Category: infrastructure software

Infosec on Wall Street: a tale of two exits

Brenon Daly

Contact: Brenon Daly

Although Sourcefire and Websense stand as the two most-recent publicly traded information security vendors erased from the stock exchange, they are dramatically different departures. Sourcefire is going out on top, garnering its highest-ever price in its half-decade on Wall Street. In contrast, Websense, which has been public since 2000, took an offer that valued its shares lower than they had traded on their own just two years earlier.

Of course, the discrepancy stems largely from the financial performance of the two companies – and, maybe more to the point, which buyer can make those numbers work. Essentially, the deals represent the dramatic difference between ‘growth’ and ‘mature’ tech companies, as well as the difference between financial and strategic buyers.

Sourcefire collected a platinum valuation from fellow corporation Cisco Systems because the networking giant assumes it can wring out additional ‘revenue synergies’ from the already quickly growing Sourcefire. (In 2012, Sourcefire bumped up overall sales 35%.) The rationale isn’t too much of a stretch: Cisco already moves much of the traffic around the Internet, so why not secure it as well? (Of course, that’s so obvious that Cisco has been trying to pitch that ‘convergence’ for about a decade, but has found only limited success on its own.)

Those earlier efforts help explain why Cisco is valuing Sourcefire at 10 times trailing revenue, the highest multiple for any all-cash acquisition of an infosec vendor valued at more than $1bn. On the other end of the valuation spectrum, we have Websense. The Web security vendor went private at just 2.5x trailing sales.

Undoubtedly, Websense’s financial profile is much more at home in a private equity (PE) portfolio than Sourcefire would ever be. The company is seven years older than Sourcefire, and while we wouldn’t say its best days were necessarily behind it, revenue at Websense actually ticked down slightly last year. Still, it generated far more cash than Sourcefire, which undoubtedly appealed to its new PE owner, Vista Equity Partners. (Websense’s operating margin is three times higher than Sourcefire’s.) As different as the two deals are, they do have one similarity: both buyers are getting what they want at a price they want.

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With $2.7bn at stake, how will Cisco handle red-hot Sourcefire?

Brenon Daly

Contact: Brenon Daly

In one big roll of the dice, Cisco Systems has nearly matched the entire spending on all information security deals across the globe in each of the past two years. The networking giant announced Tuesday that it plans to hand over $2.7bn in cash for Sourcefire. That single transaction, which gives the network security vendor a platinum double-digit valuation, barely lags the aggregate value of 2012 ($3bn) and 2011 ($3.2bn) infosec deals.

So what is Cisco getting in its big bet on security? Sourcefire is a solid mid-20% grower and has consistently ranked well in terms of stickiness with customers. TheInfoPro, a service of 451 Research, surveyed Sourcefire customers in late 2011 and found that not a single one was planning to switch from Sourcefire to another provider. Sourcefire was the only infosec vendor among the 15 companies surveyed to receive unanimous support from its customers.

The growth and positive sentiment around Sourcefire goes some distance toward balancing the concerns that this mega-transaction brings, both specific and general. For starters, Cisco has struggled with many of its purchases outside its core market of enterprise networking gear (witness its divestiture of consumer brand Linksys earlier this year). Further, the company’s security business in the most-recent quarter shrank 4%, compared with a 5% increase in overall revenue at Cisco.

More broadly, many of the multibillion-dollar acquisitions of other infosec providers have only delivered so-so results for the buyers. In some cases, rumors have pointed to acquirers looking to unwind their purchases. For instance, we’ve heard in the past that IBM has considered shedding the Internet Security Systems business it bought in mid-2006 for $1.3bn. Additionally, EMC was rumored to be exploring alternatives for RSA Security, which it picked up in a competitive process for $2.1bn seven years ago.

And then there’s the cautionary tale provided by a directly comparable transaction in early 2004. In that deal, Cisco rival Juniper Networks decided that it wanted to make a play for the convergence of networking and security, announcing a $4bn stock swap for NetScreen Technologies. That deal dragged on Juniper’s results for years, and was one of the primary reasons why Juniper was out of the M&A market entirely for a half-decade (2005-2010). We would note that during that five-year period with its rival sidelined, Cisco was incredibly active, spending more than $20bn on 40 acquisitions.

