Category: technology stocks

Rackspace acquires Mailgun in appeal to hosted app developers

Contact: Thejeswi Venkatesh, Jason Verge

Hosted services provider Rackspace isn’t known for big M&A. Instead, it has focused on tuck-in acquisitions that build off of its hosting platform. In keeping with that strategy, the company on Wednesday announced the purchase of email-enabling API provider Mailgun. The deal should help make the Rackspace cloud more attractive to app developers.

Terms of the transaction were not disclosed, but Rackspace typically pays relatively low prices for small assets. Founded in 2010, Mailgun raised $1.1m in seed funding and reportedly had six employees. The Y Combinator startup was increasing revenue at 20% a month prior to the acquisition.

Mailgun provides APIs that allow users to send, receive and track emails easily from within their own applications. In a report detailing the deal, my colleague Jason Verge notes that the ability to add email to apps is a key feature in widespread demand. Rackspace looks to provide all of the tools customers need to build their technology stack on their cloud, and Mailgun adds to this toolbox.

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LifeLock plans life as public company

Brenon Daly

Contact: Brenon Daly

Despite consumer technology names falling largely out of favor on Wall Street, LifeLock has announced plans for a $175m IPO. The identity theft prevention vendor, which has 2.3 million customers, ran at basically breakeven on sales of $125m in the first half of 2012. The offering is being led by Goldman Sachs & Co, which owns 11% of LifeLock, along with Bank of America Merrill Lynch and Deutsche Bank Securities.

LifeLock’s filing comes as other consumer-focused technology IPOs have had a rough go of it. That’s true across a number of markets, from social networking (Facebook) to gaming (Zynga) to online backup (Carbonite has been nearly cut in half during its first year on the public market) to information security (AVAST Software pulled its IPO paperwork last month). Fairly or not, LifeLock – a company that spends about half its revenue on sales and marketing – will have to work its way through that bearish sentiment in the market.

Still, the company has been steadily increasing its subscriber base (at about a 20% rate) as well as bumping up its average revenue per subscriber (currently $9 per month). That has helped LifeLock get to a point where it generated $21m of free cash flow in the first half of 2012, which is only slightly less than it generated in all of last year. Also, we recently noted that LifeLock used some of that cash to take its first step into the enterprise market, acquiring ID Analytics. Although that business is still less than 10% of total revenue, it’s a welcome hedge for LifeLock, both in terms of technology and end markets.

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HCM: When the buyers get bought

Brenon Daly

Contact: Brenon Daly

One of the knock-on effects of IBM’s purchase of Kenexa is that a whole swath of capable buyers in the densely populated human capital management (HCM) market has now been erased. We noted that Big Blue’s reach for the HCM vendor followed similar acquisitions by SAP and Oracle over the past nine months, pushing the collective value of the three deals to nearly $7bn.

The acquisitions of Kenexa, SuccessFactors and Taleo effectively take them out of the M&A market. Certainly, they won’t be nearly as active as they had been. Over the past six years, the trio had announced more than 20 transactions with an aggregate deal value of over $1bn. On average, the companies tended to buy about a company each year, adding technology in markets adjacent to core HR functions such as learning management, workplace collaboration and compensation. (For its part, Kenexa has been the most-active acquirer of the three HCM players in recent years.)

In addition to having demonstrated the institutional appetite for acquisitions, the three companies also had the money to do them. Collectively, Kenexa, Taleo and SuccessFactors held more than $400m in their treasuries at the time of their takeout.

And while the remaining publicly traded HCM providers may, likewise, have plenty of cash to go shopping, not one of them has been anywhere near as active as their three rivals that have been snapped up. In fact, if we look at the M&A activity of the next three HCM midcap vendors we see that they have spent, collectively, less than $100m – or less than one-tenth the amount spent by the trio of now-acquired HCM firms.

Saba Software has done just one deal this year, after being out of the market entirely since 2005. Cornerstone OnDemand has only announced a single transaction (a $14m acquisition earlier this year) and Ultimate Software hasn’t printed anything since a $6m purchase in 2006. And a company executive recently indicated at the Canaccord Genuity tech conference that Ultimate didn’t expect to do any deals – certainly nothing sizeable – in the coming months.

