Category: cloud computing

Mindful — and major — M&A by Mindjet

Brenon Daly

Contact: Brenon Daly

In its first major acquisition, Mindjet has handed over just less than one-third of its equity for Spigit, a social and innovation-focused front end to its collaboration platform. The deal comes as 20-year-old Mindjet continues its evolution from a Windows-based ‘brainstorming’ license software vendor to a multi-OS, subscription-based platform. That transformation – accelerated by the addition of Spigit – makes it a whole lot more likely that Mindjet will be in a position to join the ranks of public companies in a year or two.

According to our understanding, fast-growing Spigit will bump up Mindjet’s top line by about one-third. (Subscribers to The 451 M&A KnowledgeBase can click here to see our specific revenue estimates for Spigit.) Importantly, all of Spigit’s revenue is subscription, which fits with Mindjet’s efforts to transition to a fully SaaS business. Mindjet basically stopped selling perpetual licenses last year and is tracking to finish 2013 with subscriptions accounting for about 70% of total revenue.

Initially backed by Warburg Pincus, Spigit got re-capped earlier this year with PICO Holdings taking a majority stake of the company. Collectively, Spigit shareholders will own 30% of the combined company, and its 100 employees will account for almost the same ratio of the combined company’s 400 employees. Arma Partners advised Spigit on the sale.

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Much more to do at Dell

Brenon Daly

Contact: Brenon Daly

After a tortuous, acrimonious and sometimes litigious seven-month process, Dell shareholders today approved the proposed $24.6bn take-private of the IT vendor. Now comes the hard part for the folks behind the third-largest tech leveraged buyout (LBO) in history: actually changing the trajectory at Dell.

We say that because the LBO doesn’t actually change much at the company. For the most part, the LBO is a financial event, rather than a strategic one. As a private company, Dell is simply going to continue plodding along its already planned transformation from ‘box maker’ to (ideally) a strategic supplier of IT products and services.

To be clear, however, this is not a new development at Dell. The handful of priorities that it has highlighted for its life as a private company – such as expanding its enterprise business, pushing further into emerging markets and redoubling its commitment to its sales channel – are all ones that it has put forward to shareholders since at least 2008. Dell would counter that its new ownership structure, with chief executive Michael Dell owning three-quarters of the company, will allow them to move quicker on that strategy.

That may be so, but we might suggest that it skims over the difficulties for any 110,000-employee company (public or private) to transform itself. After all, Dell has been steadily and consciously looking beyond its PC and laptop business for nearly the past half-decade, with limited success. In fiscal 2008, that segment contributed 61% of total Dell revenue, but that portion has only dropped to about 54% now.

And that’s despite spending more on M&A than it ever had in its history. Since 2006, the company has averaged about five acquisitions per year, according to The 451 M&A KnowledgeBase . Altogether, it has spent more than $12bn to get into new markets, including storage (EqualLogic, Compellent), services (Perot Systems), networking (Force10) and security (SonicWALL, SecureWorks). It’s also relevant to note for the soon-to-be-private Dell that shareholders footed the bill for that shopping spree.

Yet even as Dell has added all those new businesses – to say nothing of the collective billions of dollars in revenue from the acquired companies – it has not been able to grow. In fact, as the IT vendor gets set to step off the Nasdaq and go behind closed doors, it is going to be smaller and less profitable than it was before it kicked off its multibillion-dollar M&A program.

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Arbor reaches Down Under for network analytics startup

Brenon Daly

Contact: Brenon Daly

Three years after Arbor Networks sold itself to Danaher, the security company has announced its first transaction as part of the technology conglomerate. Arbor has picked up Packetloop, a bootstrapped, five-employee startup based in Sydney, Australia, that specializes in network security monitoring and analytics.

The addition of Packetloop takes Arbor far beyond its core offering and market, which, historically, has been selling DDoS detection products to service providers. While service providers still account for a majority of the company’s revenue, sales to enterprises now represent 40% of total revenue, and are growing faster than the service providers business.

The deal also fits into a growing trend of existing security vendors looking to add capabilities around data analytics and visualization, rather than using M&A strictly as a way to step into new infosec markets. Just last week, for instance, Click Security reached for fellow startup VisibleRisk, while earlier this summer, Proofpoint added an in-memory threat-scoring startup called Abaca Technology.

