Category: technology stocks

Survey indicates economic concerns clouding deals

Brenon Daly

Contact: Brenon Daly

Even more than pricing, the uncertain economic outlook is getting in the way of closing deals, according to a survey by 451 Research and Morrison & Foerster of more than 300 executives, corporate development officials, lawyers/bankers and other M&A figures. More than seven out of 10 respondents indicated the uncertainty is the primary reason that M&A spending is running essentially where it was in the recession-plagued year of 2009, snapping two straight years of higher spending on deals. See our full report on the survey.

In the survey – which was sent out in early October, after the close of the third quarter – fully seven out of 10 (71%) respondents said the questionable outlook for growth in the US was a ‘strong’ contributor to the sluggish M&A market. Another way to look at it: Six times as many people (71% vs. 12%) said the precariousness of the US economy is crimping deal flow compared with those that saw no impact. Market forecasters predict third-quarter revenue for S&P 500 companies will actually come in lower than Q3 2011 levels, which would be the first year-on-year sales decline in three years.

Those concerns about growth appear justified, since many of the bellwether tech vendors reported results for the third quarter. For instance, a slump in third-quarter sales at Intel is almost certain to leave revenue for 2012 below the level from last year.

The chip giant followed up a 5.5% decline in sales during the July-September period with a forecast for a scant 1% revenue increase in the final quarter of this year. Against that backdrop of anemic sales, Intel has scaled back its M&A program. In the first half of 2012, Intel announced a half-dozen transactions, including four of them with disclosed values of more than $100m. Since midyear, it has done just three small purchases.

Similarly, Citrix – which has lost nearly one-quarter of its market value since mid-2012 – has done just one small purchase since then. In the first half of 2012, Citrix announced four acquisitions valued, collectively, at more than $500m. For more on activity and forecasts for the M&A market, see our full report on the survey.

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

Marketo in the market?

Brenon Daly

Contact: Brenon Daly

Although a couple of marketing automation vendors have, collectively, generated $2bn of market value in two recent richly priced IPOs, the next significant exit in the sector may be a trade sale. Marketo is rumored to be checking the market to gauge interest from buyers. High on that list of interested suitors, according to several sources, is Oracle.

A sale of Marketo, if it happens, would reverse the expected path of the six-year-old company. It doubled sales in 2011 and, we understand, will roughly double sales again this year to about $55m. That rapid growth helped push the company’s valuation in a round of funding in 2011 to about $500m, according to sources.

Obviously, a buyer would have to top that level to take home Marketo. In addition to Oracle, other companies that may have taken a look include salesforce.com and Intuit, market participants say. Some of the interest may have been spurred by ExactTarget’s recent purchase of Pardot.

Still, price may prove a snag for any acquisition of Marketo. Wall Street has given a warm embrace to two of Marketo’s rivals that have come public in the past six months or so. ExactTarget currently trades at about $1.5bn, or 5.3 times 2012 projected sales, while Eloqua garners a market capitalization of $650m, or 7.1 times this year’s sales. Of course, Marketo is growing much faster than either of its larger rivals.

Carbonite looks upmarket with Zmanda buy

Brenon Daly

Contact: Brenon Daly

After organically attempting to build up its SMB backup business over the past two years, Carbonite decided it needed to do some shopping to accelerate that initiative. The consumer-focused company said Thursday that it will hand over $15m for backup and recovery vendor Zmanda. It is Carbonite’s first acquisition since it went public in mid-2011.

Carbonite’s push into the SMB market is crucial for its business, but it is a risky move for a company that sold exclusively to consumers for the first five years of its life. Carbonite only unveiled an SMB offering in 2010, and that business currently contributes only 15 cents of every dollar in bookings.

As it looks to move upmarket, Carbonite is also facing risks to its core business. The consumer backup market is a lot more cluttered and confused than it was when Carbonite launched in 2005. For instance, Dropbox – although not a full backup vendor by any means – only got going two years after Carbonite, but it has nonetheless drawn 50 million users who store files in that service. Privately held Dropbox doesn’t disclose its revenue but it is thought to be nearly three times bigger than Carbonite’s.

