Sizing the SaaS M&A market

Contact: Ben Kolada

Traditional IT service providers, accustomed to an on-premises model of delivering products and services, have been rapidly buying into the SaaS sector to fulfill enterprises’ demand for SaaS offerings. The result has been a rapid increase in both the volume and value of SaaS deals announced. The most notable are Oracle’s RightNow Technologies purchase, which just closed, and SAP’s highly valued SuccessFactors buy, which is expected to close very soon.

As businesses increasingly adopt cloud services, as opposed to packaged software maintained on-premises, the largest IT firms are increasingly looking to break into this industry. We’ve seen a record number of acquisitions of private cloud providers, but now public firms are attracting additional attention as well. In 2011, we recorded 200 announced SaaS transactions in The 451 M&A KnowledgeBase – just a baker’s dozen shy of the all-time record set in 2007. However, total spending on SaaS targets came in at a record $9.7bn, shattering the previous record set in 2008. True, the RightNow and SuccessFactors deals accounted for more than half of total SaaS M&A spending in 2011, but the overall volume of large acquisitions is on the rise as well. For example, last year we saw a dozen SaaS transactions announced valued at least at $100m – a steady uptick in big-ticket deal volume since 2008.

Driving these acquisitions, in addition to customer demand, is the SaaS sector’s enviable revenue growth rates. While IBM, for example, grew total revenue just 7% in 2011, our 451 Market Monitor colleagues projected that the global SaaS sector grew 22%. And according to ChangeWave Research, a service of 451 Research, SaaS remains the most popular cloud service. In a ChangeWave report, a whopping 61% of respondents said they were using some SaaS product. The report also noted that 28% of respondents expect to increase their SaaS spending over the next six months, more than any other cloud service ChangeWave covered in the report.

Acquisitions of SaaS vendors, 2005-2011

Year announced SaaS deal volume SaaS deal value
2011 200 $9.7bn
2010 152 $6.1bn
2009 138 $8.1bn
2008 125 $3.5bn
2007 213 $6.7bn
2006 93 $3bn
2005 49 $712m

The 451 M&A KnowledgeBase

Big Blue’s recent shopping spree

Contact: Brenon Daly

After a slow start to the year, IBM has dramatically picked up the pace – and the spending – in its M&A program. Big Blue only announced its first deal of 2011 in late March, and then was out of the market for nearly a half-year. But in the past two months alone, it has announced four deals. And each of the purchases, according to our estimates, was valued in the hundreds of millions of dollars.

Since late August, IBM has acquired analytics and visualization software vendor i2 Group, an analytics firm focused on financial services called Algorithmics, security management specialist Q1 Labs, and – just last week – HPC pioneer Platform Computing. Although IBM only released the value of one of those transactions, we estimate the collective tab on the two-month shopping spree is in the neighborhood of $1.5bn.

The purchases come as IBM shares have been trading around their highest-ever levels. So far this year, Big Blue stock has tacked on some 27%, while the Nasdaq Index has basically flat-lined. IBM will give its latest check-up to Wall Street after the closing bell today, with investors looking for third-quarter earnings of about $3.22 per share on sales of some $26.3bn. Ahead of the release, the stock was trading in-line with the broad market.

Double-barrel SIEM deals

Contact: Brenon Daly

In a highly unusual twist of timing, both IBM and McAfee announced significant acquisitions of security event and incident management (SIEM) startups within hours of each other Tuesday morning. First up, IBM said it was adding Q1 Labs as part of a new initiative around ‘Security Intelligence.’ (The announcement confirmed the rumored pairing between the two companies that we noted on Monday.) That was followed just two hours later by McAfee’s reach for NitroSecurity.

The transactions, which are both expected to close before the end of the year, take the two largest privately held SIEM vendors off the market. According to our estimates, Q1 was tracking to about $70m in sales this year while NitroSecurity was likely to generate roughly $30m. Between them, the two startups counted more than 2,300 customers. Further, Q1 and NitroSecurity were the highest-ranked private SIEM providers in a recent survey of IT buyers by TheInfoPro, a division of The 451 Group.

