Category: infrastructure software

Looking up at the data warehousing incumbents

Brenon Daly

Contact: Matt Aslett

The face of the data-warehousing sector has changed considerably in the past 18 months. A series of acquisitions has seen Vertica Systems, Greenplum and Sybase snapped up by Hewlett-Packard, EMC and SAP, respectively. Further, Teradata and IBM have strengthened their hands to compete with Oracle and Microsoft with their respective purchases of Aster Data Systems and Netezza.

According to our 451 Information Management report, Data Warehousing: 2009-2013, Oracle, IBM, Teradata and Microsoft accounted for 93.6% of the total revenue in 2010, a level that will only drop slightly to 92.2% by 2013. Those figures were calculated prior to the recent M&A activity, but in order to make a considerable dent in the dominance of the big four, any acquiring company will not only have to buy a data-warehousing player but also invest in its growth.

EMC has the right idea: Greenplum had 140 employees when it was acquired in July 2010. EMC’s Data Computing Products Division now has more than 350 employees, and is set to reach 650 by the end of the year. Netezza can benefit by being part of the much larger IBM, but Big Blue is also investing in growing the business. IBM is expected to increase headcount there from 500 in September 2010 to 600 now, and a target of 800 by year-end. We believe that HP will have to make a similar investment in Vertica, which had just 100 employees at the time of its acquisition, just as Teradata is likely to boost the headcount at its new Aster Data ‘center of excellence’ beyond the estimated 100 employees Aster Data has today.

As for the remaining data-warehousing specialists, while they can all boast differentiating features and strategies, they must also be looking for acquisitions of their own. On their own, they can’t hope to compete with the investments available at their deep-pocketed rivals.

Oracle: The giant moves quietly in M&A

Brenon Daly

Contact: Brenon Daly

For a giant of a company, Oracle certainly strikes quietly when it moves to pick up some companies. Consider its latest purchase, the as-yet-unannounced acquisition of data-quality vendor Datanomic. Although Oracle hasn’t formally announced the purchase, the company does have it listed on its Web page for acquisitions. (That listing followed speculation by several market sources last week that Oracle had indeed sealed the deal.)

Oracle has already shown that it is ready to spend to buy in the data-quality market. A little more than a year ago, Oracle reached for Silver Creek Systems, an OEM partner that provided product-oriented data quality. Shortly after that transaction was announced, my colleague Krishna Roy speculated that Datanomic might be the next data-quality-related vendor to get snapped up, highlighting both Oracle and IBM as possible buyers for the UK-based company. We believe that Big Blue did look at Datanomic, which it considered a nice complement to the business it got when it bought Initiate Systems in early 2010. (Initiate had an OEM arrangement with Datanomic.)

Fittingly for a deal that wasn’t really announced, financials also weren’t revealed. Our understanding is that Datanomic had been posting strong growth recently, increasing revenue some 60% last year to about $15m. That rate, combined with the fact that there were undoubtedly other large bidders for Datanomic, make us absolutely confident that this transaction is significantly larger than Oracle’s related purchase of Silver Creek, which we estimate went off at $40m or so. In fact, we wouldn’t be surprised to hear that it was in the neighborhood of twice that amount.

Mentor Graphics’ ‘marginalized’ size

Brenon Daly

Contact: Brenon Daly

In knocking down Carl Icahn’s unsolicited bid, Mentor Graphics cited the regulatory difficulties that would likely accompany a combination with either of the two other large vendors of electronic design automation (EDA) software. However, the relative financial performances of the trio show the advantages of consolidation. As is true for most mature businesses, scale matters.

For the most part, the EDA industry has narrowed to three main suppliers: Mentor, Cadence Design Systems and Synopsys. Mentor and Cadence are basically the same size at slightly more than $900m in annual sales, while Synopsys is about half again as large. (It finished fiscal 2010 at $1.38bn in revenue).

Far more important than just top line, however, is the fact that Synopsys has used its size to run more efficiently – far more efficiently – than its smaller rivals, at least when measured by operating margin. (Cadence doesn’t figure into this discussion because it has posted operating losses in each of the past three years.) In Mentor’s recently closed fiscal year, it posted a 6% operating margin – its highest level in three years. That’s all well and good, but we should note that the level is just half the margin that Synopsys currently runs at.

Oracle has gone silent

Brenon Daly

Contact: Brenon Daly

While investors will be tuning in for Oracle’s Q3 report after the market’s close today, we can’t help noting that there hasn’t been much news from the consolidator recently. It has yet to announce a deal in 2011, an uncharacteristic dry spell for a company that averaged an acquisition every six weeks in each of the past two years. In Q1 2010, Oracle announced three transactions and even in the recession-wracked Q1 2009, the software giant announced a pair of deals – but nothing so far this year.

