A battlefield Exchange

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

Meru: Nasdaq or bust

At the rate networking companies are consolidating, there may be no one left to buy Meru Networks. Earlier this week, Hewlett-Packard satisfied its appetite for WLAN equipment by acquiring Colubris Networks. That deal comes just two months after rival Trapeze Networks got snapped up by Belden, a cable and wiring company.

But the deal that probably scotched any potential trade sale for Meru was Brocade’s $3bn gamble on Foundry. The reason: Foundry has an OEM arrangement with Meru and was viewed as the most-likely acquirer of the WLAN equipment startup. We’re guessing Brocade probably figures it has its hands full with integrating Foundry’s existing business without adding additional pieces. Also, we view the planned Brocade-Foundry pairing as focused primarily on the datacenter, which wouldn’t have much use for WLAN equipment.

The only suitor we can put forward for Meru at this point is Juniper Networks. While Meru’s enterprise focus would fit well with Juniper, we understand the two companies kicked around a deal in 2005, at a reported $150m, but talks didn’t go far. Besides, a Meru source indicated recently that the company is plugging away on an IPO for next year. (We’ve heard that from the company for more than two years , but maybe 2009 will be the year.)

For Meru to go public at a decent valuation, however, it needs both a healthy IPO market and a healthy comparable, Aruba Networks. That company is currently trading at half the level it was at the start of the year, following a blown quarter in February. Aruba will have a chance to make amends in two weeks, as it will report results from its fiscal year on August 28.

Recent WLAN deals

Date Acquirer Target Price
Aug. 2008 HP Colubris Not disclosed
June 2008 Belden Trapeze Networks $133m
July 2008 Motorola AirDefense $85m*

Source: The 451 M&A KnowledgeBase

What’s brewing at Cisco?

Although Cisco chief executive John Chambers has thrown cold water on speculation about a large acquisition, the market continues to buzz about possible deals by the networking giant. Observers who think Cisco is big-game hunting point to a number of unusual moves from the company, which – with a bit of reading between the lines – appear to suggest something big is brewing.

For starters, they point to the fact that Cisco has largely stepped out of dealflow, inking just two deals so far in 2008. (We recently noted Cisco’s conspicuous absence, just a day before it announced its $120m purchase of network device configuration vendor Pure Networks.) In comparison, this time last year Cisco had inked nine acquisitions. Additionally, Cisco has drastically scaled back its share repurchase program, perhaps suggesting the company is stockpiling cash for a big deal.

Of course, most of the rumors have concerned a possible pairing of Cisco and EMC, largely so Cisco could get its hands on VMware. (EMC sports a market capitalization of $30bn.) This comes on the heels of earlier rumors that Cisco might be looking at Citrix, largely so it could get its hands on XenSource.

We have a new name to toss into the Cisco M&A rumor mill: McAfee, which has a $6bn market cap. Speculation has recently surfaced that the networking company is eyeing the largest IT security pure play, a combination that would allow Cisco – for the first time – to have control over endpoints. It would pick up a solid portfolio of security products from McAfee, notably encryption and port and device control offerings, as well as potentially salvaging Cisco’s disastrous NAC effort. (And as an added bonus with the deal, Cisco could stick it to Symantec. Cisco has little love for Symantec.)

Whether a deal materializes, or even is being considered, we would expect Cisco to emphasize security much more in the future. It recently handed the division over to Scott Weiss, who came with the January 2007 acquisition of IronPort Systems. A VC who has invested in Weiss’ companies over the years (Weiss also ran Hotmail) said he wouldn’t be surprised if Cisco turned over the entire business to Weiss when Chambers decides to step down.

Cisco’s M&A machine unplugged

While Brocade Communications has used its $3bn purchase of Foundry Networks to turn up the pressure on Cisco Systems, we would quickly add that Cisco itself has hardly used M&A at all this year. Typically one of the busiest corporate acquirers, Cisco has averaged about a deal per month in recent years. However, so far this year, the networking giant has acquired just one company, DiviTech. (In addition to last month’s purchase of the tiny Danish company, the only other announced move in 2008 was snapping up the 20% stake in its subsidiary Nuova Systems that it didn’t already own.)

Earlier this year, we noted that Cisco was rumored to be making a run at Citrix. Although that speculation initially helped boost Citrix shares, they have since sunk to a 52-week low. The decline over the past three months has shaved a half-billion dollars off Citrix’s market capitalization, representing a decent ‘rebate’ for any acquirer of the infrastructure software vendor. It currently sports a $5bn market capitalization. In the past, Cisco has shown itself ready to seal multibillion-dollar deals, including its $6.9bn purchase of Scientific-Atlanta in late 2005 and its $3.2bn acquisition of WebEx Communications in March 2007. Cisco is slated to report its fiscal 2008 results in two weeks.

