Any deals to be done in open source content management market?

Contact: Brenon Daly, Kathleen Reidy

Following a massive wave of consolidation that swept through the enterprise content management (ECM) market, the list of significant vendors has basically narrowed to a handful of tech giants. Essentially, it’s just one stand-alone ECM provider with other software companies offering ECM as part of their broader portfolio. All of them have done deals to expand their ECM business, with the collective bill for acquisitions across the sector topping more than $12bn since 2002.

However, all of that activity has been done by – and for – proprietary software firms. In a recent report, my colleague Kathleen Reidy analyzes how M&A might play out for open source content management startups. Granted, the market is still young, with many of the startups still bootstrapped. (Reidy looks at a dozen potential open source content management targets, including their funding and their focus.)

So which startup might be the first to go? We speculate that Alfresco Software could eventually find itself inside a larger company. However, it probably won’t be the company we initially thought it would be. Adobe and Alfresco have a tight relationship, with Adobe embedding an Alfresco repository in its LiveCycle for content services like workflow, indexing and version control. But with Adobe reaching across the Atlantic for Day Software, it probably has all the Web content management technology it needs.

Red Hat rumors: a reheat or something more?

Contact: Brenon Daly

When VMware reached for SpringSource earlier this month, the $420m pairing represented the largest open source transaction in a year and a half. Now, the market is buzzing with rumors about another blockbuster open source deal, one that would be more than 10 times the size of VMware-SpringSource. Several sources have indicated that interest in Red Hat has been heating up lately, with Oracle and IBM popping up again as suitors.

The rumors, of course, are nothing new. We have been speculating about a possible pairing between Red Hat and IBM or Oracle for almost three years. (When Oracle launched its own support of Linux back in 2006, we wondered if it wasn’t a ‘beat ’em down and take ’em out’ strategy from the coldhearted Larry Ellison.) And when the rumblings surfaced again earlier this year, we did some back-of-the-envelope thinking about a bid from Oracle. Honestly, though, we think Big Blue is a more likely buyer for Red Hat.

While the speculation stays largely the same, however, there is one change: the price of Red Hat keeps going up. Since we noted the latest reports of Oracle’s interest in late March, shares of Red Hat have tacked on about one-quarter in value. The company currently sports a market capitalization of $4.2bn; however, its cash holdings lower the effective purchase price to about $3.5bn. Red Hat is just now wrapping its fiscal second quarter, and has already said it expects revenue to be about $179m for the period. The vendor will likely report results in about a month.

VMware: a ‘table-clearing’ bid for the clouds

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.

Sparxent bullish on M&A

-by Thomas Rasmussen, Jay Lyman

As indicated in the results of our recent corporate development survey, companies once again have an M&A appetite. Some firms even need a second helping of deals. That’s the case with Salt Lake City, Utah-based Sparxent. The IT services vendor wrapped up three acquisitions recently and says it is hungry for more.

In terms of the deals it has closed, Sparxent picked up Russian firm Arbyte Group – along with its Rikkon subsidiary – at a steep discount. We estimate that the company paid just south of $20m, which amounts to a valuation of roughly 0.5x trailing 12-month revenue. This is in addition to its purchase of XAware in May, which we estimate cost Sparxent about $7m, and its pickup of NetworkD last August. According to our understanding, Sparxent is currently generating approximately $70m in pro forma revenue and intends to double that by next year, primarily through M&A. The company tells us that it is currently running a process on a half-dozen or so deals, one of which could well be announced later this week. What vendor might Sparxent be reaching for?

Top among potential targets, based on the fact that both Sparxent and XAware had board membership and investment from vSpring Capital, is another vendor in the venture firm’s portfolio: Penguin Computing. Penguin, which is reaching out to a larger business market with its high-performance computing software and services, fits Sparxent’s preference for open-source-based software combined with commercial licensing. Another vSpring-funded company that may be a target is Infusionsoft, which is focused on automated sales and marketing software for the SMB and midmarket, where Sparxent is aiming to expand. Additional possibilities include PS’Soft with its IT asset and services management software and Sybrant Technologies, an application and product development services firm catering to midsize customers that includes open source in its offerings.

Intalio gets its rollup rolling

Contact: Dennis Callaghan

Intalio’s open source rollup has finally started to roll. The company recently took the wraps off a deal it actually did earlier this month, picking up open source CRM software vendor CodeGlide. The acquirer, which has raised some $45m in venture funding, said earlier this year that it planned to do as many as 10 acquisitions over the next two years. (Intalio indicated that it was eyeing small firms with only a dozen or so employees. For its part, CodeGlide had only four employees, all of whom have gone over to Intalio.)

Intalio has wasted little time in making CodeGlide’s software available as Intalio CRM and it plans to eventually make components of this software available under the AGPL open source license. While we can think of more exciting markets than CRM that Intalio could have bought its way into, the deal nonetheless makes a lot of sense, particularly when viewed in light of its Intalio Cloud offering.

