Category: IPO

Survey: the already weak tech IPO market looks even weaker in 2016

Brenon Daly

Contact: Brenon Daly

Despite 2015 being one of the weakest markets for tech IPOs in recent years, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster don’t expect a rebound in 2016. (See our full report on the survey.) In fact, more than four out of 10 (43%) forecast a further slowdown in public offerings next year, compared with three out of ten (29%) expecting a pickup in IPO activity. That’s a direct reversal of the already weak sentiment from the previous survey just last April.

By our count, only a half dozen enterprise tech companies have come to market on US exchanges so far this year. More alarmingly, the companies that have made it public in 2015 have continued to get roughed up on Wall Street. Half of this year’s debutants (Box, Apigee and Xactly) are currently trading below the valuations that venture investors put on them. (Similarly, Good Technology abandoned its yearlong effort to go public and instead took a relatively low-multiple sale in September that valued it at less than private-market investors had in previous funding rounds.)

With the IPO market likely to be an unwelcoming place in 2016, a dispiritingly painful reception could be waiting for those late-stage companies aiming to raise capital once again in the private market rather than on Wall Street, according to our survey respondents. A staggering seven out of 10 anticipate that the valuations of late-stage funding will decline next year, compared with just 5% who project up-rounds. Another way to view the incredibly bearish forecast from our survey respondents is that for every one person from the tech M&A community who expects the privately held high-fliers to continuing soaring to higher valuations, 14 respondents predict gravity to set in.

See our full report on the survey results, which includes the outlook for IPOs as well as a near-term forecast for M&A activity and valuations.

IPO market outlook

Survey date Forecast increase Stay the same Forecast decline
October 2015 29% 28% 43%
April 2015 41% 32% 27%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Securing an IPO pipeline

Brenon Daly

Contact: Brenon Daly

As we saw in the recent lackluster debut of Pure Storage, there isn’t much demand on Wall Street for new offerings. The fast-growing storage startup became only the fifth enterprise tech vendor to go public in 2015. Virtually all of the tech IPOs, including Pure Storage, have broken issue, often falling below the valuation they achieved as private companies, when they were smaller and more speculative investments. However, there is one exception to the generally dismal tech IPO market: information security.

Consider the standout offering from Rapid7 . Since debuting three months ago, the threat-detection provider has not only delivered a tidy return to its earlier investors, but has also traded relatively strongly in the aftermarket. And it is doing all that while maintaining a rather rich valuation. Investors value Rapid7 at about $840m, roughly 8x the $100m or so in sales this year that the company will put up.

As with any market that indicates demand, supply will look to satisfy that demand. We understand there are at least three information security firms currently on file and hoping to go public before the end of the year:

  • Veracode: The code-scanning startup is rumored to have picked J.P. Morgan Securities to lead its offering. We gather the company ran a dual-track process, but is now set to go public. It raised a late-stage round about a year ago, bringing its total to about $120m.
  • LogRhythm: The SIEM vendor has navigated through the consolidation that has thinned the number of sizable independent vendors to just a handful. An IPO from LogRhythm would come almost eight years after rival ArcSight went public.
  • SecureWorks: We noted in May that Dell’s managed security service division is looking at spinning off a minority stake of the company. The move would give SecureWorks currency to pick up other MSSPs, as well as (possibly) raise money for Dell as it looks to pay for the largest-ever tech acquisition.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Mimecast sets stage for IPO

Scott Denne

Contact: Scott Denne

Mimecast’s business is best described in the same language as the enterprise email systems it has grown up managing: reliable, but not very exciting. The 12-year-old provider of archiving, management and security of business email is prepping for an IPO, and the prospectus published in pursuit of that shows a company that, at least for the last few years, has put up steady numbers.

For its most recent fiscal year (ended March 31, 2015), Mimecast posted $116m in revenue, up 31% from the year before and just one percentage point higher than its growth during the previous period. Gross margins in 2014 came in at 68% – the same level as the previous two years – and operating expenses as a percentage of overall revenue have ticked down 10 percentage points in each of the last two years, helping the company trend toward profitability.

