Category: investment banking

Stratus snaps up rival Marathon in opportunistic buy

Contact: John Abbott, Thejeswi Venkatesh

The writing was on the wall when Marathon Technologies sold off its patent portfolio to Citrix in September 2011. Finally, the high availability software company has been acquired by veteran fault-tolerant server vendor Stratus Technologies.

Terms of the transaction were not disclosed. Since its relaunch in January 2004 (when the company emerged from receivership), Marathon has raised roughly $34m from Atlas Venture, Longworth Venture Partners, Presidio Ventures and Sierra Ventures, including debt financing of $7m.

Stratus had no real need for Marathon’s technology, having developed its own high availability software four years ago. However, Marathon’s technology was more mature and had more customers. Stratus will gain an expanded customer base and potential buyers of its fault-tolerant hardware range, which was refreshed earlier this month with Intel E5 processors. Having partnered with VMware, Stratus now gets a chance to develop a partnership with Citrix, with which Marathon had a close relationship.

The focus of both high availability and disaster recovery has shifted to the virtualization layer – first VMware with Site Recovery Manager, and then Citrix and Red Hat, which are both developing native capabilities for their hypervisors. There are also younger independent replication suppliers such as InMage and Zerto coming out with hypervisor-based replication software. More recently, there’s been a further shift toward cloud infrastructure software stacks. We’ll have a full report on Stratus’ reach for Marathon in our next Daily 451.

Qualys looks to transition from a product to a platform

Brenon Daly

Contact: Brenon Daly

As it gets set to hit the public market later this week, the question for Qualys is whether the on-demand security vendor can make the transition from a product to a platform. The 13-year-old company is known primarily for its vulnerability management offering, which will account for the vast majority of the $100m or so of bookings it will generate this year.

But Qualys is acutely aware of the fact that it won’t get a premium valuation if it doesn’t expand beyond that. The company has already helped its own cause with the early steps it has made in expanding its portfolio. It recently noted that revenue growth is outpacing customer growth. (In the first half of this year it bumped up its overall top line by 22%, about 5 percentage points higher than its growth rate in 2011.)

Qualys has a number of advantages as it attempts to pull off the transition. For starters, the company sells its service entirely on a subscription basis, which makes it easier – both commercially and in terms of technology architecture – to add additional security offerings. Besides its vulnerability management product, Qualys already offers five other products around compliance, Web application security and other areas.

That approach has drawn in nearly 6,000 customers for the company, providing a broad base to sell new products into. Yet, as Qualys highlighted during its roadshow, the company has only begun its cross-selling efforts. Currently, only one out of five customers uses more than one Qualys product.

The underwriters for Qualys, led by J.P. Morgan Securities and Credit Suisse Securities, are likely to be conservative in their initial pricing of what would be the fourth information security vendor to go public in the past year. As it stands, the range is set at $11-13 per share. We expect Qualys to actually price above that on Thursday and then likely move higher in the aftermarket, as the previous trio of enterprise security offerings have done. Even with the expected bump, Qualys will likely only create about $500m of market value. However, if the company can emerge as a true platform, that will be just the starting point.

A solid IPO for Trulia

Contact: Thejeswi Venkatesh

Amid the consumer tech IPO lull following the Facebook offering, real estate website Trulia enjoyed a solid opening on its first day as a public company. First, it priced a dollar above its indicated range, at $17 per share. Then, encouraged by its robust growth, investors bid up the stock further to $23 per share.

Trulia provides an online marketplace, delivered through the Web and mobile applications, that lets consumers and real estate professional connect with each other. Unlike traditional real estate websites like REALTOR.com, Trulia gives users detailed information on crime, commute and schools.

On the top line, the company has put up astonishing growth. In the 12 months ended in June, Trulia generated $51m in revenue, up from $38m in calendar year 2011. It makes money from a combination of advertising on its website and a freemium model for real estate professionals, with the latter accounting for more than two-thirds of its revenue.