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Two strikes and counting for acquirers of Zimbra

Brenon Daly1 Comment

Contact: Brenon Daly

Having already bounced around inside two tech giants before bouncing out of them altogether, Zimbra is now on its third owner in the past seven years. Telligent Systems, a relatively small VC-backed startup, has picked up the back-end email technology provider from VMware, which – in turn – had picked up the castoff business from Yahoo. Although terms weren’t released, we would guess Telligent spent a fraction of the $450m that the two previous buyers handed over for Zimbra.

With two tech giants having already whiffed on their ownership of Zimbra, however, we can’t help but wonder if Telligent’s purchase will be strike three for the once-promising company. The reason we ask is because in each of the deals, Zimbra was acquired in order to be something that it’s not.

For Yahoo, its mid-2007 purchase of Zimbra represented a way to counter Google Apps, which, at the time, was just starting to make its way into universities, small businesses and the service-provider market. Yahoo hosted hundreds of millions of unpaid consumer email accounts, but hadn’t been able to expand into businesses.

Yahoo’s efforts with Zimbra didn’t have any more success than the next owner, VMware. In early 2010, the infrastructure software giant made an ill-advised move into the application layer with Zimbra’s messaging and collaboration products. It has largely retreated from those efforts, divesting both Zimbra and SlideRocket as part of a larger corporate restructuring announced earlier this year.

And now it’s Telligent’s turn to see what it can do with Zimbra. From the outset, we would note that the stakes are much higher for Telligent than for either of the two previous acquirers. Both Yahoo and VMware, which do close to $5bn in annual sales, could absorb the financial impact of a questionable deal that didn’t work out. Privately held Telligent, which we estimate might generate $20m this year, doesn’t have that cushion. (Further, it may not have the brand equity to survive because Telligent is taking the unusual step of using the name of the acquired business for the surviving company.)

Telligent will have to stretch to blend its enterprise social networking products – hyped as real-time, collaborative and far more interactive than plain old email – with Zimbra. Simply put, the approaches come from different eras. Even a company as well-versed in software as Microsoft has recognized that and has adapted its M&A program accordingly. Although Microsoft dropped $1.2bn on social networking startup Yammer a year ago, the software giant only recently started integrating the Web 2.0 company with a select few stalwart programs such as SharePoint and Office, despite the connection between the applications.

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RSA adds Aveksa, bolstering goverance and provisioning

Brenon Daly

Contact: Wendy Nather, Brenon Daly

The identity and access management (IAM) market has evolved far beyond hooking up Active Directory with cloud-based identity management and single sign-on to a whole realm of business context that needs to be addressed. To cover that, EMC’s RSA Security has acquired Aveksa, a ‘business-driven IAM’ vendor, adding to the security giant’s existing portfolio of authentication, analytics and governance offerings.

Much of RSA’s portfolio has come through a steady flow of M&A. The security division of EMC typically acquires one or two startups each year. We would note that deal flow is much slower than EMC’s other major division, VMware. Nonetheless, RSA has made significant moves in recent years, adding Silver Tail Systems (antifraud), NetWitness (event monitoring) and Archer Technologies (GRC), among others.

With Aveksa, RSA will get a solid source of identity governance, user provisioning and access management to go along with its authentication business. RSA says that another reason for the acquisition was the speed with which Aveksa could be rolled out in the enterprise. The published claim is that roughly 70% of customers were up and running in production within four months – a far cry from traditional IAM infrastructures, which can take years to customize and deploy. (See our full report.)

Latest deal takes SolarWinds into a new orbit

Brenon Daly

by Brenon Daly

A serial acquirer, SolarWinds looked outside its well-worn M&A playbook in its latest deal, the $120m purchase of N-able Technologies announced Tuesday afternoon. For starters, it’s the largest of the dozen transactions the IT management software vendor has done, about three times the size of its second-largest deal. And SolarWinds plans to run Ottawa-based N-able fairly autonomously rather than integrate it into the platform, as it has done in previous acquisitions.

SolarWinds will be largely taking a hands-off approach to N-able because the startup serves a much different market – and does so through a much different delivery model. N-able sells its remote monitoring and management software to MSPs, counting roughly 2,600 MSPs as clients. For its part, SolarWinds serves IT departments. Also, about one-third of N-able’s revenue comes from subscriptions, while SolarWinds sells perpetual licenses. The transaction is expected to close by the end of the month.