What has fluctuated is foreign currency. Nearly two-thirds of Mimecast’s revenue comes from currencies other than the US dollar. In 2014 that brought it a $5m gain, pushing it slightly into the black. The previous year, currency changes led to a $5m expense, contributing to a $16m loss.

When it comes to the valuation the company might fetch, we look at Proofpoint as the best indicator of where Mimecast might trade. The quasi-competitor posts similar gross margins and a similar growth rate to Mimecast, and is valued at 10x trailing revenue. Even though Proofpoint has far steeper losses, its growth is coming off a revenue base that’s about twice Mimecast’s, and it has built up a fair amount of goodwill (and a 4x increase in its share price in the three-and-a-half years since its IPO) with investors through a series of positive revenue announcements and upward adjustments of revenue guidance. Given those factors, we would expect Mimecast to price below the 10x mark by a few turns, likely in the 5-7x trailing revenue range.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

As black swans darken summer sky, Q3 tech M&A gets grounded

Brenon Daly

Contact: Brenon Daly

Tech acquirers’ confidence eroded unmistakably in mid-August as equity markets around the world got routed, with some indexes tumbling hundreds of points in a single session. As the economic outlook dimmed around the globe, valuations for buyers and their holdings dropped as well. If the stock market uncertainty didn’t knock buyers out of the tech M&A market entirely, it at least caused them to scale back their acquisitions. Just seven of Q3’s largest 20 deals came after the mid-August turmoil, according to 451 Research’s M&A KnowledgeBase. Spending in the back half of the quarter fell 20% compared with the first half.

Slowed by the mid-quarter bear market, spending on tech, telecom and media (TMT) transactions across the globe in the July-September period totaled $81bn. Although that amount is a fairly representative quarterly total for 2013-14, it represents a dramatic slowdown from earlier this year. Q3 spending stands at less than half the level of M&A spending in Q2 and one-third lower than Q1, which kicked off 2015’s record run. On a comparative basis, the value of acquisitions in both Q1 and Q2 surged about 50% from the same quarters in 2014, while spending in the just-completed Q3 declined 21% compared with Q3 2014.

Viewed more expansively, the Q3 slowdown might have pushed back the date when spending in 2015 on TMT transactions sets a new post-bubble record, but the record will nonetheless fall this year. (Indeed, if this summer had simply continued the average monthly M&A spending we had seen in the first half of the year, 2015 would have already topped the recent record of $420bn set in the prelapsarian year of 2007.) As it stands, dealmakers have spent $407bn on TMT acquisitions so far this year, just a few big prints shy of the highest level of spending since 2000, according to 451 Research’s M&A KnowledgeBase.

See our full report on both M&A and IPO activity in Q3, as well as a look ahead to activity through the rest of 2015.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2015 1,115 $81bn
Q2 2015 1,056 $205bn
Q1 2015 1,032 $120bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

Pure’s playbill

Scott Denne

Contact: Scott Denne

It’s a play we’ve seen before: an enterprise company ingests massive amounts of venture capital to fund eye-popping top-line growth before debuting on Wall Street for Act Two. This version stars Pure Storage, a darling of the all-flash array market. Leave the kids at home for this one – Pure is posting an obscene amount of growth and when the curtain rises, it’ll be seeking an equally obscene valuation.

Pure’s now-public IPO prospectus shows that the company finished its most recent fiscal year with $174m in revenue, fully 4x its sales from the previous year. On a trailing basis, it generated $224m in revenue and the most recent quarter showed a more modest 3x year-over-year growth. As one would expect, there’s a massive investment in sales and marketing underlying that growth. That investment appears to be paying off as its sales and marketing spending – $153m last year –is ratcheting down to 87% of its revenue, from 128% last year and 177% the year before.

