Category: technology stocks

Massive SaaS: Oracle pays up for NetSuite

Brenon Daly

by Brenon Daly

Announcing the largest-ever SaaS transaction, Oracle says it will pay $9.3bn in cash for cloud ERP vendor NetSuite. The deal, which is expected to close before year-end, involves the ever-acquisitive Oracle snapping up the roughly 54% of NetSuite not already owned by Oracle founder and executive chairman Larry Ellison.

Terms call for Oracle to pay $109 for each share of NetSuite. Oracle’s bid represents a premium of nearly 60% over NetSuite’s closing price 30 days ago, before rumors swirled about this pairing. Although the premium is about twice as rich as typical enterprise software transactions, NetSuite is still valued just a smidge below its highest-ever stock price, which it hit in early 2014.

NetSuite is the latest SaaS firm that Oracle has gobbled up as the 29-year-old company increasingly stakes its future on cloud software. After initially ignoring – and even dismissing – the disruptive trend of subscription-based software, Oracle, which still sold more than $7bn worth of software licenses in its just-completed fiscal year, went on a SaaS shopping spree. In addition to NetSuite (ERP), Oracle’s other recent SaaS deals valued at $1bn or more include: Taleo (HR software), Responsys (marketing software), RightNow (CRM) and Datalogix (marketing data).

At an equity value of $9.3bn, NetSuite is valued at 11x its trailing 12-month revenue of $846m. That matches the average multiple paid by rival SAP in its multibillion-dollar SaaS acquisitions, as well as the valuation Salesforce put on e-commerce provider Demandware in June.

Further, to underscore the value that can accrue through the subscription model, it’s worth noting that NetSuite’s double-digit multiple is basically twice the multiple that Oracle has paid for the license-based software vendors it has acquired. (Of course, some of the discrepancy can be attributed to NetSuite’s enviable 30% growth rate, even as the 18-year-old company hits a $1bn run rate.)

Specifically, consider Oracle’s purchase more than a decade ago of PeopleSoft, which would stand as a representative ERP transaction for the ‘Software 1.0’ era while NetSuite serves as a ‘Software 2.0’ deal. Although Oracle paid $1bn more for PeopleSoft than NetSuite, PeopleSoft generated three times more revenue than NetSuite. Put another way, if we applied PeopleSoft’s valuation of 4x trailing sales to NetSuite, Oracle would have had to pay only $3.4bn – rather than $9.3bn – to take it home.

SaaS multiples

LogMeIn goes to GoTo

Brenon Daly

by Brenon Daly

Eight months after Citrix announced plans to spin off its GoTo business, the company has significantly bulked up the unit with the consolidation of rival online communications and support provider LogMeIn. The deal, which is structured as a tax-advantaged merger that values LogMeIn at $1.8bn, would increase GoTo’s revenue by about 50% to $1bn. It is expected to close early next year.

Terms of the Reverse Morris Trust transaction call for Citrix to own slightly more than half of the combined entity, holding 50.1% of the company with LogMeIn retaining the remaining 49.9%. Ownership notwithstanding, LogMeIn will have an outsized role in charting the future course of the $1bn SaaS giant.

Both the current CEO and CFO at LogMeIn will hold those respective roles at the combined firm, which will take LogMeIn’s current headquarters as its own. Further, LogMeIn will have five directors on the company’s board, with four coming from Citrix. We would attribute that weighting to the fact that LogMeIn has significantly outgrown the larger GoTo unit. In the just-completed second quarter, for instance, LogMeIn increased revenue about 28%, roughly twice the rate at GoTo.

At $1.8bn, the deal values LogMeIn at its highest-ever level. Over the past year, LogMeIn has generated $309m in sales, meaning it is being valued at 6x trailing sales. That’s a bit shy of the average of 7.5x trailing revenue paid for SaaS vendors in transactions valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. For instance, two months ago, Vista Equity Partners paid 8x trailing sales for Marketo, a smaller but slightly faster-growing marketing automation provider that, unlike LogMeIn, runs in the red.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

In latest infosec consolidation, Avast + AVG = AV(G)ast

Brenon Daly

by Brenon Daly

Reversing the flow of typical consolidation moves, privately held Avast Software said it will pay $1.3bn to remove fellow antivirus (AV) vendor AVG Technologies from the NYSE. In addition to flipping the script on the conventional roles of buyer and seller, there’s also a fair amount of irony in the announced pairing of the companies, which share similar roots and vintage. After all, the acquisition comes four years after Avast scrapped its plans to be a public company, a decision that was partly due to AVG’s lackluster performance immediately following its own IPO in early 2012.

