Category: IPO

Big Yellow tries on a Blue Coat

Brenon Daly

Contact: Brenon Daly

Announcing the second-largest information security transaction in history, Symantec says it will pay $4.7bn in cash for Blue Coat Systems. The single purchase eclipses the amount Big Yellow has spent, collectively, on all of its two dozen information security acquisitions over the past decade and a half, according to 451 Research’s M&A KnowledgeBase. Strategically, the proposed pairing is essentially a large-scale combination of Symantec’s endpoint security with Blue Coat’s Web defense, an M&A trend that has mostly featured deals valued in the tens of millions of dollars, rather than billions of dollars.

The transaction will further boost Symantec’s standing as the largest independent security vendor. On a GAAP basis, the combined company would have sales of about $4.2bn. (For perspective, that’s twice the size of McAfee at the time of its sale to Intel in 2010.) Blue Coat recorded GAAP revenue of $599m in its latest fiscal year. However, because of accounting regulations, that figure excludes a fair amount of deferred revenue. In its IPO paperwork, Blue Coat offered a non-GAAP ‘adjusted revenue’ figure that included the written-off deferred revenue totaling $775m in its latest fiscal year. By either measure, Blue Coat would bump up the combined company’s top line by about 20%.

For Symantec, however, bigger has not necessarily proven to be better. Big Yellow only recently cleaved off its Veritas division, unwinding a decade-long effort to pair security with storage that ultimately failed to produce returns. Yet even on the other side of the tumultuous separation, revenue at Symantec shrank in its previous fiscal year by 9%, with the company forecasting that the contraction would continue in the current fiscal year. The instability has also played out in the corner office, with Symantec having run through three CEOs in the past four years. (Note: Symantec currently doesn’t have a permanent chief executive, although as part of the agreement, current Blue Coat CEO Greg Clark will take the top job at the combined company after the deal closes, which is expected by September. In that way, there’s also a bit of an ‘acq-hire’ aspect to the multibillion-dollar pairing.)

The move marks a rare case of a dual-tracking, with Symantec buying Blue Coat less than two weeks after the company revealed its IPO paperwork. And, as we look at Blue Coat’s valuation, we can’t help but think that Big Yellow had to outbid Wall Street to get this transaction done. Think about it this way: a little more than a year ago, current owner Bain Capital was able to purchase Blue Coat for $2.4bn – just half the price Symantec is paying. (Of course, last spring Symantec probably wasn’t in a position to do a major deal, as it was focused on the Veritas divestiture.)

At $4.7bn, Blue Coat is valued at 7.8x its trailing GAAP revenue of $600m. (Even if we view the transaction on the adjusted revenue of $775m, Symantec is paying 6x non-GAAP revenue. Continuing on those unorthodox financial measures, we would add that the acquisition values Blue Coat at slightly more than 20x trailing adjusted EBITDA.) Overall, those valuations are only slightly above the average of just under 7x trailing sales for information security deals valued at more than $1bn over the past 14 years, according to 451 Research’s M&A KnowledgeBase.

Largest information security transactions, 2002-16

Date announced Acquirer Target Deal value Deal valuation*
August 19, 2010 Intel McAfee $7.7bn 3.4x
June 12, 2016 Symantec Blue Coat Systems $4.7bn 7.8x
Feb 9, 2004 Juniper Networks Netscreen Technologies $4bn 14.3x
July 23, 2013 Cisco Systems Sourcefire $2.7bn 10.7x
March 10, 2015 Bain Capital Blue Coat Systems $2.4bn 3.8x

Source: 451 Research’s M&A KnowledgeBase *Price-to-trailing-sales multiple

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No longer a faded garment, Blue Coat to hit the public market

Brenon Daly

Contact: Brenon Daly

More than four years after going private, Blue Coat is set to make a return to the public market. But the company that put in its IPO paperwork is very different from the one that beat a hasty retreat from Wall Street. The resurrected Blue Coat is cleaner, more stable and throws off more cash. And, most dramatically, it’s growing at a healthy mid-teens percentage rate, while the old version was shrinking. The reboot of Blue Coat, which has been accomplished under private equity (PE) ownership, will pay dividends as it makes its debut.

