Category: VC

Mindful — and major — M&A by Mindjet

Brenon Daly

Contact: Brenon Daly

In its first major acquisition, Mindjet has handed over just less than one-third of its equity for Spigit, a social and innovation-focused front end to its collaboration platform. The deal comes as 20-year-old Mindjet continues its evolution from a Windows-based ‘brainstorming’ license software vendor to a multi-OS, subscription-based platform. That transformation – accelerated by the addition of Spigit – makes it a whole lot more likely that Mindjet will be in a position to join the ranks of public companies in a year or two.

According to our understanding, fast-growing Spigit will bump up Mindjet’s top line by about one-third. (Subscribers to The 451 M&A KnowledgeBase can click here to see our specific revenue estimates for Spigit.) Importantly, all of Spigit’s revenue is subscription, which fits with Mindjet’s efforts to transition to a fully SaaS business. Mindjet basically stopped selling perpetual licenses last year and is tracking to finish 2013 with subscriptions accounting for about 70% of total revenue.

Initially backed by Warburg Pincus, Spigit got re-capped earlier this year with PICO Holdings taking a majority stake of the company. Collectively, Spigit shareholders will own 30% of the combined company, and its 100 employees will account for almost the same ratio of the combined company’s 400 employees. Arma Partners advised Spigit on the sale.

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

Arbor reaches Down Under for network analytics startup

Brenon Daly

Contact: Brenon Daly

Three years after Arbor Networks sold itself to Danaher, the security company has announced its first transaction as part of the technology conglomerate. Arbor has picked up Packetloop, a bootstrapped, five-employee startup based in Sydney, Australia, that specializes in network security monitoring and analytics.

The addition of Packetloop takes Arbor far beyond its core offering and market, which, historically, has been selling DDoS detection products to service providers. While service providers still account for a majority of the company’s revenue, sales to enterprises now represent 40% of total revenue, and are growing faster than the service providers business.

The deal also fits into a growing trend of existing security vendors looking to add capabilities around data analytics and visualization, rather than using M&A strictly as a way to step into new infosec markets. Just last week, for instance, Click Security reached for fellow startup VisibleRisk, while earlier this summer, Proofpoint added an in-memory threat-scoring startup called Abaca Technology.

Even old-line Blue Coat Systems caught the trend, paying an uncharacteristically rich multiple for Solera Networks. In fact, much of the network forensic capabilities that Packetloop offers are directly competitive with Solera, which was acquired just three months ago in what we understand was a highly competitive process.

How will Violin play on Wall Street?

Brenon Daly

Contact: Brenon Daly Tim Stammers

In what would be the first IPO from the storage sector in two years, Violin Memory’s prospectus is out for all the world to see. (We indicated last week that the S1 was on its way.) What people are mostly seeing in the paperwork, however, is red ink – and lots of it.

As we wrote in our full report on the all-flash array (AFA) vendor, its filing and what it has to look forward to as a public company, Violin’s offering won’t appeal to everyone on Wall Street: It’s a relatively immature company, spending money at an unsustainable rate in a market that today represents only a tiny fraction of overall storage spending but is getting more competitive every day.

If we wanted to translate that into some actual numbers, we might offer this summary from the prospectus: Each quarter, Violin has been losing anywhere from $20m to as much as $35m to bring in $20-25m in revenue. (Altogether, Violin has run up an accumulated deficit of more than $250m since incorporating in 2005.)

The main reason for the deep losses at Violin is the fact that its product is expensive to make. (Gross margins run only in the low-40% range.) Once those costs are subtracted, there’s very little left over for operating costs. Yet that hasn’t slowed Violin’s spending on R&D or sales/marketing. For the past year, quarterly operational spending at Violin has run three times higher than its gross income.

While certainly staining the P&L sheet a blood red, Violin’s lavish spending has nonetheless helped establish it as the leader in the nascent AFA market. Storage professionals at major enterprises have tapped Violin as the most exciting privately held storage vendor, according to recent interviews by TheInfoPro, a service of 451 Research. Further, Violin has succeeded in converting that into sales momentum, with recent growth rates of about 70%. For more on Violin and the offering, see our full report.

