Webinar: The future of enterprise IT

Contact: Brenon Daly

In this era of disruptive technologies, what does the future hold for enterprise IT? What new innovations are expected to reshape software, networking and even the datacenter itself in the coming year? For a look ahead, join us for a special webinar on Thursday, February 9 at 9:00am PST/12:00pm EST. (Click here to register.) The heads of several practice areas at 451 Research will highlight a number of key trends in their sectors, and what impact that will have on the broader IT landscape.

Topics we will cover in the hour-long webinar include the emergence of truly virtualized infrastructure, the rise of software-defined networks and the trend toward modularity inside the new datacenters. We will also cover some of the financial implications of those trends, both in terms of capital raising and M&A valuations. To join the webinar on Thursday, simply register here.

Will a stabilized Cisco step back into the market?

Contact: Brenon Daly

After back-to-back quarters that roughed up the networking giant, Cisco reported on Wednesday a reasonably strong close to it fiscal year. Fourth-quarter revenue and earnings at the company topped Wall Street’s expectations, and included a rebound in Cisco’s core switch business. The company also projected that its overall growth would continue in the current fiscal first quarter, although the rate would be just 1-4%.

Chief executive John Chambers stopped short of using one of the metaphoric expressions like ‘air pockets’ or ‘uncharted waters’ that he has used in the past to describe economic uncertainty, but he said repeatedly on the conference call discussing results that the economy is facing numerous ‘challenges.’ From our perspective, we wonder if Cisco will get its M&A machine humming again if it continues to stabilize its business.

The company announced a deal in each of the first three months of 2011, but has been notably absent since then. In other words, Cisco has been out of the market since it first let on that business was getting tougher. Will that change now that business appears to be picking up again?

Dual track, but singular outcomes

Contact: Brenon Daly

For the third time in just two months, a tech company that had planned to go public has instead ended up inside a company that’s already public. The latest dual-track sale came Wednesday when Force10 Networks opted to accept a bid from Dell rather than see through its IPO plan. The networking gear vendor had filed its prospectus in March 2010.

The deal follows one month after would-be debutant Apache Design Solutions sold to ANSYS and two months after SiGe Semiconductor went to Skyworks Solutions. Those three transactions probably only generated about $1.2bn in liquidity, including Force10’s reported price of roughly $700m. (As a side note, we might point out that Deutsche Bank Securities was a book runner on all three proposed IPOs.)

As this trio of enterprise-focused startups finds itself snapped out of the IPO pipeline, consumer-oriented companies continue to receive a warm welcome on Wall Street. Consider this: Zillow, which went public earlier this week, now trades at about 20 times trailing revenue. In contrast, Force10, SiGe and Apache Design garnered much more modest valuations ranging roughly from 2-6x trailing revenue in their sales.

Riverbed bolts onto Steelhead

Contact: Brenon Daly

Riverbed Technology just keeps flowing higher. Shares in the company, which hit the Nasdaq four years ago, notched their highest-ever close Wednesday. The market values the WAN traffic optimization (WTO) vendor at a staggering $4.2bn. That works out to some 7.7 times projected 2010 sales of $545m and some 6.2 times next year’s forecasted revenue of some $680m.

The company has garnered that rich valuation by selling its Steelhead appliances, which basically help customers move network traffic more quickly. Through M&A, Riverbed has added some smarts to its boxes. That expansion has been crucial for Riverbed because it is still basically a one-product shop, while its rivals (notably Cisco and Blue Coat Systems, but also Juniper Networks) pitch WTO wares as part of a larger network offering.

Most recently, the company picked up protocol analysis and packet-capture technology with its purchase of CACE Technologies. Although exact terms on the deal – only Riverbed’s second acquisition – weren’t revealed, the company did indicate that it paid less than $20m for CACE, which is perhaps best known for its Wireshark and WinPcap tools. (My colleague Steve Steinke has our full report on the purchase.) The deal comes a year and a half after Riverbed bought Mazu Networks, which added visibility and security technology through the startup’s network behavior anomaly detection offering.

