Category: infrastructure software

Few ripples from Big Blue’s big deal

Mark Fontecchio

by Scott Denne

IBM’s $33.4bn acquisition of Red Hat – announced a year ago today – propelled an already heated market for IT infrastructure management targets to a stratospheric level. But that corner of the tech M&A sector has cooled precipitously since then, with this year tracking toward the lowest point in a decade as the most stalwart buyers back away from the space.

It wasn’t just Big Blue’s purchase that drove infrastructure management M&A in 2018 to a record $94.4bn – about 10x the amount we see in a typical year, according to 451 Research‘s M&A KnowledgeBase. Seven other strategic buyers spent $1bn or more on acquisitions in infrastructure management, although few of those are likely to continue to make big IT management deals. Salesforce’s $6.6bn pickup of MuleSoft was a one-off as that company typically buys other SaaS products. And Broadcom’s $18.9bn reach for CA, and subsequent moves to boost the target’s cash flow, took out one of the most active acquirers of infrastructure management.

The buyers that typically drive up the totals have been quiet this year and spending on the category sits at $5.9bn for 2019 – the lowest since 2009, our data shows. The IT infrastructure market is in the middle of a major transition driven by the continued expansion of cloud computing. According to 451 Research‘s Voice of the Enterprise: Digital Pulse, nine of 10 organizations are moving, rebuilding or updating their IT stack to run mission-critical workloads on more modern infrastructure.

But the move to cloud computing (public, private or hybrid) is well underway, leaving legacy vendors with a choice between making a massive bet to keep up (as IBM did by nabbing Red Hat and VMware is doing through a steady pace of hybrid and multi-cloud purchases) or shifting to ancillary areas. Cisco, for example, continues to actively acquire companies, although most of its recent transactions have been in support of its security and enterprise collaboration businesses. Or Citrix, whose last deal, the $200m acquisition of Sapho in 2018, expanded its Workspace line of products.

Figure 1:

Healthy exits, no matter the path

Mark Fontecchio

by Brenon Daly

On the heels of Dynatrace‘s blockbuster $7bn IPO, it looked like the exit of choice for other fast-growing infrastructure monitoring startups had swung to Wall Street. Datadog and Sumo Logic are both thought to be tracking to an offering of their own. But as SignalFx showed, an outright sale can be pretty lucrative, too.

Splunk said it will hand over a cool $1.1bn in cash and stock for SignalFx as it looks to expand its core log management into infrastructure monitoring. (To put the deal into perspective, SignalFx’s exit price is more than Splunk has spent, collectively, on the 10 previous acquisitions it has announced, according to 451 Research‘s M&A KnowledgeBase.) To pay for its largest-ever purchase, Splunk will spend $600m in cash and $400m in equity for SignalFx. (451 Research subscribers can look for a full report on the transaction on our site later today.)

Of course, SignalFx is much smaller than either Datadog or Sumo Logic, and probably had a few years before hitting IPO-able numbers. (Subscribers to the Premium version of our Private Company database can see our specific estimates for Datadog‘s recent annual revenue as well as full revenue estimates for the past half-dozen years at Sumo Logic.) So an IPO for SignalFx probably wasn’t imminently in the cards, despite the six-year-old vendor pulling in a growth-sized round from crossover investor Tiger Global Management in summer.

Instead, SignalFx took a bid that likely valued it in the neighborhood of 20x sales. Assuming that multiple is at least directionally accurate, it does line up rather closely with a deal in the market that had elements of both exits. In early 2017, Cisco Systems paid $3.7bn for AppDynamics, picking up the application performance monitor just days before it was set to price its IPO.

Dynatrace’s dynamic debut

Mark Fontecchio

by Brenon Daly

Dynatrace’s IPO represents the third major transition in recent years for the application performance management (APM) company. Like the other two, today’s shift has proved wildly lucrative. Dynatrace created more than $7bn in market value as it moved from private equity to public trading.

Although not unprecedented, Dynatrace’s partial swapping out of financial sponsor Thoma Bravo for Wall Street investors is still somewhat unusual. (Post-offering, the PE firm still owns about 70% of Dynatrace.) By our count, just three of the two dozen enterprise-focused technology vendors, including Dynatrace, that have gone public in the US since the start of 2018 have come from PE portfolios. Dynatrace raised roughly $570m in its offering, some of which will go toward paying down its nearly $1bn in debt, which, again, stands in contrast to the typical VC-fueled growth for most tech IPO candidates.

In many ways, the partial change in ownership for 14-year-old Dynatrace is the culmination of the other two changes, the first being a technology overhaul followed by a shift in business model. As we noted in our full report on the IPO, Dynatrace revamped its product a half-decade ago, integrating all of its monitoring into a single platform. (It no longer sells its legacy product, which it refers to as ‘classic,’ except to existing customers.)