As expected, Pure still posts huge losses: $183m last year, up from $79m the year before. Its trajectory, however, points to eventual profitability. Overall, its costs are coming down – at least as a share of revenue – and the margins on its products are making meaningful gains. In the most recent quarter, Pure reached a 64% gross profit on its product sales, up from 59% last year and 49% the year before. To put that in perspective, NetApp, a storage provider that’s about 30-times larger (for now), generated a 54% product margin last year.

Pure’s last venture round, a $225m series F in April 2014, put a $3bn valuation on the company. No doubt it will be looking for a boost from that. To get a meaningful bump up, it will have to be valued at or above 15x trailing revenue. That’s a tough spot to hit, though not impossible. Recent high-flying hardware IPOs Arista Networks and Nimble Storage are both currently putting up about 7x off of comparably mild levels of growth (40-50%). For a better comp, you’d have to go back to the 2007 debut of Data Domain, whose growth was equally impressive, though slightly behind Pure’s, and whose IPO priced at 12x in a more sedated market for tech stocks.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

In a time of sky-high infosec valuations, Sophos goes for down-to-earth debut

Brenon Daly

Contact: Brenon Daly

The tech IPO market is so quiet these days that even those companies that do manage to go public do it understatedly. Consider the almost under-the-radar offering from Sophos, a giant in the infosec market that nonetheless raised a relatively small $125m on the London Stock Exchange (LSE) last Friday. Compared with the noisy funding events we’re accustomed to seeing in this current frothy investment environment, the Sophos IPO was almost refreshingly reserved.

Sophos has been around for 30 years, which makes it positively middle-aged relative to many flashy startups that still haven’t seen the ink dry on their business plans. Also, Sophos was born and raised in the UK, several time zones – and even more distant culturally – from the epicenter of tech hype in Silicon Valley. To illustrate, Sophos spends less than 40% of its revenue on sales and marketing, about half the level of some US-based IT firms (e.g., Apigee, Box) that have also come public in 2015.

Yet even as Sophos runs a business that’s clipping along at nearly a half-billion dollars in revenue, it raised the same amount of money that some startups one-tenth its size have landed from private investors. Another way to look at it: The $125m that Sophos raised in its IPO is also less than half the amount collected by Etsy, which is smaller than Sophos, in its April IPO.

And Sophos is raising money at a very down-to-earth valuation, compared with some of the sky-high valuations garnered by both public and private infosec vendors. Sophos started life on the LSE at a market cap of about $1.6bn, roughly 3.5x its trailing sales of $447m. That’s a sharp discount to many of the infosec providers trading on the NYSE and Nasdaq. For example, Proofpoint, Qualys, FireEye and Imperva, among others, all trade at more than 10x trailing sales.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Will 7 be the lucky number in latest security IPO?

Scott Denne

Contact: Scott Denne

Threat management vendor Rapid7 is heading toward its initial public offering with few financial metrics to excite prospective investors. The company posted $76.9m in revenue last year, representing 28% growth – only a hair lower than the 30% growth rate from a year earlier. While Wall Street welcomes predictability, not all revenue is created equal: low-margin professional services jumped 47% to $10.8m while product sales decelerated to 22% growth, accounting for 61% of total revenue.

The company posted a $32.6m loss in 2014 as its gross margins ticked down a few percentage points to 76% due to the rising costs of delivering services, while operating expenses grew at a faster rate than revenue. Particularly notable are Rapid7’s sales and marketing expenses, which jumped 54% – its largest increase in any of the past three years. Its most recent quarters are Rapid7’s silver lining: year-over-year revenue growth, both product and overall revenue, is accelerating in each of the past three quarters to finish up 41% in the first quarter of this year.