 Cisco’s disappearing deals

Period Deal volume Deal value Notable acquisitions
Jan. 1 – July 21, 2005 7 $899m FineGround Networks, Airespace, Topspin Communications
Jan. 1 – July 21, 2006 4 $143m Meetinghouse Data Communications, SyPixx Networks
Jan. 1 – July 21, 2007 9 $4.2bn WebEx Communications, IronPort Systems, Neopath Networks
Jan. 1 – July 21, 2008 1 undisclosed DiviTech

Source: The 451 M&A KnowledgeBase

Proofpoint buys Fortiva, expands into email archiving

After a courtship that lasted the better part of a year, on-demand security provider Proofpoint finally picked up software-as-a-service email archiving startup Fortiva this week. Based on similar transactions and industry buzz, we estimate this tuck-in acquisition cost Proofpoint somewhere in the neighborhood of $70m. Fortiva, which has 45 employees, was running at about $15-20m in revenue from about 200 enterprise customers. This marks a solid exit for the company’s venture backers, Cargill Ventures, Ventures West and McLean Watson Capital, which only pumped $8m into Fortiva.

The interesting question sparked by this transaction is what’s next for Proofpoint, which is now up to 250 employees. Though some have suggested the company has now effectively dressed itself up as an acquisition target, we believe otherwise. We think an IPO will represent the next major milestone for the company. (In wrap-up of April’s RSA conference, we said as much, adding that an acquisition by Proofpoint was likely in the next few months.)

Proofpoint has drawn in some $86m in funding since its inception in 2002, including a $28m round in February, even though it was running at close to breakeven. With more than 1,600 customers, bookings are up 70% on a year-over-year basis for 2008. The growth comes despite stiff competition. Google, Cisco and Autonomy Corp made a big push into the market last year with their respective acquisitions of Postini, IronPort Systems and Zantaz.

Yet, Proofpoint has held its own against these larger vendors, even recruiting a few high-ranking employees from Postini, we’ve heard. Speaking of hiring at Proofpoint, we would also highlight last year’s move to bring Paul Auvil on board as CFO. Auvil served as the top numbers guy at VMware, guiding that company from the tens of millions of dollars in revenue to hundreds of millions of dollars. Of course, that company never made it fully public. We have a feeling Auvil may yet have a chance to be CFO at a public company, given the direction of Proofpoint.

Select on-demand security deals

Announced Acquirer Target Deal value Target revenue
July 9, 2007 Google Postini $625m $70m*
July 3, 2007 Autonomy Zantaz $375m Not available
May 14, 2007 Verizon Business Cybertrust $450m* $225m*
April 26, 2007 Websense SurfControl $400m $220m
Jan. 4, 2007 Cisco IronPort $830m $100m*
May 19, 2004 Symantec Brightmail $370m $26m

Source: The 451 M&A KnowledgeBase, * official 451 Group estimates

Wire buys wireless

Two weeks ago, we noted Trapeze Networks had been sold without indicating what company had been sitting across the table from the wireless LAN (WLAN) infrastructure vendor. The buyer can now be named: Belden. The St. Louis-based company is more known for its wiring and cable products. (Indeed, before inking the Trapeze deal, Belden’s previous deal had been the $195m purchase of a Hong Kong cable company.) We’ll have a full report on this transaction – and the implications for the sector – in tonight’s Daily 451.

While the pairing of a wireless company with a company known for its wires may seem odd, there are actually a fair number of points that make sense for Belden-Trapeze. For starters, Belden is viewed in the WLAN market as a neutral vendor, which means that Trapeze’s sales arrangements shouldn’t be threatened by the acquisition. We would contrast that with the fallout from Cisco’s early 2005 purchase of Airespace, which forced Airespace partners Alcatel and Nortel Networks to scramble to find a replacement supplier of WLAN technology after the deal. Also, Trapeze had decent sales in Europe and Asia, markets that Belden has targeted.

In the end, however, it all comes back to money. In that sense, the Trapeze deal shows how steeply the valuations of the WLAN infrastructure vendors have come down. The multiple in this deal was two-thirds lower than the level that Cisco paid three years ago in its purchase to get into this market. (Granted, Cisco has a reputation of skewing the market with top-dollar bids.) Still, Trapeze exited for $133m after raising about $100m in venture funding. We understand that rival Meru Networks is currently out raising another round. The company already counts Lehman Brothers, Clearstone Venture Partners, Sierra Ventures and DE Shaw among its investors. While Meru may well land an up round, we’re guessing Trapeze’s valuation – combined with Aruba Networks’ rough ride on the Nasdaq – certainly haven’t helped those conversations. 

