Category: infrastructure software

Cisco prints second OpenStack deal

Scott Denne

Contact: Al Sadowski Jay Lyman Scott Denne

Cisco ups its stake in Piston Cloud Computing by converting its earlier investment into full ownership of the business. The OpenStack ecosystem has seen a number of $100m+ exits in the past 12 months, including Cisco’s own $149m acquisition of Metacloud. The space has also seen a few tuck-ins and modest exits, such as EMC’s Cloudscaling buy and the closure of heavily funded Nebula. Though terms of this deal weren’t disclosed (nor were they in IBM’s just-announced Blue Box Group purchase), consolidation in OpenStack has clearly begun and still has a long way to go. According to 451 Research’s Market Monitor report on OpenStack , 56 of the 76 vendors in this sector generated less than $5m in 2014 revenue.

OpenStack continues to gain momentum among enterprise IT leaders. Now five years old, the project has evolved into a top priority for many IT professionals and suppliers. Cisco’s purchase of Piston Cloud removes a competitor to its Metacloud-based offerings and adds rare OpenStack engineering talent and intellectual property. The acquisition probably saved Piston Cloud from turning out its own lights as the small firm likely found it difficult to compete with larger players with much more sales capacity.

The transaction highlights a couple of things about the current OpenStack market. First, there is still a demand for and dearth of OpenStack talent and expertise. Piston Cloud’s staff is among the most experienced supporting large enterprise OpenStack deployments, which Cisco – a gold sponsor of the OpenStack Foundation – is interested in driving and supporting. Second, the deal highlights how the market is still largely in a services and support phase, whereby enterprise and service-provider customers, even large ones, need intensive support deploying OpenStack. The transaction may also signal that the Metacloud acquisition and integration has been successful for Cisco and helped encourage it to pull the trigger on the Piston Cloud pickup.

We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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As RSA kicks-off, IT security M&A hits record rate

Brenon Daly

Contact: Brenon Daly

Opening on Tuesday, the RSA Conference runs its weeklong shindig under the tagline, “Where the world talks security.” When it comes to M&A, however, infosec acquirers are doing more than talking – they’re putting their money where their mouths are and shopping at a record rate.

Already this year, buyers representing a broad swath of the tech M&A community have announced 59 transactions valued at $8.1bn, according to 451 Research’s M&A KnowledgeBase. Annualized, that would put the total number of infosec deals announced this year at right around 200, significantly ahead of last year’s record number of 136.

Keep in mind, too, that infosec M&A activity in 2014 was about 30% higher than any year we’ve seen. (We consider the number of transactions – rather than spending attached to them – as the most accurate gauge of the overall vitality of M&A in what’s a relatively narrow market such as infosec, where a large print or two can dramatically swing aggregate spending. For context, infosec currently accounts for roughly 2% of the overall TMT M&A market, both in terms of annual deal volume and annual deal value.)

The boom in buying shouldn’t really surprise anyone, given the steady increases in infosec budgets coupled with the steady increases in security breaches (Sony and Anthem Inc, among others). Bankers we surveyed last December told us they expected infosec to the be the second-busiest sector for M&A in 2015, trailing only slightly behind mobility.

That bullish forecast is certainly coming through in the prints so far this year, which are running 40% higher than the same period in 2014. Maybe more noteworthy than the number of infosec transactions in 2015 is the breadth of infosec buyers. This year’s record acceleration has been driven by the usual suspects being active (Proofpoint has put up a print, while Checkpoint has inked two deals); PE shops getting busy (Bain Capital acquiring Blue Coat, Marlin Equity Partners purchasing the divested Fidelis business); as well as new buyers stepping into the market, such as Internet vendors (salesforce.com reaching for Toopher, PayPal snagging CyActive).

Information security M&A activity

Period Deal volume Deal value
YTD 2015 59 $8.1bn
2014 136 $8.6bn
2013 99 $8.4bn
2012 88 $1.8bn
2011 101 $3.2bn
2010 107 $19.82bn

Source: 451 Research’s M&A KnowledgeBase

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After dating, InfoVista marries the girl from Ipanema

Brenon Daly

Contact: Brenon Daly

Announcing its third – and largest – acquisition since its take-private in 2011, InfoVista has paid an undisclosed amount for Ipanema Technologies. The deal between the two France-based companies, which had an existing technology partnership, extends InfoVista’s core network performance management to the applications that run on them. Founded in 1999, Ipanema is primarily known for its WAN optimization offering.

