Category: SaaS

CallidusCloud’s accretive acquisitions

Brenon Daly

Contact: Brenon Daly

With the $4m purchase of assets from ViewCentral, CallidusCloud has added on to one of its first add-on businesses. The company, which started life 20 years ago selling sales compensation management software, has used a bakers’ dozen deals since 2010 to expand its portfolio into software for employee hiring, marketing automation and on-the-job training. ViewCentral brings billing and payment technology to CallidusCloud’s learning management offering, a product that has its roots in the mid-2011 acquisition of Litmos.

By themselves, the small transactions, which have cost the company an average of just $5m a pop, aren’t all that significant. But collectively, they have expanded the market for CallidusCloud and given it the opportunity to increase high-margin revenue by selling additional products. (In 2015, the company said it did more than 80 multi-product deals.) CallidusCloud’s strategy of inorganic growth also stands in sharp contrast to rival Xactly, which has stayed out of the M&A market as it has maintained its focus on selling its core sales compensation management offering. (See our recent report on Xactly’s strategy and market position.)

Obviously, the M&A activity at the two companies isn’t the sole difference between CallidusCloud and Xactly, any more than it fully accounts for the relative valuation discrepancy between them. Still, it is worth considering how the acquisition-based portfolio expansion has paid off for CallidusCloud, at least in its standing on Wall Street. CallidusCloud currently garners twice the valuation of its smaller rival. (CallidusCloud trades at about $930m, or 4.4x times 2016 projected sales of $212m, compared with Xactly, which trades at $215m, or 2.3x times this year’s projected sales of $95m.) Further, since it came public last June, Xactly has shed about one-fifth of its value, while CallidusCloud shares are slightly in the green over that period.

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After a decade of dominance, what’s next for AWS?

Brenon Daly3 Comments

Contact: Brenon Daly

Even as it begins its second decade of life today, there’s an undeniable sense that Amazon Web Services (AWS) is only getting started. From a standing start in March 2006 with a single storage product, AWS has created a profitable tech behemoth that is gobbling up huge chunks of the IT landscape. (For a deeper look at how AWS has gone about upending the multibillion-dollar markets where it operates, see a recent report from my colleague Owen Rogers on how AWS handles the pricing and delivery of its vast array of services.)

On its own, AWS is easily worth more than $100bn, a remarkable bit of value creation that’s been done almost entirely organically. Amazon has almost exclusively used R&D – rather than M&A – to build AWS. For the most part, the AWS cloud offering has been developed through reallocation of existing assets and engineering instead of acquiring those things.

In terms of corporate strategy, that sets Amazon and its AWS business apart from most other tech companies, which tend to default to buying rather than building. Each year, tech vendors collectively spend hundreds of billions of dollars expanding their product portfolios and addressable market, only to struggle to put up any growth. (To take one extreme, consider IBM, which has seen annual revenue drop from roughly $100bn in 2013 to less than $80bn this year. In that same period, Big Blue has spent more than $8.6bn on 39 acquisitions, according to 451 Research’s M&A KnowledgeBase.)

The organic value creation at AWS stands out even more when compared with even the biggest and best tech deals. Consider the case of VMware. EMC’s purchase of the virtualization startup in late 2003 for $635m is rightfully cited as one of the most successful tech acquisitions in history. VMware’s market valuation of $21.2bn is currently dictated by terms of Dell’s pending pickup of VMware’s parent, EMC. (Before the transaction was announced, VMware had a market cap of about $34bn.)

Even on an unaffected basis, AWS is at least three times more valuable than VMware. And the case could certainly be made that the gap between the two companies will only widen in the future. After all, AWS is now larger than VMware and growing nearly eight times faster than VMware, which has slowed to a single-digit percentage rate. (AWS increased revenue a stunning 72% to $7.9bn in 2015.) Further, AWS has a large and growing market opening in front of it. 451 Research’s Market Monitor forecasts that the market for cloud computing ‘as a service’ – which includes PaaS, IaaS and infrastructure software as a service (ITSM, backup, archiving) – will hit $21.9bn this year and more than double to $44.2bn by 2020.

Source: 451 Research’s Market Monitor

Wrapping a ‘blue coat’ around SaaS apps

Brenon Daly

Contact: Brenon Daly

For the second time in about three months, 20-year-old infosec vendor Blue Coat has bought its way into the cloud, paying an astronomical multiple for cloud application control startup Elastica in a $280m deal. Paired with its recent purchase of Perspecsys, Blue Coat has rung up a $400m bill in building out an offering to help secure SaaS applications. That makes it the biggest buyer in this nascent market.

