Category: VC

Nexsan: Next to go out

Brenon Daly

Contact: Brenon Daly

Nearly two years after it first filed its IPO paperwork, storage vendor Nexsan appears set to hit the Nasdaq later this week. The company is planning to sell 4.8 million shares at $10-12 each. At the high end of the range, the offering would raise some $59m for Nexsan, which would start life as a public company with an initial valuation of about $200m. Thomas Weisel Partners is running the books for Nexsan, which will trade under the ticker NXSN.

The offering continues the trend of smaller IPOs and lower initial valuations that we recently noted. Back in April 2008, Nexsan planned to raise $81m in its offering. However, the actual proceeds will come in about one-quarter below its original expectation. Similarly, the valuation that we penciled out for Nexsan two years ago has proved a bit too rich.

Back in our initial report on the company, we figured that Nexsan would hit the market at a valuation of around $300m. Built into that projection, however, was the assumption that the storage vendor would be able to increase revenue at about a 20% clip. (That didn’t seem unreasonable back in 2008, considering Compellent Technologies – a similar storage startup that had recently gone public – increased revenue 78% that year.)

Instead, Nexsan actually shrank. In its fiscal year that ended June 30, 2009 – a period that basically covers the recent ‘Great Recession’ – overall sales slipped to $61m from $63m in the previous fiscal year. In the two quarters since then, Nexsan has started to grow again, although at a rather muted 6% pace. On the other hand, Nexsan did manage to move into profitability during the worst economic conditions that most US businesses have seen.

Consistently inconsistent M&A in Q1

Brenon Daly

Contact: Brenon Daly

The first quarter is in the books and it’s hard to read much from it, at least in terms of M&A. While the quarter saw more deals announced than any other quarter since the credit crisis erupted, the aggregate spending on those transactions is lingering about one-third below the recent average. In the just-completed quarter, we recorded 841 acquisitions, with a total bill of $31bn. (We should note that nearly one-third of the M&A spending in the quarter came on a single telecom deal, where an Asian operator spent $9bn on mobile businesses in Africa just two days before the end of the quarter.)

Overall, the numbers point to an inconsistent recovery in the M&A market. On the one hand, many of the big buyers were busier than ever. CA Inc, Google, IBM and Oracle (among others) all announced at least three transactions in the just-completed quarter. But on the other side, we also saw a number of deals that continued the worrisome trends that we thought we might have left behind in 2009, with additional scrap sales and low-multiple divestitures in the first few months of 2010. Look for our full report on first-quarter M&A in tonight’s MIS and TDM sendouts.

Recent quarterly M&A activity

Period Deal volume Deal value
Q1 2010 841 $31bn
Q4 2009 822 $55bn
Q3 2009 758 $38bn
Q2 2009 778 $49bn
Q1 2009 663 $10bn

Source: The 451 M&A KnowledgeBase

IronPlanet: heavy metal and high margins

Brenon Daly

Contact: Brenon Daly

We recently noted that for the IPO market, thin is in. The offering sizes for many of the would-be debutants have been trimmed, as have the initial valuations. But in one area, some of the companies that are looking to come to market are still very, very bloated: funding. Force10 Networks, which put in its IPO paperwork earlier this month, had hit up investors for more than $400m. Motricity, which filed back in January, also raised at least that much.

So it was refreshing to skim the recently filed prospectus from IronPlanet, an online marketplace for industrial machines. Certainly, brokering the sales of tractors and bulldozers isn’t the sexiest business. But there’s good money to be made, at least based on IronPlanet’s recent performance. The capital-efficient company has been profitable for the past four years. (And that’s GAAP profitability, not the ‘kinda, sorta’ profitability that most private companies talk about.) Although it has raised some $47m in venture backing, IronPlanet currently has $30m of cash and equivalents on its balance sheet – a number that’s growing.

The 10-year-old company has increased revenue more than 50% in each of the past two years, finishing 2009 with $54.7m in sales. (It sold nearly a half-billion dollars worth of heavy machinery on its network last year.) And IronPlanet isn’t just running its business for cash. It spends heavily on sales and marketing (44% of revenue in 2009) to increase its profile and has put some money behind its recent push to expand geographically.

Two years ago, IronPlanet started investing in business outside of North America. The international unit, which generates roughly 10% of total sales, currently burns cash, while the legacy North America unit hums along at about 20% EBITDA margins. (Overall gross margins stand at an enviable 78%.) In looking ahead to forecast Wall Street’s reception for this online marketplace, we might point out that eBay shares have tacked on 110% over the past year, twice the gain of the Nasdaq during the same period.