In the same breath that it announced the CodeGlide acquisition, Intalio unveiled Intalio Cloud, which is an IBM or Hewlett-Packard server appliance preloaded with Intalio’s applications – both business process management (BPM) and CRM – along with elastic compute and storage utilities. The box is designed to be the basis for companies’ internal private clouds and is available as a managed service offering. It also powers Intalio’s own on-demand wares. So why does this all make sense?

Combine CRM, BPM and cloud infrastructure and you have the main ingredients for becoming a true platform-as-a-service (PaaS) vendor. Intalio will be able to make both its BPM software and new CRM software available on demand and now has the technology to allow customers to build and/or customize their own business applications; it can offer this technology in the cloud or via private clouds. Successful PaaS initiatives – think LongJump and – require not only good development tools but also an actual application platform that underlies these tools, which are then used for building customizations, mashups and process applications on top of the platform. Less-successful PaaS offerings like those from Coghead, whose technology was built on Intalio’s software, were separate from an underlying application platform and found it harder to deliver on their promise (at least until Coghead was acquired by SAP).

It may take Intalio a few months to deliver on its PaaS vision, but the company is starting to get the right tools in place. What’s next on its shopping list? We would guess a mashup vendor.

Back-of-the-envelope thinking on Red Hat-Oracle

Contact: Brenon Daly

If Oracle was seriously planning a bid for Red Hat (and we have our doubts about such a pairing), then Larry Ellison had better be prepared to reach deeper into his pocket. Following Red Hat’s solid fiscal fourth-quarter report, shares of the Linux giant jumped 17% to $17.60 on Thursday. That added about a half-billion dollars to Red Hat’s price tag, with the company now sporting a fully diluted equity value of some $3.5bn.

Looking back at the nine US public companies that Oracle has acquired this decade, we would note that Oracle has paid an average premium of 14% above the previous day’s closing price at the target company. (Note: We excluded the two-year-long saga around PeopleSoft.) If we apply that premium, which we acknowledge is crudely calculated, to Red Hat, the company’s equity value swells to $4bn, or about $21 per share. That’s essentially where Red Hat shares changed hands in August, before Wall Street imploded.

On the other side of the table, Red Hat recently cleaned up its balance sheet, which certainly makes it a more palatable target. (Again, we don’t think the company is in play, much less took the steps to catch Oracle’s eye. More so, that it was just good fiscal practice.) Specifically, Red Hat paid off all of its debt and finished its fiscal year, which ended last month, with $663m in cash and short-term investments. That would be a nice ‘rebate’ for any potential buyer, in the unlikely event that Ellison or anyone else reaches for Red Hat.

Oracle M&A: real and rumored

Contact: Brenon Daly

Since 2005, Oracle has notched an average of about an acquisition per month each year. Generally speaking, the deals can be sorted into three main buckets: broad horizontal technology purchases, small technology tuck-ins and equally small purchases of companies selling applications for specific industries. Fittingly for a busy buyer, Oracle has one of each of those types of transactions either done or ready to get done. At least, those are the rumors.

First, let’s start with an acquisition that Oracle has announced. On Monday, the vendor said it will pay an undisclosed amount for Relsys, a 22-year-old company that makes safety and risk management software for the pharmaceutical industry. Oracle’s purchase of the Irvine, California-based company comes after it made similar buys for software vendors that serve specific industries, including telecommunications, insurance, retail, utilities and others.

Turning to the speculative transactions, we heard a month ago from several sources that Oracle was interested in picking up Virtual Iron Software. As an example of a technology acquisition, Virtual Iron would add Xen management capabilities to Oracle, which already has a Xen-based hypervisor. And on a larger scale, the market has been buzzing with talk this week about whether Oracle might be mulling a bid for Red Hat. (The open source giant, which reports earnings after today’s close, has seen its shares double since late November.)

While Oracle has reached for open source vendors in the past (Sleepycat Software and Innobase) and still lacks an OS offering in its portfolio, we have doubts that it would make a play for Red Hat. The main reason: Larry Ellison has maintained that his company does not need to have a Linux distribution of its own since it provides support for Red Hat via its Unbreakable Linux program, which was launched in late 2006.

Select platform acquisitions by Oracle

Date Target Price Market
January 2008 BEA Systems $8.5bn Middleware
May 2007 Agile Software $495m Product lifecycle management
March 2007 Hyperion Solutions $3.3bn Business intelligence
November 2006 Stellent $440m Content management
September 2005 Siebel Systems $5.85bn CRM
December 2004 PeopleSoft $10.46bn ERP

Source: The 451 M&A KnowledgeBase

A (Big) Blue-colored Sun?

Contact: Brenon Daly

Just two days after Cisco took the fight to its longtime allies in the server wars, IBM is now looking to buy some ammunition of its own. Big Blue is reportedly mulling a $6.5bn bid for Sun Microsystems, according to The Wall Street Journal. The deal would be the largest tech transaction (excluding telecom M&A) since Hewlett-Packard jabbed at IBM’s giant services division, paying $13.9bn for EDS last May. If it comes to pass, a pairing of IBM and Sun would also radically change the battle lines in the broader fight to build out datacenters, specifically around server, storage and software offerings.

