Tag: IPO

The market and Meru

Brenon Daly

Contact: Brenon Daly

Having watched at least three of its rivals get acquired in recent years, Meru Networks is now aiming for the other exit: a public offering. The WLAN equipment maker filed its IPO paperwork on Friday for an $86m offering to be led by Bank of America Merrill Lynch, with co-managers Robert W. Baird & Co, Cowen & Co, JMP Securities and ThinkEquity. Meru plans to trade on the NYSE under the ticker MERU. (Incidentally, the company was one we put on our list of IPO candidates for 2010 in our recently published 2010 M&A Outlook – Security and networks.)

If Meru does manage to make it onto the public market, it will reverse the flow of deals in the sector. In recent years, a large publicly traded rival (Symbol Technologies) and two other competing startups (Colubris Networks and Trapeze Networks) have all been acquired. Those trade sales have valued the WLAN equipment vendors at a range of 2.1-3x trailing 12-month (TTM) sales.

We noted a year and a half ago that all of the transactions probably meant that Meru would have trouble finding a buyer, except among public market investors. Not that Meru hasn’t kicked around a possible sale in the past. Rumors have tied it to both Juniper Networks and Foundry. The Foundry relationship seems to have died off since Foundry sold to Brocade Communications. According to Meru’s S-1, Foundry/Brocade accounted for a full 35% of its revenue in 2007, but that level has fallen to less than 10% now.

With Meru aiming to hit the market in 2010, we suspect that it will be hoping to have a stronger offering than publicly traded rival Aruba Networks, which initially priced its shares in its March 2007 offering at $11 each. Although Aruba traded above the offer price for almost a year, it broke issue in February 2008 and has not traded above the initial price since then. That said, the stock is nearing that level, changing hands at about $10.65 in midday trading Tuesday. It has more than quadrupled in 2009. The dramatic rebound in Aruba shares has pushed the firm’s valuation to 4.6x TTM sales. Applying that same multiple to Meru’s $67m TTM sales gives the company a valuation of about $310m.

Cyber Monday’s here

-Contact Thomas Rasmussen, Brenon Daly

Even though the receipts from Black Friday, the traditional retailers’ launch of the holiday shopping season, weren’t much bigger than they were last year, online retailers on Cyber Monday appeared to be ringing up a pretty good business this year. Amid all of the cyber-shopping, we couldn’t help but notice that there has also been a fair amount of buying of the shopping sites themselves. For instance, Amazon recently wrapped up its $847m all-stock acquisition of online apparel retailer Zappos. This stands as Amazon’s largest purchase, nearly three times larger than its second-largest buy. (We should also note that when the deal closed earlier this month, the equity was worth a whopping $1.2bn thanks to the recent surge in Amazon shares. The stock, which hit an all-time high on Monday, has risen some 62% over the past three months.) While overall M&A spending this year appears likely to be half the amount of 2008, online retail dealmaking is still going strong. We expect spending on Internet commerce acquisitions to come in roughly where it did in previous years, at some $2.3bn worth of transactions in the sector.

Meanwhile, another e-commerce vendor continues its push for a different exit. Newegg.com filed to go public in late September, and appears to be on track for a debut early next year. The online electronics retailer, which was founded in 2001, has more than doubled sales over the past four years while also posting a profit in each of those years. Although growth has slowed so far this year, Newegg still raked in $2.2bn in revenue and $70m in EBITDA for the four quarters that ended last June.

Given the recent trend in dual-track offerings, we wonder if Newegg might not get snapped up before it hits the Nasdaq under the ticker ‘EGGZ.’ Granted, this is pure speculation, but there are a fair number of parallels between Newegg and Zappos, which could mean that Amazon will reach for it. (Both Newegg and Zappos have developed profitable, growing businesses by specializing in a slice of the market that Amazon has tried – but failed – to dominate.) Additionally, electronics retailers such as Best Buy could well be interested in bolstering their online sales units with Newegg. Although Newegg and its underwriters haven’t set an initial valuation, we suspect that any buyer would have to be ready to hand over slightly more than $2bn to add Newegg to its shopping cart.