More on Intersil-Techwell

Brenon Daly

Contact: Brenon Daly

We looked at Intersil’s purchase of Techwell on Thursday, primarily from the perspective of the senseless lawsuits that are swirling around the transaction. But fittingly for the largest acquisition of a US-based chip company since mid-2007, there’s a lot more that’s noteworthy about the deal. (Note: The equity value of the transaction is actually $450m, while the $370m figure in the announcement is the enterprise value.)

For starters, Intersil’s pickup of Techwell, which is expected to close in two months or so, is the sixth deal the chip company has inked in the past year and a half. (In another report, we noted some similarities in a pair of purchases that Intersil did back in 2008.) At $450m, the buy is the largest that Intersil has announced in a half-decade. The acquisition gets Intersil into two new markets: video security surveillance systems, where Techwell gets about 70% of its sales, and automotive displays, which accounts for the remaining 30%.

Also, the planned sale of Techwell represents the second exit at an above-market multiple in just three weeks for Technology Crossover Ventures (TCV). A late-stage investment firm, TCV owned chunks of both Techwell and RiskMetrics Group, which sold to MSCI Barra for $1.55bn at the beginning of March. TCV holds nearly 4.3 million shares of Techwell, according to the latest 13F filing with the SEC, meaning the firm stands to enjoy a $79m payday when the deal closes.

Taps turned off at Liquid Computing

Brenon Daly

Contact: John Abbott

It looks like Liquid Computing will be the latest hardware startup to shut down due to a lack of funding. The former high-performance computing vendor, founded in 2003, had raised $50m of VC funding over three rounds. Its C round of $8.3m closed as recently as last summer, and was intended to fund a shift in emphasis toward ‘unified computing’ and the development work required to eliminate proprietary hardware so that the Ottawa, Canada-based company’s Liquid Elements software would run instead on industry-standard, Intel-based servers.

However, investors ATA Ventures, Axis Capital, the Business Development Bank of Canada, Export Development Canada, Newbury Ventures and VenGrowth, along with private investor (and chairman of the board) Adam Chowaniec, were apparently unwilling to put in a further funding round, despite all the activity around unified computing stirred up by Cisco Systems and Hewlett-Packard. CEO Vikram Desai and the majority of the 50 employees have left the company. Efforts are being made to sell the intellectual property, though it’s not clear who the likely buyers might be. Cisco, Dell, HP, IBM and Oracle/Sun have already set their own technical directions in this area and are unlikely to be interested.

Previous hardware-oriented startup casualties include Fabric7, Panta Systems and SiCortex – the latter lasted until June 2009 until its VCs similarly lost their nerve. And at the end of last year Verari Systems also ran out of money; its assets were acquired by founder Dave Driggers and the vendor has since reemerged as Verari Technologies. PlateSpin (acquired by Novell in February 2008 for $205m) and RLX Technologies (acquired by HP in October 2005 for an estimated $25m) were both operating in a similar area to Liquid, and all made a similar shift away from their original hardware roots over to software. Egenera and Racemi have also turned themselves into pure software providers and have so far retained their independence.

SGI: buying low and heading higher

Brenon Daly

Contact: Brenon Daly

For any company looking to be acquired by Silicon Graphics, we have this rather unorthodox suggestion for how to position the business: declare bankruptcy. We’re kidding – but only a bit. In just the past 10 months, SGI has picked up two companies in wind-down sales. Last April, server vendor Rackable Systems bought the assets of SGI in a bankruptcy sale.

When the deal closed the following month, Rackable took on the SGI name. However, since then, the company has fashioned a new and improved performance, at least in the view of Wall Street. Shares of SGI – a vendor that had gone Chapter 11 twice under its previous incarnation – are up almost 140% since the combination of Rackable and SGI closed in May. That’s more than four times the return that the Nasdaq has posted during the same period.

On a smaller scale, SGI was back bottom-feeding again last week. The company purchased assets from COPAN Systems for just $2m. As my colleague Simon Robinson pointed out in his report on the deal, COPAN had struggled to get businesses to buy into its vision of massively consolidated storage arrays for data-archiving purposes. The startup, however, didn’t have the same difficulty in getting VCs to buy into it. COPAN had raised around $110m in backing since opening its doors in 2002.

A Coremetrics sale to salesforce.com?

Brenon Daly

Contact: Brenon Daly

Could this be a case of history repeating itself? A Web analytics vendor pulls out at the last minute of a technology conference at a boutique bank, and then announces that it has agreed to a richly priced sale of the company. That’s the way it played out last fall with Omniture at ThinkEquity’s conference. And at least part of that has happened with Coremetrics this week at Pacific Crest Securities’ Emerging Technology Summit. (Coremetrics was slated to present at the event Thursday morning, but canceled its appearance, officially because the presenter was ill.)

