Category: technology stocks

After Alibaba, the IPO market begins long slide lower

Brenon Daly

Contact: Brenon Daly

The record-setting offering by Alibaba in mid-September stands as the clear peak for IPOs in 2014. The only question is how sharp the decline will be for the rest of the year.

So far, the slope hasn’t been that steep. CyberArk followed quickly on the heels of the offering by the Chinese e-commerce company, with the online identity management vendor nearly doubling on debut and holding up solidly in the aftermarket. That was followed a week later by online home furnishings retailer Wayfair pricing above its expected range and soaring onto the NYSE at a valuation of more than $3bn. And then last week, marketing automation provider HubSpot surged onto the public market, trading at about 10x trailing sales. (Subscribers: See our report on the HubSpot IPO).

After this batch of IPOs, however, the drop-off accelerates. Currently in the pipeline are companies that are looking like they will be tough sells on Wall Street, including the deeply unprofitable GoDaddy, the profligate Box and the old-line consolidator Good Technology. (We would note that both Box and Good Technology seem to have acknowledged that they may not be pulling in any money from Wall Street any time soon, and have retreated to raising from late-stage investors again.)

Looking at the calendar, it’s unlikely that many other companies are aiming to hustle and get in their IPO paperwork and go public before the end of the year. That’s particularly true as the equity markets hit a rough patch. Both the Nasdaq and the S&P 500 dropped about 4% just last week, the sharpest weekly decline in more than two years. Volatility also ticked up substantially. Put that all together, and it’s looking like a long slide to close 2014 for new offerings.

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For Symantec, the spinoff is just the start

Brenon Daly

Contact: Brenon Daly

After a decade of uneasy – and ultimately unfulfilling – marriage, Symantec has finally served divorce papers to its ill-matched partner, Veritas. In going solo, Big Yellow will return to its roots as a stand-alone information security company while spinning off the smaller information management (IM) business at some point before the end of next year.

The separation means that Symantec’s long-suffering shareholders will continue to own Veritas, which cost them a record $13.5bn worth of stock nearly a decade ago. (Since the acquisition closed in mid-2005, Symantec stock has returned just 10%, while the Nasdaq has doubled during that period.) Or more accurately, we should say Symantec shareholders will continue to own the lower-valued IM division until it can finally be sold.

There’s little doubt, in our view, that the spinoff is an interim step. It allows the unit to put up a few quarters of stand-alone performance, perhaps even get some growth back in the IM business. But even as it stands, the division generates more than a half-billion dollars of operating income each year. A buyout shop could certainly make the leverage work on a business like that, particularly once it was ‘optimized.’ (Overall, Symantec spends some 36% of revenue on sales and marketing, even as its sales flatline.)

While the IM business is ultimately likely to land in a private equity portfolio, we would note that we heard an intriguing rumor as Symantec was working through this process. The rumor essentially had Symantec trading its IM unit to EMC for its security division, RSA.

On paper, the swap makes sense, allowing each of the tech giants to focus on their core businesses. According to our understanding, however, talks didn’t get too far along because of the valuation (the Veritas business is about twice as big as RSA) and because of the tax hit that the companies would take due to the asset swap. (As it is, the spinoff of Veritas is tax-free to Symantec shareholders.) And now, of course, EMC is under pressure to undertake a corporate restructuring of its own.

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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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Can tech companies wearing sensible shoes be nimble?

Brenon Daly

Contact: Brenon Daly

As the tech giants get more and more gray hair on their heads, they all seem to desperately want to be young again. How else to explain the impetuous plan by the sensible shoe-wearing Hewlett-Packard to separate its enterprise and consumer businesses, with the stated goal of making the two independent companies more ‘nimble?’ Do the architects of the plan somehow think that cutting in half a 75-year-old company will create two businesses in their late 30s?

Remember, too, that about three years ago, HP initially dismissed a similar (but smaller-scale) plan to spin off just its PC business. At the time, executives said HP was ‘better together,’ citing low supply costs, improved distribution and easier cross-selling from the broad HP portfolio.

So why the change of heart that will result in a messy disentanglement taking about a year to implement, costing billions of dollars and resulting in as many as 10,000 additional job cuts? We suspect the fact that HP sales are now 10% lower than when it dismissed that spinoff plan may have something to do with it. (As we noted earlier, HP is basically splitting itself into two companies roughly the size of Dell, which itself had a massive and contested change in corporate structure last year as it sought a ‘fresh start’ through a $24bn leveraged buyout (LBO).)