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Another market, another wave of multibillion-dollar M&A

Brenon Daly

by Brenon Daly

A half-decade ago, tech giants SAP, Oracle and IBM went on a $15bn shopping spree that essentially consolidated the upper end of the business intelligence (BI) market. Now, the trio has done the same thing in another slice of the application software space, human capital management (HCM). On Monday, Big Blue joined the other two vendors with a billion-dollar HCM purchase of its own, paying $1.3bn for Kenexa.

Formerly a company that didn’t acquire application software providers, IBM nonetheless is set to hand over $46 for each share of Kenexa. (IBM valued the transaction at $1.3bn on a ‘net’ basis, which would exclude the roughly $50m in net cash that Kenexa held.) With its HCM acquisition, IBM follows SAP’s $3.6bn purchase of SuccessFactors last December and Oracle’s $2bn reach for Taleo last February.

IBM’s acquisition brings the trio’s total HCM spending on the deals to about $6.9bn – less than half the amount the three vendors paid in the consolidation of the BI market. However, the valuations paid for the flurry of HCM transactions have been significantly richer, ranging from 4-11.7 times trailing sales. For comparison, the BI deals went off at range of 3.7-5x trailing sales. Interestingly, in each of the consolidation waves, the last of the three transactions in the sectors garnered the lowest multiple: Kenexa at 4x sales and Hyperion Solutions at 3.7x sales.

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As shares of salesforce.com continue to grow, could its M&A follow suit?

Ben Kolada

Contact: Ben Kolada

Salesforce.com continues to satisfy investors, even after paying up for its largest-ever acquisition. Shareholders barely blinked after the company forked over $689m for Buddy Media – the highest-valued acquisition in the social media marketing segment. As long as its shares continue to appreciate, salesforce.com has received a vote of confidence to continue to announce large deals.

The company reports its fiscal third-quarter earnings after the close of business today. Equity analysts on average are expecting the company to report about $738m in revenue for its fiscal Q3, above the company’s previously reported guidance, which was already above analysts’ estimates. CRM shares have already appreciated 46% since the beginning of the year, and analysts are predicting a median price target for each salesforce.com share of $170.

As long as it keeps growing the value of its shares, investors may not mind the company doing more – and larger – acquisitions. We’d also note that they apparently don’t mind salesforce.com covering those deals with its own stock – one-third of Buddy Media’s total purchase price was covered with its own equity. The Buddy Media buy is also only the third time that salesforce.com has covered a portion of a transaction with its own equity.

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In HP’s earnings call, M&A talk expected to be muted

Contact: Thejeswi Venkatesh

Under the stewardship of its new CEO, Meg Whitman, who took the executive seat almost a year ago, Hewlett-Packard has been cautiously quiet when it comes to M&A. The usually acquisitive firm hasn’t announced a single deal this year, and likely won’t announce a large acquisition anytime soon, since many of its previous plays are widely regarded as blunders.

Following the purchase of Autonomy Corp, the largest software acquisition in seven years, and admitting failure in some of its previous transactions, most expect that HP won’t do another big deal in the near future.

The company is still reeling from some of its prior acquisitions. HP shuttered its Palm Inc business just one year after paying $1.4bn for the company. And HP recently announced that it would take an $8bn goodwill charge on its 2008 acquisition of Electronic Data Systems. Investors expect that write-downs in goodwill may continue because the value of HP’s goodwill ($45bn) exceeds its own market cap ($38bn).

Further reinforcing analysts’ expectations that HP will stay out of M&A is the fact that the company is struggling with its own operations. HP reports its fiscal third quarter after the closing bell today. The company has already indicated that it expects a loss of $4.31-4.49 per share. Over the past six months, HP’s shares have lost one-third of their value, while the Nasdaq has gained 5%.

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FICO adapts its BI software with $115m Adeptra acquisition

Contact: Thejeswi Venkatesh

Credit risk analytics giant FICO is acquiring Adeptra for $115m in order to get its hands on the target’s customer service issue-resolution SaaS software. The deal is FICO’s largest in eight years, and culminates a five-year reseller relationship between the two companies.

Adeptra provides customer service automation software using a SaaS delivery model to enable two-way mobile SMS, email and voice messaging as well as alerts between banks, card issuers, utilities and telcos and their customers. The company also provides related risk analytics software.

FICO will combine Adeptra’s software with its own predictive analytics decision management software in order to automate and expedite customer service resolution. FICO says Adeptra’s products are a natural fit with its Falcon Fraud Manager and Debt Manager products.