Online retail M&A

Period Number of deals Total deal value
2005 30 $1.27bn
2006 53 $3.78bn
2007 36 $2.62bn
2008 45 $1.36bn (excluding the sale of Getty Images)
2009 YTD 55 $2.34bn

Source: The 451 M&A KnowledgeBase

A fittingly imperfect end for Kana

Brenon Daly

Contact: Brenon Daly

As liquidity events go, the just-announced sale of Kana Software is shaping up to be a pretty dry one for most shareholders. The customer service automation vendor said on Tuesday that it plans to sell its operating business to buyout group Accel-KKR for $49m and retain the publicly listed shell of a company as an acquisition vehicle. The proceeds from the sale of the business will flow to what essentially amounts to a special-purpose acquisition company, or SPAC, rather than long-suffering Kana shareholders. Shares of Kana have barely moved since the announcement, holding steady at around $0.75 each.

From our view, the structure of the deal reflects a creativity born out of necessity. Essentially, the challenge that shaped the sale process at Kana, which has been playing out for several years, was how to realize value for a decidedly mediocre operating business, while at the same time preserve the value of the tax advantages accrued from having burned money ($4.3bn and counting) since the company opened its doors. (The sole ‘asset’ at the SPAC, besides access to the capital markets, is the $400m in credits to offset taxes on any profit generated at whatever company it does acquire.) While the deal goes some distance toward satisfying both goals, several disgruntled shareholders have charged that it doesn’t go far enough.

For starters, the shareholders point out that if the carve-out goes through, as is expected within three months, they will have nothing to show for the sale of ‘their’ company. Instead, their future returns will be determined by an unknown group that may – or may not – buy some yet-to-determined business. (So much for the Wall Street maxim of investing in management and markets.) Particularly galling to those shareholders stuck holding illiquid Bulletin Board equity is that two of the largest owners of Kana (hedge funds KVO Capital Management and Nightwatch Capital Management, which also has a board seat) got to exit their investments at an above-market price of $0.95 per share, with the possible addition of another $0.10 for each share on top of that.

Kana would probably counter that shareholders who don’t want to roll their ownership of the company into a SPAC are free to sell their shares. And we have little doubt that the vendor exhausted every opportunity to get some value from the business, since we know that the process has been grinding along fitfully for years. In the end, though, we can’t help but view the less-than-ideal transaction as a fittingly imperfect ending to a thoroughly flawed company. Or more precisely, a thoroughly flawed public company. Red ink-stained Kana went public in 1999 on less than $5m in aggregate sales, but within a year of the offering had topped $1,000 per share on a split-adjusted basis. As shareholders now argue about dimes on the firm’s Bulletin Board-listed stock, the end of Kana just seems pathetic.

Does Wall Street run through the RedPrairie?

Brenon Daly

Contact: Brenon Daly

Along with the rising equity markets, there’s a new flow of companies that are planning to file their IPO paperwork in the next few weeks. For instance, we know of two venture-backed mobile vendors that have picked underwriters and plan to put in their prospectuses shortly. And we’re willing to bet that the expected strong offering from Fortinet, which initially filed in early August and is likely to debut before Thanksgiving, will catch the eye of quite a few VCs who have sizeable security providers in their portfolios.

Altogether, it looks like a decent IPO pipeline for VCs, as long as the equity markets hold. But what about their brethren at PE firms? We’ve seen the buyout barons file to flip a few non-tech holdings back onto the market, and the big offering from Avago Technologies (the carve-out of Hewlett-Packard’s semiconductor business by Kohlberg Kravis Roberts and Silver Lake Partners) has been above water since it hit the Nasdaq in early August. But there are still a lot of PE firms with pretty full portfolios that would like to post a realized gain – as opposed to ‘paper gains’ – before going out and raising a new fund.

So which PE-backed company is likely to hit the public market? Several sources have indicated that RedPrairie, an inventory management software vendor owned by Francisco Partners, has selected bankers and plans to ink an S-1 in the coming weeks. Francisco acquired RedPrairie in mid-2005, 30 years after the company was founded. Since the buyout, RedPrairie has rolled up six other companies. In 2008, the firm generated almost $300m in revenue. That puts RedPrairie’s revenue in the same neighborhood as rivals i2 and Manhattan Associates, but below the sales of JDA Software and Epicor Software.

Out with the old and in with the new at Compuware

Brenon Daly

Contact: Brenon Daly

Deal flow at Compuware so far this year has been out with the old and in with the new. The 36-year-old company sold off its testing automation and software quality business to MicroFocus for $80m earlier this year, and then last week, it put some of those proceeds toward covering its $295m purchase of Gomez. (Interestingly, Updata Advisors worked both the divestiture and acquisition for Compuware.)

