Category: investment banking

A barb-less Benioff? salesforce.com grows up

Brenon Daly

Contact: Brenon Daly

In just a half-year, it sounds like salesforce.com has done a fair amount of growing up. We were thinking that Thursday as the San Francisco-based company once again hosted an event in its hometown. But the tone was markedly different from the event it put together here last fall. Most notably, salesforce.com stopped throwing punches and started throwing hugs to other enterprise software vendors.

Rather than blasting Oracle as a ‘false cloud’ provider or taking swipes at SAP as a dinosaur, CEO Marc Benioff extended olive branches to those rivals. In his keynote, he talked about ‘coexisting’ with those companies, stressing the need for ‘deep integration’ between salesforce.com’s products and the widely deployed software. (But Benioff wouldn’t be Benioff if he didn’t put his own marketing spin on the relationship: he positions salesforce.com as the ‘social front office’ for rival existing back-office systems, such as general ledger apps.)

It was a rather dramatic change in tone, suggesting that salesforce.com is staking its claim as a full-fledged member of the fraternity of enterprise software vendors. The company certainly has the numbers to back up that claim: in its previous quarter, salesforce.com announced its first-ever nine-digit contract and is on track to generate close to $3bn in revenue this year. (And don’t forget that salesforce.com also sports a major-league market cap of $20.7bn.)

For their part, Benioff and other people at the company say that détente is in response to customers’ need for software vendors to work together. That’s certainly understandable as most companies run a mishmash of software from a variety of providers. But we might suggest that the tone also reflects a new reality that has only emerged on a grand scale since last fall: the division between the old-line license model and the emerging on-demand model is not as irreconcilable as once thought.

Just since salesforce.com’s last event in San Francisco, SAP and Oracle have done landmark acquisitions of high-profile SaaS vendors, ones that were often mentioned in the same breath as salesforce.com. (The spending spree cost the old-line companies more than $7bn.) So if the old software guard – and even more importantly, their customers – figure they can work with SaaS providers, maybe it’s not too farfetched to imagine SAP and Oracle perhaps taking a run at salesforce.com in the future.

A milestone for The 451 M&A KnowledgeBase

Contact: Brenon Daly, Tim Miller

After a decade of charting the ups and downs of the tech M&A market, The 451 M&A KnowledgeBase hit a significant milestone earlier this week: we entered our 30,000 transaction in what has become the go-to database for the tech dealmaking community. When we started building our comprehensive database on January 1, 2002, the tech industry was still struggling to recover from a meltdown that it had largely brought on itself.

With the drastic ‘revaluation’ that swept through the tech landscape after the Internet bubble burst, it hardly seemed possible in the early 2000s that we were about to chronicle a decade that would see a staggering $2.5 trillion in collective M&A spending. (To put that mind-boggling figure into perspective, consider that the aggregate value of tech deals equals the annual GDP for all of France.)

What’s more, the pace of dealmaking is accelerating. It took us basically four and a half years to record the first 10,000 transactions in The 451 M&A KnowledgeBase. But we’ve blazed through each of the two subsequent 10,000-deal blocks in just less than three years. For another indication of just how sharp the acceleration has been, consider this: while the tech M&A spending levels of 2004 and 2011 matched each other almost exactly at $225bn, last year saw nearly twice as many transactions (3,730) compared with 2004 (2,080).

Milestones in tech M&A

Number of transactions Period Period duration
1-10,000 January 2002-May 2006 53 months
10,000-20,000 May 2006-April 2009 35 months
20,000-30,000 April 2009-March 2012 35 months

Source: The 451 M&A KnowledgeBase

There are a number of reasons for the dramatic – and dizzying – pickup in the pace of tech M&A. Obviously, the industry is more mature, which brings increased pressure to find new growth markets that companies can buy their way into. (Cash levels at most of these buyers, meanwhile, have never been higher, with tens of billions of dollars sloshing around in many corporate treasuries.) That has meant acquisitions that have not only taken companies into markets that have historically been off-limits (think of Dell going on a two-year shopping spree in storage rather than continue to partner with outside vendors), but also led them into markets that are only emerging (think of Google, essentially a media company, getting into the mobile hardware game by buying Motorola Mobility).

