Category: IPO

A warm welcome on Wall Street

Brenon Daly

Contact: Brenon Daly

Against a backdrop that has the major stock market indexes at their highest level in about three years, investors have apparently signaled that they are ready to take a chance again on new issues. A pair of IPOs came to market Thursday at significantly higher-than-expected prices, and promptly surged in aftermarket trading. Collectively, the offerings for Responsys and 21Vianet raised a healthy $274m for the two companies.

In the hotter of the two IPOs, Chinese hosting company 21Vianet Group sold 13 million American Depository Shares at $15 each. (That raised $195m for the company, half again as much money as it originally planned to raise based on the midpoint of its initial range.) In the aftermarket, shares were changing hands at about $21 each. (We’ll have a full report on the company and its outlook in tonight’s Daily 451.)

Meanwhile, on-demand marketing software vendor Responsys also found a warm welcome on Wall Street. The offering, which we expected to be strong, raised $79m for Responsys. The company priced its 6.6-million-share offering at $12 each, roughly 30% above the midpoint of the initial range. Investors bid up the stock to about $15.50 in afternoon trading. With 44.1 million shares outstanding, Responsys garners a value of some $680m, slightly more than 7 times 2010 sales and almost 5x our projection for 2011 sales.

A responsible debut valuation for Responsys

Brenon Daly

Contact: Brenon Daly

Reversing a trend that has seen many of the major marketing software providers disappear inside larger players, Responsys is ready to step out onto the public market. The on-demand company, which filed its IPO paperwork just four months ago, plans to sell 6.6 million shares at $8.50-10 each. It is likely to begin trading Thursday. (See our full preview of the offering.)

At the high end of the range, Responsys would be valued at roughly $450m. That appears to be a fairly conservative valuation, at least when compared with recent acquisitions and even current trading multiples in the sector. We might suggest that Responsys – a company that’s solidly in the black and posting 40% growth – would garner a premium on its debut.

If it does indeed hit the market in the neighborhood of a half-billion dollars, Responsys will essentially match the exit prices over the past eight months of two of its main rivals. Last August, Unica got taken out by IBM for $523m (equity value), while Aprimo sold to Teradata for $525m in December. However, when we compare the three vendors, Responsys is growing at more than twice the rate of either of the two companies that went in a trade sale. (Aprimo had been on file to go public back in 2007, but the Credit Crisis scotched those plans.)

Despite the premium that we might expect for Responsys’ growth rate, the company is likely to start life on the Nasdaq at about 5.5 times trailing sales, roughly the midpoint of the valuations in the sales of Unica and Aprimo. Further, it would just match the current market valuation of Constant Contact, a low-end multichannel marketing firm that went public in October 2007.

China becoming social in public

Ben Kolada

Contact: Ben Kolada

While talk of social companies hitting the public markets has so far focused on US firms such as Facebook, GroupOn and LinkedIn, the first vendor to do so may actually come from the Far East. Dubbed the ‘Facebook of China,’ Beijing-based Renren filed its prospectus on Friday and will reportedly hit the NYSE in two weeks, trading under the symbol RENN.

Founded in 2002, Renren today offers social and professional networking, online commerce and gaming to an audience of approximately 117 million. According to its prospectus, the company added an average of two million users per month during the first quarter. Sales have grown at a similarly quick pace. Net revenue soared from $13.8m in 2008 to $76.5m in 2010, representing a compound annual growth rate of 136%.

Excluding underwriters’ overallotment options, Renren will offer a total of 53.1 million American Depository Shares (ADS). (Lead underwriters are Morgan Stanley, Deutsche Bank Securities and Credit Suisse.) The company expects to price at $9-11 per ADS, which at the top of that range would be a whopping $584m raised. However, if interest in previous Chinese IPOs is any indicator of what to expect, then Renren’s total amount raised could be significantly higher. Just two weeks ago, Beijing-based security vendor Qihoo 360 Technology made its debut on the NYSE, offering 12 million ADSs (excluding underwriters’ overallotment shares). Shares hit the market at $27 each, nearly twice the expected initial offering price of $14.50, and eventually closed at $34 each. Shares have dipped a bit since then, but Qihoo is still sporting nearly a $2.5bn market cap, which is approximately 43 times its 2010 sales of $57.7m.

