Category: cloud computing

Securing an IPO pipeline

Brenon Daly

Contact: Brenon Daly

As we saw in the recent lackluster debut of Pure Storage, there isn’t much demand on Wall Street for new offerings. The fast-growing storage startup became only the fifth enterprise tech vendor to go public in 2015. Virtually all of the tech IPOs, including Pure Storage, have broken issue, often falling below the valuation they achieved as private companies, when they were smaller and more speculative investments. However, there is one exception to the generally dismal tech IPO market: information security.

Consider the standout offering from Rapid7 . Since debuting three months ago, the threat-detection provider has not only delivered a tidy return to its earlier investors, but has also traded relatively strongly in the aftermarket. And it is doing all that while maintaining a rather rich valuation. Investors value Rapid7 at about $840m, roughly 8x the $100m or so in sales this year that the company will put up.

As with any market that indicates demand, supply will look to satisfy that demand. We understand there are at least three information security firms currently on file and hoping to go public before the end of the year:

  • Veracode: The code-scanning startup is rumored to have picked J.P. Morgan Securities to lead its offering. We gather the company ran a dual-track process, but is now set to go public. It raised a late-stage round about a year ago, bringing its total to about $120m.
  • LogRhythm: The SIEM vendor has navigated through the consolidation that has thinned the number of sizable independent vendors to just a handful. An IPO from LogRhythm would come almost eight years after rival ArcSight went public.
  • SecureWorks: We noted in May that Dell’s managed security service division is looking at spinning off a minority stake of the company. The move would give SecureWorks currency to pick up other MSSPs, as well as (possibly) raise money for Dell as it looks to pay for the largest-ever tech acquisition.

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Can Dell safeguard the VMware ‘crown jewels’ in EMC acquisition?

Brenon Daly

Contact: Brenon Daly

In announcing the largest-ever tech transaction, both Dell and EMC repeatedly assured the market that VMware, which has consistently accounted for an outsized chunk of EMC’s overall valuation, would retain its status as ‘first among equals’ in the EMC federation. Roughly speaking, VMware generates only about one-quarter of EMC sales, but accounted for three-quarters of the EMC’s overall value before the acquisition. VMware was rightfully termed the ‘crown jewel’ of the landmark transaction.

However, despite those intentions, VMware has nonetheless lost some of its luster due to the pending acquisition, at least in two key constituencies. Both IT buyers and Wall Street investors are more than a little bearish on Dell owning the virtualization kingpin. Since the acquisition was announced, VMware’s market value has fallen by as much as $5bn. (That decline is also pulling down the overall value of the transaction because part of the consideration is in the form of tracking stock.) VMware shares have slumped to their lowest level since mid-2013.

To understand why Wall Street is selling the Dell-EMC deal, we have to look to the ultimate arbiters of value for any company: customers. And based on 451 Research’s survey of nearly 450 IT decision-makers, Dell has a lot of work to do to ease the concerns that it will mishandle EMC and its ‘crown jewel.’ In our survey, four of 10 IT pros who currently buy EMC products, but do not buy Dell products, gave the proposed acquisition a ‘thumbs down.’ That was almost three times higher than the percentage of pessimistic Dell-only customers. The main reason cited by EMC-only customers for their bearishness? They still view Dell as dealing in commodity technology. Obviously, with that perception, it’s going to be extremely challenging for Dell to hit its target of $1bn ‘revenue synergies’ through its EMC acquisition.

VMW rev 2010-15

Dell looks to become ‘indelible’ IT vendor with EMC

Brenon Daly

Contact: Brenon Daly Simon Robinson

Announcing the largest tech deal since the Internet bubble burst, Dell plans to pay approximately $63.1bn for EMC. The debt-laden combination would create a sprawling IT giant with multibillion-dollar businesses in many of the primary enterprise technology markets, including storage, information security, IT services, servers and PCs. (For context, the combined Dell-EMC entity would be larger than Hewlett-Packard Enterprise (post-split), NetApp, Juniper Networks and Symantec combined.) Dell’s bold transformational transaction is not coming cheap, however. The company is valuing EMC significantly more richly than it valued itself when it went private two and a half years ago.

Further, Dell’s relatively pricey bulking up comes at a time when a number of rival enterprise IT vendors are slimming down. More to the point, several of these competitors are unwinding earlier blockbuster acquisitions they made in hopes of staying more relevant in a shifting IT market. The arrival of the public cloud has siphoned off billions of dollars that once flowed unimpeded to Dell, EMC and other first-generation technology firms. However, IT customers increasingly lack the appetite to buy, install and manage dozens of ‘piece parts’ and mold them into a cohesive whole. As a result, we can look at the combination of Dell and EMC as essential if the traditional IT model is to survive the onslaught from public cloud providers, most notably Amazon Web Services.

