Category: IPO

Tech companies find it hard to bid against Wall Street

Brenon Daly

Contact: Brenon Daly

Tech companies are increasingly being outbid for the startups they want to acquire by a deep-pocketed rival that hasn’t been heard from in a while: Wall Street. In our recent survey of corporate development executives, nearly half of the respondents (46%) reported that they expected the IPO market to offer more competition in 2014 for target companies. In the seven-year history of the 451 Research Tech Corporate Development Outlook Survey, the threat of dual tracking has never been ranked that high.

A quick look at some of the platinum valuations being lavished on recent IPOs certainly helps explain why startups are looking to exit to the public market rather than sell out. By our count, roughly a dozen tech companies that went public this year – representing, astoundingly, about half of the entire IPO class of 2013 – currently trade at a valuation of greater than 10 times trailing sales. A few recent debutants have been bid up by public investors to the point where they are trading at more than 30x trailing sales.

Looking ahead to next year, corporate development executives, who represent the main buyers in the tech M&A market, expect to see a record number of new offerings. On average, respondents guessed that 29 tech companies would go public in 2014. That’s higher than previous years, when the forecast has ranged basically from the low- to mid-20s. (You can see more on the IPO market outlook, as well as M&A activity and valuation forecast, in our full report on this year’s survey.)

Projected number of tech IPOs

Period Average forecast
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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With a booming market ahead of it, Nimble’s IPO pops on day one

Scott Denne

Contact: Scott Denne

Banking on the growth of the hybrid storage market, hungry investors sent Nimble Storage’s shares surging almost 50% above its IPO price for a market cap of $2.3bn in its first day as a public company. It is currently valued at a whopping 21.7x trailing sales.

Hybrid storage arrays like those Nimble sells combine flash and hard-disk drives in the same device, giving customers a better ratio of price to performance than traditional disk storage. Today the market is dominated by incumbents that have simply replaced disk drives with flash drives, rather than creating a new file system from scratch to accommodate both types, as Nimble has done.

A look at data collected by TheInfoPro, a service of 451 Research, shows that Nimble and its market are poised for more growth. This year the number of storage administrators who said they would spend more money on hybrid storage systems than they did a year earlier increased 27% compared with 18% who said the same thing last year.TIPfor1213KBI

Our surveys also show Nimble accelerating within that market. While incumbents EMC and NetApp topped the list of vendors being implemented in the survey, Nimble was the highest ranked among the private, stand-alone companies. In 2012, it didn’t even get mentioned as a player in that category.

Continue reading “With a booming market ahead of it, Nimble’s IPO pops on day one” →

High ground for Hyland? Rumors swirl about billion-dollar exit

Brenon Daly

Contact: Brenon Daly

A half-dozen years after acquiring a majority stake in Hyland Software, Thoma Bravo is rumored to be looking at selling its chunk of the enterprise content management (ECM) vendor. And the deal – if there is one – won’t be cheap: the asking price for Hyland is thought to be about $1.2bn.

According to our understanding, that would value Hyland at more than 4x trailing sales and about 15x EBITDA. Those multiples are slightly richer than the current trading valuation of ECM giant Open Text. Although we should note that Open Text shares are currently trading at an all-time high, up some 50% since the beginning of the year.

The bull market for shares of rival Open Text has prompted speculation that Hyland, which is being advised by Goldman Sachs, is dual-tracking. After all, Hyland has already been down at least some of the road to the public market. The 22-year-old maker of the OnBase product put in its IPO paperwork back in May 2004, but pulled it a half-year later. (Currently, Hyland has roughly five times the revenue and number of employees it did when it put in its prospectus almost a decade ago.)

While Hyland could certainly opt for a trade-sale, an IPO might just prove more lucrative in the long run. Some software investors might pass on putting money into a license-based company, but Hyland certainly has characteristics that would nonetheless find some buyers on Wall Street. The pure-play ECM company puts up about 20% growth, primarily by focusing on specific vertical markets, most notably healthcare, higher education and financial services.

