Category: VC

A deflating bubble

Brenon Daly

Contact: Brenon Daly

If, as some observers suspect, the valuations for tech startups are overinflated, then at least a bit of air is expected to leak out of the bubble. According to our recent survey of corporate development executives, two-thirds of the respondents indicated that they expect valuations for private companies to decline through the rest of the year. The 65% who predicted a slide in the exit prices for startups is more than five times higher than the 12% who projected that valuations would tick higher. (The question about startup valuations was part of a larger survey about M&A expectations for the rest of 2011. See our full report on the survey.)

Interestingly, the mid-2011 outlook is almost exactly the inverse of what corporate development executives told us at the beginning of the year. In our previous survey, 71% forecasted higher M&A valuations for startups this year, compared to just 9% who saw a decline. In fact, the only time the sentiment from our mid-2011 survey even loosely lines up is back in the 2009 survey, which was conducted at the depth of the Great Recession. At that time, nearly nine out of 10 respondents projected that private company M&A valuations in that year would decline, compared to just 5% who predicted an uptick.

Projected change in private company valuations

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 12% 23% 65%
December 2010 for 2011 71% 20% 9%
December 2009 for 2010 58% 36% 6%
December 2008 for 2009 4% 9% 87%
December 2007 for 2008 39% 28% 33%

Source: The 451 Group Tech Corporate Development Outlook Survey

Forget the rebound, many companies see double dip

Brenon Daly

Contact: Brenon Daly

According to many big tech acquirers, the rest of 2011 is shaping up to look an awful lot like 2009. From forecasts for declining valuations to indications of a dramatically more conservative approach to M&A, there was a bearishness in the responses to our special midyear survey of corporate development executives that hasn’t been seen since we were mired in the Great Recession. (See the full report.)

And while the responses to our most recent survey may not have hit the same lows of two years ago, many views began to approach those gloomy levels. In any case, it was a dramatic reversal from the relatively robust forecast given at the beginning of 2011. Taken altogether, the responses to our most recent survey indicate that there’s a growing concern about a recessionary ‘double dip’ that threatens to stall dealmaking for the rest of the year.

Just one-third (32%) of the corporate development executives we surveyed last month indicated that they expected their company to pick up the pace of M&A in the second half of 2011, down half (52%) from those who predicted an acceleration for full-year 2011 in our survey back in December. Meanwhile, the number who projected a slowdown more than doubled to 18% from 7%. Another way to think about it is that nearly one out of five people told us that their company won’t be as busy in the remainder of the year as it was in the first half of 2011.

Projected change in M&A activity

Period Increase Stay the same Decrease
Mid-2011 for remainder of year 32% 50% 18%
December 2010 for 2011 52% 41% 7%
December 2009 for 2010 68% 27% 5%
December 2008 for 2009 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey

Stepping to the sidelines

Brenon Daly

Contact: Brenon Daly

Despite a few high-profile acquisitions recently, companies are tempering their buying plans for the rest of the year. At least that’s what they indicated in our ‘flash’ survey of corporate development executives, which we closed last week after a record turnout. Nearly 100 respondents offered their views on what they expect in both the M&A market as well as for IPOs for the balance of 2011.

In terms of projected activity at their own companies, just one-third of the respondents indicated that they expected their company to pick up the pace of M&A during the rest of the year. That’s down from 50% who said that for full-year 2011 in our main survey back in December. On the other side, the number projecting a slowdown in their own shopping more than doubled from 7% to 18% here in August.

For a full discussion of the survey – along with our own projections for deal flow, valuation and trends for the rest of 2011 – please join us Tuesday at 11:00am PST for a special webinar on tech M&A. Registration for the free one-hour event can be found here.

Dual track, but singular outcomes

Brenon Daly

Contact: Brenon Daly

For the third time in just two months, a tech company that had planned to go public has instead ended up inside a company that’s already public. The latest dual-track sale came Wednesday when Force10 Networks opted to accept a bid from Dell rather than see through its IPO plan. The networking gear vendor had filed its prospectus in March 2010.

The deal follows one month after would-be debutant Apache Design Solutions sold to ANSYS and two months after SiGe Semiconductor went to Skyworks Solutions. Those three transactions probably only generated about $1.2bn in liquidity, including Force10’s reported price of roughly $700m. (As a side note, we might point out that Deutsche Bank Securities was a book runner on all three proposed IPOs.)