Even old-line Blue Coat Systems caught the trend, paying an uncharacteristically rich multiple for Solera Networks. In fact, much of the network forensic capabilities that Packetloop offers are directly competitive with Solera, which was acquired just three months ago in what we understand was a highly competitive process.

Ringing Wall Street

Scott Denne

Contact:Tejas Venkatesh Scott Denne

Virtual phone systems vendor RingCentral revealed its prospectus earlier this week, likely setting up an IPO for next month for the 14-year-old company. The offering comes as RingCentral continues to evolve from a hosted answering machine service to a full virtual phone systems provider. RingCentral now enables voice, text and fax communication across multiple devices, including smartphones, tablets, PCs and desk phones.

The four-year-long transition is paying off. RingCentral generated $73m in revenue in the first six months of the year, up nearly 40% from the same period last year. Advances in broadband communications have resulted in rapid growth of the number of business lines hooked up with VoIP. According to the Federal Communications Commission’s latest local telephone competition report, VoIP business lines grew 106% between the end of 2009 and last summer. Further, there’s still a lot of room for growth, as only 10% of business lines are currently VoIP-enabled.

In addition to expanding its product portfolio, RingCentral is also looking to move upmarket. The company, which counts 300,000 customers, mostly caters to businesses that have less than 10 employees. As it continues to grow, RingCentral is looking to land larger customers. That strategy makes sense because small businesses are more likely to disappear, and are more expensive to support than bigger companies with an in-house IT team.

When RingCentral hits the market, we figure it will command a premium valuation compared with rivals due to its superior growth. Its primary competitor 8×8 currently trades at roughly 6x trailing sales. But that company, which is smaller than RingCentral, only grew 19% in the first six months of the year – just half of RingCentral’s rate over the same period. As a result, we believe 7-8x trailing sales would be a good starting point for RingCentral’s valuation. Slapping that range on RingCentral, which generated $136m in sales for the year ended June 2013, would value the company at about $1bn.

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A ‘betwixt and between’ VMware opens the doors at VMworld

Brenon Daly

Contact: Brenon Daly

Even though it’s only 15 years old, VMware is beginning to look decidedly middle-aged. The virtualization kingpin, which opens its annual users’ conference today, is no longer the flashy young startup that was nearly doubling sales each year in the middle part of the previous decade. Nor is it (by any means) a tech dinosaur, defensively trying to protect its past successes while knowing full well that its best days are behind it.

Instead, VMware finds itself betwixt and between. And fittingly for a company in an indistinct period of its life, there’s uncertainty around its business. That is cascading through not only the operations of the company, but also its very identity. As it kicks off VMworld in San Francisco, VMware is still working through a restructuring, which, among other things, has seen it cut 800 jobs and divest a handful of businesses so far this year.

As one illuminating example of the uncertainty around VMware and its business, consider the company’s license sales, which are the lifeblood of any software firm. Back in the beginning of the year, VMware projected roughly 10% license growth for 2013. Off a 2012 base of about $2bn in license sales, that would imply roughly $200m of new VMware licenses sold this year. Through the first two quarters of the year, VMware has added a grand total of just $20m in additional license revenue.

The problems from the vendor’s flatlining software sales are exacerbated by the fact that it has whiffed on a few of the businesses that it acquired with the hopes of spurring growth in new markets. Misguided acquisitions such as Zimbra and SlideRocket took VMware further away from supplying technology to power datacenters and into the hotly contested consumer application market. VMware has sold off both of those businesses, along with three other divestitures so far in 2013. On the other side, it has bought only one company this year.

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Bye-bye Ballmer

Brenon Daly

Contact: Brenon Daly

Lost in the schadenfreude and snark that has accompanied Steve Ballmer’s decision to leave the top spot at Microsoft within a year is one undeniable piece of his legacy: No other tech CEO has accumulated as many assets in key markets as Ballmer.

In addition to the fat-margin franchises that Ballmer inherited, he steered the company on an M&A program that built up offerings around growth markets such as mobility, cloud infrastructure, data warehousing, online communications, digital advertising, collaboration and beyond. During Ballmer’s 13 years running the software giant, Microsoft dropped more than $25bn on its acquisitions.

