Category: VC

Former high-flyer Cassatt sold in low-multiple deal to CA

Brenon Daly

Contact: Brenon Daly

Few datacenter startups in recent memory have commanded as much attention – or as much investment – as Cassatt. The company, which drew in some $100m in backing, had top engineering talent and proven executives, starting with CEO Bill Coleman. Realizing the promise of all that, however, has proved difficult for Cassatt. It has shuffled through a number of business plans, trying to find a viable strategy. And now, we understand, Cassatt has sold to CA Inc for a fraction of the amount it raised. An announcement is expected next week.

It’s an unfortunate – if unsurprising – end to Cassatt. The company has been for sale for several months and we understand that a number of tech giants, including Oracle and IBM, looked at Cassatt. We can only imagine that talks with any would-be buyers must have been complicated by the fact that they would have had a hard time knowing exactly what they would be buying. Cassatt itself would have had a different answer, depending on when the question was asked.

In its early days, Cassatt was a high-performance computing vendor, but then switched to utility computing and, most recently, positioned itself as an eco-efficient IT vendor. (One byproduct of the ever-evolving business model is that Cassatt was only able to collect two dozen or so customers over its six-year history. We understand that the company did about $12m in revenue last year.) That’s not a knock on Cassatt. The company had grand plans – and raised money to match them. But in the end, it was probably too early into this market. Cassatt’s technology may well play a role in helping to manage the datacenter in the future, but that’s up to CA now.

Reality check for mobile ad networks?

-Contact Thomas Rasmussen

Mobile advertising startup Ad Infuse received an infusion of reality last week. The vendor, which has raised $18m in venture backing, had to put itself up for sale after it was unable to secure follow-on funding this year. After being shopped around since last summer, Ad Infuse sold for scraps to UK-based mobile advertiser Velti. We estimate that Velti paid less than $1m for Ad Infuse, which we understand generated just $1.3m in revenue in 2008.

The distressed sale of Ad Infuse comes on the heels of SmartReply’s tiny all-equity purchase of mSnap, as well as several deals involving other niche advertising networks this year. Where does this leave the remaining mobile ad networks that we were bullish on last year as the logical next step of growth for online ad startups?

We suspect there is more VC portfolio cleanout coming, since there are still too many mobile ad startups. That’s not to say there aren’t a few firms that haven’t had some success. For instance, three-year-old mobile ad network AdMob, which has successfully ridden the coattails of Apple’s iPhone AppStore’s rise by providing a way for iPhone developers to monetize their users through ads, is currently at an estimated $30m run-rate. (AdMob has raised nearly $50m to date from Sequoia Capital, Accel Partners, Draper Fisher Jurvetson and Northgate Capital.) And on a smaller scale, AdMarvel is just getting started with what we can best describe as a mobile version of the popular video ad startup Adap.tv. It has raised just $8m to date and is in the process of closing a $10m follow-on round, something its competitor Ad Infuse was unable to accomplish.

Much like what we anticipate will eventually happen in the online video ad space, there will soon come a time when ad giants such as Google and Yahoo will have to buy their way into the mobile sector. In a rare sign of foresight, AOL is the only media behemoth with a sizable presence in the mobile ad vertical following its $105m acquisition of Third Screen Media in 2007.

IBM-Exeros: the wind-down and the bid-up

Brenon Daly

Contact: Brenon Daly

Even in the ongoing recession, the fundamental economic laws concerning supply and demand still haven’t been overturned. That’s at least one lesson we can draw from the recent sale of the assets of data discovery startup Exeros. Although terms weren’t disclosed, we believe IBM paid about $13m for Exeros. While that hardly seems like a blockbuster exit for a VC-backed startup that raised some $19m, we would note that the price is four times higher than the offer Exeros received from its first bidder.