As part of the transition to a platform, Dynatrace also changed how it sold its product, as well as how it accounted for those sales. Gone were licenses, in favor of subscriptions. And while the company has undeniably made progress in its transition to a new, more valuable business model, it has also been undeniably aided in its efforts by a rather expansive definition of ‘subscription’ revenue.

Accounting purists might have a hard time signing off on Dynatrace’s practice of including term and perpetual licenses, as well as maintenance and support revenue, all as subscription revenue. Basically, the company lumps all sales of its non-classic product – regardless of whether it is true SaaS or license-based – into the subscription line on its income statement.

Our quibbles about accounting are rather minor, and certainly didn’t stand in the way of professional investors, who have long since given up on GAAP, from rushing to buy newly issued shares of Dynatrace. The stock surged 60% shortly after its debut on the NYSE. With roughly 286 million (undiluted) shares outstanding, Dynatrace began life as a public company with a value of $7.4bn. That’s one-third more than the current value of APM rival New Relic, which has been public since Dynatrace first started its product transition some five years ago.

Dialing up the next round of IPOs

Mark Fontecchio

by Scott Denne

With its recent IPO filing, IT management software vendor PagerDuty lines up to become the first enterprise software company to come to the public markets after an extended drought. A hiccup in the equity markets last autumn followed by the government shutdown effectively closed the door for new tech offerings, but now the pipeline is beginning to fill up after a record 2018.

Last year witnessed 15 enterprise tech offerings (to be clear, the count includes only business technology offerings, not those from consumer tech startups), mostly in the front half of the year (three deals priced in the first quarter and seven in the second). And while this year’s first half isn’t likely to match that, the pace of filings is picking up. To be the first enterprise tech provider to go public this year, PagerDuty will race security vendor Tufin, which filed a week earlier, while Slack announced in early February that it had confidentially filed for a direct listing.

It’s fitting that PagerDuty could be the one to kick off a new round of enterprise IPOs because it’s almost the prototypical Silicon Valley IPO candidate. It’s growing fast and losing money, though not doing either at an unheard-of pace. In its most recently reported quarter, PagerDuty came up just shy of 50% year-over-year growth as it crossed the $100m TTM revenue mark. It posted a $43m loss, though that’s smaller as a share of its overall revenue than in earlier periods.

In the market for on-call management software for IT, PagerDuty is larger than its rivals VictorOps and OpsGenie, which were acquired by Splunk and Atlassian, respectively. (Subscribers to 451 Research’s M&A KnowledgeBase can view our revenue estimates for VictorOps and OpsGenie). But PagerDuty is banking on expanding into larger and more crowded markets, such as IT event intelligence and incident management, as we noted in a November report on the company. Almost all of its revenue today comes from on-call management.

Whether Wall Street ultimately decides to embrace PagerDuty for the potential of its new products or the financial results from its older offerings, the company should have little trouble pushing past the roughly $1.3bn valuation from its series D last summer. To get there, it will need to trade above 12x TTM revenue. That seems doable given Wall Street’s welcoming mood.

As we noted in our analysis of Lyft’s IPO filing , consumer confidence in the stock market sits at a 12-month high. And even though there hasn’t been an enterprise IPO to hit the public markets since SolarWinds issued shares in mid-October, those that went out last year are being generously priced. Smartsheet, for example, trades at nearly 30x revenue and sports a topline that’s about 50% larger than PagerDuty’s, with growth rates just a few percentage points higher.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Cloudy days ahead boost infrastructure management M&A

Mark Fontecchio

by Scott Denne

The overwhelming shift toward cloud environments, mixed with reliable cash flow from pre-cloud companies, has taken M&A to unseen levels in a normally sleepy corner of the tech M&A market. IT infrastructure management vendors, those companies that make the software to monitor, manage and automate IT environments, fetched 10x the total value that such deals see in a typical year. The surge comes as legacy IT companies reach the inescapable conclusion that the cloud – from SaaS to IaaS – has forever changed IT.

According to 451 Research’s M&A KnowledgeBase, companies developing infrastructure management technology sold for a combined $94.4bn in 2018. To say that’s a record doesn’t suffice. Last year’s total came in six times higher than the previous annual high. Put another way, the total deal value for the sector was more than the combined total of the nine preceding years, which includes the previous sector record set in 2016.

In a market that typically sees 125-150 deals annually, a single transaction often skews the year’s total deal value. Certainly, IBM had such an impact with its $33.4bn acquisition of Red Hat last year. But it wasn’t a single outlier that made last year unique. It was an abundance of such deals. Since the dot-com crash, just eight infrastructure management companies have sold for more than $5bn, and five of them were sold last year. Both the largest (IBM’s Red Hat) and second-largest (Broadcom’s proposed $18bn purchase of CA Technologies) infrastructure management acquisitions were announced in 2018.

