Category: infrastructure software

Oracle’s unlikely acquisition

Brenon Daly

Contact: Brenon Daly

After spending last week with its customers and partners at its annual trade show, Oracle will be meeting later this week with its owners. The company’s annual shareholder meeting is slated for Wednesday. If the talk at OpenWorld is any indication, the question of M&A is almost certain to come up during tomorrow’s meeting of shareholders in the acquisitive company. Over the past decade, Oracle has purchased more than 80 companies at a total cost of more than $40bn.

Given some of the recent remarks, however, we’re fairly confident in scratching at least one name off of any potential shopping list: Hewlett-Packard. Some people have recently suggested that buying the reeling HP would get Oracle significantly closer to its goal of mirroring IBM’s strategy of providing not only single technology products, but also integrated systems as well as services to support the products. (The fact that Oracle hired ousted HP honcho Mark Hurd last year only added to the intrigue around the possible pairing.)

At Oracle’s meeting with financial analysts during OpenWorld, CFO Safra Catz fielded a question about the company’s appetite for a (hypothetical) transaction valued in the tens of billions of dollars. While not speaking specifically about HP, Catz made it nonetheless pretty clear that Oracle – and more to the point, her boss Larry Ellison – would be extremely unlikely to do a deal like that.

The reason? In all likelihood, Oracle would probably have to use at least some equity to cover the purchase of a company like HP, which currently has an enterprise value of $64bn. (And that’s without any premium on a stock price that is down 40% so far in 2011.) Noting that CEO Ellison owns some 1.1 billion shares of Oracle, Catz summed up the calculus this way: Would Ellison really want to trade some of his stake in Oracle, which she described as having its strongest-ever product portfolio, for a chunk of HP? That’s not a ‘compelling’ trade, she said dismissively.

The emergence of convergence

Ben Kolada

Contact: Ben Kolada

The telecommunications and IT industries are increasingly converging, with Verizon Communications’ recent CloudSwitch acquisition perhaps the best example of a telco moving up the IT stack. But the CloudSwitch deal is just one example of a series of moves by telecom service providers to attack the $3bn cloud computing market. Other telcos – such as Interoute Communications with its recent Quantix buy – are merely gobbling up cloud vendors, and may be missing out on the industry’s full potential.

Somewhat IT ignorant, telecom service providers have understandably taken a cautious and hands-off approach to cloud computing. In fact, telcos that have announced the biggest deals so far have allowed their acquired properties to operate mostly autonomously, rather than fully integrate both companies in order to take advantage of their shared strengths.

To educate service providers on how to effectively move toward the cloud, tomorrow at 8am PST we will host a webinar titled ‘Telcos in the Cloud: Who’s Doing What With Whom, and Why?’ Antonio Piraino, vice president of Tier1 Research, will join me in discussing cloud strategies, partnerships and acquisitions that telcos are and should be employing to harness the cloud industry’s growth potential. Click here to register for this free one-hour webinar.

Corel erases iGrafx from its portfolio

Brenon Daly

Contact: Brenon Daly

A decade after picking up iGrafx, the private equity-backed Corel firm has divested the business process management (BPM) software company to newly formed buyout shop The Limerock Group. The move should allow new focus and resources for iGrafx, which was always an odd fit inside Corel. For its part, iGrafx sold almost entirely to enterprises, while Corel is known as a home for many faded, second-rate consumer brands, such as WordPerfect and PaintShop.

Perhaps not surprisingly, the iGrafx business suffered from a bit of neglect inside Corel. At one point, we understand the business was generating about $20m in sales, although it is probably only running at about half that level now. One area that iGrafx will undoubtedly look to expand is around consulting and other services that tend to play a not-insignificant part of BPM deployments. IGrafx may look to build that up through internal development, or the newly capitalized company could tuck-in a small consulting shop.

The move by Limerock, a firm founded by the team that built and eventually sold NetQoS for $200m, comes after a number of big-name buyers have inked BPM deals of their own over the past two years. (Limerock was advised by Northside Advisors, while Pagemill Partners worked the other side.) Significant acquirers that have bought their way into the market since mid-2009 include IBM, Software AG, Progress Software and Open Text. Valuations for these BPM deals has ranged from roughly 1x sales to almost 6x sales. Given iGrafx’s slumping sales and its awkward fit inside Corel, we suspect the business would have likely traded at the low end of that range.

Verizon drives toward convergence with CloudSwitch buy

Ben Kolada

Contact: Ben Kolada, Antonio Piraino

True to its intentions of bolstering its cloud prowess and less than half a year after completing its Terremark Worldwide purchase, Verizon Communications has now acquired cloud onboarding provider CloudSwitch. The timing of the deal comes as a surprise – CloudSwitch was still in startup mode – but that only goes to show the strategic importance Verizon is placing on this technology. CloudSwitch provides a proprietary technology that helps Terremark onboard workloads from internal IT infrastructure to its cloud platform in a more seamless and non-reconfigurable way.

