Category: investment banking

A big seller, BMC is back as a small buyer

Brenon Daly

Contact: Brenon Daly

As the mammoth $6.9bn take-private of BMC Software nears its close, the IT systems management giant has finally turned from seller to buyer. After almost a year out of the M&A market as it was hammering out the deal with its private equity (PE) backers, BMC has returned as an acquirer, with two small purchases in the past week. (The pending LBO, which stands as the second-largest PE deal since the end of the recent recession, is still tracking to a close either this month or next.)

BMC was previously in the market last September, but now has reportedly acquired a small social collaboration startup in India and formally announced the pickup of Vancouver-based Partnerpedia. In the four years leading up to the take-private, BMC averaged about four acquisitions annually.

Of the two August deals, the addition of the roughly 70-person Partnerpedia is the more significant transaction. As my colleague Chris Hazelton described the pairing: By purchasing Partnerpedia, BMC is able to provide a centralized app store for most major computing platforms – desktop, cloud and mobile. See our full report.

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Where might FireEye be casting its eye for M&A?

Brenon Daly

Contact: Brenon Daly

When business is booming, who has time to shop? We were wondering that as we skimmed the prospectus for FireEye, an ‘advanced threat protection’ vendor that has doubled revenue so far this year. As we noted in our full report on the company’s planned IPO, FireEye has only really had its product out for three years, but is likely to put up about $150m in sales in 2013.

That’s astonishing growth, a testament to the company’s calculated effort to expand as quickly as possible. In the prospectus, FireEye notes that 375 employees – a full 40% of its entire payroll – work in sales. (That goes some distance toward explaining how FireEye has spent more just on sales and marketing than it has brought in as revenue so far this year.)

With all of the focus on – and enviable results from – organic growth, it’s no wonder inorganic growth has yet to figure into FireEye’s business. In that way, it’s basically following the practice of other high-flying companies that have come public – the companies that will serve as ‘comps’ for FireEye.

Neither Workday nor Splunk nor Tableau has been active in M&A, despite having the windfall of an IPO and richly valued equity to use in deals. Only ServiceNow has done a deal, and that was just a $13m purchase announced last month, a full year after it went public. (For those with a longer view, we would note that salesforce.com didn’t ink its first acquisition until almost two years after its IPO in mid-2004.)

Nonetheless, my colleague Wendy Nather has penciled out a few possible targets should FireEye want to go shopping. (And the company may need to use M&A, if just for customer perception. As she notes, threat intelligence and sandboxing at the network layer are not going to be considered a complete solution for handling malware attacks in the future.) We have a few thoughts around possible markets (think endpoints) and even a few specifics that may figure into FireEye’s future M&A plans in our full report.

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A red-hot IPO expected from FireEye

Brenon Daly

Contact: Brenon Daly

The next billion-dollar tech IPO is moving closer to the public market. FireEye has revealed its paperwork for an offering that’s sure to draw bullish interest from investors willing to put money into an early-stage company that’s still in hyper-growth mode. The cybersecurity vendor, which only really began shipping product in 2010, is putting up eye-popping growth rates but is also spending heavily to get them.

For instance, FireEye doubled sales in the first half of 2013 to $62m. Granted, that’s coming off a small revenue base, but it’s still an astonishing rate compared with the overall information security (infosec) market. In a survey by TheInfoPro, a service of 451 Research, more than half (52%) of infosec buyers forecasted their 2013 budgets would be the same (44%) or even lower (8%) compared with 2012. (Among the remaining roughly 48% who projected a larger infosec budget this year, most indicated it would be only a single-digit percentage higher.)

To post its enviable growth, FireEye has been spending heavily. In fact, so far this year, the company has spent more on sales and marketing costs than it has taken in as revenue. That’s appropriate (though clearly not sustainable) for a company growing in the triple digits that sees a vast opportunity in front of it.

Nonetheless, we would note that it is significantly higher than the two most-recent infosec providers that have come to market. Sales and marketing spending at both Palo Alto Networks and Imperva ranges between 50-60% of revenue. (We don’t consider Qualys, which came public last September, a fitting comp for FireEye because it is a subscription-based business rather than a product-based business like FireEye, Imperva or Palo Alto.)

Of course, we don’t expect the red ink at FireEye to deter many public market investors. Both Palo Alto and Imperva don’t turn a profit, even though they are growing at much slower rates than FireEye. (Palo Alto is increasing its top line at about a 60% rate, while Imperva is roughly half that level.) And yet, Wall Street has bid up both of the recent infosec IPOs to double-digit price-to-sales valuations. Collectively, those offerings have created $4.8bn of market value.

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For tech M&A in July, big deals but little else

Brenon Daly

by Brenon Daly

Summer is a time for blockbusters – both for Hollywood and, apparently, on Wall Street. In the just-completed month of July, tech acquirers announced seven deals valued at more than $1bn. That’s twice as many 10-digit transactions as typically get announced each month.

