Category: VC

Its IPO stuck, Box is no longer the upstart startup

Brenon Daly

Contact: Brenon Daly

This year’s Burning Man and BoxWorks have more in common than just a spot on the calendar. The two festivals have grown far beyond the original events, both in terms of scope and attendees. In fact, both the bacchanal in the desert and the Box user conference, in their own ways, have grown so much from their anti-establishment roots that they’ve now become part of the establishment. The onetime fringe events have gone mainstream.

While the Burners debate whether the festival ‘sold out’ its founding principles, the Boxers have posed a similarly existential question: What are we now?

Throughout its three-day conference for developers and customers, which wrapped Thursday, Box took great pains to show how much it has grown up in its nine years in business. For the first time ever, BoxWorks was held at an actual convention center (the same location Oracle will use later this month for its user conference and salesforce.com will use next month). And more than ever before, Box populated its panels and presentations at the event with big company representatives, consciously underscoring just how far it has come since its fabled ‘pivot’ away from the consumer business.

But the clearest indication of the change at Box came from the very top of the company. CEO Aaron Levie, who normally freewheels through speeches, sounded much more measured. The 20-something-year-old CEO dialed down his snark and couched some remarks in language that read like it came from an SEC filing. (Maybe filing an S-1 does that to a chief executive?)

As an example of this new business-like attitude, consider the shift in Box’s relationship with onetime nemesis Microsoft. At previous BoxWorks, Levie thrived by bashing Microsoft, positioning the company as a lumbering dinosaur that had been outflanked by the nimble startup, Box. And yet, one of the key features for Box that Levie played up during his keynote was the fact that Box now partially integrates into Office 365. (For the record: It’s in beta, and comes more than three years after Microsoft launched Office 365 and Levie blogged that Box ‘would love’ to connect with the offering.)

With Box likely to put up about $200m in sales this year, it’s clearly no longer a startup. But what was made equally clear at BoxWorks this year is that the company is no longer an upstart, either. It’s turning into another enterprise software vendor, whether it likes it or not.

In our opinion, it is that realization that makes it more likely that Box will be sold or, at the least, be a more willing seller. In the consolidated, mature market of enterprise software – where a company like Microsoft puts up more revenue each day than Box does in a year – scale is an advantage. Despite all of its marketing spending and a more grownup user conference, Box still doesn’t have scale, and can likely only obtain that by getting acquired. So which company is likely to pick up Box? Hewlett-Packard is our top pick, followed by Cisco.

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

Big money for little companies

Brenon Daly

Contact: Brenon Daly

With Wall Street continuing to look like forbidding territory to most IPO candidates, where are money-burning companies going to restock their treasury? Increasingly, hedge funds and mutual fund giants are providing, collectively, the hundreds of millions of dollars in financing that might have otherwise come through IPOs.

This, of course, isn’t an entirely new phenomenon. But we can’t recall a time that has seen more late-stage funding than the just-completed second quarter. Okta, Atlassian, New Relic, Pure Storage and others all drew in financing during the past three months from investment firms that have historically only purchased shares in public companies. In many ways, it’s a wonder that it took the recent chill in the IPO market to spur this ‘crossover’ activity to new levels. (We’ll have a full look at the recent IPO market – as well as the other exit, M&A – in our report on Q2 activity available later today on 451 Research.)

From the money managers’ perspective, these investments in private companies offer a bit of portfolio diversification, as well as the opportunity to outpace the returns of the broader equity market, which has registered a mid-single-digit percentage gain so far in 2014. And on the other side of the investment, the late-stage companies stand to receive tens of millions of dollars from a single investor without all the SEC rigmarole and other public company exposure.

Further, with billions of dollars to put to work, the mutual funds and hedge fund giants haven’t shown themselves to be as ‘price sensitive’ as other traditional late-stage funders. (The discrepancy between valuations of illiquid private shares and freely traded public stock stands out even more now, as new issues are being discounted heavily in order to make it public at all. For instance, Five9 stock has never even reached the minimum price the company and its underwriters thought it should be worth, and currently trades at just 3.5 times this year’s revenue. Meanwhile, MobileIron shares have dropped almost uninterruptedly since the company’s IPO, falling back to only slightly above their offer price. MobileIron is currently valued at only about half the level that a direct rival received when it sold earlier this year.)