Though Dell has been on a path to build a ‘better together’ story for almost a decade, it clearly hasn’t been enough. In its effort to buy its way out of the commodity PC business, the company stitched together a patchwork of properties. However, the resulting ‘big picture’ has still not materialized. Dell has lacked a core focus point, as well as the heft and scale in any one market to dominate. Further, it has so far not sufficiently penetrated the large enterprise segment, or moved beyond its two longtime key verticals of healthcare and the public sector. Against this backdrop, it’s easy to see the attraction of EMC, which brings large enterprise credibility in storage, perhaps the industry’s most focused and effective sales operation and, in VMware, still one of the most strategic entities on the market.

EMC’s attractiveness also shows through in the valuation that Dell is paying, if not when viewed against the broader tech M&A market than certainly when put against Dell’s own worth. According to terms, Dell is paying 2.5x trailing sales and 11.5x trailing EBITDA for EMC. For comparison, in orchestrating the take-private of his namesake company, Michael Dell and his consortium paid just one-quarter the price-to-sales multiple of EMC and half the cash-flow multiple. Dell’s LBO, which stands as the third-largest private equity tech transaction in history, valued the company at just 0.5x trailing sales and 5.2x trailing EBITDA.

Look for a full report on the proposed Dell-EMC pairing later today on our website and in tomorrow’s 451 Market Insight.

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In the red-hot SaaS SI market, which is the next shop looking to sell?

Brenon Daly

 

Contact: Brenon Daly

With IBM picking up Meteorix, we hear there’s another Workday-focused SI currently on the market. CPSG, a Dallas-based shop, is slightly bigger than Meteorix, as well as much more profitable, according to our understanding. And it’s seeking a much richer valuation on its exit.

CPSG posted $25m in revenue in 2014, and the company is reportedly forecasting $35-40m for full-year 2015. Unlike other software implementation firms, however, CPSG throws off a fair amount of cash. It should generate more than $10m of EBITDA this year.

The growth and cash flow at CPSG have the company and its advisers at Robert W. Baird & Co. looking for a top-dollar exit. Current second-round bids are coming in at roughly $140m. (For comparison, subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for the valuation IBM paid for Meteorix.)

Assuming CPSG does print, it would be the latest in a string of SaaS application implementation vendors to sell. Just in the past two months, we have seen three significant SIs snapped up by major service providers in a shopping spree that totals more than $600m. Moreover, these buyers are paying 2-3x their own valuations in their acquisitions, reflecting just how desperate they are to bulk up their practices in the fast-growing SaaS space.

Recent SaaS-focused SI M&A

Date announced Acquirer Target Description Deal value
August 11, 2015 CSC Fruition Partners ServiceNow SI See 451 Research estimate
September 15, 2015 Accenture Cloud Sherpas Salesforce, ServiceNow SI Not disclosed
September 28, 2015 IBM Meteorix Workday SI See 451 Research estimate

Source: 451 Research’s M&A KnowledgeBase

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Barracuda bite off bigger chunk of MSP market with Intronis

Brenon Daly

Contact: Dave Simpson Brenon Daly

In its largest acquisition to date, Barracuda Networks nabs Boston-based Intronis for $65m in cash, primarily to improve its position in the MSP space. Intronis, a hybrid cloud backup/recovery vendor with 100 employees, is not well-known as about 75% of its MSP customers white-label its services. But it has almost 2,000 MSP partners, compared with only 200 MSP partners (and 5,000 VARS) for Barracuda alone.

Barracuda has averaged about a deal per year over the past decade, most recently focusing its M&A on its storage business. However, the company has noted some recent weakness in the overall storage space, which is a smaller portion of Barracuda’s overall sales than its security business. Although Barracuda was already in the upper echelon of hybrid-cloud backup/recovery vendors, the Intronis buy should strengthen its position versus key competitors in the storage arena. Also, there is little overlap between the two vendors’ channel partners. Only 37 of Intronis’ top 200 partners are also Barracuda partners, and 90% of Intronis’ partners are not Barracuda partners.

We have for some time been predicting – even advocating – consolidation in the crowded market for online (cloud-based) backup and recovery. Barracuda’s purchase of Intronis is the first shoe to drop, and we anticipate further consolidation in this sector over the next year.

The deal is expected to close by the end of this calendar year. Needham & Company advised Intronis on its sale. Click here for a full report on this transaction.