All of that goes a long way toward explaining why both startups got valuations substantially above prevailing market multiples. Collectively, Q1 and NitroSecurity took in a total of about $75m in funding over the decade or so they had been in business. As we understand it, the aggregate price for the pair is somewhere in the neighborhood of 10 times the amount they raised.

Is Q1 the one for IBM?

Contact: Brenon Daly, Andrew Hay

Despite posturing for a public market debut for some time, we understand that Q1 Labs may instead be headed for a trade sale. IBM is reportedly set to acquire the fast-growing ESIM vendor in a deal to be announced this week. The price for Q1, which recorded sales of some $60m over the past four quarters, couldn’t be learned. Goldman Sachs was in line to be lead underwriter for the IPO but instead will get the print, according to our understanding.

Assuming it closes, the deal would come almost exactly a year after ESIM kingpin ArcSight sold to Hewlett-Packard. (In that process, we gather that IBM was a bidder for ArcSight through the late rounds, as was EMC. McAfee was interested as well but was priced out relatively early on.) HP paid roughly 8 times trailing sales for ArcSight. Slapping that same multiple on Q1 values the Waltham, Massachusetts-based company at nearly a half-billion dollars. IBM had paid a similar multiple for Netezza and BigFix and only a slightly lower one in its most recent significant security acquisition, Guardium.

Rumors about a possible sale of Q1 have swirled for a number of years, with suitors ranging from Cisco to Oracle to McAfee. However, the most consistent name attached to Q1 has been its largest OEM partner, Juniper Networks. Indeed, sources indicated earlier this year that Juniper was considering an acquisition but a wide gap emerged over the valuation. Apparently, Juniper was offering about $300m, while Q1 was holding out for a number significantly higher than that.

A new frontier in IT management M&A

Contact: Brenon Daly

Few areas of software have seen more consolidation than the broad bucket known as IT service management (ITSM). Where vendors were once selling relatively simple helpdesk software, the offerings have evolved – primarily through M&A – into broader IT management platforms. The deals have ranged from massive strategic bets (Hewlett-Packard’s $4.5bn reach for Mercury Interactive, for instance) to tiny technology tuck-ins (e.g., EMC’s March 2008 addition of Infra Corp).

But what we hadn’t really seen in this flurry of dealmaking is an acquisition focused on mobile capabilities. Well, that was true until Thursday, when BMC Software reached for Aeroprise. (BMC is slotting Aeroprise into its Remedy portfolio, a business that BMC acquired in 2002 for $347.3m from bankrupt parent company Peregrine Systems.) The acquisition bolsters BMC’s ability to deliver its ITSM tools to smartphones and tablets of all flavors. And BMC knows the startup very well. It has been selling Aeroprise products (branded as a BMC offering) for the past year.

All quiet on the Eastern front

Contact: Ben Kolada

In contrast to the surge in deal flow that we’ve seen so far this year, IT giant IBM has been extremely muted. So far this year the Armonk, New York-based company has announced only one deal – the pickup of real estate and facilities management vendor Tririga in March for an undisclosed amount. In comparison, last year Big Blue announced 15 transactions worth more than $5bn. But that’s not to say that the company hasn’t been looking for new properties, and likely would have inked a couple of extra deals had it not been for Oracle’s meddling. In fact, Oracle’s most recent move could motivate IBM to announce a transaction of its own soon.

We’ve written in the past that IBM may have looked at Datanomic, which Oracle quietly picked up April. We considered Datanomic a nice complement to the business Big Blue got when it bought Initiate Systems in early 2010. (Initiate had an OEM arrangement with Datanomic.) More recently, though, the company was once again thwarted by Oracle in the Web content management (WCM) sector. Oracle announced yesterday that it is acquiring WCM vendor FatWire Software, and we see IBM as the potential loser here. Big Blue could use a stronger WCM component, as it is also positioning for Web experience management, and we hypothesized recently that FatWire could possibly fill this gap. However, there are a few alternatives left for IBM. For instance, the company could make a play for CoreMedia, which is the only other WCM independent with a Java-based offering that competes at the high end.

