Category: IPO

Is anyone going to play Violin?

Brenon Daly

Contact: Brenon Daly, Henry Baltazar

As Fusion-io continues to bask in the glow of its newly created billion-dollar valuation, Wall Street is already looking for the next solid-state storage specialist. Conveniently enough, Violin Memory popped up earlier this week, announcing a $40m round at a $440m valuation. (It’s pure coincidence, certainly, that Violin – headed by the same guy who used to head Fusion-io – picked the same week as Fusion-io’s debut to trumpet not only the new investment but also the valuation it fetched. Just a fluke of the calendar, of course.)

Whatever the motivation for landing two rounds of funding in just four months, Violin also talked about topping $100m in sales this year, which would certainly put it on track for an IPO of its own. Provided, that is, the company intends to go public. If it should opt to head for the other exit and sell, we suspect that the most interested bidder in Violin may well be Hewlett-Packard.

The two companies have been publishing benchmark results from a combined offering, and HP undoubtedly could use the technology boost to more effectively compete with Oracle, which has been punching HP every chance it gets. (Oracle’s none-too-subtle ‘cash for clunkers’ ad campaign around HP servers comes to mind.) Another possible suitor for Violin would be Juniper Networks, which has already invested in the startup.

Heading toward an ‘Eloqua-ent’ IPO

Brenon Daly

Contact: Brenon Daly

A little more than a month after the strong IPO by a rival on-demand marketing vendor, Eloqua has taken its first significant step toward an offering of its own, according to market sources. We understand that the company has tapped J.P. Morgan Securities and Deutsche Bank Securities to lead the IPO, with a filing expected in a few weeks. Co-managers will be Pacific Crest Securities, JMP Securities and Needham & Co.

Eloqua has been positioning itself for an offering for the past few years, taking steps such as moving its headquarters from Canada to the Washington DC area, as well as hiring a raft of senior executives, most of whom have experience at public companies. Meanwhile, on the other side, Wall Street appears ready to buy off on marketing automation companies. At least the demand has been there for rival Responsys, which went public in late April and currently trades at a $750m valuation.

Responsys’ valuation works out to about 8 times 2010 sales and 6x 2011 sales at the on-demand company. Eloqua, which also sells its marketing automation software through a subscription model, is thought to be about half the size of Responsys. Assuming that Wall Street values the two rivals at a similar multiple, Eloqua could find itself valued at $350-400m when it hits the market later this year.

A valuable deal for Groupon

Brenon Daly

Contact: Brenon Daly

As it preps for its public debut, we note that Groupon, the coupon giant known for offering consumers deals up to 90% off, did a bit of smart bargain shopping of its own last summer as it made an important purchase to expand business in Europe. In May 2010, Groupon picked up Berlin-based CityDeal, a Groupon clone that’s posting growth that far outstrips the already astronomical rate at the acquiring company. CityDeal wasn’t even a year old when Groupon scooped it up, although it managed to generate approximately $450m in annualized revenue in 2010. For comparison, in its first year of existence, Groupon posted $30m in sales.

Groupon has since followed up the CityDeal acquisition with about a dozen other small deal-a-day sites across the globe. However, CityDeal remains the foundation for Groupon’s international operations, a business that is growing faster and has a higher gross margin than Groupon’s original operations in North America. Groupon now gets more revenue from outside its home country than from inside, which is an almost unheard of rate of internationalization for a three-year-old startup.

Given the contribution that CityDeal is making to Groupon’s financials, it’s worth remembering that Groupon only paid $125m in stock for the acquisition. Another way to look at it is that Groupon gave away about 10% of the equity of the company (roughly 41 million shares) for a company that now accounts for more than half its business. Of course, CityDeal’s owners took their payment in equity, so they will undoubtedly see their shares soar on the public market – far above the roughly $1bn valuation Groupon had when it acquired their company. (Valuations of around $20bn for Groupon on the public market are being kicked around right now.) As we think about that deal, it strikes us as a fitting structure for Groupon to use, in that the true value isn’t realized at the time of purchase, but at the point of redemption.

Flips and flops for PE shops

Brenon Daly

Contact: Brenon Daly

There are flips that fly, and flips that flop. Consider the two recent exits by private-equity (PE)-owned companies Skype Technologies and Freescale Semiconductor. One deal basically quadrupled the price of the portfolio company, while the other company is still lingering at a value of less than half its original purchase price. Granted, that ‘headline’ calculation misses some of the nuances of the holdings and their returns to the PE shops, but it’s nonetheless a solid reminder that deals need to be done with a focus on the ‘demand’ side of the exit.

