Category: networking

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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Mellanox buys Kotura for its interconnects

Contact: John Abbott, Tejas Venkatesh

New workload demands from large-scale Internet datacenters are driving M&A activity around interconnects, which are required to move large virtual workloads from server to server. Mellanox Technologies is the latest vendor to buy in this market, announcing on Wednesday an agreement to acquire Kotura for $82m in cash. Mellanox plans to use Kotura’s technology and patents to build end-to-end interconnects for datacenters, supporting 100Gbps Ethernet protocols.

Kotura designs, manufactures and markets application-specific silicon photonics circuits. Silicon photonics technology promises to provide a low-cost, high-performance means of connecting standard system modules together into more fluid pools of system resources. Nine-year-old Kotura raised $39m in venture capital funding from ARCH Venture Partners, ComVentures and other firms.

Mellanox will pay $82m in cash for Kotura, and expects to assume approximately $8m in equity awards. While respectable, our understanding of the price-to-sales valuation for Kotura does fall below what we estimate Lightwire received in its $271m acquisition by Cisco. (Subscribers to The 451 M&A KnowledgeBase can view our estimated revenue for Kotura here and for Lightwire here.)

Demand for datacenter interconnect vendors appears to be growing, as evidenced by a handful of relatively rich exits announced in the past two years. Intel is particularly interested in this market, having reached for Fulcrum Microsystems, Cray’s HPC interconnect hardware assets and QLogic’s InfiniBand assets.

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Taking it easy

Ben Kolada

Contact: Ben Kolada

J2 Global has announced the acquisition of Backup-Connect International, another characteristic play of its usual M&A strategy. Although its recent purchases of Ziff Davis and IGN Entertainment seemed to signal that j2 would focus on larger and inherently more difficult acquisitions, we read the company as still being more of an opportunistic acquirer – taking what it can if the taking is easy.

At a high level, the acquisition of Netherlands-based Backup-Connect is yet another geographic play meant to add global depth to j2’s business continuity services. With Backup-Connect, the company has now announced four acquisitions in this sector: two in Ireland, one in the US and now one in the Netherlands.

The fact that this is j2’s first foray into the Netherlands suggests that the country hasn’t historically been a strategic focus, although it does provide a handy base for continental European operations. Also, the company’s main dealmaker didn’t have to travel far to do the deal: j2’s global head of M&A, Jeroen van der Weijden, operates out of Amsterdam.

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Will Sprint side with strategy?

Ben Kolada

Contact: Ben Kolada

DISH Network’s $25.5bn offer for Sprint Nextel represents a 13% premium to SoftBank’s October bid, but its lack of mobile experience may ultimately cause the company to lose the deal. Stock plays a major component of both transactions (32% for DISH versus 30% for SoftBank), meaning the future value of either deal will be dependent on which company – SoftBank or DISH – will be able to better execute in the mobile market. Arguably, the answer is SoftBank.

Without a doubt, SoftBank understands the mobile market, and therefore would understand Sprint’s business more than DISH. Mobile is an entirely new arena for DISH. SoftBank, on the other hand, generated some $22bn in mobile revenue alone last year. To put that in perspective, that’s nearly double the total revenue DISH generated over the same period.

Meanwhile, we’d also point out that DISH’s investors already have doubts about the deal. Following the announcement, the company’s shares fell more than 5% throughout the day, though they did recoup some of the losses by midday.

Although Sprint hasn’t yet provided an official response to the DISH bid, we expect that it will staunchly defend itself against DISH, much like it is defending Clearwire against a DISH takeover.

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Packet Design picked up by PE shop with networking know-how

Brenon Daly

Contact: Brenon Daly, Peter Christy

Adding a second company to its portfolio, private equity (PE) firm Lone Rock Technology Group has picked up network analytics firm Packet Design. The acquisition of Packet Design brings the Austin, Texas-based PE shop much closer to its roots in networking than its other investment, business process automation vendor iGrafx.

