Category: SaaS

A transatlantic shopping trip for Concur

Brenon Daly

Contact: Brenon Daly

After being out of the M&A market for two years, Concur Technologies reached across the Atlantic earlier this week for a small Paris-based startup to help expand its business in Europe. Currently, business outside of the US accounts for about 10% of overall revenue at Concur. The company has indicated in the past that it plans to triple the level of international revenue in the coming years. Concur said it will pay up to $40m in cash and equity for Etap-On-Line (including unspecified earnouts), but guided not to expect much from the acquisition right now. (Deutsche Bank Securities advised Concur on the transaction.)

There are a number of reasons for the muted initial expectations for the purchase. First, much of Etap’s revenue will likely get washed out because of differences between French and US accounting standards. (Not that there was likely a lot of revenue to start with.) And even the sales that Etap has booked have come primarily from offering its travel and expense management software through licenses. That means Concur will have to convert the technology to its on-demand platform.

Of course, Concur knows a bit about that process, having transformed itself earlier this decade to an on-demand software provider from the license model. In the words of one banker, the transition was ‘a valley of death’ experience for Concur. But now the company has emerged from the valley and carries the rather alpine valuation of about 6 times fiscal year sales. (Concur currently has an enterprise value of about $1.5bn, compared to the projection of about $250m in revenue in its current fiscal year, which wraps at the end of September.) A number of other software firms quietly (and not so quietly) envy Concur’s makeover – and how it has played on Wall Street. Shares of Concur, which spent much of 2001 at less than $1, closed at nearly $37 on Thursday.

SaaS deals echo in security industry

Brenon Daly

Contact: Brenon Daly

There are more than a few echoes of Symantec’s purchase of MessageLabs last October in McAfee’s reach last week for MX Logic. In terms of strategy, both acquisitions added millions of end users of on-demand security to the two largest security software companies, which have been slowly looking to increase that side of their business. MessageLabs had attracted more than eight million users at 19,000 customers, while MX Logic brings more than four million users at 30,000 customers.

As far as deal terms go, both buys were done at a similar valuation. Symantec paid 4.8 times trailing sales for MessageLabs, while we estimate McAfee is paying closer to 4 times trailing sales for MX Logic. (If we include the potential $30m earnout in the price, the multiple hits 4.9 times MX Logic’s trailing revenue.) And, we would add that both deals stand as the largest security transactions of their respective years, with the sales of these private software-as-a-service (SaaS) companies eclipsing the prices paid even for public vendors. Symantec shelled out $695m in cash for MessageLabs, topping McAfee’s $497m pickup of Secure Computing as the largest security deal in 2008. So far this year, McAfee’s $140m purchase of MX Logic is the industry’s biggest security transaction, slightly ahead of the contested take-private of Entrust for $124m.

We also suspect that both SaaS acquisitions will pay dividends for Symantec and McAfee. (We have heard from several sources that Symantec is particularly high on its reach across the Atlantic for MessageLabs.) Undoubtedly, these deals will deliver a higher return than the other large SaaS security acquisition, Google’s pickup of Postini. Done two years ago, that buy handed Postini a valuation that’s twice as rich as either MessageLabs or MX Logic. But unlike the moves by Symantec and McAfee, Google didn’t snag Postini for its security offering. Instead, the search giant had the ill-conceived notion that a startup could serve as the platform for its push of Google Apps. Not surprisingly, that idea hasn’t panned out. We certainly haven’t heard much about Postini in the two years since the search giant bought it.

A ‘paper’ windfall in LogMeIn IPO

Brenon Daly

Contact: Brenon Daly

One of the investment banks that profited the most from Wednesday’s strong debut of LogMeIn wasn’t even on the prospectus. Instead, it was in the prospectus. McNamee Lawrence, an advisory shop with no underwriting business, realized a tidy little $2m windfall from the IPO.

Heading into the offering, McNamee Lawrence held some 99,000 shares in LogMeIn that it picked up in late 2004 for helping to place the startup’s series A funding round, as well as other advisory work. McNamee Lawrence took a small amount of money off the table, selling some 21,000 shares at the $16 initial pricing of LogMeIn. That netted the bank about $336,000. It still holds some 78,000 shares, which had a paper value of about $1.6m, based on the price of LogMeIn shares on Thursday afternoon.

Granted, the holdings of McNamee Lawrence are only a tiny slice of the overall 21.4 million LogMeIn shares outstanding. And the firm’s stake is a fraction of the major owners of LogMeIn, Prism Venture Partners and Polaris Venture Partners. Prism holds shares worth about $80m, while Polaris, which sold $7.4m worth of shares in the offering, still owns a chunk valued at about $59m.