The growing dominance of Amazon and Microsoft Azure in the cloud market catalyzed the Red Hat deal. IBM inked the largest software acquisition of all time to carve itself an opportunity, as IT environments and applications spread among different cloud services. A similar rationale drove Salesforce’s $6.6bn purchase of MuleSoft – the largest ever done by that buyer – aiming to give the SaaS giant a stake in helping businesses integrate SaaS, hosted and on-premises applications.

451 Research’s Voice of the Enterprise surveys show how fast this future will arrive. In our Digital Pulse: Vendor Evaluations report, 44% of respondents told us that most of their IT workloads reside in traditional, on-premises infrastructure. Yet only 16% of them expect that will be the case in two years, as respondents spread their workloads across SaaS, on-premises private clouds, hosted private clouds and IaaS – each of which saw 15-20% predicting those deployment options would be home to the majority of their workloads.

Complexity bolsters valuations for infrastructure software 

Scott Denne

Contact: Scott Denne

Companies looking to exit the infrastructure management space broke records in 2016, although it was enthusiastic entrants that pushed up totals last year. Acquisitions of companies that provide tools to run IT infrastructure finished 2017 at a level that’s abnormally high on strong valuations.

Purchases of infrastructure management targets finished 2017 with $8.5bn in spending across 92 deals. According to 451 Research’s M&A KnowledgeBase, both are down from the record value and volume of transactions in 2016 ($14.8bn on 121 acquisitions). Despite the high-level decline, 2017 was a stronger environment for exits in the category.

More than any other buyer, Cisco set the tone for infrastructure management M&A as two of its purchases account for half of 2017’s deal value. The company opened the year with the $3.7bn acquisition of AppDynamics, valuing the would-be public company at more than 17x trailing revenue, the highest multiple ever paid for a software vendor with more than $50m in revenue. It followed that deal with the $610m pickup of SD-WAN specialist Viptela, a smaller company that it bought at an even higher multiple.

Above-average valuations weren’t limited to Cisco. Among the 10 largest transactions in the space, only one acquisition – Clearlake’s purchase of perennial target LANDESK – came in at less than 3.5x trailing 12-month revenue. A year earlier, three of the top 10 fell below that mark, including 2016’s two largest deals – the divestitures of HPE and Dell’s software units.

Those higher multiples came as hardware providers and legacy management firms sought to expand subscription revenue from products that help customers grapple with an increasingly complex IT environment. That same trend could well fuel infrastructure management M&A this year as infrastructure, software and data look to become more distributed and cloudy.

Workloads are heading to the cloud en masse, whether it takes the form of SaaS, IaaS, private clouds or any other type. According to 451 Research’s Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects 2017 survey, between 2017 and 2019 the amount of IT workloads running on the cloud is expected to increase to 60% from 45%. In that same study, 33% of respondents told us that within two years they would be sharing workloads and business functions across multiple clouds. While the underlying IT infrastructure is becoming interchangeable, the tools for managing it all are becoming indispensable.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Small software buys big, but…

Brenon Daly

Contact: Brenon Daly

The little brothers of the software industry have stepped in front of their bigger brothers in the M&A market. Medium-sized public software companies have been inking uncharacteristically large acquisitions this year, even as the well-known vendors have been fairly reserved. And while these midmarket software firms have been big spenders recently, the deals are often missing a zero or even two compared with prices the industry bellwethers have paid in years past for some of their purchases. That has helped knock overall software M&A spending to its lowest level in four years, according to 451 Research’s M&A KnowledgeBase.

As an example of the shift in buyers, consider Oracle. The software giant has averaged at least one transaction valued at more than $1bn each year over the past decade, according to the M&A KnowledgeBase. Yet this year, it hasn’t gotten anywhere close to doing a 10-digit deal, and, in fact, hasn’t announced any acquisitions since April. On the other side, several software companies that have only a fraction of the size and resources of Oracle have thrown around a lot more money on recent transactions than they ever have before. A few prints captured over the past few months in the M&A KnowledgeBase clearly show the trend of M&A inflation among the midmarket software buyers:

-At $275m in cash and stock, Guidewire Software’s reach for Cyence in October is $100m more than the SaaS provider has ever spent on any other transaction.
-Both of the largest purchases by security software vendor Proofpoint have come in the past month. Its $60m pickup of Weblife.io in late November and $110m acquisition of Cloudmark in early November compare with an average price tag of just $20m on its previous 12 deals done as a public company from 2013-16.
-Doubling the highest amount it has ever paid in a transaction, serial acquirer CallidusCloud spent $26m for Learning Seat earlier this month.
-In a pair of deals announced earlier this year, RealPage dropped more than a quarter-billion dollars on both of its targets, after not spending more than $100m on any of its previous two dozen acquisitions.
-Upland Software announced in mid-November the purchase of Qvidian for $50m, which is twice as much as the software consolidator has spent on any of its other nine acquisitions since coming public in November 2014.

