Category: SaaS

Will Iron Mountain soon be sipping a Mimosa?

Brenon Daly

Contact: Brenon Daly, Kathleen Reidy, Simon Robinson

For what was once a fairly staid Old Economy business, Iron Mountain has done a better job than most companies in acclimating itself to the digital age. The records management vendor has accomplished that with eight acquisitions over the past half-decade, picking up technology for online backup and e-discovery, among other offerings. The $158m purchase of e-discovery provider Stratify stands, in many ways, as Iron Mountain’s marquee acquisition for its digital business. It has maintained the Stratify name and, last November, turned its whole digital subsidiary over to Ramana Venkata, the founder and former CEO of Stratify.

After that purchase in October 2007, Iron Mountain stayed out of the market for more than two years, despite many adjacent sectors that it could buy its way into. (And, from what we remember of the past two recession-wracked years, prices for startups weren’t particularly steep.) The M&A drought ended last month with the pickup of a San Francisco-based services company, Legal Imaging Technologies, that provides electronic document conversion. Terms weren’t disclosed.

But now we wonder if that small buy might be followed by a large deal. Several sources have indicated that Iron Mountain may be looking to snare a digital-archiving startup. It had relied on its partnership with MessageOne, but since that company’s acquisition by Dell, Iron Mountain has moved on, partnering with Mimecast last April. The partnership – combined with the fact that both businesses deliver their offerings through a subscription model – makes an acquisition of Mimecast by Iron Mountain a logical fit.

However, the market has been buzzing recently with another possible pairing for Iron Mountain – Mimosa Systems. Although Mimosa has talked in the past about going public this year, we have always thought that an acquisition of the company was more likely. (It has raised $50m in backing and, according to one source, was tracking to about $40m in bookings last year.) While Mimosa’s technology is highly regarded, the fact that it’s on-premises rather than on-demand would pose some integration challenges. However, it does have an emerging cloud story that would likely be of interest to Iron Mountain.

salesforce.com: All dressed up and nowhere to go

Brenon Daly

Contact: Brenon Daly, China Martens

We noted late last week that it has emerged recently that salesforce.com did indeed make an (unannounced) acquisition to help bolster its upcoming enterprise collaboration product, Chatter. The purchase of GroupSwim, which had just 30 customers, was undoubtedly a tiny one. That’s been the case in the five previous buys by salesforce.com, as well.

But now, the market is buzzing that salesforce.com may be looking to take on a larger deal. Why else would a profitable company that already has $1bn on its hands raise another $500m in an upcoming convertible offering? If that sort of reasoning worked for Occam, then it’ll work for us. All that remains, then, is to figure out where salesforce.com is going to spend that money.

It turns out that coming up with a shopping list for salesforce.com is actually a bit more complicated than it is for many other companies. For starters, the firm positions itself as a platform vendor, which means that it is designed to be open and inclusive. That is exactly counter to M&A. So while it might make sense for salesforce.com to move into marketing automation (MA), for instance, by picking up Unica or Constant Contact Inc, a play like that would immediately alienate all other MA providers on AppExchange. (Currently, there are 29 different MA applications listed on AppExchange, among more than 170 applications in the broader ‘marketing’ category.)

Salesforce.com has worked around that by looking more to partner than purchase, as it did to co-create FinancialForce.com, a partnership with Unit 4 Agresso. Clearly, salesforce.com could afford to buy Unit 4 Agresso outright. (The Dutch company has a market capitalization of about $650m.) We suspect that partnerships might be the approach that salesforce.com uses to cover human capital management (HCM). A number of rumors have tied the CRM giant to either of the big HCM players, Taleo or SuccessFactors. (As an aside, we might be willing to pay money to listen to any M&A negotiations between salesforce.com’s laidback, New Age-y chief executive Marc Benioff and the blunt-talking, hard-driving CEO at SuccessFactors, Lars Dalgaard. We can only imagine the look on Dalgaard’s face if Benioff invited him to sit zazen, which wouldn’t be out of character for the salesforce.com honcho.)

