Category: VC

A return to the ‘new normal’ for tech M&A in Q2

Brenon Daly

Contact: Brenon Daly

After two straight quarters that each featured a single blockbuster transaction, tech M&A spending in the just-completed Q2 settled back into a more representative level for the post-recession era. Spending on acquisitions of tech, telecom and Internet companies around the globe from April to June totaled $46bn – essentially matching the value of deals in Q2 of last year as well as the quarterly average from 2010-2012. (Look for our full report on the Q2 M&A totals and trends later today on our website and in our next Daily 451.)

However, Q2 spending comes in about one-third lower than both the first quarter of this year and the final quarter of last year. The decline from mid-$60bn in both of those quarters to mid-$40bn in the just-completed quarter stems primarily from the fact that Q2 didn’t see a mega-transaction like the one that boosted totals in the other two quarters.

Both Q4 2012 and Q1 2013 featured single deals valued at more than $20bn, roughly the equivalent to the aggregate total of the four largest deals announced in Q2 2013. The $24bn proposed Dell buyout, announced in February, and Softbank’s $20bn reach for Sprint Nextel last October are the two largest transactions of the past half-decade.

Turning to deal volume, we would note that even as tech M&A spending returned to more representative post-recession levels in Q2, the number of transactions didn’t keep pace. In fact, overall quarterly deal flow plunged to its lowest level since the recession. From April to June, dealmakers announced just 751 transactions, a sharp 18% year-over-year decline. (Again, we’ll have a full report on Q2 M&A activity available later today on our website and in our next Daily 451.)

Recent quarterly deal flow

Period Deal volume Deal value
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

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Adobe back in the market for marketing, drops $600m on Neolane

Brenon Daly

Contact: Brenon Daly

In its second-largest acquisition for its Marketing Cloud, Adobe Systems says it will hand over $600m in cash for marketing automation (MA) vendor Neolane. The purchase of Neolane, which is expected to close in Q3, trails only Adobe’s pickup of Omniture for $1.8bn in 2009 in terms of spending on deals to build out its Marketing Cloud. Collectively, these transactions have cost Adobe more than $3bn.

Although Adobe declined to discuss Neolane’s financials, the Paris-based startup has said it generated 2012 revenue of $58m, which would put it at roughly the same size as rivals Marketo and HubSpot. In terms of valuation, however, Neolane is a good bit off of Marketo’s market cap of some $870m.

We would chalk up the disparity in valuation to two main reasons. First, Neolane’s on-premises business is about as large as its subscription business, while Marketo is a pure SaaS company. Further, we understand that Neolane grew about 40% last year, which is a solid rate but just half the pace of the free-spending – and deeply unprofitable – Marketo. Through midyear, we would pencil out that Neolane generated roughly $70m in trailing 12-month revenue.

Adobe’s MA move comes after many other tech giants have already snapped up MA vendors, including salesforce.com paying a record $2.5bn for ExactTarget earlier this month. Other tech giants that have made significant MA acquisitions include IBM (Unica), Teradata (Aprimo), Oracle (Eloqua) and Intuit (Demandforce). Valuations for those transactions have ranged from 4.4x trailing sales to 11x trailing sales.

Select marketing automation transactions

Date announced Acquirer Target Deal value Price-to-sales valuation
June 27, 2013 Adobe Neolane $600m 8.6x*
June 4, 2013 salesforce.com ExactTarget $2.5bn 7.6x
December 20, 2012 Oracle Eloqua $956m 9.7x
April 27, 2012 Intuit Demandforce $424m 11.4x*
December 22, 2010 Teradata Aprimo $525m 6.3x
August 13, 2010 IBM Unica $523m 4.4x

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

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IPO candidates feel the tremor

Contact: Tejas Venkatesh

Over the past few weeks, it appears sentiment on Wall Street has soured significantly. With the US Federal Reserve planning to wrap up bond purchases, the broader stock market volatility as represented by the CBOE volatility index hit its highest level all year earlier this week. As a result, unknown and unproven IPO candidates are bearing the brunt of that market uncertainty. That was evident today when both IT retailer CDW and video advertising network company Tremor Video priced below their indicated range. In CDW’s case, that came after the company had already cut the number of shares on offer by 16%.

