Category: infrastructure software

Microsoft makes meaningful buy

Since shelling out nearly $10bn in a year and a half to reinvent itself as an online contender, Microsoft, on July 1, confirmed reports of its purchase of online search and natural language vendor Powerset. Microsoft aims to add Powerset’s Web search linguists, engineers and technology to its Live Search division. On the heels of its $1.2bn purchase of enterprise text analytics giant FAST Search and Transfer in January, Microsoft inked this much smaller deal to enhance its consumer Web search.

Founded in 2006, Powerset released its Web search technology earlier this year. In partnership with Xerox’s PARC (Palo Alto Research Center), the San Francisco startup, which has raised some $12.5m in funding, has been developing search software that reads online text and discerns semantics as well syntax. So far, Powerset’s semantic technology has been publicly tested only on Wikipedia and fellow open source encyclopedia Freebase, both of which have a solid structure that Powerset leverages. The company has also been in talks with major publishing companies about an ad-supported service it has in the works.

With Powerset having been sold to an established technology company to realize its plans, we wonder what that will mean for the rest of the semantic technology companies. Currently, the poster child of the market is Radar Networks, which is backed by $18m in VC. It is developing a semantic social networking application, Twine, which is still in private beta and due to be released this fall. There’s also New York-based semantic search engine Hakia, also in private beta, which has landed over $20m in funding. However, if Powerset, which was often referred to as ‘the next Google,’ got picked up for just $100m (as the rumors have it), then what’s the exit picture for the two remaining rivals, both of which have raised more money than Powerset? Maybe we need to Google the answer.

Selected Microsoft search acquisitions

Date announced Target Deal value Target description
July 1, 2008 Powerset $100m (reported) Semantic Web search engine
January 8, 2008 Fast Search and Transfer $1.2bn Enterprise search software

Source: The 451 M&A KnowledgeBase

Proofpoint buys Fortiva, expands into email archiving

After a courtship that lasted the better part of a year, on-demand security provider Proofpoint finally picked up software-as-a-service email archiving startup Fortiva this week. Based on similar transactions and industry buzz, we estimate this tuck-in acquisition cost Proofpoint somewhere in the neighborhood of $70m. Fortiva, which has 45 employees, was running at about $15-20m in revenue from about 200 enterprise customers. This marks a solid exit for the company’s venture backers, Cargill Ventures, Ventures West and McLean Watson Capital, which only pumped $8m into Fortiva.

The interesting question sparked by this transaction is what’s next for Proofpoint, which is now up to 250 employees. Though some have suggested the company has now effectively dressed itself up as an acquisition target, we believe otherwise. We think an IPO will represent the next major milestone for the company. (In wrap-up of April’s RSA conference, we said as much, adding that an acquisition by Proofpoint was likely in the next few months.)

Proofpoint has drawn in some $86m in funding since its inception in 2002, including a $28m round in February, even though it was running at close to breakeven. With more than 1,600 customers, bookings are up 70% on a year-over-year basis for 2008. The growth comes despite stiff competition. Google, Cisco and Autonomy Corp made a big push into the market last year with their respective acquisitions of Postini, IronPort Systems and Zantaz.

Yet, Proofpoint has held its own against these larger vendors, even recruiting a few high-ranking employees from Postini, we’ve heard. Speaking of hiring at Proofpoint, we would also highlight last year’s move to bring Paul Auvil on board as CFO. Auvil served as the top numbers guy at VMware, guiding that company from the tens of millions of dollars in revenue to hundreds of millions of dollars. Of course, that company never made it fully public. We have a feeling Auvil may yet have a chance to be CFO at a public company, given the direction of Proofpoint.

Select on-demand security deals

Announced Acquirer Target Deal value Target revenue
July 9, 2007 Google Postini $625m $70m*
July 3, 2007 Autonomy Zantaz $375m Not available
May 14, 2007 Verizon Business Cybertrust $450m* $225m*
April 26, 2007 Websense SurfControl $400m $220m
Jan. 4, 2007 Cisco IronPort $830m $100m*
May 19, 2004 Symantec Brightmail $370m $26m

Source: The 451 M&A KnowledgeBase, * official 451 Group estimates

Less than zero?

Brenon Daly

The company once known as MathSoft has been cancelled out by the following equation: 1 – 0.5 – 0.5 = 0. The firm made its first subtraction in early 2001, with the divestiture of its core technical calculations software business. That was followed up last week with the sale of the remaining chunk of the company – which sold data analysis software under the name Insightful Corp – to Tibco for $25m. (Along the way, Insightful further whittled off a small sliver of its business, some search assets it sold to Hypertext Solutions, which now does business as Evri, for $3.7m last year.)