The dissonance spooked Wall Street, which clipped 14% from SolarWinds’ valuation on trading that was more than twice as heavy as normal. Investors may have felt stiffed by the lack of immediate ‘revenue synergy’ in the combination, which went off at a not unreasonable 5x trailing sales. (Never mind that in most acquisitions, the much-discussed cross-selling opportunities rarely show up on the top line.)

Beyond the immediate concerns, however, the acquisition can be viewed as a bit of a hedge by highly valued SolarWinds, which still trades at about $3.2bn, nearly 10x its projected sales of roughly $335m for this year. N-able allows SolarWinds to gain access to much smaller customers than it could typically reach through a channel (MSPs) that it didn’t serve. SolarWinds sized that opportunity at $2bn just in the US, with a similarly sized opportunity abroad. New growth and new markets is something that SolarWinds needs after an admittedly slow start to 2013 that saw Q1 revenue tick up just 22%, compared with 35% in 2012.

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After 25 years as a public company, BMC gets so-so exit in take-private

Brenon Daly3 Comments

Contact: Brenon Daly

After almost a year of agitation by an activist hedge fund, BMC Software has agreed to sell itself to a group of private equity (PE) buyers for $6.9bn. The take-private of the IT systems management giant, which is the second-largest tech PE deal since the end of the recent recession, will end a quarter-century of public trading for BMC. The offer values the company at a fairly conventional, ho-hum multiple, reflecting the struggles BMC has had in finding any growth.

At $6.9bn, the bid from the consortium – made up of Bain Capital, Golden Gate Capital, GIC Special Investments and Insight Venture Partners – values BMC at 3.2x trailing sales and just 10x trailing EBITDA. As a mature company, BMC throws off a lot of cash, generating some $700m in EBITDA on $2.2bn in sales annually. The relatively rich margin prompts the question of how the company’s new PE owners will be able to boost BMC’s already high cash flow.

The consortium has offered $46.25 per share for BMC. That is only slightly above the level where BMC was trading on its own before hedge fund Elliott Management started its campaign to ‘unlock shareholder value’ at the company. (Further, the price is less than where BMC shares changed hands on their own from late-2010 to mid-2011.) Elliott ended up with a nearly 10% stake in the company as part of its campaign.

Coming just three months after the proposed PE-led management buyout of Dell, the take-private of BMC has a decidedly different structure than most recent PE deals. For starters, it is large – nearly twice the size of other recent tech LBOs and, in fact, it trails only Dell’s $24bn buyout on the list of largest post-recession PE deals.

Additionally, it marks the return of the so-called ‘club deal’ where PE firms team up to take on bigger game. Those deals were relatively frequent before the 2008-09 recession tightened the availability and rates for debt, but fell out of favor recently. Of the five take-privates of US publicly traded tech companies announced in the past two years valued at more than $1bn, four of those have been done by single PE shops, with only one club deal, according to The 451 M&A KnowledgeBase.

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Dell’s software dreams hit hard reality

Brenon Daly

Contact: Brenon Daly

As one indication of the distraction posed by the planned $24.4bn take-private of Dell, consider the blizzard of SEC paperwork coming from the company. Just in the past month, Dell has put in more than a dozen separate filings related to the planned management-led buyout (MBO). Amid all of the proxy amendments getting papered and chatter about who’s in and who’s out as bidders, it’s easy to lose sight of the fact that Dell (the company) is still doing business.

Of course, the company is doing business on a smaller scale, with Dell reporting high-single-digit revenue declines. Much of that slide is, rightly, attributed to the industry-wide slump in PC sales, which still account for about half of Dell’s total revenue.

But a more complete view of the company shows that while the box business continues to face pressure, the software division has yet to pick up the growth. While it may not be declining like the rest of Dell, the hoped-for boost in the business has yet to materialize. Software sales at the company, which still account for less than 3% of total revenue, are flatlining.

That’s a disappointment, given that Dell is now $5bn into its software shopping spree. It has acquired steadily and broadly, building its portfolio around information management, security and systems management. Much of the company’s software IP that it acquired – from the identity and authentication technology picked up with Quest Software to AppAssure’s backup software to the systems management tools from KACE Networks – got updated and highlighted at an event earlier this week in San Francisco.

