technology to CallidusCloud’s learning management offering, a product that has its roots in the mid-2011 acquisition of Litmos.

By themselves, the small transactions, which have cost the company an average of just $5m a pop, aren’t all that significant. But collectively, they have expanded the market for CallidusCloud and given it the opportunity to increase high-margin revenue by selling additional products. (In 2015, the company said it did more than 80 multi-product deals.) CallidusCloud’s strategy of inorganic growth also stands in sharp contrast to rival Xactly, which has stayed out of the M&A market as it has maintained its focus on selling its core sales compensation management offering. (See our recent report on Xactly’s strategy and market position.)

Obviously, the M&A activity at the two companies isn’t the sole difference between CallidusCloud and Xactly, any more than it fully accounts for the relative valuation discrepancy between them. Still, it is worth considering how the acquisition-based portfolio expansion has paid off for CallidusCloud, at least in its standing on Wall Street. CallidusCloud currently garners twice the valuation of its smaller rival. (CallidusCloud trades at about $930m, or 4.4x times 2016 projected sales of $212m, compared with Xactly, which trades at $215m, or 2.3x times this year’s projected sales of $95m.) Further, since it came public last June, Xactly has shed about one-fifth of its value, while CallidusCloud shares are slightly in the green over that period.

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A new face for Google’s enterprise cloud

Brenon Daly

During last week’s GPC NEXT 2016 conference, it became pretty clear that Google is hoping that Diane Greene can do for the enterprise cloud what Andy Rubin did for mobility. In both cases, the search giant has set about acquiring a well-known ‘face’ to give it a credible and visible presence in a market that it cannot organically move into but – at the same time – can’t afford to miss. (See our full report on the conference, where the company bolstered its Google Cloud Platform with multi-cloud management, a machine-learning engine and more scalable containers, among other announcements.)

A decade ago, Google’s acquisition of Android Inc not only brought the company a fledgling OS for mobile phones, but also included the high-profile figure of Rubin. From those early days, Rubin served as a kind of ‘rock-star engineer’ as Android soared to become the world’s most-used mobile OS. (Rubin stepped out of his role in Google’s mobile business in 2013 and left the company altogether the following year.) More recently, Google made what could be characterized as one of the tech industry’s largest-ever ‘acq-hires’ when it paid $380m in cash and stock four months ago to snag bebop, a startup headed by VMware cofounder (and Google board member) Diane Greene.

Just as Rubin served as a senior VP at Google as part of his company being acquired, Greene is serving as a senior VP at Google as part of her company being acquired. However, where the parallel breaks down between the two executives is around timing. Google bought Rubin’s company in August 2005 – a full two years before Apple introduced its iPhone. In contrast, Google purchased Greene’s company just last November – nearly a decade after Amazon launched its Amazon Web Services and had grown it to a $10bn run-rate business. (Click here to to read more about the remarkable growth of AWS.)

That’s not to say that Google, led in its efforts by a proven executive such as Greene, can’t make inroads into the enterprise cloud arena, thereby closing the gap with AWS and second-place Microsoft Azure. After all, the company wasn’t anywhere among the earliest search engines, but it overtook every single one of them as it netted billions of dollars on its way to becoming the world’s most-popular search engine.

But there are challenges in Google’s ‘people and products’ strategy, as demonstrated by Rubin’s own experience at the company after he left the Android division. A true gadget guy, Rubin moved over to head the search giant’s grandly ambitious robotics unit when it launched in 2013. It was built on a series of acquisitions, most notably the December 2013 pickup of Boston Dynamics. However, Rubin couldn’t replicate in Replicant (the name for Google’s robotics business) the success he had with Android, and left the company in 2014. Google is now reportedly in the process of selling off and repurposing the Replicant assets.

Cloud computing as a service MarkMon

Source: 451 Research’s Market Monitor

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After a decade of dominance, what’s next for AWS?

Brenon Daly3 Comments

Contact: Brenon Daly

Even as it begins its second decade of life today, there’s an undeniable sense that Amazon Web Services (AWS) is only getting started. From a standing start in March 2006 with a single storage product, AWS has created a profitable tech behemoth that is gobbling up huge chunks of the IT landscape. (For a deeper look at how AWS has gone about upending the multibillion-dollar markets where it operates, see a recent report from my colleague Owen Rogers on how AWS handles the pricing and delivery of its vast array of services.)

