Tag: EMC

To scale or not to scale

Ben Kolada

Contact: Ben Kolada, Brenon Daly

For businesses that both had ‘scale’ in their name, neither MaxiScale nor ParaScale got very big. Nor did they get very big exits in their recent sales. In the crowded cloud storage market – dominated by multibillion-dollar incumbents IBM, EMC and HP – startups have only a short time to prove themselves to potential customers. We suspect that both MaxiScale and ParaScale shared similar fates because VCs are becoming quicker to pull the plug on storage investments that aren’t lining up customers.

That’s particularly true for MaxiScale, which we covered a year ago as it emerged from stealth. While ParaScale chalked up some customer wins, rumors have it that MaxiScale was unable to actually generate any revenue from its product. The bleak outlook forced the company to sell its assets last week to Overland Storage at what we expect was a fraction of the $25m that investors poured into the firm. We doubt that Overland paid much more than $5m for the acquired MaxiScale assets.

However, not all cloud storage startups are landing on the scrap heap. While MaxiScale and ParaScale were unable to secure lifeline funding, rival Caringo raised a fresh $5m round in July. In the past year, the company claims to have increased its customer count from 150 to more than 400, and is set on reaching profitability by the first half of next year. We don’t consider the firm an acquisition target just yet, but if it continues to do well, it could draw some interest down the road.

Talk is cheap, but BMC isn’t

Brenon Daly

Contact: Brenon Daly

All the talk around an acquisition of BMC may be just that – talk. We have a hard time believing some of the rumored buyers for the IT management vendor. That skepticism was shared by a few bankers who we spoke with about the rumor. In fact, they reminded us that the most recent M&A buzz around BMC had the company as a buyer, not a seller. Several sources have indicated that BMC was an early bidder for security provider ArcSight, but dropped out quickly when the price got a bit rich.

Nonetheless, M&A speculation pushed BMC shares Thursday to their highest level in a decade. Currently, the company garners a market cap of $7.6bn. Fittingly for a 30-year-old firm, BMC sits on a pile of cash. It has some $1.4bn in its treasury, although a bit of debt lowers its net cash position to about $1.1bn. The company recently indicated that it would generate in the neighborhood of $700m in cash from operations in the current fiscal year, which ends in March. Sales for the fiscal year are expected to come in at $2bn.

With an enterprise value of roughly $6.2bn, BMC currently trades at more than 3 times projected sales and almost 9x projected cash flow. Even without a take-out premium, those are fairly rich multiples for a company that grows just 2% per year. A premium could take BMC’s equity value to around $10bn.

Obviously, there are only a few companies that could write that a check that big and if we were to short-list them we would probably put Oracle and Cisco Systems on there – but for different reasons. The $1bn of maintenance revenue that flows steadily to BMC each year would undoubtedly catch Oracle’s eye. But buying $1bn of annual maintenance revenue for, say, $8bn (on a net cost basis) doesn’t look like the kind of bargain Oracle typically strikes.

And while Cisco has partnered with BMC for the management within its Unified Computing System, it’s not clear to us that Cisco actually needs to own BMC to further its interest in outfitting datacenters. To our mind, Cisco should just put the money it would spend on BMC toward the company that it should really buy: EMC.

Winners and losers in data warehousing

Ben Kolada2 Comments

Contact: Ben Kolada

Just a month after Greenplum was swallowed by EMC for an estimated $400m, fellow data-warehousing startup Kickfire was sold for probably one one-hundreth of that amount to Teradata. Why did the two data-warehousing vendors – both venture-backed, Silicon Valley startups targeting the same market – see divergent outcomes? The answer to that multimillion-dollar question lies in each company’s targeted markets.

The scrap sale of Kickfire was the end result of a misguided approach by the Santa Clara, California-based startup to the low end of the data-warehousing market. Basically, Kickfire was trying to sell appliances through an expensive direct-sale model. However, the economics of a high-cost business model for a low-cost product only work on big sales. Kickfire never got anywhere close to that, collecting only about a dozen customers in its four years of business. (We would contrast Kickfire’s business model with that of its closest competitor, Infobright. That company, which sells a software-only product through an indirect channel, has more than doubled the number of customers over the past year to 120.)

As Kickfire was struggling to sell to small businesses, 30 miles up the road in San Mateo, California, Greenplum was ripening nicely by selling to enterprises. The company’s high-revenue customer accounts helped it quickly grow total sales to just shy of $30m at the time of its sale to EMC. (That works out to an eye-popping valuation of 14 times trailing sales – a multiple that’s twice as high as any valuation the data-warehousing sector has seen in major acquisitions.) Part of the reason it garnered such a high price is that Greenplum counted some 140 customers at the time of its sale.