The offering valued Trulia’s equity at $448m, or 8.8 times trailing sales, and the company currently garners a market cap of roughly $600m, or 12x trailing sales. That’s good value creation for Trulia, which has raised roughly $33m in venture capital from Accel Partners, Fayez Sarofim and Sequoia Capital. In addition to high growth, public investors were also surely encouraged by the broader housing recovery in recent months.

That’s not to say that Trulia couldn’t have done better. In recent weeks, its primary rival Zillow has traded close to 14x sales. In part, that can be explained by Zillow’s bigger size and outpaced growth. In the 12 months ended in June, Zillow doubled its sales, reaching $90m. But last week, Zillow filed a lawsuit against Trulia, alleging that the company infringed upon a home valuation patent. Trulia denies the allegations. While the eventual outcome is not yet known, investors likely factored that into the stock price.

Oracle adds social-recruiting features through acquisition of SelectMinds

Contact: Thejeswi Venkatesh

The spree of HR software M&A continued on Monday with Oracle announcing the purchase of recruitment SaaS startup SelectMinds. The tuck-in acquisition adds social recruitment features to the core platform Oracle gained via its $2bn pickup of Taleo in February.

In the past few months, the same three firms that consolidated the top end of the BI market a few years ago (SAP, Oracle and IBM) have shifted their buying to the human capital management (HCM) market. Collectively, the trio has spent roughly $7bn on HCM providers. While SAP and IBM got social recruitment tools with their acquisitions of SuccessFactors and Kenexa, respectively, Oracle-Taleo was left with a hole in its portfolio. The reach for SelectMinds is meant to close that gap.

Twelve-year-old SelectMinds provides social media-recruiting SaaS, allowing companies and employees to distribute job openings via social media. The vendor says this targeted approach increases the quality of sourced job candidates. SelectMinds, which only raised $5.5m in venture funding, has marquee customers including eBay, McGraw-Hill, Qualcomm and Visa.

We’d note that the transaction comes barely a week after rival HCM vendor iCIMS announced a similar deal, acquiring its former partner and social media-recruiting firm Jobmagic. All of this points to increasing commoditization of the HCM market, where platform providers have to offer more features to compete effectively.

KEYW picks up Sensage to build out Project G

Ben Kolada

Contact: Ben Kolada

Just three days after announcing its largest acquisition – the $126m pickup of cybersecurity software development firm Poole & Associates – KEYW has snagged small security information and event management (SIEM) vendor Sensage for $24m, with an earnout potentially raising that price by $10.5m. The two companies had previously been partners, working together on KEYW’s networking cybersecurity platform, dubbed Project G.

KEYW is handing over $15m in cash and $9m in stock. The deal also includes an earnout of up to $3m in cash and $7.5m in stock, achievable based on unspecified revenue targets for the second half of the year. The transaction is expected to close in October.

The Redwood City, California-based target, which has 35 employees, generated about $12m in revenue last year and recorded a small operating loss for the first half of this year. However, although the legacy Sensage business will be retained, the company isn’t being valued on its sales, but rather its potential contribution to KEYW’s nascent Project G platform. Sensage CEO Joe Gottlieb will head the combined company’s Project G network security initiative. KEYW began commercially testing Project G in June.

Select precedent ESIM acquisitions

Date announced Acquirer Target Price/sales valuation
April 3, 2012 TIBCO Software LogLogic 3.5*
October 4, 2011 IBM Q1 Labs 8.8*
October 4, 2011 McAfee NitroSecurity 5.3*
June 23, 2011 SolarWinds TriGeo Network Security 3.9
September 13, 2010 Hewlett-Packard ArcSight 7.7

Source: The 451 M&A KnowledgeBase *451 Research estimate. Click links for full deal details.

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Qualys: a quality offering at a tough time

Brenon Daly

Contact: Brenon Daly

Continuing a run of enterprise-focused IT security IPOs, Qualys has set an initial range of $11-13 per share for its upcoming offering. The range would value the on-demand vulnerability management vendor a bit above $400m, a rather conservative valuation for a company that will record bookings of more than $100m this year. We understand that Qualys will price its offering in two weeks, and we wouldn’t at all be surprised to see it debut at a price in the mid-teens. J.P. Morgan Securities and Credit Suisse Securities are co-leading the offering.

