Category: SaaS

The Houses of Morgan are in demand for on-demand work

Brenon Daly

Contact: Brenon Daly

It turns out that the advisers for the largest-ever SaaS acquisition are also the busiest in terms of restocking the ranks of publicly traded subscription-based software companies. J.P. Morgan Securities, which banked SAP, and Morgan Stanley, which advised SuccessFactors, are upper left on the prospectuses of no fewer than five SaaS vendors currently in registration. Between them, the ‘Houses of Morgan’ have a fairly tight grip on the sector, leading the proposed IPOs of on-demand software shops including Eloqua, ExactTarget, Bazaarvoice, Jive Software and Brightcove.

As lead underwriters, the banks stand to pocket tens of millions of dollars in fees from the upcoming offerings. Additionally, they are likely to build on that initial relationship through other advisory services for the companies. For instance, J.P. Morgan co-led Taleo’s IPO in 2005 and, more recently, advised it on its $125m purchase of Learn.com. On an even bigger scale, Morgan Stanley led the IPOs of both RightNow and SuccessFactors and then advised them on their sales, a pair of deals that totaled a whopping $5bn.

SuccessFactors works the other side of the deal

Brenon Daly

Contact: Brenon Daly

In one of the quickest M&A turnarounds, SuccessFactors has gone from a seller to a buyer in just a matter of days. The human capital management (HCM) vendor announced over the weekend that it would be selling itself to SAP for $3.4bn in cash, the largest-ever SaaS deal. The ink was hardly dry on that transaction when SuccessFactors said on Tuesday that it will hand over $110m for Jobs2Web, a recruiting marketing platform with about 150 customers. (For the record, the mammoth SAP-SuccessFactors pairing is expected to close in the first quarter of 2012, while SuccessFactors’ purchase of the Minnesota-based startup should be done by the end of the year.)

The addition of Jobs2Web makes a great deal of sense for SuccessFactors, and in some ways, it shares some similarities to another deal earlier this year – salesforce.com’s $326m pickup of Radian6. In both cases, the startups added technology around mining social media sources and powerful analytics to expand the acquirer’s existing product portfolio.

There are even more similarities between Jobs2Web and Radian6, besides simply having numerals in their names. Both startups were founded far from any of the typical launch pads for tech companies. Jobs2Web has its headquarters in Minnetonka, Minnesota, while Radian6 was in the even more remote location of Fredericton, Canada.

But more importantly, both targets were incredibly capital efficient, each raising about $5m in VC on their way to a solidly valued exit. (Updata Partners was the sole institutional backer for Jobs2Web, which was advised in its sale by Raymond James & Associates.) According to our understanding, Jobs2Web garnered a valuation of roughly 6 times sales in its sale, while Radian6 was valued north of that.

SAP looks to SuccessFactors for success in the cloud

Brenon Daly

Contact: Brenon Daly

After struggling for years to build its own on-demand offering, SAP plans to buy its way into cloud-based software, handing over $3.65bn for SuccessFactors in what would be the largest-ever SaaS acquisition. The deal combines the largest ERP vendor, which has some 500 million users, with the fast-growing human capital management (HCM) provider. However, the acquisition, which is slated to close in the first quarter of next year, does face some challenges. J.P. Morgan Securities advised SAP on the transaction, while Morgan Stanley banked SuccessFactors, after leading its IPO four years ago.

SAP, which is 30 years older than SuccessFactors, has consistently pulled back the targets for its Business ByDesign SaaS suite since it started talking about it a half-decade ago. The difficulty in moving more quickly into a subscription-based software model is underscored by the fact that even after it drops $3.65bn to make SuccessFactors its cloud-based HCM product, SAP will continue to sell its own existing on-premises talent management offering. In fairness, we had our doubts about SAP’s previous big deal – the $6.1bn purchase of Sybase in mid-2010, which thrust the German giant into a host of new markets, including mobility and databases – but the early returns from that combination have been fairly solid.

However, when we compare SAP’s two most recent significant acquisitions, we can’t help but be struck by one gigantic discrepancy: valuation. SAP is paying a price-to-sales multiple that’s roughly twice as rich for SuccessFactors compared to the one it paid for Sybase. SuccessFactors is projected to do about $330m in sales in 2011, meaning it is garnering a rich 10 times revenue valuation, while Sybase traded at about 5x revenue. Obviously, SuccessFactors’ projected growth of 57% this year goes a long way toward explaining that premium, as does the fact that it’s a subscription-based business with 15 million subscribers. But even when compared with Oracle’s recent purchase of RightNow, which went off at about 6.6x trailing sales, SAP’s move seems pricey. We’ll have a full report on the transaction in tonight’s Daily 451.

J2: from a fax machine to an M&A machine

Brenon Daly

Contact: Brenon Daly

In reporting third-quarter financial results after Wednesday’s closing bell, j2 Global Communications not only posted record revenue and cash-flow levels but also highlighted the returns it has generated in its recent M&A spree. And the communication services provider, which has some $162m in cash and short-term investments in its treasury, hinted that more deals are coming. J2 has done three acquisitions so far in 2011, after eight in 2010.

