In a February 2007 report, we asked an egghead question about valuations in a sector that had been ‘creatively destroyed,’ to borrow Joseph Schumpeter’s oft-used phrase. At the time, we weren’t asking for purely academic reasons. Rather, we were trying to put a price on Tumbleweed Communications following Cisco’s purchase of rival anti-spam appliance vendor IronPort Systems. (Rumors had private equity firms looking at Tumbleweed.)
It turns out we weren’t far off in our valuation. We slapped a $150m price tag on Tumbleweed; last Friday, French IT consulting firm Sopra Group said it would pay $138m in cash for the company. The deal is expected to close in the third quarter. While the companies see a bright future for the combination, we have some reservations. Specifically, we wonder how Sopra, which is making the acquisition through its Axway subsidiary, will hit its target of 12-15% operating margins for the combined company next year. (Tumbleweed has run at negative operating margins for years, piling up an accumulated deficit of $300m in its history.)
Whatever the performance of Tumbleweed under its new owners, we have to say that Sopra certainly didn’t overpay for the company, which should double its sales here in North America. At just two times trailing sales, Tumbleweed was valued at less than half the price-to-sales multiple found in comparable transactions.
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*estimated, Source: The 451 M&A KnowledgeBase