WLAN vendor valuations

Company Acquirer Price Price-to-TTM sales ratio
Airespace Cisco $450m 7.5x*  
Trapeze Belden $133m 2.3x  
Aruba NA $467m market cap 2.7x  

*estimated, Source: The 451 M&A KnowledgeBase

Creative destruction and its discontents

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.

Anti-spam shopping

Acquirer Target Date Price Target TTM sales
Sopra/Axway Tumbleweed June 2008 $138m $58m
Google Postini July 2007 $625m $70m*
Cisco IronPort Jan. 2007 $830m $100m
Secure Computing CipherTrust July 2006 $264m $48m
Symantec Brightmail May 2004 $370m $26m

*estimated, Source: The 451 M&A KnowledgeBase

Deal-making in a desert

Exactly a year ago, SonicWall handed over $25m in cash for Aventail. The deal looked like a ‘last-gasp’ transaction in a number of ways, not the least of which was that Aventail’s purchase price was less than one-quarter of the venture funding the company had raised over the years. Beyond the money-in/money-out gulf at Aventail, we would note that in the year that has passed, not a single significant SSL VPN deal has been reached.

Since the big-name consolidation in this market began in mid-2003, most of the large security acquirers have gone shopping here. SSL VPN deal flow hit its high point early on, with NetScreen shelling out $265m, mostly in stock, for Neoteris. (A half-year later, Juniper Networks threw $4bn in stock at NetScreen, in a deal that Juniper has yet to recognize much of a return on.) Other tech giants quickly inked deals of their own, including Cisco, Citrix and Microsoft.

In contrast, the handful of companies that have acquired SSL VPN technology since mid-2007 have been tiny outfits, with a number of consulting shops doing the buying. That hardly suggests top-dollar acquisitions. The SSL VPN vendors that missed out when the big buyers came through the market may need to scale back their exit expectations. We would drop PortWise and Array Networks, among others, into that bucket. 

Significant SSL VPN deals

Acquirer Target Date Price
F5 Networks uRoam July 2003 $25m
NetScreen Neoteris Oct. 2003 $265m
Cisco Twingo March 2004 $5m
Citrix Net6 Nov. 2004 $50m
Microsoft Whale Communications May 2006 $75m*
SonicWall Aventail June 2007 $25m

*estimated, Source: The 451 M&A KnowledgeBase

Trapeze swings to a deal

After nearly a year on the block, Trapeze Networks has been sold for about $150m, several sources have told us. An announcement is expected late next week. The buyer for the wireless LAN switch vendor isn’t immediately known – but it isn’t Juniper Networks. An OEM partner of Trapeze, Juniper also put money into Trapeze’s series D funding two years ago. One source indicated the two sides got very close to a deal last summer – at a price well north of the $150m Trapeze is expected to sell for now – but couldn’t agree on a final valuation.

We understand Trapeze looked to push the price higher, following the strong IPO of rival Aruba Networks. Aruba went public in late March 2007 at $11 per share and had doubled in price by July. At its peak, Aruba traded at a market capitalization of $1.9bn. However, Aruba has been stumbling recently, including reporting sales that were 20% lighter than Wall Street expected last quarter. The company now trades at just under a $500m market capitalization. Trapeze’s valuation also got caught in that downdraft. The rumored $150m price tag for Trapeze would value the company at roughly three times 2007 sales.

If indeed Trapeze is acquired, that would leave Meru Networks and Colubris Networks both looking for an exit. We understand that Meru, which is larger than Trapeze, is looking to hit the public markets when the IPO window opens again. In the past, we heard that Meru had talked with Foundry, although there was no indication of serious discussions. Meanwhile, Colubris would be a smaller acquisition, as it is running at about $30m in sales. Nortel Networks may be interested in Colubris. Whatever consolidation plays out in the WLAN switch market, most observers would agree that it’s overdue: It’s been more than three years since Cisco shook up the space with its $450m purchase of Airespace – a move that most expected to trigger a wave of deals. 

Rumored WLAN matchmaking

Company Rumored exit
Trapeze $150m sale to public company, to be announced next week
Meru Potential IPO, though reports of talks with Foundry
Colubris Rumors of talks with Nortel