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Violin set to play on the big stage, with IPO imminent

Brenon Daly

-by Brenon Daly

After a fitful past few quarters, Violin Memory is ready to play on the big stage. The all-flash array provider is set to reveal its IPO paperwork later this week, according to sources. Our understanding is that the offering itself will take place in about a month, with Violin likely to be valued at just under $1bn at debut. Assuming it does go public, Violin would be the first significant enterprise storage IPO in two years.

The initial valuation is a bit lower than the $1.5bn we penciled out for Violin last October when we first reported that the company was set for an IPO. Two factors are weighing on that – one inside the company and one outside. In terms of macro-level influences, there’s been a recent trend toward conservative pricing for IPOs, at least at debut, as uncertainty and volatility has increased on Wall Street.

Still, fast-growing companies have traded substantially higher in the aftermarket, and we would expect Violin to follow suit. The reason? Violin’s torrid growth rate. According to our understanding, Violin is tracking to increase sales about 80% in the current fiscal year, ending next January. We gather that Violin put up roughly $75m in sales in the previous fiscal year, and is projecting about $135m for its current fiscal year.

The heady growth hasn’t come without a stumble or two. Several sources have indicated that the company’s sales in the second half of last year came in much lighter than expected, in part because Hewlett-Packard stopped reselling Violin. But at least some of the lumpiness that Violin had been experiencing has been smoothed by new sales arrangements and new products.

For instance, my colleague Tim Stammers recently wrote an in-depth look at Violin’s partnership with Toshiba, which is also an investor in Violin, to start selling PCIe flash cards . Although the expansion into what’s likely to be a commodity market doesn’t alleviate all of the concerns around the inherent lumpiness of Violin’s big-ticket arrays, it does at least add a new revenue stream.

And in terms of its core product, Violin does have the advantage that it has created a fair amount of buzz with the audience that matters. A recent survey by TheInfoPro, a service of 451 Research, interviewed more than 260 storage professionals at major enterprises and asked them to name which vendor they found ‘exciting.’ Violin came in as the top-ranked privately held storage company, with twice the mentions of other high-flying startups such as Nimble Storage and Pure Storage.

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

Welsh Carson cleans up cap table for IPO-bound Alert Logic

Brenon Daly

Contact: Brenon Daly

In its first major move into IT security, buyout firm Welsh, Carson, Anderson & Stowe has acquired a majority stake in SaaS security vendor Alert Logic. The deal substantially cleans up the capital table at 11-year-old Alert Logic, which has drawn backing from six firms since its series A in 2005, including at least two shops that are designated as early-stage investors. As is typical for these late-stage growth investments by private equity (PE) firms, we would expect the next major capital event for Alert Logic to be an IPO.

Closer at hand, having a single, deep-pocketed owner should help Alert Logic take on its next opportunity for growth: international expansion. Currently only about 230, or 10%, of Alert Logic’s total customers are outside its home US market. The Houston-based company doesn’t have any direct sales outside the US.

International expansion for cloud-based companies like Alert Logic can be expensive because not only do they have to hire sales and marketing staff, they may also have to open in-country datacenters, depending on data residency laws. With $20bn in total capital, Welsh Carson can write those checks. (While Welsh Carson doesn’t currently hold any information security vendors in its portfolio, we would note that the PE firm is well-versed in the service-provider market, where Alert Logic does the majority of its business. The PE shop has put money into both Savvis and Peak 10.)

Alert Logic’s streamlined ownership also should help smooth the way for an IPO, although an offering may not come until 2015. The company finished 2012 with GAAP revenue of $30m and will likely bump that to nearly $45m in 2013. Assuming that growth rate roughly holds, Alert Logic could do $60-65m in sales in 2014. (Keep in mind, too, that Alert Logic is a subscription business, so revenue lags bookings.)

The two most-recent SaaS security providers to debut (Proofpoint and Qualys) both went public when their quarterly sales hit approximately $25m. (Proofpoint went public in April 2012, while Qualys followed suit last September. The two companies have market caps of $1bn and $600m, respectively.) However, we would note that although Alert Logic is smaller, it is growing twice as fast as Qualys and about half again as fast Proofpoint. Alert Logic has been clipping along at a 40-45% growth rate, compared with 20% at Qualys and 30% at Proofpoint.

