Category: IPO

RealPage gets diluted on a deal

Brenon Daly2 Comments

by Brenon Daly

Exactly a year after going public, RealPage on Monday evening announced its largest-ever acquisition. However, the $74m cash-and-stock purchase of MyNewPlace didn’t exactly go over with Wall Street as the property management software vendor might have hoped. The recently minted shares of RealPage dropped 11% on heavy trading, hitting their lowest level since just about a month after their debut.

The concern? The acquisition will lower earnings at the company, trimming non-GAAP net income at RealPage by more than $1m this year. Conscious of the dilution, RealPage opened the conference call discussing the deal in an almost apologetic tone, acknowledging that it paid ‘a lot’ for MyNewPlace. In fact, the purchase price of this latest transaction is only slightly more than RealPage paid, collectively, in its three previous acquisitions.

But on the other side, the deal positions the company to be more relevant in the lead generation part of the rental housing market, which is undergoing dramatic changes. During the call, the company estimated that it would take five years and an investment of $30-40m to build a business, internally, that would do what MyNewPlace does right now. So, RealPage billed the purchase as a play to be more relevant in the long term. After a year on the market, we would have thought that RealPage would already know enough about the myopic vision on Wall Street to not talk about delayed gratification from acquisitions.

Summing up the IPO calculus

Brenon Daly

Contact: Brenon Daly

At the risk of oversimplifying the market for new offerings this week, we might nonetheless formulate an equation like this: AAA to AA+ = RW. Spelled out, that means: The historic downgrade in the credit worthiness of the US contributed to some of the bloodiest days Wall Street has seen, which in turn contributed to many IPO candidates deciding to scrap their planned offering. (Companies formally do this by filing what’s known as an RW form, for ‘Registration Withdrawal,’ with the SEC.)

Amid the choppy trading this week, both WageWorks and Trustwave shelved their proposed IPOs, which were originally expected to raise, collectively, about $200m for the companies. Instead, they’ll be heading home empty-handed from their aborted push to the public market. (The sole tech firm that made it to market, online backup vendor Carbonite, did so only after trimming its offering, which meant raising one-third less money than planned.)

While WageWorks and Trustwave – both of which have been active acquirers, even as private companies – will undoubtedly miss that windfall from their planned IPOs, the decision to scrap the offerings this week was inevitable. For a bit of context, consider this: When the two companies originally filed their paperwork to go public back in April, the Nasdaq was roughly 10% higher and the overall market volatility (as measured by the CBOE Volatility Index, or VIX) was less than half the level it is now.

Are Internet infrastructure exits interconnected?

Ben Kolada

Contact: Ben Kolada

Providing further proof that it’s a tough time to be on the market, much less come to market, GI Partners has opted to sell its Telx investment rather than battle through an IPO. The company’s sale to ABRY Partners and Berkshire Partners closes the books (at least for now) on a proposed public offering that Telx initially filed back in March 2010. And we wouldn’t be surprised if Telx’s sale caused other IPO candidates in the industry to rethink their entry onto the public stage as well.

Terms weren’t disclosed, but we understand that Telx caught a fairly high valuation that would have provided a more immediate – and lucrative – return than an IPO. Although the Internet infrastructure industry showed resilience throughout the recession, consistently growing revenue, that hasn’t always been the case when it comes to the public markets. Chinese datacenter operator 21Vianet Group, for example, closed its first trading day on the Nasdaq with a market cap of $1bn. However, since then its shares have lost 40% of their value. (We note, however, that the success of 21Vianet’s IPO was due in part to success from other Chinese IPOs, as well as buyout speculation in the industry.)

Just as the Internet infrastructure market focuses on interconnection, we suspect that its participants’ exits are also interconnected. We feel that Telx’s recent sale to ABRY Partners and Berkshire Partners could cause the industry’s other IPO candidates to pause before hitting the public markets. Our colleagues at Tier1 Research maintain a list of the Internet infrastructure industry’s potential IPO candidates. Although speculation surrounds such fast-growing firms as SoftLayer Technologies, Peak 10, Zimory and Next Generation Data, an IPO for these players may be pushed to the back burner, at least for the foreseeable future.

‘Bear-ing’ down on the IPO market

Brenon Daly

Contact: Brenon Daly

This time last week, the Dow Jones Industrial Average was just above 12,000. Even with today’s relief rally, the benchmark index is 1,000 points lower, and is at its lowest level since last October. More broadly, both the S&P 500 and the Nasdaq have dropped 15% over the past month – declines that cut more than $1 trillion of market value from indexes. Amid all of this value being erased from the market, it’s no wonder that companies are struggling to create new market value, in the form of an IPO.

At least three tech vendors are hoping to debut this week, including online backup provider Carbonite, compliance security specialist Trustwave and WageWorks, which provides services around employee benefits. But those offerings by unknown and unproven companies appear to be a tough sell when the shares of well-known firms with a proven track record are getting mauled by the current bear market.