That position tends to be more defensible than broad, horizontal ECM offerings, which have come under threat from old rivals (SharePoint) as well as startups (Box). (My colleague Alan Pelz-Sharpe has noted that Hyland most often bumps into vendors that were consolidated during the previous round of ECM match-making, such as FileNet and Documentum.)

Cleveland, Ohio-based Hyland also benefits from strong customer support, and it has a reputation as a solid company with ‘Midwestern’ values, and a culture of an ‘honest day’s wage for an honest day’s work.’) The company boasts a 98% maintenance renewal rate among its nearly 12,000 customers.

Hyland’s approach stands out starkly to the approach taken by the much larger – and more mature – Open Text, which has dropped more than $2bn on a dozen deals over the past three years. It gobbled up a number of ECM vendors before expanding into adjacent markets such as business process management and data integration. Still, Open Text’s consolidation strategy hasn’t hurt it on Wall Street, which values the company at $5bn.

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

Today NYSE, tomorrow NBC

Scott Denne

Contact: Scott Denne

Twitter harbors ambitions of being a force in both online video and traditional television. Now that the distraction of an IPO is behind it, we expect the company to focus its dealmaking efforts on video advertising technology.

Twitter’s audience isn’t growing as fast as it once was, and to ensure that its revenue growth rate doesn’t slow, it needs to squeeze more revenue from its audience. That was the rationale behind picking up MoPub, which will help Twitter build programmatic features into its own platform and serve as a gateway to the mobile ad market. A video ad firm would enable it to monetize Vine, extend into the growing online video ad space and, most important, grab a piece of the TV ad sector (which still dwarfs the entire digital ad market) by bringing those dollars into its own platform and helping spread them to other places on the Internet by enabling advertisers to follow an audience beyond the living room.

Talent and technology have been the guideposts for Twitter’s past acquisitions, and there’s no reason to think that would change. (The same principles shape the company’s organic growth, as it spends a whopping 40% of its revenue on R&D.) Along those lines, potential targets that would be a good fit are BrightRoll, TubeMogul or even a smaller, emerging video ad provider.

While much of BrightRoll’s business comes from its video ad network, it also operates a video ad exchange, which is similar to what MoPub does in the mobile market. We understand the business has about $240m in annual revenue, so it would be a big bite. TubeMogul sits on the other side of the ad tech table, selling a platform to advertisers to distribute video ads across real-time exchanges, making it a potential complement to MoPub. In addition, it doesn’t come with the ad network baggage, making it a more attractive target for Twitter. TubeMogul also has substantial revenue of its own, bringing in $54m last year and likely well over $100m this year, all with profit margins that are far above the norm in ad tech, according to our sources.

There’s also a handful of emerging players that would likely require less of a capital commitment and could impact Twitter’s efforts in this space. For example, firms like Spongecell and Vungle would bring creative talent, as well as tech. Another possibility is StickyADS.tv, a Paris-based company that would bring Twitter video ad technology as well as a deeper presence in Europe, potentially helping it with low spending among advertisers outside the US.

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

Webinar: Tech M&A trends, valuations and more

Brenon Daly

Contact: Brenon Daly

For those of you not too busy trading freshly printed Twitter shares on Thursday, we invite you to join 451 Research and Morrison & Foerster for a webinar on the results of our semiannual M&A Leaders’ Survey. (451 Research clients can access our full report on the survey.) The webinar will be held at 10:00am PST (1:00pm EST), and you can register here.

Among other topics, we’ll be discussing both the near-term and longer-range M&A plans for many of the tech market’s top dealmakers. (For instance, we have views on whether or not we’ll see another boom in tech M&A – and what it would take to get there.) Additionally, Morrison & Foerster’s Co-Chair of Global M&A Practice, Rob Townsend, will offer insight from our survey topics around the growing trend of ‘acq-hires’ and, more broadly, HR issues that can come up in M&A.

And finally, going back to IPOs, we’ll have the forecast from our senior dealmakers about whether or not they expect to have to outbid the public market for the companies they want to buy over the next year. (Hint: The IPO market has never been more competitive, in their view.) Again, we’d love to have you join us tomorrow for what promises to be an insightful and useful webinar, which you can register for here.

