Category: VC

3Leaf ends up at Huawei – but will it be staying there?

Brenon Daly

Contact: John Abbott

Six months ago, I/O virtualization startup 3Leaf Systems disappeared from our radar screens. A little digging around more recently revealed that key staff members had scattered. VP of marketing Shahin Kahn was now at ORION Marketing Group, a consulting firm, with other ex-Sun Microsystems colleagues. CEO B.V. Jagadeesh had turned up as CEO of Virtela Technology Services, a managed network, security and technology services company. In his company biography he revealed that 3Leaf had been sold in a ‘private transaction.’ The trail of clues led on to Bob Quinn, founder and CTO of 3Leaf, who could be traced (via his LinkedIn profile) to Chinese telecom equipment maker Huawei Technologies, where he was now acting as a consultant. We surmised, and later received confirmation, that Huawei was the new owner of 3Leaf’s technology.

Two weeks ago, Huawei submitted an application to CFIUS – the US government’s Committee on Foreign Investment in the United States – including its first public statement that it had acquired 3Leaf in May. No details emerged other than that only the intellectual property and 15 of the 50 employees had been obtained in a transaction worth around $2m. According to CFIUS, Huawei should have requested permission from the committee. Huawei said it regarded the deal as a patent sale and hiring exercise and so believed it didn’t need to clear it with CFIUS. In 2008, the company abandoned its bid for 3Com due to US security terms. Hewlett-Packard stepped in to acquire 3Com a year later. More recently, Huawei has faced opposition to a proposed equipment-supply partnership in the US with Sprint Nextel over security concerns.

Aside from all this, the deal is a sorry – and somewhat worrying – end for 3Leaf, which raised roughly $67m from VCs Alloy Ventures, Enterprise Partners Venture Capital and Storm Ventures, as well as money from strategic investors Intel and LSI. 3Leaf was working on what should be a hot sector, I/O virtualization, but perhaps it entered the market too early. Its first product, the V-8000, first shipped in May 2007, but used a somewhat proprietary approach due to the lack of standards at the time. The company effectively started all over again in 2009 with plans to build new technology for virtualizing CPU and memory resources across x86 server clusters. It was looking for deals from OEMs, although there were also plans to sell prepackaged versions based on SuperMicro servers. However, 3Leaf needed more money to fund the ongoing research, and those efforts appear to have been unsuccessful.

3Leaf looked promising when it was founded, but early technology decisions led it down a blind alley. There may be some value in its patents and certainly more in the experience of its engineers, but it seems unlikely that, if CFIUS forces Huawei to sell the assets it’s bought, there will be many takers. If one is found, it’s likely to be a major server vendor with networking pretensions such as HP or IBM, or an I/O and networking adapter specialist such as Emulex or QLogic. Meanwhile, other startups in closely related areas – including ScaleMP, NextIO, Numascale, RNA Networks, VirtenSys and Xsigo Systems – soldier on.

Exits lead up and down for General Catalyst

Brenon Daly

Contact: Brenon Daly

Talk about a mixed pair of exits. Venture firm General Catalyst Partners is faced with an unusual situation of the sale of one portfolio company almost undoubtedly slashing the valuation of another portfolio company that just filed for an IPO. The trade sale could even derail the offering, although that’s probably not likely.

The specifics: Boston-based General Catalyst (and more specifically, partner Joel Cutler) has backed both ITA Software, a maker of flight search tools, and Kayak.com, an online travel site. In July, ITA agreed to a $700m sale to Google (although the close of the deal has been hung up by concerns over the search giant potentially having too much influence in the flight search market). And then just this week, Kayak.com put in its paperwork to go public. General Catalyst is the single largest owner of Kayak.com, holding about 30% of the equity.

The rub in the two exits comes because Kayak.com relies heavily on ITA for sending business its way. (According to the prospectus, ITA has accounted for 42% of airfare query results so far this year.) Of course, Google would have every reason not to continue to send that search traffic to Kayak.com if the ITA purchase goes through. So for General Catalyst, it would be nice to pocket the proceeds from a $700m sale of ITA, but probably not if it comes at the cost of Kayak.com’s valuation.

Making a middleware mini-mammoth

Brenon Daly1 Comment

Contact: Brenon Daly, Dennis Callaghan

Imagine combining Informatica and TIBCO Software into a middleware mammoth. Now, shrink the scale by almost 100. Move it from the US to Europe. And make it open source rather than proprietary software. In a roundabout way, that’s what we see in Talend’s recent acquisition of SOPERA. At least in part.

Since its founding in 2005, Talend has focused on offering an open source alternative to Informatica. (As we noted earlier this week, Informatica is a rather rich target. The data-integration vendor currently garners its highest price in a decade, valuing it at roughly 6 times projected 2010 sales.) Talend has enjoyed a good deal of success, doubling revenue last year and likely to finish next year with sales of roughly $50m, according to our understanding.

In addition to its core data integration, Talend also provides a data management suite combining master data management, which it snagged via the acquisition of Amalto Technologies in September 2009, and data quality. Now, it will also be serving up SOPERA’s application integration, where TIBCO is probably the best-known vendor. For its part, SOPERA has a much more modest business than its acquirer, claiming 60 customers, compared to the 1,500 paying customers that Talend has. SOPERA was actually founded inside the IT department of Deutsche Post a decade ago.

