Baking in security isn’t a good recipe for Intel

Contact: Brenon Daly

Intel’s multibillion-dollar experiment in bringing security in-house and baking it into its silicon is over. The chipmaker announced plans to mostly unwind its six-year-old acquisition of McAfee, which stands as the largest information security (infosec) transaction in history. However, Intel’s divestiture of a majority stake of its infosec division is being done at a substantial discount to the original purchase.

Under terms, Intel will retain a 49% stake in the infosec business, which will revert to the McAfee name, with private equity firm TPG Capital acquiring a 51% stake. The buyout shop will pay $1.1bn in cash and assume $1bn in debt. (The co-owners of McAfee plan to raise a total of $2bn in debt, with $1bn of that held by TPG and $1bn held by Intel.) Altogether, the transaction gives McAfee an enterprise value of $4.2bn, compared with an enterprise value of $7bn for McAfee in Intel’s mid-2010 puzzling purchase.

Sales at Intel’s infosec unit totaled $1.1bn in the first half of this year, according to the company. Annualizing that amount would put revenue at $2.2bn, meaning McAfee is valued at less than two times sales in its divestiture. That’s a relatively low multiple for infosec companies. In its 2010 purchase, for instance, Intel paid roughly 3.5 times sales for McAfee. Furthermore, rival Symantec currently trades at roughly the same 3.5x multiple.

Intel’s divestiture of McAfee, which had been rumored for some time, underscores the fact that infosec is an industry in transition. The move means that two of the largest and longest-standing security companies have undergone dramatic corporate overhauls since just the start of the year. Back in January, Symantec sheared off its Veritas storage business so that it could focus entirely on security. It then followed that up in summer by announcing the second-largest infosec transaction, according to 451 Research’s M&A KnowledgeBase. Symantec paid $4.65bn for Blue Coat Systems, an acquisition that, unusually, installed Blue Coat executives into the top three spots at the acquiring company.

In its IPO, will Apptio suffer the curse of the crossover?

Contact: Brenon Daly

In what’s shaping up to be a bit of a test case for late-stage financings, a rather richly valued Apptio plans to go public. The company, which sells software that helps clients manage their IT spending, has revealed paperwork for an IPO with a placeholder amount of $75m. However, as Apptio makes its way to Wall Street, one of its existing backers on Wall Street has already trimmed the value of the company.

Institutional investor T. Rowe Price led Apptio’s $50m series D round in March 2012. At the end of 2015, the mutual fund had reduced the value of its investment by 24% compared with the previous year, according to the prospectus of the fund that holds Apptio equity. T. Rowe also marked down by a similar amount its holding of Apptio shares from a financing a year later. Fellow mutual fund Janus led the $45 series E in May 2013, Apptio’s last private round. According to Apptio’s prospectus, the company sold shares to Janus and other investors in that round at $22.69 per share.

Of course, valuations rise and fall every day on Wall Street. And startups that have drawn big money from mutual funds only to see their shares get marked down after the purchase often say the downgrades are mere ‘accounting’ moves made by people who don’t really understand Silicon Valley finance. However, in the case of Apptio, some of the discount may be warranted because it is currently growing only half as fast as it was when it raised its big slugs of capital from the so-called crossover investors.

In the first two quarters of 2016, Apptio has increased revenue a solid-but-not-spectacular 22%. That’s the same pace as its full-year 2015, but just half the rate of 2014. At the same time as Apptio’s growth has slowed, losses have mounted. It lost $41m in 2015, up from $33m in 2014. Although losses have eased so far this year, Apptio still very much runs in the red.

Part of the reason for the deep losses is that Apptio’s software is a rather heavy implementation, which can take several months to set up. For its software to be useful, clients need to have an IT budget that runs in the hundreds of millions of dollars, and some customization of the software is typically required. (Roughly 20% of the vendor’s revenue comes from professional services.)

Although Apptio has collected an enviable roster of clients, it counts just 325 total customers. As a point of reference, that’s roughly the same number of customers that Workday had when it went public in 2012. Further, the two companies were roughly the same size, recording about $130m in revenue in the fiscal year leading up to their mid-summer filings. However, at the time of their IPOs, they were on very different trajectories: Workday was doubling revenue, compared with 22% growth for Apptio. Obviously, for growth-focused Wall Street, that is almost certain to result in very different valuations for the companies. Workday hit the market at an astonishing 40x trailing sales, while Apptio would probably count itself fortunate to garner a double-digit valuation.

