Category: investment banking

Qualys eyes an IPO

Brenon Daly1 Comment

Contact: Brenon Daly

Late last year and even into this year, there were rumblings that Qualys may get taken out before it could get out. Rumors were flying that the vulnerability management vendor had attracted M&A interest from two well-heeled shoppers that have both done large information security acquisitions: Check Point Software and Dell.

A pairing with either of the rumored suitors would have made a great deal of sense, adding threat scanning and analysis capabilities to the would-be buyer’s existing portfolio. Check Point needs vulnerability management capabilities as a way to add more information about what happens inside the firewall. Meanwhile, Dell, through its SecureWorks acquisition, not only integrates Qualys’ reports, but also offers Qualys as a managed service.

According to our understanding, interest from both would-be suitors diminished as Qualys held out for a price approaching $1bn. (That would represent a valuation of about 10 times this year’s bookings for Qualys.) So Qualys is now tracking to an IPO, where it is probably likely to debut at a $600-700m valuation but could well grow into a billion-dollar valuation on its own. (See our full report on the Qualys IPO.)

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

Spurred by JOBS Act, iWatt puts in its paperwork

Contact: Thejeswi Venkatesh

Taking advantage of the newly enacted JOBS Act, iWatt recently filed its IPO paperwork in an effort to raise $75m. The power management semiconductor designer has been around since 2000 and has raised more than $50m in venture funding over five rounds. For its next funding, it’s looking to be among the first wave of companies to make it to the public market under the new federal legislation, which lowers the disclosure requirements, among other changes, for IPO candidates. Barclays Capital and Deutsche Bank Securities are co-leading the IPO.

The company has grown at a healthy clip recently, with revenue nearly tripling from $18m in fiscal 2009 to $57m in the 12 months ending March 2012. However, that may not be enough to ensure a warm reception from investors. The concern? Competition. More than 80% of iWatt’s revenue comes from the highly fragmented AC/DC conversion market, where it competes with bigger players such as Power Integrations and Fairchild Semiconductor. The company, which counts Philips and Apple among its customers, says its product has better form factors and lower cost compared to its rivals.

Its chief rival, Power Integrations, currently garners an enterprise value-to-revenue multiple of just over three in the public markets. Slapping the same multiple on iWatt means that the company will debut with a meager market cap of $175m. (Of course, iWatt may well enjoy a premium over its main rival because of its growth rate. Power Integrations flatlined last year and is projected to only grow about 10% this year, while the much-smaller iWatt has bumped up sales more than 60% in each of the past two years.) On the other hand, Wall Street – particularly the big institutional investors – hasn’t shown much demand for any equities lately, much less a new offering from a tiny, unproven startup in a hotly competitive market.

Will hosting bankers follow the deal flow?

Ben Kolada

Contact: Ben Kolada

Acquisitions in the hosting and colocation sector, which dominated headlines in the first half of last year, have flatlined. Gone are the days of multiple nine- and 10-figure deals being done by telcos and buyout shops. PEER 1 Hosting’s NetBenefit acquisition, announced Wednesday, was welcome news for M&A advisers serving the hosting industry (particularly for Oakley Capital Corporate Finance, which banked NetBenefit), but as deal volume in the industry slows, some bankers are making the move to the SaaS sector.

Although valuations remain strong (PEER 1’s NetBenefit buy was done for 10 times EBITDA), deal sizes have shrunk. The median deal size so far this year is $34m, compared with about $50m in the year-ago period. Further, deal volume has flatlined. Annualizing year-to-date deal flow would mean that annual volume has plateaued from its peak in 2010. Volume may ultimately rise as private equity firms that announced hosting plays in the past few years look to exit those investments, and as US firms look overseas for deals. But investment bankers serving this industry aren’t content to wait.

While hosting bankers aren’t yet giving up on their core industry, some are already transitioning to targeting the SaaS sector. For example, one of the hosting industry’s front-running investment banks, DH Capital, recently partnered with SaaS Capital, a specialized commercial lender serving the SaaS sector. They recently worked together with existing investors to secure $12m in subordinated debt financing for SaaS security firm Alert Logic.

More hosting-focused investment banks may look to make this move as well, since the leap from hosting to SaaS banking is shorter than many would think. Hosting and SaaS businesses have similar operating models, such as recurring revenue and server-centric, hosted products. One more reason for the transition: the number of SaaS transactions is twice that of hosting acquisitions.

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

The Facebook effect

Ben Kolada

Contact: Ben Kolada

Facebook’s stratospheric growth has had a profound impact on technology entrepreneurship and exits. In addition to creating some $60bn of market value in its own recent IPO, the company has spawned an ecosystem of vendors hoping to further monetize its one billion customers. A myriad of startups have popped up over the years to help advertisers, marketers and brands manage and deliver their message across Facebook’s platform, which some bulls on the company consider something like a new operating system.

