Category: investment banking

Palo Alto puts in its paperwork

Brenon Daly

Contact: Brenon Daly, Thejeswi Venkatesh

Long rumored to be an IPO candidate, Palo Alto Networks has finally filed its paperwork for a $175m offering. The application-level firewall security vendor has put up astonishing growth in recent quarters, but unlike other early-stage companies, Palo Alto has been running in the black recently. But the real story – and one that will certainly draw interest on Wall Street – is Palo Alto’s astonishing growth. From essentially a standing start in 2007, the company has racked up more than 6,650 customers.

On the top line, Palo Alto has grown tenfold since 2009, recording sales of $185m over the past four quarters. In its most recent quarter, which ended January 31, the company more than doubled sales to $57m. While Palo Alto is obviously just getting started, it’s nonetheless worth considering how the startup is growing relative to the firewall industry’s stalwart, Check Point Software. That vendor, which crossed over the $1bn mark in 2010, expanded revenue about 13% last year.

Off a revenue base that’s counted in the billions of dollars, Check Point’s growth rate is actually fairly impressive. To put that another way, Check Point generated an additional $149m in revenue in 2011, which is less than Palo Alto generated but a level that’s still respectable. (And we should note that Check Point increases sales at a level of profitability that most other tech companies can only envy: For every dollar it books as sales, more than 40 cents of that drops straight to the bottom line.)

Wall Street certainly is bullish on Check Point, having driven the company’s shares to their highest level in 11 years. It currently garners a market cap of $12.8bn, a full 10 times trailing sales. We would expect Palo Alto to at least trade at that multiple when it comes to market later this summer. That could put its valuation above $2bn. Not a bad bit of value creation for a company that raised just $65m in venture backing. Greylock Partners and Sequoia Partners are Palo Alto’s biggest shareholders, with each firm owning 22% of the startup.

LifeLock buys an insurance policy

Brenon Daly

Contact: Brenon Daly

In its first-ever acquisition, LifeLock bought itself a bit of an insurance policy. The identity theft prevention player recently raised a big slug of money and handed it over for ID Analytics, an acquisition that we suspect was partly motivated by LifeLock’s plan to go public soon. How do we figure that?

On its own, LifeLock has built a powerful business since its founding in 2005. With more than two million registered users, the company recorded revenue of about $190m in 2011. LifeLock is known for its unapologetically brash marketing, including the full-page newspaper advertisements in which the company’s CEO tauntingly gives out his real social security number to any would-be identity thieves. (In the past, some of the company’s claims have landed LifeLock in hot water with regulators and consumer advocacy groups.)

Indeed, many critics have blasted LifeLock as little more than a marketing machine, one that chews through tens of millions of dollars each year to keep its consumer brand growing. With the acquisition of ID Analytics, however, some of that criticism has been knocked down. For starters, the purchase gets LifeLock into the enterprise business for the first time. (ID Analytics, which was founded 10 years ago, has 280 enterprise clients and will continue to operate as a stand-alone subsidiary following the acquisition.)

But perhaps more important than buying its way into a new market is the fact that LifeLock shored up some serious IP around identity risk management, compliance and credit analytics. Indeed, ID Analytics had been a key data provider to LifeLock since 2009. LifeLock likely paid roughly $150m (plus a bit of equity) for ID Analytics, which we understand was generating about $30m in sales. But that may be a small price for LifeLock to pay for being taken more seriously on Wall Street, if it does indeed go public.

A popping tech IPO market

Brenon Daly

Contact: Brenon Daly

If the overwhelmingly bullish equity market didn’t do much for M&A in the first months of 2012, it certainly gave a big boost to the companies looking to go public. Investors have handed out double-digit valuations to a number of IPO candidates so far this year, pushing several new offerings above the magical threshold of $1bn in market capitalization. That has sparked a rethink about exits by startups and their backers, who had been banking almost exclusively during the recession on selling their companies. (Overall, as we recently noted, spending on tech M&A in Q1 dropped to its lowest quarterly level in two years.)

A quick look at the list of Q1 offerings arguably shows a healthier period for tech IPOs than at any point in the past decade: Guidewire Software, which went public in January, has doubled since its debut and currently trades at a $1.5bn market value. ExactTarget has created even more market value since its March offering, which gave the company the largest capitalization of any SaaS company on its debut. Millennial Media nearly doubled during its March debut, valuing the mobile ad platform vendor at nearly $2bn. In late February, Bazaarvoice went public above its expected range and has risen steadily since then. The social commerce firm commands a valuation of $1.1bn, roughly 10 times the sales it recorded in 2011. Demandware trades at an even steeper multiple: Its $800m market cap works out to an eye-popping 14 times last year’s sales.