Still, the shares represent a nice windfall for McNamee Lawrence. (In addition, some of the firm’s partners put money individually into LogMeIn in the company’s seed round in early 2004.) Of course, the practice of taking paper as payment was pretty common across all kinds of service providers back in the Bubble Era, when startups routinely handed out options and warrants to cover bills from banks, lawyers and even landlords. After so many people got burned by taking worthless options and warrants in the early 2000s, however, cash returned as the currency of choice.

Imaging an alternative exit for LogMeIn

Brenon Daly

Contact: Brenon Daly

With LogMeIn set to price its IPO later today, the next ‘buyer’ of the company will be public market investors. The on-demand vendor will sell 6.7 million shares in an offering that’s being led by JPMorgan Chase and Barclays Capital. LogMeIn set an initial range of $14-16 per share, implying a market capitalization of $300m-340m. It will likely price above that range, and we expect strong demand for LogMeIn shares once they start trading under the ticker ‘LOGM’ on the Nasdaq.

As the company gets set to realize that exit (after more than 17 months on file with the US Securities and Exchange Commission), we thought about where it might have looked had it opted for the other possible exit, a trade sale. We’re not suggesting that LogMeIn was dual-tracking by any means. In fact, although it kept its S-1 alive while so many other tech companies pulled their IPO paperwork, that move wasn’t driven by desperation. LogMeIn doesn’t actually need the proceeds. It is heading into the offering with no debt and $27m in cash on its books, having generated cash for the past nine quarters. Even on a GAAP basis, the firm has been profitable for the past three quarters.

Thus, LogMeIn doesn’t need the offering any more than it needs a trade sale. And to be clear, we hadn’t heard that the company was pursuing anything other than an IPO. Nonetheless, as we did some blue-sky thinking, we quickly came up with two deep-pocketed companies that would have been very smart to nab LogMeIn before it went public. Keep in mind, too, that the two primary rivals to LogMeIn are GoToMyPC and WebEx Communications, firms that have been snapped up by tech giants Citrix and Cisco, respectively.

So here’s our hypothetical short list of possible buyers for LogMeIn. Symantec already has several products that compete with LogMeIn (notably, PC Anywhere), but it is a key partner for LogMeIn. And Big Yellow has shown that it is ready to go shopping to bolster its software-as-a-service business. It paid $695m, or almost 5x trailing 12-month sales, for MessageLabs last October, its largest deal in more than a year and a half. Alternatively, Dell knows all about picking up companies just before they go public. It paid a double-digit multiple for its push into storage with the $1.4bn EqualLogic purchase in November 2007. However, Dell has also done a quartet of deals to build out its services offerings, some of which are offered by LogMeIn and others that are complementary. In addition, the customer profiles of the two vendors would synch pretty well, since LogMeIn gets roughly 80% of its revenue from the SMB market.

June gloom

Brenon Daly

Contact: Brenon Daly

Whether or not the rebound got ahead of itself, the market has certainly tightened up this month. And no, we’re not talking about the equity market. (Although the sentiment is applicable there, as well, with the Nasdaq recently dipping to its lowest point in a month.) Instead, we’re talking about the M&A market. After a furious start to the second quarter, dealmaking has slipped back to the sluggish pace we saw in the first few months of 2009.

A quick glimpse at the numbers: In both April and May, we saw some 250 deals worth about $20bn in each month. So far this month, we’ve had about 205 deals worth a scant $8bn. With just three business days to go in June, we’re looking at spending being down about 60% from what it was in each of the first two months of the quarter.

We’ve also noticed the recent return of a trend that we saw more often in the opening months of 2009: the involuntary sale. In both large and small transactions, sellers have increasingly found themselves forced to take any offer that comes in. We noted that this week in the startup world, as LucidEra was turned over to a workout firm to sell its carcass. And on a larger scale, bankrupt Nortel Networks gave up on ever emerging as a viable company and began the painful process of liquidation sales. The first deal gives some sign of the resignation: Nortel sold its most valuable unit for what is likely to be less than 1x cash flow.

