Category: VC

A valuable deal for Groupon

Brenon Daly

Contact: Brenon Daly

As it preps for its public debut, we note that Groupon, the coupon giant known for offering consumers deals up to 90% off, did a bit of smart bargain shopping of its own last summer as it made an important purchase to expand business in Europe. In May 2010, Groupon picked up Berlin-based CityDeal, a Groupon clone that’s posting growth that far outstrips the already astronomical rate at the acquiring company. CityDeal wasn’t even a year old when Groupon scooped it up, although it managed to generate approximately $450m in annualized revenue in 2010. For comparison, in its first year of existence, Groupon posted $30m in sales.

Groupon has since followed up the CityDeal acquisition with about a dozen other small deal-a-day sites across the globe. However, CityDeal remains the foundation for Groupon’s international operations, a business that is growing faster and has a higher gross margin than Groupon’s original operations in North America. Groupon now gets more revenue from outside its home country than from inside, which is an almost unheard of rate of internationalization for a three-year-old startup.

Given the contribution that CityDeal is making to Groupon’s financials, it’s worth remembering that Groupon only paid $125m in stock for the acquisition. Another way to look at it is that Groupon gave away about 10% of the equity of the company (roughly 41 million shares) for a company that now accounts for more than half its business. Of course, CityDeal’s owners took their payment in equity, so they will undoubtedly see their shares soar on the public market – far above the roughly $1bn valuation Groupon had when it acquired their company. (Valuations of around $20bn for Groupon on the public market are being kicked around right now.) As we think about that deal, it strikes us as a fitting structure for Groupon to use, in that the true value isn’t realized at the time of purchase, but at the point of redemption.

Imperva impervious to consolidation

Brenon Daly1 Comment

Contact: Brenon Daly

The next exit for a database security vendor appears likely to be an IPO. Word is Imperva has picked Goldman Sachs and Deutsche Bank Securities to lead its offering, with a prospectus likely to be filed in the next few weeks. The Redwood City, California-based company is thought to be running at roughly $60m in revenue.

If Imperva does indeed go public, the IPO would cap a run of a half-dozen deals in a sector that has seen purchases by some of the biggest technology providers on the planet. Among the companies that have bought their way into the database security market over the past two years are Oracle, IBM and McAfee. That’s not to say those big players have been paying big prices.

With the exception of Guardium’s sale in November 2009 to IBM, which we valued at $232m, the other transactions have been modest ones. And the most recent deal has been less than modest: BeyondTrust likely paid only a few million dollars for Lumigent last week. In fact, as we tally the aggregate value of all M&A in the database-monitoring space, we suspect that the total bill will be less than the value Imperva creates in its IPO.

Demandware to test demand in public market?

Brenon Daly

Contact: Brenon Daly

After a pair of billion-dollar deals over the past half-year removed two old-line e-commerce vendors from the Nasdaq, an on-demand startup is rumored to be looking to replenish the ranks on the public market. Several sources have indicated that Demandware has picked underwriters and is set to file its IPO paperwork shortly, with Goldman Sachs & Co and Deutsche Bank Securities running the books. The filing, if it comes, would continue a trend of offerings by relatively small subscription-based companies. Demandware is expected to do about $40m in revenue in 2011.

Founded in 2004 and based near Boston, the company provides an e-commerce platform for more than 150 customers, including Barneys New York and The Jones Group. Demandware’s investors include local VC firms General Catalyst Partners and North Bridge Venture Partners.

The IPO for Demandware would come at a time of consolidation in the e-commerce industry, with big buyers paying big prices. Late last year, Oracle acquired Art Technology Group for $1bn, paying the highest price that ATG shares had seen since 2001. (ATG, which was founded in 1991, counted more than 1,000 customers.) And then earlier this year, eBay handed over $2.4bn for GSI Commerce. That stands as the largest Internet transaction since February 2008.

SuccessFactors pays a peak price for Plateau

Brenon Daly

Contact: Brenon Daly

Plateau Systems certainly got a peak price from SuccessFactors. At $290m, the cash-and-stock acquisition is the largest purchase of a privately held human capital management (HCM) vendor. In fact, the pending purchase of Plateau is larger than a half-dozen acquisitions of public HCM companies we have recorded in recent years.