Though small, the purchase of SOPERA is nonetheless significant. As my colleague Dennis Callaghan has indicated, Talend now has a more compelling story to tell in open source middleware, especially as more enterprises take advantage of hybrid cloud environments, with applications running in private and public cloud environments that need connectivity and data sharing between them

The rich valuation of integration

Brenon Daly

Contact: Brenon Daly

A lot of attention (and the accompanying financial rewards) around data management has tended to pile up in security, storage, analytics and other well-known market segments. Rather quietly but consistently, data integration has joined the list of richly valued markets as customers use these offering to get at the massive stores of information that run their businesses. The premium valuation is showing up both on Wall Street and, just recently, in M&A, too.

Take the case of Informatica. Shares of the data-integration provider have nearly doubled over the past year, and currently fetch their highest price in a decade. Informatica currently trades at a $3.8bn market capitalization, a rather rich six times its projected 2010 sales of $640m. The company has always stressed that part of its value has been in its independence among the software giants, but Informatica has nonetheless attracted M&A speculation in the past.

Those highly valued (and highly visible) public market vendors have helped drive up the valuation of smaller data-integration startups. For instance, we estimate that IBM paid about $200m for Cast Iron Systems, which we understand was running at about $30m in sales. And just last week, Dell reached for Boomi in a deal that valued the company at more than twice that multiple. (Subscribers can see our full report, which includes our estimates on the revenue as well as the price of Boomi.)

Small purchases add up big for IBM

Brenon Daly

Contact: Brenon Daly

Shortly after IBM bagged Netezza, we noted that Big Blue had been doing some big-game hunting in recent deals. It turns out that’s also true when it takes aim at private companies. In fact, we estimate IBM has spent more on startups than it has on the public companies it has taken home over the past year.

First, we should qualify a bit of our math. In the past 12 months, Big Blue has announced 17 acquisitions. Included in that flurry of dealmaking is the purchase of a pair of public companies (Unica and Netezza), the pickup of a billion-dollar carve-out (the Sterling Commerce business from AT&T) and the acquisition of 14 privately held companies. IBM has not disclosed a single price for any of the more than dozen private companies it has snared since last October, even though some of them are costing the company – that is to say, its shareholders – several hundred million dollars a pop.

Nonetheless, we have estimates of the price tags of nine of the 14 deals. (These estimates have all been corroborated by at least two sources familiar with the transactions.) According to our estimates, more than half of the acquisitions (five of nine) cost IBM more than $200m each. Altogether, we estimate the nine deals set Big Blue back $2bn. That incomplete bill for the private company purchases is only slightly less than the $2.3bn that IBM disclosed it is spending on Unica and Netezza.

Is GeoLearning the next to go?

Brenon Daly

Contact: Brenon Daly

While the employment market may still be sluggish, the market for software that helps companies with their employees is bustling. We recently noted that both the number of deals and spending in the human capital management (HCM) market so far this year is rivaling the records set when the overall M&A market was much healthier. Add to that, there’s even an HCM vendor that’s eyeing the other exit: Cornerstone OnDemand filed to go public two weeks ago, one of the few tech companies that’s willing to brave the chilly IPO market.

As to what’s the next likely deal in the HCM market, recent indications have pointed toward a sale of GeoLearning. (We understand that the Des Moines, Iowa-based company has retained Raymond James & Associates to advise it on a process.) Founded in 1997 by current CEO Frank Russell, GeoLearning sells its learning management software (LMS) through both a hosted and on-demand model to more than 700 customers. In February 2008, GeoLearning took in its first and only institutional money – a $31m investment from Volition Capital, which was known as Fidelity Ventures at the time.

A little more than a month ago, fellow LMS startup Learn.com got snapped up by Taleo for $125m. Sources have indicated that ADP may have been the initial bidder for Learn.com, looking to add to the half-dozen HCM acquisitions the services giant has already done. We would expect ADP to at least look closely at GeoLearning. But from our perspective, the more likely acquirer for GeoLearning is SuccessFactors. The two companies have had an integrated offering on the market for more than four years, and continue as close partners. We gather that GeoLearning is slightly larger than Learn.com, which was running at about $30m in sales.

Oracle steps back into M&A market

Brenon Daly

Contact: Brenon Daly

After taking the summer off from M&A, Oracle on Monday announced the acquisition of authentication management startup Passlogix. The purchase is the first one by the normally acquisitive Oracle since it announced a pair of asset pickups in late May. Sitting out the summer slowed Oracle’s pace from steady deal flow earlier this year as well as other years. The Passlogix buy is Oracle’s eighth deal in 2010.

The first seven purchases, however, came in the first five months of 2010. That was ahead of the M&A pace Oracle held from 2005-2008, when it inked an average of a deal a month in each of the years. Oracle announced just eight acquisitions in recession-wracked 2009, when overall M&A activity was muted.