So having scratched most names, what’s one company that we could imagine salesforce.com reaching for? InContact. The acquisition would boost salesforce.com’s Service Cloud, taking the firm even deeper into the call center. The (hypothetical) deal would fit nicely with InStranet, which salesforce.com acquired in mid-2008 for $31.5m, and would hardly break the bank. InContact has a market capitalization of merely $90m. And as a final bonus, salesforce.com would finally be able to shed its limited ticker ‘CRM’ in favor of the bigger, more encompassing ticker of ‘SAAS,’ which is what inContact currently trades under.

salesforce.com goes for a GroupSwim

Brenon Daly

Contact: Brenon Daly, China Martens

Almost two months ago, we noted that several sources had indicated that salesforce.com may have reached outside its own walls for a little help in getting its Chatter product out the door. (Salesforce.com showed off Chatter, an enterprise collaboration product, at its Dreamforce conference in November, although it is not yet available.) The official company line at the time was that Chatter was developed in-house, which is consistent for acquisition-averse salesforce.com. The vendor has done just six deals – all of them tiny – in the decade that it has been in business.

In recent days, it has surfaced that salesforce.com did indeed acquire a startup. A visit to the homepage of GroupSwim indicates that the company ‘is now part of salesforce.com.’ We have followed GroupSwim since mid-2008, with my colleague Kathleen Reidy initially writing that the startup’s pairing of semantic analysis with content sharing/collaboration appeared to be a promising approach in a rather crowded market. When we last visited with GroupSwim a year ago, the 15-employee firm claimed 30 customers. It was still living off angel money.

In contrast to the rather meager financial situation at GroupSwim, salesforce.com is closing in on an all-time price for its shares. (Current market capitalization: $8.6bn, which works out to a triple-digit P/E ratio on a trailing basis.) And the on-demand giant just priced $500m in a convertible note offering that will bring its total holdings of cash and marketable securities to $1.5bn. With such a rich treasury, salesforce.com could likely buy hundreds more startups like GroupSwim. Or maybe it’s thinking of something bigger?

Plenty of capital for Human Capital Management buyers

Brenon Daly

Contact: Brenon Daly

For the fragmented market segment called human capital management (HCM), we’d put the emphasis on ‘capital.’ Both of the two largest public HCM vendors (Taleo and SuccessFactors) have done secondaries in recent months, despite already having pretty fat treasuries. Taleo, which held some $77m in cash at the end of the most recent quarter, sold more than $130m worth of stock in late November. That offering came a month after rival SuccessFactors, which held $122m in cash, raised some $215m in its secondary.

Despite all the cash, neither player has been particularly concerned with using it to go shopping. SuccessFactors has never bought a company while Taleo has inked just one deal in each of the past two years. In May 2008, Taleo consolidated rival Vurv Technology for $128.8m in cash and stock. Last September, it spent $16m in cash for startup Worldwide Compensation, an acquisition that followed an initial early investment in the compensation management vendor. We have noted for some time that both SuccessFactors and Taleo are likely to be busy, and in fact, we heard gossip that SuccessFactors came very close to closing a deal at the end of 2009, but it fell through.

We were thinking about all this potential M&A last week, when one of the HCM rollups got rolling. Authoria, which is owned by buyout firm Bedford Funding, announced its first deal since it got snapped up in September 2008. We estimate that the $100m purchase of Peopleclick will more than double Authoria’s revenue. Not that the deal tapped out Authoria’s bank account, either. It still has some $700m to spend. Adding up the money the would-be buyers (both financial and strategic) have to shop in this market, we expect HCM deals to follow in 2010.

M&A ‘chatter’ around salesforce.com

Brenon Daly

Contact: Brenon Daly, China Martens

Official word from salesforce.com is that its recently announced Chatter product was developed in-house. And that would certainly be in keeping with the company’s history of staying away from M&A. Since it opened its doors a decade ago, salesforce.com has done just five tiny deals. The vendor certainly has one of the lowest ratios of total M&A spending (probably around $70m) to market capitalization ($7.7bn) of any of the big software vendors.

Nonetheless, there was some chatter (if you’ll pardon the pun) that salesforce.com may have acquired some technology from a small startup to shore up the recommendation engine portion of Chatter, a collaboration/social networking offering that’s slated to come out next year. The M&A speculation centered on a startup that perhaps provided some natural-language search capability. We would note that a small shopping trip by salesforce.com – if, indeed, there was one – to get some social networking/natural-language technology wouldn’t be without precedent. Rival CRM vendor RightNow tucked in HiveLive, which had just 25 customers, in a $6m deal last summer.

Whether or not salesforce.com went shopping for part of Chatter, it’s worth pointing out that the firm has used M&A as a way to go after Microsoft’s SharePoint in the past. In early 2007, the company picked up Koral, an early-stage content management startup that salesforce.com had effectively been incubating. (And on a smaller scale, several months after that, it quietly acquired a tiny social networking startup, CrispyNews.)

