Category: networking

Survey shows Elliot’s argument for Riverbed buyout weaker than perceived

Scott Denne

Contact: Scott Denne

Elliott Management’s thesis on its proposed $3bn Riverbed buyout is potentially flawed. The activist hedge fund says Riverbed should do more to capitalize on its ‘stable’ position in the WAN market. However, a survey conducted by TheInfoPro, a service of 451 Research, indicates that Riverbed’s WAN business might not be as stable as Elliott would like.

When asked last year about plans for spending on Riverbed products and services (about three-quarters of which is generated by WAN offerings), 24% of Riverbed customers said they would spend less in 2014, compared with 18% who said they would spend more. That’s a particularly negative outlook considering only 5% of survey respondents said they would decrease spending on WAN services overall in 2014.

Another worrisome sign: 4% of Riverbed’s customers said they would consider replacing Riverbed with a competing product, while a year earlier the same percentage told us they ‘might’ consider such a move.

The survey is starting to show truth: revenue growth for Riverbed’s WAN products is already slowing. The WAN business saw 4% YOY growth last quarter, down from 6% growth in the previous quarter.

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Wall Street skeptical of SolarWinds’ hot air

Scott Denne

Contact: Scott Denne Ben Kolada

A few rocky quarters aren’t going to get in the way of SolarWinds’ dealmaking as the network monitoring company pays $103m in cash for Confio in its second-largest deal to date. The timing is particularly noteworthy, given that SolarWinds issued revenue guidance below analysts’ expectations in each of the last two quarters and experienced blowback following its last acquisition.

SolarWinds’ stock is down 41% since the first of those two guidance announcements. Yesterday’s deal announcement sent it down another 3% as of midday. That’s better than the reaction it got from its last deal – the $120m purchase of N-able in May that chopped 12%, some $400m, from the company’s market value. (To be fair, the reception for N-able was due in part to the target operating a different business model in a different market than SolarWinds.)

However, analysts were comforted somewhat yesterday, as SolarWinds’ management hinted at a return to smaller tuck-ins rather than big ticket M&A. Excluding Confio and N-Able, SolarWinds’ median M&A deal size is $21.5m.

SolarWinds is valuing Confio at 6.9x last year’s booked revenue (we’ll have a longer report on the rationale for this deal in our next Daily 451). However, the valuation for its actual trailing revenue is a smidgen higher. (Click here to see our estimate of Confio’s trailing sales.) ArchPoint Partners advised SolarWinds on its sale.

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Extreme Networks doubles down with Enterasys

Contact: Tejas Venkatesh

In its first acquisition of a company in more than a decade, Extreme Networks announced the reach for a company its own size: fellow Ethernet switch vendor Enterasys Networks. While the $180m deal may seem aggressive at first glance, we see it more as an opportunistic buy designed to better compete in a market dominated by larger companies like Cisco and Huawei.

The deal values Enterasys, which generated $340m in sales for the year ended June 2013, at just 0.5x trailing sales. That’s a bargain price compared to the 1.2x multiple that Extreme currently garners on the public market. Further, the deal price is less than half of what Enterasys received in its takeover, when buyout firms Gores Group and Tennenbaum Capital Partners acquired the company in November 2005.

As a result of the deal, Extreme’s topline approximately doubles, and this should help the company compete better with larger firms, especially in winning large contracts. The two companies have almost no customer overlap, meaning the combined entity will instantly have more market breadth and a stronger sales force. We will have a full report on the transaction our next Daily 451 newsletter.

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Arbor reaches Down Under for network analytics startup

Brenon Daly

Contact: Brenon Daly

Three years after Arbor Networks sold itself to Danaher, the security company has announced its first transaction as part of the technology conglomerate. Arbor has picked up Packetloop, a bootstrapped, five-employee startup based in Sydney, Australia, that specializes in network security monitoring and analytics.

The addition of Packetloop takes Arbor far beyond its core offering and market, which, historically, has been selling DDoS detection products to service providers. While service providers still account for a majority of the company’s revenue, sales to enterprises now represent 40% of total revenue, and are growing faster than the service providers business.

The deal also fits into a growing trend of existing security vendors looking to add capabilities around data analytics and visualization, rather than using M&A strictly as a way to step into new infosec markets. Just last week, for instance, Click Security reached for fellow startup VisibleRisk, while earlier this summer, Proofpoint added an in-memory threat-scoring startup called Abaca Technology.