Like life, markets are cyclical and IPOs will undoubtedly come back into favor on Wall Street at some point. But in the meantime, many late-stage companies are calling on the big-money investors to keep the lights on. We would include Box in that category. The high-profile company, which has been on file publicly since March, has found its path to the public market a rather rocky one. Having already raised more than $400m in backing, we could well imagine the money-burning collaboration software vendor crossing off an IPO (at least for now) and going back to a crossover investor for cash later this summer.

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

Intralinks tracks down docTrackr

Brenon Daly

Contact: Brenon Daly

After opening up its M&A account last April with an opportunistic acquisition, Intralinks has followed that up with the somewhat more strategic $10m purchase of docTrackr. The purchase of the three-year-old digital rights management startup is significant because it shows Intralinks playing both offense and defense with M&A. Neither side used an advisor.

On the defense side, the deal ‘boxes out’ Box. The high-profile file-sharing company – which is likely to go public in the next few weeks and be valued in the billions of dollars – had licensed docTrackr for at least two years. As my colleague Alan Pelz-Sharpe notes in our report , there might not be much impact to Box’s business with docTrackr off the table, but Intralinks will mint some PR around the move, nonetheless.

In terms of building its business, docTrackr will slot into Intralinks’ enterprise business. That division, which generates nearly half the company’s overall revenue, is forecast to be the main growth engine at the company in the coming years. But for now, the enterprise division is basically flat. (All of Intralinks’ growth in 2013 – a year in which it increased total revenue 8% to $234m – came from its M&A-related business.)

Longer term, Intralinks has indicated it expects to grow its enterprise business 25-30% per year. That seems ambitious for a company that has seen sales there flat-line for two straight years. (Some of that performance is simply a function of accounting, with revenue lagging the actual subscriptions that Intralinks sells.) But even adjusting for that and looking at billings, the growth rate for Intralinks’ enterprise business has lagged that of rival collaboration vendors. The addition of DRM technology from docTrackr into the company’s platform hits a key point for customers, particularly those in the regulated industries that Intralinks has targeted.

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

A tale of two IPO markets

Brenon Daly

Contact: Brenon Daly

It’s not quite the clichéd ‘best of times, worst of times’ in the tech IPO market right now, but there’s a clear split in fortunes for companies coming to market. Whimsical consumer technology firms are back in favor, while the more serious enterprise-focused tech vendors are struggling to find buyers for their equity. That was shown in sharp relief in the divergent receptions of two tech companies – one from each of the broad sectors – that debuted Friday morning.

Representing enterprise tech vendors, we have Five9. On paper, the call-center software provider would appear to have a bullish profile for Wall Street: a pure SaaS delivery model, solid growth (30%+ in 2013) and a big opportunity in front of it (the company sizes its existing market at some $22bn). And how did that go over with investors? Well, Five9 had to take a sharp discount to even get public. It had planned to sell its shares at $9-11, but instead priced at just $7 and closed Friday at $7.52.

While Five9 was discounting its offering, the IPO from its consumer counterpart, GrubHub, was headed very much in the opposite direction. The online takeout ordering service sold more shares than originally planned at a higher price than originally planned. After pricing its offering at an above-range $26 per share, it closed at $34 on the NYSE.

The discrepancy in valuation between the enterprise and consumer companies is even more startling. Wall Street says Five9, which has roughly 48 million (undiluted) shares outstanding, is worth about $360m. That works out to about 4.3x 2013 revenue of $84m. On the other hand, GrubHub is valued at some $2.7bn, or nearly 20x 2013 revenue.

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

For tech M&A, the go-go days are going again

Brenon Daly

Contact: Brenon Daly

At least for the opening quarter of 2014, the go-go days are going again. Overall M&A spending in the tech, media and telecom (TMT) market set a record for the first three months of any year since the Internet bubble popped in 2000. Across the globe, the aggregate value of Q1 deals totaled $128bn, according to The 451 M&A KnowledgeBase. That puts 2014 on a run rate to hit an astonishing half-trillion dollars in M&A consideration for the full year.

Spending in the just-completed January-March period came in at roughly three times the level of a typical quarter in the years since the end of the recession. (On its own, the equity value of the proposed Comcast-Time Warner Cable transaction roughly equals the amount spent on all TMT deals in a typical post-recession quarter. But even backing out that mammoth transaction, Q1 spending would still stand as a post-recession quarterly record of $83bn.)