Similarly, the deal – which is roughly three times more than SuccessFactors had spent, collectively, on M&A – also stands out when compared to the two most-significant transactions in the learning management software (LMS) market where Plateau does its business.

Earlier this year, private equity-backed SumTotal Systems paid an estimated $150m for GeoLearning while a half-year ago, SuccessFactors’ direct rival Taleo handed over $125m for Learn.com. Just as those two deals have a lower aggregate price than Plateau’s price, publicly traded LMS vendor Saba Software actually garners a lower valuation on the market ($270m) than Plateau is set to receive in its sale.

Another marketing maker heading to market?

Brenon Daly

Contact: Brenon Daly

Will Eloqua respond to Responsys? Does the rival on-demand marketing vendor perhaps have an IPO of its own planned? We couldn’t help but wonder that last Thursday as investors showed that they could hardly get enough of the Responsys offering, which priced above range and then tacked on another 28% in its first day of trading. The IPO created some $680m in market value for Responsys.

Responsys’ rather heady valuation (roughly 7x trailing sales and 5x projected sales) undoubtedly has to have generated more than a little interest from folks at Eloqua. And the company certainly has been taking steps in recent years that could indicate that it is eyeing the public market. For instance, three years ago it moved its headquarters from Canada to the Washington DC area while also hiring a raft of senior executives, most of whom have experience at public companies.

According to our understanding, Eloqua is a bit less than one-third the size of Responsys, which generated $94m in sales last year. Also, we gather that Eloqua lags a bit behind the 40% compound annual growth rate that Responsys has put up over the past half-decade. Still, the company offers a fairly compelling profile, with predictable subscription revenue flowing from its more than 800 customers. The strong debut from Responsys, plus the fact that shares of fellow on-demand marketer Constant Contact are trading around all-time highs, clearly suggest that Wall Street is in the market for marketing vendors.

A warm welcome on Wall Street

Brenon Daly

Contact: Brenon Daly

Against a backdrop that has the major stock market indexes at their highest level in about three years, investors have apparently signaled that they are ready to take a chance again on new issues. A pair of IPOs came to market Thursday at significantly higher-than-expected prices, and promptly surged in aftermarket trading. Collectively, the offerings for Responsys and 21Vianet raised a healthy $274m for the two companies.

In the hotter of the two IPOs, Chinese hosting company 21Vianet Group sold 13 million American Depository Shares at $15 each. (That raised $195m for the company, half again as much money as it originally planned to raise based on the midpoint of its initial range.) In the aftermarket, shares were changing hands at about $21 each. (We’ll have a full report on the company and its outlook in tonight’s Daily 451.)

Meanwhile, on-demand marketing software vendor Responsys also found a warm welcome on Wall Street. The offering, which we expected to be strong, raised $79m for Responsys. The company priced its 6.6-million-share offering at $12 each, roughly 30% above the midpoint of the initial range. Investors bid up the stock to about $15.50 in afternoon trading. With 44.1 million shares outstanding, Responsys garners a value of some $680m, slightly more than 7 times 2010 sales and almost 5x our projection for 2011 sales.

A responsible debut valuation for Responsys

Brenon Daly

Contact: Brenon Daly

Reversing a trend that has seen many of the major marketing software providers disappear inside larger players, Responsys is ready to step out onto the public market. The on-demand company, which filed its IPO paperwork just four months ago, plans to sell 6.6 million shares at $8.50-10 each. It is likely to begin trading Thursday. (See our full preview of the offering.)

At the high end of the range, Responsys would be valued at roughly $450m. That appears to be a fairly conservative valuation, at least when compared with recent acquisitions and even current trading multiples in the sector. We might suggest that Responsys – a company that’s solidly in the black and posting 40% growth – would garner a premium on its debut.

If it does indeed hit the market in the neighborhood of a half-billion dollars, Responsys will essentially match the exit prices over the past eight months of two of its main rivals. Last August, Unica got taken out by IBM for $523m (equity value), while Aprimo sold to Teradata for $525m in December. However, when we compare the three vendors, Responsys is growing at more than twice the rate of either of the two companies that went in a trade sale. (Aprimo had been on file to go public back in 2007, but the Credit Crisis scotched those plans.)