We view the pickups of Perspecsys and Elastica as a bit of a portfolio update and refresh ahead of what we expect to be an IPO for Blue Coat in early 2016. As one of the few large-scale infosec providers, Blue Coat has attracted acquisition interest in recent years. Before its take-private in late 2011, the company was rumored to have drawn a bid from HP. More recently, Raytheon was thought to be considering a run at Blue Coat before nabbing fellow PE-owned network security firm Websense instead. Earlier this year, Blue Coat’s original PE owner, Thoma Bravo, sold the company to Bain Capital. (Incidentally, Goldman Sachs worked Blue Coat’s LBO as well as the secondary transaction.)

Subscribers to 451 Research can see our report on this deal – including valuation, market context and integration outlook – on our website later today and in tomorrow’s 451 Market Insight.

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In the red-hot SaaS SI market, which is the next shop looking to sell?

Brenon Daly

 

Contact: Brenon Daly

With IBM picking up Meteorix, we hear there’s another Workday-focused SI currently on the market. CPSG, a Dallas-based shop, is slightly bigger than Meteorix, as well as much more profitable, according to our understanding. And it’s seeking a much richer valuation on its exit.

CPSG posted $25m in revenue in 2014, and the company is reportedly forecasting $35-40m for full-year 2015. Unlike other software implementation firms, however, CPSG throws off a fair amount of cash. It should generate more than $10m of EBITDA this year.

The growth and cash flow at CPSG have the company and its advisers at Robert W. Baird & Co. looking for a top-dollar exit. Current second-round bids are coming in at roughly $140m. (For comparison, subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for the valuation IBM paid for Meteorix.)

Assuming CPSG does print, it would be the latest in a string of SaaS application implementation vendors to sell. Just in the past two months, we have seen three significant SIs snapped up by major service providers in a shopping spree that totals more than $600m. Moreover, these buyers are paying 2-3x their own valuations in their acquisitions, reflecting just how desperate they are to bulk up their practices in the fast-growing SaaS space.

Recent SaaS-focused SI M&A

Date announced Acquirer Target Description Deal value
August 11, 2015 CSC Fruition Partners ServiceNow SI See 451 Research estimate
September 15, 2015 Accenture Cloud Sherpas Salesforce, ServiceNow SI Not disclosed
September 28, 2015 IBM Meteorix Workday SI See 451 Research estimate

Source: 451 Research’s M&A KnowledgeBase

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Microsoft adds Adallom

Brenon Daly

Contact: Adrian Sanabria Brenon Daly

Continuing its accelerated shopping spree, Microsoft has reached for infosec startup Adallom. Although terms weren’t released, reports from newspapers in Israel, where Adallom has its roots, peg the price at $250m-320m. Assuming those reports are reasonably accurate, the acquisition would be larger than our understanding of the Aorato buy last November. Aorato stands as Microsoft’s most recent security purchase, and the technology will run alongside the just-acquired technology from fellow Israeli company Adallom.

The Adallom pickup fills a gap between cloud-based IAM and third party SaaS products, allowing Microsoft customers to add much broader control over user authorization and activity within internal (Office 365) and third-party SaaS applications such as Salesforce, Workday and Google Apps. This extension of user permissions and directory services creates a layer of monitoring and control not previously possible in the traditional enterprise. Also, with Office 365 as one of the most popular services for vendors such as Adallom to enhance, Microsoft now has the opportunity to offer much greater control, visibility and security to existing customers.

Microsoft’s purchase of Adallom is the tech giant’s twelfth transaction of 2015, which is twice as many as it has averaged in the same period each year over the past half-decade. Moreover, virtually all of the companies that Microsoft has snagged this year have been relatively small startups. (All but one of the startups acquired in 2015 has raised $50m or less in total funding.) In years past, Microsoft has typically announced a 10-digit deal (e.g., Nokia devices, Yammer, Skype) along with the technology tuck-ins. Of course, that shift to smaller targets might have something to do with the billion-dollar write-downs Microsoft has made on several of its larger acquisitions inked under previous CEO Steve Ballmer.

Recent Microsoft M&A activity

Period Number of announced transactions*
January 1 – September 8 2015 12
January 1 – September 8 2014 7
January 1 – September 8 2013 7
January 1 – September 8 2012 5
January 1 – September 8 2011 3
January 1 – September 8 2010 0

Source: 451 Research’s M&A KnowledgeBase *Excludes purchases of domain names and IP addresses

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With buyers old and new placing big bets, tech M&A hits record in 2014

Brenon Daly

Contact: Brenon Daly

Spending on tech deals surged to a new record in 2014, driven not only by massive consolidation by old-line telco buyers, but also by the ever-increasing prices of bets placed on next-generation technology. Tech buyers across the globe announced transactions valued at $440bn last year, according to the 451 Research M&A KnowledgeBase. That topped the previous record (set in 2007) by 5% and, more dramatically, comes in at twice the average annual spending on tech deals since the credit crisis.