Lone Rock was cofounded by Joel Trammel, who spent a decade as head of network flow monitor NetQoS before selling that business to CA Technologies for $200m in September 2009. A number of former NetQoS executives are now working at Packet Design, including the company’s newly appointed CEO Scott Sherwood, who ran sales at NetQoS. Packet Design was advised in the process by Mooreland Partners, while Northside Advisors worked the buyside. (Subscribers to The 451 M&A KnowledgeBase can click here for the full record on the transaction, including our proprietary estimate on the terms of the deal.)

In its decade in business, Packet Design pulled in about $65m in equity and debt backing. Like many other startups, however, it was heavy on technical expertise but light on business acumen. Packet Design sold elegant technical tools to a few of the most complex network operators but never truly expanded into much larger markets. The company has about 200 customers and, according to our understanding, roughly $10m in sales.

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Silver Spring (finally) makes it to Wall Street

Contact: Tejas Venkatesh

A year and a half after first filing its IPO papers, Silver Spring Networks has finally debuted on the public markets. The smart grid network company sold 4.75 million shares at $17 each, raising $81m and creating $750m in market value. The stock then promptly surged about 30% in its first hour of trading today.

The amount raised is only half the amount Silver Spring originally planned to raise when it filed its S-1 in the summer of 2011. It also pales in comparison to the money the company had already raised in the private markets. In its 11-year history, Silver Spring previously raised $330m in equity and debt capital from Foundation Capital, Kleiner Perkins Caufield & Byers and other firms.

Despite the first-day pop in trading, Silver Spring has attracted some bearish sentiment. For starters, the company, which has a high degree of customer concentration, reported that revenue actually declined 17%, year over year, to $197m in 2012.

Nonetheless, the offering valued Silver Spring at 3.8x trailing sales. That appears to be a fairly rich valuation, at least compared with recent acquisitions and even current trading multiples in the sector. In May 2011, Toshiba acquired energy management systems provider Landis+Gyr for $2.3bn, or 1.4x sales. Energy control networking platform vendor Echelon currently garners a market valuation of less than 1x sales. However, when we compare the three vendors, Silver Spring is the only pure-play smart grid network company.

Silver Spring’s valuation is also a recognition of the business opportunity in front of it. The company’s business rationale is straightforward: energy is an expensive and essential resource, for which demand is rising and supply is constrained. Silver Spring offers an IP-based network infrastructure that connects devices on a power grid, providing timely information to utilities and helping reduce energy costs and waste. Its hardware and software also allows utilities to bill consumers in an automated fashion, eliminating the need for manual reading of meters. Goldman Sachs and Credit Suisse, which also advised Landis+Gyr on its sale, led the offering, with Silver Spring trading under the ticker ‘SSNI’ on the NYSE.

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JDSU buys Arieso for location-specific telecom network intelligence

Contact: Tejas Venkatesh, Ben Kolada

JDS Uniphase has acquired UK-based Arieso, a provider of location-based telecom network intelligence software. The transaction is meant to help carriers alleviate bandwidth constraints caused by limited spectrum capacity.

Arieso provides location intelligence software that produces maps showing network traffic down to building-level resolution. This information, based on actual measurements from consumer devices, allows mobile operators to deploy small cells strategically or even offload traffic to Wi-Fi networks.

JDSU is paying $85m in cash for Arieso, which put up $27m in bookings last year. Assuming actual revenue is slightly below bookings, the deal probably values Arieso in the upper end of 3-5x revenue. That valuation is about one-quarter of what we estimate Intucell received in its sale to Cisco, but that valuation was certainly an outlier.

Perhaps a closer comparable would be Optimi’s sale to Ericsson in 2010 for $99m. We’ve previously heard the Optimi deal was valued at roughly 2-3x sales. Arieso raised $14.5m in funding from Add Partners Ltd and Qualcomm, among others. The company has marquee customers including AT&T, Telefónica and Vodafone. Arma Partners advised Arieso on its sale.

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Opera’s cautious move into video optimization

Ben Kolada

Contact: Ben Kolada

Coinciding with its fourth-quarter earnings release, mobile Web developer Opera Software has announced the acquisition of mobile video optimization startup Skyfire Labs for $50m in cash and stock, with an earnout potentially tripling that price. The deal is a strategic combination – bringing together Skyfire’s carrier-focused mobile video optimization offerings with Opera’s mobile browser products – but its conservative structure suggests that Opera isn’t yet confident enough to put all of its eggs into the video optimization market.

