Tag: IPO

A ‘paper’ windfall in LogMeIn IPO

Brenon Daly

Contact: Brenon Daly

One of the investment banks that profited the most from Wednesday’s strong debut of LogMeIn wasn’t even on the prospectus. Instead, it was in the prospectus. McNamee Lawrence, an advisory shop with no underwriting business, realized a tidy little $2m windfall from the IPO.

Heading into the offering, McNamee Lawrence held some 99,000 shares in LogMeIn that it picked up in late 2004 for helping to place the startup’s series A funding round, as well as other advisory work. McNamee Lawrence took a small amount of money off the table, selling some 21,000 shares at the $16 initial pricing of LogMeIn. That netted the bank about $336,000. It still holds some 78,000 shares, which had a paper value of about $1.6m, based on the price of LogMeIn shares on Thursday afternoon.

Granted, the holdings of McNamee Lawrence are only a tiny slice of the overall 21.4 million LogMeIn shares outstanding. And the firm’s stake is a fraction of the major owners of LogMeIn, Prism Venture Partners and Polaris Venture Partners. Prism holds shares worth about $80m, while Polaris, which sold $7.4m worth of shares in the offering, still owns a chunk valued at about $59m.

Still, the shares represent a nice windfall for McNamee Lawrence. (In addition, some of the firm’s partners put money individually into LogMeIn in the company’s seed round in early 2004.) Of course, the practice of taking paper as payment was pretty common across all kinds of service providers back in the Bubble Era, when startups routinely handed out options and warrants to cover bills from banks, lawyers and even landlords. After so many people got burned by taking worthless options and warrants in the early 2000s, however, cash returned as the currency of choice.

Imaging an alternative exit for LogMeIn

Brenon Daly

Contact: Brenon Daly

With LogMeIn set to price its IPO later today, the next ‘buyer’ of the company will be public market investors. The on-demand vendor will sell 6.7 million shares in an offering that’s being led by JPMorgan Chase and Barclays Capital. LogMeIn set an initial range of $14-16 per share, implying a market capitalization of $300m-340m. It will likely price above that range, and we expect strong demand for LogMeIn shares once they start trading under the ticker ‘LOGM’ on the Nasdaq.

As the company gets set to realize that exit (after more than 17 months on file with the US Securities and Exchange Commission), we thought about where it might have looked had it opted for the other possible exit, a trade sale. We’re not suggesting that LogMeIn was dual-tracking by any means. In fact, although it kept its S-1 alive while so many other tech companies pulled their IPO paperwork, that move wasn’t driven by desperation. LogMeIn doesn’t actually need the proceeds. It is heading into the offering with no debt and $27m in cash on its books, having generated cash for the past nine quarters. Even on a GAAP basis, the firm has been profitable for the past three quarters.

Thus, LogMeIn doesn’t need the offering any more than it needs a trade sale. And to be clear, we hadn’t heard that the company was pursuing anything other than an IPO. Nonetheless, as we did some blue-sky thinking, we quickly came up with two deep-pocketed companies that would have been very smart to nab LogMeIn before it went public. Keep in mind, too, that the two primary rivals to LogMeIn are GoToMyPC and WebEx Communications, firms that have been snapped up by tech giants Citrix and Cisco, respectively.

So here’s our hypothetical short list of possible buyers for LogMeIn. Symantec already has several products that compete with LogMeIn (notably, PC Anywhere), but it is a key partner for LogMeIn. And Big Yellow has shown that it is ready to go shopping to bolster its software-as-a-service business. It paid $695m, or almost 5x trailing 12-month sales, for MessageLabs last October, its largest deal in more than a year and a half. Alternatively, Dell knows all about picking up companies just before they go public. It paid a double-digit multiple for its push into storage with the $1.4bn EqualLogic purchase in November 2007. However, Dell has also done a quartet of deals to build out its services offerings, some of which are offered by LogMeIn and others that are complementary. In addition, the customer profiles of the two vendors would synch pretty well, since LogMeIn gets roughly 80% of its revenue from the SMB market.

Is Dell in the market for a GlassHouse?