If the name MathSoft seems only vaguely familiar, it’s because the old-line firm hasn’t existed for seven years, at least not under its original name and original business. Founded in 1984, the Massachusetts-based company emerged as MathSoft two years later. And while it’s too soon to say whether Tibco’s tiny purchase of Insightful will pay dividends, the former had better hope the acquisition goes smoother than the last one involving Insightful’s CEO. Before running Insightful, Jeff Coombs headed up marketing at Acta Technology – a startup selling ETL technology that was snapped up by Business Objects in mid-2002 for $65m.

Actually, that deal ended up costing Business Objects a fair bit more, in both money and time. The reason? Just a week after the deal was inked, ETL powerhouse Informatica filed a patent infringement case against Acta. That worked its way through the courts for the following four and a half years, until a jury decided a year ago to award Informatica $25m in damages. Tibco, too, has had courtroom headaches from one of its deals, picking up a company that was later sued in the widespread lawsuit over share allocations of IPOs in the bubble era. So both the buyer and seller in this deal have firsthand experience with negative additions through acquisitions. 

Subtraction from MathSoft

Date Event Price
Jan. 2001 Divestiture of core education products division $7m
August 2007 Surviving company Insightful sells search assets $3.7m
June 2008 Insightful sells to Tibco $25m

Source: The 451 M&A KnowledgeBase

VeriSign’s yo-yo diet

Brenon Daly

We’ve noted several times in the past that former binge eater VeriSign has set itself on a fairly severe corporate diet. (Last November, we outlined VeriSign’s divestiture plan that could trim up to one-third of the company’s revenue.) Having already sold off three businesses so far in 2008, VeriSign is nearing a fourth divestiture, we hear.

At the America’s Growth Capital security conference in early April, we heard hallway chatter that VeriSign was deep into talks with a networking equipment vendor and a services shop about selling its managed security service provider (MSSP) business. Now, a source indicates that VeriSign has a letter of intent signed to shed its MSSP business. The acquirer isn’t immediately known, but we hear it’s a strategic, rather than financial, buyer. Given the recent moves by telcos to buy security service shops – for instance, Verizon Business’ purchase of Cybertrust a year ago and BT Group’s acquisition of Counterpane Internet Security in October 2006 – we could also imagine a phone company adding the MSSP business to its service offering.

Like any divorce, a divestiture tends to take longer and be more expensive than any of the parties imagined at the start. And we can only guess at the discount for VeriSign’s MSSP business. The divestiture would effectively unwind its $140m cash-and-stock acquisition of Guardent in December 2003. Ironically, VeriSign inked the Guardent purchase at a time when it was also dieting, having shed its domain name-registry business and other assets. Is this the corporate equivalent of yo-yo dieting? 

Coming and going at VeriSign

Year Acquisitions Divestitures
YTD 2008 0 3
2007 0 1
2006 8 1
2005 7 1

Source: The 451 M&A KnowledgeBase

Emerald Isle M&A

Brenon Daly

Given that today is Bloomsday, we’ve given ourselves literary license to take a look at deal flow between the US and Ireland. (Don’t worry, if you’re like us and have never actually managed to get through James Joyce’s ‘Ulysses’ – despite taking more than a few cracks at the tome – this Insight will still make sense. Quick show of hands: Who’s actually read all the way to “…and yes I said yes I will Yes”?)

In any case, deal-flow between the two countries has been remarkably stable during the past four years, clipping along at about 30 deals each year. M&A spending in the most-recent year, however, has fallen to its lowest level, just half the previous year and one-quarter the level in the year before that. (Note: In three weeks, we’ll publish our annual Trans-Atlantic Tech M&A Banking Review. Obviously, the steady decline of the US dollar has had a big influence in deal-making. So far, we’ve seen European acquirers be even more active than the previous year, while US buyers have only spent about half as much as the same period last year. You can request a copy of last year’s report here.)

One company that may very well figure into the US-Ireland M&A tally very shortly is Iona Technologies. We noted in February that the Dublin-based company had attracted an unsolicited bid from an unknown company, which turned out to be Germany’s Software AG. Iona has retained Lehman Brothers, which led its IPO in the late-1990s, to advise it. At the time, we tapped SAP and Sun Microsystems as the most-logical buyers of Iona. More recently, an Irish newspaper reported that Progress Software or Red Hat is Iona’s ‘preferred’ buyer. Meantime, Software AG now says it’s out of the running. So it looks like we could very well be seeing an American company pick up another piece of the Old Sod. 