Several of these startups are finally starting to show material sales. As a result, the market overall is being targeted by tech titans looking to become advertising and marketing vendors of choice for agencies and brands. That has led to a dramatic rise in the volume of acquisitions of tech firms serving this segment. Last year set the record in both the volume and value of acquisitions.

Dealmaking this year, however, has already shattered that total spending record: The $3.6bn spent so far this year on social-related companies is already twice the 2011 total. The M&A is being driven by phenomenal growth rates in the social media market. As a proxy for that, consider Facebook’s monthly active user (MAU) count, which has grown at a compound annual growth rate of 132% from its founding in 2004 to 2011.

The social media sector’s growth is leading to top-dollar prices for hot startups. Buddy Media, probably the largest social media marketing platform vendor, increased revenue 250% last year. On Monday, salesforce.com officially announced that it is paying $689m for Buddy Media. Meanwhile, Google and Meebo made their pairing official: Google is reportedly paying $100m for the social networking and user engagement vendor. Oracle just paid an estimated $325m for social marketing provider Vitrue to gain capabilities competitive to what Buddy Media offers. (And the enterprise software giant tucked in Collective Intellect for social media monitoring on Tuesday.) And finally, even old-line vendor IBM has inked a high-priced deal in the market, likely paying north of $200m for social sentiment provider Tealeaf Technology last month.

Source: The 451 M&A KnowledgeBase *Includes transactions in social software, social networking and related categories.

A not-so-merry month of May for M&A

Brenon Daly

Contact: Brenon Daly

Spending on tech deals in the just-completed month of May fell by half from the same month in the previous year, amid renewed concerns about US growth and European economic stability. Overall, the total value for all tech acquisitions announced around the globe last month hit just $15.3bn, with the number of transactions dipping 10% (year over year) to 302. The aggregate value of deals stands as the lowest total for the month of May in eight years.

The weakness in May means that spending has now dropped in four of the five months in 2012, compared with 2011. That has dragged down the total value of transactions announced so far this year to just $64bn – one-third below the first five months of 2011.

The growing economic worries also weighed on Wall Street, with the major stock indexes dropping about 7% last month. Specific to tech companies, bellwethers such as Cisco Systems, Dell and NetApp all reported weaker-than-expected quarterly results in May. Of those three tech giants – all of which lost about one-fifth of their market value in May – only Cisco announced an acquisition last month.

CGI growing globally with acquisition of Logica

Ben Kolada

Contact: Ben Kolada

Consolidation in the IT services segment took a leap forward today, as Canadian systems integrator CGI Group announced that it would pay £1.7bn (about $2.7bn), or £2bn when including net debt, for British counterpart Logica. We’ve already written about IT services deals happening on a smaller scale in the US, but this transaction takes the cake as being the largest cross-border deal since NTT bought Dimension Data in July 2010 for $3.2bn.

Specific to CGI, this is its largest acquisition on record, and comes almost two years to the day after it announced its previous high-priced transaction, the nearly billion-dollar purchase of systems integrator Stanley Inc. The Stanley buy itself was a geographic play, meant to expand CGI’s footprint in the US. The rationale for today’s reach for Logica is no different.

CGI is buying Logica as a pure geographic move meant to diversify its revenue globally. Currently, CGI’s revenue is split about half and half between the US and Canada, with only 6% coming from Europe. Logica, on the other hand, generates almost no revenue from North American operations. Its revenue mix is heavily slanted toward Western Europe, with its top three markets by country being France, the UK and Sweden. If and when the deal closes, the combined company will have a presence in 43 countries. The transaction will also more than double CGI’s revenue, creating the sixth-largest IT services provider worldwide.

Diversification is so key to CGI’s strategy that it is tapping nearly every possible outlet to pay for its larger rival. CGI will issue 46.7 million subscription receipts (exchangeable into new Class A shares), secure a £1.25bn term loan from CIBC, National Bank of Canada and Toronto-Dominion Bank, and draw down £405m from its existing credit facility.

Although dilutive, CGI’s shareholders so far approve of the acquisition. Shares of the Canadian company, which trade on the NYSE, were up 12% at midday. Although the deal would seem to undervalue Logica by one metric, its shareholders have reason enough to approve of the acquisition. While the transaction values Logica at about half times sales (the two most recent billion-dollar-plus IT services acquisitions, both announced last year, were done for 1x sales), CGI’s offer represents a heady 60% premium to Logica’s closing share price on May 30, and a 50% premium over the average closing share price for the prior month. Bank of America Merrill Lynch advised Logica on the deal.

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

Making sense of the M&A market

Brenon Daly

Contact: Brenon Daly

It’s been tough to read the markets in 2012. On Wall Street, although all of the major US equity market indexes are still in the green for the year, uncertainty has been ticking steadily upward, with the CBOE VIX recently touching a high for the year.