Undoubtedly, those trends will continue to drive M&A at a rapid rate. (Already this year, we’re moving along at the same record-level clip that we registered in the same timeframe last year in terms of deal volume.) To help you make sense of the deal flow – and ultimately make better deals, whatever side of the transaction you find yourself – we invite you to test drive The 451 M&A KnowledgeBase. We’re confident that you’ll find the insight, in-depth categorization and propriety estimates for deal terms in the database an indispensible M&A tool. Just click here for a free, no-obligation trial of The 451 M&A KnowledgeBase.

Bigger isn’t always better at Dell

Brenon Daly

Contact: Brenon Daly

Bigger is better, right? That is often the rationale used by tech heavyweights who write multibillion-dollar checks in their quest for ‘scale.’ Not so with Dell in its recent M&A activity. In each of the company’s acquisitions so far this year, Dell passed over large, publicly traded vendors that the company knew well in favor of much smaller (and much less pricey) rivals.

To add to its security portfolio, for instance, Dell on Tuesday reached for unified threat management (UTM) provider SonicWALL. While the acquisition brings a significant UTM business to Dell, the $260m in trailing revenue is much smaller than the $440m or so UTM giant Fortinet produced last year. But then, Dell only had to pay a reported 4.5 times trailing sales, compared with Fortinet’s current market valuation of 10x trailing sales. (In a rumor that turned out to be half right, we indicated last week that Dell might be looking to pick up Fortinet, in what would have been the second-most-expensive information security acquisition.)

Dell’s security purchase comes less than a month after the company used M&A to fill a long-standing blank spot in its storage portfolio: backup and recovery. In that transaction, too, Dell opted for a startup (AppAssure Software) rather than the major-league player in the market (CommVault). That decision was even more notable because Dell was CommVault’s largest OEM partner, accounting for some 20% of that company’s total revenue. CommVault shares currently change hands near their all-time highs, giving the vendor a market cap of $2.2bn. Dell didn’t release the price it paid for startup AppAssure, but it was likely one-tenth that amount.

We might contrast Dell’s shopping trips with fellow tech giant Hewlett-Packard. For example, when HP wanted to add a SIEM product to its portfolio in 2010, it passed on any number of small SIEM providers as it settled on kingpin ArcSight, which was running at about $200m in sales – or nearly four times the revenue of any of the smaller firms. Similarly, it paid a double-digit valuation last summer for Autonomy Corp. The purchase of Autonomy, which was the largest software deal in seven years, brought nearly $1bn of revenue from the enterprise content management vendor.

Of course, those two behemoths – and their respective M&A styles – did bump up against each other in the tussle over storage giant 3PAR in 2010. Recall that Dell planned to take home the company before HP jumped the bid. A public bidding war followed. After several rounds of back-and-forth bidding, Dell dropped out, leaving HP as the buyer for 3PAR. In the end, HP paid nearly twice as much as for 3PAR as Dell had planned to pay – the deal printed at $33 for each 3PAR share, compared with Dell’s opening offer of $18 per share.

Dell adds UTM vendor, but not the one we thought

Brenon Daly

Contact: Brenon Daly

Just days after we reported rumors that Dell was looking to acquire a unified threat management (UTM) vendor, the tech giant did indeed reach for one. However, it wasn’t the one we indicated. Dell said Tuesday that it will be picking up SonicWALL, less than two years after the security company went private in a $717m deal sponsored by Thoma Bravo.

The market chatter last week had Dell adding UTM rival Fortinet. However, even on a rough, back-of-the-envelope basis, a purchase of Fortinet would likely cost Dell at least four times as much as it probably paid for SonicWALL. Early indications are that Dell paid slightly more than $1bn for SonicWALL, while Fortinet garners a market valuation of $4.3bn, and that’s without an acquisition premium.

Dell didn’t release the price for SonicWALL, although it did note that the company generated $260m in trailing sales. The guidance would appear to indicate that SonicWALL was posting rather muted growth. When it went private, SonicWALL said it would do about $230m in sales in 2010. That would imply that SonicWALL only grew 13% in 2011, less than half the 33% rate put up by Fortinet last year. (Further, Fortinet is generating that growth off a significantly higher revenue base, and will top a half-billion dollars in sales this year.)

But in many ways, SonicWALL is a better fit inside the Dell portfolio than Fortinet. For starters, SonicWALL targets SMBs, where Dell traditionally focuses as well. (Although with recent releases, Dell has announced its aspirations for an enterprise foothold.) Both companies go to market largely through the channel, and even share some partners. Dell has actually been reselling SonicWALL for a decade. We’ll have a full report on this deal in tonight’s Daily 451.