The original Blue Coat, which was founded 20 years ago, was a bit of a faded garment when its initial PE owner, Thoma Bravo, got its hands on it. As noted, revenue was declining as the company stumbled from its network performance origins into Web security, while not doing either particularly well. (451 Research surveys of customers at the time of Blue Coat’s leveraged buyout showed that respondents had a largely unfavorable view of the company, with many indicating they planned to cut their spending with it.) That corporate uncertainty was compounded by churn in the corner office, as three CEOs came and went in just the 18 months leading up to Blue Coat’s LBO.

The company is now squarely focused on network security, while also spending liberally to step into securing the cloud. This growth is crucial because the cloud has effectively expanded the perimeter of a network, and many legacy network-based security products – from some of Blue Coat’s contemporaries – have proven ineffective at addressing cloud and mobile use cases. That helps explain why the company has rung up a $400m bill for SaaS security, acquiring both Perspecsys and Elastica last year.

Blue Coat has taken these strategic steps while roughly tripling cash-flow generation and increasing revenue by about two-thirds. Some caveats, however, are needed when comparing the current financial performance at the company with its earlier numbers. In its prospectus, Blue Coat has put forward several non-GAAP measures as key metrics, including ‘adjusted revenue’ and ‘adjusted EBITDA.’ Although 451 Research relies on GAAP figures, there are compelling reasons – notably the deferred revenue write-downs, which are essentially an accounting exercise – that make it understandable why the company favors those nonstandard measures. With those disclaimers, Blue Coat reports adjusted revenue of $775m and adjusted EBITDA of $223m for its most recent fiscal year, which ended in April. Regardless of the measure, however, it’s fair to say that the new Blue Coat is a whole lot bigger and throws off more cash than it ever has before.

After much of the initial cleanup at Blue Coat was done under Thoma Bravo, the buyout shop sold the company to current owner Bain Capital last March. (As an aside, we would note that Thoma Bravo – despite having one of the biggest buyout portfolios in the tech industry – still hasn’t taken a portfolio company public.) Bain Capital paid $2.4bn, and looks certain to see its blue-hued portfolio company hit the market at north of $3bn.

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Calling Wall Street: Twilio looks to break the slump of VC-backed IPOs

Scott Denne

Contact: Scott Denne

Twilio has set itself up for the first venture-backed IPO of the year. The maker of communications tools and services for mobile app developers unveiled its prospectus showing solid revenue growth, mild losses (for a venture capital portfolio company) and a lack of long-term contracts that will make its future results challenging to predict.

The San Francisco-based company finished 2015 with $167m in revenue, an increase of 88% from a year earlier and a growth rate that’s 10 percentage points higher than 2014’s growth. Its losses increased to $36m from $27m. Losses, measured as a percentage of revenue, decreased to 21% from 30% as Twilio generated increasing revenue for each dollar of sales and marketing spending. Marketing spending will likely trend back up in the wake of the company’s IPO as it plans to invest in building its enterprise sales team to land more business within that sector.

Twilio will have to be successful in that strategy to keep growth near its historic pace. The company depends on a single customer for much of its revenue: Facebook’s WhatsApp accounted for 17%, or $28m, of last year’s sales. Meanwhile, its top 10 customers made up a combined 32% of its revenue – so aside from WhatsApp, those clients spent only an average of $3m on the platform. The average account outside the top 10 paid just $4,000 (some customers have more than one account). Unlike most SaaS vendors, the bulk of Twilio’s revenue – over 70% – is billed based on usage. Few accounts, including WhatsApp, have contracts with minimum spending levels – the company maintains just $6m in deferred revenue on its balance sheet.

The variability, lack of contracts and dependence on WhatsApp will weigh down the valuation and, we believe, push Twilio’s market cap toward the lower end of the spectrum among SaaS firms. The company seems to be aware of this and invented a non-GAAP financial metric (something that’s always worrisome to see) called ‘dollar-based net expansion rate’ that, no surprise, shows a growth rate that’s nearly twice that of its GAAP revenue.

RingCentral provides a good predictor of where Twilio’s valuation might fall when it hits the public markets. That company also offers voice and text communications services, although mainly to businesses. While RingCentral has a slower rate of growth – about 30% year over year – it posts more predictable revenue. As Twilio is seeking to do, it started at the low end of the market and has been pushing upstream. RingCentral trades at 4x trailing revenue and we would expect Twilio to fetch something in that neighborhood, giving it a market cap of about $750m on $192m in trailing revenue.