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

Will Criteo be a have, or have-not, ad-tech IPO?

Scott Denne

Contact: Scott Denne

Ad-tech IPOs have had mixed results this year. While Wall Street has shown little inclination to get behind most ad networks, it’s been quick to reward high-growth companies with demonstrated technology chops. Which bucket will Criteo fall into when it starts trading?

Compare the 2x and 4x trailing revenue multiples given to YuMe and Tremor Video with the 11.6x given to Rocket Fuel. On the one hand, Criteo looks more like Rocket Fuel. The company posted $253m in revenue through the first half of 2013, up 72% from a year earlier. While that’s about half the rate Rocket Fuel grew, it is off a base that’s about twice as high.

The price Criteo pays for inventory – the empty slots where it puts its customers’ ads – could hamper its valuation. That cost is now 60% of revenue, up slightly from 56% a year earlier, and enough of a change to tip the profitable company into the red this year for the first time in at least three years.

Ad networks like Criteo and Rocket Fuel compete by offering customers the lowest prices for a desired outcome (typically, clicks on an ad). To offer lower prices, they can either build technology to lower their media spending without lowering the click-through rates, or they can swallow smaller profit margins on each ad campaign. Criteo’s rising media costs suggest it’s moving toward the latter camp, perhaps because its technological advancements may not be keeping up with competitors’ price cuts. Rocket Fuel, by comparison, is seeing its media costs shrink steadily, to 45% of revenue so far this year, from 51% in 2011.

Criteo last adjusted its proposed price range up to between $27 and $29 per share, which would give it a valuation of about $1.5bn, or 3x its last 12 months of revenue, were it to set a price at the midpoint of that range. When it becomes available to public investors, we anticipate the company will trade with a valuation multiple between 6x and 7x its trailing sales – higher than most ad-tech companies, but lower than Rocket Fuel – giving it a valuation between $2.8bn and $3.2bn.

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

Hop aboard the Nimble spaceship

Scott Denne

Contact: Scott Denne

From basically a standing start just two years ago, Nimble Storage is on track to put up an astonishing $100m in sales this year. That’s a faster growth rate than we’ve seen at any of the other storage companies that have come public in recent years. The hybrid flash storage vendor recorded $50m in revenue in the first half of 2013 – almost as much as it did in all of 2012.

Nimble also claimed the title of fastest-growing storage company in at least a decade, growing faster than even Data Domain did in its early days – as have several of the latest generation of storage startups, such as Pure Storage and Nutanix. Thanks to the filing, we know that the crown belongs to Nimble, at least for now. Revenue for the year ending January 31, 2013, its third year of sales, nearly tripled to $54m, and was ahead of the $46m Data Domain posted during its third year.

Storage companies’ annual revenue leading to IPO

Company Year 1 Year 2 Year 3
Nimble Storage $2m $14m $51m
3PAR $24m $38m $66m
Data Domain $1m $8m $46m
EqualLogic $10m $30m $68m
Isilon $1m $8m $21m

#AcquiringForGrowth

Scott Denne

Contact: Ben Kolada Scott Denne

Twitter is ramping up its M&A program in what appears to be an attempt to buy faster growth. The company made its much-anticipated IPO paperwork public on Thursday and while the numbers are impressive, their acceleration is slowing. To offset the slowdown in its organic business, Twitter is doing more deals than ever before – and bigger ones at that. Its two largest deals, according to our understanding, have both been announced this year, collectively accounting for probably about three-quarters of all the money Twitter has spent on its M&A program. Further, 2013 has been its most active dealmaking year, and we still have one quarter to go.

From what was likely very little revenue in 2009, Twitter’s top line has hockey-sticked to $316.9m last year. That’s nearly 300% growth year over year and more than 11x what it recorded just two years earlier.

