Category: security

Shakeout looming in MDM sector?

Ben Kolada

Contact: Ben Kolada

The crowded mobile device management (MDM) sector is likely to see a shakeout in the near future. By one account, there are already more than 80 firms vying for space in the growing MDM market. As the sector’s more notable vendors increasingly advance ahead of the competition, we expect laggard firms will either shutter their doors or be picked off one by one in small bolt-on technology acquisitions. But as the sector narrows, the future may shine brighter for firms that are making names for themselves.

As the smartphone and tablet take more overall computing share from laptops and desktops, the need for MDM will accelerate. Increasing adoption of tablets, in particular, is driving MDM demand. According to a report by ChangeWave Research, the survey arm of 451 Research, 23% of respondents said they plan on purchasing tablets for their employees in the first quarter of 2012, up from just 5% in the fourth quarter of 2010.

As the largest acquirers continue to consolidate the software stack, we expect to see them move into the MDM market. IBM has already announced a couple such acquisitions, picking up BigFix in July 2010 for an estimated $400m and Worklight in January for an estimated $70m. Dell and BMC are also expected to be eyeing this market, and would likely look at the frontrunners – firms like AirWatch, BoxTone, Good Technology, MobileIron and Zenprise, to name a few – as their top acquisition choices. But these firms aren’t likely to be had for cheap. We’ve already heard rumors that one of them is looking for a $400m-plus exit, and that another was previously in the sights of a $250m deal. Meanwhile, valuations will likely rise as these vendors continue growing. In 2011, Zenprise tripled its headcount, while MobileIron doubled its employee base. AirWatch’s headcount hit 400 last year, and it expects to double that this year.

A ‘logic’-al pairing as Alert Logic reaches for Amorlogic

Brenon Daly

Contact: Brenon Daly, Wendy Nather

In its first-ever acquisition, Alert Logic said Wednesday that it will hand over an undisclosed amount of cash and stock for Armorlogic. The purchase will bring application-layer security to the Houston-based MSSP. Up to now, Alert Logic has built its business on just two products: Threat Manager (a combination of vulnerability assessment, intrusion protection and other technologies) along with Log Manager.

That said, Alert Logic has built a tidy little business with its existing portfolio, finishing 2011 with sales of $21m, up slightly more than 40% over the previous year. It has accumulated more than 1,500 customers since setting up shop in 2002. Alert Logic indicated that it will cover part of the purchase by drawing on the $12.6m it raised in its series E funding round last April.

Although Armorlogic is small (only three employees and 70 customers), its Web application firewall (WAF) offering is selling into a hot market. As perhaps the cleanest proxy for the WAF sector, consider the princely valuation garnered by Imperva. Since its IPO last November, Imperva has steadily risen to a current market cap of about $750m. That’s almost 10 times the $78m in revenue it generated in 2011 and roughly seven times the revenue it’s likely to generate this year.

Recent Blue Coat shareholders no longer in the red

Brenon Daly

Contact: Brenon Daly

Anyone who bought shares of Blue Coat Systems over the past half-year breathed a sigh of relief after the recent buyout of the old-line security vendor. Thoma Bravo’s bid of $25.81 for each share means that buyers since May are all above water. (The offer represents a 48% premium over the previous close and is almost twice the price that Blue Coat stock fetched on its own back in August.)

But there’s another longtime shareholder that’s probably plenty relieved as well: Francisco Partners. Recall that the buyout firm, which had previously invested in the company, also loaned Blue Coat $80m to help it pay for its purchase of Packeteer in 2008. Francisco took convertible notes, which came at an exercise price of $20.76. Although that was roughly where the stock was trading in the spring of 2008, it finished out the year in the single digits as the recession deepened.

More recently, Blue Coat had been trading below the exercise price for the past four months, hurt by three consecutive revenue shortfalls and turnover in the chief executive office. But with Thoma Bravo’s take-private, which is slated to close in the first quarter of 2012, Francisco Partners will pocket a tidy return. On paper, the firm will book a $19m profit on the convertible notes, equaling a roughly 25% gain. That’s certainly not the biggest gain Francisco Partners has ever put up, but given that the firm spent a fair amount of time underwater on its holding, it’s not a bad outcome at all. And it certainly beats the return from just plunking the money into the broad market, which declined about 10% over the period.

Securing a tweet

Brenon Daly

Contact: Wendy Nather

Whisper Systems has announced that it has been acquired by Twitter (appropriately enough, the news was tweeted). Terms of the acquisition were not disclosed, but given Whisper’s emphasis on Google Android security, we expect that the deal was as much about the brains behind the technology as it was about the tools themselves. Whisper’s products include WhisperCore, a set of functions for data and network encryption as well as permissions management; WhisperMonitor, an Android-based firewall for mobile devices; Flashback, a cloud-based secure backup service for Android data; TextSecure, a facility for encrypting SMS messages on the fly; and RedPhone, an encryption function for voice that saw heavy use by activists during Egypt’s political uprising.