The mega-deals helped push last month’s overall spending on tech M&A to its highest level for the mid-summer month in seven years. The aggregate value for IT, telco and digital media transactions announced around the world in the just-completed month totaled $23.7bn, slightly above the total for July 2012 but nearly twice the monthly spending level we tallied during the recession.

Among the significant acquisitions announced last month: Schneider Electric’s $5bn consolidation of Invensys, Cisco Systems’ $2.7bn reach for network security vendor Sourcefire (the third-largest information security transaction) and AT&T’s $1.2bn play in the prepaid wireless segment with Leap Wireless. (Including the debt and cash carried by Leap, which is better known under its Cricket brand, AT&T is actually paying closer to $4bn.)

While there was an unusual amount of activity at the top end of the M&A market in July, deal flow dried up dramatically elsewhere. We tallied just 240 transactions in July – a decline of about one-quarter from the same month in the two previous years. In fact, we have to go back almost two years (November 2011) to find a month with as low a total number of deals as July 2013.

The light activity in July actually accelerated the already pronounced decline that we’ve registered in tech M&A. So far this year, tech buyers have done just shy of 1,800 transactions, a 20% falloff in activity compared with the roughly 2,200 deals announced during the comparable period in both 2012 and 2011. Another way to look at it: The number of transactions announced in 2013 almost exactly matches the comparable number from 2009, while this year’s spending is twice as high as the recession year.

Global tech M&A

Month Deal volume Deal value
July 2013 240 $23.7bn
July 2012 341 $21.8bn
July 2011 328 $13.9bn
July 2010 268 $15bn
July 2009 277 $8.6bn

Source: The 451 M&A KnowledgeBase

E2open acquires icon-scm to sharpen decisions

Contact: Tejas Venkatesh, Carl Lehmann

On-demand supply chain management (SCM) vendor E2open has acquired icon-scm for $34m, its first purchase in almost eight years. The deal is complementary to E2open’s SCM platform, adding supply chain planning software. But it does bring a significant challenge – icon-scm’s only channel partner, SAP, through which the startup generates all its sales, is killing the partnership as a result of the acquisition.

Despite the (presumably temporary) revenue plunge at icon-scm, E2open appears confident that it can resuscitate the company’s business, both in term of growth and how the startup sells its software. Icon-scm generated $10m in sales in 2012 through perpetual license sales, but in laying out plans for icon-scm, its new owner said it will convert the delivery to a subscription model, in-line with how it sells its core products.

The rationale for the acquisition makes sense. E2open’s strength is in building supply chains and integrating supply chain partners with a secondary dimension of value in SCM services. Icon-scm’s strength is in developing the software and analytics required for supply chain decision-making. The acquisition by E2open also brings a supplier collaboration hub and data hub developed by icon-scm, expanding its market footprint.

Positive outlook for network monitoring M&A

Contact: Tejas Venkatesh, Christian Renaud

In its first quarter as a public company, Gigamon beat both revenue and earnings expectations, pushing the company’s market value to $1bn. The network traffic visibility vendor reported on Monday revenue growth of 44% year over year. In mid-Tuesday trading, the stock was changing hands at $34, up more than 70% since its IPO six weeks ago. The strong growth shows the rising importance of network monitoring, which could make players in this sector hot properties for larger companies.

Network monitoring and analysis has become more important as networks – whether traditional, virtualized or hybrid – increasingly employ some component of public/private cloud technology. Virtualized and cloud-based networks are often ‘dark traffic’ to network monitoring tools, and Gigamon has announced offerings for both virtualized and cloud environments that will help address the dark traffic issue.

Network monitoring is still pegged as a relatively small market. (Gigamon management estimated the total addressable market to be $2-3bn during their analyst call.) However, we have seen public and private players such as NetScout, WildPackets and cPacket Networks continue to put up strong growth.

The continued growth of network traffic visibility providers could draw acquisition interest from deep-pocketed suitors such as Cisco, Juniper Networks and Brocade. The sector has already seen a fair bit of M&A activity: Danaher acquired Gigamon rival VSS Monitoring last summer for an estimated $180m, and Ixia paid $145m for Anue Systems around the same time. We would note that those deals went off at about 5x and 3x trailing sales, respectively. In comparison, Gigamon trades at more than 8x trailing sales, and that’s without any acquisition premium.

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Omnicom and Publicis Groupe ink $35bn merger agreement

Contact: Tejas Venkatesh

Traditional advertising firms Publicis Groupe and Omnicom, which together generated $22.7bn in revenue last year, are combining to become the biggest advertising company in the world. The blockbuster consolidation comes as advertising increasingly moves online, a transformation that threatens the entire media landscape. In many ways, advertising has become more Silicon Valley than Madison Avenue – a key point that executives from both Publicis and Omnicom said drove the deal.

Both firms have used M&A in the past – albeit on a much smaller scale – to try to stay relevant as ad dollars go to digital outlets. For the most part, recent deals at both Omnicom and Publicis were driven by technology gaps, with geographic expansion also spurring some acquisitions. That has led to a flurry of transactions at Publicis. According to The 451 M&A KnowledgeBase, Publicis inked 16 deals in the past 24 months. (During the same period, Omnicom acquired only three companies.)