In fact, Oracle has been out of the market since it spent $1bn on Art Technology Group in early November, nearly five months ago. And it’s not just Oracle that’s currently on the M&A sidelines. Fellow big-name buyers such as Microsoft, Symantec, EMC and Nokia have all yet to open their accounts in 2011. Even serial shopper IBM was also on that list until earlier this week, when it announced its purchase of Tririga

Out with the old, in with the new

Brenon Daly

Contact:  Brenon Daly

Just over the past week, we’ve been struck by the fact that after in-house development efforts came up short, companies simply reached out of house for other companies that were doing the same thing – only better. In one case, it was to buy; in another case, it was just to partner.

Take Hewlett-Packard’s purchase earlier this week of Vertica Systems. (Subscribers can see our full report on the transaction, including our estimates of the undisclosed deal terms.) The purchase came just three weeks after HP said it was phasing out its Neoview platform, which never caught on in the otherwise fast-growing data-warehousing market. (We’re just guessing, but the move might have also been rooted in personal reasons, as well as financial reasons. Neoview was closely associated with HP’s former CEO Mark Hurd, who has been taking shots at his former shop ever since he joined Oracle.)

Although that acquisition doesn’t entirely line up with Nokia’s ‘strategic alliance’ with Microsoft, there are more than a few echoes. In both cases, a tech giant – armed with tens of millions of R&D dollars, not to mention dozens of engineers dedicated to the effort – was in danger of slipping into irrelevancy in an explosively growing market. The agreements represented dramatic about-faces for HP and Nokia. But that’s probably better than both trying to put a good face on what the market has said is a losing effort.

A public signoff from McAfee

Brenon Daly

Contact: Brenon Daly

After nearly two decades in some form or another as a public company, McAfee all but certainly reported its quarterly results to Wall Street for the final time on Tuesday morning. The company’s sale to Intel is expected to close in the coming weeks, a deal that will bring the largest stand-alone security vendor under the ownership of the largest semiconductor maker. For 2010, McAfee reported sales of $2.1bn and cash from operations of $595m. It didn’t hold a conference call because of the imminent close of its sale to Intel. (We suspect that the company won’t miss that quarterly ritual.)

The unexpected acquisition, which received our Golden Tombstone award as the most significant transaction of last year, was supposed to have already closed. When the $7.7bn deal was announced in mid-August, the companies indicated that they expected it to close before the end of 2010. It got overwhelming clearance from McAfee’s shareholders in early November, with 1,500 ‘yes’ votes for every one ‘no’ vote. US regulators signed off on the transaction in December.

But it took another month for European regulatory authorities to give their blessing – and they did so only conditionally. Among other things, Intel had to assure the European Commission that it won’t prevent other security providers from working on its chips and that the vendors will be able to use ‘functionalities’ of Intel’s products in the same way that McAfee is able to. While Intel may not be thrilled about making concessions to the EC, at least the six-month-old deal isn’t getting bogged down there. Remember that it took Oracle some nine months to close its purchase of Sun Microsystems, largely because of European regulatory concerns.

At long last, Open Text makes a BPM play

Brenon Daly

Contact:  Brenon Daly

More than a year and a half ago, we noted that Metastorm was looking to buy its way into some adjacent markets such as risk and compliance or perhaps collaboration. The planned shopping trip would have come after the business process management (BPM) provider pulled its IPO paperwork. At the time, however, we wondered if the would-be IPO candidate might not head to the other exit: a trade sale.

Specifically, we floated the single name of Open Text, which we noted had consolidated much of its core enterprise content management (ECM) market but still appeared to be losing deals to rival vendors with more robust BPM offerings. However, we thought that valuation might make it tough to bridge the bid/ask spread between the two sides. In most of its dozen deals over the past decade, Open Text has paid somewhere in the range of 0.5-1.5 times trailing sales for its acquisitions. That’s true for its most visible purchases, including deals that saw it gobble up rival ECM firms Hummingbird in August 2006 and Vignette in May 2009, as well as add image capture software maker Captaris in September 2008.

