Category: VC

Fixed on the market

Brenon Daly

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.

Early, and over-looked

Brenon Daly1 Comment

In times of uncertainty, investors tend to gravitate toward known companies. That’s seen in the public market, where large cap tech stocks have weathered the storm on Wall Street better than their smaller brethren. And, we’re getting word that phenomenon also played out in the private market.

Dow Jones VentureSource reported Monday that later-stage investments in the third quarter accounted for a larger share of overall VC dollars than a year ago (82% of all investments, up from 77%). Meanwhile, early-stage investments (seed and Series A) sank to just $1.3bn in the quarter – the lowest level in two years. Against that worrisome backdrop, IBF is set to open its 9th annual conference on early stage investment. The event, which runs Wednesday in San Francisco, brings together more than 300 early stage investors.

Net effect from Intel’s buy

-by Thomas Rasmussen

It’s a somber 10-year anniversary for 10-Gigabit Ethernet vendor NetEffect. The company was picked up by Intel in a bankruptcy asset sale last week for a bargain $8m. Its technology, along with 30 of its engineers, will be rolled into Intel’s LAN Access Division. NetEffect has burned through some $50m in funding since recapitalizing in 2004. The company, which we once heralded as an innovator and potential leader in 10GigE technology, simply ran out of cash.

One reason for NetEffect’s scrap sale might be the increased competition. Big players like Intel, with its own organic offerings and its tuck-in of NetEffect, and Broadcom, with its $77m acquisition of Siliquent Technologies in 2005, have been crowding an already teeming market. This, coupled with scarce funding and lack of widespread adoption of the technology, makes us wonder what will happen to NetEffect’s surviving former rival startups still trying to stay afloat.

Venture capitalists have thrown hundreds of millions of dollars at 10GigE companies, with little to no payoff. We suspect the wind-down of NetEffect is an indication that VCs have had enough. Tehuti Networks, iVivity, Myricom, Neterion Technologies and Alacritech are some of the many startups in this sector that could potentially feel the net effect from this. In fact, iVivity seems to have quietly hit the switch already; its website is down and its phones are off the hook. Firms that will benefit from this include IBM, Hewlett-Packard, Dell and Hitachi, which are likely to follow Intel’s lead and peruse the bargain bin.

Known funding of select 10GigE players

Company Total funding Last round Status
Chelsio Communications $100m $25m series E (2008) Active
iVivity $60m $10m series D (2006) Missing in action
NetEffect $47m $25m series B (2006) Acquired by Intel for $8m
Siliquent Technologies $40m $21m (2004) Acquired by Broadcom in 2005 for $77m
Silverback Systems $51m $16m series D (2006) Acquired by Brocade Communications in 2007 for less than $10m*
Tehuti Networks Unknown Series B (2008) Active

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

SAP’s next big deal?

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Earlier this week, SAP marked the first anniversary of its largest deal ever, the $6.8bn purchase of Business Objects. Now, some folks in the market are already lining up the next multibillion-dollar acquisition for the German giant. JMP Securities analyst Pat Walravens has floated the idea that SAP may be planning to buy data-warehouse titan Teradata. (Incidentally, Teradata celebrated its own first anniversary this week, having started trading on the NYSE on October 9, 2007.)

The pairing would make a fair amount of sense. We noted a year ago that SAP and Teradata have a deep partnership, sharing more than 200 customers. And SAP clearly needs more technological heft if it wants to sell a stand-alone data warehouse. (It currently offers its data warehouse as part of the NetWeaver BI integration stack.) But we have a hard time seeing SAP reaching for Teradata, which sports a $2.9bn market capitalization.

Typically, SAP doesn’t make consolidation plays like Teradata. (That’s the role of Oracle, which is likely to be less interested in Teradata since recently rolling out its high-end data-warehouse offering, HP Oracle Database Machine, which is its answer to the massively parallel-based warehouses offered by Teradata and others.) Instead, SAP generally favors small technology purchases, and one startup that we think would fit SAP pretty well is Greenplum. SAP thought well enough of Greenplum to put some money into its series C earlier this year.