But as the company reaches a larger revenue base, its growth rate is beginning to slow. Annualizing Twitter’s first-half results would put its projected 2013 sales at just north of $500m. While it may not be fair to annualize six months of results for such a fast-growing company, we still don’t think its 2013 revenue will top $650m, which would be about twice its sales from last year. (We’d also note that Twitter’s year-over-year quarterly revenue growth rate has been declining since Q3 2012.)

Further, growth in Twitter’s total number of users and their level of engagement is slowing. In the US, which accounts for three-quarters of its advertising revenue, the average number of times that users engaged with Twitter was up only 1% from the previous quarter while the number of monthly users was up just 2%. Compare that with a year ago when those same metrics posted 11% and 9% quarterly growth, respectively.

Given the need for more advertising revenue on a slowing user base, we expect Twitter to increase its volume and value of acquisitions. One area the company could move into is digital video advertising, where the rates are higher than mobile or display. Twitter has already announced a product that enables television advertisers to follow an audience from a TV show to Twitter. That could become a more powerful proposition to both advertisers and content providers if Twitter could expand that capability to other parts of the digital world.

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

Barracuda sets up for an IPO that should go swimmingly

Brenon Daly

Contact: Brenon Daly

The holdout is over for Barracuda Networks. After a decade of steady expansion behind closed doors, the closely held information security (infosec) vendor is now set to step onto the public market. And it will be a big step by a big company: At about a quarter-billion dollars in revenue this fiscal year, Barracuda is roughly twice as large as other infosec firms that have come public recently.

Barracuda shipped its first product – a firewall – back in 2003. It has used a half-dozen or so acquisitions since 2006 to move into other infosec markets, as well as expand into storage. The company’s core security business represents about two-thirds of overall revenue, with the remaining revenue coming from its faster-growing storage business. It sells primarily to SMBs, having rung up some 150,000 customers.

Barracuda’s planned offering comes at time when Wall Street is particularly bullish on infosec IPOs. Most notably, FireEye doubled in its debut last month on its way to creating almost $5bn in market value. That’s a head-spinning valuation for a company that will do about $150m in sales this year.

But we wouldn’t necessarily hold out FireEye, with its triple-digit growth rates and enterprise focus, as a comparable offering to Barracuda. Instead, we might look back to the IPO four years ago from another appliance-based, multiproduct infosec provider, Fortinet.

Although that company is about twice as big as Barracuda, it is growing at just half the rate of Barracuda. Currently trading at about the midpoint of its 52-week range, Fortinet is valued at roughly $3.5bn, or about 6x this year’s sales. Putting that multiple on Barracuda, we come up with a rough valuation of about $1.5bn for the company. That’s probably a baseline valuation for Barracuda as it hits the market.

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

A round trip for Active Network shares

Ben Kolada

Contact: Ben Kolada

After a little more than two years of trading on the NYSE, registration and events management software vendor Active Network is leaving the public eye in a $1bn take-private by Vista Equity Partners. The deal carries a fairly paltry valuation, and only returns the company’s share price to basically the same level where it sold them in the IPO. And that was when Active Network’s revenue was roughly one-quarter smaller than it is today.

Vista is paying $14.50 per share in cash for Active Network, valuing the company’s equity at $1.05bn. Including the assumption of cash and capital lease obligations, the deal values Active Network at 2.1x trailing sales. For comparison, the company’s much smaller competitor Cvent is currently valued much higher at $1.4bn, or 14.5x trailing revenue. Citi Capital Markets advised Active Network, while Bank of America Merrill Lynch advised Vista Equity Partners.

We’d argue that the subpar valuation is the combination of meager growth and an inability to meet financial expectations. Wall Street expects Active Network to grow revenue 8.5% this year, to about $455m. Although that’s from a much larger base, it’s still a fraction of the 30% growth analysts expect Cvent to record. Further, financial expectations for Active Network are far from certain, given that the company has repeatedly issued results below its own estimates.

In a roundabout way of acknowledging the company’s public troubles, Vista took a charitable view of the per-share premium, noting that its offer is 111% above the average year-to-date closing price for Active Network. A more grounded view, however, shows the offer only matches Active Network’s $15 IPO price in May 2011, and represents a more common 27% premium to its closing share price Friday.

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