The purchase of Gomez significantly bolsters Compuware’s application performance management (APM) business. It also dramatically changes the face that Compuware shows to Wall Street. Most investors know Compuware – if they know it at all – as ‘a mainframe company.’ (Indeed, roughly two-thirds of the firm’s product revenue comes from its mainframe business.) Even in a robust IT spending environment, the mainframe business is a slow-growing one.

While only a small slice of overall revenue, Gomez brings a predictable base of subscription revenue that’s been growing at a pretty good clip recently. In the first two quarters of 2009, Gomez increased revenue 25%. Granted, Compuware paid for that growth, valuing Gomez roughly four times as richly as Wall Street currently values Compuware itself. But the fact that Compuware shares actually ticked higher when the vendor announced the acquisition indicates that the deal has some support. (In contrast to, say, Wall Street’s punishment of Xerox shares on that company’s plan to pick up ACS.)

And Compuware is essentially paying the prevailing market valuation (5.5x trailing sales) for an on-demand company in its reach for Gomez. Undeniably, the firm could have found any number of targets available at a sharp discount if it wanted to consolidate a bunch of mainframe software providers. After all, Compuware has some experience with M&A, having inked nearly 40 deals since it went public in 1992. However, we would argue that few of those transactions have been as forward-looking as the addition of Gomez.

What’s next for billionaire Twitter?

-Contact Thomas Rasmussen

At a time when the social networking bubble is quickly deflating, micro-blogging startup Twitter seems to be living in an alternative universe. We are, of course, referring to the much-publicized $1bn valuation the San Francisco-based company received in a recent round of funding. The rich funding dwarfs even the kinds of valuations we saw during the height of the short-lived social networking bubble last year. And it’s pretty difficult to justify Twitter’s valuation based on its financial performance, since the money-burning startup has absolutely no revenue to speak of, nor a clear plan of how to change that. It seems the entire valuation is predicated on the impressive user growth it has experienced over the past year, as well as the charismatic founders’ wild dreams of ‘changing the way the world communicates.’ That’s pretty thin, particularly when compared to LinkedIn’s funding last year at a similar valuation. That round, which was done at a time when the social networking fad was near its peak, nonetheless had some financial results to support it. Reid Hoffman’s startup was profitable on what we understand was about $100m in revenue and a proven and lucrative business model.

The interesting development from this latest funding is that it makes a sale of Twitter less likely, we would argue. This may be fine with the founders, who have drawn in some $150m for the company and will (presumably) look to the public market to repay those investments at some point in the future. But without any revenue to speak of at this point, any offering from Twitter is a long way off. Also, an IPO by Twitter in the future hangs on successful offerings from Facebook and LinkedIn, which are far more likely to go public before Twitter. If both of those social media bellwethers enjoy strong offerings, and Twitter actually starts to make money off its fast-growing base of users, then a multibillion-dollar exit – in the form of an IPO – might not be farfetched. But we should add that there are a lot of ‘ifs’ included in that scenario.

An offering looks all the more likely for Twitter because the field of potential acquirers has gotten significantly slimmer, since not many would-be acquirers have deep-enough pockets to pay for a premium on the startups’ already premium valuation. As we know from Twitter’s own embarrassing leak of some internal documents, Microsoft, Yahoo, Google and Facebook have all shown an interest in the startup at one point or another. But we’re not sure any of those companies would really be ready to do a 10-digit deal for a firm that’s still promising – rather than posting – financial results. Moreover, we wonder if any of the four would-be buyers even need Twitter. Yahoo and Microsoft seem focused on other parts of their business. Meanwhile, Google is hard at work on Google Wave, and Facebook appears to have moved on already with its much-cheaper acquisition of Twitter competitor FriendFeed in August.

Recent high-profile social networking valuations (based on last known valuation event)

Date Company Valuation/exit value Revenue Revenue to value multiple
September 2009 Twitter $1bn $0* N/A
Summer 2009 Facebook $8bn $500m* 16x*
June 2008 LinkedIn $1bn $100m* 10x*
May 2008 Plaxo $150m* (acquisition by Comcast) $10m* 15x*
March 2008 Bebo $850m (acquisition by AOL) $20m* 42.5x*
July 2005 MySpace/Intermix $580m (acquisition by NewsCorp) $90m 6.5x
December 2005 FriendsReunited $208m (acquisition by ITV; divested to Brightsolid in $42m fire sale in August 2009) $20* 10x*

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

The dual-track is back

Brenon Daly

Contact: Brenon Daly

Derailed by the bear market for much of the past two years, the ‘dual-track’ is back. Witness Wednesday’s purchase of Gomez by Compuware. The application performance management vendor got snapped up for $295m after being on file to go public for some 17 months. But as this trade sale indicates, the dual-track is no longer necessarily a path to riches. In fact, Gomez sold for about half the multiple that other dual-track companies garnered in recent deals.