As it turns out, valuation didn’t necessarily snag Open Text’s significant acquisition to bolster its BPM credentials. The company said late last week that it will hand over $182m in cash for Metastorm. In a conference call, Open Text indicated that Metastorm was generating $70-75m in sales, implying a valuation of about 2.5x sales for the BPM provider. That’s a fair bit richer than the valuation that the Canadian consolidator has paid in the past. However, we suspect that guidance assumes a bit of revenue write-downs and (perhaps) a bit of sandbagging. The reason? Metastorm said in mid-2009 that it was above that level of revenue in 2008 and targeting $90m in 2009. In its IPO filing, Metastorm reported $60m in sales for 2007.

Comings, goings and growings in the data-warehousing market

Brenon Daly

Contact: Brenon Daly, Matt Aslett

Over the past two and a half years, tech giants such as Microsoft, IBM and EMC have all inked major data-warehousing (DW) acquisitions, running up a collective bill of some $2.5bn. All that time, Hewlett-Packard stayed out of the shopping spree, opting to develop its own DW offering in-house. On Monday, HP conceded that those efforts haven’t generated the return that it was looking for, and indicated that it would phase out sales of its Neoview product.

HP is expected to continue its DW-related partnerships, including a recently announced accord with Microsoft to deliver four new data appliances. On its own, however, HP wasn’t able to capture much business in the fast-growing DW market, in part because the company approached it as a services play. (My colleague Matt Aslett noted some of the struggles HP was having with Neoview in a recent report, where he indicated that if HP was serious about DW it should have either reached for Netezza or made the big move for Teradata.) It couldn’t have helped Neoview, either, that it was so closely associated with former CEO Mark Hurd, who is being erased as quickly as possible from HP since his unceremonious departure last summer.

HP’s shift away from directly focusing on the DW market comes as Teradata enjoys its richest-ever valuation. (Shares of Teradata, which is the largest and most-visible DW vendor, have jumped about 60% over the past year, giving the company a $7.7bn valuation.) We’re also hearing that Teradata may be looking to do a deal of its own. Having just closed its purchase of Aprimo to get into the business application market, the buzz is that Teradata will shift its M&A focus back to its basic business, perhaps picking up additional analytics and other DW technology.

Everything is bigger at Big Blue

Brenon Daly

Contact: Brenon Daly

Sometimes, we forget why IBM is called Big Blue. The giant just reported $100bn in sales for 2010, making it more than twice the size of Cisco Systems and almost four times the size of Oracle. (Just on its own, IBM’s software portfolio is larger than all of Oracle, not to mention the fact that IBM’s software operations are vastly more profitable than Oracle.) IBM’s current valuation is big, too, with shares currently changing hands at their highest levels ever.

And, as we listened to the company discuss its recent financial results, we were reminded that it has a big appetite for deals. It dropped a cool $6bn on acquisitions last year, with half of that coming in just the fourth quarter. Just in the last year, IBM took two public companies off the board (Netezza, Unica), gobbled up another two companies that could have been looking for an IPO (Initiate Systems, BigFix), and was even on the buyside of an unusual $1.4bn divestiture (AT&T shedding Sterling Commerce). Of course, it’s easy to write those big checks when the company generated more than $16bn in free cash flow in 2010.

Google’s growing video ambitions

Brenon Daly

Contact: Brenon Daly, Jim Davis

More than four years after Google acquired YouTube, the video content site is either putting up black numbers, or is very close to it. That’s according to hints offered recently by the company, although Google has often appeared unconcerned about the profitability of the wildly popular site that the search giant picked up in its second-largest acquisition. (YouTube could have slipped to Google’s third-largest deal, but it appears that rumored talks with Groupon have come to nothing.)

Just how popular is YouTube? Google recently indicated that a day’s worth of video (a full 24 hours) is uploaded every single second to the site. And while profitability has not been an immediate concern for YouTube, Google has nonetheless demonstrated that it is committed to online video – and that it is willing to put even more money behind the effort. Just late last week, Google picked up Widevine Technologies.

As my colleague Jim Davis notes, Widevine gives Google technology used to underpin both online and broadcast premium TV services through the use of software-based DRM systems. This means the company – with its recently launched Google TV product, as well as Android-powered phones and laptops running Chrome – will be able to offer secure premium content on any of these platforms and enable subscription and video-on-demand services, as an example.

For instance, YouTube could now charge for access to live events that it has broadcast on occasion, including a U2 concert last year and the Indian Premier League cricket matches this year. Until recently, YouTube had used CDN services from Akamai for live broadcasts. But just in the past few months, YouTube has started testing its own live-streaming services platform (and has hired a number of former Akamai employees to boot). If Google continues to develop a secure and scalable content delivery platform, CDN vendors may well feel the pinch.