Category: VC

VHS-era Autodesk stretches in acquisition of mobile video startup Socialcam

Brenon Daly

Contact: Brenon Daly

Autodesk is no Facebook, but the latest deal by the 30-year-old, battle-worn enterprise software vendor looked like it came from the M&A playbook of one of the new generation of tech buyers. In one of the oddest pairings of new and old, Autodesk, which belongs squarely in the VHS era, said it would hand over $60m for one-year-old Socialcam, a mobile video-sharing service that’s sort of an Instagram for videos. Even though the financial impact is muted (Autodesk has $1.5bn – enough to cover an Instagram and a half – in its treasury), the purchase of Socialcam is a huge stretch for the company.

For starters, there’s no clear way for Autodesk, which sells products primarily to engineers, to make money from consumer-focused Socialcam. While Autodesk touts the fact that Socialcam has been downloaded 16 million times, that doesn’t get Autodesk any closer to the $600m in revenue it has to put up every quarter. (Meanwhile, the deal will lower Autodesk’s earnings for the rest of the year, at least on a GAAP basis.) It’s EPS – rather than eyeballs – that’s the relevant financial metric for Autodesk.

Of course, it’s understandable that the explosive growth of Socialcam and other consumer-oriented companies looks tantalizing to Autodesk and other tech giants posting single-digit-percentage revenue increases. However, that M&A enthusiasm needs to be tempered by the fact that getting a return on an acquisition that doesn’t really fit into the existing business model can prove challenging. That’s particularly true with a company like Autodesk that can’t monetize the acquisition by just throwing a bunch of advertisements against the audience that an app like Socialcam has collected. Like we said, Autodesk is no Facebook.

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Gigamon eyes IPO even as a market stalls

Brenon Daly

Contact: Brenon Daly

Despite the crosscurrents in the IPO market, Gigamon has put in its paperwork for a planned $100m offering. The network traffic management vendor runs solidly in the black and has been increasing revenue at about a 50% clip in recent years. It finished 2011 with revenue of $68m and, assuming its growth rate continues, will wrap this year at roughly $100m. (Most of the revenue – between two-thirds and three-quarters of overall sales – comes from products, with associated services generating the remainder.)

Eight-year-old Gigamon competes with network heavyweights such as Cisco Systems and Juniper Networks, while a number of other companies have acquired technology that makes them rivals as well. Just in the past two months, Ixia paid $145m for Anue Systems while Danaher added VSS Monitoring. (Subscribers to 451 Research can see our full report on the transaction, including our estimate of the undisclosed terms.)

The proposed offering from Gigamon comes at a time when the IPO market is still struggling to find its footing: On the same day Gigamon put in its S-1, MobiTV withdrew its. And while the market should get a bit hotter this week with the expected debut of Palo Alto Networks, many investors are still underwater on their Facebook shares. The IPO of the fast-growing social networking firm was supposed to serve as a catalyst for the market, but instead deteriorated into a mishandled offering that has sparked lawsuits and losses.

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A tale of two IPO markets as Palo Alto Networks and Kayak hit the road

Brenon Daly

Contact: Brenon Daly

To understand the relative health of consumer and enterprise IPOs in the aftermath of the Facebook offering, consider the rather stark contrast between KAYAK.com and Palo Alto Networks. Both technology vendors set terms for next week’s debuts on Monday, but only enterprise-focused Palo Alto can expect to run with the bulls.

For starters, take a look at the gestation period for each of the offerings. Palo Alto set its range in only its third amendment to its S-1, which it filed just three months ago. (For the record, Palo Alto plans to sell 6.2 million shares at $34-37 each). In contrast, KAYAK’s paperwork has a lot of dust on it. The online travel site originally filed in November 2010 and set its range in its 12th update to its S-1. (For its part, KAYAK intends to sell 3.5 million shares at $22-25 each.)

But the contrast will come out even more sharply in terms of valuation. Although the companies are roughly the same size (Palo Alto did $220m in trailing 12-month (TTM) revenue, compared with $245m in TTM revenue for KAYAK), Palo Alto is more than doubling sales each quarter while KAYAK is posting growth in the mid-30% range.

Wall Street always awards fast-growing companies a premium, but the gap between these two offerings is substantial. Assuming both Palo Alto and KAYAK come to market at the high end of their expected price ranges, the security vendor will begin life with a market cap of about $2.5bn while the online travel site will start life as a public company at a valuation of roughly $1bn. That means Palo Alto will be valued at more than 11 times TTM sales, while KAYAK will garner just 4x TTM sales.

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Tech M&A stuck in low gear

Brenon Daly

Contact: Brenon Daly

Tech dealmakers continued to stay on the sidelines in the just-completed Q2 as worries about the slowing US economy and a financial collapse in parts of Europe had them rethinking their acquisitions. Spending on deals across the globe in the April-June period plummeted to $43bn, a 40% slide from the same quarter in 2011. Further, the number of transactions slid 9% year-over-year to 878 – the lowest quarterly total in a year and a half.

