Category: infrastructure software

Desktop virtualization could lead to real security deals

Brenon Daly

Contact: Brenon Daly, Steve Coplan

Despite virtualization sweeping datacenters and now serving as a cornerstone of cloud computing, virtualization security has largely been an afterthought. Few startups focused on this market are generating much revenue, and M&A activity has been muted, both in terms of deal flow and valuations.

For instance, VMware – the kingpin of virtualization, which sits on nearly $3bn in cash and has spent hundreds of millions of dollars on acquisitions in other markets – has made only tiny moves around security. It reached for Blue Lane Technologies in October 2008 for what we believe to be less than $10m. (Blue Lane was one of about 20 initial partners in VMware’s VMsafe, which was introduced in early 2008.) That purchase came almost a year after VMware added hypervisor security vendor Determina for an estimated $15m.

Things may be about to change. My colleague Steve Coplan has written in a new report that the rise of desktop virtualization is likely to make security much more of a central concern. But as he notes, it’s not immediately clear which companies will actually be providing the security – the virtualization vendors, security firms or perhaps even management software providers? He looks at the rationale for all three groups as acquirers, and even lays out a few scenarios in the report.

In the dark on Big Blue’s buys

Brenon Daly

Contact: Brenon Daly

At the risk of stepping into a Kantian dialectic on ‘materiality,’ we can’t help but comment on the fact that when IBM does a deal – even a semi-large deal – mum’s the word. So far this year, Big Blue has picked up two companies that were large enough to consider going public at some point, with each acquisition costing the company around $400m in cash (according to our estimates). Yet in both the purchase of Initiate Systems and BigFix, IBM declined to disclose the price.

Viewed from the Big Blue side, it’s understandable that a startup like Initiate or BigFix, both of which were generating less than $100m in sales, is hardly a significant addition to a tech giant that’s going to post about $100bn in sales this year. Further, even though $400m sounds like a lot of money to most of us, we have to remember that IBM generates that much in cash roughly every two weeks. So, the thinking goes, Big Blue is well within its rights to not disclose ‘immaterial’ transactions. (That’s a view shared by Apple, for instance, which we have taken to task in the past for being run more like a private fiefdom than a public company.)

However, as is often the case in arguments based on relativism, there’s a distinct lack of accountability in it. After all, IBM is spending other people’s money. Shareholders own the company and, at least theoretically, the executives and management at the company – including all those who had a hand in the deals – work for shareholders.

Not to get overly sanctimonious about it, but in deals like Initiate and BigFix, IBM’s true owners are in the dark about how their employees are spending their money. And we’re not talking about dipping into the petty cash jar, but emptying hundreds of millions of dollars from the corporate treasury. That seems to us to be a fairly significant event.

The Big Blue erasure

Brenon Daly

Contact: Brenon Daly

In addition to the current snarling bear market and the onerous regulatory requirements, we’ve noticed yet another hurdle IPO candidates have to clear to get to the public market: IBM. With last week’s purchase of BigFix, the tech giant has gobbled up two private companies this year that were both tracking for an IPO. In February, Big Blue snagged Initiate Systems, a master data management vendor that had filed to go public in late 2007 but pulled its prospectus in mid-2008.

As we understand it, BigFix wasn’t nearly as close to an offering as Initiate. But the security management startup certainly had the financial profile to become a public company. (In fact, we’ve listed the Emeryville, California-based vendor as a possible IPO candidate in our outlook for the security market in each of the past two years.) BigFix was tracking to $65m in revenue for 2010, up from $52m in 2009, according to sources. (Bookings were closer to $85m last year.) The company also generated some $14m in free cash flow in 2009, a surprisingly large amount for a 13-year-old startup that had only raised $36m in venture backing.

In both of the deals, IBM paid a fairly rich multiple. Although terms weren’t disclosed, we understand that Big Blue handed over $425m, or 5.3 times trailing revenue, for Initiate. And we hear from multiple sources that IBM paid $400m, or nearly 8x trailing revenue, for BigFix. The multiple in both deals is substantially higher than the median price-to-sales multiple (1.8x) that we recently calculated for all tech transactions in the second quarter.

As a final thought, we highly (highly, highly) doubt that if either Initiate or BigFix came public right now, it would garner anywhere near a $400m valuation. (We recently put out a special report on the dreary IPO market.) More likely, skittish investors would discount the debut valuation to around $250m, give or take. Add in lockup periods and other considerations in an IPO that draw out the path to liquidity, and it’s no wonder both Initiate and BigFix took a rich, all-cash offer from IBM.

Is SafeNet looking to secure an IPO?

Brenon Daly

Contact: Brenon Daly

A little more than three years after it went private, SafeNet is looking to return to the public market. Several sources have indicated that the encryption vendor has lined up its underwriters and plans to file an S-1 in about two weeks. If indeed the offering goes ahead, it will face a market that is proving rather hostile to IPOs right now. (We recently looked at the dreary state of the IPO market in a special report.)