Juniper returns to the M&A table

Contact: Brenon Daly

After almost a half-decade out of the market, Juniper Networks is back buying. The communications equipment vendor announced plans last week to hand over ‘less than $100m’ for Ankeena Networks, its first purchase since picking up Funk Software in November 2005. The company declined to be more specific on the deal value, but at least one source indicated that the price for Ankeena was indeed less than $100m, but not by much.

Whatever its final price, Ankeena undoubtedly got a rich valuation, as it essentially launched a year ago. Sales of the company’s software for serving and managing content delivery were fairly small. Ankeena also undoubtedly delivered a rich return for its three backers: Mayfield Fund, Clearstone Venture Partners and Trinity Ventures. The trio put just $16m into Ankeena.

In the four-and-a-half years that Juniper has been sidelined, its rivals have been busy. Ericsson has inked some 17 deals in that period, including the $2.1bn acquisition of Redback Networks. Meanwhile, Cisco has sealed 39 deals in that time, spending more than $40bn. Most observers would chalk up Juniper’s M&A hiatus, at least in part, to the fact that it came up way short on its biggest gamble, the $4bn all-equity purchase of NetScreen Technologies. (On a smaller scale, Juniper also has precious little to show for its $337m cash-and-stock pickup of Peribit Networks, a WAN traffic optimization vendor that we understand was running at less than $15m in sales.)

Realizing a return on NetScreen was going to be difficult from the outset because Juniper overpaid for the security provider. In a transaction that had more than a few echoes of the Internet Bubble era, Juniper paid 14 times trailing sales and more than 50 times trailing EBITDA for NetScreen. And when it tried to make the deal work, Juniper found itself struggling to integrate NetScreen’s firewall product into its core networking line, and was unable to reconcile NetScreen’s indirect sales model with its own direct model. Maybe buying Ankeena is the clearest sign yet that Juniper, which replaced its longtime CEO in September 2008, has finally closed the NetScreen acquisition and moved on.

HP buys big

Contact: Brenon Daly

Earlier this week, Hewlett-Packard closed its $3.1bn acquisition of 3Com. It was a significant shot at the company’s new rival Cisco Systems, adding additional networking and security products to HP’s ProCurve portfolio while also dramatically increasing its business in Asia (3Com generates roughly half its sales in China). The deal was announced on November 11, and closed on Monday.

What’s interesting is that HP, which was once a fairly steady dealmaker, has been out of the market since that purchase. Its rivals, however, haven’t been on the sidelines. In the five months since HP announced the 3Com buy, IBM has inked five deals, Dell has announced two transactions and Cisco has picked up one company. Of course, some of HP’s inactivity could be chalked up to its efforts to digest 3Com, which stands as the company’s fourth-largest acquisition. (On the other side, Cisco knocked out a pair of $3bn purchases in just two weeks in the month before HP reached for 3Com.)

But we understand from a couple of different sources that although HP is looking to do fewer deals, they will be larger. The shift has actually been taking place for some time at the company. In 2007, like a number of cash-rich tech giants, HP was basically knocking out a purchase each month. That pace slowed to just five deals in 2008, including the landmark acquisition of services giant EDS. Last year, HP bought just two other companies besides 3Com. It looks like the company, which is tracking to more than $120bn in sales this year, has realized that the big get bigger by buying big.

Blue-light special on Brocade

by Brenon Daly

For all of the would-be suitors of Brocade Communications, now is seemingly the time to move on the enterprise networking vendor. The value of the company has been trimmed by about one-quarter this week, meaning that a buyer paying a typical premium would be getting Brocade for the price that it fetched on its own last week. (We understand that valuations aren’t quite that simple – and it probably shortchanges Brocade – but it’s directionally accurate.) The recent problems at Brocade stem largely from the Foundry Networks business that it acquired a little more than a year ago.

With investors lopping off the gains that Brocade had run up over the past 10 months, the company has clearly been marked down. Yet, on the other side of any theoretical deal for Brocade, the demand has probably dipped since M&A speculation was swirling around Brocade last October. The reason? One company that had been mentioned as a possible buyer for Brocade is probably now out of the market.

Hewlett-Packard made a major networking move of its own shortly after most people put it at the top of the list of potential suitors for Brocade. Last November, HP handed over some $3.1bn for 3Com, which means that it doesn’t need Brocade (or more specifically, Foundry) quite as much. Of course, IBM is still a big OEM partner for Brocade, as is Dell. Both of those vendors could still be interested in a major networking acquisition, particularly at a discounted price. Brocade currently sports an enterprise value of $3.1bn.