For Skype’s PE ownership of Silver Lake Partners, Index Ventures and Andreessen Horowitz, the $8.5bn all-cash sale to Microsoft came less than two years after the consortium carved the VoIP provider out of eBay for just $2bn. The deal stands as the largest ever purchase by Microsoft, and the double-digit price-to-sales valuation suggests Redmond had to reach deep to take Skype off the board. Skype had filed to go public, but was also rumored to have attracted interest from Google as a possible buyer.

On the other hand, there wasn’t much demand for Freescale, which was coming public after undergoing the largest tech LBO in history. Freescale priced its recent IPO some 20% below the bottom end of its expected range. That had to be a painful concession for the PE owners of the company: Blackstone Group, Carlyle Group, Permira Funds and Texas Pacific Group. The club paid $17.6bn in mid-2006 for the semiconductor maker, loading up the company with billions in debt just as the market tanked. Freescale, which still carts around about $7.5bn in debt, has lower sales now than when it was taken private four years ago.

Imperva impervious to consolidation

Brenon Daly1 Comment

Contact: Brenon Daly

The next exit for a database security vendor appears likely to be an IPO. Word is Imperva has picked Goldman Sachs and Deutsche Bank Securities to lead its offering, with a prospectus likely to be filed in the next few weeks. The Redwood City, California-based company is thought to be running at roughly $60m in revenue.

If Imperva does indeed go public, the IPO would cap a run of a half-dozen deals in a sector that has seen purchases by some of the biggest technology providers on the planet. Among the companies that have bought their way into the database security market over the past two years are Oracle, IBM and McAfee. That’s not to say those big players have been paying big prices.

With the exception of Guardium’s sale in November 2009 to IBM, which we valued at $232m, the other transactions have been modest ones. And the most recent deal has been less than modest: BeyondTrust likely paid only a few million dollars for Lumigent last week. In fact, as we tally the aggregate value of all M&A in the database-monitoring space, we suspect that the total bill will be less than the value Imperva creates in its IPO.

Looking past the losses at Carbonite

Brenon Daly

Contact: Brenon Daly

Is Wall Street ready to buy into a company that spends $1 on advertising to bring in just $2 in bookings? That’s one of the key questions around Carbonite, a fast-growing online backup vendor that just filed for its IPO. (We looked at Carbonite’s planned offering in an in-depth report, including projecting its likely valuation when it does hit the Nasdaq later this year.) Carbonite has more than doubled revenue in each of the past two years. And while that is an eye-popping growth rate, it has been fueled by an equally eye-popping spending on advertising.

Consider this: Carbonite shelled out $24m on advertising last year on its way to recording $54m in bookings. (For those of you who like old-fashioned, by-the-book accounting, the $54m in bookings in 2010 equaled a scant $39m in actual revenue for the six-year-old startup.) And to be clear, that $24m was straight advertising spending, which is just a portion of the $33m in sales and marketing spending that it rang up last year. Obviously, that’s not a sustainable ratio, at least not for a technology company that also needs to spend a few million dollars on servers and other equipment each quarter and hopes to run profitably. (For its part, Carbonite hasn’t posted anything close to black numbers.)

That’s not to say that Carbonite won’t be a hit with investors when it does go public. Bulls can point to the fact that the service has attracted more than one million paying users, and those that use it tend to stick with it. (Carbonite puts its retention rate at 97%.) And on the buyside of the IPO, Wall Street has been willing to look past red-stained income statements if the growth rates are high enough. As evidence, we might point to the mid-March offering of Cornerstone OnDemand, a company that has a similar financial profile to Carbonite, though it competes in a vastly different market. After pricing its offering above range and soaring onto the market, Cornerstone currently trades at about 18 times trailing revenue

Demandware to test demand in public market?

Brenon Daly

Contact: Brenon Daly

After a pair of billion-dollar deals over the past half-year removed two old-line e-commerce vendors from the Nasdaq, an on-demand startup is rumored to be looking to replenish the ranks on the public market. Several sources have indicated that Demandware has picked underwriters and is set to file its IPO paperwork shortly, with Goldman Sachs & Co and Deutsche Bank Securities running the books. The filing, if it comes, would continue a trend of offerings by relatively small subscription-based companies. Demandware is expected to do about $40m in revenue in 2011.

Founded in 2004 and based near Boston, the company provides an e-commerce platform for more than 150 customers, including Barneys New York and The Jones Group. Demandware’s investors include local VC firms General Catalyst Partners and North Bridge Venture Partners.

The IPO for Demandware would come at a time of consolidation in the e-commerce industry, with big buyers paying big prices. Late last year, Oracle acquired Art Technology Group for $1bn, paying the highest price that ATG shares had seen since 2001. (ATG, which was founded in 1991, counted more than 1,000 customers.) And then earlier this year, eBay handed over $2.4bn for GSI Commerce. That stands as the largest Internet transaction since February 2008.