Second-quarter deal flow

Period Deal volume Deal value
April 2009 263 $21bn
May 2009 242 $19bn
June 2009 205 $8bn

Source: The 451 M&A KnowledgeBase

End of a (Lucid)Era

Brenon Daly

Contact: Brenon Daly, Krishna Roy

After unsuccessfully trying to find a buyer for several months, LucidEra has turned itself over to a workout firm to sell off the patents and whatever else has value at the once-promising on-demand business intelligence (BI) vendor. We understand that CEO Robert Reid and the company’s board members have left LucidEra, replaced by Diablo Management Group. DMG, which got the mandate last week, has sole fiduciary control at LucidEra. A scrap sale, if it occurs, is likely within the next two months or so.

It’s a stunning fall for LucidEra, which was arguably the most visible startup in the market. Certainly, cofounder and former CEO Ken Rudin was one of the loudest – if not the loudest – evangelist for on-demand BI. (Rudin served as CEO until last July, when he assumed the role of chief marketing officer and turned the company over to Reid.) The company had raised some $23m from Crosslink Capital, Benchmark Capital and Matrix Partners over two rounds. We would note that if DMG does manage to sell LucidEra, the startups’ creditors will be first in line for payment, with any remaining funds then available to investors. LucidEra doesn’t have many creditor claims, but there are some.

In many ways, what initially allowed LucidEra to get going ultimately proved to be its undoing. From the beginning, the vendor tied its fate to Salesforce.com, specifically offering a pipeline reporting and analytics feature for the on-demand CRM vendor. That essentially made LucidEra an after-market add-on for Salesforce.com customers, which limited its market and always prompted questions about why Salesforce.com wouldn’t just offer that technology. It also got us wondering in a report two months ago why Salesforce.com wouldn’t just acquire LucidEra. That may still happen. If it does, however, Salesforce.com will be picking up just a fraction of what LucidEra had been when they last discussed a deal. And it will be paying just a fraction of the price, as well.

Intalio gets its rollup rolling

Brenon Daly

Contact: Dennis Callaghan

Intalio’s open source rollup has finally started to roll. The company recently took the wraps off a deal it actually did earlier this month, picking up open source CRM software vendor CodeGlide. The acquirer, which has raised some $45m in venture funding, said earlier this year that it planned to do as many as 10 acquisitions over the next two years. (Intalio indicated that it was eyeing small firms with only a dozen or so employees. For its part, CodeGlide had only four employees, all of whom have gone over to Intalio.)

Intalio has wasted little time in making CodeGlide’s software available as Intalio CRM and it plans to eventually make components of this software available under the AGPL open source license. While we can think of more exciting markets than CRM that Intalio could have bought its way into, the deal nonetheless makes a lot of sense, particularly when viewed in light of its Intalio Cloud offering.

In the same breath that it announced the CodeGlide acquisition, Intalio unveiled Intalio Cloud, which is an IBM or Hewlett-Packard server appliance preloaded with Intalio’s applications – both business process management (BPM) and CRM – along with elastic compute and storage utilities. The box is designed to be the basis for companies’ internal private clouds and is available as a managed service offering. It also powers Intalio’s own on-demand wares. So why does this all make sense?

Combine CRM, BPM and cloud infrastructure and you have the main ingredients for becoming a true platform-as-a-service (PaaS) vendor. Intalio will be able to make both its BPM software and new CRM software available on demand and now has the technology to allow customers to build and/or customize their own business applications; it can offer this technology in the cloud or via private clouds. Successful PaaS initiatives – think LongJump and Salesforce.com – require not only good development tools but also an actual application platform that underlies these tools, which are then used for building customizations, mashups and process applications on top of the platform. Less-successful PaaS offerings like those from Coghead, whose technology was built on Intalio’s software, were separate from an underlying application platform and found it harder to deliver on their promise (at least until Coghead was acquired by SAP).

It may take Intalio a few months to deliver on its PaaS vision, but the company is starting to get the right tools in place. What’s next on its shopping list? We would guess a mashup vendor.

Where might Omniture shop next?

-by Thomas Rasmussen, Kathleen Reidy

When we checked in with Omniture last month, we noted that it was likely to do a bit of shopping. My colleague Kathleen Reidy expanded on that recently with an in-depth report on the possible M&A moves by the analytics giant. Omniture has already shown itself ready to shop, having picked up five companies since its IPO in 2006. Those acquisitions, along with a solid organic growth rate, have helped to push up Omniture’s revenue seven-fold in the past three years. The company finished 2008 with $296m in sales. First-quarter results are due Thursday before the opening bell.

