A clear return and ‘cloudy’ outlook for Tripwire’s only deal

Contact: Brenon Daly

Exactly a year ago, Tripwire made its first and only acquisition in its 14-year history, picking up the assets of Activeworx. The tiny startup added log management technology to Tripwire, an IT configuration and compliance vendor. The deal itself, which only set Tripwire back about $3m, was a fittingly quiet purchase of a company that had lived a pretty quiet life. On Thursday, Tripwire took that technology to the cloud.

Although Tripwire actually closed its pickup of Activeworx last August, it only began talking about its log management offering, which is based on the acquisition, earlier this year. It also only began selling its log management offering earlier this year. As it was rolling out the offering, we noted that the log management market looked awfully crowded. But so far, Tripwire appears to be getting a solid return on its Activeworx buy. From a standing start, Tripwire’s Log Center business has generated about $2m of license sales in the first two quarters of 2010. (And to be clear, that’s GAAP revenue, as listed in the company’s latest amendment to its S-1 filed with the SEC, not some loosey-goosey figure that has been rounded way up.)

Granted, the Log Center contribution is still a small slice of the $18m in total licenses it has sold over the same period, and an even smaller portion of the $40m it tallied as total first-half 2010 revenue. But for a new product introduction, that’s a strong start out of the gate. And today, Tripwire announced a partnership with Terremark through which the datacenter provider will now be offering Log Center to its clients. The on-demand compliance and security arrangement between the two companies marks the first cloud offering from Tripwire.

Having its inaugural acquisition already producing revenue at a strong clip, we suspect that Tripwire will look to return to the market. The only question in our mind is what corporate structure Tripwire will have when it goes shopping again. Will it remain a privately held company, or will it see through its IPO filing and join the ranks of the Nasdaq-listed companies? Or will it – as we have speculated in the past – get snapped up by a larger vendor? From what we’re hearing now, however, a Tripwire trade sale is looking less likely than earlier in the summer. From our perspective, two of the companies that would head any list of likely buyers for Tripwire (McAfee and Hewlett-Packard) have their own M&A events to sort through right now.

Imagining ‘what if’ on Tripwire

Contact: Brenon Daly

As we were skimming through Tripwire’s recently filed IPO paperwork, we couldn’t help but wonder ‘what if….’ Specifically, we were wondering what the company would be like if it had gone for the other exit and taken the rumored offer from BMC more than three years ago. At the time, Tripwire was only about half the size it is now and nowhere near as profitable. But with the benefit of hindsight, it’s almost certain that Tripwire would have been valued at a much richer multiple in a trade sale during a time when M&A dollars were flowing freely (late 2006-07) than by going public in the current bearish environment.

To be clear, that’s not a knock on Tripwire. As we highlight in our report on the proposed offering, the company has a solid growth story to tell Wall Street: six consecutive years of revenue growth, while generating cash in each of those years. Instead, it’s just a reflection of the dramatic change in the valuation environment over the past three years. Consider this: In March 2008, BMC paid roughly 11 times trailing sales and 9x projected sales for BladeLogic, a valuation that wasn’t at all out of whack for the fast-growing datacenter automation vendor. (It was actually lower than what Hewlett-Packard spent on Opsware, a BladeLogic rival.)

While we have no idea what kind of valuation BMC was kicking around for Tripwire at the time, we have to believe it’s above the multiple we have penciled out for the IT security and compliance vendor in its market debut. Because of the bear market, we figure Tripwire will probably come public at about $300m. If that initial valuation holds more or less accurate, it will value Tripwire at basically 4x trailing sales and 3x projected sales – just one-third the valuation that BladeLogic got in its sale.