The purchases come as part of a dramatic overhaul of the company, which has expanded through M&A from its core fax offering to now include a number of services for small businesses including email, Web-based collaboration and even marketing. Most recently, it has moved into online backup, buying three small startups – all of which are based in Ireland – just in the past year. The European acquisitions are also part of a larger effort at j2 to increase international revenue, which accounts for only about 15% of total sales.

Overall, j2 has spent almost $400m on M&A over the past half-decade. One of the reasons why the company has money to go shopping is that it generates a ton of cash each quarter. In Q3, j2 recorded $86m in sales and $37m in free cash flow (FCF), an enviable 43% FCF margin. And we should note that the cash is being generated as the company continues to grow at a healthy clip. It guided that sales for 2011 should come in at about $340m, which represents a 33% increase from 2010. Granted, much of that increase is coming from j2’s $213m all-cash purchase of Protus IP Solutions last December. (Protus had recorded $72m in the year leading up to its sale to j2.) But as the company has said in the past, it ‘isn’t picky’ when it comes to organic versus inorganic growth.

RightNow: A seller rather than a buyer

Brenon Daly

Contact: Brenon Daly

Ever since it raised $175m in a convertible debt offering last November, RightNow Technologies has been telling anyone who would listen that it intended to go shopping with some of that money. The move more than doubled the amount of cash on hand for the customer service automation vendor. And since RightNow was generating cash on its own, and had only a small share buyback program in place, it wasn’t like there were a lot of claims on the company’s treasury.

But with the $1.5bn sale to Oracle, RightNow’s M&A program has been snuffed out before it ever really got going. It would have been a dramatic change at the company, which had largely stayed out of the M&A market. Over the past decade and a half, RightNow has only tallied four deals with a total value of just $52m.

While RightNow was unlikely to ever be a big acquirer, we can’t help but make the larger point that the sale to Oracle removes yet another player from the pool of potential tech buyers. And that pool is constantly getting shallower, even just in terms of public companies. Along with RightNow, some 50 other tech vendors have been erased from the Nasdaq and the NYSE in just 2011 alone.

Oracle buys big, again

Brenon Daly

Contact: Brenon Daly

Announcing its third deal in just the past month, Oracle said Monday that it will pay about $1.5bn for customer service software provider RightNow Technologies. The purchase brings the acquisitive software giant even closer into competition with salesforce.com, which has also used M&A to expand its customer service offering. However, true to form, the deals by the rivals underscore their wildly different approaches to dealmaking.

For Oracle, bigger appears to be better. The price of its planned purchase of RightNow, which is expected to close by early next year, is a whopping 50 times larger than the amount salesforce.com spent on InStranet back in August 2008. (Salesforce.com handed over $31.5m for InStranet.) While RightNow counts more than 2,000 customers, InStranet had just 50 at the time of its acquisition. And, finally, another key difference: Oracle is valuing RightNow at more than 6 times trailing sales, which is three times the multiple salesforce.com paid for InStranet.

Of course, as the chief consolidator of the software industry, Oracle is accustomed to making big moves. In fact, its pending purchase of RightNow ranks as only its sixth-largest purchase. (It has done more than 80 deals over the past decade.) As a point of comparison, we’d note that Oracle’s single acquisition of RightNow is larger than the $1bn or so that salesforce.com has spent on the 18 deals it has announced in its entire history. We’ll have a full report on Oracle’s pickup of RightNow in tonight’s Daily 451.

Renaissance plays politics

Brenon Daly

Contact: Brenon Daly

It must be election season. That’s what struck us when we saw earlier this week that Renaissance Learning went ahead and accepted a buyout offer that valued the online education vendor at about 10% less than an unsolicited bid. To our ear, some of the material in the proxies filed in connection with the $455m leveraged buyout could very well have come from a campaigning politician. The deal closed earlier this week.

Consider the language that the company used in laying out why shareholders should follow the lead of the company’s cofounders, who controlled some 69% of the equity, and back the initial offer from buyout firm Permira: The deal would be ‘more favorable’ to the employees and the broader community than the unsolicited bid from rival company PLATO Learning. (In addition, Renaissance said PLATO’s offer would take longer and be less likely to close, in their view.)

The concern, presumably, is that there would be far more overlapping employees if the two companies were merged, resulting in more job cuts than if Renaissance were taken private and largely left to run as it had been running. Who knows, maybe if PLATO took the company over, the combined company would start with cuts in the executive ranks. If that were the case, the cofounders of Renaissance would go from majority owners to unemployed.

Don’t get us wrong. We’re all for not contributing to the already intractably high unemployment rate in the US. But as a public company, Renaissance has a fiduciary responsibility to all its shareholders, not just the ones in its hometown. It’s worth noting that Renaissance is incorporated in its home state of Wisconsin, rather than the typical location for incorporation, Delaware. (Roughly half of US companies, including PLATO, are incorporated in Delaware.) So that may go some distance toward explaining why the company made ‘jobs and community’ a part of its pitch.