Cornerstone: the newest — and priciest — HCM vendor

Brenon Daly

Contact: Brenon Daly

So much for the ‘debut discount.’ Cornerstone OnDemand hit the market Thursday at an eye-popping valuation, going against the recent trend toward conservative pricing for new issues. The human capital management (HCM) vendor priced its shares at $13 each, above the indicated range of $9-11 each. (Goldman Sachs & Co and Barclays Capital are leading the IPO.) By early afternoon Thursday, the stock was changing hands at about $19.

The offering gives Cornerstone one of the richest valuations of any recent IPO. At $19 per share, the company’s market cap is roughly $900m. That’s 15 times trailing bookings (not sales) and likely in the neighborhood of 9x projected bookings. (Our math: Cornerstone reported 2010 bookings of $61m, up 74% from the previous year. Assuming that the growth rate comes down a smidge to 60-65% for 2011, that would put Cornerstone’s full-year bookings at $100m, give or take.)

Cornerstone’s valuation vastly outstrips what the market says rival Taleo is worth, and even puts it ahead of SuccessFactors, which had been the HCM industry’s ‘favorite child.’ (That’s been the view on Wall Street, anyway.) SuccessFactors, which went public in late 2007, currently garners a $2.7bn market cap, roughly 10.5x trailing bookings and about 8x projected 2011 bookings. We should note that both SuccessFactors and Taleo are about four times the size of their newest rival on the public market. But for now, both of them are looking up at Cornerstone.

Western Digital goes big in storage

Contact: Henry Baltazar, Brenon Daly

After flirting with a potential IPO, Hitachi Global Storage Technologies (GST) is set to be snapped up by its hard drive manufacturing rival Western Digital (WD) for $4.25bn in cash and stock. The deal would be the largest transaction in the storage industry in more than seven years, and would solidify WD’s position as the biggest hard drive vendor.

Beyond the benefits of consolidated manufacturing and increased market share, the Hitachi GST acquisition provides WD with credibility in the enterprise market, which was the key handicap it had to overcome against its longtime rival Seagate. Wall Street certainly saw it that way, sending WD shares up 14% in heavy Monday-morning trading. (WD indicated that the combination, which is expected to close in the third quarter, would be immediately accretive to non-GAAP earnings.)

We would also note that Hitachi GST’s expertise in enterprise SAS and fiber-channel hard drives was the key asset that led to its partnership with Intel for enterprise-class solid-state disks, and WD will now benefit from having these high-performance NAND flash products in its lineup. In the Hitachi GST/Intel partnership, though Intel manufactures the drives and supplies the NAND flash for the units, the products have Hitachi GST branding and are sold through Hitachi GST’s business partners.

The logic behind that strategy stemmed from the fact that Hitachi GST already had relationships with major enterprise storage and server providers, which would have made it easier for the products to get through qualification cycles at OEM partner sites. With this deal, WD will also attempt to leverage these relationships to build up its market share well beyond the consumer space.

The year of the privately held storage supplier?

Contact: Simon Robinson

The storage M&A market is expected to favor smaller private providers this year, as recent activity has reduced the number of available midsize public targets. Indeed, in the past 24 months, Data Domain, 3PAR, Isilon Systems and Compellent have all been taken off the market. And buyout speculation caused by this recent spate of activity has bloated valuations at remaining public firms, such as CommVault, making them less likely to be acquired next.