For its part, Tremor Video sold 7.5 million shares for $10 each, below its indicated range of $11-13. In the process, the company raised $75m and debuted at an (undiluted) market cap of $485m. By midmorning, the stock headed further south and was changing hands on the NYSE at $9.50.

Tremor Video analyzes in-stream video content, detects user attributes and uses that information to optimize video ad campaigns for marquee brands like Procter & Gamble, Ford Motor and Walt Disney. The eight-year-old company, which raised about $120m in total funding, generated $113m in revenue for the year ended March 2013.

The sudden souring of sentiment is leading to a difference in expectations between investors and issuing companies. Tremor Video is the first advertising technology (adtech) IPO to price below its expected range. In its case, the performance of recent adtech IPOs didn’t help. Both Millennial Media and Marin Software are trading about 30% below their IPO price.

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

Here comes consumer hardware?

Ben Kolada

Contact: Ben Kolada

MakerBot Industries recently turned about $11m in funding into a potential $604m sale ($403m in stock upfront, with $201m in earnout potential). Just as the company transforms its newfound parent Stratasys’ market potential, moving the commercial 3-D printer manufacturer into the consumer market, the MakerBot sale may also help transform the greater technology industry, and bring consumer hardware back into favor.

We’ve written before about the emergence of consumer hardware in the form of wearable technology. As we noted then, the majority of companies tackling this nascent market are large multinational corporations such as Nike, Apple and Google.

That could soon change. VCs often lament that hardware is too capital intensive and can quickly get commoditized. But MakerBot’s growth and exit valuation certainly don’t reflect those concerns.

After only a few years in business, and having taken in roughly $11m in funding, MakerBot was able to grow total revenue to $15.7m last year. The company was set to smash that this year – in just the first quarter, it recorded $11.5m in sales.

Meanwhile, some VCs have complained recently that consumer software startups have become too stale, and the market too fad-driven. (Of course, some of that griping may be coming from VCs that missed out on the $1bn exits of consumer-focused startups Tumblr and Waze in the past month.) Nonetheless, MakerBot’s gold-plated exit may help some of the venture shops broaden their investment areas.

MakerBot’s funding history

Year – Amount – Investors
2009 – $75,000 – Individual investors
2010 – $1.2m – 500 Startups, Angel Investors, Bezos Expeditions, Founder Collective, High Line Venture Partners, Lerer Ventures, Thrive Capital, True Ventures
2011 – $10m – Angel investors, Bezos Expeditions, Foundry Group, RRE Ventures, True Ventures

Source: The 451 M&A KnowledgeBase

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Gigamon soars on debut

Contact: Tejas Venkatesh, Christian Renaud

A year after first filing its IPO papers, Gigamon finally debuted on the public markets Wednesday. The network traffic monitoring vendor sold 4.5 million shares at $19 each, raising $85.5m and creating $560m in market value. By midmorning, the stock changed hands at $25, up more than 35% from its debut price. Goldman Sachs & Co, Bank of America Merrill Lynch and Credit Suisse acted as lead joint book-running managers for the offering, with Gigamon trading under the ticker symbol GIMO on the NYSE.

The rapid growth of cloud computing and the move to dynamic virtual environments has created the need for increased visibility and control over network traffic. Gigamon’s revenue growth reflects that potential: sales have more than doubled since 2010, hitting $106m for the fiscal year ended in March. The company has managed that impressive growth while running solidly in the black, netting $7.6m in 2012.

Gigamon’s traffic visibility fabric combines hardware and proprietary software, offering independent traffic visibility across multivendor networks. Last year, the company also unveiled a software-only product, GigaVUE-VM, for cloud-based applications. This new release allows Gigamon to provide network managers with integrated visibility into their physical, virtual and cloud traffic. The nine-year-old company raised $23m in funding from Highland Capital Partners, which owns about one-quarter of Gigamon following the IPO.