Enterprise tech IPOs* over the past 12 months

Company Date of offering
Pure Storage October 7, 2015
Mimecast November 20, 2015
Atlassian December 10, 2015
SecureWorks April 22, 2016
Twilio June 23, 2016
Talend July 29, 2016

*Includes Nasdaq and NYSE listings only

In latest infosec consolidation, Avast + AVG = AV(G)ast

by Brenon Daly

Reversing the flow of typical consolidation moves, privately held Avast Software said it will pay $1.3bn to remove fellow antivirus (AV) vendor AVG Technologies from the NYSE. In addition to flipping the script on the conventional roles of buyer and seller, there’s also a fair amount of irony in the announced pairing of the companies, which share similar roots and vintage. After all, the acquisition comes four years after Avast scrapped its plans to be a public company, a decision that was partly due to AVG’s lackluster performance immediately following its own IPO in early 2012.

Terms call for private equity-backed Avast, which has secured about $1.7bn from a lending syndicate, to pay $25 for each share of AVG. Although that represents a 33% premium over the previous closing price, it is actually lower than AVG shares were trading on their own at this time last year.

Both companies, which have been in business for more than a quarter-century, have struggled to adjust their portfolios to match recent changes in the threat landscape. Specifically, they have been somewhat caught out by the ineffectiveness of their historic desktop-based AV offerings, as well as the emerging threats posed by mobile devices. Over the past two years, Avast and AVG have used M&A to help move into the post-AV world, including doing four acquisitions to bolster their mobile security portfolios.

However, the overall transition of the business has been slow. AVG, for instance, said revenue in the first quarter expanded just 5% and indicated that sales in the just-ended Q2 actually declined slightly. AVG’s sluggish recent performance goes some distance toward explaining its rather muted valuation. Avast is paying $1.3bn, or slightly more than 3x the $433m in trailing sales put up by AVG. That’s just half the average multiple of 6.4x trailing sales in the 10 other information security transactions valued at $1bn or more, according to 451 Research’s M&A KnowledgeBase.

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

Still early days for IoT security

Contact: Christian Renaud Brenon Daly

The Internet of Things (IoT) market is transitioning from early (over) hype to production deployments, causing problems with operational security. This has raised the visibility of an increasing number of IoT startups, ranging from legacy operational technology (OT) security vendors that have been ‘IoT washed’ to IT security providers and pure plays. In a just-published report, we profile 11 startups looking to take advantage of the growing interest in IoT security. (Collectively, these companies have received about $115m from venture investors, and we would note that they represent a small subset of all IoT security technology startups.)

In terms of exits, 451 Research’s M&A KnowledgeBase tallies just nine security-related transactions that we believe were driven entirely, or in large part, by IoT. Spending on just those rather narrowly defined IoT security deals totaled $966m, with one pairing (Belden-Tripwire) accounting for the vast majority of the total.

The fact that security isn’t spurring more IoT acquisitions isn’t all that surprising, when viewed against how M&A has played out in other emerging tech markets. Vendors tend to focus on the opportunities – rather than the threats – that come with the new, new thing. Consider the SaaS space, which essentially changes the delivery of software. Literally, thousands of SaaS applications have been acquired in recent years, whether through consolidation or expansion into adjacent areas.

However, only a handful of transactions have gone toward securing the app, despite the fact that 451 Research surveys have shown that concerns about security are the primary obstacle for SaaS adoption, just as they are for IoT deployments. (For instance, just two of the 43 acquisitions that SaaS kingpin Salesforce has done since its founding have involved security, and both have been tiny deals.) As IoT deployments broaden and become more complex, we expect security to account for more than its current 3% of deal flow. Again, to see which startups might be figuring into upcoming deal flow, see our full report on IoT security M&A.

IoT MA as % of overall

Dell’s discounted divestiture

Contact: Brenon Daly

Continuing its efforts to slim down before it gets massively bigger, Dell has announced plans to divest its software business to a buyout group led by Francisco Partners. The sale essentially unwinds Dell’s previous acquisitions of Quest Software and SonicWALL, which cost the company some $3.5bn. Although terms weren’t revealed, we understand that Dell will pocket $2.2bn from the deal.

The discount divestiture of the Dell Software Group (DSG), which generated some $1.3bn in trailing sales, comes less than three months after the company likewise sold its IT services unit, Perot Systems, for less than it originally paid. Dell’s portfolio pruning serves two purposes as it prepares to close its pending $63.1bn purchase of EMC. Divesting the software unit will not only raise some much-needed cash for Dell to cover the largest-ever tech acquisition, but will also clear out some software offerings that would overlap with the assets it is set to pick up from EMC/VMware, notably in the identity and IT management markets. EMC shareholders are set to vote on the sale to Dell next month, with the close of the transaction expected shortly after that. Similarly, Dell expects to complete the DSG divestiture in the late summer or fall.

