A bidding war (of sorts) between the virtualization vendors

Contact: Brenon Daly

The tech industry has another bidding war. No, we’re not talking about the parrying over 3PAR or even the private equity shops slugging it out over Phoenix Technologies, a company that had largely been consigned to the corporate ash heap. Instead, we’re talking about the latest M&A moves by the virtuosos of virtualization, Citrix Systems and VMware.

Citrix opened the bidding with one deal earlier this week, putting its chips on virtualization management startup VMLogix. One day later, VMware matched the bid of one acquisition and then raised it another one. In a rare twin billing, VMware said it would be taking home both performance analytics startup Integrien as well as identity and access management vendor TriCipher. VMware’s two deals in a single day (do we call the amalgamated company ‘Trintegrien’?) brings its total number of acquisitions so far this year to five, after just one in all of last year. For its part, Citrix had been out of the market entirely since November 2008 before announcing the VMLogix purchase.

Of the three deals, the one that caught our eye was VMware’s pickup of Integrien. That might have been due to the astronomical multiple the startup garnered. We understand that the company, which was only running at about $2m in revenue, went for about $100m. Of course, looking at this transaction on a revenue multiple largely misses the point. Instead, as my colleague Dennis Callaghan notes in his report on the deal, the move makes VMware a legitimate contender in the IT performance management market and could hurt opportunities for other IT performance management vendors looking to sell into the vast VMware installed base.

The acquisition came just one day after Integrien released a special version of its flagship predictive root cause analysis software for VMware environments, so the two sides clearly knew each other. In fact, we gather that the two sides knew each other so well they negotiated directly, without an outside adviser. The VMware team was led on the Integrien deal by Alex Wang. Meanwhile, on the day’s other transaction, America’s Growth Capital advised TriCipher, while Jason Hurst, who recently joined VMware after a long stint as a software banker at Citigroup, led the buyside effort.

Desktop virtualization could lead to real security deals

Contact: Brenon Daly, Steve Coplan

Despite virtualization sweeping datacenters and now serving as a cornerstone of cloud computing, virtualization security has largely been an afterthought. Few startups focused on this market are generating much revenue, and M&A activity has been muted, both in terms of deal flow and valuations.

For instance, VMware – the kingpin of virtualization, which sits on nearly $3bn in cash and has spent hundreds of millions of dollars on acquisitions in other markets – has made only tiny moves around security. It reached for Blue Lane Technologies in October 2008 for what we believe to be less than $10m. (Blue Lane was one of about 20 initial partners in VMware’s VMsafe, which was introduced in early 2008.) That purchase came almost a year after VMware added hypervisor security vendor Determina for an estimated $15m.

Things may be about to change. My colleague Steve Coplan has written in a new report that the rise of desktop virtualization is likely to make security much more of a central concern. But as he notes, it’s not immediately clear which companies will actually be providing the security – the virtualization vendors, security firms or perhaps even management software providers? He looks at the rationale for all three groups as acquirers, and even lays out a few scenarios in the report.

Microsoft (officially) pals up with Opalis

Contact: Brenon Daly

Two months after we first indicated that Microsoft was interested in Opalis Software, the software giant has indeed acquired the runbook automation (RBA) vendor. No terms were disclosed, but when we talked with sources in mid-October, the price being kicked around was $60m. Opalis was thought to be running at about $10m in revenue. We understand that Cowen Group banked Toronto-based Opalis.

The deal, now that it is official, comes after other fellow RBA startups were snapped up. In March 2007, Opsware (now part of Hewlett-Packard) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. As that wave of consolidation swept through the RBA market, Opalis positioned itself as an independent alternative to the offerings from the system management giants. That said, the vendor had been drawing closer to Microsoft. In late April, the two companies announced a joint technology agreement that saw, among other things, Opalis integrated into Microsoft’s System Center Operations Manager 2007 and System Center Virtual Machine Manager 2008 consoles.

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.

EMC and advisors: All or nothing

Contact: Brenon Daly

After EMC doled out no fewer than nine credits to different banks for working on its acquisition of Data Domain, we were curious how the deal credits would flow around the largest-ever purchase by EMC subsidiary VMware. (The unusually long list of advisers for EMC on Data Domain made us think – of all things – about the quip about compensation under some communist regimes: People pretended to work and the government pretended to pay them.) As it turns out, EMC/VMware swung to the other extreme, with not a single bank working for the virtualization giant in its purchase of SpringSource.

That’s not unusual, since VMware hadn’t really used bankers in the dozen or so acquisitions that it had inked before SpringSource. But those deals were mostly small. In fact, the cumulative spending for all of its earlier buys totals only about half of the $420m in cash and stock that VMware is set to hand over for SpringSource. By our tally, VMware’s pending purchase is the third-largest pickup of a VC-backed tech firm so far this year. Not that the print will show up for any bank. SpringSource didn’t use an adviser, either.

Another security buy for VMware?

Although the knickknacks have long since been packed up from VMworld earlier this month, one rumor continues to make the rounds. Several sources have indicated that VMware, the host of VMworld in Las Vegas, has acquired startup Blue Lane Technologies for about $15m. The two companies have been technology partners for more than a year, with Blue Lane’s VirtualShield integrated with VMware’s VirtualCenter.

Security and virtualization in general have been major concerns for VMware. To help shore up the hypervisor and broader virtual environment, VMware in March introduced VMsafe, a set of APIs that third-party security vendors can use to write interoperable programs. Blue Lane was one of about 20 initial partners in VMsafe, as were the security industry’s heavyweights.