To indicate just how far Q1 stands out from the recent recession, consider this: total M&A spending in just Q1 2014 came in only 10% lower than the full year of 2009. So far this year, we’ve seen such blockbuster prints as the second-largest TMT transaction overall since 2002 (Comcast’s pending acquisition of Time Warner Cable), as well as the biggest price ever paid for a VC-backed startup (WhatsApp’s $19bn exit to Facebook).

While those two deals helped push M&A spending in Q1 to a new high-water mark, we saw solid activity across a number of submarkets that haven’t been busy since before the recession. Large-scale consolidation continued on a steady pace (Comcast-Time Warner Cable, plus several European telco transactions), but underneath that, the midmarket saw an above-average number of deals, with the median value surging to a post-recession record high. (Also, valuations of those midmarket transactions in Q1 basically matched the big-ticket deals, which hasn’t necessarily been the case in recent years.)

And finally, deal flow at the start of this year reflects an unprecedented level of youthful exuberance. Facebook, with its back-to-back purchases of WhatsApp and Oculus VR, obviously stands out. But we would add Google and FireEye to the list of acquirers that did uninhibited, speculative transactions so far in 2014. Look for our full report on Q1 M&A activity and valuations, plus our assessment of the current tech IPO market, in our next 451 Market Insight.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2014 816 $128bn
Q4 2013 787 $59bn
Q3 2013 829 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $59bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: The 451 M&A KnowledgeBase

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

451 Research Tech M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

The momentum that drove tech M&A spending to a post-recession record level in 2013 is continuing to roll into this year. In just the first three weeks of January, we’ve already seen blockbuster transactions such as Google’s effort to reach inside your home with its $3.2bn purchase of Nest Labs; the largest-ever tech acquisition by a Chinese company (Lenovo’s pickup of IBM’s x86 server business); and VMware going mobile, inking the biggest deal in its history by paying $1.54bn for AirWatch.

But what does the rest of 2014 look like? What broad-market trends are likely to continue to impact deal flow this year? And what specific drivers are expected to shape M&A and IPOs in some of the key enterprise IT markets, such as SaaS, mobility and information security? Well, we’ll have a few answers for you as we look ahead in our annual Tech M&A Outlook webinar. The hour-long event is scheduled for Tuesday, January 28 at 1:00pm EST, and you can register here.

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

Blue Coat plays in sandbox with Norman Shark

Scott Denne

Contact: Scott Denne Wendy Nather

After coming up empty in its efforts to secure funding, Norman Shark opts for an acquisition by Blue Coat. Many venture capitalists question whether sandboxing technology, which isolates suspicious code before it can execute on an endpoint, can sustain a large independent business, especially in a market where they’ll run up against FireEye’s freewheeling sales and marketing spending.

Fellow sandboxing vendor Invincea was able to pull together a $16m series C funding round this week, an effort that took up most of this year. Bromium had better luck with its $40m series C round, which we understand came with a $380m valuation.

We gather that Norman Shark anticipated revenue of $5m in 2012 while it was seeking capital for the business, though it’s not clear if it met or surpassed that goal. The purchase of the 50-person company is likely far smaller than Blue Coat’s recent acquisitions of Solera Networks (451 M&A KnowledgeBase subscribers can click here for our estimated valuation on that deal) and Crossbeam Systems (click here for estimate). We’d also note that this transaction is the second sandboxing acquisition announced this week, after Invincea said Monday that it had scooped up Sandboxie sometime earlier this year.

Broadly speaking, there’s demand among security providers to add new ‘advanced malware detection’ capabilities, which include sandboxing and behavioral analysis, as a way to compensate for what antivirus is missing. FireEye raised awareness of this new breed by going public in September, though malware analysis M&A activity had been going on for a while.

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

Webinar: Tech M&A trends, valuations and more

Brenon Daly

Contact: Brenon Daly

For those of you not too busy trading freshly printed Twitter shares on Thursday, we invite you to join 451 Research and Morrison & Foerster for a webinar on the results of our semiannual M&A Leaders’ Survey. (451 Research clients can access our full report on the survey.) The webinar will be held at 10:00am PST (1:00pm EST), and you can register here.

Among other topics, we’ll be discussing both the near-term and longer-range M&A plans for many of the tech market’s top dealmakers. (For instance, we have views on whether or not we’ll see another boom in tech M&A – and what it would take to get there.) Additionally, Morrison & Foerster’s Co-Chair of Global M&A Practice, Rob Townsend, will offer insight from our survey topics around the growing trend of ‘acq-hires’ and, more broadly, HR issues that can come up in M&A.