CloudSwitch is addressing the first hurdle faced by the cloud platform proposition – how does a company with an established IT practice even begin to consider transitioning to the cloud? ‘Bursting’ over to the cloud, and making it so that applications can shift seamlessly to the cloud without rewriting code, is a good start. Giving enterprise system administrators the ability to point and click through an entire datacenter migration project is highly attractive for operations staff to consider migrating to a cloud environment. Even though hybrid mixes of in-house and off-premises resources are expected to exist for quite some time, there is still a considerable opportunity for providers in the space.

My colleagues at Tier1 Research don’t believe that Verizon/Terremark is finished building on this enterprise cloud play. When it has developed the infrastructure (including onboarding and orchestration layers), they expect that it will continue to move further up the IT stack. And in this era of heavy M&A activity, there’s a fine line to be drawn between buying prior to proven maturity and possessing technology before your competition grabs it, making this a good investment for Verizon/Terremark.

A longshot for Leo?

Brenon Daly

Contact: Brenon Daly

Hewlett-Packard is now, officially, Leo Apotheker’s company. Since his somewhat surprising appointment as HP’s chief executive last fall, Apotheker has been taking small steps while also dropping big hints that he would be recasting the tech giant. But few observers could have imagined the almost unprecedented scope of the transition that Apotheker laid out late Thursday: HP will be integrating the largest acquisition in the software industry in seven years while simultaneously looking into selling off its hardware business.

Wall Street appears to be skeptical that HP can pull that off, as shares in the company on Friday sank to their lowest level since mid-2006. (Incidentally, that’s just before Apotheker’s predecessor, Mark Hurd, took over the company.) On their own, either one of HP’s dramatic moves (working through the top-dollar acquisition of Autonomy Corp and possibly selling the world’s largest PC maker) would be enough to keep any company busy. Taken together, the combination appears doubly difficult. And that’s even more the case for HP, which, to be candid, has a spotty record on M&A.

Consider this: Autonomy will be slotted into HP’s software unit, which has been built primarily via M&A. But that division runs at a paltry 19% operating margin, less than half the rate of many large software companies, including Autonomy itself. And then there’s the $13.9bn HP spent in mid-2008 for EDS in an effort to become a services giant. So far this year, however, that business hasn’t put up any growth. And perhaps most damning is the fact that HP now doesn’t really know what it will do with its hardware business – a unit that largely comes from the multibillion-dollar purchases of Compaq Computer and Palm Inc.

Riverbed buys Zeus, but shares go to Hades

Brenon Daly

Contact: Brenon Daly

Announcing the largest deal in its history, Riverbed Technology said it will hand over $110m in cash for Zeus Technology in an effort to broaden its application performance portfolio. Zeus, which sells software for load balancing and traffic management, generated about $12m in revenue over the last year and is expected to contribute some $20m in sales for the coming year. That means Riverbed is paying nearly 10 times trailing sales for Zeus, and that’s not including a potential $30m earnout for the UK-based startup. (Fellow UK-based firm Arma Partners advised Zeus on the sale.)

In addition to being a rather richly valued purchase, the acquisition of Zeus also effectively doubles the amount that Riverbed has spent, collectively, on M&A in its history. The deal will likely bring Riverbed more deeply into competition with the main application delivery control vendors, including F5 and Citrix.

From our perspective, we might note that it’s a good thing Zeus is taking its payment in cash. Why? Riverbed stock lost nearly a quarter of its value on Wednesday. (The WAN traffic optimization provider reported a bit of softness in sales in Europe for the second quarter.) The decline erased all of Riverbed’s gains for 2011, but the stock is still twice the level it was at this time last year.

Mirror moves at CA and Compuware

Contact: Brenon Daly, Dennis Callaghan

Both Compuware and CA Technologies recently announced deals for application development and the related field of performance monitoring in which the transactions themselves shared more than a few similarities. The two acquisitions saw the old-line companies, with their corporate roots in the mainframe era, paying nearly double-digit multiples for startups that have been doubling sales each year. Further, each buyer was adding the acquired technology to an existing management platform that has largely been shaped by earlier M&A.

In the first transaction, CA Technologies announced that it will hand over $330m in cash for ITKO, which adds testing capabilities to CA’s management portfolio as well as makes the company more of a player in ‘devops’ as cloud adoption blurs the roles between development and operations in IT departments. The following week, Compuware paid $256m in cash for dynaTrace Software to bolster its business transaction management offering, particularly in the area of pre-deployment performance monitoring, which goes hand-in-hand with testing. The two deals mean that the companies will be competing hard against each other in distributed systems performance testing and monitoring, especially around Java applications.

