Category: investment banking

Big money, behind closed doors

Brenon Daly

Contact: Brenon Daly

Who needs to go public when there’s so much late-stage money sloshing around out there? That question hit us in the head this week after two startups announced, separately, that they were each raising $50m in new funding. First, it was marketing automation vendor Marketo saying it pulled in $50m in a new round led by Battery Ventures and then on Thursday, vulnerability management company Rapid7 also drew in that amount from Technology Crossover Ventures.

The latest round for Marketo, which effectively doubles the amount of capital it has raised, is particularly noteworthy. After all, Marketo has seen two of its main rivals track to the public market. Eloqua is currently on file for a $100m offering, while Responsys went public in late April, an offering that raised $79m.

In the case of Responsys, it may well consider itself fortunate that it raised money when it did. The company recently indicated that business through the end of the year is likely to be substantially slower than it had been. The warning knocked the stock about 25% below where it priced in April and half the level it had hit in the summer.

And the next IT security IPO is…

Brenon Daly

Contact: Brenon Daly

From what we hear, investors won’t have to wait anywhere close to another two years for an IPO by an information security vendor. In fact, a pair of companies is set to put in their paperwork, with at least one prospectus possibly filed yet this year. Those offerings would follow last week’s strong debut of Imperva, which was the first IPO in the information security sector since Fortinet hit the market in November 2009.

Since then, however, a half-dozen other security providers that we might have expected to go public – both those formally on file, as well as ones in the ‘shadow’ pipeline – have been snapped up in trade sales or have scrapped IPO plans. So which companies are likely to make it through the ongoing wave of consolidation and actually hit the public market?

Several sources have indicated that both AVG Technologies and AVAST Software have picked their underwriting teams and should be filing prospectuses in the coming weeks. In addition to similar timing on their IPOs, the two companies actually have a fair number of traits in common: both trace their roots back more than 20 years to Prague, and both are primarily known for their ‘freemium’ antivirus offering. Additionally, both AVG and AVAST boast that their products have been downloaded more than 100 million times.

Assuming AVG and AVAST do indeed file and come public, they will likely benefit from two key trends on Wall Street. First, there is a clear demand among investors for security companies. Consider the fact that they are valuing Imperva at a rather rich level of nearly seven times 2011 sales, with Fortinet commanding an even higher valuation.

Second, there has been a notable shift toward the ‘consumerization’ of IPOs. Tech vendors that have debuted so far this year such as LinkedIn, Pandora Media, HomeAway, Zillow and, of course, Groupon have not only dominated headlines, they have also raised significantly more money in their offerings than pure enterprise offerings. Most notably, Groupon raised $700m in its hotly debated IPO. But LinkedIn also raised $400m and Pandora raised $240m, which is more than twice the amount Imperva garnered in its offering, for instance. We’ll have a full look at the rumored offerings by AVG and AVAST, along with a broader look at the information security market, in a special report in tonight’s Daily 451.

In a flash, Fusion-IO plans secondary

Brenon Daly

Contact: Brenon Daly

Just eight months after first filing its IPO paperwork and a scant five months after debuting on the NYSE, Fusion-io has already indicated that there will be a lot more of its shares hitting the market in the coming days. The flash memory specialist plans to sell $100m worth of stock in a secondary, with insiders slated to sell another $250m. In its June IPO, Fusion-io raised more than $200m, selling over 10 million shares. In that offering, insiders sold only 1.5 million shares.

Even though other companies often get slammed for insiders ‘running for the exits’ when selling such a large slug of equity so quickly after the offering, Fusion-io stock barely moved when it announced the secondary. If nothing else, that was consistent with the vendor’s overall stunning aftermarket performance. It priced at $19, first traded in the low $20s and was flirting around $36 on Monday afternoon. And although the stock is highly volatile, with some 10% intra-day swings, it only dipped briefly below its offer price in late September. Overall, any investor who bought on the opening day in June is up about 50%, compared to a flat performance during that period on the Nasdaq.

In that way, Fusion-io is rather unique among the other enterprise technology firms that have gone public so far this year. Cornerstone OnDemand, which went public in March, hit the market at about $19. While Cornerstone held that level for its first four months as a public company, it has been underwater for the last four months. It is down about 25% while the Nasdaq has flatlined. Even more dramatically, Responsys has sunk to just half the level it first traded back in April. Although Responsys had been slipping steadily since early September, the online marketing vendor got buried last week when it warned – in just its third report to Wall Street – that sales in the final months of 2011 would increase only about one-third the rate that revenue had been growing.