The network monitoring sector has also seen a fair bit of M&A activity. For instance, Danaher acquired Gigamon rival VSS Monitoring last summer for an estimated $180m, or 5.1 times trailing sales. Around the same time, Ixia reached for Anue Systems, paying $145m, or 3x sales. Gigamon is currently trading at a market cap of $760m, or 7.2x trailing sales. Its larger size and impressive growth almost certainly helped garner a premium valuation compared with the trade sales in the market.

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

For US tech IPOs, precious little new blood amid the larger bleed-out

Brenon Daly

Contact: Brenon Daly

Over the past month it’s been ‘one on/one off’ for publicly traded marketing automation vendors. In mid-May, we saw Marketo debut on the Nasdaq. (If rumors are to be believed, incidentally, Marketo only made it to market after stiffarming some would-be buyers.) On the other side, earlier this week we saw ExactTarget announce plans to depart the NYSE, selling for an industry-record $2.5bn a little more than a year after its own IPO.

Leaving aside the vast gap in value left by the two events – Marketo currently trades at less than one-third of ExactTarget’s terminal value – at least there’s some replacement in this sector. That isn’t true for most of the tech industry. In terms of the overall number of tech companies on US exchanges, there’s been precious little fresh blood to offset a continual bleed-out.

Looking broadly at the enterprise tech market so far this year, we’ve tallied a half-dozen IPOs, with half of those coming in the past month alone. In addition to Marketo, May also saw the listings of ChannelAdvisor and Tableau Software. That trio joined Marin Software, Model N and Rally Software Development as the Class of 2013 so far.

So that’s six new entrants to the ranks of US publicly traded tech companies, an average of about one IPO each month this year. (And keep in mind, this rate is post-JOBS Act, which supposedly made it easier for companies to come public.) Against those new arrivals, we have seen some 20 US public companies acquired so far this year, according to The 451 M&A KnowledgeBase.

That rate equals three tech companies erased from US exchanges for every one that joins. Many of these deals are taking major companies – which, in some cases, have traded for a decade or even longer – off Wall Street: Dell, BMC, Acme Packet, Websense and others. The debutantes just can’t keep pace with the departures.

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

A mixed May for M&A

Brenon Daly

Contact: Brenon Daly

Continuing the M&A trend we’ve seen so far this year, tech buyers in May either bought big or bought nothing. Spending on tech transactions across the globe this month ticked about 16% higher than the same month last year, although it was lower than both May 2011 and May 2010.

This month’s spending totals were boosted by three deals valued at more than $1bn, headlined by the planned $6.9bn take-private of BMC Software. (The buyout, which was spurred by an activist hedge fund, is the largest infrastructure software transaction in a half-decade.) With the BMC deal and the second-largest transaction of the month (Fidelity National Financial’s $2.9bn reach for mortgage software vendor Lender Processing Services), May accounted for two of the five largest tech deals announced so far in 2013.

However, overall M&A activity remained muted, with the number of transactions announced in May dropping about 15% compared with the same month of the two previous years. Once again in May, monthly deal volume failed to crack 300 transactions, the rough monthly average for tech deals in 2010 and 2011. That has left year-to-date deal volume levels down a significant 14% compared with the start of each of the two previous years.

2013 activity, month by month

Period Deal volume Deal value % change in spending vs. same month, 2012
May 2013 275 $18.4bn Up 16%
April 2013 251 $32.8 Up 129%
March 2013 219 $4.4bn Down 76%
February 2013 246 $47.6bn Up 296%
January 2013 303 $10.7bn Up 155%

Source: The 451 M&A KnowledgeBase

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Venturing into healthcare

Ben Kolada

Contact: Ben Kolada

With angel investors increasing competition for early-stage capital raises and later-stage rounds dominated by more elite firms, mid-tier tech-focused VC firms may be smart to pivot their portfolios toward the emerging healthcare IT (HIT) sector. Those who do will find a growing market with much less competition for deals.

Market demand for advanced healthcare will grow as the senior population expands. According to the federal Administration on Aging, about one in eight Americans was at least 65 years old in 2009, the latest year for which data is available. However, seniors’ share of the population is expected to grow to nearly one-fifth – 19% – by 2030.