Irish-US M&A (year ending each Bloomsday)

Period Deal volume Deal value
June 16 2004-05 28 $1.2bn
June 16 2005-06 29 $3.8bn
June 16 2006-07 36 $1bn
June 16 2007-08 33 $860m

Source: The 451 M&A KnowledgeBase

Captive deal

Brenon Daly1 Comment

For many startups, the deeper a partnership is, the shallower the pool of potential acquirers. Consider the case of SwapDrive and this week’s quiet sale to Symantec. The two sides inked an OEM agreement nearly two years ago – a bit of paperwork that turned out to be a precursor to an M&A contract. With Symantec likely accounting for a majority of sales at SwapDrive, a trade sale seemed the realistic exit for SwapDrive. That became even more likely as sales of Norton 360, which is based on the technology supplied by SwapDrive, outstripped Symantec’s early projections, according to our understanding. The Norton 360/SwapDrive offering targets the consumer market, which complements the company’s enterprise-focused Symantec Protection Network.

However, perhaps because it was essentially a captive deal, SwapDrive ended up getting taken out at a significant discount to its rival Berkeley Data Systems. Just half a year ago EMC shelled out $76m for Berkeley Data, which runs the Mozy service. We understand Mozy generated about $8m in sales in the year leading up to the sale, meaning EMC paid 9.5 times sales for the online backup startup. In contrast, SwapDrive went for 5.6 times trailing sales. According to reports, Symantec paid $123m for SwapDrive, which was running at $22m.

Symantec’s purchase of SwapDrive continues a run of larger storage players snagging online backup vendors. The earlier deals – inked by Iron Mountain and Seagate Technology – got done at multiples closer to Symantec-SwapDrive, although the market has heated up a bit since those first combinations. We wonder what that will mean for the last remaining online backup vendor of note: Carbonite Inc. The company took in $20m in its series B in February and has indicated it’s looking for an IPO late next year. Who knows, maybe the window will be open by then. 

Selected online backup deals

Acquirer Target Date Price Target revenue
Symantec SwapDrive June 2008 $123m* $22m*
EMC Berkeley Data Systems [Mozy] Oct. 2007 $76m* $8m*
Seagate EVault Dec. 2006 $185m $35m*
Iron Mountain LiveVault Dec. 2005 $42m $10m

*estimated, Source: The 451 M&A KnowledgeBase

How do you say ‘Tumbleweed’ in French?

Brenon Daly

About a year and a half ago, we heard Tumbleweed Communications was being shopped hard by private equity firms. The intervening credit crises – which bumped up the price of debt and trimmed the returns on LBOs – quite likely tabled any buyout. The email security vendor has struggled since then. It came up short of Wall Street estimates in every quarter in 2007. Shares that changed hands above $3 each in early 2007 dropped in a straight line to just above $1 this March.

Rather than a PE shop, however, it turns out Tumbleweed’s buyer will be the Sopra Group, a French IT consulting firm. Sopra will make the acquisition through its Axway subsidiary, paying $2.70 in cash for each share. With about 51 million shares outstanding, Tumbleweed gets a an equity value of about $138m, only slightly more than twice the sales it is expected to record this year. Sopra also got a discount from its currency: the Euro has climbed about 18% in value since we reported on Tumbleweed in February 2007. See full report.

NetQoS: a small buy on the way to a sale

Brenon Daly2 Comments

On its way to a probable public offering next year, NetQoS has acquired a startup that will boost the company’s offering to the financial services industry. On Tuesday, NetQoS said it’ll pay a small amount of cash for Helium Systems, which makes trade monitoring software. (Helium isn’t expected to add much revenue to NetQos, which has been tracking to $60m this year, up from $45m in 2007.)

Indeed, organic growth has been the story at NetQoS, since the Helium acquisition is the first by the company in nearly two-and-a-half years. But the pace may be about to pick up. The reason? As it gets ready to put together an underwriting ticket for an IPO down the road, NetQoS has found (surprise, surprise) that bankers are also pitching other deals. Meanwhile, for its part, the company has started to look at ways to fill up its corporate coffers if it finds a deal that’s too good to pass up.

Thus far, NetQoS has been remarkably conservative in its capitalization, raising just $21m total. (Liberty Partners, a New York PE firm that typically invests in midmarket companies, is the majority owner of NetQoS and the company’s only institutional investor.) NetQoS, which has been cash-flow positive since 2005, hasn’t taken any outside money in a half-decade. But with an IPO payday likely in 2009, we’re guessing NetQoS wouldn’t have any trouble lining up funds, either from its current backer or even a new partner. 