Even old-line Blue Coat Systems caught the trend, paying an uncharacteristically rich multiple for Solera Networks. In fact, much of the network forensic capabilities that Packetloop offers are directly competitive with Solera, which was acquired just three months ago in what we understand was a highly competitive process.

Ringing Wall Street

Scott Denne

Contact:Tejas Venkatesh Scott Denne

Virtual phone systems vendor RingCentral revealed its prospectus earlier this week, likely setting up an IPO for next month for the 14-year-old company. The offering comes as RingCentral continues to evolve from a hosted answering machine service to a full virtual phone systems provider. RingCentral now enables voice, text and fax communication across multiple devices, including smartphones, tablets, PCs and desk phones.

The four-year-long transition is paying off. RingCentral generated $73m in revenue in the first six months of the year, up nearly 40% from the same period last year. Advances in broadband communications have resulted in rapid growth of the number of business lines hooked up with VoIP. According to the Federal Communications Commission’s latest local telephone competition report, VoIP business lines grew 106% between the end of 2009 and last summer. Further, there’s still a lot of room for growth, as only 10% of business lines are currently VoIP-enabled.

In addition to expanding its product portfolio, RingCentral is also looking to move upmarket. The company, which counts 300,000 customers, mostly caters to businesses that have less than 10 employees. As it continues to grow, RingCentral is looking to land larger customers. That strategy makes sense because small businesses are more likely to disappear, and are more expensive to support than bigger companies with an in-house IT team.

When RingCentral hits the market, we figure it will command a premium valuation compared with rivals due to its superior growth. Its primary competitor 8×8 currently trades at roughly 6x trailing sales. But that company, which is smaller than RingCentral, only grew 19% in the first six months of the year – just half of RingCentral’s rate over the same period. As a result, we believe 7-8x trailing sales would be a good starting point for RingCentral’s valuation. Slapping that range on RingCentral, which generated $136m in sales for the year ended June 2013, would value the company at about $1bn.

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Positive outlook for network monitoring M&A

Contact: Tejas Venkatesh, Christian Renaud

In its first quarter as a public company, Gigamon beat both revenue and earnings expectations, pushing the company’s market value to $1bn. The network traffic visibility vendor reported on Monday revenue growth of 44% year over year. In mid-Tuesday trading, the stock was changing hands at $34, up more than 70% since its IPO six weeks ago. The strong growth shows the rising importance of network monitoring, which could make players in this sector hot properties for larger companies.

Network monitoring and analysis has become more important as networks – whether traditional, virtualized or hybrid – increasingly employ some component of public/private cloud technology. Virtualized and cloud-based networks are often ‘dark traffic’ to network monitoring tools, and Gigamon has announced offerings for both virtualized and cloud environments that will help address the dark traffic issue.

Network monitoring is still pegged as a relatively small market. (Gigamon management estimated the total addressable market to be $2-3bn during their analyst call.) However, we have seen public and private players such as NetScout, WildPackets and cPacket Networks continue to put up strong growth.

The continued growth of network traffic visibility providers could draw acquisition interest from deep-pocketed suitors such as Cisco, Juniper Networks and Brocade. The sector has already seen a fair bit of M&A activity: Danaher acquired Gigamon rival VSS Monitoring last summer for an estimated $180m, and Ixia paid $145m for Anue Systems around the same time. We would note that those deals went off at about 5x and 3x trailing sales, respectively. In comparison, Gigamon trades at more than 8x trailing sales, and that’s without any acquisition premium.

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How a change at the top got Juniper back into the M&A market

Brenon Daly

Contact: Brenon Daly

When Kevin Johnson arrived to take the top spot at Juniper Networks in September 2008, the networking giant hadn’t done an acquisition in nearly three years. Historically, the company had been a sporadic buyer of adjacent technologies, such as WAN optimization (Peribit Networks) and application acceleration (Redline Networks), but had stumbled badly in its $4bn ‘convergence’ play with NetScreen Technologies in 2004.

Although deal flow didn’t immediately start gushing when Johnson took over, investment bankers at the time noted that Juniper had begun taking meetings again, indicating the company was inching back toward the M&A market. The first deal under Johnson’s tenure – the $69m reach for Ankeena Networks – came in April 2010. Johnson announced earlier this week that he’d be stepping down from the CEO post as soon as a replacement is hired.