Other data-warehousing vendors have also experienced the highs of the enterprise market. Netezza and Teradata both made it to the public markets. (Although we heard a rumor that Netezza was almost erased from the market. Word is that EMC first talked to Netezza, even floating a bid earlier this year that basically would have valued Netezza at its current price on the NYSE. Needless to say, talks didn’t go too far between the two Boston-area companies.) And of course, DATAllegro was scooped up by Microsoft for an estimated 7x trailing sales.

With all of this consolidation playing out, we expect that much of the attention in the data-warehousing space is now turning to Aster Data Systems. The fast-growing vendor, which is based in San Carlos, California, has raised $27m in venture backing. If Aster Data gets snapped up in a trade sale (like many of its rivals have), we wouldn’t be surprised to see Dell as the buyer. The two companies are currently partners, and Dell has shown an increasing interest in big data following its continued attempts to buy 3PAR.

Storage sector M&A holding steady

Ben Kolada

Contact: Ben Kolada, Henry Baltazar

In its eighth storage play, IBM announced last week that it is acquiring data compression vendor Storwize. The move, which came quickly on the heels of Dell’s purchase of data de-duplication provider Ocarina Networks, brings the number of storage deals we’ve tallied in 2010 to 19. That’s roughly on par with the volume of storage transactions in the same period last year.

Of course, deal flow in the sector last year was dominated by a bidding war over Data Domain, which sold to EMC for $2.3bn after NetApp put the data de-dupe specialist in play but then got topped. We would note that EMC – the most active acquirer in the storage industry, having picked up some 15 storage companies over the past eight years – has been out of the storage market since it bought Data Domain. However, the storage giant may figure into the industry’s most recent deal. What do we mean?

Big Blue’s purchase of Storwize appears to be a reaction to EMC’s announcement in May that it was adding compression to its midrange Clariion and Celerra platforms. (The Storwize deal was first rumored in June, just after EMC’s announcement.) Storwize is unique in the storage space because it offers real-time data compression of up to 80%. Further, my colleague Henry Baltazar claims that IBM has already been working with Storwize for about a year. Storwize’s appliances run on System x servers, which Big Blue points out should ease the integration process – and help it to match the competitive moves by rival EMC.

A different outcome of the EMC-Netezza rumors

Brenon Daly

Contact: Brenon Daly

Although EMC paid top dollar for Greenplum, the startup may not have been EMC’s top choice for its move into data warehousing. At least two sources have indicated that the storage giant talked with fellow Boston-area company Netezza earlier this year. Talks were apparently short-lived, as the two sides never got close on price.

When discussions were going on, Netezza stock was trading at about $10. Our sources report that EMC was kicking around a bid that had a roughly 40% premium – in other words, essentially where shares change hands right now. Netezza, which came public three years ago, has been trading at its highest level since October 2007 lately.

Yet even with the run in Netezza shares (up 45% so far this year), the company isn’t egregiously expensive. It currently sports a market capitalization of $870m, but has about $110m in cash and equivalents, lowering its net cost to $760m. That’s about 3.2 times projected sales this fiscal year and just 2.7x next fiscal year’s estimated sales.

As it is, EMC paid a substantially higher multiple for Greenplum. (Our estimate, based on two sources familiar with the transaction, is that EMC handed over about $400m, or roughly 13x estimated trailing sales, for Greenplum.) Of course, there are different motivations – and, naturally, multiples – attached to either move. Netezza was a much more mature company, with more than twice the number of customers of Greenplum. On the other side, Greenplum had developed some pretty slick technology, particularly for cloud environments, that should fit easily into EMC’s broad sales channel.

Charting the market

Brenon Daly

Contact: Brenon Daly

To get a sense of the relative health of the overall M&A market, it’s often more revealing to look at a specific sector and chart the valuation fluctuations over time. Take the highly visible – and rapidly consolidating – market for governance, risk and compliance (GRC) software. (Or, as my colleague Paul Roberts would have it: GRC stands for governance, risk and consolidation.) Since GRC straddles a number of technology areas (security, BI, performance and policy management, and others), it’s natural that we’ve seen a steady flow of deals across this sector. (We highlighted that in a report last spring where we offered our own (admittedly weak) take on the GRC acronym: ‘Get Ready for Consolidation.’)