The acquisition of Zmanda also comes as Carbonite is working through recent changes in its basic business, such as introducing additional editions of its core backup offering and shifting around its advertising spending. (Advertising is Carbonite’s single biggest expense, typically consuming about half of the company’s revenue in any given quarter.)

Carbonite has, admittedly, tripped up on a few of those changes. After posting 43% sales growth in the first half of 2012, it lowered its forecasted revenue growth rate to just 34% growth for the back half of this year. (Carbonite, which is in the process of swapping out its CFO, reports Q3 results on October 25.) Shares of the company are currently changing hands at their lowest level since the IPO. Wall Street values the backup vendor, which will record sales of about $83m this year, at just $160m.

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

Microsoft marketing tries to take flight with MarketingPilot

Ben Kolada

Contact: Ben Kolada

Microsoft’s nascent marketing business got a small boost on Wednesday when the company announced the acquisition of marketing automation veteran MarketingPilot Software for an undisclosed sum. Although we’ve been expecting Microsoft to make a marketing buy to add to its CRM business, we anticipated something more significant.

Few details were provided on the rationale for the deal, other than it seems that MarketingPilot will be slotted into Microsoft’s Dynamics CRM business. We think that Microsoft could be proactively adding traditional marketing automation to its CRM suite to better compete with salesforce.com’s feature set, which is strong in social marketing but weak in lead generation.

The transaction is an interesting competitive move, since most of Microsoft’s CRM rivals have focused on social media marketing M&A. However, buying a dated and presumably small company likely won’t considerably alter the competitive landscape for marketing software.

No terms were released on the acquisition, but given MarketingPilot’s size and age, and the language used in the press release (PR), we doubt that the price was substantial. MarketingPilot was founded in 2001 and has 30 employees (who have all joined Microsoft). Further, pure-SaaS companies are receiving the highest valuations nowadays, but in the PR announcing the deal, Microsoft notes that MarketingPilot’s software is available both in the cloud and on-premises.

The transaction is only Microsoft’s second inorganic foray into marketing and advertising software, after its 2008 purchase of Navic Networks for a price reportedly in the range of $200-300m.

Separately, Microsoft will report fiscal year 2013 first-quarter earnings after the closing bell today. Analysts are expecting the company to report revenue of $16.4bn (a nearly 6% drop from the year-ago quarter).

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

Is Wall Street readying to play Violin?

Brenon Daly

Contact: Brenon Daly

Even as enterprise-focused IPOs have come back into fashion, one key sector of the IT stack has missed out on the recent parade of multibillion-dollar offerings: storage. Indeed, Wall Street has only really seen one new arrival from the enterprise storage market since a flurry of IPOs a half-decade ago that included Data Domain, Isilon, 3PAR and others. Of course, investors can’t buy shares in hardly any of the storage vendors that went public in 2007-2008 because they’ve pretty much all been snapped up by larger companies.

But there very well may be a new storage company coming to market shortly in what should be a hot offering. Violin Memory is rumored to have filed its IPO paperwork in a confidential filing with the SEC and plans to debut in early 2013. We understand that J.P. Morgan Securities, Deutsche Bank Securities, Bank of America Merrill Lynch and Barclays Capital will lead the planned $300m offering.

Market sources have indicated that the fast-growing flash array provider is targeting an initial valuation of more than $1.5bn, which would be twice the price of its latest funding round. It raised $50m in March. We understand that Violin will record about $125m in sales in the current year, which wraps at the end of January. That would be more than twice the revenue it recorded last year.

Assuming Violin does make it public in January, it would be the first significant enterprise storage offering since fellow solid-state storage startup Fusion-io hit the market in mid-2011. That company debuted at a $1.8bn valuation and has added another $1bn to its market capitalization since then.

The relative drought in storage IPOs stands out even more when we consider the fact that we’ve seen high-flying IPOs from nearly all the other sectors supplying the technology that keeps businesses running. In terms of application software, Workday debuted on Friday at a staggering $7.8bn, while the standout infrastructure software offering, Splunk, has created $3bn in market value since its April debut. Palo Alto Networks, an IT security vendor that went public three months ago, is currently valued at $4.2bn. Even the networking sector has a pair of players ready to hit the market shortly, with both Gigamon and Ruckus Wireless on file now.