Keynote adds to its mobile monitoring business

Brenon Daly

Contact: Brenon Daly

Moving to bolster its enterprise mobile monitoring portfolio, Keynote Systems said Monday that it will hand over $60m in cash for testing and quality assurance (QA) startup DeviceAnywhere. (Additionally, terms provide for a potential $30m earnout over the next two years, although Keynote indicated that any payments would likely be back-end loaded.) Keynote will finance the deal, which is expected to close in two weeks, entirely from cash on hand. There were no advisers on either side of the transaction.

DeviceAnywhere is based about five miles from Keynote’s headquarters in San Mateo, California, and will move most of its 119 employees into the building that Keynote owns. The startup had attracted more than 1,200 customers, although about 1,100 of those are developers with the remaining 100 being enterprises. DeviceAnywhere brings testing and QA capabilities for mobile websites and applications to Keynote, which has focused almost exclusively on monitoring. It generated about $20m on a trailing revenue basis.

Taken together, DeviceAnywhere and Keynote’s existing enterprise mobile monitoring unit would generate roughly $26m in revenue – a level that Keynote executives project could quadruple in the coming years. The purchase of DeviceAnywhere is Keynote’s first acquisition since April 2008. Since then, shares of Keynote have basically doubled, compared to a single-digit percentage gain for the Nasdaq over that period. Keynote will discuss the acquisition more fully when it reports fiscal year results on November 3.

SaaS giant salesforce.com thinks small

Brenon Daly

Contact: Brenon Daly

Just several months after putting money into Assistly in its second round of funding, salesforce.com decided Wednesday to pick up the whole startup for $50m. The purchase should help the SaaS giant extend its customer service offering, Service Cloud, to small businesses. Founded in 2009, Assistly had drawn in more than 1,000 customers, although not all of those are paying. (Salesforce.com declined to give a breakdown on paying vs. nonpaying customers, but indicated revenue at the startup was a tiny amount.)

The acquisition marks the third time salesforce.com has stepped into the M&A market to bolster its customer service product. Three years ago, it reached for InstraNet, a startup that was led by Alex Dayton, who continues in an executive role for the customer service offering at salesforce.com. A year ago, salesforce.com quietly added Activa Live. (Although terms weren’t disclosed, we suspect the bill for that purchase probably only ran in the single digits of millions of dollars.) The net result of those acquisitions – along with healthy organic growth – is that Service Cloud is now the largest single product outside salesforce.com’s core sales force automation product.

Additionally, salesforce.com says Assistly will be part of its upcoming launch of a ‘small business cloud’ product. In that, Assistly will be joining the collaboration offering that salesforce.com picked up with its acquisition of SMB-focused startup Manymoon in February. The reason for the new downmarket products is pretty clear when you remember that salesforce.com gets roughly one-third of its overall revenue from small businesses.

Buying and building at salesforce.com

Brenon Daly

Contact: Brenon Daly

At the rate Marc Benioff is going, we have to wonder how long it will be until he renames the company he founded. Or at the very least, shouldn’t Benioff, who founded salesforce.com in 1999 and continues to serve as the company’s CEO, be thinking about swapping the company’s current ticker (CRM) for something that captures the broad, all-encompassing vision for the ‘social enterprise’ that he laid out at last week’s Dreamforce?

After all, the company’s core sales force automation (SFA) product barely merited a mention at the conference. Instead, most of the attention was directed toward upgrades and expansions to the Chatter and Radian6 offerings, as well as moves to broaden its two main platform plays, Heroku and Force.com. As such, Dreamforce dramatically underscored just how much of salesforce.com’s future has been staked on its M&A program.

Of course, virtually all tech vendors use acquisitions to change the trajectory of their business, whether it’s a slight nudge in some new direction through a tactical purchase (Informatica comes to mind) or roll-the-dice-and-bet-the-company transformational transactions (Dell and, more painfully right now, Hewlett-Packard.) But hardly any other tech company (with the possible exception of VMware) has used M&A so consistently to expand beyond its original offering while still managing to preserve an acrophobia-inducing valuation.

Just consider the role that acquired companies played in announcements around salesforce.com’s conference:

  • Chatter has been bolstered by the purchase of two firms (GroupSwim and Dimdim), as has Service Cloud (InStranet and Activa Live). Service Cloud is salesforce.com’s largest non-SFA product.
  • The Data.com product, which was launched at the show, goes back to the purchase of Jigsaw Data in April 2010. It was further bolstered last week through a partnership with company records provided by Dun & Bradstreet.
  • Heroku was acquired last December, and salesforce.com noted at the conference that the platform currently has triple the number of customer applications built on it than it did a year ago.
  • The social media monitoring capabilities that salesforce.com obtained with its acquisition of Radian6, which was announced in late March, are only starting to make their way into the products but are a key part of the ‘social enterprise’ that the company has described.

Altogether, salesforce.com noted that non-SFA offerings – in other words, products and technology that got significant boosts through acquired IP or engineers – accounted for a full 20% of second-quarter revenue. (That was the first time the company has broken out revenue for its new products.) Given that salesforce.com booked nearly $550m in Q2 revenue, that would imply non-SFA sales of about $110m. To be clear, very little of that amount has come directly from the acquired companies, all of which were still in their early days. Instead, it’s the net result of the ‘buy and build’ approach at salesforce.com.