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Microsoft adds Adallom

Brenon Daly

Contact: Adrian Sanabria Brenon Daly

Continuing its accelerated shopping spree, Microsoft has reached for infosec startup Adallom. Although terms weren’t released, reports from newspapers in Israel, where Adallom has its roots, peg the price at $250m-320m. Assuming those reports are reasonably accurate, the acquisition would be larger than our understanding of the Aorato buy last November. Aorato stands as Microsoft’s most recent security purchase, and the technology will run alongside the just-acquired technology from fellow Israeli company Adallom.

The Adallom pickup fills a gap between cloud-based IAM and third party SaaS products, allowing Microsoft customers to add much broader control over user authorization and activity within internal (Office 365) and third-party SaaS applications such as Salesforce, Workday and Google Apps. This extension of user permissions and directory services creates a layer of monitoring and control not previously possible in the traditional enterprise. Also, with Office 365 as one of the most popular services for vendors such as Adallom to enhance, Microsoft now has the opportunity to offer much greater control, visibility and security to existing customers.

Microsoft’s purchase of Adallom is the tech giant’s twelfth transaction of 2015, which is twice as many as it has averaged in the same period each year over the past half-decade. Moreover, virtually all of the companies that Microsoft has snagged this year have been relatively small startups. (All but one of the startups acquired in 2015 has raised $50m or less in total funding.) In years past, Microsoft has typically announced a 10-digit deal (e.g., Nokia devices, Yammer, Skype) along with the technology tuck-ins. Of course, that shift to smaller targets might have something to do with the billion-dollar write-downs Microsoft has made on several of its larger acquisitions inked under previous CEO Steve Ballmer.

Recent Microsoft M&A activity

Period Number of announced transactions*
January 1 – September 8 2015 12
January 1 – September 8 2014 7
January 1 – September 8 2013 7
January 1 – September 8 2012 5
January 1 – September 8 2011 3
January 1 – September 8 2010 0

Source: 451 Research’s M&A KnowledgeBase *Excludes purchases of domain names and IP addresses

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Family drama at VMworld

Brenon Daly

Contact: Brenon Daly

Even before he talked products or markets, VMware CEO Pat Gelsinger kicked off his comments to Wall Streeters at his company’s annual conference with a moment of ‘family time.’ In this case, it was to defend the current corporate parentage, with EMC owning a super majority of VMware as part of a larger ‘EMC Federation.’

Gelsinger essentially said that the way things are now in the EMC family is the way they should be. He went on to knock down rumors that he was planning – or even considering – any changes in the current corporate structure, specifically singling out recent reports about a kind of fratricide by VMware in which his company would take over EMC. ‘Better together’ is the family motto.

Not everyone agrees, however. Some critics, such as the kind that buy small chunks of stock in a company and then try to tell it what to do, counter that the current structure actually inhibits growth in the family.

The activist hedge funds have a point, given that VMware stock has basically flatlined over the past five years while the S&P 500 Index has nearly doubled. (The underperformance stands out even more when we consider that a half-decade ago, VMware was running at less than $1bn in quarterly revenue. It now puts up more than $1.5bn in sales each quarter. There aren’t too many S&P 500 companies that are two-thirds bigger now than they were in 2011. Most, including EMC, have only slightly grown.)

Given that Elliott Associates, an activist hedge fund that has already successfully pushed to reshuffle EMC’s board of directors, effectively crashed the VMworld party, it’s not unreasonable to expect even more changes in the EMC Federation. (Remember, too, that the ‘standstill’ agreement between Elliott and EMC expires this month.) There may well be some family drama before the year is out.

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Datacenter consolidation hits a record pace as Europe gets more international

Scott Denne

Contact: Mark Fontecchio

Global datacenter consolidation in 2015 is on a tear, and the reason varies by continent. European MTDC suppliers on the hunt for regional diversity are printing an unprecedented increase in the number and value of deals, while North American providers are outpacing overall M&A volume as they move up the stack to offer more managed services.

Through the first seven months of this year, there have been 11% more tech deals compared with 2014, yet colocation and hosting transactions are up 49%, according to 451 Research’s M&A KnowledgeBase. Western Europe alone is up 67% in datacenter deal volume. Datacenter consolidation is clearly outpacing the rest of the field.

Western European datacenter deal value has skyrocketed more than the rest. Last year, 4% of all datacenter M&A value went to Western European targets; this year, it’s half. Equinix buying UK-based TelecityGroup accounts for most of that – the $3.6bn price is the largest datacenter transaction in the KnowledgeBase. As we have previously noted, one of the key reasons for all of the consolidation activity in Europe is because customers in traditional markets are seeking reach into locations where new builds are difficult. The highly fragmented European market still has many regional providers with significant pull in their locales. They are now being subject to M&A conversations as bigger players look to enter territories without building new facilities.