Of course, there have been M&A missteps. The company has endured big write-offs (aQuantive), gotten burned by targets with dubious accounting (FAST Search & Transfer), drastically overpaid on other acquisitions (Skype), and has seen the period for returns on deals drag beyond a decade (Great Plains Software, Navision).

But in the end, Microsoft has at least brought together a basket of offerings, built on in-house and acquired technology, that makes it relevant in today’s tech market. Want proof of that? Microsoft is actually increasing sales. Granted, it’s only about 5% growth, but at least Microsoft is growing. The same can’t be said for IBM or Oracle or Intel or Dell or Hewlett-Packard. (Oh yeah, and Microsoft is growing while also throwing $20bn to the bottom line each year.)

From our perspective, one of the main challenges for Microsoft’s next CEO will be realizing a return on all of its previous dealmaking. Ballmer’s M&A program has put the pieces in place, but for the most part, they have been underutilized. It’s time for an execution-focused chief executive to wring more value out of the enviable collections of assets that Microsoft has already acquired.

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Welsh Carson cleans up cap table for IPO-bound Alert Logic

Brenon Daly

Contact: Brenon Daly

In its first major move into IT security, buyout firm Welsh, Carson, Anderson & Stowe has acquired a majority stake in SaaS security vendor Alert Logic. The deal substantially cleans up the capital table at 11-year-old Alert Logic, which has drawn backing from six firms since its series A in 2005, including at least two shops that are designated as early-stage investors. As is typical for these late-stage growth investments by private equity (PE) firms, we would expect the next major capital event for Alert Logic to be an IPO.

Closer at hand, having a single, deep-pocketed owner should help Alert Logic take on its next opportunity for growth: international expansion. Currently only about 230, or 10%, of Alert Logic’s total customers are outside its home US market. The Houston-based company doesn’t have any direct sales outside the US.

International expansion for cloud-based companies like Alert Logic can be expensive because not only do they have to hire sales and marketing staff, they may also have to open in-country datacenters, depending on data residency laws. With $20bn in total capital, Welsh Carson can write those checks. (While Welsh Carson doesn’t currently hold any information security vendors in its portfolio, we would note that the PE firm is well-versed in the service-provider market, where Alert Logic does the majority of its business. The PE shop has put money into both Savvis and Peak 10.)

Alert Logic’s streamlined ownership also should help smooth the way for an IPO, although an offering may not come until 2015. The company finished 2012 with GAAP revenue of $30m and will likely bump that to nearly $45m in 2013. Assuming that growth rate roughly holds, Alert Logic could do $60-65m in sales in 2014. (Keep in mind, too, that Alert Logic is a subscription business, so revenue lags bookings.)

The two most-recent SaaS security providers to debut (Proofpoint and Qualys) both went public when their quarterly sales hit approximately $25m. (Proofpoint went public in April 2012, while Qualys followed suit last September. The two companies have market caps of $1bn and $600m, respectively.) However, we would note that although Alert Logic is smaller, it is growing twice as fast as Qualys and about half again as fast Proofpoint. Alert Logic has been clipping along at a 40-45% growth rate, compared with 20% at Qualys and 30% at Proofpoint.

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Two strikes and counting for acquirers of Zimbra

Brenon Daly1 Comment

Contact: Brenon Daly

Having already bounced around inside two tech giants before bouncing out of them altogether, Zimbra is now on its third owner in the past seven years. Telligent Systems, a relatively small VC-backed startup, has picked up the back-end email technology provider from VMware, which – in turn – had picked up the castoff business from Yahoo. Although terms weren’t released, we would guess Telligent spent a fraction of the $450m that the two previous buyers handed over for Zimbra.

With two tech giants having already whiffed on their ownership of Zimbra, however, we can’t help but wonder if Telligent’s purchase will be strike three for the once-promising company. The reason we ask is because in each of the deals, Zimbra was acquired in order to be something that it’s not.

For Yahoo, its mid-2007 purchase of Zimbra represented a way to counter Google Apps, which, at the time, was just starting to make its way into universities, small businesses and the service-provider market. Yahoo hosted hundreds of millions of unpaid consumer email accounts, but hadn’t been able to expand into businesses.

Yahoo’s efforts with Zimbra didn’t have any more success than the next owner, VMware. In early 2010, the infrastructure software giant made an ill-advised move into the application layer with Zimbra’s messaging and collaboration products. It has largely retreated from those efforts, divesting both Zimbra and SlideRocket as part of a larger corporate restructuring announced earlier this year.