However, we’re guessing that those purchases, particularly the Koral deal, haven’t generated the returns that salesforce.com might have hoped. The vendor originally said that Salesforce Content – an add-on, extra-cost module based partly on Koral – could do to SharePoint (among other document management offerings) what salesforce.com did to Siebel in CRM. That hasn’t come close to happening. In fact, salesforce.com just announced that Content will be available free of charge to all customers.

Out with the old and in with the new at Compuware

Brenon Daly

Contact: Brenon Daly

Deal flow at Compuware so far this year has been out with the old and in with the new. The 36-year-old company sold off its testing automation and software quality business to MicroFocus for $80m earlier this year, and then last week, it put some of those proceeds toward covering its $295m purchase of Gomez. (Interestingly, Updata Advisors worked both the divestiture and acquisition for Compuware.)

The purchase of Gomez significantly bolsters Compuware’s application performance management (APM) business. It also dramatically changes the face that Compuware shows to Wall Street. Most investors know Compuware – if they know it at all – as ‘a mainframe company.’ (Indeed, roughly two-thirds of the firm’s product revenue comes from its mainframe business.) Even in a robust IT spending environment, the mainframe business is a slow-growing one.

While only a small slice of overall revenue, Gomez brings a predictable base of subscription revenue that’s been growing at a pretty good clip recently. In the first two quarters of 2009, Gomez increased revenue 25%. Granted, Compuware paid for that growth, valuing Gomez roughly four times as richly as Wall Street currently values Compuware itself. But the fact that Compuware shares actually ticked higher when the vendor announced the acquisition indicates that the deal has some support. (In contrast to, say, Wall Street’s punishment of Xerox shares on that company’s plan to pick up ACS.)

And Compuware is essentially paying the prevailing market valuation (5.5x trailing sales) for an on-demand company in its reach for Gomez. Undeniably, the firm could have found any number of targets available at a sharp discount if it wanted to consolidate a bunch of mainframe software providers. After all, Compuware has some experience with M&A, having inked nearly 40 deals since it went public in 1992. However, we would argue that few of those transactions have been as forward-looking as the addition of Gomez.

The dual-track is back

Brenon Daly

Contact: Brenon Daly

Derailed by the bear market for much of the past two years, the ‘dual-track’ is back. Witness Wednesday’s purchase of Gomez by Compuware. The application performance management vendor got snapped up for $295m after being on file to go public for some 17 months. But as this trade sale indicates, the dual-track is no longer necessarily a path to riches. In fact, Gomez sold for about half the multiple that other dual-track companies garnered in recent deals.

That’s by no means a knock on Gomez, which got a relatively handsome valuation of 5.5 times trailing revenue in its sale to Compuware. Instead, it’s simply a reflection of how much the equity markets have come down. Keep in mind that a buyer looking to take out a company that’s already filed for an IPO effectively has to outbid the public market. Obviously, the lower the indexes, the less an acquirer has to bid; the opposite is also true.

Back when the markets were buoyant, dual-tracking companies could pull off a double-digit multiple if they opted to sell. For instance, EqualLogic sold to Dell in November 2007 for 12x trailing sales, just three months after filing its IPO paperwork. (We would note that the timing of EqualLogic’s sale for $1.4bn in cash was impeccable. The Nasdaq promptly went on a nearly uninterrupted slide for the next 18 months that cut the index in half.) And even when the market was dropping, mobile software provider Danger Inc still got picked up by Microsoft for nearly 9x trailing sales. Danger filed its prospectus in mid-December 2007, just two months before Microsoft snagged the company.

Of course, both of those previous dual-track deals were inked when the Nasdaq was higher than it currently is. And if we compare the valuation that Gomez got with other publicly traded SaaS companies, 5.5x trailing sales for an unprofitable, relatively small on-demand company starts to look pretty enticing. Add to that instant liquidity in the form of cash, rather than locked-up shares, and that’s a bid that most backers would hit every time.

Intuit mints a rich deal

-Contact Thomas Rasmussen, Brenon Daly

We might be inclined to read Intuit’s recent purchase of Mint Software as a case of ‘If you can’t beat ’em, buy ’em.’ The acquisition by the powerhouse of personal finance software undoubtedly gives the three-year-old startup a premium valuation. Intuit will hand over $170m in cash for Mint, which we understand was running at less than $10m in revenue. (Although we should add that Mint had only just begun looking for ways to make money from its growing 1.5-million user base.)