Deferring to VMware as the software specialist for the combined entity makes financial sense for Dell. By and large, Dell’s software business has been a lackluster performer, unable to grow and running at single-digit operating margins. In comparison, VMware continues to increase its revenue (although at a lower rate than it once had) and operates twice as profitably as Dell’s software unit. And then there’s the matter of scale: VMware alone is five times as large as DSG.

Dell was a relative latecomer to M&A, only really starting to buy companies in 2007. While Dell was on the sidelines, for instance, EMC picked up more than 40 businesses, including RSA and, of course, VMware. Further, we would argue that if EMC hadn’t made the acquisitions it did during the early 2000s, Dell probably wouldn’t have bought the company. It certainly wouldn’t have had to pay anywhere close to the $63.1bn that it is set to hand over for EMC if the target hadn’t used M&A to expand beyond its core storage products.

DSG will be purchased by Francisco Partners, with participation from Elliott Management, a hedge fund better known for pushing businesses to sell than it is for buying them. (Indeed, Elliott took a small stake in EMC and then agitated for a sale of that company.) Francisco says this is its largest-ever deal. The DSG transaction comes as buyout shops are becoming increasingly busy with big prints. Including DSG, private equity buyers have now announced 14 acquisitions valued at more than $1bn since last June, according to 451 Research’s M&A KnowledgeBase.

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

Big Yellow tries on a Blue Coat

Contact: Brenon Daly

Announcing the second-largest information security transaction in history, Symantec says it will pay $4.7bn in cash for Blue Coat Systems. The single purchase eclipses the amount Big Yellow has spent, collectively, on all of its two dozen information security acquisitions over the past decade and a half, according to 451 Research’s M&A KnowledgeBase. Strategically, the proposed pairing is essentially a large-scale combination of Symantec’s endpoint security with Blue Coat’s Web defense, an M&A trend that has mostly featured deals valued in the tens of millions of dollars, rather than billions of dollars.

The transaction will further boost Symantec’s standing as the largest independent security vendor. On a GAAP basis, the combined company would have sales of about $4.2bn. (For perspective, that’s twice the size of McAfee at the time of its sale to Intel in 2010.) Blue Coat recorded GAAP revenue of $599m in its latest fiscal year. However, because of accounting regulations, that figure excludes a fair amount of deferred revenue. In its IPO paperwork, Blue Coat offered a non-GAAP ‘adjusted revenue’ figure that included the written-off deferred revenue totaling $775m in its latest fiscal year. By either measure, Blue Coat would bump up the combined company’s top line by about 20%.

For Symantec, however, bigger has not necessarily proven to be better. Big Yellow only recently cleaved off its Veritas division, unwinding a decade-long effort to pair security with storage that ultimately failed to produce returns. Yet even on the other side of the tumultuous separation, revenue at Symantec shrank in its previous fiscal year by 9%, with the company forecasting that the contraction would continue in the current fiscal year. The instability has also played out in the corner office, with Symantec having run through three CEOs in the past four years. (Note: Symantec currently doesn’t have a permanent chief executive, although as part of the agreement, current Blue Coat CEO Greg Clark will take the top job at the combined company after the deal closes, which is expected by September. In that way, there’s also a bit of an ‘acq-hire’ aspect to the multibillion-dollar pairing.)

The move marks a rare case of a dual-tracking, with Symantec buying Blue Coat less than two weeks after the company revealed its IPO paperwork. And, as we look at Blue Coat’s valuation, we can’t help but think that Big Yellow had to outbid Wall Street to get this transaction done. Think about it this way: a little more than a year ago, current owner Bain Capital was able to purchase Blue Coat for $2.4bn – just half the price Symantec is paying. (Of course, last spring Symantec probably wasn’t in a position to do a major deal, as it was focused on the Veritas divestiture.)

At $4.7bn, Blue Coat is valued at 7.8x its trailing GAAP revenue of $600m. (Even if we view the transaction on the adjusted revenue of $775m, Symantec is paying 6x non-GAAP revenue. Continuing on those unorthodox financial measures, we would add that the acquisition values Blue Coat at slightly more than 20x trailing adjusted EBITDA.) Overall, those valuations are only slightly above the average of just under 7x trailing sales for information security deals valued at more than $1bn over the past 14 years, according to 451 Research’s M&A KnowledgeBase.