On a year-over-year basis, tech M&A spending declined in every month of Q2. Viewed more broadly, that means that buyers have spent less money on deals in five of the six months so far in 2012 compared with 2011. The waning activity has left the total value of acquisitions announced in the first half of 2012 at its lowest level in three years. Somewhat ominously, the spending rate so far in 2012 puts the full-year level at almost exactly the same level as the recession-wracked year of 2009.

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 282 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 291 $13.3bn Down 20%

Source: The 451 M&A KnowledgeBase

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Box eyes a new round at $1bn valuation

Brenon Daly1 Comment

Contact: Brenon Daly

Box is back in the market. Several sources have indicated that the enterprise content management and collaboration startup is currently looking to raise $100m in new funding, on top of the roughly $160m it has already pulled in. Box’s valuation is said to be north of $1bn.

That’s a heady valuation for a company that’s likely to finish this year at about $60m, according to sources. The round (assuming it does get raised) comes at a time when competition is heating up for Box. For instance, Citrix has made a series of acquisitions to piece together an enterprise collaboration and file-sharing platform. (Those small deals came after Citrix was rumored to have missed out on acquiring Box at a price thought to be roughly $600m.)

Likewise, VMware has used small purchases to bolster its Project Octopus while its parent, EMC, recently reached for synchronization startup Syncplicity to expand its collaboration offering. Other tech giants have rolled out their own collaboration platforms through organic development, such as Google’s Drive, Microsoft’s SkyDrive and even Apple’s iCloud. (Additionally, Microsoft is adding much more cloud functionality to its SharePoint product in its next release, due out late this year or early next year.)

Box – along with dozens of other cloud- and drive-themed rival offerings – effectively provides centralized storage as well as a shared file system for all of the documents at an enterprise. As we see it, the seven-year-old company is currently facing two main challenges, and is likely to put at least some of its new funding toward these.

First, since Box is competing as an enterprise software vendor, it needs to hire more sales agents to land enterprise accounts. We understand that the company has added dozens of experienced enterprise sales agents and is looking to bring on dozens more. Second, Box needs to establish itself as a platform on which other software shops can develop additional applications and enhancements. Earlier this year, the company introduced a new API – its first in four years – to draw in more developers.

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Qualys eyes an IPO

Brenon Daly1 Comment

Contact: Brenon Daly

Late last year and even into this year, there were rumblings that Qualys may get taken out before it could get out. Rumors were flying that the vulnerability management vendor had attracted M&A interest from two well-heeled shoppers that have both done large information security acquisitions: Check Point Software and Dell.

A pairing with either of the rumored suitors would have made a great deal of sense, adding threat scanning and analysis capabilities to the would-be buyer’s existing portfolio. Check Point needs vulnerability management capabilities as a way to add more information about what happens inside the firewall. Meanwhile, Dell, through its SecureWorks acquisition, not only integrates Qualys’ reports, but also offers Qualys as a managed service.

According to our understanding, interest from both would-be suitors diminished as Qualys held out for a price approaching $1bn. (That would represent a valuation of about 10 times this year’s bookings for Qualys.) So Qualys is now tracking to an IPO, where it is probably likely to debut at a $600-700m valuation but could well grow into a billion-dollar valuation on its own. (See our full report on the Qualys IPO.)

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Spurred by JOBS Act, iWatt puts in its paperwork

Contact: Thejeswi Venkatesh

Taking advantage of the newly enacted JOBS Act, iWatt recently filed its IPO paperwork in an effort to raise $75m. The power management semiconductor designer has been around since 2000 and has raised more than $50m in venture funding over five rounds. For its next funding, it’s looking to be among the first wave of companies to make it to the public market under the new federal legislation, which lowers the disclosure requirements, among other changes, for IPO candidates. Barclays Capital and Deutsche Bank Securities are co-leading the IPO.

The company has grown at a healthy clip recently, with revenue nearly tripling from $18m in fiscal 2009 to $57m in the 12 months ending March 2012. However, that may not be enough to ensure a warm reception from investors. The concern? Competition. More than 80% of iWatt’s revenue comes from the highly fragmented AC/DC conversion market, where it competes with bigger players such as Power Integrations and Fairchild Semiconductor. The company, which counts Philips and Apple among its customers, says its product has better form factors and lower cost compared to its rivals.

Its chief rival, Power Integrations, currently garners an enterprise value-to-revenue multiple of just over three in the public markets. Slapping the same multiple on iWatt means that the company will debut with a meager market cap of $175m. (Of course, iWatt may well enjoy a premium over its main rival because of its growth rate. Power Integrations flatlined last year and is projected to only grow about 10% this year, while the much-smaller iWatt has bumped up sales more than 60% in each of the past two years.) On the other hand, Wall Street – particularly the big institutional investors – hasn’t shown much demand for any equities lately, much less a new offering from a tiny, unproven startup in a hotly competitive market.