As we understand the process, SAP offered just $3m for the assets. Exeros gambled and let the ‘no shop’ period expire on SAP’s bid and then successfully enticed IBM. (Big Blue will slot in the Exeros technology alongside a number of other tools in its Information Management portfolio.) One source added that IBM agreed to an earn-out that could take the final price up to $20m, potentially making Exeros’ backers whole on their investment.

Whatever IBM ends up handing over for Exeros, the target should probably consider any amount over SAP’s initial bid a windfall. The last time we spoke with Exeros (in mid-September, just before capitalism as we know it ended), the unprofitable startup said it was looking to raise a third round of funding that would carry it through to break-even status. Of course, we can all imagine how those fundraising conversations must have gone.

So instead of drawing down money, Exeros was wound down. However, the resulting transaction wasn’t like the dozens of scrap sales that we’ve seen in recent months, where a single buyer pushes the price down so low that the startup’s investors get just pennies on the dollar. With both SAP and IBM bidding, Exeros’ backers may well break even. And that’s not a bad return, given what they were facing.

That giant sucking sound on the US equity market

Brenon Daly

Contact: Brenon Daly

On the US equity markets Wednesday, it was one step forward, two steps back in terms of aggregate value of listed companies. As SolarWinds soared onto the NYSE, creating more than $800m of market value early in the day, Data Domain got picked up by storage rival NetApp. That deal, which is slated to close this summer, will erase some $1.75bn from the Nasdaq. That’s twice the amount added by SolarWinds.

Wednesday’s net outflow continues a long-running trend of a declining number of tech listings on the US public markets. Consider that since the last tech IPO (Rackspace’s offering on August 8, 2008), acquisitions of more than 50 US public companies have been announced. The total amount of market capitalization erased in those deals: $33bn. Considered another way, we would need 40 more SolarWinds-sized offerings to make up the deficit.

Will OpenTable’s IPO lead to M&A?

-Email Thomas Rasmussen

Just three months after filing its initial IPO paperwork, OpenTable set the terms of its $46m offering last week. At the high point of the $12-14 range for its shares, the company would sport a valuation just shy of $300m, or about 6x trailing 12-month (TTM) revenue and 50x TTM EBITDA. For the past three years, OpenTable has grown revenue at a compound annual rate of about 43%. Despite skepticism about the IPO market and OpenTable’s prospects during a period when its primary customers (restaurants) are struggling, the online restaurant reservations service should debut on the Nasdaq under the ticker ‘OPEN’ in the next week or two. OpenTable’s offering comes as Solarwinds is also slated to go public, after its prospectus aged for more than a year.

OpenTable has not disclosed how it will allocate the funds that it will raise in its offering. However, we believe it might be gearing up to make its first foray into M&A. One indication: the presence of Allen & Co as one of OpenTable’s four underwriters. Sure it had a hand in Google’s IPO, but Allen & Co is certainly known more as a media banker than a tech underwriter. OpenTable’s offering is being led by Merrill Lynch, with ThinkEquity and Stifel Nicolaus also on the ticket.

If OpenTable were to shop, we suspect it could well look to bolster its international operations. Since 2004, the San Francisco-based company has sunk millions of dollars into expanding outside the US, but has little to show for it. Its international business, which is burning money, accounts for just 5% of total sales. (The vendor recently pulled out of Germany and France.) We see a parallel between what OpenTable has run into in its unsuccessful international expansion and the early woes that its rich Web services cousin eBay experienced in trying to translate its business outside of its home market. After struggling to address foreign markets by just expanding its existing online auction service, eBay has been picking up local foreign sites that fit the nuances of business and culture in those markets. Ebay has spent billions of dollars lately buying its way into foreign markets.

Sales of tech assets are on the rise

-by Thomas Rasmussen, Yulitza Peraza

At a time when both M&A volume and deal values have declined dramatically, the relative volume of asset sales continues to rise. There are two main contributors to this. First, companies are under increasing pressure to focus on their core operations, so they’re looking to divest underperforming business units. And second, cash-burning startups often find their venture backers unwilling to sink more money into them, resulting in wind-down sales of the intellectual property they had developed.