Using an enterprise value of $50m (Skyfire had $8m cash on its balance sheet), the purchase – Opera’s largest ever – is valued at 12.2x trailing revenue. However, if Skyfire’s sales live up to expectations, its price-to-projected revenue valuation would be a more palatable 2.9x. Architect Partners, which helped Skyfire raise its $8m series C round, advised the company on its sale. Skyfire had raised $41m in venture capital. (We’ve made our M&A KnowledgeBase record on the transaction, which includes full financial details and round-by-round funding information, freely available here.)

Besides the $50m upfront payment, Opera is on the hook for an earnout of up to $105m in cash and stock. We’d note that although Opera also just announced a $100m credit facility, it could elect to pay $79m of the earnout in stock.

Opera is no stranger to earnouts, using them in all six deals we’ve recorded for the company, but the sheer size of this earnout suggests that the company isn’t fully confident in the video optimization market’s potential. And rightfully so – nearly every video optimization vendor we know of has seen total revenue flatten over the past few years, and many are anxiously seeking exits. (For a longer report on the mobile video optimization market, click here.)

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Once indelibly on the market, Dell looks to go private

Brenon Daly

Contact: Brenon Daly

In the third-largest tech leveraged buyout (LBO), Dell will end a quarter century as a public company in a $24bn take-private led by Silver Lake Partners. The private equity firm will be joined by Michael Dell, who is maintaining a significant minority stake in the company that he will continue to lead once it goes private. The LBO comes after Dell has struggled for much of the past half-decade to recast its business away from the rapidly diminishing PC market.

As part of that shift, Michael Dell returned as CEO to his namesake firm in early 2007 and (somewhat belatedly) began an M&A spree that eventually totaled some 20 transactions with a tab of $10bn. The acquisitions got Dell into virtually every part of the tech landscape, including IT services (Perot Systems), security (SecureWorks, SonicWALL), networking (Force10 Networks), storage (Compellent, AppAssure) and infrastructure software (Quest Software).

However, the acquisitions and other strategic shifts that Dell has made have yet to show up in the company’s financials. Dell, which just wrapped its fiscal year, is likely to post revenue that’s nearly 10% lower than the previous year. The company’s operating income has dropped by about one-third.

Since Michael Dell returned to the corner office six years ago, shares of the company have lost about half their value. Rightly or wrongly, Wall Street still views Dell – which gets half its revenue from PC sales – as a low-value ‘box maker’ rather than a strategic supplier of IT products and services. In the end, Dell is exiting the market at just one-quarter the value it once commanded.

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Oracle sets its sights on networking, reaches for Acme Packet

Brenon Daly

Contact: Brenon Daly

After consolidating huge swaths of the software landscape, Oracle has turned its attention to networking with a landmark acquisition. The company will hand over about $2bn in cash for Acme Packet, which Oracle hopes will allow it to capture more business with service providers and enterprises as networks look to deal with higher-level traffic like voice and video in which Acme specializes. Acme – which gets about three-quarters of its revenue from product sales and the remaining one-quarter from maintenance and support – counts about 1,900 service providers and enterprises as customers.

However, Acme has run into difficulties recently. Sales dropped almost 10% through the first three quarters of 2012, and the company has found itself running in the red after years of profitable operations. Before Oracle’s bid, Acme shares had dropped more than 20% over the previous year, underperforming nearly all of the company’s beaten-down networking rivals. Even reflecting the premium, Oracle is acquiring Acme at just half the level that Acme commanded on its own as recently as mid-2011.

Not that Acme is ending its six-and-half-year run as a public company on the cheap. Oracle will hand over $29.25 for each share of Acme, or an enterprise value of $1.7bn. That works out to 5.9x Acme’s trailing sales, which is roughly inline with most of Oracle’s other big-ticket purchases. However, we would note that the 5.9x valuation is more than twice the median valuation for the 50 largest transactions over the previous year, according to The 451 M&A KnowledgeBase.

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