Take the server market. If the deal goes through, a combined IBM-Sun would dominate the high-end, RISC-based, Unix-based symmetrical multiprocessor server market, leaving HP a distant third. However, one point that might pose a challenge for Big Blue is how long it would want to continue with Sun’s Sparc architecture, a direct clash with its own Power chips and System-p servers. Turning to storage, IBM is probably less excited about Sun’s assets in that market. Sun’s storage business has been languishing in the doldrums for years, despite Sun supporting it with its largest-ever acquisition, its mid-2005 purchase of StorageTek for $4.1bn in cash. Nonetheless, there are probably enough enterprise customers locked into Sun’s high-end, mainframe-centric tape business to interest Big Blue. And in software, IBM and Sun are both committed to open source, although we would add that they have slightly different models for monetizing their investments there.

Of course, there’s a chance that the reported talks may not result in a deal. However, we would note that Sun shares are behaving as if it will go through, soaring nearly 80% in early Wednesday afternoon trading to $8.80. That’s essentially where they were last September. That fact probably won’t be lost on Sun’s largest shareholder, Southeastern Asset Management. The activist investor, which has indicated that it talked with Sun to explore a possible sale of the company, among other steps to ‘maximize shareholder value,’ holds some 20% of Sun stock, according to its most-recent SEC filing.

Architects of the new Web

Since 2004, Amazon and its founder Jeff Bezos (through his personal investment fund Bezos Expeditions) have been banking big on Web services infrastructure companies. This week, participated in a $15m VC investment in San Francisco-based Engine Yard. Founded in 2006, Engine Yard hosts software that enables enterprises to build and manage open source Ruby on Rails applications. The investment also comes on the heels of adopting SnapLogic’s open source data integration framework into its Amazon Elastic Compute Cloud (EC2) service.

In addition, Bezos has been actively investing in the applications that run on top of its service. On Monday, Bezos Expeditions contributed to a $15m round for Social Gaming Network Inc, which distributes games on Facebook and other social networks. The fund also participated in a $15m series C for Twitter in May. That same month, Bezos made another $15m series B for Seattle-based Pelago, which sports the popular mobile social networking app Whrrl, and whose founders Jeff Holden and Darren Erik Vengroff have solid roots in Amazon.

On top of its VC spending spree, Amazon has made eight acquisitions of Web companies since 2004. This rapid expansion has landed the Internet behemoth next to Google in the Web services business. Interestingly, Bezos Expeditions also injected $12.5m in San Francisco-based Wikipedia search startup Powerset last summer, which was picked up by Microsoft two weeks ago for a reported $100m. Incidentally, Powerset is deployed by Amazon’s EC2 service. While looking for ways to catch up to its rivals on the Web, Microsoft might benefit by partnering with, or (we daresay) buying the Web infrastructure Jeff Bezos and company have been so insightful to build.

Lessons from a big Yahoo

Talk about being thrown straight into the shark tank (or more accurately a barracuda tank): John Burris has agreed to step from the board to the CEO spot at Sourcefire. The appointment comes just two weeks after Barracuda Networks made an unsolicited offer for the network security vendor. We noted that the low-ball bid of $7.50 per share from Barracuda – an aggressive company that lives up to its name – will likely set the ‘floor price’ for any sale of Sourcefire. (Since the bared-teeth bid was revealed, Sourcefire’s long-suffering shares have closed above the offer price in every trading session, finishing Wednesday at $7.92. The $0.42 difference equates to about a $10m gulf between what the market says Sourcefire is worth and what Barracuda says the company is worth.)

The fact that Sourcefire – which had been looking for a chief executive replacement since February – stayed in-house to fill the top spot makes us wonder if the company hasn’t resigned itself to a sale. Don’t forget that Sourcefire was supposed to be sold to Check Point Software Technologies more than two years ago – at a higher price than its current valuation, no less. And although we are far from experts in employment contracts, we saw nothing in Burris’ agreement that would make an acquisition of Sourcefire prohibitively expensive. Certainly nothing like the employee severance plan at Yahoo, which is effectively a poison pill.

Indeed, Burris may well look at the tenure of Yahoo’s Jerry Yang during Microsoft’s unsolicited approach to the search engine as a quick executive lesson in how not to handle M&A. On the no-no list: refusing to talk to a suitor, erecting all sorts of obstacles to consolidation and, above all, continuing to insist that you know best in creating value at a company – even when all evidence points to the contrary. “I bleed purple,” Yang said at one point, using Yahoo’s signature color to demonstrate his closeness to the company he helped found. Yang may see it that way, but Carl Icahn and other Yahoo shareholders don’t particularly care. They’re very clear that blood is red, just as money is green. We think Burris – whose connection to Sourcefire only dates back to March and who previously headed up sales at Citrix Systems – won’t suffer a similar case of color blindness.