The nearly half-trillion dollars’ worth of deal value was, of course, dominated by telecommunications and media transactions. Last year’s two largest acquisitions (AT&T’s $48.5bn play for DIRECTV, and Comcast’s $45.2bn reach for Time Warner Cable) accounted for slightly more than 20% of the total yearly spending.

Add to that European telcos and cable outfits, which also took advantage of a highly attractive debt market, and bought up rivals at an unprecedented rate in 2014. Major buyers on the Continent included Altice, Vodafone and British Sky Broadcasting. Altogether, telco and media deals around the world accounted for roughly half of last year’s total spending.

The other half came from a series of speculative deals by emerging tech icons – emboldened by record amounts of cash and, in many cases, record prices for their stock. For instance, Facebook – which finished last year with shares trading around an all-time high – not only paid the highest price for a VC-backed startup ($19bn for WhatsApp) but also rolled the dice on a virtual reality company that barely had a prototype product (it paid $2bn in March for Oculus VR). Similarly, Google dropped $3.2bn on Nest Labs. The maker of ‘smart’ thermostats may offer Google a way into broader home-automation offerings. Or not.

More established tech stalwarts also paid up for deals last year. SAP announced the largest-ever SaaS transaction, its $8.3bn acquisition of Concur Technologies in the summer. SAP valued the travel and expense management application vendor three times more richly than SAP itself is valued. Oracle inked its largest deal in a half-decade, handing over $5.3bn for old-line hospitality software provider MICROS Systems in June.

And finally, in addition to strategic acquirers, financial buyers got back to business in 2014, announcing more than $50bn worth of transactions, according to the 451 Research M&A KnowledgeBase. Included in last year’s total are a number of headline-grabbing LBOs (TIBCO Software, Riverbed Technology, Compuware), as well as a healthy number of sponsor-driven midmarket transactions.

Global tech M&A

Year Deal volume Deal value
2014 3872 $439bn
2013 3275 $255bn
2012 3644 $186bn
2011 3794 $232bn
2010 3293 $190bn
2009 3030 $143bn
2008 3098 $326bn
2007 3654 $420bn
2006 4036 $418bn
2005 3054 $360bn
2004 2091 $219bn
2003 1514 $60bn
2002 1922 $81bn

Source: The 451 M&A KnowledgeBase

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Big Oil has big trouble; Big Data has big opportunity

Brenon Daly

Contact: Brenon Daly

If data is the new oil, as some futurists would have it, then the accompanying transfer of value came through loud and clear in Friday trading. As oil prices slumped to their lowest levels since the recession, a pair of data-centric startups skyrocketed onto the market. The IPOs of New Relic and Hortonworks, collectively, created $2.5bn of market value.

Both offerings priced above the expected range and then surged another 40% on a day that saw US stock markets tick lower, in part, because of the pronounced slump in oil prices. The debut left both companies trading at platinum double-digit valuations. (New Relic, which will put up about $115m in sales in the current fiscal year, is being valued on Wall Street at about $1.5bn, while Hortonworks, which will do roughly $50m in sales this year, garnered a $1bn valuation.)

New Relic, which collects billions of data points around the performance of applications and the IT systems that run them, priced its shares at $23 each and saw them soar to about $33 in mid-Friday trading. ( See our full report on the New Relic offering.)

Similarly, Hortonworks – a ‘big data’ vendor that sells a Hadoop distribution – priced its shares at an above-range $16 and then saw its stock change hands at roughly $23. (See our full report on the Hortonworks offering.)

Just to put a point of contrast between old oil patch and new digital economy, consider this: the cost of buying one share each of New Relic and Hortonworks is roughly the same as the cost of buying a barrel of benchmark crude oil. Wall Street was very clear on which investment option looks more rewarding right now.

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After staying out of the M&A market, Qualys is ready to deal

Brenon Daly

Contact: Brenon Daly

Having built a $1bn market capitalization largely on the back of its core vulnerability management (VM) technology, Qualys is now looking to further expand into new markets. And to get there, the company is considering M&A for the first time in its 15-year history.

Qualys, which opens its annual user conference today, has already organically added new offerings to its VM, including Web application security and compliance monitoring. However, that expansion has only come in the past several years. Further, those products currently generate less than 20% of total revenue at the company. Overall, Qualys has moved slowly, hanging a ‘beta’ tag on products for extended periods. (The need to expand its portfolio was something we highlighted during the company’s IPO two years ago.)

Yet when Qualys does make new offerings available, they tend to be well received. At the end of Q2, some 44% of its more than 6,500 customers had purchased more than one product from the company. That’s up from 30% at the end of 2013 and just 20% at the end of 2012. Cross-selling has been one of the main reasons Qualys has been able to accelerate growth in 2014 compared with last year.