Cloud deals arising from the fog

Ben Kolada

Contact: Ben Kolada

Going into the last day of the 9th Cloud Computing Expo, held in Santa Clara, California, we get the feeling that conference attendees will see an M&A shakeout within the next few years. To a degree, this dealmaking has already begun, with a small handful of exhibitors already having been scooped up, including a couple of firms that were acquired just last month. Meanwhile, the remaining vendors, most of whom are young startups, are scrapping to define and prove themselves for what they hope will someday be their own fruitful exits.

The cloud computing market is real and growing. My 451 Market Monitor colleagues, who have the tedious task of sizing the cloud market, estimate global cloud revenue (excluding SaaS) at $9.8 billion for 2011, with nearly 40% revenue growth expected in 2012. Many players in this sector have already taken note of its potential and acquirers’ interest, resulting in an increase in both deal sizes and deal volume for cloud vendors. According to The 451 M&A KnowledgeBase, so far this year a record 465 transactions claimed some aspect of cloud. That’s nearly double what we saw in the same period last year. (To be honest, many of these acquired companies are about as cloudy as snake oil, but there are real cloud deals being done. Platform Computing and Gluster, which both announced their sales last month, sold for an estimated combined deal value just shy of $450m.)

However, in terms of revenue, most of the cloud startups we spoke with haven’t yet really proven themselves commercially. But as these firms transition their focus from product development to marketing and sales, their growth will attract more and more suitors. And double-digit revenue isn’t exactly a requirement for a successful exit, as both the recent CloudSwitch and Cloud.com takeouts proved. Though we understand that none of these companies are looking to sell just yet, we wouldn’t be surprised if cloud-enablement providers such as OnApp, Abiquo and Nimbula are picked off one by one within the next few years. And we were reminded yet again that open source networking and routing vendor Vyatta could someday see a real offer from Dell, though the IT giant would likely face a competing bid from Cisco.

Imperva: the strong, silent type

Brenon Daly

Contact: Brenon Daly

As far as tech IPOs are concerned, the two latest offerings could hardly be more different. Last week, we had the debut of Groupon – the daily deals site that is either the next Amazon or the next Pets.com, depending on the point of view. The debate around Groupon raged loudly and publicly, dominating last week’s financial news broadcasts and financial sites. In contrast, Imperva quietly crept onto the public market on Wednesday, with little fanfare. (The company didn’t even get to ring the opening bell on the NYSE, where it started trading today. Instead, it’ll be doing the honors on Thursday.)

For all of the differences in attention for the two companies, however, there’s one important similarity: performance. Both offerings priced above their expected range and then surged in trading. Groupon, which has created more than $15bn in market value, is still above water. In its offering, Imperva has also put up a strong debut. The data security vendor priced its five-million-share offering at $18 each, above the expected range of $14-16. In midday trading, Imperva stock was changing hands at $24.50. With more than 22 million shares outstanding, Imperva’s offering created more than a half-billion dollars of market value.

Best Buy buys outside the box

Brenon Daly

Contact: Brenon Daly

Best Buy continues to buy outside the box. The consumer electronics giant, which has more than 1,000 big-box stores, announced a pair of deals Monday that add to its emerging businesses that have been responsible for most of the company’s recent growth. In the larger of its purchases, Best Buy will pay $1.3bn to pick up full ownership of its US and Canadian mobile phone business, which had been run as a joint venture with British retailer Carphone Warehouse Group. Additionally, Best Buy will pay $167m for mindSHIFT Technologies, a managed service provider that has about 5,400 small business customers.

The transactions continue a revamp of Best Buy, which started out life as an audio equipment store in 1966. More recently, it has made several acquisitions to expand beyond its historic business. For instance, it bought Geek Squad in 2002 to provide helpdesk support for customers. Service revenue, which has been bolstered by Geek Squad, currently accounts for 7% of the roughly $50bn in sales Best Buy will record this year, and it’s one of the few business lines that has actually increased same-store sales so far this year.

While the Geek Squad pickup has paid off for Best Buy, others have been disappointments. The retailer paid almost $700m for mall-based CD retailer Musicland in 2001, just as the business got ambushed by online music. More recently, it spent $97m in a puzzling purchase of Speakeasy, an Internet service provider. And then there’s the $121m acquisition in September 2008 of Napster. While some of those M&A missteps may have hurt Best Buy, they’ve been nothing like the stumble by its main rival, Circuit City. The company, which pioneered the electronic superstore model, got liquidated in 2009.

Yahoo: hunted, but still in the hunt

Brenon Daly

Contact: Brenon Daly

Amid all the speculation that Yahoo would sell itself (or not), the search engine operator swung to the other side of the table on Tuesday, announcing the $270m all-cash purchase of interclick. The planned acquisition, which is expected to close early next year, is the first time Yahoo has reached for a fellow public company in more than eight years. Yahoo has picked up more than 45 privately held companies and one Bulletin Board-listed company since it acquired Overture Services in 2003 for $1.6bn, its largest-ever acquisition. (Another interesting side note on the interclick deal: Boutique advisory firm GCA Savvian has now advised the past two companies that Yahoo has acquired.)