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

IBM puts its antifraud faith in Trusteer

Contact: Tejas Venkatesh

In its first security deal in two years, IBM reaches for financial antifraud and endpoint integrity software provider Trusteer. According to The 451 M&A KnowledgeBase, this is the highest-valued (on a price/sales basis) security acquisition for IBM, and should help further its already strong presence in the financial services vertical.

Terms of the transaction were not disclosed, but our sources corroborated the reported $800-1bn price range that IBM paid for the seven-year-old company. Using the midpoint of that range and our own verified revenue estimates gives the target a valuation far north of any of Big Blue’s other security deals. (Subscribers to the KnowledgeBase can view our estimates, including last year’s, trailing 12-month and projected revenue, here.)

Trusteer is known for providing lightweight fraud-prevention technology that scales en masse and provides an unobtrusive user experience. Having made its mark in the banking sector for end users, Trusteer recently launched an enterprise product in its foray into that market. From Trusteer’s perspective, having IBM as a parent will further accelerate its product’s adoption in the enterprise segment.

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

Millennial Media acquires Jumptap to consolidate mobile advertising

Contact: Tejas Venkatesh

In its largest acquisition by far, Millennial Media has announced the purchase of fellow mobile advertising firm Jumptap. Millennial will hand over 24.6 million of its shares and $12m in cash to Jumptap, valuing the target at $221m based on Millennial’s stock price close on Tuesday. The deal brings together the advertising networks of the two companies, which will now combine to form a larger network of ad properties to compete against Google.

Jumptap generated sales of $63.6m in 2012, including $10.5m from its telecom portal business, which it will shutter. Excluding that legacy business, Millennial is valuing Jumptap at 4.2x last year’s sales. For comparison, Millennial garners a valuation of 3.5x trailing sales on the public markets. On the other side, the transaction is a ho-hum exit for Jumptap’s investors – General Catalyst Partners, Redpoint Ventures and other firms – which collectively funneled roughly $120m into the nine-year-old company.

The deal comes even as Millennial reported a second-quarter earnings loss after the bell yesterday. The company also fell short of analyst expectations for its top line, reporting $57m in revenue versus the consensus estimate of $59m. As a result of the acquisition and its earnings report, Millennial’s stock plummeted more than 17% in early trading today. By midmorning, shares were changing hands at $7 per share, roughly half its IPO price of $13 in its March 2012 debut.

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

Where might FireEye be casting its eye for M&A?

Brenon Daly

Contact: Brenon Daly

When business is booming, who has time to shop? We were wondering that as we skimmed the prospectus for FireEye, an ‘advanced threat protection’ vendor that has doubled revenue so far this year. As we noted in our full report on the company’s planned IPO, FireEye has only really had its product out for three years, but is likely to put up about $150m in sales in 2013.

That’s astonishing growth, a testament to the company’s calculated effort to expand as quickly as possible. In the prospectus, FireEye notes that 375 employees – a full 40% of its entire payroll – work in sales. (That goes some distance toward explaining how FireEye has spent more just on sales and marketing than it has brought in as revenue so far this year.)

With all of the focus on – and enviable results from – organic growth, it’s no wonder inorganic growth has yet to figure into FireEye’s business. In that way, it’s basically following the practice of other high-flying companies that have come public – the companies that will serve as ‘comps’ for FireEye.

Neither Workday nor Splunk nor Tableau has been active in M&A, despite having the windfall of an IPO and richly valued equity to use in deals. Only ServiceNow has done a deal, and that was just a $13m purchase announced last month, a full year after it went public. (For those with a longer view, we would note that salesforce.com didn’t ink its first acquisition until almost two years after its IPO in mid-2004.)

Nonetheless, my colleague Wendy Nather has penciled out a few possible targets should FireEye want to go shopping. (And the company may need to use M&A, if just for customer perception. As she notes, threat intelligence and sandboxing at the network layer are not going to be considered a complete solution for handling malware attacks in the future.) We have a few thoughts around possible markets (think endpoints) and even a few specifics that may figure into FireEye’s future M&A plans in our full report.