Terms call for private equity-backed Avast, which has secured about $1.7bn from a lending syndicate, to pay $25 for each share of AVG. Although that represents a 33% premium over the previous closing price, it is actually lower than AVG shares were trading on their own at this time last year.

Both companies, which have been in business for more than a quarter-century, have struggled to adjust their portfolios to match recent changes in the threat landscape. Specifically, they have been somewhat caught out by the ineffectiveness of their historic desktop-based AV offerings, as well as the emerging threats posed by mobile devices. Over the past two years, Avast and AVG have used M&A to help move into the post-AV world, including doing four acquisitions to bolster their mobile security portfolios.

However, the overall transition of the business has been slow. AVG, for instance, said revenue in the first quarter expanded just 5% and indicated that sales in the just-ended Q2 actually declined slightly. AVG’s sluggish recent performance goes some distance toward explaining its rather muted valuation. Avast is paying $1.3bn, or slightly more than 3x the $433m in trailing sales put up by AVG. That’s just half the average multiple of 6.4x trailing sales in the 10 other information security transactions valued at $1bn or more, according to 451 Research’s M&A KnowledgeBase.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Brexit breaks Q2’s tech M&A rebound

Brenon Daly

Contact: Brenon Daly

For the first two months of the just-completed second quarter, tech dealmakers went about their business at the same sedate pace they had all year. Then came the June boom. Spending on tech, media and telecom (TMT) acquisitions in the final month of Q2 tripled from the average level in the five previous months, with June alone featuring six of the seven largest TMT deals announced in all of Q2, according to 451 Research’s M&A KnowledgeBase. The late flurry of big-ticket transactions helped elevate M&A spending from the middling level it had sunk to in 2016 after last year’s record run.

If Q2 ended with a bang for M&A, the same could certainly be said about geopolitics. In what is widely considered the largest reshaping – and the sharpest reversal – in Europe since World War II, the UK narrowly voted in late June to end its European Union membership. The so-called ‘Brexit’ decision immediately sparked a wave of selling on equity exchanges around the world that incinerated trillions of dollars of market value.

As the political instability and economic uncertainty sparked by the unprecedented vote by members of the world’s fifth-largest economy rippled around the world, shell-shocked dealmakers stepped out of the market. In the final week of June – a period that covers the results of the UK vote and the immediate aftermath – the number of deals dropped by fully one-quarter compared with the weekly average of the first three weeks of the month. More dramatically, transactions announced in the post-Brexit week accounted for only 4% of the total spending in June. (Obviously, these are very short-term reactions to the historic event. See our analysis of the potential longer-term impact of Brexit on the tech economy, including employee movement, taxes and tariffs, privacy, and capital markets.)

Yet even as June ended with a whimper, the robust activity before Brexit boosted overall Q2 spending to $107bn, about 50% higher than the $73bn recorded in Q1, according to the M&A KnowledgeBase. (However, for some perspective on just how far M&A spending has fallen from last year’s historic levels, spending in the just-completed Q2 stands at just half the level of Q2 2015.) Still, the flurry of sizable deals in the first three weeks of June lifts the total value of year-to-date transactions to about $180bn, putting 2016 on track for the third-highest-spending year since the end of the recession.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2016 1,008 $107bn
Q1 2016 1,031 $73bn
Q4 2015 1,052 $184bn
Q3 2015 1,162 $85bn
Q2 2015 1,074 $208bn
Q1 2015 1,040 $121bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

Pricing out an alternate reality for Salesforce-LinkedIn

Brenon Daly

Contact: Brenon Daly

An enterprise software giant trumpets its acquisition of an online site that has collected millions of profiles of business professionals that it plans to use to make its applications ‘smarter’ and its users more productive. We’re talking about Microsoft’s blockbuster purchase of LinkedIn this week, right? Actually, we’re not.

Instead, we’re going back about a half-dozen years – and shaving several zeros off the price tag – to look at Salesforce’s $142m pickup of Jigsaw Data in April 2010. Jigsaw, which built a sort of business directory from crowdsourced information, isn’t exactly comparable to LinkedIn because it mostly lacked LinkedIn’s networking component and because the ultimate source of information for the profiles differed at the two sites. However, the rationale for the two deals lines up almost identically, and the division that Salesforce created on the back of the Jigsaw buy (Data.com) runs under the tagline that could be lifted directly from LinkedIn: ‘The right business connection is just a click away.’