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

Will SoftBank-backed Sprint look to M&A?

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

After churning through the rumor mill for the past half-week, official word came Monday that Japanese telco SoftBank is making a significant investment in Sprint, the third-largest mobile carrier in the US. SoftBank is acquiring 70% of Sprint in exchange for approximately $20bn, of which $12bn will be distributed to shareholders in exchange for 55% of the existing company. The remaining $8bn will be used for network expansion, primarily related to deploying 4G LTE. Beyond those efforts, the new Sprint could look to use some of its newfound cash to expand via M&A.

In announcing the deal, Sprint noted that this investment comes at a prime time. The company is continuing to execute on a multiyear turnaround. After Dan Hesse took the helm in December 2007, he spent the next three years focused on reversing Sprint’s customer attrition and improving its beleaguered brand. (Of course, some of those difficulties stemmed from its acquisition of Nextel in 2004. However, regarding customer service, those issues have largely been resolved, as the table below shows.) SoftBank’s move comes during Sprint’s investment phase, where it is now focused on building out its network and improving operational efficiency.

Now, with a stronger balance sheet, we wonder if SoftBank-backed Sprint will look to M&A for accelerated expansion. SoftBank has already shown a willingness to consolidate telecom assets in its home Japanese market. Earlier this month, it announced that it would buy Japanese wholesale broadband provider eAccess for $1.84bn. And in 2006, it picked up Vodafone K.K., the Japanese mobile unit of Vodafone Group, for about $16bn.

Although Sprint has struggled with M&A in the past, it could be spurred to move once more, as there are only a finite amount of targets left in the US and one was recently removed from reach. Earlier this month, T-Mobile announced that it was acquiring MetroPCS, which had long been rumored as a Sprint acquisition target. After MetroPCS, the next most likely candidate for Sprint to buy is Leap Wireless, which, including its cash and debt, is valued at about $3.2bn.

Wireless service provider satisfaction rating by company – ranking of customers who say they are very satisfied with their current wireless provider

Rank October 2006 September 2012
1 Verizon – 45% Verizon – 48%
2 T-Mobile – 33% Sprint – 32%
3 Cingular (now known as AT&T) – 30% T-Mobile – 28%
4 Sprint – 25% AT&T – 21%

Source: ChangeWave Research

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A highly remunerative Workday

Brenon Daly

Contact: Brenon Daly

Apparently, the third time is the charm for second-chancers. Workday became the third significant tech IPO in 2012 headed by executives who previously ran similar companies in the Internet 1.0 era. And while each of the other ‘redo’ companies (ServiceNow and Palo Alto Networks) have created more than $4bn of market value since their IPOs last summer, Workday soared past that level. In fact, on a fully diluted basis, the human capital management vendor is valued at more than the two other earlier IPOs combined.

In its offering, Workday priced its 22.8 million shares at $28 each, raising an eye-popping $638m. That’s a mountain of money, roughly three times more than most other ‘big’ tech IPOs raise. But that was just the start for the company, which was founded in 2005 by executives from PeopleSoft after that ERP veteran was acquired by Oracle.

Once trading began on Friday, the stock continued to move higher, changing hands at $47 late in the session. With about 160 million shares outstanding (on a non-diluted basis), Workday is being valued at $7.5bn. That works out to 30 times this year’s expected sales of about $250m. For an indication of just how rich that is, consider that PeopleSoft garnered just 4x sales when it was snapped up in 2005. Or another way to look at the price: Workday is commanding three-quarters of the valuation of PeopleSoft while only putting up one-tenth the sales of the first-generation version.

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

Box goes for integrations, not acquisitions

Brenon Daly

Contact: Brenon Daly

Box hasn’t been a buyer. The enterprise file-sharing and collaboration startup has only inked one acquisition in its history, and that deal was done exactly three years ago. Meanwhile, the market is rapidly consolidating around it, with both big and small buyers rounding out their technology portfolios. Just this year alone, Box’s consumer market rival, Dropbox, has inked three purchases.