And now it’s Telligent’s turn to see what it can do with Zimbra. From the outset, we would note that the stakes are much higher for Telligent than for either of the two previous acquirers. Both Yahoo and VMware, which do close to $5bn in annual sales, could absorb the financial impact of a questionable deal that didn’t work out. Privately held Telligent, which we estimate might generate $20m this year, doesn’t have that cushion. (Further, it may not have the brand equity to survive because Telligent is taking the unusual step of using the name of the acquired business for the surviving company.)

Telligent will have to stretch to blend its enterprise social networking products – hyped as real-time, collaborative and far more interactive than plain old email – with Zimbra. Simply put, the approaches come from different eras. Even a company as well-versed in software as Microsoft has recognized that and has adapted its M&A program accordingly. Although Microsoft dropped $1.2bn on social networking startup Yammer a year ago, the software giant only recently started integrating the Web 2.0 company with a select few stalwart programs such as SharePoint and Office, despite the connection between the applications.

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Adobe back in the market for marketing, drops $600m on Neolane

Brenon Daly

Contact: Brenon Daly

In its second-largest acquisition for its Marketing Cloud, Adobe Systems says it will hand over $600m in cash for marketing automation (MA) vendor Neolane. The purchase of Neolane, which is expected to close in Q3, trails only Adobe’s pickup of Omniture for $1.8bn in 2009 in terms of spending on deals to build out its Marketing Cloud. Collectively, these transactions have cost Adobe more than $3bn.

Although Adobe declined to discuss Neolane’s financials, the Paris-based startup has said it generated 2012 revenue of $58m, which would put it at roughly the same size as rivals Marketo and HubSpot. In terms of valuation, however, Neolane is a good bit off of Marketo’s market cap of some $870m.

We would chalk up the disparity in valuation to two main reasons. First, Neolane’s on-premises business is about as large as its subscription business, while Marketo is a pure SaaS company. Further, we understand that Neolane grew about 40% last year, which is a solid rate but just half the pace of the free-spending – and deeply unprofitable – Marketo. Through midyear, we would pencil out that Neolane generated roughly $70m in trailing 12-month revenue.

Adobe’s MA move comes after many other tech giants have already snapped up MA vendors, including salesforce.com paying a record $2.5bn for ExactTarget earlier this month. Other tech giants that have made significant MA acquisitions include IBM (Unica), Teradata (Aprimo), Oracle (Eloqua) and Intuit (Demandforce). Valuations for those transactions have ranged from 4.4x trailing sales to 11x trailing sales.

Select marketing automation transactions

Date announced Acquirer Target Deal value Price-to-sales valuation
June 27, 2013 Adobe Neolane $600m 8.6x*
June 4, 2013 salesforce.com ExactTarget $2.5bn 7.6x
December 20, 2012 Oracle Eloqua $956m 9.7x
April 27, 2012 Intuit Demandforce $424m 11.4x*
December 22, 2010 Teradata Aprimo $525m 6.3x
August 13, 2010 IBM Unica $523m 4.4x

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

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Increasing number of partnerships in the DCIM sector

Contact: Rhonda Ascierto, Tejas Venkatesh

The niche datacenter infrastructure management (DCIM) software sector is small, but is expected to grow quickly. It hasn’t yet yielded much in the way of M&A, but that could change as there are several potential acquirers that have an interest in this growing market. However, partnerships are likely to be the preferred means of growth for large DCIM vendors.

DCIM helps managers track and analyze information about their datacenters’ operational status, assets and resource use (space, power, cooling, etc.) So far, there have only been a handful of acquisitions because large DCIM suppliers have managed to rapidly develop capabilities organically. But big IT and systems software companies that have remained on the sidelines to date may make strategic moves into the DCIM market.

In contrast, large DCIM providers are likely to choose partnerships as their preferred route to growth. We expect many partnerships by leading DCIM suppliers to round out their offerings, since no single DCIM product offers all features. Market leader Emerson Network Power, for instance, has already led the way in partnering by announcing significant partnerships with IBM and Joyent. We’ll take a closer look at this emerging sector, including potential acquirers and market-size forecasts, in a forthcoming report. This week, we also have our annual Uptime Institute Symposium , which will highlight the rapid changes in the datacenter industry.

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