Of course, there’s been a lot of M&A buzz around Coremetrics in recent weeks, with at least two sources indicating that the company had retained Goldman Sachs to represent it. As to who might be a buyer for the Web analytics shop, we come back to one name: salesforce.com. We understand that the CRM giant was acutely interested in Omniture and, according to some sources, was the cover bidder in that process. (Omniture, of course, ultimately sold to Adobe in a somewhat puzzling pairing.)

Coremetrics’ analytics would fit neatly with salesforce.com’s sales and marketing offering. Both are also SaaS companies. And, as we noted last month, the profitable company, which has about $1bn in cash available, has announced plans to raise another $500m in a convertible offering. Altogether, that’s plenty of cash to cover a potential purchase of Coremetrics, which would probably go for several hundred million dollars. And if the Coremetrics sale parallels the Omniture sale in that the analytics company goes to a somewhat unexpected buyer, we might put forward Autonomy Corp as a possibility, as my colleague Nick Patience did in a recent report. The acquisitive British vendor also recently announced plans to raise a slug of money.

Informatica parlays MDM bets

Brenon Daly

Contact: Brenon Daly

Informatica’s purchase of Siperian at the end of January marked the data-integration vendor’s first acquisition of a master data management (MDM) company. However, it wasn’t the first time Informatica has put money into the sector. The company held small stakes of both Purisma, which sold to Dun & Bradstreet for $48m in November 2007, and Initiate Systems, which IBM snared last week for what we heard was $425m. Both investments were tiny, with one source indicating that Informatica put less than $1m into Purisma and less than $5m into Initiate.

Though small, the investments certainly paid off for Informatica, coming at a time when most fulltime VCs are struggling to generate any returns. (Never mind the rather dismal, start-and-stop performance of nearly all other corporate venture programs.) We understand, for instance, that Informatica doubled its money on Initiate in less than a year and a half. Who knows, maybe the company just rolled over the proceeds from the sales of both MDM investments (Purisma and Initiate) into an MDM deal of its own. After all, Siperian was the largest buy that Informatica has ever made.

Will Iron Mountain soon be sipping a Mimosa?

Brenon Daly

Contact: Brenon Daly, Kathleen Reidy, Simon Robinson

For what was once a fairly staid Old Economy business, Iron Mountain has done a better job than most companies in acclimating itself to the digital age. The records management vendor has accomplished that with eight acquisitions over the past half-decade, picking up technology for online backup and e-discovery, among other offerings. The $158m purchase of e-discovery provider Stratify stands, in many ways, as Iron Mountain’s marquee acquisition for its digital business. It has maintained the Stratify name and, last November, turned its whole digital subsidiary over to Ramana Venkata, the founder and former CEO of Stratify.

After that purchase in October 2007, Iron Mountain stayed out of the market for more than two years, despite many adjacent sectors that it could buy its way into. (And, from what we remember of the past two recession-wracked years, prices for startups weren’t particularly steep.) The M&A drought ended last month with the pickup of a San Francisco-based services company, Legal Imaging Technologies, that provides electronic document conversion. Terms weren’t disclosed.

But now we wonder if that small buy might be followed by a large deal. Several sources have indicated that Iron Mountain may be looking to snare a digital-archiving startup. It had relied on its partnership with MessageOne, but since that company’s acquisition by Dell, Iron Mountain has moved on, partnering with Mimecast last April. The partnership – combined with the fact that both businesses deliver their offerings through a subscription model – makes an acquisition of Mimecast by Iron Mountain a logical fit.

However, the market has been buzzing recently with another possible pairing for Iron Mountain – Mimosa Systems. Although Mimosa has talked in the past about going public this year, we have always thought that an acquisition of the company was more likely. (It has raised $50m in backing and, according to one source, was tracking to about $40m in bookings last year.) While Mimosa’s technology is highly regarded, the fact that it’s on-premises rather than on-demand would pose some integration challenges. However, it does have an emerging cloud story that would likely be of interest to Iron Mountain.

More than one way to market

Brenon Daly

by Brenon Daly

Apparently, UPEK really wants to be a public company. It put in its IPO paperwork back in mid-2007, only to pull it in March 2008. Unlike other former filers, however, the biometric security vendor hasn’t dusted off its S-1 in an attempt to hit the public markets. (In the past week, both Convio and GlassHouse Technologies have re-filed to go public.) Instead, UPEK wants to get on the Nasdaq by picking up a rival that already trades there.

UPEK lobbed an unsolicited offer at AuthenTec on Friday that basically envisioned consolidating the two companies, which make fingerprint sensors, into a single business. Equity ownership would be evenly divided between the two sides. For its part, AuthenTec has been a public company since mid-2007, although its shares have lost some three-quarters of their value in that time. On Monday, AuthenTec, advised by America’s Growth Capital, rejected UPEK’s ‘highly dilutive and speculative transaction.’