On its own, AWS is easily worth more than $100bn, a remarkable bit of value creation that’s been done almost entirely organically. Amazon has almost exclusively used R&D – rather than M&A – to build AWS. For the most part, the AWS cloud offering has been developed through reallocation of existing assets and engineering instead of acquiring those things.

In terms of corporate strategy, that sets Amazon and its AWS business apart from most other tech companies, which tend to default to buying rather than building. Each year, tech vendors collectively spend hundreds of billions of dollars expanding their product portfolios and addressable market, only to struggle to put up any growth. (To take one extreme, consider IBM, which has seen annual revenue drop from roughly $100bn in 2013 to less than $80bn this year. In that same period, Big Blue has spent more than $8.6bn on 39 acquisitions, according to 451 Research’s M&A KnowledgeBase.)

The organic value creation at AWS stands out even more when compared with even the biggest and best tech deals. Consider the case of VMware. EMC’s purchase of the virtualization startup in late 2003 for $635m is rightfully cited as one of the most successful tech acquisitions in history. VMware’s market valuation of $21.2bn is currently dictated by terms of Dell’s pending pickup of VMware’s parent, EMC. (Before the transaction was announced, VMware had a market cap of about $34bn.)

Even on an unaffected basis, AWS is at least three times more valuable than VMware. And the case could certainly be made that the gap between the two companies will only widen in the future. After all, AWS is now larger than VMware and growing nearly eight times faster than VMware, which has slowed to a single-digit percentage rate. (AWS increased revenue a stunning 72% to $7.9bn in 2015.) Further, AWS has a large and growing market opening in front of it. 451 Research’s Market Monitor forecasts that the market for cloud computing ‘as a service’ – which includes PaaS, IaaS and infrastructure software as a service (ITSM, backup, archiving) – will hit $21.9bn this year and more than double to $44.2bn by 2020.

Source: 451 Research’s Market Monitor

New insight on rapidly emerging IoT M&A activity

Brenon Daly

Contact: Brenon Daly

With the number of Internet of Things (IoT) acquisitions in 2015 already topping the total from the past two years combined, 451 Research has launched a dedicated channel for our qualitative and quantitative research in this rapidly emerging market. The IoT channel is the first addition to our 14-sector research dashboard, which we unveiled last summer.

The new channel covers the full scope of IoT, focusing on 10 primary ‘building block’ technologies that are increasingly enabling the digitalization and virtualization of huge swaths of the physical world. These trends – spanning from edge technology to core technology – have also sparked unprecedented M&A activity in the IoT sector, not only in terms of number of prints and spending on them but also the variety of buyers.

Essentially, any company that has a ‘thing’ and wants to create actionable business intelligence from it can be viewed as a potential IoT acquirer. According to 451 Research’s M&A KnowledgeBase , we have already seen companies as diverse as Google, adidas, Cisco and even farm machinery maker Deere & Company all ink IoT acquisitions. Even as those buyers have helped push spending on IoT deals up a staggering 100-fold in the past four years, the sense is that shopping in this market has only just begun.

For insight and forecasts on both activity and valuations around M&A in the IoT market, be sure to check out our new IoT channel.

IoT M&A

Year Deal volume Deal value
YTD 2015 81 $21.3bn
2014 61 $14.4bn
2013 21 $454m
2012 15 $767m
2011 18 $201m

Source: 451 Research’s M&A KnowledgeBase

Wrapping a ‘blue coat’ around SaaS apps

Brenon Daly

Contact: Brenon Daly

For the second time in about three months, 20-year-old infosec vendor Blue Coat has bought its way into the cloud, paying an astronomical multiple for cloud application control startup Elastica in a $280m deal. Paired with its recent purchase of Perspecsys, Blue Coat has rung up a $400m bill in building out an offering to help secure SaaS applications. That makes it the biggest buyer in this nascent market.

We view the pickups of Perspecsys and Elastica as a bit of a portfolio update and refresh ahead of what we expect to be an IPO for Blue Coat in early 2016. As one of the few large-scale infosec providers, Blue Coat has attracted acquisition interest in recent years. Before its take-private in late 2011, the company was rumored to have drawn a bid from HP. More recently, Raytheon was thought to be considering a run at Blue Coat before nabbing fellow PE-owned network security firm Websense instead. Earlier this year, Blue Coat’s original PE owner, Thoma Bravo, sold the company to Bain Capital. (Incidentally, Goldman Sachs worked Blue Coat’s LBO as well as the secondary transaction.)

Subscribers to 451 Research can see our report on this deal – including valuation, market context and integration outlook – on our website later today and in tomorrow’s 451 Market Insight.

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