In addition to HP – Silicon Valley’s original startup – a number of other tech industry standard-bearers have found (or likely will find) themselves under pressure to radically overhaul their corporate structure in pursuit of growth. Some of these have already been targeted by activist hedge funds, while others are still on a watch-list:

  • CA Technologies: Revenue is declining at the 38-year-old company, but it still throws off a ton of cash, trading at less than 10 times EBITDA. Its size and financial profile make it a textbook LBO candidate.
  • EMC: Already under pressure by an activist shareholder to ‘de-federate’ its business, EMC has staunchly resisted calls for change with a variation on the ‘better together’ theme. (But then, so did eBay until recently.) With VMware, it owns one of the most valuable pieces of the IT vendor landscape.
  • Symantec: After a decade of trying to marry enterprise storage and security, a corporate divorce seems likely at some point. (The three CEOs the company has had in the past two years have all kicked around such a separation.) Meanwhile, the topline is flat and Symantec trades at a discount to the overall tech market at just 2.5 times sales.
  • Citrix Systems: In business for a quarter-century, Citrix rode the wave of client-server software to a multibillion-dollar market value. However, despite numerous acquisitions and focus, it has yet to fully capitalize on the next wave of software delivery, SaaS. That business currently generates about 25% of total revenue at Citrix but is only slightly outpacing overall growth, despite industry trends. Citrix stock has been flat for the past four years, while the Nasdaq has nearly doubled during that period.

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‘One HP’? Not any longer

Brenon Daly

Contact: Brenon Daly

In the largest-ever corporate overhaul of a tech company, Hewlett-Packard said Monday that it will split its business in half. The 75-year-old company, which had recently marketed itself under the tagline ‘One HP,’ will separate its broad enterprise IT portfolio from its printer and PC unit within a year. Each of the two stand-alone businesses (Hewlett-Packard Enterprise and HP Inc.) will be roughly the size of rival Dell, booking more than $50bn of sales annually.

Increasing those sales, even under the new structure, will be challenging. In discussing the planned separation, HP executives emphasized that the move comes at the end of a three-year ‘fix and rebuild’ phase at the company. During that time, HP’s top line has shrunk more than 10%. It has already laid off 36,000 employees, and said Monday that the final number of employee cuts may reach as high as 55,000. And HP has virtually unplugged its M&A machine, even as rivals such as IBM and Cisco continue to buy their way into new, faster-growth markets.

Through the first three quarters of its current fiscal year, HP has flatlined. The company indicated that will continue into its next fiscal year, which starts in November. While HP didn’t offer specific growth rate targets or forecasts for the stand-alone companies – once they get on the other side of the hugely disruptive separation – executives noted that the two businesses would be more ‘nimble’ and ‘responsive’ than they would be together.

That may well be, but the two businesses will also be burdened by higher costs individually than they currently face. ‘Dis-synergies’ such as higher supply and distribution costs, as well as supporting two full corporate structures, will shrink cash flow, which has been the key metric for Wall Street’s evaluation of HP’s mature business. Still, HP will throw off several billion dollars of free cash flow.

Some of that cash appears to be earmarked for M&A, although spending there will be a distant afterthought behind dividends and share repurchases. (And HP executives were quick to add that any deals would be ‘return-driven’ and ‘disciplined.’) But even stepping back into the market for acquisitions represents a dramatic shift at HP. After all, it was a series of poor acquisitions – most notably Autonomy but also services giant EDS – that partially forced the prolonged restructuring that culminated in this planned separation.

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IPO = Interminable Private Offerings

Brenon Daly

Contact: Brenon Daly

For one pair of money-burning companies, IPO no longer stands for Initial Public Offering – instead, it’s Interminable Private Offerings. Unable to graduate to Wall Street, both Box and Good Technology have retreated, returning hat in hand to the ranks of late-stage investors for their next round of life-sustaining capital.

Good Technology, a mobile management software consolidator that has never come close to turning a profit, drew in another $80m on Wednesday. That comes almost three months after collaboration software vendor Box – a startup that spends more on sales and marketing than it takes in as revenue – pulled in $150m. (Tellingly, Box’s latest round was reportedly done at a flat valuation.)

Taken together, Good Technology and Box have now raised more than $800m in funding from private sources. In comparison, Good Technology had hoped to raise $100m from public investors, while Box plans a $150m offering, scaled back from an original $250m.

The new fundings are a clear setback to both Good Technology and Box, which have been on file to go public since May and March, respectively. Further, it may well give pause to other companies that were looking to Wall Street to subsidize their free-spending ways. After all, an S-1 is an expensive, time-consuming and very revealing bit of paperwork.

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As growth flatlines, TIBCO taps out

Brenon Daly

Contact: Brenon Daly

Announcing the largest tech take-private in 16 months, Vista Equity Partners said it will acquire middleware and analytics software vendor TIBCO Software for about $4.3bn. The leveraged buyout (LBO) comes after the one-time highflier spent the previous several months exploring ‘strategic alternatives.’ Even though the LBO values TIBCO at a market multiple of some 4x trailing sales, the exit price is less than TIBCO fetched on its own this time last year. That reflects the difficulty the company has had in finding any growth recently.

Private equity (PE) firm Vista will pay $24 for each of the roughly 165 million TIBCO shares outstanding. At more than $4bn, TIBCO stands as the largest-ever purchase for Vista, more than twice the size of any check the PE firm has written in the past.

