The Big Blue erasure

Contact: Brenon Daly

In addition to the current snarling bear market and the onerous regulatory requirements, we’ve noticed yet another hurdle IPO candidates have to clear to get to the public market: IBM. With last week’s purchase of BigFix, the tech giant has gobbled up two private companies this year that were both tracking for an IPO. In February, Big Blue snagged Initiate Systems, a master data management vendor that had filed to go public in late 2007 but pulled its prospectus in mid-2008.

As we understand it, BigFix wasn’t nearly as close to an offering as Initiate. But the security management startup certainly had the financial profile to become a public company. (In fact, we’ve listed the Emeryville, California-based vendor as a possible IPO candidate in our outlook for the security market in each of the past two years.) BigFix was tracking to $65m in revenue for 2010, up from $52m in 2009, according to sources. (Bookings were closer to $85m last year.) The company also generated some $14m in free cash flow in 2009, a surprisingly large amount for a 13-year-old startup that had only raised $36m in venture backing.

In both of the deals, IBM paid a fairly rich multiple. Although terms weren’t disclosed, we understand that Big Blue handed over $425m, or 5.3 times trailing revenue, for Initiate. And we hear from multiple sources that IBM paid $400m, or nearly 8x trailing revenue, for BigFix. The multiple in both deals is substantially higher than the median price-to-sales multiple (1.8x) that we recently calculated for all tech transactions in the second quarter.

As a final thought, we highly (highly, highly) doubt that if either Initiate or BigFix came public right now, it would garner anywhere near a $400m valuation. (We recently put out a special report on the dreary IPO market.) More likely, skittish investors would discount the debut valuation to around $250m, give or take. Add in lockup periods and other considerations in an IPO that draw out the path to liquidity, and it’s no wonder both Initiate and BigFix took a rich, all-cash offer from IBM.