Brenon Daly

Contact: Brenon Daly, Simon Robinson

After getting its M&A machine revving in the second half of 2007, Dell largely unplugged it after that. It has inked just three deals over the past year and a half, and only one of those has been significant. In February 2008, Dell spent $155m for email-archiving company MessageOne, in a transaction that was a bit of a family affair. The other two buys: a $12m play for a consulting shop and a tiny amount for a Web address to help sell its Adamo line of laptops.

And now, Dell’s efforts to bring in a new executive to do deals for the company have gotten hung up. David Johnson, formerly IBM’s top dealmaker, had been tapped to take over that role at Dell. However, Big Blue sued Johnson, saying the move to Dell would violate the terms of his employment agreement. (Meanwhile, back in Armonk, New York, Cosmo Nista, who had worked corporate development for IBM’s hardware division, has been named acting head of M&A at the company, replacing Johnson, according to one source.)

If Dell is looking to do a deal, our research director for storage, Simon Robinson, has come up with a pretty solid nomination: GlassHouse Technologies. The IT infrastructure services vendor pulled its IPO paperwork in March and recently indicated that it may do some shopping of its own. However, if GlassHouse were to go to the other side of a transaction, it could very well be in a sale to Dell, which is already an investor in GlassHouse as well as being its largest partner. And strategically, the services offered by GlassHouse would fit nicely with Dell’s effort to become a larger supplier of servers and storage to its enterprise customers.

Is the IPO window open again?

Brenon Daly

Contact: Brenon Daly

With SolarWinds debuting on the public market Wednesday and OpenTable set to follow shortly, some observers have suggested these offerings mark a return of the IPO market. While it’s always healthy to have new issues, particularly after months and months without a technology IPO, we think it’s a bit overly optimistic to say either offering will kick off an IPO market like we had even two years ago. Certainly, there will be a handful of companies that make it out the window. But we don’t expect there to be a flood of new offerings.

That’s particularly true if we look at the astonishing numbers put up by SolarWinds. We doubt many other IPO hopefuls were able to generate anywhere near the $6m in net income in the first quarter that the network management software vendor recorded. In fact, we’re fairly certain that some companies thinking about putting in an S-1 won’t even generate as much profit in all of 2009 as SolarWinds did in one of the toughest economic quarters in recent history. Wall Street appears ready to reward the black numbers at SolarWinds. The company priced its offering at $12.50 per share, ahead of the initial range. With some 64.2 million shares outstanding, SolarWinds started life on the NYSE with a valuation of $803m, although it moved up above $900m in early trading Wednesday.

Nonetheless, the rich valuation at SolarWinds (8.6x 2008 sales) may well encourage a few companies to dust off their IPO paperwork and update numbers. One obvious candidate: NetQoS, a fellow Austin, Texas-based networking software company. (We noted last year that the company had done a bit of ‘portfolio round-out’ ahead of what we expected would be an IPO this year.) And Nimsoft is undoubtedly cheering for a warm reception for SolarWinds. Nimsoft offers essentially the same technology as SolarWinds but targets the midmarket, while SolarWinds sells primarily to small businesses. (Nimsoft was in the market earlier this week, picking up assets from Cittio to bolster its network monitoring product.) Since Nimsoft has only about half the revenue of SolarWinds, it’s probably a bit early for the vendor to plan a prospectus. Nonetheless, it’s always helpful to have a strong, richly valued comparable public company when considering an IPO.

One less obvious – but more intriguing – vendor that could be drawn out by a well-received SolarWinds offering is Barracuda Networks. Both firms have the same models of high-volume sales of software to small businesses, and both are currently running at over $100m in annual revenue. Barracuda is tight with its financials, but word is that the company is closer to $150m in sales right now. Even if it doesn’t have the same rich margins that SolarWinds enjoys, Barracuda would almost certainly be worth more than $1bn on the market.

Will OpenTable’s IPO lead to M&A?

-Email Thomas Rasmussen

Just three months after filing its initial IPO paperwork, OpenTable set the terms of its $46m offering last week. At the high point of the $12-14 range for its shares, the company would sport a valuation just shy of $300m, or about 6x trailing 12-month (TTM) revenue and 50x TTM EBITDA. For the past three years, OpenTable has grown revenue at a compound annual rate of about 43%. Despite skepticism about the IPO market and OpenTable’s prospects during a period when its primary customers (restaurants) are struggling, the online restaurant reservations service should debut on the Nasdaq under the ticker ‘OPEN’ in the next week or two. OpenTable’s offering comes as Solarwinds is also slated to go public, after its prospectus aged for more than a year.