While Publicis and Omnicom focus on the complex task of trans-Atlantic integration, we suspect the pace of M&A at the soon-to-be-formed giant will slow. But eventually, we expect the company to step back into the market as it realizes that even with the sprawling portfolio, it still lacks the necessary technology to keep pace in a digital ad world. After all, even Google – the dominant online advertising company, and one that’s native to the digital world – has had to spend billions of dollars on dozens of deals (DoubleClick, AdMob, Wildfire Interactive, etc.) to round out its own portfolio.

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How a change at the top got Juniper back into the M&A market

Brenon Daly

Contact: Brenon Daly

When Kevin Johnson arrived to take the top spot at Juniper Networks in September 2008, the networking giant hadn’t done an acquisition in nearly three years. Historically, the company had been a sporadic buyer of adjacent technologies, such as WAN optimization (Peribit Networks) and application acceleration (Redline Networks), but had stumbled badly in its $4bn ‘convergence’ play with NetScreen Technologies in 2004.

Although deal flow didn’t immediately start gushing when Johnson took over, investment bankers at the time noted that Juniper had begun taking meetings again, indicating the company was inching back toward the M&A market. The first deal under Johnson’s tenure – the $69m reach for Ankeena Networks – came in April 2010. Johnson announced earlier this week that he’d be stepping down from the CEO post as soon as a replacement is hired.

Since that print, if we had to characterize Juniper’s approach to M&A, we would call it ‘measured.’ Over the past three years, the chastened company has been clipping along at an average of three acquisitions per year, with an average price tag of about $80m.

Further, fully three of the eight companies that Juniper has acquired recently have been ones it previously put money into through its investment arm. That’s a relatively conservative approach to dealmaking, and certainly a much higher rate of ‘try before you buy’ than any other corporate venture program.

But then, given where the company was coming from, it was probably prudent for Johnson to move Juniper slowly along in its corporate development program. Nonetheless, the deliberate pace of Juniper’s M&A activity stands out when compared with rival Cisco Systems.

In the same previous three years that saw Juniper spend a total of $650m on eight acquisitions, Cisco dropped an astonishing $11bn on 29 companies, including writing checks of more than $1bn for three separate companies. Granted, Cisco has about 10 times the revenue – and 10 times the market cap – of its rival. Nonetheless, the discrepancy in dealmaking between the two networking rivals is striking.

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Can Criteo spark interest on Wall Street?

-By Jonas Kristensen

Although Wall Street has not been overly bullish on the prospects of advertising technology companies recently, Criteo may be the next company from this fast-growing market to make its pitch to investors. But to do that, the Paris-based online ad retargeter will have to overcome a lot of burned adtech shareholders, who have seen the shares of recent IPOs in the sector (Marin Software and Millennial Media) both shed about one-quarter of their value so far this year. Meanwhile, Tremor Video is still underwater from its IPO last month.

But Criteo, which is rumored to have gross revenue of more than $500m, has one thing these other companies don’t – a profitable business. And it’s been printing black numbers for several years now. Further, it has shored up its mobile offering, where much of the adtech growth is expected to happen. (Witness the 75% growth in Q2 mobile ad revenue Facebook reported on Wednesday.) Just last week, Criteo announced the acquisition of mobile ad-tracking startup AD-X Tracking, which closes the gap in the company’s product offering and should enable it to take its retargeting technology mobile.

Given its growth rate and product portfolio, Criteo is probably out of reach of most would-be acquirers. Indeed, although M&A activity in the adtech space has increased steadily, the deals haven’t necessarily been at the top end of the market. According to The 451 M&A KnowledgeBase, there hasn’t been an adtech acquisition valued at more than $1bn since 2007.

If indeed Criteo does make it public, it doesn’t necessarily mean that the company will have to take a cut-rate valuation. After all, the other publicly traded adtech vendors have been overly discounted. Even with their sliding share prices, the trio have created more than $1.5bn in market value and trade at an average of 5x trailing sales, a higher multiple than many other tech sectors garner.

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RetailMeNot’s strong offering

Contact: Tejas Venkatesh

In a strong debut, digital coupon vendor RetailMeNot leaped onto the public markets today, creating $1.4bn in market value. After pricing at $21 each, shares shot up more than 30% to change hands at $27.60 by midmorning.

RetailMeNot’s rapid top-line growth contributed to its warm reception on Wall Street. The company increased revenue from $17m in 2010 to $155m for the year ended March 31, while running solidly in the black throughout.

The market currently values RetailMeNot at $1.4bn, or 9x trailing sales. That’s a premium valuation compared with M&A activity in the sector. For instance, we estimate that Slickdeals was valued at 4.6x trailing sales in its sale to Warburg Pincus in January. RetailMeNot itself was valued at 5.6x trailing sales in its $159m sale to WhaleShark Media in 2010, after which the acquirer took on the name of the target. Morgan Stanley, Goldman Sachs and Credit Suisse were lead bookrunners for the offering.

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