Riverbed buys Zeus, but shares go to Hades

Contact: Brenon Daly

Announcing the largest deal in its history, Riverbed Technology said it will hand over $110m in cash for Zeus Technology in an effort to broaden its application performance portfolio. Zeus, which sells software for load balancing and traffic management, generated about $12m in revenue over the last year and is expected to contribute some $20m in sales for the coming year. That means Riverbed is paying nearly 10 times trailing sales for Zeus, and that’s not including a potential $30m earnout for the UK-based startup. (Fellow UK-based firm Arma Partners advised Zeus on the sale.)

In addition to being a rather richly valued purchase, the acquisition of Zeus also effectively doubles the amount that Riverbed has spent, collectively, on M&A in its history. The deal will likely bring Riverbed more deeply into competition with the main application delivery control vendors, including F5 and Citrix.

From our perspective, we might note that it’s a good thing Zeus is taking its payment in cash. Why? Riverbed stock lost nearly a quarter of its value on Wednesday. (The WAN traffic optimization provider reported a bit of softness in sales in Europe for the second quarter.) The decline erased all of Riverbed’s gains for 2011, but the stock is still twice the level it was at this time last year.

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.

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.

Is Riverbed the next Data Domain?

Contact: Brenon Daly

With Data Domain off the market, we did a bit of blue-sky thinking about which company might find itself snapped up in a similar scenario. Our pick? Riverbed Technology. We’re not suggesting that the vendor is in play by any means, but hear us out on this one.

For starters, both Data Domain and Riverbed are fast-growing, single-product companies in markets that are dominated by mature technology vendors that have deep pockets and are hungry for growth. In the case of Data Domain it’s the storage market, while for Riverbed it’s the networking market. (To put some numbers around the differences, consider that Data Domain more than doubled its revenue in 2008, while its acquirer, EMC, saw storage revenue inch up just 10% last year.)

The obvious buyer of Riverbed would be Cisco. That’s so obvious, in fact, that we heard Cisco made at least two overtures to Riverbed before the company went public in September 2006. (However, one source characterized Cisco’s interest more as ‘industrial espionage’ than acquisition negotiations.) So we don’t see Riverbed going to Cisco. Instead, we like Hewlett-Packard as the acquirer of Riverbed.

The two companies have been friendly for years. HP originally had an OEM deal with Riverbed, and later resold the Riverbed product. HP has also integrated the Riverbed Optimization Software into its ProCurve infrastructure. To be clear, we’re not suggesting that there’s anything more than technology talks between the two sides right now. But if HP wanted to bolster ProCurve, picking up Riverbed would do that. Plus, such a deal could help HP stick it to Cisco, which took a swipe at HP earlier this year by jumping into the server market. Maybe HP is interested in countering with a big buy into one of the fastest-growing segments of the networking market.

Are earn-outs cop-outs?

-Contact Thomas Rasmussen and Yulitza Peraza

Despite being derided by some as cop-outs, earn-outs are nonetheless popping up more frequently in deal terms. It used to be that the staggered payments were a way to keep the talent at the acquired company from bailing as soon as the ink was dry on the deal. Now, retention isn’t so much the concern, it’s more valuation. Earn-outs are being used to bridge the increasingly wide gulf between buyer and seller expectations.

So far this year, 18% of deals with an announced value of less than $500m had an earn-out provision, up slightly from 15% for the same period in 2008. However, the additional payments are making up a larger part of potential deal values. The average earn-out amounted to half of the deal value in transactions announced so far this year, compared to just one-third during the same period last year. We would attribute that to the leverage buyers have in the current M&A environment as well as their need to preserve cash.

And, anecdotally, we have been hearing that buyers are using their position to set unrealistic terms (thus avoiding payouts down the road, and preserving more of their cash). Consider the case of Mazu Networks, which sold to Riverbed Technology last month for $25m in cash and a potential $22m earn-out. Combined, the upfront and earn-out payments would have nearly made whole the investors in the Cambridge, Massachusetts-based security company. But a closer look at the terms reveals just how unlikely it is that Mazu and its backers will see much – if any – of that earn-out. The reason? To be paid in full, Mazu will have to more than double its bookings by the end of March next year at a time when the economy is shrinking and even tech stalwarts are struggling to post any revenue growth.

Cisco: not a common-sense shopper

Contact: Brenon Daly

Through both direct and indirect cues, Cisco Systems’ John Chambers has created the impression that he’s about set to start wheeling a shopping cart up and down the Valley, grabbing technology companies with abandon. Folks who anticipate a dramatic return of Cisco to the M&A market have been busy putting together a shopping list for the company. (As has been well reported, the networking giant has plenty of pocket money; it current holds some $29bn of cash, and just raised another $4bn by selling bonds.) Most of the names on the list are ones that have been kicked around for some time.

For instance, fast-growing Riverbed Technology tops the list for some people. Indeed, Chambers approached the WAN traffic optimizer at least twice before the company went public in 2006, according to a source. We understand that talks ended with Riverbed feeling rather disenchanted with the giant. Other speculation centers on Cisco making a large virtualization play, either reaching for Citrix or VMware. The thinking on the latter is that Cisco would actually buy EMC, which sports an enterprise value of $21bn, to get its hands on the virtualization subsidiary. And last year we added another name to the mix, reporting that Cisco may have eyes for security vendor McAfee.

There’s a certain amount of logic to all of the potential acquisition candidates. At the least, speculation about them is defensible since they are all rooted in common sense. The only hook is that Cisco isn’t a ‘common-sense’ shopper. That’s not to say it isn’t an effective acquirer. Cisco very much is a smart shopper, and we’d put its recent record up there with any other tech company. What we mean is that Cisco’s deals are anything but predictable.

For instance, Cisco was selling exclusively to enterprises when it did an about-face nearly six years ago and shelled out $500m in stock for home networking equipment vendor Linksys. And it got further into the home when it followed that up with its largest post-Bubble purchase, the late-2005 acquisition of Scientific-Atlanta for $6.9bn. (Although word of the deal for the set-top box maker leaked out, few people would have initially put the two companies together.) Similarly, WebEx Communications wasn’t on any of the Cisco shortlists that we saw before the company pulled the trigger on its $3.2bn purchase of the Web conferencing vendor. But what do we know? Maybe some folks out there not only called one or two of those deals, but also hit the unlikely trifecta. If so, maybe you could email us to let us know – and while you’re at it, could you pass along some numbers for lottery picks?

Fixed on the market

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.