Conveniently enough, we’ve seen a number of GRC deals inked recently that encapsulate the state of the broader space. (This isn’t meant to be a comprehensive tally of deal flow in the sector, but rather a selection of illustrative transactions.) Back when the markets were soaring in 2006, SAP paid an estimated 10 times trailing sales for Virsa Systems. By late 2007, the multiple that Sun Microsystems paid for Vaau had come down to an estimated 7x trailing sales. (Incidentally, Sun announced that purchase right as the Nasdaq, which had been at its highest level since early 2001, began a protracted slide that ultimately cut the index by more than half. It still hasn’t recovered to the level of November 2007.)

A year later, the multiple had been cut in half, with Thomson Reuters paying an estimated 3x trailing sales for Paisley. The upheaval in the early part of last year put even more pressure on valuations, with McAfee paying just 2.5x trailing sales for Solidcore Systems. And then on Monday, EMC announced that it was making its own GRC play, reaching for industry veteran Archer Technologies. While terms weren’t disclosed, we’re pretty confident that Archer’s valuation rebounded from the level that Solidcore got just six months ago. We understand that Archer finished last year with about $32m in sales, and would guess that it sold at a price in the neighborhood of $200m, meaning they got twice the multiple Paisley got a year ago.

NetApp: Single and lovin’ it

Brenon Daly

Contact: Brenon Daly

Jilted earlier this summer, NetApp is nonetheless doing just fine on its own, thank you very much. Shares of the storage giant are now changing hands at their highest level in more than two years, giving the company a market capitalization of a cool $10bn. (The stock tacked on 4% on Thursday after NetApp topped Wall Street expectations for its fiscal second-quarter results and indicated that its current quarter is shaping up stronger than investors initially projected. Shares closed up $1.21 at $30.83 Thursday in an otherwise down day for the market.)

Thursday’s move higher continues a recent bull run for NetApp shares since the firm got elbowed aside by EMC in the fight over Data Domain. In the six months since NetApp unveiled its unsuccessful bid for the data de-duplication specialist, shares of NetApp have soared 70%. (In comparison, the winner in the bidding war, EMC, has returned ‘only’ 40% over that period.) We mention the relative performance of the shares of the two vendors because originally, NetApp planned to use its equity to cover slightly more than half the cost of Data Domain. (With its deeper pockets, EMC always planned to pay all cash for Data Domain, as it did when it wrapped up the acquisition in late July.)

So, from the outset, we agree that our back-of-the-envelope calculation is a bit academic, given that the Data Domain deal has been done and dusted for nearly four months. (And we’ll acknowledge that it’s a bit inexact because NetApp never formally announced the precise amount of stock, or even the specific conversion price, that it planned to use.) Nonetheless, it’s pretty clear that Data Domain owners would have done pretty well if they had taken NetApp equity. (Of course, shareholders did just fine with the $33.50 in cash from EMC, which, at 7.4 times trailing sales, was the highest multiple paid for a US-listed public company since March 2008.)

With all of those disclaimers, here’s our math: When NetApp first announced the bid on May 20, its shares traded at about $17.30 each. Although it didn’t reveal the exact breakdown of cash and stock in its offer, which had an equity value of $1.75bn, we understand that NetApp was planning to hand over about $800m in cash and cover the remaining $950m in equity. Assuming that’s roughly the breakdown, that same chunk of NetApp stock would now be worth about $1.8bn – more than the full value of its initial cash-and-stock offer. Add the $800m in cash into the mix, and the total consideration for Data Domain (based on NetApp’s current share price) hits $2.6bn. That’s roughly $300m more than EMC ended up paying for Data Domain.

Rumor mill churning on CommVault

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

To paraphrase Mark Twain, a rumor can travel halfway around the world while the truth is still putting on its shoes. At least that’s the case with M&A gossip right now. Rumors are flying, in many cases given wing by some of the unusual multibillion-dollar pairings that have popped up in recent weeks. Who would have thought, for instance, that Cisco would have gone shopping in Norway (of all places) to ink its largest deal in a year and a half? And who would have picked Dell as the buyer for Perot Systems? (Except for that guy who traded Perot options on inside information, that is.)

All uncertainty, of course, serves as fertile ground for speculation and rumors. Earlier this week, The Wall Street Journal reported that Brocade Communications may have selected a banker to help it with a sale. While we’ve noted in the past that Brocade is likely to get snapped up, we have our doubts that anything is imminent. (And we doubt even more that Brocade would ever end up at Oracle, as the WSJ speculated.) But since we love rumors as much as the next person, we figured we’d pass along one that we’ve heard making the rounds this week: CommVault may be in play, with NetApp as the possible buyer.