As this trio of enterprise-focused startups finds itself snapped out of the IPO pipeline, consumer-oriented companies continue to receive a warm welcome on Wall Street. Consider this: Zillow, which went public earlier this week, now trades at about 20 times trailing revenue. In contrast, Force10, SiGe and Apache Design garnered much more modest valuations ranging roughly from 2-6x trailing revenue in their sales.

Intel buys Fulcrum to further datacenter product push

Contact: Thejeswi Venkatesh, Ben Kolada

In a move that further boosts its 10-Gigabit Ethernet push, Intel has announced that it will acquire Fulcrum Microsystems, a fabless semiconductor company that developed the fully integrated FocalPoint family of 10Gb and 40Gb Ethernet switch chips. The acquisition advances Intel’s desire to transform itself into a comprehensive datacenter provider that offers computing, storage and networking building blocks.

Terms of the deal were not disclosed, though we estimate that Fulcrum generated about $13m in revenue in the 12 months before its sale. For a comparable transaction, we could look to Broadcom’s November 2009 acquisition of Dune Networks for about 3 times trailing sales, or twice the median for all semiconductor design deals announced so far this year. However, given Fulcrum’s strategic importance to Intel, we wouldn’t be surprised if its valuation is not only higher than the median, but also surpasses Dune’s. We would also note that Intel already had an insider’s view into Fulcrum – its venture investment arm, Intel Capital, provided mezzanine financing to Fulcrum in 2010.

Connecting thousands of nodes at maximum bandwidth is the holy grail of datacenter networking. Fulcrum’s FocalPoint portfolio provides high-performance, low-latency network switches to support evolving cloud architectures and the growth of converged networks in the enterprise. Intel’s earlier foray on this front was with InfiniBand, which it supported for many years before finally being squeezed out by faster, ultra-low-latency architectures like AMD’s HyperTransport consortium on the one end and on the other end by cheaper but slightly slower 10GigE. Intel has been supportive of 10Gb architecture and this acquisition further enhances that strategy. More importantly, 10GigE makes more sense for Intel if it is looking for a common single interconnect architecture for datacenters, since all applications run on it anyway.

A new frontier in IT management M&A

Brenon Daly

Contact: Brenon Daly

Few areas of software have seen more consolidation than the broad bucket known as IT service management (ITSM). Where vendors were once selling relatively simple helpdesk software, the offerings have evolved – primarily through M&A – into broader IT management platforms. The deals have ranged from massive strategic bets (Hewlett-Packard’s $4.5bn reach for Mercury Interactive, for instance) to tiny technology tuck-ins (e.g., EMC’s March 2008 addition of Infra Corp).

But what we hadn’t really seen in this flurry of dealmaking is an acquisition focused on mobile capabilities. Well, that was true until Thursday, when BMC Software reached for Aeroprise. (BMC is slotting Aeroprise into its Remedy portfolio, a business that BMC acquired in 2002 for $347.3m from bankrupt parent company Peregrine Systems.) The acquisition bolsters BMC’s ability to deliver its ITSM tools to smartphones and tablets of all flavors. And BMC knows the startup very well. It has been selling Aeroprise products (branded as a BMC offering) for the past year.

Maybe M&A for McAfee?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

With the ink barely dry on the M&A papers of SolarWinds’ purchase of TriGeo, we understand that another deal in the enterprise security information management (ESIM) market may be already in the works. Several industry sources have indicated that McAfee and NitroSecurity are thought to be close to an agreement that would give Intel’s subsidiary a solid ESIM offering.

McAfee has been looking in this market for some time. We gather that the company lobbed a bid (thought be in the neighborhood of $600m) for ESIM kingpin ArcSight before that company went public in February 2008. More recently, we weren’t surprised to hear that McAfee was in the process early for ArcSight last summer but got outbid by Hewlett-Packard, which ended up paying $1.65bn, or a steep 8 times trailing revenue for ArcSight.