And finally, going back to IPOs, we’ll have the forecast from our senior dealmakers about whether or not they expect to have to outbid the public market for the companies they want to buy over the next year. (Hint: The IPO market has never been more competitive, in their view.) Again, we’d love to have you join us tomorrow for what promises to be an insightful and useful webinar, which you can register for here.

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

An early frost chills tech M&A in October

Brenon Daly

Contact: Brenon Daly

After a rip-roaring summer that pushed tech M&A spending totals back to their highest levels since the end of the recession, an early frost chilled dealmaking in October. The aggregate value for tech, media and telecom transactions announced across the globe last month dropped to $11.2bn, just half the monthly average of 2013. Further, continuing the yearlong trend, the number of announced deals in October ticked lower, too.

The drop-off in spending in the just-completed month is even sharper when compared with October 2012. Last October saw an unusually large number of transactions valued at $1bn or more. The six mega-deals helped to boost spending in October 2012 to $32.7bn, three times higher than the spending this October. In comparison, last month we recorded only one transaction valued at more than $1bn. Somewhat unusually, the buyer in the largest acquisition in both last October and this October was the same: SoftBank. However, the Japanese telco dropped almost $20bn more on its deal last year (Sprint Nextel) than this year (Supercell).

Perhaps more of a concern than tech M&A spending, which is inherently lumpy, is the uninterrupted slide in deal volume. Once again, the number of announced transactions in October declined from the same month last year. That means that deal flow has dropped in every month so far in 2013. The net result: tech buyers have printed more than 400 – or almost 15% – fewer transactions so far this year than last year. In fact, the number of announced deals is tracking only slightly above the number announced in the recession year of 2009.

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

Tech buyers play defense, push Q3 tech M&A spending to near record

Brenon Daly

Contact: Brenon Daly

Tech M&A spending in the just-completed third quarter edged toward a post-recession record, as buyers announced more blockbuster transactions than they have in any quarter since the credit crisis ended. This summer’s combination of slowing growth rates and rising interest rates lent an urgency to big bets from a number of tech giants that might have otherwise let deals slip away from them. In the July-September period, we tallied a post-recession record of 15 transactions valued at more than $1bn. That means that almost half of the 10-digit deals announced so far in 2013 were printed just in the past three months.

The surge in big-ticket transactions helped push aggregate Q3 spending to just under the highest quarterly levels since the end of the recession. Overall, buyers spent $71.8bn on 800 purchases of tech, telco and Internet companies around the globe in Q3, according to The 451 M&A KnowledgeBase. That boosted M&A spending levels in just the first three quarters of 2013 higher than full-year levels in both 2010 and 2012. Further, 2013 is tracking to basically match 2011 as the highest amount of annual spending on tech acquisitions since the credit crisis.

Yet, even as spending neared record levels, the tech industry showed its age. Deal flow in the July-September period featured big moves – large-scale, cost-driven consolidations as well as significant divestitures – that come in a maturing industry. Many of the biggest prints in the quarter appeared to be ‘defensive’ deals, which also came through in the below-market multiples paid in eight of the 10 largest Q3 transactions.

Meanwhile, on the other side of the M&A spectrum, we would note that not a single VC-backed startup sold for more than $1bn this summer. Further, just one VC portfolio company (Tumblr) has hit that threshold in 2013, compared with four startups that pocketed 10-digit exits in 2012.

Another sign of the ‘graying’ of tech is that there are fewer buyers and less activity in the market. The number of deals announced so far this year is tracking to its lowest level since the depth of the recession. The number of transactions announced in the past three months has dropped 13% compared with the same period in 2012. The decline continues a slide that we have seen all year long. In fact, spending in every single month in 2013 has been lower than the corresponding month in 2012. A full report on Q3 M&A activity and valuations will be available for subscribers on the 451 Research website tomorrow.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2013 800 $72bn
Q2 2013 751 $46bn
Q1 2013 785 $64bn
Q4 2012 851 $64bn
Q3 2012 912 $39bn
Q2 2012 916 $44bn
Q1 2012 918 $34bn
Q4 2011 904 $44bn
Q3 2011 969 $64bn
Q2 2011 980 $76bn
Q1 2011 919 $45bn

Source: The 451 M&A KnowledgeBase

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