OpenTable has not disclosed how it will allocate the funds that it will raise in its offering. However, we believe it might be gearing up to make its first foray into M&A. One indication: the presence of Allen & Co as one of OpenTable’s four underwriters. Sure it had a hand in Google’s IPO, but Allen & Co is certainly known more as a media banker than a tech underwriter. OpenTable’s offering is being led by Merrill Lynch, with ThinkEquity and Stifel Nicolaus also on the ticket.

If OpenTable were to shop, we suspect it could well look to bolster its international operations. Since 2004, the San Francisco-based company has sunk millions of dollars into expanding outside the US, but has little to show for it. Its international business, which is burning money, accounts for just 5% of total sales. (The vendor recently pulled out of Germany and France.) We see a parallel between what OpenTable has run into in its unsuccessful international expansion and the early woes that its rich Web services cousin eBay experienced in trying to translate its business outside of its home market. After struggling to address foreign markets by just expanding its existing online auction service, eBay has been picking up local foreign sites that fit the nuances of business and culture in those markets. Ebay has spent billions of dollars lately buying its way into foreign markets.

Comings and goings on US exchanges

Brenon Daly

Contact: Brenon Daly

The flurry of M&A announcements on Wednesday not only boosted trans-Atlantic shopping totals so far this year by nearly 20%, it also continued the trend of thinning the ranks of US public companies. The pair of Nasdaq-listed firms that got erased on Wednesday (Borland and Vignette) brings the number of acquisition announcements of US public tech companies to some 22 so far this year.

To be clear, that sum is made up of deal announcements, not closed transactions. So it includes offers that have been rejected by the would-be target (Emulex) as well as bids where the terms are still in play (SumTotal Systems). Against that, we have had only a minimal ‘repopulation’ of the US exchanges. Just three tech companies – none of which is a true IT vendor – have gone public this year. That’s about to change with SolarWinds, which is expected to hit the market in a week or two. (And on the consumer Internet side, OpenTable set the terms of its planned IPO on Thursday.)

We would also note that Wednesday’s ‘twofer’ of Borland and Vignette is actually the third time in the past month that two deals for US public companies have been announced in a single day. The other days: April 20, with Oracle-Sun Microsystems and Trilogy-Autobytel, and April 13, with Thoma Bravo’s bid for Entrust and Image Holdings’ reach for InFocus. In terms of banking, JP Morgan Securities did the double Wednesday, advising both Borland and Vignette on their sales to Micro Focus and Open Text, respectively. But the bank is doing its part to add back public companies, leading the SolarWinds offering.

Tough exits for VCs

Brenon Daly

Contact: Brenon Daly, Thomas Rasmussen

After being frozen for more than six months, there were some signs of a thaw this week in the tech IPO market. Chinese game maker Changyou.com enjoyed a strong debut on Thursday, and only inched down slightly in the following session. In addition, language software maker Rosetta Stone set the terms of its planned offering earlier in the week.

While the offerings are encouraging from a capital markets perspective, the same can’t be said for the VC community. The IPOs of Changyou.com and Rosetta Stone won’t mean a payoff for any of the Sand Hill Road crowd. (Changyou.com is a spinoff from online portal Soho, while Rosetta Stone counts a pair of buyout shops as its majority owners.) Of course, VCs have long since given up on betting on IPOs to boost their returns. Most acknowledge that for every portfolio company that does make it onto the public market, nearly 10 startups will get snapped up in a trade sale.

Unfortunately, there’s bad news on the M&A front, as well. My colleague Thomas Rasmussen calculated that the median valuation in the sale of VC-backed companies in the first quarter of 2009 slumped to 2.1x trailing 12-month (TTM) sales, compared to 3.8x TTM sales during the same period last year. Granted, that multiple was about twice as rich as first-quarter sales of non-VC-backed companies. But we would be quick to add that the 2.1x TTM sales multiple essentially matches the level for non-VC-backed startups in the first quarter of 2008. For more on first-quarter valuations and overall deal flow, see our first-quarter M&A report.