For the first quarter of 2008, the volume of asset sales represented some 15% of total announced transactions. That number doubled in the first quarter of 2009 and has even inched up a bit in April. About one out of every three transactions announced so far this year has been an asset sale.

For all the talk of unbridgeable valuation gaps, however, we would note that the buyers often get a sharp markdown on the price of the assets. Consider Artistdirect’s acquisition of SafeNet’s MediaSentry unit this month. SafeNet, which originally paid $20m for the division in 2005, wanted the MediaSentry assets off its books before the end of the first quarter, and Artistdirect’s new management was happy to fork over less than $1m for the unit. We understand that the deal closed within a few weeks. Or look at semiconductor startup Nethra Imaging, which picked up the assets of Ambric for an estimated $1m this month. Ambric had received an estimated $30m in funding, but when investors refused to step up with another round, the startup had little choice but to sell.

Asset sales spike

Period Volume of asset sales, as % of overall M&A
April 1-24, 2009 32.4%
Q1 2009 31.8%
Q4 2008 19.9%
Q3 2008 17.4%
Q2 2008 16.2%
Q1 2008 15.8%
Q4 2007 13.7%

Source: The 451 M&A KnowledgeBase

A somewhat secure M&A market

Brenon Daly

Contact: Brenon Daly

With RSA set to open later this week, we thought we’d take a look back on deal flow since the trade show closed last year. Over the past year, we’ve seen some 83 acquisitions of security companies, with total spending of about $4.2bn. While that’s down from the comparable year-earlier period (April 2007-April 2008: 90 deals worth $5.2bn), the drop-off in security M&A has not been as steep as the overall decline in tech deals. In fact, the number of security transactions slipped just 7% from the previous year, compared to an 18% drop in the number of total tech M&A. Spending on security deals also fell less than the overall market.

Moreover, there are a number of trends that have emerged since the last RSA event that suggest security M&A may well remain healthier than the overall market. For starters, the big shoppers have done big deals. By our tally, Symantec has inked the largest security transaction since the end of last year’s RSA, paying $695m in cash to bolster its on-demand offering with MessageLabs. And McAfee checked in with the second-largest acquisition. Its $497m all-cash purchase of Secure Computing was its largest deal in a decade, and its only acquisition of a public company in at least seven years (excluding the pickup of Bulletin Board-listed Citadel Security Software in 2006).

In addition to the strategic vendors, we’re also seeing financial buyers – both through funds and PE-backed companies – looking to do deals. For instance, Sophos went back to its investors to help finance its $341m acquisition of Utimaco, the largest purchase by a privately held security company of a public counterpart. Also, Vector Capital took home Aladdin Knowledge Systems and, more recently, Thoma Bravo has a pending $114m offer for Entrust. Certainly there have been a few scrap sales, but that’s to be expected in an over-funded market like security. Overall, deal flow remains comparatively healthy in the security sector.

Symantec goes box shopping?

Brenon Daly

Contact: Brenon Daly

After holding off for some time, Websense finally rolled out its first secure Web gateway appliance earlier this month. Now we’re hearing that another major security vendor is about to get into the box business. Only this time, it’ll be through acquisition, rather than internal development like it was at Websense. Several market sources have indicated that Symantec has purchased Mi5 Networks, a security appliance startup based in Sunnyvale, California.

The acquisition is expected to be announced at next week’s RSA conference, according to a source. If indeed the deal goes through, it will be Symantec’s first since picking up MessageLabs for $695m last October. Obviously, the purchase of five-year-old Mi5 would be much smaller. (We weren’t able to learn terms of the deal.)

