Storage sector M&A holding steady

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.

In the dark on Big Blue’s buys

Contact: Brenon Daly

At the risk of stepping into a Kantian dialectic on ‘materiality,’ we can’t help but comment on the fact that when IBM does a deal – even a semi-large deal – mum’s the word. So far this year, Big Blue has picked up two companies that were large enough to consider going public at some point, with each acquisition costing the company around $400m in cash (according to our estimates). Yet in both the purchase of Initiate Systems and BigFix, IBM declined to disclose the price.

Viewed from the Big Blue side, it’s understandable that a startup like Initiate or BigFix, both of which were generating less than $100m in sales, is hardly a significant addition to a tech giant that’s going to post about $100bn in sales this year. Further, even though $400m sounds like a lot of money to most of us, we have to remember that IBM generates that much in cash roughly every two weeks. So, the thinking goes, Big Blue is well within its rights to not disclose ‘immaterial’ transactions. (That’s a view shared by Apple, for instance, which we have taken to task in the past for being run more like a private fiefdom than a public company.)

However, as is often the case in arguments based on relativism, there’s a distinct lack of accountability in it. After all, IBM is spending other people’s money. Shareholders own the company and, at least theoretically, the executives and management at the company – including all those who had a hand in the deals – work for shareholders.

Not to get overly sanctimonious about it, but in deals like Initiate and BigFix, IBM’s true owners are in the dark about how their employees are spending their money. And we’re not talking about dipping into the petty cash jar, but emptying hundreds of millions of dollars from the corporate treasury. That seems to us to be a fairly significant event.

The Big Blue erasure

Contact: Brenon Daly

In addition to the current snarling bear market and the onerous regulatory requirements, we’ve noticed yet another hurdle IPO candidates have to clear to get to the public market: IBM. With last week’s purchase of BigFix, the tech giant has gobbled up two private companies this year that were both tracking for an IPO. In February, Big Blue snagged Initiate Systems, a master data management vendor that had filed to go public in late 2007 but pulled its prospectus in mid-2008.

As we understand it, BigFix wasn’t nearly as close to an offering as Initiate. But the security management startup certainly had the financial profile to become a public company. (In fact, we’ve listed the Emeryville, California-based vendor as a possible IPO candidate in our outlook for the security market in each of the past two years.) BigFix was tracking to $65m in revenue for 2010, up from $52m in 2009, according to sources. (Bookings were closer to $85m last year.) The company also generated some $14m in free cash flow in 2009, a surprisingly large amount for a 13-year-old startup that had only raised $36m in venture backing.

In both of the deals, IBM paid a fairly rich multiple. Although terms weren’t disclosed, we understand that Big Blue handed over $425m, or 5.3 times trailing revenue, for Initiate. And we hear from multiple sources that IBM paid $400m, or nearly 8x trailing revenue, for BigFix. The multiple in both deals is substantially higher than the median price-to-sales multiple (1.8x) that we recently calculated for all tech transactions in the second quarter.

As a final thought, we highly (highly, highly) doubt that if either Initiate or BigFix came public right now, it would garner anywhere near a $400m valuation. (We recently put out a special report on the dreary IPO market.) More likely, skittish investors would discount the debut valuation to around $250m, give or take. Add in lockup periods and other considerations in an IPO that draw out the path to liquidity, and it’s no wonder both Initiate and BigFix took a rich, all-cash offer from IBM.

IBM analyses Coremetrics, makes a deal

Contact: Brenon Daly

We were close on our earlier rumor-mongering on Coremetrics, but tapped the wrong buyer. Four months ago, we heard that the Web analytics firms was in play and had retained Goldman Sachs to represent it. (And, indeed, Goldman did advise Coremetrics in the process.) On June 15, IBM said it was picking up Coremetrics for an undisclosed amount. Originally, we thought made the most sense as the buyer for Coremetrics.

It’s not hard to imagine that IBM’s desire for Coremetrics increased significantly after its two most-recent acquisitions, Sterling Commerce and Cast Iron Systems. For instance, Coremetrics would give much more insight into the activities on the business-to-business network that Big Blue picked up three weeks ago when it paid $1.4bn for Sterling Commerce. Coremetrics has some 2,100 customers.

