Tag: EMC

VMware: a ‘table-clearing’ bid for the clouds

Brenon Daly

Contact: Brenon Daly

About a year and a half after Paul Maritz got picked up by EMC, the former Microsoft honcho has struck his signature deal for his new employers. When EMC reached for Pi Corp, which had yet to release a product, we figured the move was basically ‘HR by M&A.’ And that has turned out to be the case, as Maritz took over leadership of EMC’s virtualization subsidiary VMware in July 2008. He stepped into the top spot just as VMware’s once-torrid revenue growth had dwindled to a trickle. Sales at VMware rose 88% in 2007 and 42% in 2008, but are projected to inch up just 2% this year.

To help jumpstart VMware’s growth, Maritz looked to the clouds, pushing through the acquisition of SpringSource earlier this week. At roughly twice as much as VMware has spent on its previous dozen deals, the SpringSource buy is the virtualization kingpin’s largest purchase. It was also, as we understand it, a deal very much driven by Maritz. (Because the purchase topped $100m, it also had to be blessed by VMware’s parent, EMC. This indicates that Maritz enjoys a level of support at the Hopkinton, Massachusetts, HQ that probably wasn’t extended to his predecessor, VMware founder Diane Greene.)

As we have noted, no bankers were involved in negotiations and one source indicated that terms were hammered out directly by Maritz and his counterpart at SpringSource, Rod Johnson, in a scant three-and-a-half-week period. Not that there was much negotiating needed. As we understand it, Maritz approached Johnson with a ‘table-clearing’ offer of $400m. SpringSource didn’t contact any other potential buyers, and in fact, the five-year-old startup only weighed VMware’s bid against the possibility of going public in 2011. (Subscribers to the 451 M&A KnowledgeBase can click here to view our estimates on SpringSource’s revenue, both trailing and projected, as well as its valuation.)

However, the source added that getting to an IPO would have likely required another round of funding for SpringSource. The dilution that would come with another round, combined with the deep uncertainty about the direction of the equity markets, tipped SpringSource toward the trade sale. In the end, that decision – and how Maritz executes on his step into application virtualization – will go a long way toward shaping his legacy at VMware.

EMC and advisors: All or nothing

Brenon Daly

Contact: Brenon Daly

After EMC doled out no fewer than nine credits to different banks for working on its acquisition of Data Domain, we were curious how the deal credits would flow around the largest-ever purchase by EMC subsidiary VMware. (The unusually long list of advisers for EMC on Data Domain made us think – of all things – about the quip about compensation under some communist regimes: People pretended to work and the government pretended to pay them.) As it turns out, EMC/VMware swung to the other extreme, with not a single bank working for the virtualization giant in its purchase of SpringSource.

That’s not unusual, since VMware hadn’t really used bankers in the dozen or so acquisitions that it had inked before SpringSource. But those deals were mostly small. In fact, the cumulative spending for all of its earlier buys totals only about half of the $420m in cash and stock that VMware is set to hand over for SpringSource. By our tally, VMware’s pending purchase is the third-largest pickup of a VC-backed tech firm so far this year. Not that the print will show up for any bank. SpringSource didn’t use an adviser, either.

Advisors in EMC-Data Domain: a chorus and a solo

Brenon Daly

Contact: Brenon Daly

It’s often said that there are three types of falsehoods: lies, damn lies and statistics. To that list, we might be tempted to add a fourth category: league tables. That’s in the front of our minds because we just put together our mid-2009 update to the rankings of the busiest tech banks. (For those curious, Credit Suisse Securities took the top honor, with more deals and more dollars advised than any other bank. Banc of America Securities and JP Morgan Securities rounded out the podium.)

To be clear, we’re not saying that banks make up deal credits. Instead, we’re just noting that the credits, like statistics, may be more malleable than most people think. As we tally the transactions to come up with our rankings, there are invariably deals that smack of a little gamesmanship. In this case, it’s the chorus of advisers for EMC in the storage giant’s purchase of Data Domain. No fewer than eight banks – ranging from bulge brackets to a high-end boutique to even a midmarket firm – are all claiming credit for EMC. (We confirmed, indirectly, with EMC that each of the banks did indeed play a role in the acquisition.)

Meanwhile, on the other side, boutique advisory firm Qatalyst Group took sole credit for working the sell-side for Data Domain. Some observers initially dinged Frank Quattrone’s shop for running such a narrow process. (We understand, for instance, that EMC didn’t see the initial book on Data Domain when NetApp was preparing its bid.) Whether that’s the case or not is largely academic at this point, since the transaction closed a week ago. And it’s largely irrelevant, given where the deal was ultimately done. Data Domain enjoyed the richest price-to-revenue multiple in the sale of a US public company since March 2008.