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Survey: After years of big plans and big buys, tech acquirers signal a slowdown

Brenon Daly

After pushing M&A spending to a 15-year high last year, a record number of tech acquirers have indicated that they will be stepping out of the market in 2016. For the first time in the four-year history of the M&A Leaders’ Survey from 451 Research and Morrison & Foerster, the number of respondents forecasting an uptick in acquisition activity only slightly exceeded the number saying they would be cutting back on their shopping. That’s a significant deterioration in M&A sentiment compared with past surveys, which, on average, have seen more than four times as many respondents project an increase than a decrease.

In our late-April survey, fully one-third (33%) of respondents said they would be slowing their acquisition activity over the next six months, compared with just 38% who reported that they would be accelerating their M&A program. Taken together, the responses mark the most bearish tone ever from our respondents, who represent many of the most well-known buyers in the tech industry as well as their advisers. In our previous surveys, the average forecast has been overwhelming bullish, with more than half of respondents (55%) anticipating an acceleration in activity and only 13% saying the opposite. (Subscribers to 451 Research can see our full analysis of the M&A Leaders’ Survey.)

 

2016 MA outlook

The SecureWorks IPO: delayed, downsized and discounted

Brenon Daly

by Brenon Daly

So much for the comeback of the tech IPO market. Although SecureWorks did manage to make it public on Friday, the managed security service provider – along with its 17 underwriting banks – had to trim both the size and price of its offering to get investors interested. In afternoon trading on the Nasdaq exchange, SecureWorks shares were changing hands around its offer price of $14, which is lower than the range it laid out earlier.

Recent enterprise tech IPOs*

Company Date of offering
Box, Inc Jan. 23, 2015
GoDaddy April 1, 2015
Apigee April 24, 2015
Xactly June 26, 2015
Rapid7 July 17, 2015
Pure Storage Oct. 7, 2015
Mimecast Nov. 20, 2015
Atlassian Dec. 10, 2015
SecureWorks April 22, 2016

*Includes Nasdaq and NYSE listings only

SecureWorks’ underwhelming debut comes as the first enterprise tech offering since Atlassian hit the market in December. In the intervening months, concerns about slowing economic growth have swept through the world’s equity markets. Here in the US, the Nasdaq Composite Index dropped 15% in the first six weeks of this year. During that bear market, tech companies prudently opted not to continue with their offerings, much as a ship captain would not choose to set sail in stormy seas.

However, by late April, as SecureWorks launched its delayed offering, the storm had mostly passed. The Nasdaq has recovered its losses from earlier in the year, and Wall Street was no longer shaky ground. An April survey of individual investors by ChangeWave (a subsidiary of 451 Research) showed a dramatic turnaround in sentiment: Only one-third of respondents to our April survey said they were ‘less confident’ in the stock market than they were three months ago. That was just half the level at the start of 2016, and the lowest reading in more than a year. On the other hand, almost one-quarter of the respondents indicated they are feeling ‘more confident’ in Wall Street, which was the most-bullish reading we’ve had in three years.

So SecureWorks wasn’t necessarily heading out into stormy weather. Yet it still had to give up a fair amount to get public, which doesn’t seem to make much sense. (And Wall Street is nothing if not rational and judicious.) Sure, the company is unprofitable. But red ink has never stopped investors from buying, even when a company counts its revenue in the tens of millions of dollars but its net losses in the hundreds of millions of dollars. (For the record, SecureWorks is nowhere near that level, having lost $72m on revenue of $340m in its most-recent fiscal year, which ended in January.)

If SecureWorks’ so-so IPO wasn’t entirely due to the broad market or the company, maybe it had something to do with the offering itself. The basics of the SecureWorks IPO could be summarized like this: An established tech company acquires a fast-growing startup, then spins off a minority stake of a class of equity that effectively gives shareholders no voice in the direction or outcome at the company. That’s virtually the same structure as the VMware IPO, which hasn’t necessarily been kind to the company’s minority shareholders.

CW wall street April 2016

Will Zuora play in Peoria?

Brenon Daly

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

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That giant sucking sound on Wall Street

Brenon Daly

Contact: Brenon Daly

After a hard freeze last winter, there are signs of new growth on Wall Street this spring, with a pair of tech startups reportedly soon set to join the ranks of US public companies. After more than three months of silence, both SecureWorks and Nutanix have recently updated their IPO paperwork and have indicated that their offerings are back on track. In a more receptive market, the two companies would already be public by now. (Assuming that Nutanix does indeed debut, for instance, it will have been on file with the SEC more than twice as long as Pure Storage, which went public last fall.)