More than revenue, we suspect this deal was driven by Intuit’s desire to get into a new market, online money management and budgeting, as well as the fear of the prospects of a much smaller but rapidly growing competitor. (Intuit and Mint have been talking for most of this year, according to one source.) In that way, Intuit’s latest acquisition has some distinct echoes of its previous buy, that of online payroll service PayCycle. For starters, the purchase price of both PayCycle and Mint totaled $170m. And even more unusually, bulge bracket biggie Goldman Sachs advised Intuit on both of these summertime deals. (Remember the days when major banks would hardly answer the phone for any transaction valued at less than a half-billion dollars? How times change.) On the other side of the table in this week’s deal, Credit Suisse’s Colin Lang advised Mint.

Intuit M&A, 2007 – present

Date Target Deal value
September 14, 2009 Mint Software $170m
June 2, 2009 PayCycle $170m
April 17, 2009 BooRah <$1m*
December 3, 2008 Entellium $8m
December 19, 2007 Electronic Clearing House $131m
November 26, 2007 Homestead Technologies $170m

Source: The 451 M&A KnowledgeBase *451 Group estimate

‘What’s up with Omniture?’

Brenon Daly

Contact: Brenon Daly

It wasn’t quite shouting ‘fire’ in a crowded theater, but an early Tuesday afternoon development at an investment conference concerning Omniture certainly sparked a firestorm of speculation. During the luncheon at ThinkEquity’s 6th Annual Growth Conference in San Francisco, word came out that Omniture had scrapped its presentation, which had been scheduled for 1:30 p.m. PST. Chief executive Josh James was slated to speak.

Immediately, the money managers began trying to read between the lines. Was the company in play, or had James just missed his flight or something like that? Speculation was flying around the lunch tables and hallways, with people pulling in all sorts of information. One guy noted that the company’s CFO didn’t show up at his scheduled presentation at Deutsche Bank’s technology conference on Monday, either. Another chimed in that maybe executives were delayed by the heavy thunderstorms in Salt Lake City, where Omniture is based. Meanwhile, both the price and trading in shares of Omniture was picking up, after just bumping along up to that point.

As more people at the ThinkEquity conference started gossiping about Omniture, consensus grew that something big was brewing at the Web analytics firm. By the time the stock was halted, just ahead of the closing bell, speculation had shifted to certainty: Omniture was getting taken out. The only question was who was nabbing the company. For the record, not a single one of the hallway matchmakers picked Adobe Systems as the buyer. (Under terms of the deal, Adobe will hand over $21.50 per share, or $1.8bn, for Omniture.) Instead, the names that surfaced as potential acquirers of Omniture included Microsoft, Google and Salesforce.com.

Will Taleo exercise its M&A option?

Brenon Daly

Contact: Brenon Daly

Having crossed the anniversary of its acquisition of Vurv Technology earlier this summer, Taleo recently indicated that it is looking to return to the M&A market. (Shares of the human capital management vendor trade essentially where they did when the company closed its $128m consolidation play with Vurv, while the Nasdaq is down about 12% over that same period.) Taleo’s pickup of Vurv was its largest-ever transaction, roughly doubling the number of customers for the company. The success that Taleo has enjoyed with migrating Vurv users to its own platform stands in sharp contrast to the other main consolidation play by a publicly traded rival, Kenexa’s $115m reach for BrassRing in 2006.

If we had to speculate on Taleo’s next M&A move, we suspect it would involve exercising a kind of ‘call option’ that it has on a startup. What do we mean by that? Last summer, when Taleo had its hands full with Vurv, it also made a $2.5m equity investment in a Redwood City, California-based startup called Worldwide Compensation (WWC). So rather than take on another acquisition immediately, Taleo smartly structured its investment – its only such investment – to give it right of first refusal to pick up all of WWC at any time through the end of 2009.

The investment in WWC comes with a partnership that adds WWC’s compensation management offering to Taleo’s core performance management products. In the second quarter, Taleo reported that it had three joint deals with WWC involving enterprise customers. As pay-for-performance offerings get more widely adopted, we could certainly imagine a case where Taleo would want to bring WWC in-house. In that regard, we might view the WWC investment as just a ‘try before you buy’ arrangement for Taleo.