UPDATE: After initially publishing this piece, Bank of America Merrill Lynch reached out to us to say that they, too, should have a deal credit for advising EMC. For those of you keeping score at home, that brings the total number of advisors for EMC, which was working to land Data Domain for all of two months, to nine separate banks.

With Data Domain done, what’s next for NetApp?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Data Domain was originally slated to report second-quarter earnings later this afternoon. Instead, the data de-duplication specialist is done as as an independent company, with the acquisition by EMC for the princely sum of $2.3bn closing today. The deal looks even ‘princelier’ when we consider the markdown M&A that we’ve been seeing recently. In fact, EMC’s bid values Data Domain at 7.4 times its trailing 12-month (TTM) revenue. That’s the richest multiple paid for a US public company since March 2008, when Ansys paid 8.2 times TTM sales for Ansoft.

Assuming the deal does indeed go through as expected, we wonder what will happen with the vendor that originally put Data Domain in play, NetApp. Certainly, the proposed pairing, which was approved by the boards at both firms, would have been a boost for NetApp. The storage system giant could certainly benefit from a midrange de-dupe product to serve customers beyond its existing base, which is precisely what Data Domain would have provided. The head of our storage practice, Simon Robinson, recently speculated that NetApp may well target other de-dupe providers. None of the potential candidates appears to fit as cleanly into NetApp as Data Domain would have, but there are nonetheless cases to be made for both CommVault and ExaGrid Systems.

While CommVault does indeed offer de-dupe technology, its backup software would pose a tricky integration challenge for NetApp, which sells appliances as an alternative to traditional backup software. (Keep in mind, too, that NetApp’s M&A track record hardly inspires confidence.) Meanwhile, ExaGrid is a company that in many ways has shaped itself in the image of Data Domain, albeit while selling de-dupe appliances. Buying ExaGrid wouldn’t bring NetApp the same heft as picking up Data Domain, but it would fit nicely into its focus on the SME market. If nothing else, NetApp could put some of the windfall of the $57m breakup fee that it received from the Data Domain deal toward another de-dupe move.

Is Riverbed the next Data Domain?

Brenon Daly

Contact: Brenon Daly

With Data Domain off the market, we did a bit of blue-sky thinking about which company might find itself snapped up in a similar scenario. Our pick? Riverbed Technology. We’re not suggesting that the vendor is in play by any means, but hear us out on this one.

For starters, both Data Domain and Riverbed are fast-growing, single-product companies in markets that are dominated by mature technology vendors that have deep pockets and are hungry for growth. In the case of Data Domain it’s the storage market, while for Riverbed it’s the networking market. (To put some numbers around the differences, consider that Data Domain more than doubled its revenue in 2008, while its acquirer, EMC, saw storage revenue inch up just 10% last year.)

The obvious buyer of Riverbed would be Cisco. That’s so obvious, in fact, that we heard Cisco made at least two overtures to Riverbed before the company went public in September 2006. (However, one source characterized Cisco’s interest more as ‘industrial espionage’ than acquisition negotiations.) So we don’t see Riverbed going to Cisco. Instead, we like Hewlett-Packard as the acquirer of Riverbed.

The two companies have been friendly for years. HP originally had an OEM deal with Riverbed, and later resold the Riverbed product. HP has also integrated the Riverbed Optimization Software into its ProCurve infrastructure. To be clear, we’re not suggesting that there’s anything more than technology talks between the two sides right now. But if HP wanted to bolster ProCurve, picking up Riverbed would do that. Plus, such a deal could help HP stick it to Cisco, which took a swipe at HP earlier this year by jumping into the server market. Maybe HP is interested in countering with a big buy into one of the fastest-growing segments of the networking market.

Data Domain: Battle at Centre Court

Brenon Daly

Contact: Brenon Daly

A long, drawn-out battle – with back-and-forth volleying – to claim a coveted prize. We could be talking about the amazing men’s final at Wimbledon over the weekend, but since we’re back in the office, we’re actually referring to the ongoing fight over Data Domain. On Monday, EMC served up what it hopes will be an ace. It raised its existing all-cash offer for the data de-duplication specialist to $33.50 per share.

EMC’s latest bid values Data Domain at roughly $2.3bn, richer than its previous offer as well as the one from original suitor NetApp. Recall that NetApp served first, offering $1.75bn in cash and stock for Data Domain on May 20. EMC returned that with a $2.1bn bid of its own a week and a half later. And now, EMC has knocked a shot that, honestly, we feel NetApp will have trouble stretching to get. Our view: Advantage EMC.