Yet, despite all of Dell’s efforts (both organic and inorganic) to boost its software business, the division is stuck at $1.5bn or so in sales. Clearly, there’s more work for Dell to do in that unit.

If it needs a model, Dell can look across to IBM, a onetime box company that has successfully bought and built a software business. Big Blue’s $25bn software business hums along at twice the margins of its other major divisions. Further, software was the only division at IBM to actually post growth in 2012. Whatever the outcome of the proposed MBO, Dell could certainly use a contribution like that from its software group.

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From partner to parent

Contact: Tejas Venkatesh

Intel has quickly moved from Mashery’s partner to its parent, buying Mashery just six months after entering into a reseller relationship with the API management startup. The deal could help further propel growth of Intel’s datacenter group, one of the company’s growth centers.

Contrasting total revenue in the first quarter, which declined 4%, Intel’s datacenter group saw its revenue grow 7% compared with the year-ago period. Its datacenter business makes semiconductors and software to be used for servers and storage inside datacenters.

APIs expose information and data to customers and partners where and when it is needed via applications, websites and any number of on-premises or mobile devices. The proliferation of SaaS offerings and the need to link them with on-premises software has caused an explosion in the number and type of APIs. Thus, managing them while ensuring security and scalability is becoming extremely important. The API management market is relatively new, and Mashery was one of the first out of the blocks. With Mashery’s assets, Intel now has API management technology, which is required for both cloud and mobile device integration.

Intel already sells a combined product, Intel Expressway API Manager (EAM), which combines Mashery’s API management technology with its own security capabilities for API execution. Intel’s EAM can securely expose and scale APIs by enabling the controls needed for compliance and data protection.

This isn’t Intel’s first acquisition in this sector, but is likely its largest. Though financial details were not disclosed, we understand that Mashery generated about $10m in revenue last year, and was set to double this year. We haven’t yet pinned down the price paid, but rumors so far peg the deal value at north of $100m. Intel had previously picked up API security capabilities with the small acquisitions of Sarvega in August 2005 and Conformative Systems in February 2006, yielding software designed to take better advantage of its multicore processor architecture.

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An ‘affinity acquisition,’ as LANDesk picks up divested Shavlik division

Brenon Daly

Contact: Brenon Daly

As a company that has been cast off twice from its larger corporate owners, LANDesk Software might have a special affinity for its latest transaction: the acquisition of Shavlik Technologies, which is being cast off by VMware. The deal adds Shavlik’s technology for managing and securing physical and virtual environments to the systems management vendor’s portfolio. Inside VMware, Shavlik was known as VMware Protect; under LANDesk, the business is called Shavlik Protect.

LANDesk’s purchase effectively unwinds VMware’s acquisition of the security company in mid-2011. At the time, we estimated that the virtualization giant paid about 3x sales for Shavlik. We understand that today’s deal went off at a more representative multiple for divestitures. That said, Shavlik, which never took any outside funding, is known to generate healthy cash flow. (Subscribers to The 451 M&A KnowledgeBase can click on the following links to see our estimated revenue and price for both the original VMware-Shavlik transaction as well as today’s LANDesk-Shavlik pairing.)

The purchase of the carved-out business represents the third deal LANDesk has done since private equity (PE) firm Thoma Bravo carved the company itself out of Emerson Electric in August 2010. (That transaction came almost exactly eight years after another PE shop, Vector Capital, carved LANDesk out of Intel.) On the other side, VMware’s sale of Shavlik is its second divestiture announced in 2013, as the virtualization giant works through a previously announced restructuring.

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Rackspace adds error monitoring with Exceptional buy

Ben Kolada

Contact: Ben Kolada, Agatha Poon

Rackspace has acquired developer-focused Web application error-monitoring and hosting startup Exceptional Cloud Services. The acquisition is meant to drive further adoption of Open Cloud. With Exceptional’s offerings, Rackspace is positioned to be a one-stop shop for developers with its cloud platform, network management and application performance monitoring.

Terms weren’t disclosed. Exceptional was founded in 2010 and had 10 employees at the time of its sale (the transaction closed last Friday). The company hadn’t taken outside funding. We’d note that Exceptional’s founder, Jonathan Siegel, already had experience with a company that sold to Rackspace. Siegel was an adviser to Cloudkick, which Rackspace bought in December 2010 for about $30m.

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