We were thinking back on Jigsaw’s acquisition – which, at the time, stood as the largest transaction by Salesforce – as reports emerged that the SaaS giant had been bidding for LinkedIn, but ultimately came up short against Microsoft. Our first reaction: Of course Benioff & Co. had been in the frame. After all, the two high-profile companies have been increasingly going after each other, with Salesforce adding a social network function (The Corner) to the directory business at Data.com and LinkedIn launching its CRM product (Sales Navigator). And, not to be cynical, even if it didn’t want to buy LinkedIn outright, why wouldn’t Salesforce use the due-diligence process to gain a little competitive intelligence about its rival?

As we thought more about Salesforce’s M&A, we started penciling out an alternate scenario from the spring of 2010, one in which the company passed on Jigsaw and instead went right to the top, acquiring LinkedIn. To be clear, this requires us to make a fair number of assumptions as we revise history with a rather broad brush. Further, our ‘what might have been’ look glosses over huge potential snags, such as the fact that Salesforce only had $1.7bn in cash at the time, and leaves out the whole issue of integrating LinkedIn.

Nonetheless, with all of those disclaimers about our bit of blue-sky thinking, here’s the bottom line on the hypothetical Salesforce-LinkedIn pairing at the turn of the decade: It probably could have gotten done at one-third the cost that Microsoft says it will pay. To put a number on it, we calculate that Salesforce could have spent roughly $9bn for LinkedIn back in 2010, rather than the $26bn that Microsoft is handing over.

Our back-of-the envelope math is, admittedly, based on relatively selective metrics. But here are the basics: At the time of the Jigsaw deal (April 2010), fast-growing LinkedIn had about $200m in sales and 150 million total members. If we apply the roughly $60 per member that Microsoft paid for LinkedIn ($26bn/433 million members = $60/member), then LinkedIn’s 150 million members would have been valued at $9bn. (Incidentally, that valuation exactly matches LinkedIn’s closing-day market cap on its IPO a year later, in May 2011.)

On the other hand, if we use a revenue multiple, the hypothetical valuation of a much-smaller LinkedIn drops significantly. Microsoft paid about 8x trailing sales, which would give the 2010-vintage LinkedIn, with its $200m in sales, a valuation of just $1.6bn. (We would add that other valuation metrics using net income or EBITDA don’t make much sense because LinkedIn was basically breaking even at the time, throwing off only a few tens of millions of dollars in cash.)

However, LinkedIn would certainly have commanded a double-digit price-to-sales multiple because it was doubling revenue every year at the time. (LinkedIn finished 2010 with $243m in revenue and 2011 with over $500m in sales, while Salesforce was increasing revenue only about 20%, although it was north of $1bn at the time.) By any metric, LinkedIn would have garnered a platinum bid from Salesforce in our hypothetical pairing, as surely as it got one from Microsoft. But on an absolute basis, the CRM giant would have gotten a bargain compared to Microsoft.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Big Yellow tries on a Blue Coat

Brenon Daly

Contact: Brenon Daly

Announcing the second-largest information security transaction in history, Symantec says it will pay $4.7bn in cash for Blue Coat Systems. The single purchase eclipses the amount Big Yellow has spent, collectively, on all of its two dozen information security acquisitions over the past decade and a half, according to 451 Research’s M&A KnowledgeBase. Strategically, the proposed pairing is essentially a large-scale combination of Symantec’s endpoint security with Blue Coat’s Web defense, an M&A trend that has mostly featured deals valued in the tens of millions of dollars, rather than billions of dollars.

The transaction will further boost Symantec’s standing as the largest independent security vendor. On a GAAP basis, the combined company would have sales of about $4.2bn. (For perspective, that’s twice the size of McAfee at the time of its sale to Intel in 2010.) Blue Coat recorded GAAP revenue of $599m in its latest fiscal year. However, because of accounting regulations, that figure excludes a fair amount of deferred revenue. In its IPO paperwork, Blue Coat offered a non-GAAP ‘adjusted revenue’ figure that included the written-off deferred revenue totaling $775m in its latest fiscal year. By either measure, Blue Coat would bump up the combined company’s top line by about 20%.