And, if anything, the current quarter should build on the momentum established by the IPO market at the start of the year. All investor eyes are looking ahead to the seminal offering from Facebook, which is reportedly set to take place next month. The social networking site, which filed its prospectus on February 1, is likely to start its life as a public company valued at about $100bn. That’s an astounding valuation for a company that earned $1bn on sales of $3.7bn in 2011.

While Facebook is pretty much a once-in-a-generation IPO, the buzz it generates will undoubtedly spread beyond the specific offering and even the consumer Internet sector. That will likely help entice more IPO candidates to put in their paperwork, as well as boost the fortunes of those that do make it to market.

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

M&A spending slump to start 2012

Brenon Daly

Contact: Brenon Daly

With Q1 set to wrap on Friday, M&A spending is on track for its lowest quarterly level in two years. The aggregate value of all tech transactions announced around the globe in the first three months of 2012 slipped to just $31bn, lower than both the previous quarter (Q4 2011) and the same quarter last year (Q1 2011).

The declining M&A activity comes as the overall economic environment has improved dramatically from 2011. For instance, there haven’t been emergency bailouts or historic downgrades of sovereign debt so far this year. Even Europe, which was the epicenter for much of the recent economic woes, is back growing again after actually contracting in the fourth quarter.

Reflecting that renewed optimism, the Nasdaq index has poked above 3,000 for first time since late 2000. During the quarter, the index recorded an almost uninterrupted ascent, gaining an astounding 19% since the start of the year. On top of the ever-increasing share price, most tech companies are continuing to stuff cash into their treasuries at a record rate.

So there are plenty of resources – in the form of both market confidence and acquisition currency – to do transactions. And yet few companies are shopping, at least not for significant purchases. In Q1, we recorded just eight transactions valued at $1bn or more – compared with an average of 12 big-ticket deals announced in each quarter last year.

Recent quarterly deal flow

Period Deal volume Deal value
Q1 2012 882 $31bn
Q4 2011 874 $38bn
Q3 2011 955 $63bn
Q2 2011 952 $71bn
Q1 2011 914 $47bn

Source: The 451 M&A KnowledgeBase

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

Millennial Media doubles on debut

Ben Kolada

Contact: Ben Kolada

Taking advantage of the emerging market for mobile advertising, platform vendor Millennial Media leapt onto the public stage Thursday, creating nearly $2bn in market value in its debut on the New York Stock Exchange. The company priced its 10.2 million shares at $13 each – the high end of its proposed range. Shares traded at about twice that level in early afternoon. Millennial Media is trading under the symbol MM. Morgan Stanley, Goldman Sachs and Barclays led the offering, while Allen & Company and Stifel Nicolaus Weisel served as co-managers.

Millennial Media, which has nearly 75 million shares outstanding, currently garners a market cap of $1.9bn. That values the company at 18 times trailing sales, in the ballpark of where we estimate Quattro Wireless was valued in its sale to Apple, but about half the valuation we believe AdMob received from Google. Those two companies are Millennial’s primary rivals, although Millennial stakes its claim as the largest independent mobile ad platform provider.

Interest in advertising technology has been building throughout both the equity and M&A markets. Earlier this month, for instance, telco SingTel announced that it was acquiring Amobee for $321m. (We estimate the startup, which provides mobile ad campaign management software, garnered roughly 9x trailing sales in its purchase by the Singapore telco giant.) Meanwhile, the Adtech pipeline is far from dry, even after a recent slew of big-ticket exits. Earlier this month, advertising intelligence firm Exponential Interactive filed its paperwork to go public. The company, which plans to trade under the symbol EXPN, increased revenue 35% last year to $169m.

Acquisitions drive EnerNOC

Contact: Brenon Daly, Thejeswi Venkatesh

EnerNOC and Comverge both went public in 2007, barely a month apart from each other. Since then, however, the paths of the two energy demand response vendors have diverged dramatically. EnerNOC’s revenue has more than quadrupled from $61m in 2007 to $287m in 2011. Meanwhile, Comverge has plodded along, growing at less than half the rate of its rival. But the real problem with the company wasn’t its top line, but rather its liquidity position: Comverge was on the verge of breaching its debt covenants.

It was that shaky financial position that helped to push Comverge into a capitulation sale to H.I.G. Capital earlier this week. The buyout firm is paying just $49m, or $1.75 for each share. (That basically equals the trading price for Comverge over the past week but is a far cry from when the stock changed hands above $30 back in 2007.) H.I.G.’s offer values Comverge at a measly 0.4 times trailing sales. That’s about half the valuation that EnerNOC currently garners, and that’s after shares of the company have lost nearly two-thirds of their value over the past year or so.

So how did the rival firms end up in such different places after starting from a similar spot? Part of the answer may have to do with the M&A activity from each of the players. EnerNOC has spent more than $60m on four acquisitions over the past three years, while Comverge shied away from rolling the dice on M&A.