The market and Meru

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.

Profiting from the battle for the datacenter

Contact: Brenon Daly

Although the battle between Hewlett-Packard and Cisco Systems over outfitting datacenters is still playing out, some winners have already emerged. First and foremost, the shareholders of 3Com have benefitted tremendously from the turf war between the two tech titans. On Wednesday, HP said it is picking up 3Com for $3.1bn, bolstering its ProCurve lineup with 3Com’s switches and routers, which are Cisco’s core products.

Terms call for HP to hand over $7.90 in cash for each share of 3Com. That’s roughly 50% higher than 3Com shares garnered in an unsuccessful buyout two years ago and nearly four times the price of 3Com stock just one year ago. Additionally, it means that anyone who bought shares in 3Com over the past half-decade will be above water on their holdings when the sale to HP closes in the first half of next year. We can’t say that we’ve seen many situations like that in recent transactions. In most cases this year, the sale prices of public companies – particularly those that have faded in recent years, like 3Com – have been below the market prices they fetched back in 2007. And that was before any takeout premium.

But there are other parties that stand to come out ahead in the HP-3Com deal, as well. We have to imagine that the bankers at Goldman Sachs are glad (if not relieved) to have their client, 3Com, looking likely to have finally been sold. Goldman was advising the networking vendor back in 2007 on its proposed sale to Bain Capital and Huawei Technologies, which dragged on for a half-year before being scuttled due to national security concerns. There are success fees and then there are well-earned success fees.

Meanwhile, on the other side of the desk, Morgan Stanley also has reason to celebrate its work with HP. Not only is the pending purchase of 3Com the largest enterprise networking transaction since mid-2007, but the deal continues a strong recent run by Morgan Stanley. This week alone, the bank advised HP on its $3.1bn purchase of 3Com, AdMob on its $750m sale to Google and Logitech on its $405m acquisition of LifeSize Communications. Altogether, that means Morgan Stanley has had a hand in three of the four largest deals this week.

Is Riverbed floating toward a deal?

Contact: Brenon Daly

Riverbed Technology is one of those companies that has seemingly been in play for as long as it’s been around. And that’s understandable enough, given that the company has an attractive profile as the fast-growing leader in a market that’s taking off. Add to that the fact that Riverbed plays in the networking space, which is dominated by deep-pocketed giants hungry for growth, and acquisition rumors are inevitable. The most-recent would-be buyer for Riverbed? Juniper Networks.

Of course, Juniper is just the latest in a long list of rumored suitors. Cisco Systems is said to have made at least two runs at Riverbed before the company went public in September 2006. More recently, we heard that EMC also looked very closely at Riverbed before its IPO. (We understand that while EMC was seriously interested in Riverbed, Cisco effectively killed the deal by telling its partner EMC that it wouldn’t look kindly on the information management giant stepping into the WAN traffic optimization (WTO) market.)

And last summer, we noted that Hewlett-Packard would make a logical buyer for Riverbed. The two companies have had a long relationship with HP reselling Riverbed boxes and integrating the Riverbed Optimization System into its ProCurve infrastructure. (Not to mention that HP could stick it to its new rival Cisco by picking up Riverbed.) And several sources have pointed to talks in the past between F5 and Riverbed. We suspect that would be a tricky combination because Riverbed’s current market capitalization ($1.7bn) is half that of F5’s market value ($3.5bn).

All of that leaves us with Juniper. However, we don’t think a deal between the two is likely. For starters, Juniper has already gone shopping once in the WTO market. It shelled out a princely $337m (most of it in stock) for Peribit Networks in April 2005. From Juniper’s perspective, the Peribit purchase gave the networking vendor a hot product to sell to its enterprise customers, many of which came via Juniper’s $4bn acquisition of NetScreen Technologies a year earlier. However, we wouldn’t hold out Peribit as a particularly successful transaction for Juniper. Certainly, it hasn’t generated the type of returns for Juniper that would make the company want to double down with a multibillion-dollar bid for Riverbed, we would think.