For Symantec, however, bigger has not necessarily proven to be better. Big Yellow only recently cleaved off its Veritas division, unwinding a decade-long effort to pair security with storage that ultimately failed to produce returns. Yet even on the other side of the tumultuous separation, revenue at Symantec shrank in its previous fiscal year by 9%, with the company forecasting that the contraction would continue in the current fiscal year. The instability has also played out in the corner office, with Symantec having run through three CEOs in the past four years. (Note: Symantec currently doesn’t have a permanent chief executive, although as part of the agreement, current Blue Coat CEO Greg Clark will take the top job at the combined company after the deal closes, which is expected by September. In that way, there’s also a bit of an ‘acq-hire’ aspect to the multibillion-dollar pairing.)

The move marks a rare case of a dual-tracking, with Symantec buying Blue Coat less than two weeks after the company revealed its IPO paperwork. And, as we look at Blue Coat’s valuation, we can’t help but think that Big Yellow had to outbid Wall Street to get this transaction done. Think about it this way: a little more than a year ago, current owner Bain Capital was able to purchase Blue Coat for $2.4bn – just half the price Symantec is paying. (Of course, last spring Symantec probably wasn’t in a position to do a major deal, as it was focused on the Veritas divestiture.)

At $4.7bn, Blue Coat is valued at 7.8x its trailing GAAP revenue of $600m. (Even if we view the transaction on the adjusted revenue of $775m, Symantec is paying 6x non-GAAP revenue. Continuing on those unorthodox financial measures, we would add that the acquisition values Blue Coat at slightly more than 20x trailing adjusted EBITDA.) Overall, those valuations are only slightly above the average of just under 7x trailing sales for information security deals valued at more than $1bn over the past 14 years, according to 451 Research’s M&A KnowledgeBase.

Largest information security transactions, 2002-16

Date announced Acquirer Target Deal value Deal valuation*
August 19, 2010 Intel McAfee $7.7bn 3.4x
June 12, 2016 Symantec Blue Coat Systems $4.7bn 7.8x
Feb 9, 2004 Juniper Networks Netscreen Technologies $4bn 14.3x
July 23, 2013 Cisco Systems Sourcefire $2.7bn 10.7x
March 10, 2015 Bain Capital Blue Coat Systems $2.4bn 3.8x

Source: 451 Research’s M&A KnowledgeBase *Price-to-trailing-sales multiple

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

The software buyout boom

Brenon Daly

Contact: Brenon Daly

After playing small ball for the first few months of the year, buyout shops have begun taking bigger swings in the M&A market. That’s nowhere more evident than in the bustling enterprise software sector, where private equity (PE) firms have displaced their strategic rivals as the main buyers at the top end of the market.

According to 451 Research’s M&A KnowledgeBase, PE shops have been the acquirers in four of five enterprise software transactions announced so far this year valued at more than $1bn. (The big-ticket shopping list: the $3bn take-private of Qlik, the $1.8bn take-private of Marketo and the $1.7bn take-private of Cvent, as well as the $1.1bn purchase of Sitecore.) Set against this recent string of 10-digit deals by financial buyers, the only corporate acquirer to ink a similarly sized transaction is Salesforce with its $2.8bn reach for Demandware.

The fact that buyout barons are leading the current software shopping spree is a direct reversal of recent years. At this point last year, for instance, there were four software deals valued at more than $1bn, with corporate acquirers announcing three of them, according to the M&A KnowledgeBase. More broadly, PE firms typically account for only about 10-20% of overall M&A spending in any given year. So far this year in the software sector, however, PE shops have accounted for just less than half of announced spending.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

No longer a faded garment, Blue Coat to hit the public market

Brenon Daly

Contact: Brenon Daly

More than four years after going private, Blue Coat is set to make a return to the public market. But the company that put in its IPO paperwork is very different from the one that beat a hasty retreat from Wall Street. The resurrected Blue Coat is cleaner, more stable and throws off more cash. And, most dramatically, it’s growing at a healthy mid-teens percentage rate, while the old version was shrinking. The reboot of Blue Coat, which has been accomplished under private equity (PE) ownership, will pay dividends as it makes its debut.

The original Blue Coat, which was founded 20 years ago, was a bit of a faded garment when its initial PE owner, Thoma Bravo, got its hands on it. As noted, revenue was declining as the company stumbled from its network performance origins into Web security, while not doing either particularly well. (451 Research surveys of customers at the time of Blue Coat’s leveraged buyout showed that respondents had a largely unfavorable view of the company, with many indicating they planned to cut their spending with it.) That corporate uncertainty was compounded by churn in the corner office, as three CEOs came and went in just the 18 months leading up to Blue Coat’s LBO.