However, SAP might find itself in competition for Greenplum with the startup’s other strategic investor, Sun. Greenplum has a data warehouse appliance for Sun servers. There’s also the alumni connection: Greenplum CEO Bill Cook worked for 19 years at Sun before running the startup. That said, Greenplum is not the only data-warehouse vendor Sun has invested in, having taken a minority investment in Infobright’s series C last month.

Symantec ‘discovers’ Kazeon?

Brenon Daly

We hear Symantec, which has already inked five deals so far this year, may be getting close to another acquisition. Several sources have indicated that Big Yellow is planning to bolster its e-discovery offering through a purchase of startup Kazeon Systems. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. Mountain View, California-based Kazeon has raised some $51m in venture backing from a handful of firms, including Redpoint Ventures, Clearstone Venture Partners and Menlo Ventures, which led the startup’s second round.

Several large technology vendors have already made e-discovery acquisitions, running up a tab of about a half-billion dollars in the past year alone. Most recently, Interwoven snagged on-demand e-discovery startup Discovery Mining. In the past, we have speculated that NetApp, which at one point accounted for more than half of Kazeon’s revenue through an OEM arrangement, would be a logical buyer of Kazeon. (We would note, however, that NetApp’s share of total sales at Kazeon has declined in recent months.)

While the e-discovery marketplace is relatively crowded, there are also several key challenges for companies looking to sell in this space. For starters, e-discovery products don’t immediately appeal to departments that must budget to buy software, such as IT or finance. The end user of the e-discovery software, which in many cases is a company’s general counsel, may not have the authority to write a check for an offering that can run $100,000 and up. We recently spoke with a venture capitalist who pulled the plug on an e-discovery startup in his portfolio. He pointed out that e-discovery projects are still largely taken on by service providers and companies have been slow to move that work in-house with purchased software. Recognizing this last fact, Kazeon has inked a number of service partners for its e-discovery products.

Selected e-discovery deals over the past year

Date Acquirer Target Deal value
July 2008 Interwoven Discovery Mining $36m
March 2008 Hewlett-Packard Tower Software $100m
February 2008 Dell MessageOne $155m
December 2007 Seagate Metalincs $74m
October 2007 Iron Mountain Stratify $158m

Source: The 451 M&A KnowledgeBase

Banking deals

With the current credit crisis rocking the big banks, online consumer banking portal Bankrate has sidestepped most of the damage and even plans to do a bit of shopping. In the last month alone, it acquired banking blog Bankaholic and consumer credit resource portal Creditcardguide.com for $12.4m and $34m, respectively. That brought its total shopping tab over the past year to $150m on six acquisitions. (We would note that most of the companies that Bankrate picked up were existing partners.) The company recently told us that it will continue its acquisition spree, and it has the means to do so. Bankrate will have an estimated $35m in cash after its latest acquisitions, and has generated some $25m in cash flow over the past year. So who might the portal bank next?

Bankrate is decidedly a so-called ‘Web 1.0′ company. It lacks the customization and social networking features that many of its newer Web 2.0 competitors tout. This lack of new technology, along with a softening online advertising market, could land the portal in trouble. Bankrate could help shore itself up against those technology shortcomings by focusing its acquisition efforts on personal finance startups like Rudder and Mint.com. However, we don’t think it will do that. Instead, we expect Bankrate to focus strictly on the space that it knows, expanding partly by targeting its legacy competitors.

Given this, we think a likely target might be Creditcards.com, which is both a rival and a partner. Creditcards.com, majority owned by Austin Ventures since 2006, tapped Credit Suisse and Citigroup to bring it public in December, but the economic environment forced it to delay its offering in May. The company is profitable, with $60m in sales, but is laden with debt. Besides having very similar businesses, the two companies are hardly strangers. In fact, current Creditcards.com CEO Elisabeth DeMarse was the CEO of Bankrate prior to becoming Austin Ventures’ CEO-in-residence.