Oracle has gone silent

Contact: Brenon Daly

While investors will be tuning in for Oracle’s Q3 report after the market’s close today, we can’t help noting that there hasn’t been much news from the consolidator recently. It has yet to announce a deal in 2011, an uncharacteristic dry spell for a company that averaged an acquisition every six weeks in each of the past two years. In Q1 2010, Oracle announced three transactions and even in the recession-wracked Q1 2009, the software giant announced a pair of deals – but nothing so far this year.

In fact, Oracle has been out of the market since it spent $1bn on Art Technology Group in early November, nearly five months ago. And it’s not just Oracle that’s currently on the M&A sidelines. Fellow big-name buyers such as Microsoft, Symantec, EMC and Nokia have all yet to open their accounts in 2011. Even serial shopper IBM was also on that list until earlier this week, when it announced its purchase of Tririga

An extended cold snap in the M&A market

Contact: Brenon Daly

The tech M&A spending slump continued into February. For the sixth straight month, the aggregate value of deals came in at only about $10bn. (Specifically, we tallied 256 deals in February, worth just $9.7bn – the lowest monthly spending total in a year.) The rather anemic recent spending comes after a flurry of dealmaking last summer had many observers speculating about a return to a more robust M&A environment.

Instead, recent monthly spending has flat-lined at just half the level it was last summer. Another way to look at the activity: The total value of deals so far this year (January and February combined for $20.6bn in spending) is only equal to the single-month totals from April to August last year.

One reason why 2011 has gotten off to such a slow start is that many big-name tech buyers haven’t been in the market. Among the companies that have yet to open their M&A account this year: Microsoft, Symantec, Oracle, IBM, EMC, BMC and others.

Comings, goings and growings in the data-warehousing market

Contact: Brenon Daly, Matt Aslett

Over the past two and a half years, tech giants such as Microsoft, IBM and EMC have all inked major data-warehousing (DW) acquisitions, running up a collective bill of some $2.5bn. All that time, Hewlett-Packard stayed out of the shopping spree, opting to develop its own DW offering in-house. On Monday, HP conceded that those efforts haven’t generated the return that it was looking for, and indicated that it would phase out sales of its Neoview product.

HP is expected to continue its DW-related partnerships, including a recently announced accord with Microsoft to deliver four new data appliances. On its own, however, HP wasn’t able to capture much business in the fast-growing DW market, in part because the company approached it as a services play. (My colleague Matt Aslett noted some of the struggles HP was having with Neoview in a recent report, where he indicated that if HP was serious about DW it should have either reached for Netezza or made the big move for Teradata.) It couldn’t have helped Neoview, either, that it was so closely associated with former CEO Mark Hurd, who is being erased as quickly as possible from HP since his unceremonious departure last summer.

HP’s shift away from directly focusing on the DW market comes as Teradata enjoys its richest-ever valuation. (Shares of Teradata, which is the largest and most-visible DW vendor, have jumped about 60% over the past year, giving the company a $7.7bn valuation.) We’re also hearing that Teradata may be looking to do a deal of its own. Having just closed its purchase of Aprimo to get into the business application market, the buzz is that Teradata will shift its M&A focus back to its basic business, perhaps picking up additional analytics and other DW technology.

Everything is bigger at Big Blue

Contact: Brenon Daly

Sometimes, we forget why IBM is called Big Blue. The giant just reported $100bn in sales for 2010, making it more than twice the size of Cisco Systems and almost four times the size of Oracle. (Just on its own, IBM’s software portfolio is larger than all of Oracle, not to mention the fact that IBM’s software operations are vastly more profitable than Oracle.) IBM’s current valuation is big, too, with shares currently changing hands at their highest levels ever.

And, as we listened to the company discuss its recent financial results, we were reminded that it has a big appetite for deals. It dropped a cool $6bn on acquisitions last year, with half of that coming in just the fourth quarter. Just in the last year, IBM took two public companies off the board (Netezza, Unica), gobbled up another two companies that could have been looking for an IPO (Initiate Systems, BigFix), and was even on the buyside of an unusual $1.4bn divestiture (AT&T shedding Sterling Commerce). Of course, it’s easy to write those big checks when the company generated more than $16bn in free cash flow in 2010.