And in its purchase of interclick, Yahoo is getting a relative bargain, at least on one key measure. (Interclick only generates a few million dollars of cash flow each year, so calculating an EBITDA multiple doesn’t make much sense.) At a $270m equity value, interclick is valued at roughly two times projected 2011 revenue. Even with the takeout premium, that’s less than half of Yahoo’s corresponding valuation. The search engine operator currently garners an equity value of about $19bn, or 4.2 times projected sales of $4.5bn this year.

A frightfully slow October

Brenon Daly

Contact: Brenon Daly

Spending on tech M&A in the just-completed month of October slumped to the third-lowest monthly tally of the year, amid concerns about the growth prospects across the globe as well as specific questions about the stability of Europe. The total value of deals in the past month hit just $10.7bn, trailing only the totals for September ($8.5bn) and February ($10.3bn). Spending for the month of October hasn’t been this low since 2004.

The main reason for the rather anemic spending level in the past month is the absence of significant transactions. October’s priciest deal (Oracle’s $1.5bn all-cash purchase of RightNow Technologies) doesn’t even land in the top 25 largest acquisitions announced so far this year. We would add that the small amount of M&A spending came despite a stunning 11% gain on the Nasdaq index in October. Of course, that equity market surge has to be considered in context: The index has only returned to the level where it started the year, and is still below the level where it started August.

Sterling Partners aids Mosaid

Contact: Thejeswi Venkatesh

Earlier this month, Wi-LAN indicated it would ‘pack up and move on’ if Mosaid Technologies’ shareholders did not accept its sweetened $42 per share unsolicited offer. But in a rather unusual turn of events, it is Mosaid that has moved on. On Friday, the chip technology company announced an agreement with buyout shop Sterling Partners to go private at $46 a share in cash. (Sterling’s bid values Mosaid at about 10 times trailing EBITDA and represents the highest price for the stock in more than a decade.)

Ontario-based Mosaid has many characteristics that make it a good LBO candidate. For instance, it generated $32m in operating cash flow last year. Even more importantly, that cash flow has been fairly predictable thanks to fixed payment agreements with the likes of Hynix Semiconductor, IBM and Samsung. (During the recession-hammered years of 2008 and 2009, Mosaid still generated about the same level of cash from operations.)

And finally, the company has a robust patent portfolio of 2,800 patents. As we have seen in a number of deals recently, IP is increasingly playing a role in M&A, whether it’s the acquisition of Nortel Networks’ patents by a group of companies led by Apple, or the subsequent $12.5bn purchase of Motorola Mobility by Google, the second-largest tech transaction of 2011. Mosaid’s large – and growing – portfolio of patents could well add a bit more to Sterling’s return, when the private equity firm looks to exit this deal.

‘Googorola’ close to closing

Brenon Daly

Contact: Brenon Daly

In what could be its last financial report before it is formally acquired by Google, Motorola Mobility said after the closing bell Thursday that mobile device revenue in the third quarter rose 20% over the same period last year to $2.4bn. That was nearly twice the overall rate of growth at the company in the quarter, although it was a slower rate than the mobile device division had grown in earlier quarters this year.

The main drag on the unprofitable division was anemic sales of its Xoom tablet, with the company indicating that it shipped just 100,000 units in the quarter. That’s just half the number it shipped in Q1 and one-quarter the number it shipped in Q2. But Motorola Mobility did manage to ship more smartphones in the just-completed quarter (4.8 million) than it did in either of the two previous quarters.

And once Google does assume ownership of the company, it may well see a slight bump in demand for those devices, at least according to a finding by our ChangeWave Research division. In late September, ChangeWave asked more than 4,100 consumers what impact Google’s acquisition of Motorola Mobility would have on their plans to buy a smartphone from the combined company. The vast majority said Google’s ownership wouldn’t have any impact. However, of the respondents that indicated a preference, four times the number said they were ‘more likely’ (13%) than said they were ‘less likely’ (3%) to buy a smartphone from the combined company in the future.

The planned $12.5bn sale of Motorola Mobility stands as the second-largest tech acquisition announced so far this year. (The purchase doubled Google’s aggregate M&A spending.) Shareholders in the Libertyville, Illinois-based company are slated to vote on the proposed deal November 17, although it will still need to be cleared by regulators. Assuming that all goes to plan, Google should close its acquisition of Motorola Mobility by the end of the year or early next year.