If indeed Blue Lane has been acquired (as one industry source and two financial sources reveal is the case), then it marks the end of a company that got its start more than six years ago. When we initially checked in with the vendor shortly after it rolled out its first product three years ago, the Cupertino, California-based company was shipping a patch management appliance. Along the way, it received some $18.4m in two rounds of funding. Remaining startups that are focusing on securing virtual networks include Catbird Networks and Reflex Security.

Selected VMware acquisitions

Date Target Price Rationale
June 2006 Akimbi $47.3m Testing and configuration
August 2007 Determina $15m* Hypervisor security
September 2007 Dunes Technologies $45* Workflow and orchestration
January 2008 Thinstall Not disclosed Application virtualization

Source: The 451 M&A KnowledgeBase *Estimated deal value

Citrix sits out

Since announcing its landmark acquisition of XenSource a little more than a year ago, Citrix has largely taken itself out of the M&A market. And don’t expect that to change anytime soon. CFO David Henshall told the Deutsche Bank Technology Conference earlier this week that the company ‘has its hands full’ with working out its virtualization strategy, which it grandly refers to as a datacenter-to-desktop offering. (That strategy largely reflects the fact that VMware, with an estimated 85% of the server virtualization market, isn’t as vulnerable as Citrix initially thought, at least around ESX.)

While Citrix has inked three deals since XenSource, the acquisitions have been quiet technology purchases. For instance, in January Citrix snagged a product line from FullArmor, a self-funded business process orchestration tool vendor, and in May it added Sepago, a 30-person company that only launched a product a year ago after a few years as a consulting shop.

Instead of spending on M&A, Citrix’s Henshall indicated that the company will continue to put much of the cash it generates ($75-100m each quarter) toward buybacks. If nothing else, Citrix has been getting a relative bargain in the buyback. After two straight earnings warnings earlier this summer, shares sank to their lowest level in almost three years. Around that same time, perhaps not coincidentally, rumors began to surface that Cisco or IBM might be shopping Citrix. If Citrix does get acquired, we still think the deal will flow through Redmond, with Microsoft to reach for its longtime partner to shore up its own virtualization offering.

Citrix deal flow

Year Deal volume Deal value
2008 2 Not disclosed
2007 5 $500m
2006 3 $117m
2005 2 $338m

Source: The 451 M&A KnowledgeBase

Buying and building at Google

Since the beginning of 2007, Google has spent nearly $3.5bn on research and development. The freewheeling company, which makes liberal use of the ‘beta’ tag for many of the in-house projects it rolls out, often goes to great pains to present a corporate portrait of uninhibited engineers running wild on their whiteboards, coming up with the next Great Idea. (All the while, founders Sergey and Larry benevolently look on.)

With all the building going on at Google, it’s easy to lose sight of the fact that the company is also buying. In fact, since the beginning of 2007, Google has averaged about a deal a month. That’s about the same acquisition pace as both Cisco and Oracle over the last 18 months, although the sizes of the deals – and the rationale – are very different. Google, for instance, has never purchased a public company.

Instead of the consolidation plays inked by other large vendors, Google tends to pick up small bits of technology or even a team of engineers that the company can eventually turn into a product. Sometimes, the acquisitions show up directly in Google products, such as its mid-2005 purchase of Android Inc. At the time, Android was reportedly working on an operating system for mobile phones, which Google officially unveiled last November. Another example is Google’s purchase in November 2006 of iRows, which became the spreadsheet offering in Google Docs.

Other Google purchases show up only as features in more significant offerings. In May 2007, for instance, Google picked up GreenBorder Technologies, a small company with a fitful history and a doubtful commercial outlook, but some solid technology. Specifically, GreenBorder developed a virtualized browser session, which isolated any browser-based security threats from the user’s computer.

However, not much had been seen from this ‘sandbox’ technology over the past year. At least, not until Google rolled out its new Chrome browser on September 1. One of the key selling points of the would-be killer of Internet Explorer: security. According to Google, Chrome prevents malware from installing itself on a computer through a browser as well as by blocking one tab from infecting another tab. In our opinion, it won’t take many people switching to Chrome to justify the $20m-30m we estimate Google spent on GreenBorder for that acquisition to pay off.

Google deal flow

Year Deal volume
YTD 2008 3
2007 15
2006 11
2005 6
2004 3

Source: The 451 M&A KnowledgeBase

M&A for HR

Last February, EMC made the curious purchase of a tiny Seattle-based information management startup, Pi Corp, which had yet to release a product. We scratched our heads over the acquisition, in no small part because the release announcing the deal spent as much time talking about Pi’s leader Paul Maritz as it did about the company itself. That shopping trip in Microsoft’s neighborhood makes a lot more sense now that we know Maritz is taking over at VMware. Call it M&A for HR.

A 14-year veteran of Microsoft, Maritz is replacing Diane Greene, the founder and undisputed queen of VMware. (A person who worked under Greene but moved on to another virtualization company recalled recently that she had a say in essentially every aspect of the firm, down to picking out the door handles at its headquarters.) An engineer, Greene built one of the fastest-growing software companies. Just nine short years after its founding, VMware was able to push revenue to more than $1bn, finishing 2007 at $1.3bn.

Greene managed that tremendous growth despite an often tense relationship between VMware and its parent EMC. About the only knock on Greene’s leadership was her decision to sell VMware to EMC for $625m – a transaction that allowed EMC to reap billions of dollars of value creation at VMware, while essentially leaving the latter to operate on its own. Maritz is now charged with navigating that relationship, as well as parrying ever-sharper competitive threats, principally from his old employer and its release of Hyper-V. In terms of compensation, we can only hope Maritz didn’t load up his contract with VMware options. Otherwise, the new CEO may well find himself underwater during his time in the corner office. VMware shares sunk to their lowest-ever level in midafternoon trading Tuesday, plummeting 27% to $38.75.