It’s not like Box can’t afford to go shopping. Earlier this summer, the startup pulled in $125m in fresh funding, bringing its total amount raised to $287m. But so far, it hasn’t put that toward M&A, preferring instead to partner with a wide swath of companies. Indeed, partnerships are a major theme at BoxWorks 2012, its ongoing annual customer conference. At the two-day event, Box announced partnerships with Proofpoint for data loss prevention and GoodData for analytic dashboards, along with other initiatives.

Part of what has kept Box out of the market is that it has sought to establish itself as an open, inclusive platform vendor. As part of that strategy, companies tend to favor integration ahead of acquisition.

But there comes a point for many companies when they need to own the technology outright. For cloud stalwart salesforce.com, that point came when the company hit its seventh year in business, which is where Box finds itself now. In the half-decade since then, salesforce.com has reeled off 26 deals that have taken it far beyond its core sales force automation product and helped create some $21bn of the company’s market value.

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LifeLock takes its lumps in IPO

Brenon Daly

Contact: Brenon Daly

The post-IPO slide of LifeLock highlights yet another case of overinflated private market valuations. The identity theft prevention vendor has had a tough run since its debut on the NYSE on Wednesday. LifeLock priced at $9 per share, which was below its expected range, and has never traded above that level in the aftermarket. In mid-Thursday afternoon trading, shares were changing hands at about $8.10.

That decline has brought LifeLock shares to nearly the same level they were when the company sold equity more than two years ago. In May 2010, Industry Ventures paid $7.88 per preferred share of LifeLock in a series E round. That’s only a 3% discount to LifeLock’s current market price.

Obviously, both valuations are just ‘moment in time’ prices. And in this particular moment, consumer names in nearly all markets are out of favor on Wall Street. Recall that consumer Internet security provider AVAST Software pulled its IPO paperwork in late July after not being able to get a valuation it wanted.

As we look back on recent IPOs in the security market, we are reminded that where a company starts out isn’t necessarily where it ends up. For instance, enterprise security vendors Sourcefire and ArcSight both had underwhelming IPOs, trading underwater before going on a tear on Wall Street. In the end, ArcSight got taken off the board in September 2010 at four times its offering price. Meanwhile, Sourcefire is currently trading at three times the level at which it first sold shares to the public in early 2007, compared with a 30% return over that period for the Nasdaq.

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A double-dip for tech M&A

Brenon Daly

Contact: Brenon Daly

Three-quarters of the way through 2012, tech M&A activity is looking a lot like recession-plagued 2009. Spending on deals around the globe so far this year has slid to just $115bn, a decline of more than one-third compared with the same period last year and 20% lower than Q1-Q3 2010. The dealmaking slump comes amid a solid bull market for equities, with the Nasdaq up some 20% so far this year.

Looking ahead, the rate for the first three quarters puts the full-year 2012 on track for about $150bn in total M&A spending. Assuming that pace holds, that would roughly match the level of 2009 and would represent less than half the amount spent on tech acquisitions in each year from 2005-08. (We’ll have a full report on Q3 M&A activity in tomorrow’s Daily 451.)

The disconnect between the M&A and stock markets, which historically have been tightly correlated, suggests that activity in one of the markets doesn’t necessarily reflect fundamentals. If we had to guess which one is less rooted in reality, we would probably start with the Nasdaq, which has been trading above 3,000 since early August. The tech-heavy index hasn’t been at that rarified level in 12 years.

And yet, the run has come even as corporate earnings rates have slowed, the European debt picture remains unresolved and the US economy faces huge uncertainty around both elections and the potential expiration of measures that have stimulated the economy in recent years (the so-called ‘fiscal cliff’).

Of all the concerns that are keeping corporate buyers out of the market right now, we suspect that the lackluster earnings outlook is the main reason. We expect to hear more about that in two weeks or so, when the third-quarter earnings season kicks off in earnest.

But as one indication of how the reports might go, consider that a recent survey by ChangeWave Research, a service of 451 Research, of more than 2,600 corporate employees indicated that one of every three (33%) predicted that Q3 sales at their company would come in below plan, compared with just one in five (19%) who projected that their company would top expectations. The percentage seeing sales at their companies falling short has risen steadily throughout 2012. On the other side, the percentage seeing stronger-than-expected sales in Q3 is at its lowest level since the summer of 2009.

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