IPO window opens a crack

Brenon Daly

Contact: Brenon Daly

It’s been exactly a year since SolarWinds put in its paperwork to go public. In that time, capitalism has been beaten and bloodied. To underscore that, consider that the late-great Lehman Brothers was one of the original underwriters of the proposed offering. Obviously, that bank has been erased – both on prospectus and elsewhere. Morgan Stanley now serves as the other major bulge-bracket underwriter on SolarWinds’ ticket.

As we noted earlier this month, the tech IPO market has had nothing to offer since the debut of Rackspace in the middle of last year. Last week, Omneon Video Networks pulled its planned IPO, two years after initially filing the paperwork. That withdraw came less than two weeks after GlassHouse Technologies also scrapped its planned debut.

But a funny thing happened after we declared the IPO market dead: We began to see some signs of life. Chinese online game developer Changeyou.com is set to hit the Nasdaq next week. We would guess that planned debut has much to do with the rebound in the Nasdaq, where Changeyou.com intends to trade. Since finishing a month-long slide on March 9, the Nasdaq has gained some 17%. The index has risen from below 1,300 (close to where it bottomed out in October 2002, after the tech wreck) to above 1,500 during Monday’s Treasury-inspired rally.

We wonder if SolarWinds, which has already amended its original prospectus six times, won’t also look to take advantage of this slim opening of the IPO window to go public. Of course, we’ve always thought that SolarWinds could go public in just about any market, given the fact that it mints money. Last year, the company continued to run at an EBITDA margin of more than 50%, even as revenue hit $93m, up from just $38m in 2006 and $59m in 2007.

IPOs: nothing to offer

Brenon Daly

Contact: Brenon Daly

Security vendor ArcSight marked its first full year on the public market with an unexpectedly solid fiscal third-quarter report Thursday. (That said, my colleague Nick Selby reads between the lines and sees some potential problems at the company, which now sports a market capitalization of nearly $350m.) Heading into the release, ArcSight shares traded essentially where they did when they hit the market last February, though an after-market rally pushed the stock above $11 for the first time in seven months.

The fact that ArcSight is now above its offer price is nothing short of astounding, given that both the Nasdaq and the Dow have nearly been cut in half since the debut of the security company. (Rackspace, which was the only other VC-backed tech IPO in 2008, has likewise been cut in half since going public last summer.) It’s telling that we have to limit our discussion about the IPO market to after-market performance, rather than new issues. Not to put too fine a point on it, but we all know that the IPO market is dead right now. (As if to reiterate that, GlassHouse Technologies on Thursday pulled its planned $100m offering, which it filed in January 2008.)

And even when the market opens up once again for debutants (and we think that date is a long time off), it will almost certainly provide even fewer exits for VC-backed companies than in the past. Sandy Miller, a general partner at late-stage venture firm Institutional Venture Partners (IVP), recently noted that roughly one-quarter of IVP’s past exits had come through an IPO. (Included in that number is ArcSight; IVP was its second-largest holder before the IPO.) In the future, however, Miller projected that the percentage of portfolio companies exiting to the public market would drop to ‘single digits.’

Interplay between M&A and IPO

Brenon Daly

Contact: Brenon Daly

With the IPO calendar essentially blank right now – and likely to stay that way as long as the Nasdaq keeps lurching downward – companies that are both of size and mind to go public are using the pause to do a little shopping of their own. These transactions tend to be smaller plays, typically rounding out the company’s existing portfolio. (We would contrast these tuck-in deals with the larger consolidation plays that companies make so they can get big enough to paper their S-1. Of course, those deals only work when the public market is receptive. For instance, Convio acquired a rival that was about half its size in hopes of bulking up and going public. It pulled its IPO paperwork last August.)

Last summer, we noted that NetQos inked a small buy on its way to what we expect will be a larger sale of its equity to the public, whenever the market returns (it was the first deal by the network performance management vendor in some two-and-a-half years). In a similar situation, Tangoe last week announced that it was picking up mobile device management startup InterNoded.

The deal, which was Tangoe’s third purchase in less than two years, certainly wasn’t done to boost revenue. InterNoded posted sales of about $4m in 2008; meanwhile, Tangoe is anticipating about $60m in 2009. Tangoe has raised some $20m in VC, along with an undisclosed slug of debt. But the company, which is running in the black, doesn’t appear to have any immediate plans to raise capital (even if that were possible right now). We understand that it hasn’t met with bankers, much less held a bake-off.