In North America, it’s different. While geo-based deals are still aplenty (e.g., CyrusOne’s $400m purchase of Cervalis ), more large transactions have focused on providers moving up the stack and offering additional managed services. Digital Realty’s reach for Telx and QTS Realty’s pickup of Carpathia Hosting are prime examples.

Biggest datacenter deals of 2015

Date announced Acquirer Target Target HQ Deal value
May 29 Equinix TelecityGroup Western Europe $3.6bn
July 14 Digital Realty Trust Telx Group North America $1.9bn
March 2 NTT Communications e-shelter Western Europe See estimate
January 14 Zayo Group Latisys North America $675m

Source: 451 Research’s M&A KnowledgeBase

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HP moves into PaaS, containers with Stackato purchase

Scott Denne

Contact: Scott Denne Jay Lyman

After a muted presence in M&A over the past few years, HP has set a stronger pace for acquisitions in 2015 by printing its fourth deal with the pickup of Stackato, ActiveState’s PaaS business. HP’s earlier deals of the year filled gaps in security (Vaultive) and networking (Aruba Networks and ConteXtream) – this transaction plugs two holes in its cloud offering.

HP was among the few enterprise cloud providers that did not have its own PaaS play. With Stackato, HP obtains an enterprise, polyglot private PaaS that also benefits from its basis in the open source Cloud Foundry software and community. Furthermore, the deal gives HP a much-needed stake in the container space through Stackato’s integration and support for Docker and containers.

Valuations in the PaaS sector have been a mixed bag, and there’s been little M&A activity. A couple of companies (Heroku and Tier 3) were taken out early in transactions valued above $100m. The market has also seen some tuck-ins (AppFog and dotCloud). Though terms of HP’s Stackato buy aren’t known, we noted early last year that Stackato was approaching a $10m run rate.

HP’s move comes amid the convergence of IaaS and PaaS. Other acquisitions, customer demand for IaaS-like experience in PaaS, deeper enterprise pushes from the likes of Amazon and Google via PaaS, and software from a number of providers have all contributed to a blurring of the lines, particularly when it comes to managing PaaS and IaaS, which is increasingly integrated. With its existing IaaS software in HP Helion (based on OpenStack), along with the acquired Eucalyptus, HP can now join the IaaS PaaS party by pairing with Stackato.

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Growth gets a premium at soon-to-be-private Informatica

Brenon Daly

Contact: Brenon Daly

A buyout group is taking Informatica private for $5.3bn, a full $1bn more than the middleware vendor’s primary rival got in its LBO just a half-year earlier. Private equity (PE) shop Permira, along with Canada Pension Plan Investment Board, says it will pay $48.75 in cash for each share of Informatica, or $5.3bn in total. That’s the highest price for the stock in two years but only a slight closing premium for Informatica, which had been under pressure from a hedge fund to sell. The deal is expected to close by Q3 2015.

At an equity value of $5.3bn, Informatica is the largest company to be erased from a US exchange by a PE firm since BMC went private in May 2013 for $6.9bn. More importantly, Informatica is getting a much richer sendoff than either comparable multibillion-dollar enterprise software LBOs or, more specifically, the take-private of rival TIBCO.

Debt-free Informatica’s cash holding of $722m lowers the enterprise value of the proposed transaction to $4.6bn. That works out to 4.4x Informatica’s trailing revenue. For comparison, other significant recent software LBOs have gone off at least a full turn lower (Compuware at 3.1x trailing sales, BMC at 3.2x), while TIBCO garnered 3.8x in its take-private by Vista Equity Partners last September. (Informatica is also getting a richer valuation than the other relevant – if a bit dated – middleware deal: Ascential Software, which was only one-quarter the size of TIBCO and Informatica, got 3.6x in its sale to IBM in 2005.)

What did Informatica do to get a premium, relative to other software hawkers, from its buyout buyers? In a word: growth. While virtually all of the other software providers that have gone private recently have struggled to bump up their top line, Informatica has posted mid-teens-percentage revenue growth over the past half-decade. (The company cracked $1bn in sales in 2014, a significant step up from the $650m it posted in 2010.) Yet even with sales increasing, Informatica still drew the attention – and agitation – of activist hedge fund Elliott Management.

Significant middleware transactions

Date announced Acquirer Target Deal value Enterprise value/trailing sales valuation
April 7, 2015 Permira, Canada Pension Plan Investment Board Informatica $5.3bn 4.4x
September 29, 2014 Vista Equity Partners TIBCO $4.2bn 3.8x
March 14, 2005 IBM Ascential Software $1.1bn 3.6x

Source: 451 Research’s M&A KnowledgeBase

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