The purchase also brings InfoVista, which does virtually all of its sales directly, Ipanema’s sales channel. Ipanema goes to market primarily through more than 50 partners, including many of the large Western European communication service providers such as Telefónica and BT. Altogether, it serves some 750 enterprise customers. (Subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for Ipanema’s revenue here.) We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

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Bain reaches into Thoma Bravo’s closet for a Blue Coat

Brenon Daly

Contact: Brenon Daly

More than three years after going private, Blue Coat Systems has been flipped to another private equity firm at nearly twice the price of the initial leveraged buyout (LBO) by a Thoma Bravo-led consortium. Bain Capital said Tuesday that it will pay $2.4bn in cash for the old-line networking and security vendor. (Subscribers to The 451 M&A KnowledgeBase can click here to see our estimates for both the trailing revenue and cash flow at Blue Coat.) Thoma Bravo took Blue Coat private for $1.3bn in late 2011, after HP was rumored to have dropped out of the bidding.

Under Thoma’s ownership, we understand that Blue Coat returned to mid-teens percentage growth as it expanded beyond its core offering of network security and WAN optimization, both of which are rather mature markets. (For instance, a mid-2014 survey of more than 200 information security professional by TheInfoPro, a service of 451 Research, showed that almost nine out of 10 respondents (86%) have already deployed some form of Web content filtering, a long-standing offering from Blue Coat.)

Blue Coat made three acquisitions while in Thoma Bravo’s portfolio, including paying a rather ‘un-PE’ multiple for network analytics startup Solera Networks. (Click here to see our proprietary estimate of terms of that transaction.) Of course, being a PE-owned company, Blue Coat also fattened up its cash flow in recent years. According to our understanding, Thoma Bravo has more than tripled Blue Coat’s EBITDA since the LBO.

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Buying a dried-up Riverbed

Brenon Daly

-by Brenon Daly, Christian Renaud

Announcing its largest-ever acquisition, private equity (PE) firm Thoma Bravo says it will pay $3.6bn for Riverbed. The take-private of the WAN optimization vendor comes after more than a year of pressure from activist hedge fund Elliott Management. Under terms, Thoma, which has a history of profitably acquiring infrastructure software providers, will hand over $21 for each of the roughly 170 million fully diluted Riverbed shares.

Thoma Bravo is valuing Riverbed at 3.4x the $1bn that the company has put up over the past year. (Sales growth has been underwhelming so far in 2014. Through the first three quarters of the year, Riverbed inched up its top line by 6% – just one-quarter the growth rate from full-year 2013.) The valuation is roughly in line with other recent significant take-privates such as Thoma’s leveraged buyout of Compuware and Vista Equity Partners’ LBO of TIBCO Software.

The primary reason why Riverbed’s growth has stalled – which precipitated the initial unsolicited approach from Elliott – is the considerable changes in market requirements (greater demand for traffic analysis and grooming) and enterprise networking (evolution to cloud-delivered services). A study by TheInfoPro, a service of 451 Research, earlier this year indicated that more customers were planning to cut their spending with Riverbed in 2014 than increase their spending with the vendor. We’ll have a full report on this transaction in tomorrow’s 451 Market Insight.

RVBD spend plan

 

Big Oil has big trouble; Big Data has big opportunity

Brenon Daly

Contact: Brenon Daly

If data is the new oil, as some futurists would have it, then the accompanying transfer of value came through loud and clear in Friday trading. As oil prices slumped to their lowest levels since the recession, a pair of data-centric startups skyrocketed onto the market. The IPOs of New Relic and Hortonworks, collectively, created $2.5bn of market value.

Both offerings priced above the expected range and then surged another 40% on a day that saw US stock markets tick lower, in part, because of the pronounced slump in oil prices. The debut left both companies trading at platinum double-digit valuations. (New Relic, which will put up about $115m in sales in the current fiscal year, is being valued on Wall Street at about $1.5bn, while Hortonworks, which will do roughly $50m in sales this year, garnered a $1bn valuation.)

New Relic, which collects billions of data points around the performance of applications and the IT systems that run them, priced its shares at $23 each and saw them soar to about $33 in mid-Friday trading. ( See our full report on the New Relic offering.)

