services – Page 4 – Inorganic Growth

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

February 22, 2012 Brenon Daly

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.

HP takes itself out of the market

November 22, 2011 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.

Best Buy buys outside the box

November 7, 2011November 8, 2011 Brenon Daly

Contact: Brenon Daly

Best Buy continues to buy outside the box. The consumer electronics giant, which has more than 1,000 big-box stores, announced a pair of deals Monday that add to its emerging businesses that have been responsible for most of the company’s recent growth. In the larger of its purchases, Best Buy will pay $1.3bn to pick up full ownership of its US and Canadian mobile phone business, which had been run as a joint venture with British retailer Carphone Warehouse Group. Additionally, Best Buy will pay $167m for mindSHIFT Technologies, a managed service provider that has about 5,400 small business customers.

The transactions continue a revamp of Best Buy, which started out life as an audio equipment store in 1966. More recently, it has made several acquisitions to expand beyond its historic business. For instance, it bought Geek Squad in 2002 to provide helpdesk support for customers. Service revenue, which has been bolstered by Geek Squad, currently accounts for 7% of the roughly $50bn in sales Best Buy will record this year, and it’s one of the few business lines that has actually increased same-store sales so far this year.

While the Geek Squad pickup has paid off for Best Buy, others have been disappointments. The retailer paid almost $700m for mall-based CD retailer Musicland in 2001, just as the business got ambushed by online music. More recently, it spent $97m in a puzzling purchase of Speakeasy, an Internet service provider. And then there’s the $121m acquisition in September 2008 of Napster. While some of those M&A missteps may have hurt Best Buy, they’ve been nothing like the stumble by its main rival, Circuit City. The company, which pioneered the electronic superstore model, got liquidated in 2009.

Ness gets a scant sendoff

September 1, 2011 Brenon Daly

Contact: Brenon Daly

Three-quarters of Ness Technologies shareholders have backed the planned $307m take-private of the IT services vendor, clearing the way for the sale to Citi Venture Capital International (CVCI) to close by the end of the month. CVCI acquired nearly 10% of Ness in early 2008 and first offered to pick up the whole company in July 2010, according to the proxy filed in connection with the proposed deal.

Last summer, CVCI indicated that it would be looking to pay $5.50-5.75 for each Ness share it didn’t already own. Three financial buyers who also got involved in the bidding last fall indicated that they would be prepared to top that by about a dollar a share. In the end, CVCI agreed to pay $7.75 for each share, roughly one-third more than the opening bid from the buyout shop .

And yet, despite the topping bid, Ness is exiting the public market at what would appear to be a rather paltry valuation. The company recently reported that it was tracking to about $600m in sales for 2011, and yet is selling for just $307m. (Including Ness’ small net debt position, the enterprise value of the deal is $342m.) That works out to a scant 0.6 times trailing sales – just one-third the median price-to-sales valuation for US publicly traded companies so far this year, according to our calculations.

Some of that can be attributed to the fact that IT services vendors typically trade at a substantial discount to other technology firms. And yet, even within recent IT services deals, 0.6x trailing sales is the low end of the range for most acquisitions. (For instance, EDS went for that multiple in its sale to Hewlett-Packard in mid-2008, while Perot Systems got more than twice that (1.4x) in its purchase by Dell in September 2009.) In fact, Ness is selling to CVCI for a lower price than it fetched on the open market more than three years ago when the buyout shop first took its stake.

A longshot for Leo?

August 19, 2011 Brenon Daly

Contact: Brenon Daly

Hewlett-Packard is now, officially, Leo Apotheker’s company. Since his somewhat surprising appointment as HP’s chief executive last fall, Apotheker has been taking small steps while also dropping big hints that he would be recasting the tech giant. But few observers could have imagined the almost unprecedented scope of the transition that Apotheker laid out late Thursday: HP will be integrating the largest acquisition in the software industry in seven years while simultaneously looking into selling off its hardware business.

Wall Street appears to be skeptical that HP can pull that off, as shares in the company on Friday sank to their lowest level since mid-2006. (Incidentally, that’s just before Apotheker’s predecessor, Mark Hurd, took over the company.) On their own, either one of HP’s dramatic moves (working through the top-dollar acquisition of Autonomy Corp and possibly selling the world’s largest PC maker) would be enough to keep any company busy. Taken together, the combination appears doubly difficult. And that’s even more the case for HP, which, to be candid, has a spotty record on M&A.

Consider this: Autonomy will be slotted into HP’s software unit, which has been built primarily via M&A. But that division runs at a paltry 19% operating margin, less than half the rate of many large software companies, including Autonomy itself. And then there’s the $13.9bn HP spent in mid-2008 for EDS in an effort to become a services giant. So far this year, however, that business hasn’t put up any growth. And perhaps most damning is the fact that HP now doesn’t really know what it will do with its hardware business – a unit that largely comes from the multibillion-dollar purchases of Compaq Computer and Palm Inc.

Taking care of unfinished business, Oracle snares InQuira

July 29, 2011 Ben Kolada

Contact: Ben Kolada

Oracle scratched a lingering itch recently, as it announced that it is acquiring knowledge management and customer service automation vendor InQuira for an undisclosed amount. The announcement comes nearly three years to the day after Oracle was stinted by salesforce.com in its attempt to scoop up InQuira rival InStranet. And although terms of the deal weren’t disclosed, we suspect that the database giant paid up for its expansion in this sector.