After reselling Adeptra’s software since 2007, FICO is now buying the company for $115m in cash, or 2.6 times trailing 12-month revenue. Adeptra had amassed more than 50 customers, including Citi, Barclays, Telstra and Sabre. The company lists ABS Ventures, ACT Venture Capital, Advent Venture Partners, Barclays and Foresight Group as its investors. Arma Partners advised Adeptra on its sale.

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JDS Uniphase tucks in GenComm as Wall Street focuses on earnings

Contact: Thejeswi Venkatesh, Ben Kolada

JDS Uniphase (JDSU) on Tuesday announced that after reselling GenComm’s test and measurement products, it has decided to acquire its OEM partner. GenComm provides wireless test and measurement hardware and software for troubleshooting, installation and maintenance of wireless base stations and repeaters.

Terms of the deal were not disclosed, but JDSU positioned the pickup as a tech and talent play, and further stated that revenue from GenComm’s products accounted for more than $7.5m of JDSU’s Communications Test and Measurement business division revenue in its fiscal 2012. The acquisition of Seoul-based GenComm will expand JDSU’s reach in the Asia-Pacific region.

The small tuck-in is likely to be quickly overshadowed by JDSU’s earnings call, which is scheduled after the closing bell today. Wall Street analysts expect the company’s fiscal year revenue to dip 7% to $1.67bn, due to the economic slowdown. JDSU isn’t the only company struggling in this sector, however. Danaher, a competitor to JDSU’s communications test and measurement business, recently reported Q3 earnings per share (EPS) below analysts’ estimates, and lowered its full-year 2012 EPS expectations.

Actian persuading Pervasive to go private

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

After a tough 15 years in the public spotlight, Pervasive Software may have finally found a graceful exit. The data integration vendor, whose revenue has flattened since the turn of the century, today announced that it has received an unsolicited $154m buyout offer from Actian.

Pervasive would be wise to accept the offer, as the Austin, Texas-based company had done little to excite investors during its public lifetime. The company’s annual revenue has been roughly in the $40-50m range ever since 2000, and its shares have appreciated less than the broad, tech-heavy Nasdaq.

The lackluster performance factored into today’s offer. Actian’s bid values Pervasive at 2.3 times trailing sales. The best comparable deal is IBM’s Cast Iron Systems pickup in May 2010, which we estimate was valued at 6.7x revenue. And Boomi took an estimated 20x valuation in its sale to Dell in November 2011, though that target was much smaller. In fact, had it not been for Pervasive’s strong cash balance, the deal value would have been much less palatable. Pervasive held $42m in cash and no debt as of June. That treasury reduces the acquisition’s total cost to Actian by more than one-third.

Pressuring Pervasive’s shareholders to act on the offer, Actian is taking an unusually persuasive tone in its acquisition announcement, blatantly pointing out that its offer is the highest closing price reached by Pervasive’s common shares in the past 10 years. The deal carries a 30% premium to Pervasive’s closing share price on Friday, August 10.

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VMware’s aggressive M&A of disruptive technologies

Brenon Daly

Contact: Brenon Daly

One of the highest compliments that can be paid to any technology company is to call it ‘disruptive.’ And by both organic and inorganic means, VMware has certainly earned that accolade. That’s on top of the more than $40bn of market value that it has also earned.

Starting with its homegrown server virtualization (a radically disruptive technology to the server industry), VMware has steadily expanded into other markets through M&A. Along the way, we’ve seen that at the root of disruption is conflict, with VMware’s acquisitions putting it on a collision course with vendors of various sizes in various markets.

For instance, VMware has taken some shots at Microsoft through purchases such as Zimbra and SlideRocket, which take aim at Microsoft cash cows Exchange and PowerPoint, respectively. More recently, VMware dropped $1.26bn on Nicira, a deal that could threaten Cisco Systems and other networking providers because Nicira’s technology effectively virtualizes networks.

And earlier this week, VMware bolstered its log management/analytics business by picking up Log Insight. The acquisition is a bit of an elbow jab at Splunk, which has collected a sky-high market capitalization of nearly $3bn as the market leader in log management/analytics. Of course, it’s important to keep these tussles in perspective – Splunk is still a Gold Sponsor at VMworld later this month.

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