The IPO of Qualys would mark the fourth enterprise IT security provider to hit the market in the past year, following Imperva, Proofpoint and Palo Alto Networks. That makes this particular slice of the tech landscape the most active – and most lucrative – area for IPOs. Collectively, the quartet – including the roughly half-billion-dollar initial market cap we project for Qualys at its debut – will have created about $6bn in market value.

Two-thirds of that amount comes from the wildly successful IPO of Palo Alto Networks. But we would note that Imperva and Proofpoint have been fairly well received on Wall Street, with both offerings trading above water. That stands in contrast to the loosely related consumer security companies and, even more broadly, the overall IPO market, which is highly skeptical of new offerings as a number of recent high-profile IPOs have turned out to be big money losers for investors.

For instance, shares of consumer Internet security provider AVG Technologies have broken issue and are currently changing hands at nearly their lowest level since the company debuted in February. AVG’s woeful performance contributed to the decision by AVAST Software, a similar consumer Internet security provider, to pull its IPO in late July.

Undoubtedly, the bearishness around the consumer security market is weighing on the offering from Qualys. However, we suspect that pressure will be relatively short-lived for Qualys, and the company will enjoy the same strong aftermarket performance of other recent enterprise security IPOs.

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

Though relatively small, Thoma Bravo’s Mediware buy signals larger trends

Ben Kolada

Contact: Ben Kolada

Although Thoma Bravo’s $195m reach for Mediware Information Systems isn’t exactly a market-moving acquisition, tech dealmakers will note that the transaction underscores a pair of larger trends in tech M&A. The deal continues the consolidation in the medical-focused IT vertical, as well as hints at the reemergence of buyout shops as volume acquirers.

Thoma Bravo is handing over $22 in cash for each share of Mediware’s stock, a 40% premium to the day-prior closing price, and the highest price Mediware’s shares have ever seen. The transaction values Mediware’s equity at $195m. However, the medical management software vendor’s $40m in cash holdings, and no debt, reduces its net cost to $155m. Using that enterprise value figure, Mediware is valued at 2.4 times trailing revenue and 8.8x trailing EBITDA.

Mediware’s sale is the latest acquisition in the rapidly consolidating medical-focused IT vertical. In July, Huntsman Gay Global Capital sold Sunquest Information Systems to Roper Industries for $1.4bn, or about 10x projected EBITDA, and One Equity Partners acquired M*Modal for an enterprise value of $1.1bn, or 2.4x trailing sales. We’ve recently noted that medical speech recognition and transcription companies in particular seem to be receiving considerable buyout interest.

While the Mediware acquisition shows the health of medical-focused tech M&A, it also points at somewhat of a reemergence of private equity firms as volume acquirers. Thoma Bravo, including its portfolio companies LANDesk and PLATO Learning, has already announced five acquisitions this year. PE firms were also especially active in August, with Carlyle Group shelling out $3.3bn for Getty Images.

PE activity also comes while some strategics are sitting on the sidelines. For instance, CA Technologies, which has historically announced about four acquisitions per year, has only announced one this year – the purchase of process automation software veteran Paragon Global Technology. The deal, announced this week, is CA’s first disclosed transaction in more than a year. Also, Symantec has been out of the market since March.

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

Infosys’ largest deal is still small

Contact: Thejeswi Venkatesh

Last October, Infosys Technologies CEO Kris Gopalakrishnan indicated that the firm was ready to make big acquisitions, contrasting the conservative company’s historical growth strategy. The Indian IT outsourcing giant walked that talk today with the announcement of its largest-ever acquisition – the $350m pickup of Swiss SAP systems integrator Lodestone Holding.

The purchase comes four years after Infosys was outbid by HCL Technologies in its attempt to acquire Lodestone rival Axon Group and helps the company shore up its higher-margin consulting business while also increasing its presence in Europe. Infosys’ consulting and systems integration segment already accounts for about 30% of its revenue.