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

A red-hot IPO expected from FireEye

Brenon Daly

Contact: Brenon Daly

The next billion-dollar tech IPO is moving closer to the public market. FireEye has revealed its paperwork for an offering that’s sure to draw bullish interest from investors willing to put money into an early-stage company that’s still in hyper-growth mode. The cybersecurity vendor, which only really began shipping product in 2010, is putting up eye-popping growth rates but is also spending heavily to get them.

For instance, FireEye doubled sales in the first half of 2013 to $62m. Granted, that’s coming off a small revenue base, but it’s still an astonishing rate compared with the overall information security (infosec) market. In a survey by TheInfoPro, a service of 451 Research, more than half (52%) of infosec buyers forecasted their 2013 budgets would be the same (44%) or even lower (8%) compared with 2012. (Among the remaining roughly 48% who projected a larger infosec budget this year, most indicated it would be only a single-digit percentage higher.)

To post its enviable growth, FireEye has been spending heavily. In fact, so far this year, the company has spent more on sales and marketing costs than it has taken in as revenue. That’s appropriate (though clearly not sustainable) for a company growing in the triple digits that sees a vast opportunity in front of it.

Nonetheless, we would note that it is significantly higher than the two most-recent infosec providers that have come to market. Sales and marketing spending at both Palo Alto Networks and Imperva ranges between 50-60% of revenue. (We don’t consider Qualys, which came public last September, a fitting comp for FireEye because it is a subscription-based business rather than a product-based business like FireEye, Imperva or Palo Alto.)

Of course, we don’t expect the red ink at FireEye to deter many public market investors. Both Palo Alto and Imperva don’t turn a profit, even though they are growing at much slower rates than FireEye. (Palo Alto is increasing its top line at about a 60% rate, while Imperva is roughly half that level.) And yet, Wall Street has bid up both of the recent infosec IPOs to double-digit price-to-sales valuations. Collectively, those offerings have created $4.8bn of market value.

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

For tech M&A in July, big deals but little else

Brenon Daly

by Brenon Daly

Summer is a time for blockbusters – both for Hollywood and, apparently, on Wall Street. In the just-completed month of July, tech acquirers announced seven deals valued at more than $1bn. That’s twice as many 10-digit transactions as typically get announced each month.

The mega-deals helped push last month’s overall spending on tech M&A to its highest level for the mid-summer month in seven years. The aggregate value for IT, telco and digital media transactions announced around the world in the just-completed month totaled $23.7bn, slightly above the total for July 2012 but nearly twice the monthly spending level we tallied during the recession.

Among the significant acquisitions announced last month: Schneider Electric’s $5bn consolidation of Invensys, Cisco Systems’ $2.7bn reach for network security vendor Sourcefire (the third-largest information security transaction) and AT&T’s $1.2bn play in the prepaid wireless segment with Leap Wireless. (Including the debt and cash carried by Leap, which is better known under its Cricket brand, AT&T is actually paying closer to $4bn.)

While there was an unusual amount of activity at the top end of the M&A market in July, deal flow dried up dramatically elsewhere. We tallied just 240 transactions in July – a decline of about one-quarter from the same month in the two previous years. In fact, we have to go back almost two years (November 2011) to find a month with as low a total number of deals as July 2013.

The light activity in July actually accelerated the already pronounced decline that we’ve registered in tech M&A. So far this year, tech buyers have done just shy of 1,800 transactions, a 20% falloff in activity compared with the roughly 2,200 deals announced during the comparable period in both 2012 and 2011. Another way to look at it: The number of transactions announced in 2013 almost exactly matches the comparable number from 2009, while this year’s spending is twice as high as the recession year.

Global tech M&A

Month Deal volume Deal value
July 2013 240 $23.7bn
July 2012 341 $21.8bn
July 2011 328 $13.9bn
July 2010 268 $15bn
July 2009 277 $8.6bn

Source: The 451 M&A KnowledgeBase