Even with this deal done, we still think Coremetrics would have been a natural fit for, and would have given a significant boost to the company’s effort to diversify from its legacy sales force automation (SFA) business. Sales of that product still account for two-thirds of overall company revenue. recently indicated it was willing to go shopping to increase its non-SFA business, reaching for business directory provider Jigsaw Data. At $142m in cash, the price of Jigsaw was more than spent, collectively, on its previous seven acquisitions. Who knows, maybe will turn to fellow analytics firm Webtrends, which is owned by buyout shop Francisco Partners. Incidentally, one of Francisco’s founding partners, Sandy Robertson, serves on’s board of directors.

Big Blue dials up a deal with Ma Bell

Contact: Brenon Daly

Sterling Commerce has had one of the more colorful and varied ownership histories in the software industry. Founded inside parent company Sterling Software, the business-to-business software vendor was then spun off through an IPO in the mid-1990s before being acquired by SBC Communications (now AT&T) in a Bubble-era deal that valued Sterling Commerce at $3.9bn.

For the past decade, it has been a largely unknown business inside Ma Bell. Although Sterling Commerce generates sales in the hundreds of millions of dollars, it amounts to less than 1% of AT&T’s revenue. AT&T doesn’t break out the financials for Sterling Commerce, but instead lumps the sales into a catch-all bucket of ‘Other.’  To give some idea of the importance of that category, consider that AT&T also accounts for revenue from its pay phones in Other.

We always assumed that some buyout shop would carve out the Sterling Commerce business from the phone giant and use it as a platform to roll up the fragmented business software landscape. (Sterling Commerce had done a few deals of its own, including its $155m purchase of order configuration vendor Comergent Technologies in November 2006.) Instead, Sterling Commerce said Monday that it will now be part of IBM.

Big Blue, which was advised by JP Morgan Securities, is paying just $1.4bn in cash for Sterling Commerce. The transaction, which is expected to close in the second half of 2010, is the largest by IBM in two and a half years. It also comes just weeks after Big Blue announced that it will look to once again be a busy buyer, indicating that it plans to spend $20bn on deals over the next five years. While that figure roughly matches the amount that IBM has spent on M&A over the previous half-decade, the majority of the spending was concentrated in 2005-07.

A (belated) Oscar for IBM

Contact: Brenon Daly

We hand out our version of the Oscar every year in late December. (Like the movie industry award, our Golden Tombstone is voted on by folks in the industry, which, in this case, are fellow corporate development executives.) Last year, Oracle’s drawn-out acquisition of Sun Microsystems took the top spot, while the year before, Hewlett-Packard’s multibillion-dollar purchase of services giant EDS caught the voters’ favor. But watching Christopher Waltz and Mo’Nique last night pick up best supporting actor and actress, respectively, reminded us that we neglected to award our Golden Tombstone for best supporting strategic player last year.

The winner, of course, is IBM. It did a heap of due diligence on Sun and had the acquisition nearly done before it ‘failed’ to close it (to use the words of eventual acquirer Oracle). It’s actually the second time that Big Blue has done a lot of work on a multibillion-dollar transaction only to see a rival swoop in and carry off the target. IBM had an acquisition of WebEx all but inked before Cisco wrapped up a deal for the online conferencing vendor in less than two weeks, according to our understanding.

Pouring cold water on the latest Sourcefire rumor

Contact: Brenon Daly

At the tail end of last week, the market was buzzing that Sourcefire may be back in play. Of course, that’s not all that unusual for the Snort shop, which has seen two publicly disclosed acquisition offers in the past four years come to nothing. (Recall that Check Point Software failed to land Sourcefire because of vague and off-target ‘national security concerns’ in early 2006. And then, in mid-2008, Barracuda lobbed an opportunistic low-ball bid for Sourcefire. Talks between the two sides never really got going, according to at least one source.)

So who’s the new bidder? Rumor has it that IBM may be looking at Sourcefire now. While the pairing has been making the rounds, we have our doubts about whether Big Blue would actually reach for the security company. Its $1.3bn acquisition of Internet Security Systems in mid-2006 has never generated the returns that IBM had hoped. (The ISS business, which was centered on the company’s Proventia boxes, never really fit well inside IBM Global Services.) Having little to show for that purchase of an intrusion-prevention system (IPS) vendor, we doubt that Big Blue would double down on another IPS vendor, Sourcefire.

And while IBM could certainly afford it, Sourcefire has gotten a little pricey. Over the past year, shares have more than tripled, giving the security vendor a market capitalization of about $600m. Backing out the $100m in cash and short-term investments gives Sourcefire an enterprise value (EV) of $500m. Without a takeout premium, Sourcefire commands a valuation (on an EV basis) of five times trailing sales and four times projected sales. Paying a premium on top of Sourcefire’s trailing P/E that’s in the triple digits might be tough for IBM, which trades at a trailing P/E of just 12.