We’re already seeing signs of the fallout from the rout. WageWorks had to substantially trim the price range in its expected IPO last week. And on Monday, Cornerstone OnDemand, which went public in March, shelved a planned secondary offering.

Even if the equity market does stabilize in the coming days, there’s still a fair amount of uncertainty lingering from recent events such as the debt ceiling debate and the downgrade of the US credit rating, a move that would have been almost unimaginable in earlier decades. Reflecting that skittishness, the CBOE Volatility Index, or VIX, closed at 48 on Monday. That’s the highest reading since the recession days of early 2009 and twice the level from earlier this summer. Altogether, it’s a tough time to be on the market, much less come to market.

InterNap’s time as a takeover target could be running out

Ben Kolada

Contact: Ben Kolada

If its past is any prediction of its future, hosting services provider InterNap Network Services could soon lose its position as the industry’s next takeover target. The Atlanta-based firm, which is set to release its second-quarter results, has seen flat sales for the past three years. This is in stark contrast to the hosting industry at large, which has historically grown in the double digits. Meanwhile, other firms are emerging as more desirable targets, pushing InterNap to the back of the buyout line.

Our colleagues at Tier1 Research have written that InterNap was a favored takeover target. However, the firm appears to have since lost its luster. Investors are becoming increasingly frustrated with its poor performance, particularly after first-quarter total revenue declined 6% year over year. And shareholders once again fear the worst – in the past month, shares of InterNap have lost more than one-tenth of their value.

As InterNap is lying stagnant, other firms are posting enviable growth rates, making them much more attractive acquisition candidates. We understand that privately held SoftLayer is gearing toward the public markets, though it could certainly be scooped up before filing its paperwork. SoftLayer surpassed InterNap’s revenue last year, and is projecting bottom-line growth of about 20% this year, to just shy of $350m. InterXion has been cited as a potential target, as well. The company is also enjoying double-digit growth rates, and would provide a large platform for any telco looking to expand its European hosting footprint.

We would note, however, that both InterXion and SoftLayer are considerably pricier properties. While InterNap currently sports a market cap of about $330m, InterXion is valued at nearly $1bn. And we estimate that SoftLayer, on its own, cost GI Partners some $450m. However, when including the other legs of the SoftLayer platform – Everyones Internet and The Planet – the full price to the buyout shop could exceed $600m. But InterXion’s and SoftLayer’s price tags won’t necessarily stand in the way of their sales. We would never have guessed that CenturyLink would have been able to afford Savvis, especially so soon after closing its $22bn Qwest purchase.

Dual track, but singular outcomes

Brenon Daly

Contact: Brenon Daly

For the third time in just two months, a tech company that had planned to go public has instead ended up inside a company that’s already public. The latest dual-track sale came Wednesday when Force10 Networks opted to accept a bid from Dell rather than see through its IPO plan. The networking gear vendor had filed its prospectus in March 2010.

The deal follows one month after would-be debutant Apache Design Solutions sold to ANSYS and two months after SiGe Semiconductor went to Skyworks Solutions. Those three transactions probably only generated about $1.2bn in liquidity, including Force10’s reported price of roughly $700m. (As a side note, we might point out that Deutsche Bank Securities was a book runner on all three proposed IPOs.)

As this trio of enterprise-focused startups finds itself snapped out of the IPO pipeline, consumer-oriented companies continue to receive a warm welcome on Wall Street. Consider this: Zillow, which went public earlier this week, now trades at about 20 times trailing revenue. In contrast, Force10, SiGe and Apache Design garnered much more modest valuations ranging roughly from 2-6x trailing revenue in their sales.

What happened to the storage sector’s Class of 2007?

Brenon Daly

Contact: Brenon Daly

Back in mid-2007, BlueArc was one of a quartet of storage vendors that put in their paperwork to go public during those go-go days on the stock market. However, if the NAS systems specialist, which recently re-filed its prospectus, does manage to see through its offering on this go-round, it will find itself very much alone. All three of BlueArc’s would-be fellow public storage contemporaries have been consumed by larger tech companies. The total bill for those three transactions: $4.8bn.

Dell would have had a hat trick for the Class of 2007 storage firms, if not for Hewlett-Packard. As it was, the Round Rock, Texas-based vendor took home EqualLogic in November 2007 before that company could even go public and then erased Compellent Technologies from the NYSE last December. Of course, Dell was lead bidder for 3PAR last summer, too, before losing out to HP. (And those deals are just for the big storage providers that filed their S1s in 2007. If we move back a year to 2006, another two vendors – Double-Take Software and Isilon Systems – that debuted that year were both gobbled up in 2010.)

With all this consolidation, where does that leave BlueArc? As we penciled out in our report on its planned IPO, the company is almost certain to be worth less when it does hit the market than it would have been worth before the Great Recession. Somewhat perversely, that’s true even though BlueArc will be twice the size that it was when it put in its prospectus in 2007.

