Category: investment banking

A mixed picture for tech M&A in August

Brenon Daly

Contact: Brenon Daly

The value of tech M&A around the globe in August ticked higher by about one-quarter over the same month last summer, the fourth consecutive increase in year-over-year monthly spending. However, the slump in the number of deals continued in August. We have yet to see a single month in 2013 with more transactions announced than in the comparable month of 2012, leaving total deal flow down about 17% so far this year.

We tallied 260 acquisitions with an aggregate value of $13.2bn this month. (That compares with 285 deals worth $10.6bn in the same month last year.) August’s significant transactions included the largest purchases by Chinese search engine Baidu ($1.85bn for 91 Wireless Websoft) and the reconstituted AOL ($465m for Adap.tv). IBM also paid one of its highest-ever M&A multiples in its reach for Trusteer. (Subscribers to The 451 M&A KnowledgeBase can see our estimated terms for this transaction.)

The split picture in the M&A market mirrors the recent crosscurrents in the equity markets, which influence one another. All of the major US stock indexes declined in August, but are still higher by a mid-teens percentage since the beginning of the year. We would note that a number of previously active tech buyers that haven’t necessarily participated in the stock market’s double-digit percentage rally have been much less active shoppers so far this year. Oracle, VMware and BlackBerry are all examples of that.

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How will Violin play on Wall Street?

Brenon Daly

Contact: Brenon Daly Tim Stammers

In what would be the first IPO from the storage sector in two years, Violin Memory’s prospectus is out for all the world to see. (We indicated last week that the S1 was on its way.) What people are mostly seeing in the paperwork, however, is red ink – and lots of it.

As we wrote in our full report on the all-flash array (AFA) vendor, its filing and what it has to look forward to as a public company, Violin’s offering won’t appeal to everyone on Wall Street: It’s a relatively immature company, spending money at an unsustainable rate in a market that today represents only a tiny fraction of overall storage spending but is getting more competitive every day.

If we wanted to translate that into some actual numbers, we might offer this summary from the prospectus: Each quarter, Violin has been losing anywhere from $20m to as much as $35m to bring in $20-25m in revenue. (Altogether, Violin has run up an accumulated deficit of more than $250m since incorporating in 2005.)

The main reason for the deep losses at Violin is the fact that its product is expensive to make. (Gross margins run only in the low-40% range.) Once those costs are subtracted, there’s very little left over for operating costs. Yet that hasn’t slowed Violin’s spending on R&D or sales/marketing. For the past year, quarterly operational spending at Violin has run three times higher than its gross income.

While certainly staining the P&L sheet a blood red, Violin’s lavish spending has nonetheless helped establish it as the leader in the nascent AFA market. Storage professionals at major enterprises have tapped Violin as the most exciting privately held storage vendor, according to recent interviews by TheInfoPro, a service of 451 Research. Further, Violin has succeeded in converting that into sales momentum, with recent growth rates of about 70%. For more on Violin and the offering, see our full report.

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Nuance’s not-so-nuanced response to Icahn

Brenon Daly

Contact: Brenon Daly

Even though Nuance Communications is a company that does a lot of buying, the serial shopper has made it clear that it doesn’t want to be on the other side of a transaction. The speech recognition vendor, which has spent more than $1bn on a dozen deals over the past two years, announced earlier this week that it would be putting a ‘shareholder rights plan’ in place by the end of the month. The defensive measure (also known as a ‘poison pill’) effectively scotches any unwanted M&A approaches.

In other words, exactly the type of unwanted approach the company is likely to get from its largest shareholder, who has a history of making unwanted M&A approaches to tech companies. Carl Ichan has steadily snapped up Nuance stock. His stake, according to the most recent SEC filing, is now a mountainous 51 million shares, or 16% of the company.

With Icahn unlikely to play the role of spoiler in the planned Dell LBO, we suspect that he’ll have more time to spend on his other activist investments very soon. Probably on the top of his hit list is Nuance, as the company has already put up subpar numbers in two quarters this year. Nuance stock is down about 15% in 2013.