A ‘feature rich’ bidding war for Data Domain

Brenon Daly

Contact: Brenon Daly

A multibillion-dollar bidding war over a technological feature? As crazy as it sounds, that’s one way to look at the contested effort to acquire Data Domain. (Obviously, the company offers much more than the data de-duplication technology that it’s known for. But some rivals – and even one of its current suitors – have nonetheless dismissed Data Domain as a ‘feature’ in the past.) EMC on Monday topped NetApp’s two-week-old agreement to pick up Data Domain.

Even though EMC raised the bid on Data Domain to $30 in cash for each share, the market is clearly expecting more. In mid-afternoon trading Tuesday, Data Domain shares were changing hands at $31.27 – roughly 4% above EMC’s offer. NetApp, which originally offered $25 in cash and stock for each share of Data Domain, hasn’t yet responded to EMC’s move. (As an aside, the bid-and-raise for Data Domain came just hours after we noted bidding wars for two other public companies.)

EMC entering the fray for Data Domain isn’t surprising. According to its offer to purchase the company filed with the US Securities and Exchange Commission, EMC planned to discuss an acquisition with Data Domain in early May, but the target cancelled the meeting. Only a few days later, NetApp, which is being banked by Goldman Sachs, announced its bid for Data Domain, advised by Qatalyst Partners. At this point, EMC hasn’t formally retained a banker to advise it on landing Data Domain (much to the dismay of fee-hungry bankers everywhere). Incidentally, speaking of Qatalyst, the boutique officially announced that it has hired former Goldman Sachs software banker Ian Macleod, which we heard about more than two months ago.

Just how far has the CDP market fallen?

Brenon Daly

by Brenon Daly, Henry Baltazar

In the days before the big storage vendors turned continuous data protection (CDP) into a feature rather than a stand-alone product, investors in CDP startups could still make decent returns. Both Kashya and Topio raised about $20m in VC backing, and ended up exiting for eight times that amount. Kashya sold to EMC for $153m in cash in May 2006 while Topio, which wisely blended CDP with heterogeneous replication in its offerings, went to NetApp for $160m in cash a half-year later. (Of the two deals, NetApp-Topio has been the underwhelming transaction. NetApp recently shuttered the SnapMirror for Open Systems product line that it picked up with Topio.)

Since those paydays, however, CDP valuations have plummeted. Symantec acquired assets of Revivio for an estimated $20m in November 2006, while Double-Take Software handed over just $8.3m for TimeSpring Software in late 2007. But even those deals seem rich when we consider BakBone Software’s recent reach for CDP startup Asempra Technologies. Under terms of the deal, BakBone is shelling out just $2.1m for Asempra, which had raised $36m from its backers. To add insult to injury, BakBone is paying for the acquisition mostly in equity, with $1.7m of the price tag covered by its illiquid, Pink Sheets-traded paper. We would note that Asempra’s owners are getting 3.8 million shares of BakBone, which typically only trade about 30,000 shares each session.

Select CDP transactions

Date Acquirer Target Price
May 2009 BakBone Software Asempra Technologies $2.1m
December 2007 Double-Take Software TimeSpring Software $8.3m
November 2006 Symantec Revivio $20m*
November 2006 NetApp Topio $160m
May 2006 EMC Kashya $153m
March 2006 Atempo Storactive Not disclosed

Source: The 451 M&A KnowledgeBase *451 Group estimate

What’s brewing at Cisco?

Brenon Daly3 Comments

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.

M&A for HR

Brenon Daly

Last February, EMC made the curious purchase of a tiny Seattle-based information management startup, Pi Corp, which had yet to release a product. We scratched our heads over the acquisition, in no small part because the release announcing the deal spent as much time talking about Pi’s leader Paul Maritz as it did about the company itself. That shopping trip in Microsoft’s neighborhood makes a lot more sense now that we know Maritz is taking over at VMware. Call it M&A for HR.

A 14-year veteran of Microsoft, Maritz is replacing Diane Greene, the founder and undisputed queen of VMware. (A person who worked under Greene but moved on to another virtualization company recalled recently that she had a say in essentially every aspect of the firm, down to picking out the door handles at its headquarters.) An engineer, Greene built one of the fastest-growing software companies. Just nine short years after its founding, VMware was able to push revenue to more than $1bn, finishing 2007 at $1.3bn.

Greene managed that tremendous growth despite an often tense relationship between VMware and its parent EMC. About the only knock on Greene’s leadership was her decision to sell VMware to EMC for $625m – a transaction that allowed EMC to reap billions of dollars of value creation at VMware, while essentially leaving the latter to operate on its own. Maritz is now charged with navigating that relationship, as well as parrying ever-sharper competitive threats, principally from his old employer and its release of Hyper-V. In terms of compensation, we can only hope Maritz didn’t load up his contract with VMware options. Otherwise, the new CEO may well find himself underwater during his time in the corner office. VMware shares sunk to their lowest-ever level in midafternoon trading Tuesday, plummeting 27% to $38.75.