Despite the premium that we might expect for Responsys’ growth rate, the company is likely to start life on the Nasdaq at about 5.5 times trailing sales, roughly the midpoint of the valuations in the sales of Unica and Aprimo. Further, it would just match the current market valuation of Constant Contact, a low-end multichannel marketing firm that went public in October 2007.

Looking up at the data warehousing incumbents

Brenon Daly

Contact: Matt Aslett

The face of the data-warehousing sector has changed considerably in the past 18 months. A series of acquisitions has seen Vertica Systems, Greenplum and Sybase snapped up by Hewlett-Packard, EMC and SAP, respectively. Further, Teradata and IBM have strengthened their hands to compete with Oracle and Microsoft with their respective purchases of Aster Data Systems and Netezza.

According to our 451 Information Management report, Data Warehousing: 2009-2013, Oracle, IBM, Teradata and Microsoft accounted for 93.6% of the total revenue in 2010, a level that will only drop slightly to 92.2% by 2013. Those figures were calculated prior to the recent M&A activity, but in order to make a considerable dent in the dominance of the big four, any acquiring company will not only have to buy a data-warehousing player but also invest in its growth.

EMC has the right idea: Greenplum had 140 employees when it was acquired in July 2010. EMC’s Data Computing Products Division now has more than 350 employees, and is set to reach 650 by the end of the year. Netezza can benefit by being part of the much larger IBM, but Big Blue is also investing in growing the business. IBM is expected to increase headcount there from 500 in September 2010 to 600 now, and a target of 800 by year-end. We believe that HP will have to make a similar investment in Vertica, which had just 100 employees at the time of its acquisition, just as Teradata is likely to boost the headcount at its new Aster Data ‘center of excellence’ beyond the estimated 100 employees Aster Data has today.

As for the remaining data-warehousing specialists, while they can all boast differentiating features and strategies, they must also be looking for acquisitions of their own. On their own, they can’t hope to compete with the investments available at their deep-pocketed rivals.

Cisco shares are a flop for Flip’s owners

Brenon Daly

Contact: Brenon Daly

Since the purchase of Flip, Cisco Systems shares have been a flop. That’s actually an important consideration for the former owners of digital camera maker Pure Digital Technologies, which Cisco shuttered on Tuesday. Recall that when the networking giant (somewhat inexplicably) reached for Pure Digital two years ago, it covered the $590m purchase with its own equity. It was the first time Cisco had used its own equity as currency in four years, according to our records.

For the first year or so after the deal closed on May 21, 2009, Cisco basically tracked the S&P 500 Index. However, over the past half-year, Cisco stock has slumped as it has failed to execute, as the company indicated in a recently leaked memo from CEO John Chambers. Those acknowledged missteps have left Flip’s backers (at least the ones who haven’t sold) underwater on their holdings. Since the deal closed, Cisco stock has dropped 10% while the S&P 500 has tacked on 50%.

EMC bolsters security portfolio with NetWitness

Brenon Daly1 Comment

Contact: Brenon Daly, Josh Corman

Announcing its first deal in almost five months, EMC moved to bolster its security management portfolio by picking up fast-growing NetWitness. The purchase adds the rich network data and powerful analysis capabilities of the NetWitness NextGen platform, which is a bit like a TiVo for network traffic – capturing, indexing and storing massive amounts of network traffic. From a financial point of view, it is EMC’s first significant security acquisition since buying RSA Security in mid-2006.

In fact, we would estimate that the price of NetWitness tops EMC’s spending, collectively, on the four bolt-on acquisitions it has made to RSA since the $2.1bn deal. According to our understanding, NetWitness more than doubled revenue to about $45m in 2010. Given the growth rate and premium customer list NetWitness had assembled, we have no trouble believing market speculation that EMC paid $450-500m for NetWitness. A double-digit multiple isn’t out of whack for a fast-growing startup that has strategic value to EMC. We understand, for instance, that last summer EMC paid just shy of $400m for Greenplum, a data-warehousing startup that was clipping along at just under $30m in sales.