The offerings would also come after a quarter in which startups were shut out of the public market. Not a single tech vendor went public in Q1, the first time that has happened since the recession years. (451 Research subscribers: See our full report on Q1 activity, including the IPO shutout and the implications on the tech M&A market.)

Yet, even if SecureWorks and Nutanix do manage to join the public market, the new arrivals will do little to offset the number of tech companies leaving the public ranks. Already this year, we’ve seen 16 firms erased from the Nasdaq and NYSE exchanges, according to 451 Research’s M&A KnowledgeBase. (To be clear, we are including only full acquisitions, and excluding divestitures.) The departures have ranged from household names (Ingram Micro, ADT) to somewhat faded businesses (LoJack, LeapFrog). Altogether, the announced transactions for public companies have siphoned off nearly $32bn of value from the two main US exchanges.

The net outflow of tech firms from the US exchanges is, of course, nothing new. (In 2015, according to the M&A KnowledgeBase, 79 tech companies got erased.) But it stands out all the more this year as – thus far – there haven’t been any offsetting offerings. And even as SecureWorks, Nutanix and others work their way toward a listing, other vendors are looking like they could very well get pushed off of Wall Street. Both Citrix and Qlik have drawn interest from a hedge fund with a record of pushing businesses to sell.

Projected number of tech IPOs

Period Average forecast
December 2015 for 2016 19
December 2014 for 2015 33
December 2013 for 2014 29
December 2012 for 2013 20
December 2011 for 2012 25
December 2010 for 2011 25
December 2009 for 2010 22
December 2008 for 2009 7
December 2007 for 2008 25

Source: 451 Research Tech Corporate Development Outlook Survey

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For tech IPOs in Q1, it’s a startup shutout

Brenon Daly

Contact: Brenon Daly

Call it a startup shutout. Not a single tech company went public in the just-completed first quarter, marking the first time since the recent recession that we haven’t seen a tech IPO in a quarter. The lack of tech offerings so far this year stands out even more when we consider the dozens of startups in recent years that have indicated – either directly or indirectly – that they are of a size and mind to go public.

Consider the plight of one of the two tech vendors that recently revealed its IPO paperwork, Nutanix. The fast-growing provider of hyperconverged infrastructure officially filed its IPO prospectus, which was supported by no fewer than a dozen underwriting banks, in late December and fully planned to debut in Q1. And yet, despite all of the time, effort and expense in putting together the paperwork to go public, Nutanix remains private. The company hasn’t even updated its original filing from three months ago. (For comparison, SecureWorks filed its paperwork shortly before Nutanix and rather belatedly amended its filing in March, and is expected to launch its offering in April.)

Meanwhile, the other exit available to startups – an outright sale – isn’t looking like the richly rewarding process it once was. Sure, Jasper Technologies enjoyed a 10-digit exit to Cisco in early February. But we would point out that no other VC-backed tech startup has sold for more than $400m so far this year. Rather than Jasper’s exit, we might highlight a pair of other transactions involving IPO wannabes as far more representative of the current environment.

Take the case of Yodle. The digital marketing firm had been on file to go public since 2014, but hadn’t updated its original filing. Instead of dusting off its prospectus, it accepted a relatively low bid of $342m, or 1.6x sales, from hosting provider Web.com in February. Or even consider the sale of iSIGHT Partners to FireEye in February for $200m upfront plus an addition $75m earnout. According to our understanding, the $200m upfront is only slightly more than the company’s valuation in its funding a year ago. Around the time of the funding, iSIGHT had been indicating that it planned to debut either in 2016 or 2017.

451 Research subscribers can view our analysis of the recent IPO and M&A activity and our outlook for the rest of 2016 in our Q1 report, which will be on our website later today and in tomorrow’s 451 Market Insight.