Unlike Ichan’s earlier stirrings against BEA Systems or Lawson Software, however, there isn’t an obvious single acquirer for Nuance. The reason stems largely from the fact that the Burlington, Massachusetts-based company has four separate business units. (Collectively, those divisions should produce about $1.7bn in annual sales when Nuance wraps its fiscal year at the end of next month.)

Instead, we could imagine that Icahn might push for a breakup of Nuance, arguing that the value of the individual units – on their own – is higher than the current $7.4bn enterprise value of the company. After all, Icahn has experience in that sort of agitation too, having helped spur a breakup of tech giant Motorola at the beginning of 2011.

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Violin set to play on the big stage, with IPO imminent

Brenon Daly

-by Brenon Daly

After a fitful past few quarters, Violin Memory is ready to play on the big stage. The all-flash array provider is set to reveal its IPO paperwork later this week, according to sources. Our understanding is that the offering itself will take place in about a month, with Violin likely to be valued at just under $1bn at debut. Assuming it does go public, Violin would be the first significant enterprise storage IPO in two years.

The initial valuation is a bit lower than the $1.5bn we penciled out for Violin last October when we first reported that the company was set for an IPO. Two factors are weighing on that – one inside the company and one outside. In terms of macro-level influences, there’s been a recent trend toward conservative pricing for IPOs, at least at debut, as uncertainty and volatility has increased on Wall Street.

Still, fast-growing companies have traded substantially higher in the aftermarket, and we would expect Violin to follow suit. The reason? Violin’s torrid growth rate. According to our understanding, Violin is tracking to increase sales about 80% in the current fiscal year, ending next January. We gather that Violin put up roughly $75m in sales in the previous fiscal year, and is projecting about $135m for its current fiscal year.

The heady growth hasn’t come without a stumble or two. Several sources have indicated that the company’s sales in the second half of last year came in much lighter than expected, in part because Hewlett-Packard stopped reselling Violin. But at least some of the lumpiness that Violin had been experiencing has been smoothed by new sales arrangements and new products.

For instance, my colleague Tim Stammers recently wrote an in-depth look at Violin’s partnership with Toshiba, which is also an investor in Violin, to start selling PCIe flash cards . Although the expansion into what’s likely to be a commodity market doesn’t alleviate all of the concerns around the inherent lumpiness of Violin’s big-ticket arrays, it does at least add a new revenue stream.

And in terms of its core product, Violin does have the advantage that it has created a fair amount of buzz with the audience that matters. A recent survey by TheInfoPro, a service of 451 Research, interviewed more than 260 storage professionals at major enterprises and asked them to name which vendor they found ‘exciting.’ Violin came in as the top-ranked privately held storage company, with twice the mentions of other high-flying startups such as Nimble Storage and Pure Storage.

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Welsh Carson cleans up cap table for IPO-bound Alert Logic

Brenon Daly

Contact: Brenon Daly

In its first major move into IT security, buyout firm Welsh, Carson, Anderson & Stowe has acquired a majority stake in SaaS security vendor Alert Logic. The deal substantially cleans up the capital table at 11-year-old Alert Logic, which has drawn backing from six firms since its series A in 2005, including at least two shops that are designated as early-stage investors. As is typical for these late-stage growth investments by private equity (PE) firms, we would expect the next major capital event for Alert Logic to be an IPO.

Closer at hand, having a single, deep-pocketed owner should help Alert Logic take on its next opportunity for growth: international expansion. Currently only about 230, or 10%, of Alert Logic’s total customers are outside its home US market. The Houston-based company doesn’t have any direct sales outside the US.

International expansion for cloud-based companies like Alert Logic can be expensive because not only do they have to hire sales and marketing staff, they may also have to open in-country datacenters, depending on data residency laws. With $20bn in total capital, Welsh Carson can write those checks. (While Welsh Carson doesn’t currently hold any information security vendors in its portfolio, we would note that the PE firm is well-versed in the service-provider market, where Alert Logic does the majority of its business. The PE shop has put money into both Savvis and Peak 10.)