That’s by no means a knock on Gomez, which got a relatively handsome valuation of 5.5 times trailing revenue in its sale to Compuware. Instead, it’s simply a reflection of how much the equity markets have come down. Keep in mind that a buyer looking to take out a company that’s already filed for an IPO effectively has to outbid the public market. Obviously, the lower the indexes, the less an acquirer has to bid; the opposite is also true.

Back when the markets were buoyant, dual-tracking companies could pull off a double-digit multiple if they opted to sell. For instance, EqualLogic sold to Dell in November 2007 for 12x trailing sales, just three months after filing its IPO paperwork. (We would note that the timing of EqualLogic’s sale for $1.4bn in cash was impeccable. The Nasdaq promptly went on a nearly uninterrupted slide for the next 18 months that cut the index in half.) And even when the market was dropping, mobile software provider Danger Inc still got picked up by Microsoft for nearly 9x trailing sales. Danger filed its prospectus in mid-December 2007, just two months before Microsoft snagged the company.

Of course, both of those previous dual-track deals were inked when the Nasdaq was higher than it currently is. And if we compare the valuation that Gomez got with other publicly traded SaaS companies, 5.5x trailing sales for an unprofitable, relatively small on-demand company starts to look pretty enticing. Add to that instant liquidity in the form of cash, rather than locked-up shares, and that’s a bid that most backers would hit every time.

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.

Will Fortinet go shopping after going public?

Brenon Daly

Contact: Brenon Daly, Paul Roberts

Not that Fortinet actually needs more cash to go shopping, but the company will likely substantially fatten its treasury by the end of the year. Officially, the security vendor, which has been generating cash for the past three years, said in its IPO prospectus this week that it plans to raise $100m. However, we suspect the actual amount that it raises could be as much as $200m, a fitting offering for a firm that may well hit the market with a valuation in the neighborhood of $1bn. (Which exchange Fortinet debuts on is still undecided. We can only imagine the fight between the NYSE and the Nasdaq over listing a big-time IPO like Fortinet in such a lean time for new offerings.)

Whatever the amount of money Fortinet ends up raising in the offering, it will have plenty to go shopping. (Not to mention the fact that it will also have freshly minted shares if it wants to do a larger deal.) My colleague Paul Roberts, who heads our security practice, put together a possible shopping list for the company back in April, based on our understanding that Fortinet was a few months away from filing to go public. Roberts discussed a number of possibilities for Fortinet, including network access control and perhaps WAN traffic optimization.

However, he argued that Fortinet would perhaps be best served by making a play for an enterprise security information management (ESIM) provider to make sense of all the information generated by the various offerings. And, as fate would have it, Fortinet already knows one ESIM vendor rather well. Since 2004, the company has been OEMing eIQnetworks’ Network Security Analyzer and reselling it as FortiReporter.

Turning down the trade sale

Brenon Daly

Contact: Brenon Daly

Since the Wall Street crisis erupted last fall, the M&A advice most companies have gotten has been not to sell unless they absolutely have to. That sentiment has quieted overall dealmaking activity, as well as pressured valuations across the board. It turns out that not even promising startups could escape the malaise. Later this afternoon, Tim Miller, our head of financial markets, will present our findings on the status of the AlwaysOn Global 250 to the seventh annual Summit at Stanford University. One key finding about the AO 250 startups: only 12 companies sold in the year since the previous conference, which is just half the number in each of the three previous years. Tech giants that have picked up AO 250 startups since the last conference include CA Inc, Omniture, Nokia and Hewlett-Packard.

While the number of trade sales declined notably for AO 250 companies, there was a significant pickup in the other exit option, an IPO. Three AO 250 companies managed to make it to the public markets over the past year, creating an aggregate market valuation of some $2.5bn. Those offerings came despite talk about the IPO window being closed. Further, all of them are trading above their issue price even though the broader market has been rather inhospitable lately. The Summit at Stanford opens Tuesday and runs through Thursday afternoon. For more details on the conference, see the event page.