Select EnerNOC deals

Date Announced Target Deal value Focus
July 6, 2011 Energy Response $30.1m Demand-side response aggregation
January 26, 2011 M2M Communications $28.6m Wireless sensors for remote monitoring
March 24, 2010 SmallFoot $1.4m Demand control software

Source: The 451 M&A KnowledgeBase

Monitise pays out now for payoff later

Ben Kolada

Contact: Ben Kolada

Mobile banking and payments vendor Monitise made a big bet on Monday when it moved to consolidate its industry with the acquisition of startup Clairmail. At first glance, the deal should have set off alarms among Monitise’s investors. The all-stock transaction will significantly dilute Monitise’s shareholders, leaving them owning three-quarters of the combined company. However, its investors remained calm – Monitise’s share price closed down only 2%. Why? Although the deal is richly valued and dilutes Monitise’s shareholders, those same investors are all but assured of their own rich payoff eventually.

Another explanation for the muted shareholder response is that the transaction only seems overvalued on the surface. It is actually fairly valued by several metrics. Monitise’s £109m ($173m) offer values Clairmail at 9.3 times trailing sales, a smidgen below its own current 10x enterprise value (Monitise held $68m in net cash at the end of 2011, while Clairmail had $5m). Further, Monitise is also obtaining more valuable customers. Clairmail had 48 banking customers generating a total of $18m in revenue last year, or about $375,000 per customer. Monitise, meanwhile, had more than 250 customers, each of which generated an average of less than $150,000 in annual revenue. And because of Clairmail’s growth rate (its revenue jumped 90% in 2011), its price-to-projected-sales valuation is certain to be much lower. Further placating investors, Monitise is forecasting continued heady growth. The combined company, which would have generated $56m in revenue in 2011 on a pro forma basis, is projecting 2012 total revenue close to $100m.

There’s certainly no reason for alarm among the acquirer’s investors, considering valuations across the mobile payments industry are already high and the potential for Monitise itself to one day find a fruitful takeover offer. In July, eBay announced that it was buying Zong for $240m. And in June, Visa announced that it was buying Fundamo for $110m, or about 11x estimated trailing sales. The latter deal is of particular note, given the growing relationship between Visa and Monitise. Following the Fundamo buy, will Visa make a larger play in mobile payments, perhaps by acquiring Monitise? The two companies are already partners – Visa Europe made a $38m investment in Monitise in October, the two companies equally share a joint venture in India and Visa Europe president and CEO Peter Ayliffe sits on Monitise’s board. And as of February 28, Visa and Visa Europe combined owned 21% of Monitise’s equity.

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

NEC converges on business support systems

Contact: Thejeswi Venkatesh

Close on the heels of its announced restructuring, NEC has inked the biggest acquisition in its history. Taking advantage of a strong yen, the Japanese tech giant said last week that it will acquire Convergys’ information management division for $449m. In some ways, the dramatic overhaul at NEC was overdue. But that does not mean the nearly half-billion-dollar bet is certain to pay off.

The company is rolling the dice on M&A as its core business continues to shrink. In recent years, revenue at NEC has dropped about one-third, sliding from ¥4,652bn($41.4bn) in 2007 to ¥3,100bn($40.1bn) in 2011. When the company announced a drastic restructuring in January, it indicated that it would refocus on the IT services, carrier network and social infrastructure sectors. While the latest acquisition bolsters NEC’s IT services division, it is picking up a business that hasn’t done too well under its previous ownership.

According to public filings, sales at Convergys’ information management business unit slid from $723m in 2007 to $329m in 2011. The decline came even as Convergys spent more than $80m over the past three years trying to resurrect the division. All of this underlines the difficulties that NEC, which has precious little experience with acquisition and integration, faces in getting a return on its purchase of Convergys’ castoff business.

A pivot that pays off for ExactTarget

Brenon Daly

Contact: Brenon Daly

In the startup world, there are more pivots than in an NBA game. But often lost in this flurry of activity is that – at some point – changing the direction of the business needs to produce some actual value. (Otherwise, the pivoting just becomes pirouetting, as one of our VC friends recently quipped.) One of the most successful pivots we’ve seen recently came to light on Thursday, with the IPO of ExactTarget.

The online marketing vendor stormed onto the NYSE with a debut valuation of more than $1bn, and then surged from there. (The offering – led by J.P. Morgan Securities, Deutsche Bank Securities and Stifel Nicolaus Weisel – priced at an above-range $19 per share and then traded above $24 in early-afternoon session.) Followers of the IPO market will know that this was actually ExactTarget’s second run at an offering. It had been on file in 2008, before pulling the paperwork in mid-2009.