Survey: Business looking up for startups

Brenon Daly

Contact: Brenon Daly

Even though M&A activity so far this year has remained rather muted, startups are still seeing a trade sale as the likely exit for their business. In a survey that Montgomery & Co released at its ninth annual technology conference last week, a full three-quarters (73%) of the startups indicated that a sale of their business was the ‘most likely exit path.’ That was more than 10 times the percentage of respondents (7%) who said an IPO was the ‘most likely’ outcome.

The responses, which came from a selection of the 180 companies that presented during the two-day Montgomery conference, also indicated that business is picking up. Six out of 10 (61%) predicted a significant improvement in business in the first half of this year compared with the back half of 2011. A further 25% projected moderate improvement. When it came to putting a number on that, nearly half (48%) the respondents said they expected sales to at least double in 2012.

However, whether that bullishness comes through in the prices these startups ultimately fetch in trade sales is less certain. In our survey last December of corporate developer executives – the main buyers of these startups – nearly four out of 10 (39%) indicated that they expected the M&A valuation of startups to decline in 2012. That level was actually slightly higher than the percentage who forecasted an increase – the first time that has happened in three years.

These differing views between the buyers and sellers in the tech market are creating a valuation gap, which goes some distance toward explaining why M&A spending so far this year is running only slightly more than half the level it was at the same time last year. In all five years of our survey, corporate development executives have highlighted the ‘bid/ask spread’ as the single biggest M&A pain point for them.

Who will shop during Quest’s ‘go shop’?

Brenon Daly

Contact: Brenon Daly

After more than two decades as a public company, Quest Software said Friday that it was planning to go private in a $2bn management buyout (MBO) with participation from Insight Venture Partners. The deal isn’t unexpected, as the old-line software vendor has a financial profile that (arguably) is more at home in a private equity (PE) portfolio than on the Nasdaq: a company that grows at a modest 10% clip (led by its services business), does a handful of acquisitions every year, and is headed by a CEO who owns about one-third of the equity.

Under terms, the MBO group will offer $23 for each of the remaining shares not currently held by chief executive Vinny Smith. (As is standard in these transactions, Smith will roll over his equity into the newly owned entity once the deal closes.) Quest has about 90 million shares outstanding, so the equity value of the proposed transaction is roughly $2bn. On a net basis, the company carries about $200m in cash, giving Quest an enterprise value of roughly $1.8bn.

That means the MBO group is offering 2.1 times Quest’s 2011 revenue of $857m and 1.9x its forecasted revenue of about $940m in 2012. Or looked at from a financial buyers’ vantage point: Quest is being valued at 3.5x trailing services revenue. (The proposed buyout would be the largest purchase of a software company by a PE firm since the equity markets melted down and credit markets tightened up last August.)

Wall Street has already indicated that the offer, representing a 19% premium, isn’t rich enough. (The stock was trading through the bid on Friday afternoon, changing hands at nearly a dollar higher.) Last summer, even without the takeout premium, shares traded above the price the MBO group is offering. Perhaps anticipating that, the MBO has a 60-day ‘go-shop’ period where Quest and its advisers can actively canvass the market for a higher offer. If they secure a superior bid in that two-month window, Quest would be on the hook for a 2% breakup fee, compared with a 3% fee after that time.

Is Dell looking to fortify its security business with Fortinet?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

Long rumored as an acquisition candidate, Fortinet found itself at the center of M&A speculation again on Thursday. The buzz was making the rounds, with the unified threat management (UTM) vendor paired with the increasingly acquisitive Dell. Fortinet shares currently trade about twice the level they came public at back in November 2009, with a market cap of $4.1bn.

Even a standard one-third premium on Fortinet’s current trading value would put the price in the neighborhood of $5.5bn. That would make this (still rumored) transaction the second-largest deal in the information security market, trailing only Intel’s $7.68bn purchase of McAfee. (McAfee garnered a roughly 60% premium.) Fortinet recorded sales of $433m in 2011 and will likely generate about $520m in revenue this year, so the company would almost certainly pull in a double-digit multiple.

Fortinet was founded by Ken Xie – who, along with his brother, still owns a significant chunk of the business – who already has a multibillion-dollar security exit. He sold his company NetScreen Technologies to Juniper Networks for $4bn in equity back in 2004. In the past, Fortinet has attracted attention from Dell, Cisco Systems and IBM, among other tech giants.