If the company finds that prospect too demoralizing, it could always follow its fellow filers and opt for a trade sale. We would have put forward Oracle as a possible buyer of BlueArc, in a kind of ‘discount’ play for NetApp. But that seems even less likely since Oracle rolled in Pillar Data Systems on Wednesday morning. So, it looks like either HDS decides that it wants to own its OEM partner outright or BlueArc (finally) hits the market.

Maybe M&A for McAfee?

Brenon Daly

Contact: Brenon Daly, Andrew Hay

With the ink barely dry on the M&A papers of SolarWinds’ purchase of TriGeo, we understand that another deal in the enterprise security information management (ESIM) market may be already in the works. Several industry sources have indicated that McAfee and NitroSecurity are thought to be close to an agreement that would give Intel’s subsidiary a solid ESIM offering.

McAfee has been looking in this market for some time. We gather that the company lobbed a bid (thought be in the neighborhood of $600m) for ESIM kingpin ArcSight before that company went public in February 2008. More recently, we weren’t surprised to hear that McAfee was in the process early for ArcSight last summer but got outbid by Hewlett-Packard, which ended up paying $1.65bn, or a steep 8 times trailing revenue for ArcSight.

If the acquisition indeed comes together, NitroSecurity would make a great deal of sense for McAfee. NitroSecurity, which we understand is running at about $40m in revenue, sells big-ticket installations to enterprises and the federal government – a market that McAfee clearly wants to be in. (NitroSecurity is also one of the few security vendors that has been able to crack into the industrial control system market, which gives the company a shot at lucrative contracts securing some of the nation’s critical infrastructure.)

The only other ESIM provider of size that might also give McAfee a comparable presence in the enterprise market would be Q1 Labs. However, that firm has a deep relationship with Juniper Networks, which is its single largest OEM partner. Nonetheless, Q1 has ascribed itself a fairly rich valuation, according to sources. The market may well soon have its vote on that, as Q1 recently indicated that it is looking toward an IPO.

Different exits at different prices

Brenon Daly

Contact: Brenon Daly

Imperva’s pending IPO offers a fairly intriguing counterpoint to the trade sale of rival Guardium nearly two years ago. In 2009, both companies would have been rather similarly sized (basically, $35-40m) and posting roughly comparable growth rates.

Rather than continue as a stand-alone vendor, however, Guardium took a relatively rich bid from IBM for what we understand was about $232m, or about 6 times trailing sales. For a deal that was announced in November 2009, when the overall market was only starting to recover from the credit crisis, Guardium’s valuation looked positively platinum. (It was even more shiny when we consider that the Boston-based company raised just $21m in venture backing.)

But now with Imperva’s IPO, we may well get to see what Guardium might have been worth if it had opted for the other exit. (Obviously, there are a lot of flaws built into standing Imperva as a proxy for Guardium, and doing so glosses over the impact of time and risk on the return. But, arguably, it’s still a useful exercise.)

Nonetheless, assuming that Imperva can garner roughly the same trailing valuation that Guardium got in its sale, that would imply an initial valuation of about $330m – or roughly $100m more than its rival’s clearing price. That $330m would work out to about 4.5x this year’s expected revenue, which seems like a reasonable starting point for Imperva when it does hit the NYSE. (See our speciual report on Imperva’s offering.)

Online coupon service providers a hot commodity

Contact: Brian Satterfield

With Groupon’s IPO looming on the horizon, the online coupon business model is attracting more attention than ever before. That’s also coming through in deal flow, with the number of transactions in the emerging sector having increased more than six-fold so far this year compared to last year. The main driver for these deals is the push by deal-a-day sites to buy their way into new markets, mostly overseas. (We’ve already noted how Groupon got an incredible value on its primary international purchase, Berlin-based CityDeal.)

Like the online coupon market itself, M&A in the sector is accelerating at a dizzying rate after a very recent start. As a proxy for the overall daily deal market, consider the almost unprecedented growth of Groupon: the Chicago-based company launched in November 2007, generated less than $1m in sales in 2008 but then posted sales of $30m in 2009 and more than $700m last year. In terms of acquisitions, we only tallied the first online coupon transaction in the sector in April 2010. That was one of just five acquisitions in the market that we recorded in the first half of 2010. In comparison, we’ve already had 29 online coupon acquisitions this year – a 500% increase.

Geographic expansion is the primary factor driving the robust growth in this sector, as more than half of the 43 total online coupon deals that we’ve seen appear to be driven by a push into new markets, both domestically and overseas. Groupon, which has been the buyer in nearly one-quarter of all online coupon transactions, exemplifies this trend, pocketing a total of 11 competitors overseas. Meanwhile, the company hasn’t made a single consolidation move in its home market. That’s not surprising, given that Groupon’s international operations, which account for the majority of its revenue, are growing faster and run at a higher margin than its US business.

Online coupon transactions

Period Deal volume
Q1-Q2, 2009 0
Q1-Q2, 2010 5
YTD 2011 29

Source: The 451 M&A KnowledgeBase