Twitter has inked 15 transactions, but this is the first one that focuses on security, and it’s in an area that appears to add real gravitas to the communications technology: it’s not just for ensuring that your Uncle Fred can’t accidentally get to your status updates. Mobile devices and protection against regimes make a solid combo, and they bolster Twitter’s use as a real-time reporting system. It’s not clear how many of the current products will remain viable under Twitter’s control, but the reasoning behind the choice of Whisper, as opposed to any number of other mobile device security startups, seems pretty clear.

But we find this deal even more interesting due to the fact that one of Whisper’s founders, security researcher Moxie Marlinspike, has also been making the conference rounds discussing a well-known problem: that of Internet-wide trust in domain name system (DNS) and SSL infrastructure. Certificate authorities that underpin transactions over the Internet have been increasingly attacked directly (with COMODO and DigiNotar being prime examples; the latter went bankrupt as a result of its breach), and DNS-based attacks are on the rise. Marlinspike not only points out the inherent design problems in the trust-based system, but also has proposed the most plausible solution: overhauling the structure into a new system he has dubbed Convergence. When you have access to an Internet security architect of Marlinspike’s caliber, you don’t let it go to waste. We’ll be watching for new developments on a possibly more fundamental level than just secure text messaging for Tweets.

HP takes itself out of the market

Brenon Daly1 Comment

Contact: Brenon Daly

Over its two previous fiscal years, Hewlett-Packard has spent more than $20bn on a dozen acquisitions, with five of them costing the tech giant more than $1bn each. Those days are over, according to recently named CEO Meg Whitman. In her first conference call discussing quarterly financial results on Monday, Whitman told investors not to expect any ‘major M&A’ in the current fiscal year, which runs through the end of next October. That means HP will look to ink deals valued mostly at less than $500m, she added later in the call.

That conservative M&A plan comes as HP enters what Whitman described as a ‘reset and rebuilding year.’ Both revenue and earnings are projected to slide in the current fiscal year, but HP didn’t offer specifics on the decline. The company scrapped its revenue forecast altogether, while saying only that it expected to earn ‘at least’ $4 in non-GAAP earnings per share (EPS), compared to $4.88 in non-GAAP EPS in the just-completed fiscal year. With roughly two billion shares outstanding, that indicates HP will likely net at least $1bn less this year than last year. No wonder HP isn’t in the mood to go shopping these days.

Big money, behind closed doors

Brenon Daly

Contact: Brenon Daly

Who needs to go public when there’s so much late-stage money sloshing around out there? That question hit us in the head this week after two startups announced, separately, that they were each raising $50m in new funding. First, it was marketing automation vendor Marketo saying it pulled in $50m in a new round led by Battery Ventures and then on Thursday, vulnerability management company Rapid7 also drew in that amount from Technology Crossover Ventures.

The latest round for Marketo, which effectively doubles the amount of capital it has raised, is particularly noteworthy. After all, Marketo has seen two of its main rivals track to the public market. Eloqua is currently on file for a $100m offering, while Responsys went public in late April, an offering that raised $79m.

In the case of Responsys, it may well consider itself fortunate that it raised money when it did. The company recently indicated that business through the end of the year is likely to be substantially slower than it had been. The warning knocked the stock about 25% below where it priced in April and half the level it had hit in the summer.

And the next IT security IPO is…

Brenon Daly

Contact: Brenon Daly

From what we hear, investors won’t have to wait anywhere close to another two years for an IPO by an information security vendor. In fact, a pair of companies is set to put in their paperwork, with at least one prospectus possibly filed yet this year. Those offerings would follow last week’s strong debut of Imperva, which was the first IPO in the information security sector since Fortinet hit the market in November 2009.

Since then, however, a half-dozen other security providers that we might have expected to go public – both those formally on file, as well as ones in the ‘shadow’ pipeline – have been snapped up in trade sales or have scrapped IPO plans. So which companies are likely to make it through the ongoing wave of consolidation and actually hit the public market?

Several sources have indicated that both AVG Technologies and AVAST Software have picked their underwriting teams and should be filing prospectuses in the coming weeks. In addition to similar timing on their IPOs, the two companies actually have a fair number of traits in common: both trace their roots back more than 20 years to Prague, and both are primarily known for their ‘freemium’ antivirus offering. Additionally, both AVG and AVAST boast that their products have been downloaded more than 100 million times.