As usual, Oracle hasn’t disclosed terms of the transaction. Nearly all precedent deals in this sector have fallen in the range of $30-50m. However, InQuira could have broken this benchmark since the company was growing and was more mature than its acquired rivals. InQuira has expanded from about 135 employees serving 50 customers when we last covered the firm in 2008 to more than 85 customers today, with a headcount surpassing 200. Assuming its average deal size has remained somewhat constant, we would roughly place the company’s trailing revenue in the ballpark of $55-65m. Based on precedent valuations (comparable transactions have been valued at 1.3-1.8 times trailing sales) and our loose estimates of the company’s revenue, Oracle could have paid about $100m for InQuira. In comparison, salesforce.com forked over just $32m for InStranet in 2008.

Privately held InQuira offers integrated applications for Web self-service, knowledge management and agent-assisted support by bringing together intelligent retrieval, content management, collaboration and analytics. The acquisition, which is expect to close in the fall, will become the core of Oracle’s Fusion CRM product line.

Unify buys a new identity

July 13, 2011 Brenon Daly

Contact: Brenon Daly

It’s fairly rare for an acquiring company to take on the name of the target it has purchased, and it’s even more uncommon for the buyer to then dive headlong into the business it just picked up. And yet, that’s exactly what’s happening at Unify Corp, an old-line vendor now known as Daegis. (See our full report on the transition.) The name trade comes almost exactly a year after Unify spent some $38m in cash and stock to acquire its new namesake, Daegis. That was more, collectively, than Unify had spent on all of its other deals.

Before it added Daegis, Unify had been known for its software application development and migration tools. The 30-year-old company realized that there probably wasn’t much value to be created by being a fairly staid performer in a fairly staid market, so it went shopping. In 2009, Unify bought a small archiving and records compliance provider, AXS-One. It followed that up a year later with the much more significant purchase of Daegis, which got the company squarely in the e-discovery market. That business is now providing virtually all of the growth for Unify/Daegis.

While the new focus on the e-discovery space is a reasonable – and potentially profitable – move for Unify/Daegis, the transition does bring a fair amount of risk. The vendor already had to bump back the release of the product that was supposed to combine Unify’s archiving technology with Daegis’ e-discovery capabilities. Further, it recently scrapped any financial guidance as it sorts through its changes in business model. So far, Wall Street hasn’t really voted on the renamed and refocused company. Shares in Daegis, which also have the new symbol DAEG, are largely unchanged over the past month.

Apple drops interest in Dropbox for iCloud

June 7, 2011 Brenon Daly

by Brenon Daly

Earlier this year, rumors were flying that Apple was putting together a bid – valued at more than $500m – for cloud storage startup Dropbox. That speculation obviously didn’t go anywhere, but it looked a whole lot more credible in light of Monday’s introduction of Apple’s online storage and synching offering, iCloud. The service, which will be free for up to 5GB, will be available in the fall.

On the face of it, Apple’s new service looks mostly like a convenient and efficient way to move iTunes into the cloud. Viewed in that rather limited way, iCloud appears to compete most directly with Google and Amazon, which have both launched online music storage offerings in recent weeks. But as is the case with most of what Apple does, there’s much more going on.

In addition to automatically storing and synching media files such as music, photos and movies, iCloud will keep up-to-date documents as well as presentation and other files. In other words, the uses for iCloud are pretty much exactly the same reasons why some 25 million people also use Dropbox. Is this yet another case of a Silicon Valley giant initially looking to buy but then opting instead to build?

A tale of two e-discovery deals

May 26, 2011May 26, 2011 Brenon Daly

Contact: Nick Patience

Last week was more or less bookended with two acquisitions in the e-discovery market, with Autonomy Corp picking up Iron Mountain’s digital assets on Monday and Symantec buying Clearwell Systems on Thursday. Autonomy and Symantec share a market but little else between them. Both are experienced acquirers – having made, collectively, 50 deals over the past decade – but each company chooses its targets and executes acquisitions in very different ways.

Autonomy often buys rivals simply to remove them from the market. Or it inks deals to obtain customer bases or move into adjacent sectors, and it often swoops in on companies at the last minute (as it did with Zantaz in 2007). The purchase of Iron Mountain’s divested business has all four of those characteristics. Iron Mountain was a direct rival in the e-discovery and archiving segments, while it also provided a backup and recovery business, which is a new area for Autonomy. The buyer also netted 6,000 customers, although there is some overlap. Autonomy took out Verity back in 2005 to remove a competitor and picked up Zantaz to get into the archiving space. The vendor is known for being aggressive in integrating companies, which often leads to a lot of people quickly moving on after being acquired, and we expect both people and products to be removed rapidly here.

Symantec’s M&A strategy is still somewhat shaped by its misguided attempt to add storage to its core security offering with the acquisition of Veritas in 2004. (That deal remains Big Yellow’s largest-ever purchase, accounting for more than half of the company’s entire M&A spending.) Of course, that transaction happened more than a half-decade ago and a different management team was heading the company.

Still, that experience – along with the constant reminders about the misstep from Symantec’s large shareholders – appears to have made the company more considered in its approach. For example, it had been working with Clearwell in the field as well as at the product development level for more than two years before the deal. However, we don’t think Big Yellow could have waited much longer to add some key e-discovery capabilities to boost its market-leading (but aging) Enterprise Vault franchise. We suspect that is why Symantec paid such a high premium for Clearwell, valuing the e-discovery provider at 7 times sales – more than twice the multiple Autonomy paid in its e-discovery purchase.

Clearwell had been on a growth tear since its formation at the end of 2004 and the firm helped define the e-discovery space, starting with early case assessment and then systematically moving into other segments of the e-discovery process. We get the feeling that management may have wished to have waited another year or so before being bought. We think they would have relished the chance to turn Clearwell into something substantial and possibly take it public; the fact that no bankers were used on either side indicates that Clearwell was not actively shopping itself around. But some offers are just too good to turn down.