Any acquisition by Qualys, which has about $100m in cash, would likely be small. Also, the technology would have to be multi-tenant. (The company’s revenue is entirely annual subscriptions: no licenses and, unlike most other SaaS vendors, no professional services.)

What technology might Qualys be looking to pick up? Mobility represents an obvious market, as a way to help secure the ‘extended enterprise.’ Other areas that Qualys has been developing but could use a boost via M&A include SIEM and compliance automation.

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Small ball M&A paying off for salesforce.com

Brenon Daly

Contact: Brenon Daly

When it comes to M&A at salesforce.com, starting small has yielded higher returns than going big. The SaaS giant has returned to the ‘buy and build’ strategy with its latest step into a new market with Analytics Cloud. The data visualization offering, which was unveiled this week at Dreamforce, was underpinned by the acquisition of EdgeSpring back in June 2013.

The $134m price notwithstanding, EdgeSpring stands as a small deal for salesforce.com. (We profiled EdgeSpring shortly after it emerged from stealth and a half-year before it was acquired. At the time, it claimed more than 10 paying customers and about 30 employees.)

Certainly, there were bigger targets for a move into the analytics market by salesforce.com, which will do more than $5bn in revenue this fiscal year and says it has a ‘clear line of sight’ to $10bn in sales. For instance, both Qlik Technologies and Tableau Software offer their data visualization software on salesforce.com’s AppExchange. With hundreds of millions of dollars in revenue, either of those vendors would have established salesforce.com as a significant player in the data analytics market as well as moving the company closer to its goal of doubling revenue in the coming years.

However, in that regard, a purchase of either Qlik or Tableau would be comparable with salesforce.com’s reach for ExactTarget in June 2013, which serves as the basis for its Marketing Cloud. The deal was uncharacteristically large, with salesforce.com spending more on the marketing automation provider than it has in all 32 of its other acquisitions combined. More significantly, salesforce.com has struggled a bit with ExactTarget, both operationally (platform integration and cross-selling opportunities) and financially (margin deterioration).

In contrast to that big spending, salesforce.com dropped only about one one-hundredth of the price of ExactTarget on InStranet in August 2008 ($2.5bn vs. $32m). The purchase of InStranet helped establish Service Cloud, which is now the company’s second-largest business behind its core Customer Records Management offering. And salesforce.com says the customer service segment is much larger than the market for its sales software.

Those divergent deals are something to keep in mind when salesforce.com buys its way into a new market. If we had to guess, we would expect the company to next make a play for online retailing (maybe call it Commerce Cloud?). If that’s the case, we might suggest that it look past the big oaks like Demandware and focus on the seedlings that can then grow up in the salesforce.com ecosystem.

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In HubSpot IPO, it’s the company and the company it keeps

Brenon Daly

by Brenon Daly

Wall Street typically doesn’t have the chance to learn too much about the companies that come public before the actual IPO. Certainly, the debutants don’t come with the track record of businesses that have lived in institutional investor portfolios for quarters on end. To alleviate some of that uncertainty, which is corrosive to any investment, a key selling point for some IPOs isn’t so much the company, but the company that it keeps.

Consider the case of HubSpot. (Subscribers: See our earlier preview of the HubSpot IPO .) The marketing automation (MA) vendor hit the NYSE on Thursday, creating more than $900m of market value. (The company priced its 5.75-million-share offering at an above-range $25 each, with shares ticking to $30 after the IPO.) HubSpot’s initial valuation works out to roughly 10 times trailing revenue, which is among the richest valuations for MA providers. In fact, it almost exactly matches the current trading valuation for MA high-flier Marketo.

While HubSpot is lumped in with Marketo, the two companies aren’t direct head-to-head rivals. They hawk their wares to very different customers, with HubSpot focusing solidly on the midmarket while Marketo targets bigger businesses. That shows up clearly in the fact that HubSpot has more than three times as many customers as Marketo, but generates roughly one-quarter the revenue of the larger – and faster-growing – MA vendor. (HubSpot has more than 11,600 customers, while Marketo has 3,300 or so.)

Undoubtedly, HubSpot is enjoying a bit of a boost by getting compared with an upmarket vendor. It wouldn’t find such bullishness if it went the opposite way, selling its marketing suite to small businesses. The public market proxy for that market is Constant Contact, which has had a choppy run on Wall Street and trades at a sharp discount to either Marketo or HubSpot.

Constant Contact sells to very small businesses. Nearly two-thirds of its roughly 600,000 customers have less than 25 employees. Still, it has built a sizeable business selling to corner stores, freelancers and other small operations. (Constant Contact will put up more revenue this year than Marketo and HubSpot combined.) What the marketing platform supplier hasn’t done so successfully is market its story to Wall Street. Constant Contact trades at about 3x trailing sales, just one-third the valuation of upmarket vendors HubSpot and Marketo.

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