These deals by midmarket software vendors (as well as other similarly sized buyers) go some distance toward making up for the missing big names. Yet they won’t fully cover the shortfall this year. Partially due to this change in acquirers, spending on software M&A in 2017 is tracking roughly one-third lower than it has been over the previous three years, according to the M&A KnowledgeBase.

MongoDB maintains in its IPO

Brenon Daly

Contact: Brenon Daly

Despite a well-received IPO, MongoDB’s valuation basically flatlined from the private market to the public market. The open source NoSQL database provider priced shares at $24 each and jumped in mid-Thursday trading to about $30. The 25% pop on the Nasdaq basically brought MongoDB shares back to the price where the company sold them to crossover investors in late 2014.

MongoDB has slightly more than 50 million shares outstanding, on an undiluted basis. With investors paying about $30 for shares in the company’s public debut, that gives MongoDB a market cap of more than $1.5bn. It raised $192m in the public offering, on top of the $300m it raised as a private company.

That means Wall Street is valuing MongoDB, which will put up about $150m in the current fiscal year, at 10x current revenue. That’s a rather rich premium compared with the most-recent big-data IPO, Cloudera. The Hadoop pioneer, which went public six months ago, currently trades at about 6x current revenue. For more on MongoDB’s IPO, 451 Research subscribers can see our full report, including our sizing of the NoSQL database market, as well as an in-depth look at the evolution of the 10-year-old company’s technology and its competitors.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Exclusive: A deal for Datto?

Brenon Daly

Contact: Brenon Daly

A unicorn is rumored to be on the block, with several market sources indicating that disaster-recovery startup Datto is looking for a buyer. We understand that Morgan Stanley is running the process. While Datto secured a $1bn valuation in a growth round of funding two years ago, we are hearing that current pricing would add a solid – but not exorbitantly rich – premium to that level.

According to our understanding, early discussions with buyers have bids coming in at about $1.3bn for Datto. Our math has that rumored price valuing the 10-year-old startup at 6.5x this year’s sales of roughly $200m. (Estimates in 451 Research’s M&A KnowledgeBase Premium, which features in-depth profiles and proprietary insight about specific privately held startups, indicate that Datto generated $160m in sales last year, up from $130m in 2015. Click here to see Datto’s full profile in our M&A KnowledgeBase Premium.) The company sells its backup and recovery products to SMBs, with virtually all sales going through the channel.

With its scale and business model, Datto appears almost certain to end up in the portfolio of a private equity (PE) firm, assuming the company does trade. There is precedent. Datto’s smaller rival Axcient was consolidated by eFolder earlier this summer in a transaction that was at least partially backed by financial sponsor K1 Investment Management.

More broadly, PE shops, which have never had more money to spend on tech in history, have been increasingly looking to the IT infrastructure market to make big bets. Already this year, buyout shops have announced three deals valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. Unlike those targets, which were all owned by fellow PE firms, Datto founder Austin McChord still holds a majority stake in his company.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Another ‘down round’ IPO?

Brenon Daly

Contact: Brenon Daly

Another unicorn is set to gallop onto Wall Street, as MongoDB has put in its IPO paperwork. The open source NoSQL database provider plans to raise $100m in the offering, on top of the $311m it drew in from private-market investors over the past decade. As has been the case in other recent tech offerings, however, some of those later investors in MongoDB may well find that the IPO represents a ‘down round’ of funding.

Any discount for MongoDB likely won’t be as steep as the discount Wall Street put on the previous data platform provider to come public, Cloudera. Investors currently value the Hadoop pioneer at $2.2bn, slightly more than half its peak valuation as a private company. For its part, MongoDB, which last sold stock at $16.72, has more than 100 million shares outstanding, giving it a valuation of roughly $1.7bn.

While not directly comparable, Cloudera and MongoDB do share some traits that lend themselves to comparison. Both companies have their roots in open source software, and wrap some services around their licenses. (That said, MongoDB has gross margins more in line with a true software vendor than Cloudera. So far this year, it has been running at 71% gross margins, compared with just 46% for Cloudera.) Further, both companies are growing at about 50%, even though Cloudera is more than twice the size of MongoDB.

Assuming Wall Street looks at Cloudera for some direction on valuing MongoDB, shares of the NoSQL database provider appear set to hit the public market marked down from the private market. Cloudera is valued at slightly more than six times its projected revenue of $360m for the current fiscal year. Putting that multiple on the projected revenue of roughly $150m for MongoDB in its current fiscal year would pencil out to a market cap of about $920m. Given its cleaner business model and less red ink, MongoDB probably deserves a premium to Cloudera. While MongoDB certainly may top the $1bn valuation on its debut, reclaiming the previous peak price seems a bit out of reach.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.