Similarly, Hortonworks – a ‘big data’ vendor that sells a Hadoop distribution – priced its shares at an above-range $16 and then saw its stock change hands at roughly $23. (See our full report on the Hortonworks offering.)

Just to put a point of contrast between old oil patch and new digital economy, consider this: the cost of buying one share each of New Relic and Hortonworks is roughly the same as the cost of buying a barrel of benchmark crude oil. Wall Street was very clear on which investment option looks more rewarding right now.

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Belden plugs into Tripwire

Brenon Daly

Contact: Brenon Daly

Belden’s acquisition of Tripwire marks not only the company’s largest purchase, but also the richest valuation it has ever paid. Belden is handing over $710m in cash for the security management vendor. That values Tripwire at nearly 5x sales, which is more than twice the multiple Belden has paid in its past half-dozen deals. (For its part, Belden trades at less than 2x sales, despite its shares hitting an all-time high upon the deal announcement.)

A company known primarily for cables and wiring, Belden has inked seven purchases over the past four years as part of a broader effort to get into new markets. Not all of those moves have worked. (For instance, it divested a wireless LAN startup after more than two years on the books. Despite the irony of a wiring provider buying a wireless vendor, Belden actually sold Trapeze Networks for more than it originally paid for it.) Nonetheless, growth in new markets is one of the main reasons why Belden shares have more than tripled since the end of the recession, roughly three times the gain in the broader US indexes.

Still, the pickup of Tripwire is a not-insignificant gamble. Strategically, Belden imagines extending Tripwire’s security, which is currently focused entirely on enterprises, to industrial settings. And financially, Belden is essentially clearing out its coffers to cover the transaction. (It is drawing down approximately $200m on an existing line of credit to help pay for Tripwire.)

And, as noted, Belden is paying up for Tripwire. Terms value the Portland, Oregon-based target at 4.9x sales. For context, Tripwire sold to its current owner – private equity shop Thoma Bravo – for about $225m, or 2.2x sales, in mid-2011, according to our understanding. So one way to look at the three-year period Tripwire was owned by Thoma Bravo is that while revenue didn’t quite double, the company’s price more than tripled.

The primary reason why Thoma Bravo is getting an above-market valuation on its exit is the operational efficiencies that it helped bring into Tripwire. The company is projected to grow in the high teens, which is twice the rate it was growing before being acquired by the PE shop. Maybe more importantly, Tripwire more than tripled its EBITDA margin, to above 30% currently, while also accelerating its growth.

Look for a more detailed report on Belden’s acquisition of Tripwire in tomorrow’s 451 Market Insight.

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In the IPOs of New Relic and Hortonworks, it’s the grownup vs. the startup

Brenon Daly

Contact: Brenon Daly

Although both New Relic and Hortonworks revealed their IPO paperwork on the same day, that’s pretty much all the similarities we could find between the two enterprise technology companies. The two candidates have wildly different delivery models, operating margins, customer counts and even maturity of business models. That’s not to say they both can’t find a home on Wall Street, but only one of them is likely to dwell in a ritzy neighborhood. (451 Research subscribers: look for our full reports on both the New Relic and Hortonworks offerings later today.)

Of the two offerings, New Relic looks to be the standout. The application performance management vendor is growing quickly, but maybe more importantly, it is starting to show some leverage in its business model. This stands in sharp contrast to some of the other unprofitable IPO candidates that talk distantly about the company hitting some magical ‘inflection point’ when the red ink turns black.

New Relic is already demonstrating greater efficiency in its model, which will undoubtedly appeal to Wall Street. Consider this: In the first six months of the company’s current fiscal year, its operating loss basically stayed the same even as revenue soared 84%. More specifically, New Relic actually lost less money in its most recent quarter, which wrapped in September, than it did in the same quarter a year earlier. It trimmed its quarterly loss even as the company added more than $10m, or 78%, to its top line.

In contrast, Hortonworks is still forming its business, without much – if any – regard to optimizing it. The three-year-old Hadoop distributor is a classic startup, with many of the concerns that come with early-stage businesses: customer concentration, heavy upfront spending and precariously thin margins. (Hortonworks’ professional services business, which actually runs at a negative gross margin, has been a serious drag on the company’s overall gross margin. Through the first three quarters of the year, Hortonworks has been running at just a 34% gross margin, less than half the 81% gross margin posted by New Relic.)