Given Creditcards.com’s likely valuation of several hundred million dollars, however, it is unlikely that Bankrate could afford the acquisition. (Bankrate currently sports a market capitalization of about $700m.) Instead, we suspect that Bankrate will continue to ink tuck-in acquisitions. We wouldn’t be surprised if smaller competitors like Credit.com or Credit-Land.com caught its eye.

Recent Bankrate acquisitions

Date Target Deal Value
September 23, 2008 Bankaholic $12.4m
September 11, 2008 LinkSpectrum (dba CreditCardGuide.com) $34m
February 5, 2008 InsureMe $65m
February 5, 2008 Lower Fees (dba Fee Disclosure) $2.9m
December 10, 2007 Nationwide Card Services $27.4m
December 10, 2007 Savingforcollege.com $2.3m

Source: The 451 M&A KnowledgeBase

Another security buy for VMware?

Brenon Daly3 Comments

Although the knickknacks have long since been packed up from VMworld earlier this month, one rumor continues to make the rounds. Several sources have indicated that VMware, the host of VMworld in Las Vegas, has acquired startup Blue Lane Technologies for about $15m. The two companies have been technology partners for more than a year, with Blue Lane’s VirtualShield integrated with VMware’s VirtualCenter.

Security and virtualization in general have been major concerns for VMware. To help shore up the hypervisor and broader virtual environment, VMware in March introduced VMsafe, a set of APIs that third-party security vendors can use to write interoperable programs. Blue Lane was one of about 20 initial partners in VMsafe, as were the security industry’s heavyweights.

If indeed Blue Lane has been acquired (as one industry source and two financial sources reveal is the case), then it marks the end of a company that got its start more than six years ago. When we initially checked in with the vendor shortly after it rolled out its first product three years ago, the Cupertino, California-based company was shipping a patch management appliance. Along the way, it received some $18.4m in two rounds of funding. Remaining startups that are focusing on securing virtual networks include Catbird Networks and Reflex Security.

Selected VMware acquisitions

Date Target Price Rationale
June 2006 Akimbi $47.3m Testing and configuration
August 2007 Determina $15m* Hypervisor security
September 2007 Dunes Technologies $45* Workflow and orchestration
January 2008 Thinstall Not disclosed Application virtualization

Source: The 451 M&A KnowledgeBase *Estimated deal value

Uptake in travel deals

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-by Thomas Rasmussen

The past year has seen a surge in online travel deals as well as venture funding of travel startups. In fact, we wonder if the industry hasn’t gotten a little too crowded. A number of startups have received funding, including Uptake, which was founded by ex-Yahoo Travel execs. Uptake brings the social aspect to the online travel world by aggregating user-generated reviews from various portals. It fetched $10m in venture funding from Trinity Ventures and Shasta Ventures last week, bringing its total raised to $14m. The company says the funds are to be used for internal expansion and acquisitions. Indeed, the current competitive landscape has presented startups like Uptake as well as established players like Expedia with one choice: grow or risk becoming irrelevant.

Against this backdrop, online travel companies have taken different approaches to M&A. Relative newcomer Kayak.com is one company that recently took a major step to buy growth. Hoping to go public eventually, the company doubled its size overnight by acquiring competitor SideStep Inc for an estimated $180m in December. Meanwhile, fellow startup Farecast worked on the other side of a transaction, opting for a sale to Microsoft in April for an estimated $115m to help Redmond shore up its ailing MSN Travel division. Meanwhile, the giant of the industry, Expedia, has been ratcheting up the M&A pace. Of the 15 acquisitions it has done, 11 were inked in the last 18 months. In a recent filing with the US Securities and Exchange Commission, Expedia said it spent $180m on five acquisitions in the first two quarters alone.

As for Uptake, we expect the small company to consider a few tuck-in acquisitions of smaller rivals to add more voices to its reviews. Potential targets include companies such as TravelMuse and TripSay, which also offer user reviews. However, while Uptake is eyeing targets, we have a feeling it may be a target itself. We suspect the social aggregation aspect of Uptake is very appealing to larger players that are trying to bring the social Web 2.0 experience to online travel. Likely acquirers include Kayak and Microsoft, which both lack a social rating system. Expedia and Yahoo Travel, an outfit Uptake’s founders know well, might also want the technology to improve on their own systems.