The deal values Lodestone at 1.6 times last year’s sales, identical to the valuation Axon took in its roughly $800m sale to HCL in 2008. On its website, Lodestone reported revenue of $220m for 2011, up from $192m in 2010. UBS advised Lodestone.

We’d note, however, that although this is Infosys’ largest acquisition, it’s still a fairly conservative play. The Lodestone deal was done for nearly half of what Infosys was willing to shell out for Axon in 2008, and its revenue is only 3% of Infosys’ total.

Buying your loyalty

Ben Kolada

Contact: Ben Kolada

Gannett Co announced on Thursday the acquisition of Mobestream Media, maker of the Key Ring customer loyalty application. The deal is one of only a handful of mobile rewards and loyalty purchases announced so far, but as the market matures, we expect that many startups will be acquired and tucked into larger digital marketing vendors’ portfolios.

Like its pickup of social media marketing startup BLiNQ Media last month, Gannett bought Mobestream to build out its digital marketing portfolio. Mobestream’s Key Ring app allows smartphone users to store and receive merchant loyalty card information and digital coupons. The company’s retail customers also use its platform for marketing campaigns. So far, more than five million users have downloaded the app. Horizon Partners advised Mobestream on its sale (this is Horizon’s fifth M&A deal this year, but won’t be its last).

Because the mobile loyalty sector is still so young, there have only been a few acquisitions. However, there are more than a dozen startups operating in this sector, and purchases by Gannett and Constant Contact suggest that their products are better suited as part of a larger digital marketing portfolio.

As the mobile loyalty market matures, the leading startups will likely become acquisition targets for larger tech marketing vendors and publishers such as Google, Vocus, Teradata and Advance Publications. Several startups have already secured funding to propel their growth. In May, RewardLoop announced a $1m series A round, Beintoo took $5m in its A round and Belly secured $10m in its series B. Kiip followed in July with an $11m B round.

Select mobile loyalty M&A

Date announced Acquirer Target
September 7, 2012 MasterCard Truaxis
September 6, 2012 Gannett Co Mobestream Media [dba Key Ring]
January 19, 2012 Constant Contact CardStar
December 8, 2011 Plum District Chatterfly
July 8, 2011 Google Punchd Labs
November 9, 2010 Angoss Software Hitgroup.ca (mobile solutions assets)

Source: The 451 M&A KnowledgeBase

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FormFactor acquires MicroProbe to push into SOC wafer testing

Contact: Thejeswi Venkatesh

Two years after unsuccessfully suing competitor MicroProbe for patent infringement, FormFactor on Tuesday announced that it would acquire the Flywheel Ventures-backed company for $100m in cash and $16.8m in stock.

Both companies design and manufacture semiconductor wafer test probe card systems, which are used by semiconductor manufacturers to test wafers before they are cut up into individual chips. The deal helps memory market-focused FormFactor diversify its revenue base and shore up its presence in the growing system on a chip (SOC) market, where MicroProbe has a significant presence.

FormFactor’s DRAM memory segment, which constitutes more than two-thirds of its revenue, declined 12% in 2011 due to an oversupply of memory devices and a resulting reduction in demand for its probe cards. That decline hurt its stock price, which is now at its lowest point ever. On the other hand, its SOC segment fared better, driven by the proliferation of complex processor-like devices powering PCs, tablets and other mobile connectivity. FormFactor’s SOC segment, which currently constitutes 15% of its business, grew 6% in 2011. For its part, MicroProbe has grown its sales robustly, going from $60m in calendar year 2010 to $98.1m for the 12 months ended June 30, 2012.

The transaction values MicroProbe at 1.2 times trailing sales, right in the ballpark of similar deals. For comparison, we could look at Advantest’s acquisition of Verigy for 1.5 times sales in December 2010. Needham & Company, which advised MicroProbe on its $26m sale to Flywheel Ventures in 2008, advised FormFactor on the purchase. Morgan Stanley banked MicroProbe.

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