Google takes another swing at Office

Brenon Daly

Contact: Brenon Daly

Google has reached for the popular maker of mobile software suite Quickoffice, the fourth notable acquisition the company has made in its effort to take on Microsoft Office. Each of the purchases has given Google specific pieces of technology that have helped draw users away from Office, which stands as the dominant desktop productivity suite and has generated tens of billions of dollars of sales for Microsoft over the past two decades.

Looking to siphon off some of those incredibly high-margin sales, Google has scooped up startups offering online word processing (Upstartle with its Writely program), spreadsheet programs (iRows), as well as collaboration and sharing of Office documents (DocVerse). As it built on those deals over the past six years, Google has always pitched its offering – first in Google Docs, then in Google Apps and now in Google Drive – as a Web-based alternative to the largely desktop-based Office franchise. (Of course, Microsoft also offers a hosted, or cloud, version of its popular suite in the form of Office 365.)

With Quickoffice, Google is shoring up the technology around a productivity suite for the post-PC era, as Quickoffice is installed on more than 400 million devices. In addition to the broad user base, Google also gets some much-needed technology that should help iron out some of the wrinkles that can pop up when converting Microsoft Office documents to Google formats. Additionally, Quickoffice can run Office apps on the iPad, while Microsoft has yet to release an official version of Office for the rival tablet. (It is rumored to be working on one, however.)

While terms of the acquisition weren’t released, we would note that Quickoffice has a rather compelling business model, with an extremely low cost of customer acquisition. It gets paid by licensing its software suite to device makers and then generates business on top of that by upselling customers to subscription offerings. (We understand that ‘aftermarket’ business was running at about $5m a quarter recently.) Not bad for a business that was founded in 1996 inside the recently disappeared Palm Inc. For the record, Google has now acquired pieces of two wireless pioneers: Palm and Motorola Mobility.

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Salesforce.com puts $1bn to work to buy parts of its Marketing Cloud

Brenon Daly

Contact: Brenon Daly

Salesforce.com has now shelled out a cool billion dollars to acquire the makings of its Marketing Cloud. The marketing offering, which is built on the back of the company’s two largest acquisitions, represents the most significant push to grow beyond the on-demand sales force automation product that it’s primarily known for. At stake: billions of dollars of market value for the richly valued SaaS kingpin.

On Monday, the company announced that it will pay $689m in cash and stock for Buddy Media, a social media marketing platform that counts 8 of the 10 largest advertisers as clients. The business, which should officially become part of salesforce.com by the end of October, will be combined with Radian6, a social media monitoring startup that salesforce.com picked up a little over a year ago for $326m.

Both transactions valued the target companies at a double-digit price-to-trailing-sales multiple. Buddy Media is being valued at an eye-popping 27 times 2011 revenue, roughly twice the valuation that Radian6 garnered. For its part, salesforce.com trades a little above 7x trailing sales.

Salesforce.com has shown through its M&A program – where it has acquired core parts of not only its Marketing Cloud, but also its Service Cloud offering – that the company is acutely aware that it can’t sustain an above-market valuation on a single product. With its platform being built on ever-pricier acquisitions, salesforce.com is gambling that it can use M&A to pull off a portfolio expansion that precious few software vendors have done successfully. To date, it’s been hard to bet against the company: Since its shares came public almost eight years ago, salesforce.com is up more than 700%, compared to a flatline S&P 500 over that same period.

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

Bazaarvoice buys a down-market voice with PowerReviews

Brenon Daly

Contact: Brenon Daly

Having just minted its public market shares three months ago, Bazaarvoice put them to use in a big way on Thursday. The company, which provides an online customer review platform, announced plans to acquire smaller rival PowerReviews in a deal valued at $152m – $121m of the consideration coming in stock, with the remaining $31m in cash. Terms give PowerReviews control of roughly 10% of Bazaarvoice’s total equity.

The transaction represents a significant bet on being able to move down-market, expanding Bazaarvoice’s voice-of-customer platform to SMBs. To get a sense of the discrepancy in size, consider this: PowerReviews has more customers (1,100) than Bazaarvoice (737), but only slightly more than one-tenth the revenue.

As with any platform, the value increases as the number of users increases. So the play for scale is a relatively sound motivation for Bazaarvoice’s first-ever acquisition. But we would have to add that the scale isn’t necessarily coming cheap. Bazaarvoice is valuing each dollar that PowerReviews generated last year at about $13, while the public market values each dollar that Bazaarvoice generated at roughly $9. Obviously there are differences in the size of the businesses – not to mention the takeout premium – but it’s worth noting the valuation gap nonetheless.

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