Number of known strategic online travel deals

Period Deal volume
September 2007-2008 14
September 2006-2007 11
September 2005-2006 6
September 2002-2005 19

Source: The 451 M&A KnowledgeBase

Not ‘Finnish’ with M&A

Finnish cell phone giant Nokia launched its mobile file-sharing Ovi application last week, coming quickly on the heels of the rollout of Nokia Music and other high-profile offerings. Much like Google and its Android and Chrome products, Nokia used technology that it acquired to form the core of its recently launched products. Specifically, its file-sharing technology came when it picked up Avvenu late last year.

And more M&A may be in the cards. Nokia recently told us that it is bullish on making further acquisitions to boost its service offerings. The company is aiming to evolve from strictly a mobile handset maker to a service-oriented handset maker – and strategic acquisitions are expected to play a big role in this transformation. (Of course, Nokia isn’t the only hardware company looking to do deals to get out of its core commodity market and into a more profitable – and defensible – service offering. PC maker Dell has spent some $2bn over the past two years increasing its service portfolio, buying companies offering everything from storage to email archiving to remote services.) What services could Nokia look to add and what companies might it acquire to do so?

With its music, games and mapping services well established, Nokia’s lack of a video service is strikingly curious. We suspect the company will quickly move to fill this gap. Two potential targets come to mind. Startups kyte and Qik both specialize in mobile video, and have already gotten a lot of interest from big mobile companies. In fact, kyte has drawn money not only from large telcos such as TeliaSonera, but also from Nokia’s own investment arm, Nokia Growth. Another venture that was recently brought to our attention is a startup called ZoneTag. It’s a Yahoo Labs startup that does location-based photo tagging. The software was developed for Nokia phones with the support of Nokia research and we hear the two divisions have a very good relationship.

Nokia’s recent mobile software acquisitions

Date Target Deal value
June 24, 2008 Symbian $410.8m
June 23, 2008 Plazes $30m*
January 28, 2008 Trolltech $153.5m
December 4, 2007 Avvenu Not disclosed
October 1, 2007 Navteq $8.1bn

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

A battlefield Exchange

Brenon Daly

As the world’s largest and richest software company, Microsoft gets a lot of targets hung on it. Companies of all sizes are drawing a bead on Microsoft, whether it’s a startup looking to undercut or outperform one product or a fellow tech giant deciding Microsoft is making too damn much money on some particular line of business and buying a competing offering. (There are a lot of those cash-rich products at Microsoft, which hums along at an astounding mid-30% operating margin overall.)

Consider who’s been targeting Microsoft Exchange Server lately. In the last year, tech heavyweights Yahoo and, most recently, Cisco have both inked multimillion-dollar deals that allow them to offer a way around Exchange. The goal: siphon off some of the more than $1bn in high-margin revenue that flows to Microsoft from its email and collaboration server product line.

The first shot was fired almost exactly a year ago, when Yahoo spent $350m for Zimbra. (As a side note, it would have been interesting to watch how Microsoft – if its planned $44.5bn purchase of Yahoo had gone through – would have killed off Zimbra. We’re guessing it would have immediately and forcefully ‘cut off the air supply,’ to borrow a time-honored strategy in Redmond.)

In a direct echo of that deal, Cisco went shopping two weeks ago and found its own Linux-based replacement for Exchange, paying $215m for PostPath. Cisco says it picked up the five-year-old company, which had pocketed about $30m in venture backing, to enhance the email and collaboration tools available in WebEx.

Whatever the motivation, we’re guessing that at least one of PostPath’s board members may be relishing the chance to stick it to Microsoft. Bob Lisbonne, who led Matrix Partners’ investment in PostPath, spent a half-decade at Netscape, including the time in which Microsoft was trying to ‘cut off the air supply’ of the browser pioneer. Not that business is ever personal, of course.

Going after Exchange

Date Acquirer Target Price
September 17, 2007 Yahoo Zimbra $350m
August 28, 2008 Cisco PostPath $215m

Source: The 451 M&A KnowledgeBase