Alert Logic’s streamlined ownership also should help smooth the way for an IPO, although an offering may not come until 2015. The company finished 2012 with GAAP revenue of $30m and will likely bump that to nearly $45m in 2013. Assuming that growth rate roughly holds, Alert Logic could do $60-65m in sales in 2014. (Keep in mind, too, that Alert Logic is a subscription business, so revenue lags bookings.)

The two most-recent SaaS security providers to debut (Proofpoint and Qualys) both went public when their quarterly sales hit approximately $25m. (Proofpoint went public in April 2012, while Qualys followed suit last September. The two companies have market caps of $1bn and $600m, respectively.) However, we would note that although Alert Logic is smaller, it is growing twice as fast as Qualys and about half again as fast Proofpoint. Alert Logic has been clipping along at a 40-45% growth rate, compared with 20% at Qualys and 30% at Proofpoint.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Zillow takes a big bite of the Big Apple, acquires StreetEasy

Brenon Daly

Contact: Brenon Daly

Looking to expand its offering in one of the most competitive real estate markets in the US, Zillow pays $50m in cash for New York City-focused StreetEasy. The deal, which should close this month or next, will be part of the company’s Marketplace portfolio, which generates about two-thirds of total revenue at Zillow. (The remaining revenue comes from display advertising and mortgage offerings, two businesses where Zillow has also used tuck-in acquisitions.)

Founded in 2006, StreetEasy provides both rental and for-sale listings in the New York City area. The company draws nearly 1.2 million unique visitors each month. (For comparison, Zillow attracted more than 61 million users in July, up from 37 million in July 2012.) StreetEasy is the largest of Zillow’s seven acquisitions, which have all come in the past two and a half years, according to The 451 M&A KnowledgeBase.

Fitting for a company that is growing at about 60%, Zillow recently told Wall Street that it will be increasingly reinvesting in its business. In the second quarter, Zillow lowered its EBITDA projection for the rest of the year, while bumping up its revenue forecast. (It now sees about $185m in sales for 2013, compared to a market capitalization of $3bn.)

Although Zillow holds roughly $170m in cash and short-term investments, the company also announced plans to sell 2.5 million new Class A shares. (Additionally, private equity firm Technology Crossover Ventures and company insiders have registered to sell another 2.5 million shares.) At current market prices, the secondary would add some $215m to Zillow’s treasury. Zillow priced its IPO at $20 per share in mid-2011, sold additional shares last September at about $40 each, and now trades at more than $80 each.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

IBM puts its antifraud faith in Trusteer

Contact: Tejas Venkatesh

In its first security deal in two years, IBM reaches for financial antifraud and endpoint integrity software provider Trusteer. According to The 451 M&A KnowledgeBase, this is the highest-valued (on a price/sales basis) security acquisition for IBM, and should help further its already strong presence in the financial services vertical.

Terms of the transaction were not disclosed, but our sources corroborated the reported $800-1bn price range that IBM paid for the seven-year-old company. Using the midpoint of that range and our own verified revenue estimates gives the target a valuation far north of any of Big Blue’s other security deals. (Subscribers to the KnowledgeBase can view our estimates, including last year’s, trailing 12-month and projected revenue, here.)

Trusteer is known for providing lightweight fraud-prevention technology that scales en masse and provides an unobtrusive user experience. Having made its mark in the banking sector for end users, Trusteer recently launched an enterprise product in its foray into that market. From Trusteer’s perspective, having IBM as a parent will further accelerate its product’s adoption in the enterprise segment.

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Millennial Media acquires Jumptap to consolidate mobile advertising

Contact: Tejas Venkatesh

In its largest acquisition by far, Millennial Media has announced the purchase of fellow mobile advertising firm Jumptap. Millennial will hand over 24.6 million of its shares and $12m in cash to Jumptap, valuing the target at $221m based on Millennial’s stock price close on Tuesday. The deal brings together the advertising networks of the two companies, which will now combine to form a larger network of ad properties to compete against Google.