Those crosscurrents are also being seen in the M&A market: In the recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster, more than half of the respondents said they are busier with activity such as networking, meetings and negotiations around deals so far this year than in either of the two previous years. (That was twice as high as the percentage that said general activity has tailed off.) Yet in terms of actual M&A spending, the total for January-May 2012 is lower than the same period in both 2011 and 2010.

To help decipher the market and – more importantly – get a sense of where it’s heading for the rest of 2012, please join Brenon Daly, 451 Research’s head of M&A, and Robert Townsend, co-chair of Morrison & Foerster’s Global M&A Practice, for an exclusive webinar on Thursday, May 31 at 1:00pm EST/10:00am PST. Register now for this free webinar.

All Covered covering the US

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

IT services shop All Covered has been on a steady M&A tear over the past year. Since its sale to Japanese consumer electronics giant Konica Minolta, announced in January 2011, All Covered has acquired nine complementary vendors throughout the United States. It’s expected to continue acquiring, but could see increased competition for its desired targets if M&A interest in this sector continues to rise.

All Covered is now the US expansion platform for Konica Minolta’s Business Services division. With funding from Konica Minolta (which has earmarked $500m for its Business Services group), the company has bought several IT services shops primarily for geographic expansion. Its dealmaking has expanded All Covered, which is based in Redwood City, California, into nine different states. So far, it’s taken a buckshot approach, casting a wide range rather than focusing on single market penetration. No two of its acquisitions have been in the same state.

However, its rapid M&A pace may slow if the IT systems integrator and professional services sector continues to attract interested acquirers, and if bidding competition increases as a result. M&A interest in this sector has risen dramatically since the bottom of the recession. According to The 451 M&A KnowledgeBase, deal volume in this sector last year nearly eclipsed the previous record set in 2006. (We’d note that while the majority of acquisitions are of systems integrators and IT professional services shops, purchases of email marketing and website design firms in particular are on the rise.)

Meanwhile, consolidation among IT services firms isn’t the only strategy playing out. Acquirers from all corners of the IT industry, as well as some non-tech shops, have made plays in this sector.

Acquisitions of IT services vendors

Year Deal volume
2011 633
2010 581
2009 478
2008 421
2007 577
2006 652

Source: The 451 M&A KnowledgeBase

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

Does the next social media marketing deal involve Involver?

Brenon Daly

Contact: Brenon Daly

In acquiring Vitrue, Oracle joined a crowded field of big-name vendors that are looking to stay relevant as social networking sites increasingly become marketing channels. Spurred by this trend, Adobe shelled out $400m late last year for Efficient Frontier, while IBM picked up Tealeaf Technology earlier this month. The total spending for just these three deals is likely in the neighborhood of $1bn.

And the total may be growing. A market source has indicated that Involver may be the next social marketing platform that gets acquired. Word is that Microsoft was close to buying Involver but it was unclear if those talks were still live. To date, Microsoft has made mostly small steps into social networking, such as taking a tiny 1.6% stake in Facebook in 2007 and very quietly launching its own social network – ‘so.cl,’ pronounced ‘social’ – just over the weekend. Could the software giant be looking at a bigger move into the hot sector, with a marketing management platform as its play?

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

SAP’s platinum payouts

Brenon Daly

-Contact: Brenon Daly

Even though SAP has historically been a reluctant buyer, it hasn’t hesitated to throw around big numbers as it has picked up its M&A pace over the past half-decade. The German giant announced its latest top-dollar acquisition on Tuesday, paying roughly $4.5bn for Ariba (on an equity value basis). The supplier relationship management vendor hasn’t traded that high in more than a decade, as the first Internet bubble was deflating.

The purchase of Ariba continues SAP’s practice of paying high prices to clear deals. For instance, its offer for SuccessFactors last December matched the highest level that company’s shares had ever hit, and likewise, when it erased Sybase in 2010, it did so at a high-water mark for that stock. (Incidentally, the collective bill for those three transactions, which have been done in just two years, is more than $14bn.)

In terms of valuation, Ariba basically splits the difference between SAP’s two recent big software deals. Based on SAP’s valuation of Ariba at $4.3bn, the German giant is paying 8.6 times the roughly $500m that Ariba generated over the trailing 12 months (TTM). In comparison, it valued SuccessFactors at 11.3x TTM revenue and Sybase at 4.8x TTM revenue. (The relative valuation of each of those vendors primarily reflects their growth rates: Sybase was growing at a single-digit percentage, while Ariba is clipping along at nearly 40% and SuccessFactors was topping 50%.)

Select SAP transactions

Date announced Target Deal value Enterprise value/TTM sales multiple Bid
May 22, 2012 Ariba $4.5bn 8.6x $45 per share, highest price in 11 years
December 3, 2011 SuccessFactors $3.6bn 11.7x $40 per share, matching highest-ever price
May 12, 2010 Sybase $6.1bn 4.8x $65 per share, highest-ever price

Source: The 451 M&A KnowledgeBase

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