Through both organic and inorganic growth, the SafeNet that returns to the market will be about half the size of the one that stepped off the market. We understand that the company is running at about $450m in revenue, compared to about $300m in revenue in the year leading up to its leveraged buyout. While private, SafeNet did a handful of small deals as well as the contentious $160m take-private of Aladdin Knowledge Systems.

An IPO would mark a second straight exit for SafeNet’s owner, Vector Capital. The buyout shop sold its Register.com portfolio company last week, realizing a return of two and a half times its investment. Vector took the Web registration and design firm private in 2005, pared down the business, made it dramatically more profitable and then sold it to Web.com.

Also noteworthy about the rumored IPO by SafeNet is that the offering is being handled entirely by bulge-bracket banks. The book-runners are said to be JP Morgan Securities, Morgan Stanley and Goldman Sachs, with the offering co-managed by Bank of America Merrill Lynch and Deutsche Bank. Off the top of our heads, that’s the first tech IPO that we can think of that doesn’t have a regional or boutique bank also helping to bring out a company.

LANDesk nearly done

Brenon Daly

Contact: Brenon Daly

After a nearly half-year process, Emerson Electric is close to having LANDesk off its books. Emerson, which picked up the systems management vendor when it acquired Avocent for $1.2bn last fall, classifies LANDesk as a ‘discontinued operation’ and hired Greenhill & Co to advise it on the divestiture. We understand that final bids are being submitted right now, and a deal announcement is expected in two weeks or so.

Although it’s unclear who will end up with LANDesk, several sources have indicated that the buyer is likely to be another company, rather than a buyout shop. (Corporate castoffs often land in the portfolios of PE firms for a period of ‘rehabilitation’ before being snapped up by another company. Indeed, that was the path for LANDesk, which was sold off by Intel in 2002 to a pair of PE buyers, Vector Capital and VSpring Capital, before being bought four years later by Avocent.) Of course, a PE buyer could pair the LANDesk property with an existing portfolio company to enjoy some of the cost savings that generally allow strategic buyers to outbid pure financial buyers.

In an earlier report, my colleague Dennis Callaghan highlighted a few potential buyers for LANDesk, including virtualization vendors, hardware companies and security firms. However, we understand that the obvious suitors in those sectors are no longer in the process: VMware and Lenovo, both of which have key partnerships with LANDesk, are said to have moved on.

Another corporate buyer that we can scratch off the list? Novell. Apparently, the company was aggressively courting LANDesk early in the process, including offering a rumored high price in exchange for exclusivity. Of course, Novell has other issues to contend with, and may well be a seller of the overall company rather than a buyer of other assets.

IBM analyses Coremetrics, makes a deal

Brenon Daly

Contact: Brenon Daly

We were close on our earlier rumor-mongering on Coremetrics, but tapped the wrong buyer. Four months ago, we heard that the Web analytics firms was in play and had retained Goldman Sachs to represent it. (And, indeed, Goldman did advise Coremetrics in the process.) On June 15, IBM said it was picking up Coremetrics for an undisclosed amount. Originally, we thought salesforce.com made the most sense as the buyer for Coremetrics.

It’s not hard to imagine that IBM’s desire for Coremetrics increased significantly after its two most-recent acquisitions, Sterling Commerce and Cast Iron Systems. For instance, Coremetrics would give much more insight into the activities on the business-to-business network that Big Blue picked up three weeks ago when it paid $1.4bn for Sterling Commerce. Coremetrics has some 2,100 customers.

Even with this deal done, we still think Coremetrics would have been a natural fit for salesforce.com, and would have given a significant boost to the company’s effort to diversify from its legacy sales force automation (SFA) business. Sales of that product still account for two-thirds of overall company revenue.

Salesforce.com recently indicated it was willing to go shopping to increase its non-SFA business, reaching for business directory provider Jigsaw Data. At $142m in cash, the price of Jigsaw was more than salesforce.com spent, collectively, on its previous seven acquisitions. Who knows, maybe salesforce.com will turn to fellow analytics firm Webtrends, which is owned by buyout shop Francisco Partners. Incidentally, one of Francisco’s founding partners, Sandy Robertson, serves on salesforce.com’s board of directors.

Securing a busy time for M&A

Brenon Daly

Contact: Brenon Daly

Overall M&A is nowhere near the level it was in the boom days of 2007, but there is one sector where deal makers are actually more active than ever: IT security. So far this year, we’ve tallied 45 security acquisitions with an aggregate deal value of some $5.4bn. That is substantially higher than the same period in the previous two years, when the recession knocked M&A into a tailspin.

This year’s level of security M&A is even higher than the $3.7bn spent on 44 deals that we recorded in the same period in 2007, which was a record year for tech acquisitions. The activity in the sector stands out even more when we consider that, overall, deal makers have spent a total of just $80bn on transactions across all sectors so far this year – just one-third the level of spending at this point in 2007.

Perhaps the single biggest reason for the jump in spending so far this year has been the return to the market of Symantec. On its own, Big Yellow accounts for about one-third of the total shopping bill in the sector, having announced four deals valued at nearly $1.7bn in 2010. Included in that quartet of purchases is the pick-up of the identity and authentication business from VeriSign, which was Symantec’s largest single transaction since its misguided purchase of storage company Veritas Software in December 2004. It also announced a pair of deals for encryption vendors in a single day in April.