Jumptap generated sales of $63.6m in 2012, including $10.5m from its telecom portal business, which it will shutter. Excluding that legacy business, Millennial is valuing Jumptap at 4.2x last year’s sales. For comparison, Millennial garners a valuation of 3.5x trailing sales on the public markets. On the other side, the transaction is a ho-hum exit for Jumptap’s investors – General Catalyst Partners, Redpoint Ventures and other firms – which collectively funneled roughly $120m into the nine-year-old company.

The deal comes even as Millennial reported a second-quarter earnings loss after the bell yesterday. The company also fell short of analyst expectations for its top line, reporting $57m in revenue versus the consensus estimate of $59m. As a result of the acquisition and its earnings report, Millennial’s stock plummeted more than 17% in early trading today. By midmorning, shares were changing hands at $7 per share, roughly half its IPO price of $13 in its March 2012 debut.

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Bezos and The Post: Lessons from media’s M&A history?

Contact: Tim Miller

When Amazon founder Jeff Bezos acquired The Washington Post, he commented that he was entering into ‘uncharted terrain’ that would require ‘experimentation’ in taking on an old-media company that has seen its operating revenue decline more than 40% over the past six years. If part of Bezos’ experimentation includes M&A, he may actually be entering fairly well-charted terrain – to the tune of about 750 transactions and $42bn in spending. That’s what traditional media and entertainment companies have totted up in buying technology, Internet or digital media companies since 2002. Two-thirds of those acquisitions have, not surprisingly, been in the broadly defined Internet content and commerce category, with news itself the most popular of the 20-odd sub-segments we track in that sector, accounting for 80 deals and nearly $3bn in spending during the period.

What we used to call ‘bricks to clicks’ M&A by media companies is actually on the increase in the most recent six years compared with the post-dot-com period of 2002-2007. With a few months still to go in the six years ending this December, we have already seen an increase of 25 in total number of deals over the prior six-year period. That said, total spending has decreased almost 70% to about $10bn in the most recent period, suggesting that fewer big – or wild – bets are being made.

A look at the list of largest transactions by news-oriented companies provides some sobering ‘charting’ of the historical terrain. For example, six years after its $580m purchase of MySpace in 2005, News Corp unwound the limping property for a reported $35m. And seven years after paying $410M, or 10x revenue, for consumer content site About.com, also in 2005, The New York Times Company sold it off to Ask.com for $300m, or roughly 3x revenue.

The data may suggest at least one other clue as to where Bezos should – or should not – focus his experimentation. One of the biggest increases in M&A activity by media companies in the past six years has come in the ‘analysis and reference’ sub-category, whose content businesses typically rely on subscriptions or per-use fees rather than on the advertising-based models that so many media companies have struggled to make successful.

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A solid offering from Cvent

Contact: Tejas Venkatesh

At first glance, event management software may seem like a niche business idea. But Wall Street gave Cvent a stellar reception on its first day as a public company today. The event management startup leaped onto the public markets, raising $118m. The company first priced its shares above range at $21 per share and traded up more than 60% from there. By midmorning, the stock changed hands at $34 per share, valuing the company at $1.3bn.

Cvent has put up impressive topline growth, while running solidly in the black. The startup has grown its revenue from $26m in 2008 to $84m in 2012, representing a CAGR of 35%. Cvent claims to be continuously cash-flow positive for the past eight years and estimates its total addressable market to be roughly $7bn.

In the 12 months ending March 31, the company generated $90m in sales. That means the market is valuing Cvent at 14.5x trailing sales. For comparison, we could look to Concur Technologies. The travel and expense management software vendor, which operates in a fairly compartmentalized part of the market like Cvent, currently garners a valuation of 11x trailing sales. Cvent’s premium valuation could be attributed to its higher growth clip compared with Concur, which grew 26% last year.

Cvent trades on the Nasdaq under the ticker symbol CVT. Morgan Stanley and Goldman Sachs were lead bookrunners for the IPO.

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