If the acquisition indeed comes together, NitroSecurity would make a great deal of sense for McAfee. NitroSecurity, which we understand is running at about $40m in revenue, sells big-ticket installations to enterprises and the federal government – a market that McAfee clearly wants to be in. (NitroSecurity is also one of the few security vendors that has been able to crack into the industrial control system market, which gives the company a shot at lucrative contracts securing some of the nation’s critical infrastructure.)

The only other ESIM provider of size that might also give McAfee a comparable presence in the enterprise market would be Q1 Labs. However, that firm has a deep relationship with Juniper Networks, which is its single largest OEM partner. Nonetheless, Q1 has ascribed itself a fairly rich valuation, according to sources. The market may well soon have its vote on that, as Q1 recently indicated that it is looking toward an IPO.

Different exits at different prices

Brenon Daly

Contact: Brenon Daly

Imperva’s pending IPO offers a fairly intriguing counterpoint to the trade sale of rival Guardium nearly two years ago. In 2009, both companies would have been rather similarly sized (basically, $35-40m) and posting roughly comparable growth rates.

Rather than continue as a stand-alone vendor, however, Guardium took a relatively rich bid from IBM for what we understand was about $232m, or about 6 times trailing sales. For a deal that was announced in November 2009, when the overall market was only starting to recover from the credit crisis, Guardium’s valuation looked positively platinum. (It was even more shiny when we consider that the Boston-based company raised just $21m in venture backing.)

But now with Imperva’s IPO, we may well get to see what Guardium might have been worth if it had opted for the other exit. (Obviously, there are a lot of flaws built into standing Imperva as a proxy for Guardium, and doing so glosses over the impact of time and risk on the return. But, arguably, it’s still a useful exercise.)

Nonetheless, assuming that Imperva can garner roughly the same trailing valuation that Guardium got in its sale, that would imply an initial valuation of about $330m – or roughly $100m more than its rival’s clearing price. That $330m would work out to about 4.5x this year’s expected revenue, which seems like a reasonable starting point for Imperva when it does hit the NYSE. (See our speciual report on Imperva’s offering.)

Is anyone going to play Violin?

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

As Fusion-io continues to bask in the glow of its newly created billion-dollar valuation, Wall Street is already looking for the next solid-state storage specialist. Conveniently enough, Violin Memory popped up earlier this week, announcing a $40m round at a $440m valuation. (It’s pure coincidence, certainly, that Violin – headed by the same guy who used to head Fusion-io – picked the same week as Fusion-io’s debut to trumpet not only the new investment but also the valuation it fetched. Just a fluke of the calendar, of course.)

Whatever the motivation for landing two rounds of funding in just four months, Violin also talked about topping $100m in sales this year, which would certainly put it on track for an IPO of its own. Provided, that is, the company intends to go public. If it should opt to head for the other exit and sell, we suspect that the most interested bidder in Violin may well be Hewlett-Packard.

The two companies have been publishing benchmark results from a combined offering, and HP undoubtedly could use the technology boost to more effectively compete with Oracle, which has been punching HP every chance it gets. (Oracle’s none-too-subtle ‘cash for clunkers’ ad campaign around HP servers comes to mind.) Another possible suitor for Violin would be Juniper Networks, which has already invested in the startup.

Heading toward an ‘Eloqua-ent’ IPO

Brenon Daly

Contact: Brenon Daly

A little more than a month after the strong IPO by a rival on-demand marketing vendor, Eloqua has taken its first significant step toward an offering of its own, according to market sources. We understand that the company has tapped J.P. Morgan Securities and Deutsche Bank Securities to lead the IPO, with a filing expected in a few weeks. Co-managers will be Pacific Crest Securities, JMP Securities and Needham & Co.

Eloqua has been positioning itself for an offering for the past few years, taking steps such as moving its headquarters from Canada to the Washington DC area, as well as hiring a raft of senior executives, most of whom have experience at public companies. Meanwhile, on the other side, Wall Street appears ready to buy off on marketing automation companies. At least the demand has been there for rival Responsys, which went public in late April and currently trades at a $750m valuation.

Responsys’ valuation works out to about 8 times 2010 sales and 6x 2011 sales at the on-demand company. Eloqua, which also sells its marketing automation software through a subscription model, is thought to be about half the size of Responsys. Assuming that Wall Street values the two rivals at a similar multiple, Eloqua could find itself valued at $350-400m when it hits the market later this year.