Category: VC

GFI may face IPO headwinds

Brenon Daly

Contact: Brenon Daly

Undeterred by a chilly reception to similar firms, GFI Software has put in its paperwork for a $100m IPO. The company, which is based in Luxembourg, sells a variety of infrastructure and collaboration services to the SMB market. GFI was originally founded in 1992 as an e-fax software vendor, and has steadily built out its portfolio through internal expansion and a handful of acquisitions.

However, it is still primarily known for its security offerings, with that product line accounting for about 60% of total revenue in 2010. Since then, the company has been rapidly expanding into other areas, most notably collaboration. In its prospectus, GFI said collaboration now generates almost one-third of all revenue.

Still, Wall Street may well put GFI into the bucket of ‘European IT security vendor.’ If that’s the case, it could hurt the company’s debut, because investors haven’t backed IPOs from other infosec firms from across the Atlantic. AVG Technologies, for instance, has never traded above its offer price since coming public in February. And AVAST Software had to pull its IPO paperwork in July.

Additionally, there are some concerns with GFI itself. The company’s growth rate has cooled so far this year, with revenue ticking up just 27% in the first half of 2012 after increasing 46% in 2011. (The falloff in billings growth has been even sharper.) Further, GFI is not profitable and has not been generating as much cash as it had been.

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

A quickly to Z

Ben Kolada

Contact: Ben Kolada

Rather than go for the quick exit, Andreessen Horowitz’s investing thesis focuses on the long haul, investing in companies that have the potential to become tech giants. Its investment in anti-fraud startup Silver Tail Systems counters that thesis, but that’s what happens when the money comes knocking early.

Andreessen Horowitz first disclosed that it invested in Silver Tail in June 2011. The thought was that, like the malware wave, sophisticated fraud attacks would first hit the largest enterprises and eventually move downwind to SMBs. However, the market has greatly expanded, as a variety of fraud attacks are now hitting businesses of all sizes.

Noticing the market’s potential, EMC moved to take Silver Tail’s capabilities in-house. Terms were not officially disclosed on EMC’s acquisition of Silver Tail, although the price was reported to be in the $300-400m range.

As we understand it, though, Silver Tail was initially looking for the opposite of an exit. The story we’re hearing is that Silver Tail was out on the fundraising circuit, looking for upward of $30m, but EMC made a table-clearing offer. That reported price, if true, would have been about twice the post-money valuation Silver Tail was seeking in its round. As it is, the midpoint of the reported price is actually about five times the post-money valuation it took in its last round, according to our understanding.

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

‘Dual track’ an empty threat as IPO window closes

Brenon Daly

Contact: Brenon Daly

If not shut, the tech IPO window is too narrow for most would-be debutants to get through right now. It’s been two full weeks since Workday soared onto the market in one of the hottest offerings in recent times. But since that IPO, there’s been nothing but crickets in the tech sector.

Perhaps that shouldn’t be surprising, given that the equity market has ticked lower while volatility has ticked higher over the past two weeks. In any case, the IPO drought certainly isn’t surprising to any of the respondents of the semiannual M&A Leaders’ Survey, which we sent out earlier this month and wrote up earlier this week.

Of the dozen reasons why deals aren’t getting done, survey respondents ranked ‘competition from IPOs’ dead last. (Not only that, the response also showed the single biggest decline since our earlier survey in April.) Fully seven out of 10 respondents said the IPO market isn’t really having an impact on M&A activity, up from 51% who said that back in April.

Competitive impact of IPO market on M&A

Survey period Strong Neutral Weak
April 2012 24% 25% 49%
October 2012 12% 18% 70%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

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.

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.

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

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.

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

A September slump for tech M&A

Brenon Daly

Contact: Brenon Daly

Summer is always a seasonally slow time for M&A. But this year, it’s like no one was even at their desks to do deals at all. With September wrapping up, spending on tech transactions around the globe is coming in at its second-lowest monthly total of 2012. Even compared with September 2011, it was quiet this month: Deal value dropped almost 40%, year-on-year, to just $5.8bn.