Some VC firms are starting to take note. At the HealthBeat conference, which started yesterday and ends today in San Francisco, three firms are taking a closer look at HIT investments. Morgenthaler Ventures, Norwest Venture Partners and Venrock Associates are judging pitches in two competitions with five finalists each – seed-stage-only startups and startups that have only raised up through a series A. Among the prizes for the seed-stage contestants is a $250,000 convertible bridge loan from Venrock.

These firms’ interest in healthcare IT gives some credence to the industry’s potential value, but they also prove that we’re still in the early stages of investment in HIT. For example, just four out of Norwest’s 109 active investments are in the HIT sector. For an opportunity comparison, more than 150 startups vied for one of the 10 positions the firms are judging.

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

Same price but very different deals for Tumblr and Websense

Brenon Daly

Contact: Brenon Daly

It’s often said that tech M&A valuations are more art than science, a perspective that stood in stark relief thanks to a pair of transactions announced Monday morning. The deals, which have wildly different strategic underpinnings, involve companies at opposite ends of their corporate lifecycle but came in at the same price: $1bn.

On the one hand, we have a fairly staid take-private of a 20-year-old information security vendor with flatlining sales of slightly more than one-third of a billion dollars. On the other, we have a wildly popular blogging site that gets a multiple of nearly 100x its nascent sales as a faded Internet kingpin makes a highly speculative acquisition.

In the more conventional transaction, buyout shop Vista Equity Partners said it will hand over about $1bn for Websense. The offer values the Web content filtering vendor at loosely 3x sales. (That’s just slightly higher than the multiple that fellow private equity firm Thoma Bravo paid a year and a half ago for Blue Coat Systems, a ‘vintage’ technology company that also offered Web content filtering as part of its broader portfolio.) According to a recent survey of IT buyers by TheInfoPro, a service of 451 Research, Blue Coat was the top-ranked Web content filtering vendor, cited by 27% of respondents, followed by Websense at 22%.

And then, there’s Yahoo’s reach for Tumblr. The $1.1bn all-cash acquisition is Yahoo’s largest in about a decade. And while Tumblr has a heavy user base (about 300 million unique monthly visitors), it had only really begun generating revenue. The company has only about one-tenth the number of employees at Websense.

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

A big ‘DATA’ debut for Tableau

Brenon Daly

Contact: Brenon Daly

Big ‘DATA’, indeed. Tableau Software, which debuted Friday on the NYSE under the ticker DATA, created nearly $3bn of market value in its hotly anticipated IPO. The data discovery and analytics vendor becomes the latest enterprise-focused software company to command a platinum valuation on Wall Street.

Tableau priced its 8.2 million shares at $31 each, raising some $254m in the offering. Not that the company particularly needed the outside cash: It has been running in the black since 2010 and has an accumulated deficit of just $5.8m. And Tableau has been printing black numbers while doubling revenue, a rare combination that clearly resonated with investors.

After pricing at $31, shares changed hands at about $48 each in the early aftermarket. Based on the (non-diluted) share count of 58 million shares from the prospectus, the market is valuing Tableau at $2.8bn.

That’s 14x a loose projection of roughly $200m in sales for 2013. We penciled out that number based on the (probably conservative) assumption of nearly 60% growth in revenue from the $128m recorded in 2012. Whatever the exact numbers, it’s safe to say that Tableau has secured a double-digit multiple of this year’s sales.

The rarified valuation is all the more noteworthy because of Tableau’s throwback business model: It sells on-premises licenses, rather than subscriptions, which typically command higher multiples. Of course, when license sales are doubling – as they have at Tableau in each of the past two years – Wall Street can get comfortable with the model.

As a final thought, we would note that the license model certainly hasn’t hurt Splunk, which went public a year ago. While that company doesn’t compete with Tableau, the fellow self-described ‘big data’ play lines up rather closely with Tableau.

As mentioned, both fast-growing companies sell their software through licenses rather than subscriptions, and both get about 30% of total sales through maintenance and services on that software. Further, the similarities extend to what the market says the companies are worth: Splunk is valued at $4.6bn, or 23x last year’s revenue, compared with Tableau debuting at $2.8bn, or 22x last year’s sales.

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