A pairing with Dell would make a great deal of sense. Foremost, Dell has a tremendous product distribution channel that could push along Fortinet’s appliances. More broadly, it would also fit well with Dell’s previous significant security acquisition, SecureWorks. Fortinet would boost the SecureWorks’ portfolio and make for easy management of those offerings.

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

Nuance consolidates with Transcend acquisition

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Following a record dealmaking year for the speech recognition software vendor, Nuance Communications today announced the $313m acquisition of medical-focused rival Transcend Services. The deal is Nuance’s largest purchase since its last significant medical acquisition in April 2008, when it paid $363m for eScription. Nuance had earlier acquired Transcend competitor Webmedx for an undisclosed amount in July 2011. Each of these transactions bolsters Nuance’s healthcare division.

Nuance is handing over $29.50 per share in cash for Transcend, valuing the target’s equity at $313m (Transcend had no debt and about $13m in cash at the end of 2011, so the enterprise value is slightly lower at $300m). The per-share offer is a 40% premium to Transcend’s closing share price the day before the deal was announced and, with the exception of a brief uptick in July 2011, the highest price Transcend’s shares have seen since 1996. However, the valuation for the company is lower than a precedent transaction. Using enterprise value, Nuance is valuing Transcend at only 2.4x trailing sales. Meanwhile, its pickup of eScription, a SaaS provider of voice recognition and transcription services, was valued at a loftier 8.1x trailing sales. Some explanation for the discrepancy is the premium given to SaaS companies and difference in margins. EScription had an equally lofty operating margin of 39% compared with Transcend’s 16%. Further, Transcend’s SaaS platform was relatively nascent, having hit the market just last summer.

The Transcend buy follows a record year of dealmaking that saw Nuance announce eight transactions worth nearly $400m. But the buying spree may not be over, given the continuing consolidation in the transcription and voice recognition sector. Even MedQuist, a relatively infrequent acquirer and Transcend’s chief competitor, bought three companies in the past two years, including M*Modal for $130m in July 2011.

PLATO sets sail for Archipelago

Contact: Thejeswi Venkatesh

Last fall, PLATO Learning failed in its bid to acquire Renaissance Learning even though it was ready to pay more than its competing bidder. (The reason: Renaissance’s majority shareholders felt employee interests would be better protected by selling to Permira Funds.) On Monday, the Thoma Bravo-backed online education company announced its biggest purchase since then, the acquisition of Archipelago Learning for $292m in cash. PLATO is unlikely to face similar problems in buying Archipelago, given that it has already received the support of fellow buyout firm Providence Equity Partners, which owns 46% of the target.

The transaction values Archipelago at 4.1 times sales, a handsome valuation compared with the 3.3x multiple that Renaissance received in its buyout. More interestingly, that’s almost twice the 2.1x multiple that PLATO itself garnered in its 2010 buyout by Thoma Bravo. In our view, however, Archipelago’s growth justifies the rich valuation. The company has grown from $18m in 2007 to $73m in 2011, an impressive compound annual growth rate (CAGR) of 42%, compared with the paltry 6% CAGR that Renaissance put up in the three years prior to its acquisition. Barclays Capital acted as financial adviser to Archipelago.

Security sector ripe for M&A

Ben Kolada

Contact: Ben Kolada

Thousands of security executives, bankers and investors descended on San Francisco last week for the annual RSA and America’s Growth Capital West Coast Information Security & Emerging Growth conferences. (Many of them also joined us at our executive-only breakfast last week.) Nearly 700 companies exhibited at the two conferences, and after speaking with many of these companies we walked away convinced that the number of M&A opportunities in enterprise security seem as large as ever.

Many of these companies saw explosive growth in 2011, and the forecasts are equally bullish for this year. One such company is network security analytics startup Solera Networks. Following RSA last year, we predicted that NetWitness would soon sell – we were right. This year, we expect NetWitness rival Solera to get some acquisition attention. We hear that the company generated just under $10m in sales last year, but is growing quickly. Although Solera’s current revenue is much smaller than what NetWitness generated in the year before its sale, we wouldn’t be surprised if its investors expect a comparable valuation. Including a recent $20m series D funding round secured in January, Solera’s investors have collectively put $51m into the company. NetWitness, on the other hand, had taken in just about $20m before its sale.

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