Qualys, a competing vulnerability management provider, is the best available comp for gauging Rapid7’s potential IPO valuation. Investors value that company at 9x trailing revenue. At that level, Rapid7 would post a $750m market cap. We believe, however, that the offering will price below that level. Qualys’ growth was a bit slower – 24% compared with Rapid7’s 28% – but off a baseline that’s nearly double the size. Qualys also hit that mark while scaling back sales and marketing spending as a percentage of its overall revenue and generating a $30.2m profit.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

A steady Sophos now set to step on public stage

Brenon Daly

Contact: Brenon Daly

After an on-again, off-again march to the public market over the past decade, Sophos finally looks set to sell shares to the public for the first time. The 30-year-old, UK-based security vendor put in its paperwork last week for a $100m IPO on the London Stock Exchange (LSE). It was actually the second time the decidedly middle-aged Sophos filed to go public, and comes five years after it flirted with an IPO before selling a majority stake to Apax Partners instead.

During the half-decade in the private equity firm’s portfolio, Sophos has been a steady acquirer, picking up a company about every year. Its most recent deal, announced earlier this week, is the first time Sophos has acquired a cloud-based vendor. Sophos paid an undisclosed amount for email security and archiving startup Reflexion. The technology is expected to be integrated into Sophos Cloud later this year.

When Sophos does hit the LSE next month, we expect it to create a few billion dollars of market value. In its most recent fiscal year, which finished last March, Sophos increased revenue 18% to $447m. For comparison, Barracuda Networks – a diversified security provider that, like Sophos, serves the SMB market – posted an identical growth rate in its most recent fiscal year. (Although Sophos is growing off a revenue base that is more than half again as large as the $277m that Barracuda put up last year.) Since it went public in November 2013, Barracuda has doubled its market value to about $2bn.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Webinar: 451 Research and Morrison & Foerster M&A Leaders’ Survey

Brenon Daly

Contact: Brenon Daly

Even as tech dealmaking clips along at a post-bubble record rate in 2015, the overwhelming view from the M&A Leaders’ Survey from 451 Research and Morrison & Foerster is that business is expected to get even more brisk as the year progresses. To find out more about the forecast, as well as how the survey sentiment maps to both the current M&A market and current M&A practices, join 451 Research and Morrison & Foerster on Tuesday, May 19 at 1pm EST (10am PST) for an information-packed webinar. Click here to register.

The webinar will cover not only the forecast for acquisition activity for the next six months, but also what buyers expect to have to pay to cover their purchases and what strategies will be driving those deals. Additionally, Morrison & Foerster will provide real-world insight on some of the key findings around recent trends in structuring transactions and other practical M&A considerations. To register for the complimentary webinar, simply click here.

M&A activity forecast for the next six months

Survey date Increase Stay the same Decrease
April 2015 61% 30% 9%
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Exclusive: An IPO in the works for Dell SecureWorks?

Brenon Daly

Contact: Brenon Daly

When Michael Dell pulled his company off the Nasdaq two years ago, he had very few good things to say about being a public business. Dell first listed his company back in 1988, but as its PC-dominated business fell out of favor among investors, he blasted the ‘short-term thinking’ of most money managers and engineered a $24bn take-private of his company. Now, it seems he’s looking to make a return trip to Wall Street, at least with a portion of his business.

Rumors are now swirling that Dell is planning to sell a minority stake in SecureWorks, a managed security service provider (MSSP) that Dell acquired in January 2011 for $612m. As we understand it, the plan is to sell about one-third of the SecureWorks division in an IPO later this year. We estimate revenue at SecureWorks at just under $300m, with the business running right about breakeven. Assuming it gets a valuation comparable to what has been handed out in recent MSSP transactions, SecureWorks could be valued at roughly $1bn.

Dell was rumored to be a bidder for Trustwave, an MSSP that sold to Singtel for $810m in April. (SecureWorks is roughly one-third larger than Trustwave.) Market sources have also suggested that Dell has looked at smaller regional MSSPs. Raising money through selling a minority stake to the public would give SecureWorks additional currency to pursue acquisitions.

MSSPs have been around in various forms since the late 1990s, but have recently come into favor amid a shortage of skilled infosec workers and IT security technology that hasn’t kept pace with threats. The market appears to have a fair amount of growth in front of it. In a recent study by The InfoPro, a service of 451 Research, slightly fewer than four out of 10 respondents indicated that they were currently using an MSSP.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.