Projected ‘competition’ from IPOs for target companies

Year More competition About the same Less competition
December 2015 for 2016 13% 36% 51%
December 2014 for 2015 26% 46% 28%
December 2013 for 2014 46% 34% 20%
December 2012 for 2013 15% 38% 47%
December 2011 for 2012 33% 42% 25%

Source: 451 Research Tech Corporate Development Outlook Survey

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With two months in the books, 2016 tech M&A is still slogging along

Brenon Daly

Contact: Brenon Daly

For the second straight month, tech M&A in February looked more like the post-recession years leading up to 2015’s record activity than last year’s bonanza. Spending on tech, media and telecom (TMT) acquisitions around the globe in the just completed month hit $28.7bn, according to 451 Research’s M&A KnowledgeBase. While that represents a significant bump from the paltry $20.5bn of aggregate spending in January, February’s total falls more than one-third lower than the average monthly level in 2015. Further, the number of transactions in this leap-year February slipped to the lowest monthly number since late 2014.

Looking inside the pricing of last month’s deal flow, transactions tended to be polarized. On the top end, big buyers Cisco and Microsoft both paid double-digit valuations in their purchases of Jasper Technologies and Xamarin, respectively. Also, in terms of deal size, IBM’s $2.6bn reach for Truven Health Analytics is notable as Big Blue’s largest acquisition since late 2007.

However, as might be expected as the equity markets ground lower across the globe in February, many more tech acquisitions went off at significantly reduced valuations. For instance, onetime IPO hopeful Yodle fetched just $342m, or 1.6x trailing sales, in its sale to Web.com. LoJack got erased from the Nasdaq at just 1x trailing sales. And LeapFrog Enterprises, an educational toy maker whose shares once traded at north of $40 each, is set to be consolidated for just $72m, or $1 per share.

In addition to pressuring valuations, the turmoil in the equity markets has also scared off any companies from going public. Two months into 2016, we still haven’t seen a tech IPO. Even Nutanix – which filed its initial S-1 in late December – hasn’t updated its paperwork in the 10 weeks since then. The drought so far this year comes as corporate development executives in a 451 Research survey gave their lowest forecast for the number of tech IPOs since the credit crisis.

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What is Charles Darwin doing at this year’s RSA Conference?

Brenon Daly

Contact: Brenon Daly

In addition to the Pollyanna marketers and go-getter executives that make up most of the attendees at the RSA Conference, there will also be a slightly more unsettling figure looming around the security industry’s marquee event: Charles Darwin. No, the long-dead scientist won’t be actually docking his ship, HMS Beagle, on the San Francisco waterfront to attend next week’s confab. But Darwin’s seminal theory about ‘natural selection’ is going to be one of the more visible – if unacknowledged – themes at this year’s RSA Conference. Bluntly put, some of the 500 companies and sponsors that help put on this year’s event won’t be around when RSA opens the doors on future conferences. (451 Research subscribers, see our full preview of this year’s RSA Conference.)

This isn’t to say that the RSA show floor is somehow going to turn into a killing ground. Rather than viewing it cinematographically, we view it clinically. The RSA Conference is nothing more than a petri dish of organisms that, until now, have had ideal conditions to evolve and reproduce. In the months leading up to this year’s gathering, however, those life-sustaining conditions have deteriorated to the point where some of the organisms will not survive. The weak will be ‘selected out’ – a process that in some ways is overdue in the crowded information security market.

We’re already seeing some of that pressure come through in infosec M&A. Consider the contrast between the two largest acquisitions by FireEye, which has served as a convenient bellwether for the next-generation infosec vendors. Two years ago, it spent almost $1bn, more than 10x trailing sales, for incident response firm Mandiant. Last month, it handed over just $200m upfront for iSIGHT Partners, valuing the threat intelligence specialist at half the multiple it paid for Mandiant. Further, according to our understanding, iSIGHT garnered only a slight uptick in valuation in its sale compared with its valuation in a funding round announced a year earlier. The return can still be boosted, provided iSIGHT hits the targets of a $75m earnout. But even including the additional kicker, it’s still a relatively modest exit for a company that as recently as last year had positioned itself in the IPO pipeline.

That bearishness might not come through on the RSA Conference show floor or even in the afterhours cocktail parties next week. But long after the booths are packed up and the drinks have stopped flowing, infosec startups will have to get back to business. And what they are likely to find is that business for the rest of the year is going to get a whole lot tougher as buyers and backers hold much more tightly onto their life-sustaining purchases and investments, respectively. To help adapt to that new environment, startups might be well served to tuck a copy of Darwin’s On the Origin of Species into their RSA Conference swag bag and look for some pointers on how to make it through the upcoming selection cycle in the infosec industry. See our full report.

CW infosec spend 2016