NetQoS acquisitions

Date Target Rationale
June 2008 Helium Systems Trade monitoring
Dec. 2005 Pine Mountain Group Services
April 2005 RedPoint Network Systems Device management

Source: The 451 M&A KnowledgeBase

Taking stock

Brenon Daly

Pocketing equity as currency always makes a deal a little more dicey than a straight cash transaction. (Just ask Ted Turner, or any other shareholders – public or private – who got burned on post-sale stock distributions in the early part of this decade.) Those bitter memories – along with concerns about diluting existing shareholders – have pushed companies to hold on to their shares, rather than hand them out in acquisitions. Besides, many large tech companies are now on the other side of steep cost-reduction plans, which allows them to throw off hundreds of millions of dollars in free cash flow every quarter. That has swollen corporate treasuries to near record levels, in some cases.

Nonetheless, a few tech companies have been paying at least a part of their M&A bills with their own shares. In the three deals Omniture inked last year, the online business optimization vendor used its shares to cover more than half the cost of each deal. (The largest chunk of stock – $342m of equity to cover its $394m total purchase of Visual Sciences – is basically flat with the level where shares traded when Omniture closed the deal in mid-January.) Additionally, Ariba paid for half of its $101m purchase of Procuri with its stock. (Taking Ariba shares turned out to be a good bet for Procuri, since the stock has jumped 40% since the deal closed in mid-December.)

However, one deal that’s set to close at the end of business Thursday offers a reminder of the risks. Although Blue Coat Systems used all cash to buy Packeteer in its $268m purchase, it would have undoubtedly heard grumblings from Packeteer shareholders if it had done a stock swap. The reason? Just a month after announcing the deal, Blue Coat posted weak quarterly results and offered a tepid outlook for its business. That knocked the stock down 20% in one trading session. In this kind of uncertain market, cash may well be king. 

Recent all-cash strategic deals

Date Acquirer Target Amount of cash
May 2007 Thomson Reuters $17.2bn
Jan. 2008 Oracle BEA Systems $8.5bn
Oct. 2007 Nokia Navteq $8.1bn
Oct. 2007 SAP Business Objects $6.8bn
May 2007 Microsoft aQuantive $6.4bn
Nov. 2007 IBM Cognos $5bn

Source: The 451 M&A KnowledgeBase

Wire buys wireless

Brenon Daly

Two weeks ago, we noted Trapeze Networks had been sold without indicating what company had been sitting across the table from the wireless LAN (WLAN) infrastructure vendor. The buyer can now be named: Belden. The St. Louis-based company is more known for its wiring and cable products. (Indeed, before inking the Trapeze deal, Belden’s previous deal had been the $195m purchase of a Hong Kong cable company.) We’ll have a full report on this transaction – and the implications for the sector – in tonight’s Daily 451.

While the pairing of a wireless company with a company known for its wires may seem odd, there are actually a fair number of points that make sense for Belden-Trapeze. For starters, Belden is viewed in the WLAN market as a neutral vendor, which means that Trapeze’s sales arrangements shouldn’t be threatened by the acquisition. We would contrast that with the fallout from Cisco’s early 2005 purchase of Airespace, which forced Airespace partners Alcatel and Nortel Networks to scramble to find a replacement supplier of WLAN technology after the deal. Also, Trapeze had decent sales in Europe and Asia, markets that Belden has targeted.

In the end, however, it all comes back to money. In that sense, the Trapeze deal shows how steeply the valuations of the WLAN infrastructure vendors have come down. The multiple in this deal was two-thirds lower than the level that Cisco paid three years ago in its purchase to get into this market. (Granted, Cisco has a reputation of skewing the market with top-dollar bids.) Still, Trapeze exited for $133m after raising about $100m in venture funding. We understand that rival Meru Networks is currently out raising another round. The company already counts Lehman Brothers, Clearstone Venture Partners, Sierra Ventures and DE Shaw among its investors. While Meru may well land an up round, we’re guessing Trapeze’s valuation – combined with Aruba Networks’ rough ride on the Nasdaq – certainly haven’t helped those conversations. 

WLAN vendor valuations

Company Acquirer Price Price-to-TTM sales ratio
Airespace Cisco $450m 7.5x*  
Trapeze Belden $133m 2.3x  
Aruba NA $467m market cap 2.7x  

*estimated, Source: The 451 M&A KnowledgeBase