At an enterprise value of $4.3bn, TIBCO is going private at roughly 4x its trailing sales of $1.1bn. (Both sales and profit have declined through the first three quarters of TIBCO’s current fiscal year.) The multiple is slightly richer than the 3.6x sales that rival Ascential got from IBM almost a decade ago. For more of a current comp, rival Informatica – which is only a smidge smaller than TIBCO, but is still growing at double-digit rate – trades at roughly $3.7bn market value. Subscribers: Look for our full report on the transaction later on 451 Research.

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With its IPO, Cyber-Ark floats on high water

Brenon Daly

Contact: Brenon Daly

It seems the record-setting Alibaba offering didn’t suck up all the IPO money on Wall Street after all. Although investors handed out a staggering $25bn to the Chinese e-commerce vendor last week, they stepped right back into the market to buy newly minted shares of Cyber-Ark on Thursday. And boy, did they buy.

Cyber-Ark, an Israel-based identity and access management (IAM) provider, sold 5.4 million shares at an above-range price of $16 each. Once free to trade, shares doubled. (In early afternoon trading under the ticker ‘CYBR’ the stock was changing hands at $32.20, having never dipped below $30 on its debut.) Cyber-Ark’s IPO stands as the first tech offering (aside from Alibaba) in some three months.

The strong demand for Cyber-Ark pushed it to a rather princely valuation. With roughly 30 million shares outstanding, the company’s market cap is nosing toward the magical $1bn mark. That stands out because Cyber-Ark, while profitable, will put up less than $100m in sales in 2014. Further, those sales are coming from old-fashioned license and support, rather than the more highly valued subscription delivery model. The company has been increasing revenue in the 30-40% range in recent quarters. (See our full report on Cyber-Ark’s filing.)

Cyber-Ark is particularly richly valued when compared with other IAM providers, in both the IPO and M&A markets. It trades at more than twice the current multiple of Imprivata, which went public three months ago and is currently under water. (Imprivata focuses entirely on the healthcare market, while Cyber-Ark counts more than 1,500 customers across a range of industries.) Meanwhile, earlier this month, direct rival BeyondTrust got flipped to another PE portfolio in a deal that we estimate went off at about 3x trailing sales.

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Concur is just the latest of SAP’s pricey plays in the cloud

Brenon Daly

Contact: Brenon Daly

Announcing the largest SaaS acquisition in history, SAP will pay $8.3bn for travel and expense management software provider Concur Technologies. The purchase comes as the German giant is on the hook for doubling its cloud revenue in 2015 – a corporate target that has driven SAP’s recent M&A.

In its 42-year history, SAP has announced seven acquisitions valued at $1bn or more, according to The 451 M&A KnowledgeBase . However, the five most recent deals have all been pickups of subscription-based software vendors. (SAP’s two consolidation plays for firms hawking software licenses came in 2007 and 2010, with Business Objects and Sybase, respectively.) The purchase of Concur is the Germany company’s largest acquisition, and the fifth-largest transaction in the software market overall.

More significantly, SAP is paying up as it tries to move to the cloud. Including the Concur buy, SAP has handed out a lavish multiple, on average, of 11x trailing revenue to its SaaS targets. (Obviously, revenue doesn’t fully reflect the economic value of multiyear contracts common at SaaS firms. But even on a more liberal measure of business activity such as bookings, SAP has paid double-digit multiples in its subscription-based acquisitions.)

The SaaS premium stands out even more when compared with the valuations SAP has paid for conventional license-based vendors. The purchases of both Business Objects and Sybase went off at slightly less than 5x trailing revenue, or half the average SaaS valuation. Further, SAP itself trades at less than half the valuation it has paid for its SaaS acquisitions.

SAP acquisitions, $1bn+

Date announced Target Software delivery model Deal value Price/revenue multiple
September 18, 2014 Concur Technologies Subscription $8.3bn 12.4
October 7, 2007 Business Objects License $6.8bn 4.7
May 12, 2010 Sybase License $6.1bn 4.8
May 22, 2012 Ariba Subscription $4.5bn 8.6
December 3, 2011 SuccessFactors Subscription $3.6bn 11.7
June 5, 2013 hybris Subscription $1.3bn 10.7*
March 26, 2014 Fieldglass Subscription $1bn* 11.8*

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

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At the Wall Street box office, Alibaba is a blockbuster

Brenon Daly

Contact: Brenon Daly

In Hollywood, a blockbuster debut that is expected to help support the release of other films around the same time is known as a ‘tentpole.’ And while that phenomenon may have also played out in the IPO business in the past, no one is expecting the Alibaba debut later this week to help prop up other offerings. Quite the opposite, in fact.

To understand why, think of Alibaba as Godzilla (the monster, not the movie). The Chinese e-commerce giant is looking to come to market – backed by no fewer than 20 investment banks – and create almost a Facebook-size valuation overnight. The sheer size of Alibaba’s record-setting offering of some 320 million shares at (currently) $68 each basically pushes other IPO candidates outside the awning of any Alibaba tentpole.

With Alibaba and its underwriters looking to place billions of dollars of equity, buyers are unlikely to step right back in to buy smaller-ticket tech IPOs. That means solid offerings that are in process, such as Cyber-Ark and HubSpot, may initially open a bit soft at the box office that is Wall Street.

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