For the targets in the purchases, though ITKO and dynaTrace were focused on slightly different markets, the two startups had a number of traits in common. Both were founded far from Silicon Valley and went on to be parsimonious fundraisers, each drawing in only about $20m. (In other words, an exit price that was 10 times greater than the money that went into the company.) Both startups had more than 100 employees and were tracking to top $50m in sales next year. And finally, both startups went with boutiques to advise them on the sales, with ITKO tapping Qatalyst Partners and dynaTrace working with Pacific Crest Securities.

A new frontier in IT management M&A

Brenon Daly

Contact: Brenon Daly

Few areas of software have seen more consolidation than the broad bucket known as IT service management (ITSM). Where vendors were once selling relatively simple helpdesk software, the offerings have evolved – primarily through M&A – into broader IT management platforms. The deals have ranged from massive strategic bets (Hewlett-Packard’s $4.5bn reach for Mercury Interactive, for instance) to tiny technology tuck-ins (e.g., EMC’s March 2008 addition of Infra Corp).

But what we hadn’t really seen in this flurry of dealmaking is an acquisition focused on mobile capabilities. Well, that was true until Thursday, when BMC Software reached for Aeroprise. (BMC is slotting Aeroprise into its Remedy portfolio, a business that BMC acquired in 2002 for $347.3m from bankrupt parent company Peregrine Systems.) The acquisition bolsters BMC’s ability to deliver its ITSM tools to smartphones and tablets of all flavors. And BMC knows the startup very well. It has been selling Aeroprise products (branded as a BMC offering) for the past year.

Tripwire pulls the plug on its IPO

Brenon Daly

Contact: Brenon Daly

Almost exactly a year after Tripwire formally filed its IPO paperwork, the security vendor has opted for the other exit, a trade sale. Thoma Bravo, a buyout shop with a number of other security and management companies in its portfolio, expects to close the acquisition of Portland, Oregon-based Tripwire this month. Terms weren’t disclosed but we understand that Thoma Bravo is paying about $225m. The decision by Tripwire to sell isn’t a surprise, any more than the fact that a buyout shop is its new owner.

If it had gone ahead with its IPO, we suspect that Tripwire would have had a rough go of it as a public company. Wall Street looks for growth, and while Tripwire has put up steady growth, it hasn’t been explosive growth or particularly valuable growth, at least in the eyes of portfolio managers. In 2010, Tripwire bumped up its overall top line 16% to $86m, primarily driven by increases in maintenance revenue and, to a lesser degree, consulting work. Collectively, those lines of business, which now represent more than half of Tripwire’s total revenue, rose 25% in 2010 – three times the rather anemic growth rate of 8% in license sales. (License sales actually flatlined in both the third and fourth quarters of 2010.)

The lagging license sales certainly wouldn’t have helped the company attract interest from strategic buyers. We noted earlier that nearly four years ago Tripwire came very close to selling to BMC. Since it filed its prospectus, we’ve heard that both Quest Software and CA Technologies looked at Tripwire. Still, in our view, Tripwire has a financial profile that should fit well inside a PE portfolio: some 6,000 customers; seven consecutive years of revenue and operating income growth; a rock-steady – and growing – maintenance stream of about $40m; and roughly $10m in cash flow per year.

‘Acquisition in Motion’?

Brenon Daly

Contact: Brenon Daly

Instead of Research In Motion, maybe we should start calling the company ‘Acquisition In Motion.’ With Monday’s announcement of its purchase of ubitexx, the BlackBerry maker has now rung up nine acquisitions in just the past 13 months. That’s as many as the company had done, collectively, in the previous seven years. As we think about RIM’s accelerated M&A pace, we can’t help but wonder how much of that activity is essentially papering over weaknesses that were exposed by its two big smartphone rivals.

For instance, RIM needed some help on its core OS, so it went out about a year ago and spent $200m on QNX Software Systems. Then it realized that office productivity apps could stand to be displayed a bit more clearly on BlackBerry devices, so it reached for DataViz. And then there was the somewhat clunky user interface, which RIM hoped to polish with its purchase of The Astonishing Tribe in December for an estimated $125m. Those deals – along with the other half-dozen recent acquisitions – were seen as signs that RIM was getting the message that its phones just weren’t as appealing as the Apple iPhone or Google Android-powered devices.

The pickup of tiny German startup ubitexx pretty much makes that sentiment official. (That’s particularly true when we consider that the transaction came just two days after RIM reported that it will sell fewer phones than it predicted this quarter, and that the phones that do sell will be going cheaper than the company originally planned. The warning knocked RIM into a tailspin, and the stock has now shed one-third of its value over the past year.) Ubitexx allows RIM to bring mobile device management for Android and iOS smartphones and tablets to its BlackBerry Enterprise Server – a somewhat belated recognition that it isn’t just BlackBerry devices that are coming to the office these days