When we net out all the differences between New Relic and Hortonworks, we see a vast gulf between the two IPO candidates at the bottom line. Sure, both still run in the red, but New Relic is only a light red, while Hortonworks is hemorrhaging a blood red. To put some specific numbers on that metaphor: At its current rate, New Relic loses about 40 cents for every $1 it brings in as revenue. In contrast, Hortonworks loses a staggering $2.60 for every $1 it brings in as revenue.

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NetApp carves SteelStore out of Riverbed

Brenon Daly

Contact: Brenon Daly

NetApp’s first acquisition in more than a year and a half comes with a bit of a twist. The storage giant is only a few months removed from a period in which hedge fund Elliott Management was stirring for changes at the company. Having largely settled with the activist investor, NetApp has now picked up a division carved out from Riverbed Technology, which is currently being targeted by Elliott.

Terms call for NetApp to pay $80m for Riverbed’s SteelStore cloud storage gateway. The size of the business, which was formerly known as Whitewater, wasn’t disclosed. However, our understanding is that it was generating less than $10m in sales. Only 26 employees are going over to NetApp as part of the deal.

SteelStore was part of Riverbed’s broader portfolio expansion, an effort that hasn’t really paid off for the company. Some 70% of Riverbed’s revenue still comes from its core WAN optimization unit. The slowdown in that business is one of the main drags on Riverbed, which recently forecasted that sales in the current quarter may be flat.

However, according to our understanding of the transaction, it wasn’t driven by Riverbed, which is currently exploring ‘strategic alternatives,’ looking to jettison a non-core business. Instead, we gather that NetApp went after the division. Neither side used a financial adviser.

That dynamic may help explain the relatively rich valuation of the deal. (Though we would note that both EMC and Microsoft also paid princely multiples in their purchases of cloud storage gateways.) Also, price-to-sales multiples tend to get exaggerated by companies posting only tiny revenue.

And to be clear, virtually all of the cloud storage gateway startups are generating tiny sales. In a recent study of IT professionals at midsized and large enterprises conducted by TheInfoPro, a service of 451 Research service, only 4% of participating companies had deployed cloud storage gateways – a figure that was essentially unchanged from a similar TIP study in 2013. (See our full report .) With the cloud storage market still very much in its early stages, we would argue that a gateway startup is more at home in a storage vendor like NetApp than in a networking provider like Riverbed.

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For Symantec, the spinoff is just the start

Brenon Daly

Contact: Brenon Daly

After a decade of uneasy – and ultimately unfulfilling – marriage, Symantec has finally served divorce papers to its ill-matched partner, Veritas. In going solo, Big Yellow will return to its roots as a stand-alone information security company while spinning off the smaller information management (IM) business at some point before the end of next year.

The separation means that Symantec’s long-suffering shareholders will continue to own Veritas, which cost them a record $13.5bn worth of stock nearly a decade ago. (Since the acquisition closed in mid-2005, Symantec stock has returned just 10%, while the Nasdaq has doubled during that period.) Or more accurately, we should say Symantec shareholders will continue to own the lower-valued IM division until it can finally be sold.

There’s little doubt, in our view, that the spinoff is an interim step. It allows the unit to put up a few quarters of stand-alone performance, perhaps even get some growth back in the IM business. But even as it stands, the division generates more than a half-billion dollars of operating income each year. A buyout shop could certainly make the leverage work on a business like that, particularly once it was ‘optimized.’ (Overall, Symantec spends some 36% of revenue on sales and marketing, even as its sales flatline.)

While the IM business is ultimately likely to land in a private equity portfolio, we would note that we heard an intriguing rumor as Symantec was working through this process. The rumor essentially had Symantec trading its IM unit to EMC for its security division, RSA.

On paper, the swap makes sense, allowing each of the tech giants to focus on their core businesses. According to our understanding, however, talks didn’t get too far along because of the valuation (the Veritas business is about twice as big as RSA) and because of the tax hit that the companies would take due to the asset swap. (As it is, the spinoff of Veritas is tax-free to Symantec shareholders.) And now, of course, EMC is under pressure to undertake a corporate restructuring of its own.

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