At roughly the same time that it took itself off the IPO track, ExactTarget dramatically changed its business. It went from selling a single product (email marketing) to a single slice of the market (SMB) to a full cross-channel marketing vendor serving companies of all sizes. The pivot had immediate consequences on its P&L sheet: ExactTarget went from running solidly in the black when it was on file four years ago to running deeply in the red now.

However, it’s a move that has paid off. Counter to the typical pattern, the growth rate at ExactTarget has actually accelerated as the company has gotten bigger. As it consciously increased its spending (particularly around sales and marketing), ExactTarget has taken its annual growth rate from 32% in 2009 to 41% in 2010 and then pushed that to 55% last year. And this is not some rinky-dink business. ExactTarget recorded $208m in sales in 2011. Another way to look at its growth: the $60m in revenue that ExactTarget did in Q4 2011 is more than it did in the full year when it was previously on file (2007 revenue was $48m).

With the benefit of hindsight, it’s probably a good thing that ExactTarget didn’t go public when it had initially hoped to. Three years ago, it was a sub-$100m revenue company, putting up a decent, but hardly spectacular, growth rate. Sure, it could have expanded the business as a public company, but the moves would have been far riskier and (almost certainly) slower because of the myopic scrutiny of Wall Street.

Instead, ExactTarget had the freedom behind closed doors to reposition its business to accelerate. The series of investments it chose to make have almost certainly meant the creation of several hundred million dollars of additional market value. In fact, on just a back-of-the-envelope calculation, ExactTarget’s debut has created more value than any other IPO of an on-demand vendor that we can think of. The company has some 66 million shares outstanding (or closer to 74 million fully distributed), so at a price of $19 each, ExactTarget was worth an astounding $1.25bn (or closer to $1.4bn fully distributed) before it even hit the aftermarket. In comparison, salesforce.com priced at a valuation of about $1.1bn in its 2004 IPO, based on the prospectus share count.

AMD now faces a fabless future

Contact: John Abbott

Advanced Micro Devices is now officially a fabless semiconductor company. Under the leadership of its recently installed CEO Rory Read, AMD has renegotiated the terms of its agreement with GLOBALFOUNDRIES (GF), finally relinquishing its stake in the chip-manufacturing arm that it originally spun off at the end of 2008. It’s a complex arrangement, but the net result is that AMD no longer has to buy from GF and is free to play the market. That’s good for a number of reasons, not least being that problems ramping up 32nm and 28nm production at GF last year delayed the launches of both AMD’s Fusion graphics processors and Opteron CPU product rollouts, hurting its competitiveness against rivals Intel and NVIDIA and directly hitting its bottom line.

AMD isn’t likely to use that trump card straight away. The company says it has no current plans to dual-source its Fusion APUs (the combined CPUs and GPU semiconductors that are crucial to its future), and it has agreed to set up a framework with GF to negotiate prices for wafer fabrication in 2013 – but that doesn’t mean it won’t be looking hard for better deals elsewhere, just as other fables semiconductor firms do as part of their daily business. AMD must be hoping that its freedom to go elsewhere will provide enough incentive for GF to stick more closely to its deadlines in the future. AMD already has a close relationship with GF rival Taiwan Semiconductor Manufacturing Company, which acts as a second source for Fusion chipsets – and that relationship might well be deepened.

What does AMD lose along with its manufacturing arm? Preferential pricing, of course, because it was buying its wafers at cost from GF, and these will now be subject to a negotiated fixed-price contract, dependent on volumes. In SEC filings, AMD says it now expects to spend $1.5bn for wafer fabrication with GF in 2012 (up from $904m in 2011). On the other hand, it will spend less on R&D on the manufacturing side ($71m in 2012, down from $79m last year) – and nothing on capital manufacturing assets for the fab, which cost it $34m in 2011.

GLOBALFOUNDRIES, based around AMD’s original manufacturing facility in Dresden, Germany, was spun off with financial help from Advanced Technology Investment Company (ATIC) and Mubadala Development, both investment arms of the Abu Dhabi state. They took a 67% stake between them – ATIC 44.4% and Mubadala 19.3%. But in late 2009, ATIC announced the acquisition of Chartered Semiconductor for an enterprise value of roughly $4bn and set about combining it with GF, diluting AMD’s stake in the process. Further investments in a new facility in upstate New York took AMD’s stake below 10% by the end of last year.

Now AMD has transferred the remaining capital stock that it was holding in GF, 1.06 million shares worth $278m, back to the fab itself. Along with the stake goes the remainder of a five-year exclusive manufacturing arrangement. To get out of these commitments, AMD will pay GLOBALFOUNDRIES $425m over the next two years – an amount effectively replacing cash incentives that AMD had agreed to pay the fab in 2012 under the old agreement. The $278m and $425m payments will be recorded as a one-time charge on AMD’s Q1 balance sheet.