Cloud deals arising from the fog

Contact: Ben Kolada

Going into the last day of the 9th Cloud Computing Expo, held in Santa Clara, California, we get the feeling that conference attendees will see an M&A shakeout within the next few years. To a degree, this dealmaking has already begun, with a small handful of exhibitors already having been scooped up, including a couple of firms that were acquired just last month. Meanwhile, the remaining vendors, most of whom are young startups, are scrapping to define and prove themselves for what they hope will someday be their own fruitful exits.

The cloud computing market is real and growing. My 451 Market Monitor colleagues, who have the tedious task of sizing the cloud market, estimate global cloud revenue (excluding SaaS) at $9.8 billion for 2011, with nearly 40% revenue growth expected in 2012. Many players in this sector have already taken note of its potential and acquirers’ interest, resulting in an increase in both deal sizes and deal volume for cloud vendors. According to The 451 M&A KnowledgeBase, so far this year a record 465 transactions claimed some aspect of cloud. That’s nearly double what we saw in the same period last year. (To be honest, many of these acquired companies are about as cloudy as snake oil, but there are real cloud deals being done. Platform Computing and Gluster, which both announced their sales last month, sold for an estimated combined deal value just shy of $450m.)

However, in terms of revenue, most of the cloud startups we spoke with haven’t yet really proven themselves commercially. But as these firms transition their focus from product development to marketing and sales, their growth will attract more and more suitors. And double-digit revenue isn’t exactly a requirement for a successful exit, as both the recent CloudSwitch and takeouts proved. Though we understand that none of these companies are looking to sell just yet, we wouldn’t be surprised if cloud-enablement providers such as OnApp, Abiquo and Nimbula are picked off one by one within the next few years. And we were reminded yet again that open source networking and routing vendor Vyatta could someday see a real offer from Dell, though the IT giant would likely face a competing bid from Cisco.

J2: from a fax machine to an M&A machine

Contact: Brenon Daly

In reporting third-quarter financial results after Wednesday’s closing bell, j2 Global Communications not only posted record revenue and cash-flow levels but also highlighted the returns it has generated in its recent M&A spree. And the communication services provider, which has some $162m in cash and short-term investments in its treasury, hinted that more deals are coming. J2 has done three acquisitions so far in 2011, after eight in 2010.

The purchases come as part of a dramatic overhaul of the company, which has expanded through M&A from its core fax offering to now include a number of services for small businesses including email, Web-based collaboration and even marketing. Most recently, it has moved into online backup, buying three small startups – all of which are based in Ireland – just in the past year. The European acquisitions are also part of a larger effort at j2 to increase international revenue, which accounts for only about 15% of total sales.

Overall, j2 has spent almost $400m on M&A over the past half-decade. One of the reasons why the company has money to go shopping is that it generates a ton of cash each quarter. In Q3, j2 recorded $86m in sales and $37m in free cash flow (FCF), an enviable 43% FCF margin. And we should note that the cash is being generated as the company continues to grow at a healthy clip. It guided that sales for 2011 should come in at about $340m, which represents a 33% increase from 2010. Granted, much of that increase is coming from j2’s $213m all-cash purchase of Protus IP Solutions last December. (Protus had recorded $72m in the year leading up to its sale to j2.) But as the company has said in the past, it ‘isn’t picky’ when it comes to organic versus inorganic growth.

Increasing cloudiness

Contact: Brenon Daly

Just three weeks after VMware inked its company-defining acquisition of SpringSource, the virtualization kingpin is throwing the doors open on its annual VMworld conference today. (We can only hope that those attending the get-together found it smoother than those trying to access the conference through the website. For much of Monday morning, pages on the VMworld site were unavailable due to ‘temporary maintenance.’ With our tongue planted firmly in cheek, we might suggest that they need to add some additional server capacity.)

Although known primarily for its virtualization software, VMware’s purchase of SpringSource indicates that it sees much of its future growth coming from ‘cloud computing.’ To show just how serious the company is taking this, consider that VMware is spending roughly twice as much on SpringSource as it spent, collectively, in the dozen deals it had done before picking up the open source application development startup. The VMware-SpringSource transaction is also, we would argue, the most important cloud computing deal so far.

As a concept, cloud computing is a relatively new term, but one that has caught on strongly in the tech industry. Consider that a search of ‘cloud computing’ in our 451 M&A KnowledgeBase returns 36 deals already this year, up from just eight transactions in all of 2008. Before last year, there were no instances of the term in our M&A database, which has more than 20,000 technology deals going back to the beginning of 2001.

Of course, some of that can be chalked up to the fact that cloud computing is a pretty vague and sprawling term, covering everything from infrastructure management to storage to security to hosting and other areas. To help get some clarity around what can be an otherwise opaque topic, The 451 Group will be hosting its own conference on Thursday called ‘Cloud in Context.’ The half-day event in San Francisco will feature end users discussing working in the cloud, innovative startups and (for the first time ever) the release of our own estimates and projections for the cloud computing market. More details on ‘Cloud in Context’ can be found at the conference website.

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

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.

SAP goes (Cog)head hunting

Contact: Brenon Daly

Having put a bit of money into Coghead about two years ago through its venture wing, SAP picked up all of the platform-as-a-service vendor in a wind-down sale late last week. Coghead drew in $11m in two rounds from backers El Dorado Ventures, American Capital Strategies and SAP Ventures. American Capital and SAP Ventures joined in Coghead’s last round, raised in April 2007, which came a little more than a year after El Dorado provided a $3.2m first round.

We had heard late last year that Coghead, originally known as Versai Technology, was trying to land another round. However, like so many other startups these days, the company wasn’t having success in raising new capital. Indeed, earlier this month, my colleague Dennis Callaghan noted that Coghead had been quiet for several months. He speculated that the company might fit well into the portfolio of open source business process management vendor Intalio. Coghead actually embedded Intalio’s process engine, and the two startups share SAP Ventures as a backer. (Overall, SAP Ventures has some 38 active investments.)

Instead of landing with Intalio, the Coghead assets are headed to SAP. And what will the German giant do with them? While much of the speculation has portrayed the purchase as SAP buying its way into the cloud, a more tangible indication is the ‘situational applications’ that Coghead announced at last summer’s SAP conference, Sapphire. With Coghead’s technology, users could build and manage applications that integrate with SAP. Given SAP’s proprietary language and platform, allowing customers to build applications or Web front-ends to those applications could go some distance toward getting SAP a return on its investment.