Assuming AVG and AVAST do indeed file and come public, they will likely benefit from two key trends on Wall Street. First, there is a clear demand among investors for security companies. Consider the fact that they are valuing Imperva at a rather rich level of nearly seven times 2011 sales, with Fortinet commanding an even higher valuation.

Second, there has been a notable shift toward the ‘consumerization’ of IPOs. Tech vendors that have debuted so far this year such as LinkedIn, Pandora Media, HomeAway, Zillow and, of course, Groupon have not only dominated headlines, they have also raised significantly more money in their offerings than pure enterprise offerings. Most notably, Groupon raised $700m in its hotly debated IPO. But LinkedIn also raised $400m and Pandora raised $240m, which is more than twice the amount Imperva garnered in its offering, for instance. We’ll have a full look at the rumored offerings by AVG and AVAST, along with a broader look at the information security market, in a special report in tonight’s Daily 451.

Symantec gets the better end of a ‘win-win’ deal

Brenon Daly

Contact: Brenon Daly

When a marriage dissolves, it’s typically a messy process with bitter recriminations and resentments over how to divide the results of lives pooled together. Not so with Symantec’s step out of its three-and-a-half-year-old joint venture (JV) with Huawei. Selling its 49% stake in the storage and security appliance JV to its Chinese partner for $530m brings both companies a number of advantages. And while we might be tempted to label it one of those mythical win-win transactions, a closer look at the deal shows that Big Yellow gets more of the ‘win’ than Huawei, at least in our view.

From a purely financial standpoint, Symantec exits the JV having more than tripled the valuation of the entity. As CFO James Beer noted on a call discussing the sale, Symantec is realizing an annualized internal rate of return (IRR) of 31%. (We might add that performance came in the face of the worst global economic slowdown since the Great Depression, and is roughly three times the return of the Nasdaq over the same period. The IRR is undoubtedly higher than the numbers put up by many of the late-stage investors and buyout shops over that time.)

Additionally, the terms don’t limit Symantec from expanding its business in China, either in terms of distribution or even in new agreements with other hardware providers. Meanwhile, Huawei will be paying Symantec OEM royalties from its contributions to products for the next seven years. (No amount was given for those payments.) That’s not a bad deal at all for Symantec, which was advised by Citigroup Global Markets while Morgan Stanley banked Huawei.

Imperva: the strong, silent type

Brenon Daly

Contact: Brenon Daly

As far as tech IPOs are concerned, the two latest offerings could hardly be more different. Last week, we had the debut of Groupon – the daily deals site that is either the next Amazon or the next Pets.com, depending on the point of view. The debate around Groupon raged loudly and publicly, dominating last week’s financial news broadcasts and financial sites. In contrast, Imperva quietly crept onto the public market on Wednesday, with little fanfare. (The company didn’t even get to ring the opening bell on the NYSE, where it started trading today. Instead, it’ll be doing the honors on Thursday.)

For all of the differences in attention for the two companies, however, there’s one important similarity: performance. Both offerings priced above their expected range and then surged in trading. Groupon, which has created more than $15bn in market value, is still above water. In its offering, Imperva has also put up a strong debut. The data security vendor priced its five-million-share offering at $18 each, above the expected range of $14-16. In midday trading, Imperva stock was changing hands at $24.50. With more than 22 million shares outstanding, Imperva’s offering created more than a half-billion dollars of market value.

Double-barrel SIEM deals

Brenon Daly

Contact: Brenon Daly

In a highly unusual twist of timing, both IBM and McAfee announced significant acquisitions of security event and incident management (SIEM) startups within hours of each other Tuesday morning. First up, IBM said it was adding Q1 Labs as part of a new initiative around ‘Security Intelligence.’ (The announcement confirmed the rumored pairing between the two companies that we noted on Monday.) That was followed just two hours later by McAfee’s reach for NitroSecurity.

The transactions, which are both expected to close before the end of the year, take the two largest privately held SIEM vendors off the market. According to our estimates, Q1 was tracking to about $70m in sales this year while NitroSecurity was likely to generate roughly $30m. Between them, the two startups counted more than 2,300 customers. Further, Q1 and NitroSecurity were the highest-ranked private SIEM providers in a recent survey of IT buyers by TheInfoPro, a division of The 451 Group.

All of that goes a long way toward explaining why both startups got valuations substantially above prevailing market multiples. Collectively, Q1 and NitroSecurity took in a total of about $75m in funding over the decade or so they had been in business. As we understand it, the aggregate price for the pair is somewhere in the neighborhood of 10 times the amount they raised.