As we noted in our report on Q3 M&A, Oracle was one of the highly visible companies that didn’t announce a single transaction in the July-September period. Similarly, both Microsoft and Symantec sat out the quarter, too. But their inactivity was more than made up for by fellow tech giants Hewlett-Packard and IBM. That duo went on an M&A safari in the third quarter, with an eye toward bagging big game. In the just-completed July-September period, IBM and HP combined to announce 11 deals with a total bill of more than $7.3bn.

HCM deal flow nears high-water mark

Brenon Daly

Contact: Brenon Daly

Dealmaking in the human capital management (HCM) market has surged in recent months, pushing spending to near-record levels. So far this year, we’ve tallied 36 HCM transactions, with an aggregate value of $1.9bn. That basically matches the high-water mark of $2.1bn in the sector set during the first three quarters of 2007. (However, we should note that nearly all of the HCM spending three years ago came from the $1.8bn take-private of Kronos by Hellman & Friedman in March 2007.)

The number of HCM transactions so far this year (36) matches exactly the number during the same period in 2007. Another similarity between the two years is that strategic and financial buyers have both been active in the sector. Consider this: In the four deals announced so far this month, buyout shops have been behind two while corporate buyers have inked the other two. Valuations for this month’s transactions – and most other recent HCM deals, for that matter – have ranged from just below 2 times trailing sales to around 4x trailing sales.

However, in the sector’s latest acquisition, the valuation came in well north of that range. On Monday, private equity firm Madison Dearborn Partners (MDP) took a majority stake of Fieldglass in a transaction that valued the HCM vendor at more than $220m. (ArchPoint Partners advised Fieldglass in the deal between the two Chicago-based firms.) Fieldglass focuses on the so-called contingent market, which covers project-based contractors, offshore workers and so on. According to our understanding, Fieldglass generated nearly $30m in revenue and $5m in EBITDA in 2009 and was tracking to nearly $40m in sales and $10m in EBITDA for this year. That means MDP’s stake valued the company overall at about 6x trailing sales, according to our calculations.

Valuations separated by more than the Atlantic

Brenon Daly

Contact: Brenon Daly

Comparing the valuations of US tech companies with their European counterparts, we can’t help but notice the fact that the recovery hasn’t been enjoyed equally on both sides of the Atlantic. We noted a few months ago that the strong US dollar had opened the way for some opportunistic shopping on the continent. Although most European currencies have inched back up since then, there are still discounts available because the valuations of the companies are still lagging their US peers and rivals.

Earlier this summer, we pointed out that discrepancy in Deltek Systems’ purchase of Maconomy, which valued the Danish ERP vendor at twice the level it started the year – but still below Deltek’s current valuation on the Nasdaq. Similarly, Adobe acquired Day Software at a price that was four times higher than the Swiss company’s own valuation last summer. However, Adobe’s own valuation is higher than the take-out valuation for Day, which included a 60% premium. (Adobe is still valued higher, even though it lost 20% of its value Wednesday after forecasting weaker-than-expected results.)

But those deals pale in comparison to the arbitrage that OpenTable did in its reach across the Atlantic for toptable.com. OpenTable values the British restaurant reservation service at basically 6 times trailing sales, while the San Francisco-based company trades at 19x trailing sales. (For those of you who haven’t looked lately, OpenTable trades in the mid-$60 range, commanding a market cap of some $1.5bn. Incidentally, various measures of OpenTable’s valuation – specifically, both trailing and forward price to earnings ratio – line up almost exactly with those of salesforce.com.)

A Big Blue move into the data warehousing market

Brenon Daly

Contact: Brenon Daly

A little more than three years after Netezza debuted on the NYSE, the data-warehousing vendor is being erased from the Big Board at basically twice its valuation at the time of its IPO. Under terms, IBM is handing over $27 in cash for each share of Netezza, which went public at $12 in July 2007. However, after the strong debut, which valued the company at around $1bn, gravity set in on Netezza shares. They spent most of 2008 and all of 2009 under the $12 offer price.

Earlier this summer, however, Netezza shares started running. The run was fueled by strong second-quarter results that saw total revenue surge 45%, as well as lingering M&A rumors. (We noted in early July that we had heard EMC was interested in Netezza before it opted for rival data-warehousing vendor Greenplum. IBM’s bid values Netezza at twice the level it was trading at the time.)

As Netezza shares continued climbing to new highs on the market, the move whittled away the premium Big Blue is offering. Compared to the previous day’s close, IBM is paying just a 10% premium for Netezza. But judged against where Netezza was trading a month ago, the premium is 80%. We would add that Netezza shares have traded above the $27 bid since the open Monday morning. UBS advised IBM, while Qatalyst Partners advised Netezza.

Based on the enterprise value of $1.7bn given by IBM, the offer values Netezza at 8.9 times sales in its fiscal year that ended in January. (As a trading comparison, Teradata currently garners a valuation that’s about one-third that level.) At the end of its second quarter, Netezza guided Wall Street to expect about $250m in sales for the current fiscal year, meaning IBM is paying 6.8x projected sales. While that is a relatively rich valuation, it’s much lower than rival EMC paid in its big data-warehousing purchase. We understand that it handed over $400m for Greenplum, which was running at about $30m in sales.