Mi5 has raised just $3.5m in venture backing from Labrador Ventures, First Round Capital and several angel investors. Among the company’s early backers is Sunil Paul, who founded Brightmail. (That’s right, the very same company that was run by current Symantec CEO Enrique Salem.) And finally, there’s an even more direct link in the rumored pairing: Mi5 is currently headed by Doug Camplejohn, a former executive at Vontu, which Symantec acquired in late 2007.

WDC goes SSD

-Contact Thomas Rasmussen

The market for solid-state-drive (SSD) technology is heating up. As an increasing number of consumer and enterprise products (including servers, desktops, laptops and netbooks) incorporate the technology, some old-line technology companies are looking to expand their SSD offerings. Western Digital acknowledged that last week by acquiring SSD vendor SiliconSystems for $65m in cash after about a year of on-and-off talks. (It was Western Digital’s first purchase since its $1.14bn acquisition of Komag in mid-2007.) On the other side, SiliconSystems had taken in just $14m in venture capital since its inception in 2002 from Miramar Venture Partners, Rustic Canyon Partners, Samsung Ventures America, Shepherd Ventures and SanDisk.

We understand that SiliconSystems generated about $50m in trailing 12-month (TTM) sales, meaning Western Digital paid about 1.3x TTM sales for the startup. This is in line with historical averages for the space, but comes at a time when the median valuation for venture-backed startups has been nearly cut in half. In the first quarter of 2009, the median valuation in a sale for a VC-backed tech company sank to just 2.1x TTM sales, compared to 3.8x TTM sales during the same period last year. (See our full report on first-quarter M&A.)

SiliconSystems will be re-branded as Western Digital’s Solid-State Storage business unit and will be headed by former CEO Michael Hajeck, who used to run STEC Inc’s enterprise SSD division. The importance of this relatively small acquisition should not be underestimated. Having essentially become a player in the SSD space overnight, Western Digital has taken the first step toward securing its future survival. With $1.4bn in cash, we wonder if Western Digital will continue to use acquisitions to expand in this market. Possible targets are Hajeck’s former employer STEC, which we previously speculated might be on sale, as well as Smart Modular Technologies. There are also a few potentially disruptive startups out there worth looking at such as Pliant Technology, Texas Memory Systems and Fusion-io.

Western Digital M&A

Date announced Target Enterprise value Price to sales multiple
March 30, 2009 SiliconSystems $65m 1.3x*
June 28, 2007 Komag $1.14bn 1.1x
July 24, 2003 Read-Rite $172m 1.0x

Source: The 451 M&A KnowledgeBase *451 Group estimate

Tough exits for VCs

Brenon Daly

Contact: Brenon Daly, Thomas Rasmussen

After being frozen for more than six months, there were some signs of a thaw this week in the tech IPO market. Chinese game maker Changyou.com enjoyed a strong debut on Thursday, and only inched down slightly in the following session. In addition, language software maker Rosetta Stone set the terms of its planned offering earlier in the week.

While the offerings are encouraging from a capital markets perspective, the same can’t be said for the VC community. The IPOs of Changyou.com and Rosetta Stone won’t mean a payoff for any of the Sand Hill Road crowd. (Changyou.com is a spinoff from online portal Soho, while Rosetta Stone counts a pair of buyout shops as its majority owners.) Of course, VCs have long since given up on betting on IPOs to boost their returns. Most acknowledge that for every portfolio company that does make it onto the public market, nearly 10 startups will get snapped up in a trade sale.

Unfortunately, there’s bad news on the M&A front, as well. My colleague Thomas Rasmussen calculated that the median valuation in the sale of VC-backed companies in the first quarter of 2009 slumped to 2.1x trailing 12-month (TTM) sales, compared to 3.8x TTM sales during the same period last year. Granted, that multiple was about twice as rich as first-quarter sales of non-VC-backed companies. But we would be quick to add that the 2.1x TTM sales multiple essentially matches the level for non-VC-backed startups in the first quarter of 2008. For more on first-quarter valuations and overall deal flow, see our first-quarter M&A report.