Largest information security transactions, 2002-16

Date announced Acquirer Target Deal value Deal valuation*
August 19, 2010 Intel McAfee $7.7bn 3.4x
June 12, 2016 Symantec Blue Coat Systems $4.7bn 7.8x
Feb 9, 2004 Juniper Networks Netscreen Technologies $4bn 14.3x
July 23, 2013 Cisco Systems Sourcefire $2.7bn 10.7x
March 10, 2015 Bain Capital Blue Coat Systems $2.4bn 3.8x

Source: 451 Research’s M&A KnowledgeBase *Price-to-trailing-sales multiple

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The software buyout boom

Contact: Brenon Daly

After playing small ball for the first few months of the year, buyout shops have begun taking bigger swings in the M&A market. That’s nowhere more evident than in the bustling enterprise software sector, where private equity (PE) firms have displaced their strategic rivals as the main buyers at the top end of the market.

According to 451 Research’s M&A KnowledgeBase, PE shops have been the acquirers in four of five enterprise software transactions announced so far this year valued at more than $1bn. (The big-ticket shopping list: the $3bn take-private of Qlik, the $1.8bn take-private of Marketo and the $1.7bn take-private of Cvent, as well as the $1.1bn purchase of Sitecore.) Set against this recent string of 10-digit deals by financial buyers, the only corporate acquirer to ink a similarly sized transaction is Salesforce with its $2.8bn reach for Demandware.

The fact that buyout barons are leading the current software shopping spree is a direct reversal of recent years. At this point last year, for instance, there were four software deals valued at more than $1bn, with corporate acquirers announcing three of them, according to the M&A KnowledgeBase. More broadly, PE firms typically account for only about 10-20% of overall M&A spending in any given year. So far this year in the software sector, however, PE shops have accounted for just less than half of announced spending.

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

The SecureWorks IPO: delayed, downsized and discounted

by Brenon Daly

So much for the comeback of the tech IPO market. Although SecureWorks did manage to make it public on Friday, the managed security service provider – along with its 17 underwriting banks – had to trim both the size and price of its offering to get investors interested. In afternoon trading on the Nasdaq exchange, SecureWorks shares were changing hands around its offer price of $14, which is lower than the range it laid out earlier.

Recent enterprise tech IPOs*

Company Date of offering
Box, Inc Jan. 23, 2015
GoDaddy April 1, 2015
Apigee April 24, 2015
Xactly June 26, 2015
Rapid7 July 17, 2015
Pure Storage Oct. 7, 2015
Mimecast Nov. 20, 2015
Atlassian Dec. 10, 2015
SecureWorks April 22, 2016

*Includes Nasdaq and NYSE listings only

SecureWorks’ underwhelming debut comes as the first enterprise tech offering since Atlassian hit the market in December. In the intervening months, concerns about slowing economic growth have swept through the world’s equity markets. Here in the US, the Nasdaq Composite Index dropped 15% in the first six weeks of this year. During that bear market, tech companies prudently opted not to continue with their offerings, much as a ship captain would not choose to set sail in stormy seas.

However, by late April, as SecureWorks launched its delayed offering, the storm had mostly passed. The Nasdaq has recovered its losses from earlier in the year, and Wall Street was no longer shaky ground. An April survey of individual investors by ChangeWave (a subsidiary of 451 Research) showed a dramatic turnaround in sentiment: Only one-third of respondents to our April survey said they were ‘less confident’ in the stock market than they were three months ago. That was just half the level at the start of 2016, and the lowest reading in more than a year. On the other hand, almost one-quarter of the respondents indicated they are feeling ‘more confident’ in Wall Street, which was the most-bullish reading we’ve had in three years.

So SecureWorks wasn’t necessarily heading out into stormy weather. Yet it still had to give up a fair amount to get public, which doesn’t seem to make much sense. (And Wall Street is nothing if not rational and judicious.) Sure, the company is unprofitable. But red ink has never stopped investors from buying, even when a company counts its revenue in the tens of millions of dollars but its net losses in the hundreds of millions of dollars. (For the record, SecureWorks is nowhere near that level, having lost $72m on revenue of $340m in its most-recent fiscal year, which ended in January.)

If SecureWorks’ so-so IPO wasn’t entirely due to the broad market or the company, maybe it had something to do with the offering itself. The basics of the SecureWorks IPO could be summarized like this: An established tech company acquires a fast-growing startup, then spins off a minority stake of a class of equity that effectively gives shareholders no voice in the direction or outcome at the company. That’s virtually the same structure as the VMware IPO, which hasn’t necessarily been kind to the company’s minority shareholders.

CW wall street April 2016

A new face for Google’s enterprise cloud

During last week’s GPC NEXT 2016 conference, it became pretty clear that Google is hoping that Diane Greene can do for the enterprise cloud what Andy Rubin did for mobility. In both cases, the search giant has set about acquiring a well-known ‘face’ to give it a credible and visible presence in a market that it cannot organically move into but – at the same time – can’t afford to miss. (See our full report on the conference, where the company bolstered its Google Cloud Platform with multi-cloud management, a machine-learning engine and more scalable containers, among other announcements.)