Since that print, if we had to characterize Juniper’s approach to M&A, we would call it ‘measured.’ Over the past three years, the chastened company has been clipping along at an average of three acquisitions per year, with an average price tag of about $80m.

Further, fully three of the eight companies that Juniper has acquired recently have been ones it previously put money into through its investment arm. That’s a relatively conservative approach to dealmaking, and certainly a much higher rate of ‘try before you buy’ than any other corporate venture program.

But then, given where the company was coming from, it was probably prudent for Johnson to move Juniper slowly along in its corporate development program. Nonetheless, the deliberate pace of Juniper’s M&A activity stands out when compared with rival Cisco Systems.

In the same previous three years that saw Juniper spend a total of $650m on eight acquisitions, Cisco dropped an astonishing $11bn on 29 companies, including writing checks of more than $1bn for three separate companies. Granted, Cisco has about 10 times the revenue – and 10 times the market cap – of its rival. Nonetheless, the discrepancy in dealmaking between the two networking rivals is striking.

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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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Thoma Bravo hopes to unlock value from Keynote in LBO

Brenon Daly

Contact: Brenon Daly

After focusing its recent M&A activity on rounding out existing portfolio companies, buyout shop Thoma Bravo made another ‘platform play’ on Monday, offering $395m for Keynote Systems. Under terms, the private equity firm will pay $20 per share, or a total of $395m, for the 18-year-old testing and measurement vendor.

The deal, which is expected to close by September, comes at a time when Keynote is struggling to put up growth. Business across its two operating units – the core Internet measurement products as well as the newer mobile testing offerings – have both been flat so far this fiscal year. Further, the company has seen its operating and net income drop this year as some customers have recently narrowed Keynote projects or put them off.

The price Thoma Bravo is paying reflects the operating challenges at Keynote, which traded above the $20 bid for much of 2011. The dividend-paying company holds nearly $60m in cash and short-term investments. Backing out that amount from the $395m equity value for Keynote gives an enterprise value of $335m, or about 2.7 times the $125m in trailing sales the company has put up.

Keynote’s valuation of 2.7x sales is almost exactly the midpoint of Thoma Bravo’s two previous take-privates, the $195m buyout of Mediware Information Systems last September and the $1bn acquisition of Deltek in August. Since those LBOs, the buyout shop has been busy doing deals to bulk up its portfolio companies, including two follow-on acquisitions for Mediware as well as recent bolt-on deals for Blue Coat Systems, LANDesk Software and Tripwire.

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Gigamon soars on debut

Contact: Tejas Venkatesh, Christian Renaud

A year after first filing its IPO papers, Gigamon finally debuted on the public markets Wednesday. The network traffic monitoring vendor sold 4.5 million shares at $19 each, raising $85.5m and creating $560m in market value. By midmorning, the stock changed hands at $25, up more than 35% from its debut price. Goldman Sachs & Co, Bank of America Merrill Lynch and Credit Suisse acted as lead joint book-running managers for the offering, with Gigamon trading under the ticker symbol GIMO on the NYSE.

The rapid growth of cloud computing and the move to dynamic virtual environments has created the need for increased visibility and control over network traffic. Gigamon’s revenue growth reflects that potential: sales have more than doubled since 2010, hitting $106m for the fiscal year ended in March. The company has managed that impressive growth while running solidly in the black, netting $7.6m in 2012.

Gigamon’s traffic visibility fabric combines hardware and proprietary software, offering independent traffic visibility across multivendor networks. Last year, the company also unveiled a software-only product, GigaVUE-VM, for cloud-based applications. This new release allows Gigamon to provide network managers with integrated visibility into their physical, virtual and cloud traffic. The nine-year-old company raised $23m in funding from Highland Capital Partners, which owns about one-quarter of Gigamon following the IPO.

The network monitoring sector has also seen a fair bit of M&A activity. For instance, Danaher acquired Gigamon rival VSS Monitoring last summer for an estimated $180m, or 5.1 times trailing sales. Around the same time, Ixia reached for Anue Systems, paying $145m, or 3x sales. Gigamon is currently trading at a market cap of $760m, or 7.2x trailing sales. Its larger size and impressive growth almost certainly helped garner a premium valuation compared with the trade sales in the market.

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