OpenPages: a restart that finished strong

Contact: Brenon Daly

In the startup world, a restart rarely goes anywhere. What typically happens is a company swaps one failing business plan for another, with the inevitable wind-down delayed only by a fresh round of capital. Yet that’s not the case with OpenPages, which secured a solid exit with its sale to IBM after completely overhauling its business.

OpenPages, which sells software for the governance, risk and compliance (GRC) market, has virtually nothing in common with the company that started out in 1996. As its name implies, OpenPages was originally a content management vendor. The firm survived the dot-com bust, but only after trimming its headcount from more than 300 down to 15. In the aftermath, it also switched to Plan B for the business: GRC.

Although the initial draw to the GRC space was Sarbanes-Oxley, OpenPages found success in the broader market. By 2006, Sarbanes-Oxley only accounted for about 15% of revenue at the firm. As it recast its business, OpenPages also recapitalized the business. It raised some $10m in 2004 and added another $10m in 2007. (Back in the Bubble Era, it had raised about $60m from investors.)

The sale to IBM makes a fair amount of sense, both strategically and financially. Big Blue and OpenPages have been partners for at least three years. In addition to OpenPages’ technology fitting well with the BI portfolio IBM acquired with Cognos, there’s also a large chunk of services revenue that Big Blue can pocket around an OpenPages implementation. (OpenPages has some 140 customers.)

And, at least as we understand the deal, the exit valued OpenPages at a healthy 5 times its estimated $35m in sales. (Both the price and the valuation line up almost exactly with the other large GRC deal of the year, EMC’s purchase of Archer Technologies back in January.) In our view, whatever valuation OpenPages got should probably be viewed as a rich one when we consider the fact that the company nearly died penniless earlier in its life.

Charting the market

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.

GRC=Get Ready for Consolidation

Contact: Brenon Daly

After a pretty thin stretch of deals in the governance, risk and compliance (GRC) market, Thomson Reuters reached for startup Paisley Consulting last week. The deal comes after the two companies partnered for a year, but not in the conventional manner. Rather than the big company reselling the startup’s wares, Paisley actually resold Thomson’s tax and auditing product, Checkpoint. The two companies also had a fair number of joint customers.

We understand that Paisley wasn’t really looking for a deal. Founded in 1995, Paisley is still run – and was majority owned – by its founding husband-and-wife team of Tim and Stacey (née Paisley) Welu. (The pair will continue to run the business after the acquisition.) The Minneapolis–based company took only one round of outside money, a $10m slug in 2003 from Insight Venture Partners. Despite its beginnings, Paisley was no mom-and-pop shop. We understand the company is set to finish 2008 with sales of more than $40m.

The Thomson-Paisley pairing comes after several large software companies, which would be the most conventional buyers of GRC startups, inked deals of their own. Oracle stayed close to home, and grabbed existing GRC partner LogicalApps last year, while SAP made a big play for Virsa Systems in mid-2006. (As a side note on SAP’s move, we would mention that longtime Oracle executive Ray Lane sat on Virsa’s board and helped broker the initial partnership that led to the purchase.)

With Paisley gone, there are still a few high-profile GRC vendors in the market. BWise, which has its roots in the Netherlands, has a strong presence in Europe; OpenPages, which started life as a content management vendor before focusing on GRC; and a company that’s not unlike Paisley, Archer Technologies, which my colleague Paul Roberts recently profiled. We understand that both BWise and Archer, which is about half the size of Paisley, have been talking with potential suitors throughout the year. However, a month ago, Archer sold a 40% stake of the company to Bain Capital Ventures, which likely takes it off the block for now.