The company is now squarely focused on network security, while also spending liberally to step into securing the cloud. This growth is crucial because the cloud has effectively expanded the perimeter of a network, and many legacy network-based security products – from some of Blue Coat’s contemporaries – have proven ineffective at addressing cloud and mobile use cases. That helps explain why the company has rung up a $400m bill for SaaS security, acquiring both Perspecsys and Elastica last year.

Blue Coat has taken these strategic steps while roughly tripling cash-flow generation and increasing revenue by about two-thirds. Some caveats, however, are needed when comparing the current financial performance at the company with its earlier numbers. In its prospectus, Blue Coat has put forward several non-GAAP measures as key metrics, including ‘adjusted revenue’ and ‘adjusted EBITDA.’ Although 451 Research relies on GAAP figures, there are compelling reasons – notably the deferred revenue write-downs, which are essentially an accounting exercise – that make it understandable why the company favors those nonstandard measures. With those disclaimers, Blue Coat reports adjusted revenue of $775m and adjusted EBITDA of $223m for its most recent fiscal year, which ended in April. Regardless of the measure, however, it’s fair to say that the new Blue Coat is a whole lot bigger and throws off more cash than it ever has before.

After much of the initial cleanup at Blue Coat was done under Thoma Bravo, the buyout shop sold the company to current owner Bain Capital last March. (As an aside, we would note that Thoma Bravo – despite having one of the biggest buyout portfolios in the tech industry – still hasn’t taken a portfolio company public.) Bain Capital paid $2.4bn, and looks certain to see its blue-hued portfolio company hit the market at north of $3bn.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

For tech M&A, it’s more of the same in May

Brenon Daly

Contact: Brenon Daly

Tech M&A spending appears to be settling into a new normal. In the just-completed month of May, total spending on tech, media and telecom transactions across the globe came in at $21.2bn, according to 451 Research’s M&A KnowledgeBase. That marks the fifth straight month that spending has totaled about $20bn, a level of consistency rarely seen in the generally lumpy tech M&A market. For comparison, in the January-May period in each of the past three years, the highest monthly spending has been at least twice the lowest monthly spending.

May also marked another month of consistency in terms of deal value being concentrated at the top end of the market. Last month, the three largest transactions accounted for half of the total spending, according to the M&A Knowledgebase. That has been true for every month so far in 2016 except February. May’s big-ticket deals included CSC’s purchase of Hewlett Packard Enterprise’s services arm, which stands as the largest divestiture of 2016; Bell Canada’s consolidation of Manitoba Telecom Services; and Vista Equity Partners’ buyout of Marketo, the second-largest take-private of 2016.

Assuming the relatively uniform monthly spending holds for the remaining seven months of 2016, the full-year value of tech deals would come in at about $275bn. That would be less than half of the amount spent in 2015, which represented a 15-year high in M&A, and basically match the level of 2013.

Deal flow in 2016

Month Deal volume Deal value
May 305 $21.2bn
April 335 $19.6bn
March 334 $23.3bn
February 319 $29.2bn
January 378 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

What do the ‘latent take-unders’ on Wall Street mean for startups?

Brenon Daly

by Brenon Daly

Either the acquirers of big tech companies on US exchanges are getting steals right now or Wall Street got duped last year. We say that because a majority of the public companies that have been acquired so far this year have signed off on deals – including takeover premiums – that value them at lower prices than they achieved on their own in 2015.

To put some numbers on the trend of latent ‘take-unders,’ we looked at the 13 tech vendors in 2016 that got erased from the NYSE or Nasdaq in deals valued at $500m or more, according to 451 Research’s M&A KnowledgeBase. In eight of the 13 transactions, companies sold for prices below their 52-week highs, with just five coming in above those levels. (We would note that while US equity indexes have whipped around a bit, they are basically flat over the past year.) Among the vendors that have tacitly agreed they are worth less now are TiVo, Polycom, Lexmark and Cvent.

Because of liquidity, public market valuations adjust far more quickly and visibly than private market valuations. We tend not to hear much about the ‘down-round’ sale of a startup. And yet, those discounted deals are coming, according to the recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster. A record two-thirds of the dealmakers (64%) we surveyed said private companies were likely to get sold for less during the remaining months of 2016 than they would have in the same period last year.

Startup valuation outlook