To put that paltry deal total into perspective, consider that earlier this year, Cisco dropped almost that much on a single transaction, handing over $5bn for British set-top box software provider NDS. Indeed, we tallied only one acquisition valued at more than $1bn in September, down from an average of about three 10-digit deals in each month so far in 2012. Altogether, the slump in September activity means that M&A spending has now dropped in seven of the nine months this year.

2012 monthly activity

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 266 $10.4bn Up 16%
March 292 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 291 $13.3bn Down 20%
July 336 $21.1bn Up 52%
August 277 $10.3bn Down 74%
September 266 $5.8bn Down 38%

Source: The 451 M&A KnowledgeBase

Qualys looks to transition from a product to a platform

Brenon Daly

Contact: Brenon Daly

As it gets set to hit the public market later this week, the question for Qualys is whether the on-demand security vendor can make the transition from a product to a platform. The 13-year-old company is known primarily for its vulnerability management offering, which will account for the vast majority of the $100m or so of bookings it will generate this year.

But Qualys is acutely aware of the fact that it won’t get a premium valuation if it doesn’t expand beyond that. The company has already helped its own cause with the early steps it has made in expanding its portfolio. It recently noted that revenue growth is outpacing customer growth. (In the first half of this year it bumped up its overall top line by 22%, about 5 percentage points higher than its growth rate in 2011.)

Qualys has a number of advantages as it attempts to pull off the transition. For starters, the company sells its service entirely on a subscription basis, which makes it easier – both commercially and in terms of technology architecture – to add additional security offerings. Besides its vulnerability management product, Qualys already offers five other products around compliance, Web application security and other areas.

That approach has drawn in nearly 6,000 customers for the company, providing a broad base to sell new products into. Yet, as Qualys highlighted during its roadshow, the company has only begun its cross-selling efforts. Currently, only one out of five customers uses more than one Qualys product.

The underwriters for Qualys, led by J.P. Morgan Securities and Credit Suisse Securities, are likely to be conservative in their initial pricing of what would be the fourth information security vendor to go public in the past year. As it stands, the range is set at $11-13 per share. We expect Qualys to actually price above that on Thursday and then likely move higher in the aftermarket, as the previous trio of enterprise security offerings have done. Even with the expected bump, Qualys will likely only create about $500m of market value. However, if the company can emerge as a true platform, that will be just the starting point.

A solid IPO for Trulia

Contact: Thejeswi Venkatesh

Amid the consumer tech IPO lull following the Facebook offering, real estate website Trulia enjoyed a solid opening on its first day as a public company. First, it priced a dollar above its indicated range, at $17 per share. Then, encouraged by its robust growth, investors bid up the stock further to $23 per share.

Trulia provides an online marketplace, delivered through the Web and mobile applications, that lets consumers and real estate professional connect with each other. Unlike traditional real estate websites like REALTOR.com, Trulia gives users detailed information on crime, commute and schools.

On the top line, the company has put up astonishing growth. In the 12 months ended in June, Trulia generated $51m in revenue, up from $38m in calendar year 2011. It makes money from a combination of advertising on its website and a freemium model for real estate professionals, with the latter accounting for more than two-thirds of its revenue.

The offering valued Trulia’s equity at $448m, or 8.8 times trailing sales, and the company currently garners a market cap of roughly $600m, or 12x trailing sales. That’s good value creation for Trulia, which has raised roughly $33m in venture capital from Accel Partners, Fayez Sarofim and Sequoia Capital. In addition to high growth, public investors were also surely encouraged by the broader housing recovery in recent months.

That’s not to say that Trulia couldn’t have done better. In recent weeks, its primary rival Zillow has traded close to 14x sales. In part, that can be explained by Zillow’s bigger size and outpaced growth. In the 12 months ended in June, Zillow doubled its sales, reaching $90m. But last week, Zillow filed a lawsuit against Trulia, alleging that the company infringed upon a home valuation patent. Trulia denies the allegations. While the eventual outcome is not yet known, investors likely factored that into the stock price.