Having essentially consolidated its core market (except for a few private competitors), where might the giant shop next? We think a broader push into marketing automation seems a logical next step. Email marketing is one of the most active areas of Omniture’s Genesis ISV partner program. Potential targets in this space include Eloqua, a well-known and established player in marketing automation. The vendor pulled in an estimated $35m in revenue last year and has so far raised more than $40m in venture funding. Other potential targets include Silverpop, Right On Interactive and Marketbright. Like Mercado Software, which Omniture scooped up last October, all of these email marketing startups are Genesis partners.

Omniture’s acquisitions to date

Target Date Deal value Technology/Rationale
Mercado Software October 14, 2008 $6.5m Retail site search/merchandising
Visual Sciences October 25, 2007 $394m Web analytics market share
Offermatica September 7, 2007 $65m Multivariate testing
Touch Clarity February 14, 2007 $48.5m Behavioral targeting
Instadia January 18, 2007 $11.4m Web analytics market share – Europe

Source: The 451 M&A KnowledgeBase

Omniture: the optimistic opportunist

-Contact Thomas Rasmussen

After digesting its $382m double-down acquisition of competitor Visual Sciences last year, Web analytics firm Omniture is bullish on buying. At the Pacific Crest Securities conference last week, the company outlined its M&A strategy, which essentially boils down to one word: opportunistic. It tucked in its struggling competitor Mercado Software for $6.5m in November 2008, adding an estimated $12m to its top line. The company had raised $66m in venture capital over the past 10 years. Omniture told us some of Mercado’s large customers had in fact approached it to do the deal. Moreover, Omniture said its remaining privately held competitors Coremetrics and WebTrends are struggling. The company added that it’s seeing an increasing amount of their customers transition over (some even in mid-contract), and it’s ready to deal, as long as it’s at 2009-type discounts.

Not so fast, say the two firms, which we estimate ring up combined revenue of just south of $200m. WebTrends, which PE shop Francisco Partners took off of NetIQ’s books in 2005 for $94m, says that despite a shakeup in management, the company is well positioned. It cites profitability, consistent quarter-over-quarter growth, its highest revenue quarter in its history last quarter, and says it has no need for further funding from its rich backer. (Reports Thursday indicated that Francisco is set to begin raising a third fund, targeting at least $2bn.) Meanwhile, Coremetrics seems to have overindulged on venture capital, closing a $60m series E round last March, bringing its total raised to date to $111m. We tend to get skeptical when this happens, especially in this environment. However, CEO Joe Davis assured us that having shelved further funding-related expansion plans, the company has the majority of the latest round in the bank. Its January restructuring will return the company to cash-flow neutral this month, and cash-flow positive going forward, and it is on track to grow revenue 20% year over year. The CEO added, “Rumors of my death have been greatly exaggerated by my competitor.”

With more than $80m in cash and short-term investments, its profitable standing and surprisingly upbeat outlook, Omniture can certainly handle a few more tuck-ins. Will it scoop up its feisty rivals? At the moment, it certainly does not look like it. In fact, competitors Coremetrics and WebTrends, which haven’t been in the market since 2006 and 2007, respectively, say they are looking at doing some buying of their own and have the cash to do so.

Omniture M&A

Completed Target Enterprise value Revenue multiple Price per customer
November 2008 Mercado Software $6.5m 0.5x* $32,500*
January 2008 Visual Sciences $382m 5.0x $240,302
December 2007 Offermatica $65m 7.2x* $650,000

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

Bargains for SuccessFactors

Brenon Daly

Contact: Brenon Daly

Having organically built an on-demand business that cracked $100m in sales last year, SuccessFactors may be ready to do a bit of shopping. The switch comes a year after the human capital management (HCM) vendor told us that despite the company’s close ties to Jack Welch, it didn’t expect to do deals like the former General Electric chief executive.

But as valuations of smaller HCM players have been slashed, there may be some bargains out there that are too good to pass up, CFO Bruce Felt said recently. He added that the company has some $70m in cash and $33m in short-term investments. And in the fourth quarter of 2008, SuccessFactors generated operating cash flow for the first time, and the company indicated that would continue in 2009.

SuccessFactors would be looking to pick up technology, rather than make a large-scale consolidation move. (We would note that neither of the recent consolidation moves in the HCM market, Taleo’s $128.8m purchase of rival Vurv Technology and Kenexa’s $115m acquisition of BrassRing, has gone particularly well.) While SuccessFactors says it’s in the market, the company isn’t counting on deals to continue to boost its top line. It recently forecast 30% organic growth for this year. While that’s less than half as fast as it grew in 2008, it’s a pretty healthy clip during a recession.