We’ve mulled over a CommVault-NetApp pairing in the past, most recently after the storage giant lost the bidding war for data de-duplication specialist Data Domain this summer. But we’ve never felt that the two companies fit tightly together all that well. (Still, one recent competitive development may spur NetApp to make a move. Symantec, which had been a longtime partner of NetApp, rolled out its own NAS software offering. To counter Symantec’s move on its turf, NetApp could use the archiving and de-dupe offering that would come with CommVault. Whether that’s enough to drive a deal, well, we’re not so sure.)

There are still a lot of differences between the two companies. For starters, CommVault pretty much sells straight software, while NetApp wraps its IP in hardware. (Further, its boxes are at least partly an alternative to CommVault’s offering.) Also, CommVault, while now targeting enterprise sales, primarily pursues the low end of the market while NetApp sells at the high end. Add to that a newly appointed chief executive who might want to actually move into the corner office before making an acquisition that would (for good or ill) reshape the company irrecoverably, and we just don’t see NetApp reaching for CommVault.

Instead, we have our own leading candidate for CommVault: Dell. On the heels of its purchase of Perot, Dell went out of its way to say that it was still very much planning to do deals, and storage has been a focus of its shopping in the past. CommVault and Dell already have an OEM arrangement and share thousands of customers. The fact that CommVault recently rolled out a relatively low-cost de-dupe offering would make it even more attractive to Dell, we suspect. CommVault, which is solidly profitable, has a market capitalization of $870m but holds about $120m in cash, lowering its enterprise value to just $750m.

‘She got the ring, I got the finger’

Brenon Daly

Contact: Brenon Daly

As every country and western crooner knows, relationships can build you up but they can also break you down. (Suggested listening: ‘I Fall to Pieces’ by Patsy Kline.) That’s as true in love as it is in business, as my colleague Kathleen Reidy notes in a new report. Specifically, she takes a look at the future for StoredIQ, which got dumped by EMC last month when the tech giant acquired rival company Kazeon for its e-discovery offering. (Suggested listening: ‘She Got the Ring (and I Got the Finger)’ by Chuck Mead.)

It was undoubtedly a big blow for StoredIQ, which had a longer-standing and deeper relationship with EMC than Johnny-come-lately Kazeon. EMC has been reselling StoredIQ under its SourceOne brand since 2008. But obviously, StoredIQ will be a bit of a third wheel following the Kazeon acquisition, and the relationship with EMC is effectively over. (Suggested listening: ‘If the Phone Don’t Ring, Baby, You’ll Know It’s Me’ by Jimmy Buffet.) While the official reason has never surfaced as to why EMC passed on StoredIQ in favor of Kazeon, we might chalk it up to the difficult task of parsing out revenue in any reselling agreement, and how to value those sales. That’s always tricky.

In any case, StoredIQ is moving on. (Suggested listening: ‘How Can I Miss You if You Won’t Go Away’ by Dan Hicks and His Hot Licks.) The eight-year-old startup has solid technology to identify and manage data that lives outside companies’ managed repositories, which is a key part of e-discovery. And StoredIQ may well be a good fit for Symantec, which also had a relationship with Kazeon and may now be in the market for a new partner. (Suggested listening: ‘I May Be Used (But Baby I Ain’t Used Up)’ by Waylon Jennings.)

Unexpected partners in e-discovery dance

Brenon Daly

Contact: Brenon Daly

After a flurry of more than a half-dozen e-discovery acquisitions from mid-2007 to mid-2008, deal flow has dried up in the sector. Buyers during the active period included companies that, broadly speaking, have an interest in storing, managing and searching electronic information, including such tech giants as Seagate Technology, Iron Mountain and Autonomy Corp. Collectively, spending on all the e-discovery deals in that one-year period topped $800m.

And then, like the rest of the M&A market, e-discovery activity dropped off dramatically. In this vacuum, rumors started bouncing around. The main one, which we noted last October, had Symantec looking closely at Kazeon. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. (We also did a broader matchmaking report on the sector right around that time.)

And while a pairing between Kazeon and Symantec may well have made sense, the e-discovery vendor ended up selling to EMC on Tuesday. (Terms were not disclosed, but one report put the price at $75m. We think that may well turn out to be a bit higher than the amount EMC actually paid, particularly since we understand that Kazeon was only running at about $10m in sales.) So we were a bit off on our pairing for Kazeon, just as we were off on our assumption that EMC would reach for its longtime e-discovery partner, StoredIQ. Undeterred by that, we find ourselves nonetheless wondering if StoredIQ will end up at Symantec. There’s certainly some logic to that pairing. But then again, that was also true for the other deals we came up with that never got signed.