Tripwire pulls the plug on its IPO

Brenon Daly

Contact: Brenon Daly

Almost exactly a year after Tripwire formally filed its IPO paperwork, the security vendor has opted for the other exit, a trade sale. Thoma Bravo, a buyout shop with a number of other security and management companies in its portfolio, expects to close the acquisition of Portland, Oregon-based Tripwire this month. Terms weren’t disclosed but we understand that Thoma Bravo is paying about $225m. The decision by Tripwire to sell isn’t a surprise, any more than the fact that a buyout shop is its new owner.

If it had gone ahead with its IPO, we suspect that Tripwire would have had a rough go of it as a public company. Wall Street looks for growth, and while Tripwire has put up steady growth, it hasn’t been explosive growth or particularly valuable growth, at least in the eyes of portfolio managers. In 2010, Tripwire bumped up its overall top line 16% to $86m, primarily driven by increases in maintenance revenue and, to a lesser degree, consulting work. Collectively, those lines of business, which now represent more than half of Tripwire’s total revenue, rose 25% in 2010 – three times the rather anemic growth rate of 8% in license sales. (License sales actually flatlined in both the third and fourth quarters of 2010.)

The lagging license sales certainly wouldn’t have helped the company attract interest from strategic buyers. We noted earlier that nearly four years ago Tripwire came very close to selling to BMC. Since it filed its prospectus, we’ve heard that both Quest Software and CA Technologies looked at Tripwire. Still, in our view, Tripwire has a financial profile that should fit well inside a PE portfolio: some 6,000 customers; seven consecutive years of revenue and operating income growth; a rock-steady – and growing – maintenance stream of about $40m; and roughly $10m in cash flow per year.

Microsoft pays a princely premium for Skype

Ben Kolada

Contact: Ben Kolada

In its largest-ever deal, Microsoft announced today that it is buying VoIP provider Skype for $8.5 billion in cash. This is the third time Skype has changed hands since 2005. Microsoft claims that the deal is yet another move in its long line of real-time communications initiatives, but we suspect that the true intent, and more so the price, was driven by a desire to keep the hot property out of the hands of search rival Google, which is expanding its own communications prowess.

That Skype attracted Microsoft should come as no surprise, since the company has consistently garnered more than its fair share of attention in its eight-year history. Since its founding in 2003, Skype has been acquired by eBay, sold to a consortium of private equity investors led by Silver Lake Partners, filed for an IPO, rumored to have been a target by Facebook and Google and is now being scooped up by Microsoft. Its three trade sales combined have totaled more than $13bn in deal flow.

Indeed, Facebook and Google’s rumored involvement in the bidding process would certainly have contributed to the stellar valuation. Consider this: on an equity value basis, Microsoft is paying nearly twice as much as Skype received in its previous two trade sales combined. When factoring in the assumption of cash and debt, the offer values Skype at nearly 11 times its 2010 revenue, and 34x last year’s adjusted EBITDA. And while the price paid represents a fraction of the $50bn in cash and short-term investments Microsoft held at the end of March, it should be high enough to prevent a competing offer from Google alone. A topping bid from Big G would most likely exceed $9bn – or one-quarter of the total cash and short-term investments the search giant held at the end of March.

Skype’s suitors

Date announced Acquirer Deal value
May 10, 2011 Microsoft $8.5bn
September 1, 2009 Silver Lake Partners/Index Ventures/Andreessen Horowitz/Canada Pension Plan (CPP) Investment Board $2.03bn
September 12, 2005 eBay $2.57bn

Source: The 451 M&A KnowledgeBase

Another marketing maker heading to market?

Brenon Daly

Contact: Brenon Daly

Will Eloqua respond to Responsys? Does the rival on-demand marketing vendor perhaps have an IPO of its own planned? We couldn’t help but wonder that last Thursday as investors showed that they could hardly get enough of the Responsys offering, which priced above range and then tacked on another 28% in its first day of trading. The IPO created some $680m in market value for Responsys.

Responsys’ rather heady valuation (roughly 7x trailing sales and 5x projected sales) undoubtedly has to have generated more than a little interest from folks at Eloqua. And the company certainly has been taking steps in recent years that could indicate that it is eyeing the public market. For instance, three years ago it moved its headquarters from Canada to the Washington DC area while also hiring a raft of senior executives, most of whom have experience at public companies.

According to our understanding, Eloqua is a bit less than one-third the size of Responsys, which generated $94m in sales last year. Also, we gather that Eloqua lags a bit behind the 40% compound annual growth rate that Responsys has put up over the past half-decade. Still, the company offers a fairly compelling profile, with predictable subscription revenue flowing from its more than 800 customers. The strong debut from Responsys, plus the fact that shares of fellow on-demand marketer Constant Contact are trading around all-time highs, clearly suggest that Wall Street is in the market for marketing vendors.