The other security deal this year we’d highlight is the planned take-private of SonicWALL. With an equity value of $717m, that’s the largest security LBO we’ve seen in some time. (For comparison, a year ago, the same buyout shop, Thoma Bravo, took digital identity firm Entrust private in a deal valued at just $124m.) Add in other smaller deals by McAfee, EMC, Oracle and Check Point Software, and the security M&A market has been busy this year. Given the strength of the sector and the broad base of buyers, we expect activity to remain brisk for the rest of 2010.

Security M&A

Period Deal volume Deal value
Jan. 1 – June 14, 2010 45 $5.4bn
Jan. 1 – June 14, 2009 33 $381m
Jan. 1 – June 14, 2008 35 $648m
Jan. 1 – June 14, 2007 44 $3.7bn

Source: The 451 M&A KnowledgeBase

Emulex goes from defense to offense

Brenon Daly

Contact: Brenon Daly

This time a year ago, Emulex was stiff-arming an unwelcome suitor. Now, it is warmly embracing another company. Emulex said Monday that it will acquire ServerEngines for $159m in cash and stock.

It will hand over about $78m in cash and eight million shares, which were valued at $81m based on Emulex’s closing price ahead of the announcement. The deal, which is expected to close in July, also has a possible earnout of four million shares that would be paid over the next two years. (While the terms are fairly straightforward, it does have one surprising agreement: a $10m breakup fee, representing a fairly steep 6% of the deal value.)

Emulex’s purchase of its partner comes a year after the vendor fended off an unsolicited bid from larger rival Broadcom. The fight between the two Southern California companies turned particularly nasty during the two-and-half-month process, which ended last July after Emulex’s board shot down Broadcom’s offer for a second time. (For the record, shares of Emulex trade at roughly the level of Broadcom’s first offer but 14% below its topping bid.) The two companies are still battling it out in the courtroom over alleged patent infringement.

As a final thought, we would note that Emulex’s contentious relationship with Broadcom is probably not an unknown feeling at the firm that it just acquired, ServerEngines. A decade ago, the CEO of SeverEngines, Raju Vegesna, sold his previous company ServerWorks to Broadcom for $1.8bn. He left two years later after a fallout with Broadcom leadership over the strategic direction of the business.

The deepening discount on DivX

Brenon Daly

Contact: Brenon Daly

A week ago, Sonic Solutions announced that it was making its largest-ever acquisition: the $325m cash-and-stock purchase of DivX. While that pending transaction remains the biggest deal that the digital media management vendor has ever considered, it is getting smaller virtually every day. Because of the decline in shares of Sonic Solutions, the price tag for DivX has been trimmed by about $50m, or 15%.

Under terms, Sonic Solutions will hand over $3.75 in cash and about half a share (0.514) for each share of DivX. The cash portion is fixed, so DivX shareholders stand to pocket about $125m from that. On the other hand, the value of the stock component of the proposed transaction varies from day to day, depending on the price of shares of Sonic Solutions.

On the day before Sonic Solutions announced the acquisition, the company’s stock closed at $11.83. Based on that price, DivX shareholders stood to pocket about $200m of equity consideration ($11.83 x 0.514 = $6.18/share x 33 million DivX shares = $200m). With its stock finishing trading Monday at $8.83, the total value of the equity that Sonic Solutions will hand over to DivX shareholders has dropped to $150m. So altogether, the consideration for DivX is about $275m. But the value is headed even lower. On Tuesday, Sonic Solutions shares closed lower — the fifth straight decline since announcing the acquisition.

SonicWALL should be right at home in PE portfolio

Brenon Daly

Contact: Brenon Daly

Except for losing its ticker, we don’t expect the soon-to-be private SonicWALL to be radically different from the one that traded on the Nasdaq. At least not the SonicWALL of the past few years. The reason? The unified threat management vendor has already been running a strategy that’s found fairly often in PE portfolios.

Basically, the company has taken the cash it has generated from its rather mature core product (firewalls) and done acquisitions to expand into emerging markets. SonicWALL has inked about a deal each year for the past half-decade, buying startups that had developed technology for anti-spam, continuous data protection and, most recently, WAN traffic optimization.

The collective bill on those deals is about $78m, a relatively small amount for a company that held more than $200m in its treasury and generated roughly $10m of cash each quarter. Once it goes private, we wonder if SonicWALL won’t start eyeing some larger deals. After all, it will have deep-pocketed new owners and will no longer be penalized in its accounting for acquisitions.

SonicWALL’s shopping trips

Date announced Target Deal value Market
April 19, 2010 DBAM Systems (assets) $4m WAN traffic optimization
June 12, 2007 Aventail $25m SSL/VPN
February 8, 2006 MailFrontier $31m Anti-spam
November 21, 2005 Lasso Logic $15.5m Continuous data protection
November 21, 2005 enKoo $2.4m SSL/VPN

Source: The 451 M&A KnowledgeBase