Is IBM about to ‘initiate’ a major MDM purchase?

Contact: Brenon Daly

Although we recently noted that SAP may be considering a major master data management (MDM) move, we understand that the next buyer in the market may actually be IBM. We’ve heard from several sources that Big Blue is close to announcing an acquisition of Initiate Systems. If the deal does indeed happen, Initiate would substantially boost IBM’s offering for the healthcare industry. Despite being competitors, Initiate and IBM Global Services have been longtime partners for healthcare projects. The transaction could happen as soon as this week, we’re told. And we gather that it’ll come at a rather rich valuation for Initiate.

One of the largest stand-alone MDM vendors, Initiate filed to go public back in November 2007, but withdrew its IPO paperwork the following summer. (Goldman Sachs was lead underwriter of the planned offering.) Shortly after it pulled its prospectus, it announced a $26m funding round that included strategic investments from both EMC and Informatica. However, we hear that the biggest competition for IBM’s rumored bid for Initiate may have come from the public market.

Given the very real prospect that Initiate could reheat its plans to go public, IBM would effectively have to top the valuation that Initiate could receive in an IPO and afterward. We understand that the company was running around breakeven and likely did just shy of $90m in 2009. (That would imply mid-teens growth from the $76m in revenue that Initiate recorded in 2008.) With that dynamic at play, Initiate may well garner 4.5-5x sales in the trade sale to IBM, according to sources.

Silver Creek comes out golden in sale

Contact: Brenon Daly

Although terms weren’t disclosed in Oracle’s reach for Silver Creek Systems earlier this week, we suspect the startup can claim something that not one of the nine companies that Oracle gobbled up in 2009 can say: it garnered an above-market valuation in the deal. The trade sale also undoubtedly generated a decent return for Silver Creek’s backers, which hasn’t been the case in many recent sales of VC-backed companies.

A pretty lean operation, Silver Creek has raised some $14m since its restart as a data-quality vendor back in 2002 and hasn’t needed to raise money since 2005. We believe Oracle may have ended up paying twice the amount that Silver Creek raised, since we understand there was at least one other bidder. The acquisition essentially formalizes an OEM relationship that the two companies have had since April, as my colleague Krishna Roy noted in her report on the transaction.

Whatever price Silver Creek ended up getting, it’s a notable uptick from last summer, when we were writing about how a startup in a similar market had pulled off an improbable deal that – if everything falls into place and full earnouts are earned – might just make its backers whole again. (See our earlier item on Exeros’ gamble and ultimate sale to IBM.) Also keep in mind that Big Blue only picked up some of the assets of the data discovery startup, not the whole company and its employees, as is the case with Oracle’s reach for Silver Creek. All in all, Oracle’s purchase of Silver Creek is yet another sign that the tech M&A market continues to rebound, even if it hasn’t yet fully recovered.

What a pair of startup sales tells us about the recession

Contact: Brenon Daly

If there was any doubt that the M&A climate has warmed since the beginning of this year, consider the relative exits for a pair of database-monitoring startups. Back in February, when venture funding was hard to come by and wind-down sales were plentiful, Tizor Systems sold to Netezza for just $3m. Fast-forward nine months, and Guardium sells to IBM for an estimated $230m. Viewed another way, Tizor returned just one-tenth the amount of venture funding it raised, while Guardium returned more than 10 times the funding it raised.

Granted, the relative returns of Guardium and Tizor probably have more to do with the business performance of the two rivals than what was going on in the economy. After all, Tizor was limping along with just $2m in sales, while Guardium was sprinting along at around $40m. (Both companies were founded in 2002.) That said, we’re pretty confident that the fact that the US is no longer (officially) in a recession certainly didn’t hurt the valuation of Guardium, a company we have thought has been in play for some time.

Indeed, as we look down our list of recent IT security deals, we can’t help but notice that the three largest transactions – all of which saw marquee tech companies paying above-market multiples – have come in the past four months. In addition to the sale of Guardium to IBM at an estimated 6x trailing sales, we’ve also seen Cisco Systems pay the same multiple for ScanSafe and McAfee pick up MX Logic for an estimated 4x trailing sales. A few more of these types of deals and we may start to believe that we are indeed out of the recession.