A decade ago, Google’s acquisition of Android Inc not only brought the company a fledgling OS for mobile phones, but also included the high-profile figure of Rubin. From those early days, Rubin served as a kind of ‘rock-star engineer’ as Android soared to become the world’s most-used mobile OS. (Rubin stepped out of his role in Google’s mobile business in 2013 and left the company altogether the following year.) More recently, Google made what could be characterized as one of the tech industry’s largest-ever ‘acq-hires’ when it paid $380m in cash and stock four months ago to snag bebop, a startup headed by VMware cofounder (and Google board member) Diane Greene.

Just as Rubin served as a senior VP at Google as part of his company being acquired, Greene is serving as a senior VP at Google as part of her company being acquired. However, where the parallel breaks down between the two executives is around timing. Google bought Rubin’s company in August 2005 – a full two years before Apple introduced its iPhone. In contrast, Google purchased Greene’s company just last November – nearly a decade after Amazon launched its Amazon Web Services and had grown it to a $10bn run-rate business. (Click here to to read more about the remarkable growth of AWS.)

That’s not to say that Google, led in its efforts by a proven executive such as Greene, can’t make inroads into the enterprise cloud arena, thereby closing the gap with AWS and second-place Microsoft Azure. After all, the company wasn’t anywhere among the earliest search engines, but it overtook every single one of them as it netted billions of dollars on its way to becoming the world’s most-popular search engine.

But there are challenges in Google’s ‘people and products’ strategy, as demonstrated by Rubin’s own experience at the company after he left the Android division. A true gadget guy, Rubin moved over to head the search giant’s grandly ambitious robotics unit when it launched in 2013. It was built on a series of acquisitions, most notably the December 2013 pickup of Boston Dynamics. However, Rubin couldn’t replicate in Replicant (the name for Google’s robotics business) the success he had with Android, and left the company in 2014. Google is now reportedly in the process of selling off and repurposing the Replicant assets.

Cloud computing as a service MarkMon

Source: 451 Research’s Market Monitor

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After a decade of dominance, what’s next for AWS?

Contact: Brenon Daly

Even as it begins its second decade of life today, there’s an undeniable sense that Amazon Web Services (AWS) is only getting started. From a standing start in March 2006 with a single storage product, AWS has created a profitable tech behemoth that is gobbling up huge chunks of the IT landscape. (For a deeper look at how AWS has gone about upending the multibillion-dollar markets where it operates, see a recent report from my colleague Owen Rogers on how AWS handles the pricing and delivery of its vast array of services.)

On its own, AWS is easily worth more than $100bn, a remarkable bit of value creation that’s been done almost entirely organically. Amazon has almost exclusively used R&D – rather than M&A – to build AWS. For the most part, the AWS cloud offering has been developed through reallocation of existing assets and engineering instead of acquiring those things.

In terms of corporate strategy, that sets Amazon and its AWS business apart from most other tech companies, which tend to default to buying rather than building. Each year, tech vendors collectively spend hundreds of billions of dollars expanding their product portfolios and addressable market, only to struggle to put up any growth. (To take one extreme, consider IBM, which has seen annual revenue drop from roughly $100bn in 2013 to less than $80bn this year. In that same period, Big Blue has spent more than $8.6bn on 39 acquisitions, according to 451 Research’s M&A KnowledgeBase.)

The organic value creation at AWS stands out even more when compared with even the biggest and best tech deals. Consider the case of VMware. EMC’s purchase of the virtualization startup in late 2003 for $635m is rightfully cited as one of the most successful tech acquisitions in history. VMware’s market valuation of $21.2bn is currently dictated by terms of Dell’s pending pickup of VMware’s parent, EMC. (Before the transaction was announced, VMware had a market cap of about $34bn.)

Even on an unaffected basis, AWS is at least three times more valuable than VMware. And the case could certainly be made that the gap between the two companies will only widen in the future. After all, AWS is now larger than VMware and growing nearly eight times faster than VMware, which has slowed to a single-digit percentage rate. (AWS increased revenue a stunning 72% to $7.9bn in 2015.) Further, AWS has a large and growing market opening in front of it. 451 Research’s Market Monitor forecasts that the market for cloud computing ‘as a service’ – which includes PaaS, IaaS and infrastructure software as a service (ITSM, backup, archiving) – will hit $21.9bn this year and more than double to $44.2bn by 2020.

Source: 451 Research’s Market Monitor