But while recent public storage acquisitions may have halted the sales of their public peers, they may have actually benefited private suppliers. For example, EMC’s reach for Isilon highlighted the growing requirement for high-scale storage systems in markets where the exponential growth of highly rich – or ‘big’ – data is a key pressing challenge. Indeed, that deal could be important in refocusing attention on the remaining privately held players.

We took a look at several of the remaining private targets in a recent Sector IQ and noticed that would-be buyers still have several options to choose from. Though the IPO window has been closed for a couple of years, there are many attractive storage specialists that are fairly mature on both the product and go-to-market fronts, and a closer examination reveals a number of storage system specialists that were formed in the late 1990s that are still making headway today. Click here for our full report on potential targets in the storage sector.

At long last, Open Text makes a BPM play

Brenon Daly

Contact:  Brenon Daly

More than a year and a half ago, we noted that Metastorm was looking to buy its way into some adjacent markets such as risk and compliance or perhaps collaboration. The planned shopping trip would have come after the business process management (BPM) provider pulled its IPO paperwork. At the time, however, we wondered if the would-be IPO candidate might not head to the other exit: a trade sale.

Specifically, we floated the single name of Open Text, which we noted had consolidated much of its core enterprise content management (ECM) market but still appeared to be losing deals to rival vendors with more robust BPM offerings. However, we thought that valuation might make it tough to bridge the bid/ask spread between the two sides. In most of its dozen deals over the past decade, Open Text has paid somewhere in the range of 0.5-1.5 times trailing sales for its acquisitions. That’s true for its most visible purchases, including deals that saw it gobble up rival ECM firms Hummingbird in August 2006 and Vignette in May 2009, as well as add image capture software maker Captaris in September 2008.

As it turns out, valuation didn’t necessarily snag Open Text’s significant acquisition to bolster its BPM credentials. The company said late last week that it will hand over $182m in cash for Metastorm. In a conference call, Open Text indicated that Metastorm was generating $70-75m in sales, implying a valuation of about 2.5x sales for the BPM provider. That’s a fair bit richer than the valuation that the Canadian consolidator has paid in the past. However, we suspect that guidance assumes a bit of revenue write-downs and (perhaps) a bit of sandbagging. The reason? Metastorm said in mid-2009 that it was above that level of revenue in 2008 and targeting $90m in 2009. In its IPO filing, Metastorm reported $60m in sales for 2007.

KIT buys in bulk

Ben Kolada

Contact: Ben Kolada

No stranger to inorganic growth, video asset management provider KIT digital just announced three acquisitions worth $77m. The company’s recent dealmaking brings its total M&A spending to $151m since 2006 – a hefty sum considering that KIT currently sports just a $350m market cap. While similarly sized firms might stop for a breather, KIT plans to announce another large purchase by the end of the quarter.

KIT has bought KickApps, Kyte and Kewego as it continues to consolidate the video asset management market and add social media to its platform. Kyte, the least expensive of the three targets, will provide KIT with mobile video content delivery while Paris-based Kewego provides a video distribution software platform for internal communications to enterprises in the EMEA region. KickApps, arguably the most valuable of the acquired assets, provides social media software for interactive video to enterprises. (A side note: KickApps is betting the farm on the role that social media will play in KIT’s evolving business – the company’s equity holders took their $45m payout entirely in KIT digital stock.)

As if announcing three acquisitions at once isn’t enough, the company claims to be on track to close another large transaction by the end of the quarter. KIT wouldn’t comment on who its next target would be, and the video asset management market is still too fragmented to tell which companies are on KIT’s radar. But we expect that the new target will continue KIT’s M&A strategy of buying companies for geographic expansion, entry into new verticals and complementary technology. KIT will pay for its new property out of the proceeds from its recently closed IPO, which netted $103m.

KIT’s triple play

Date closed Target Deal value Target adviser Acquirer adviser
January 28, 2011 KickApps $44.7m America’s Growth Capital Janney Montgomery Scott
January 26, 2011 Kewego $26.7m Not disclosed No adviser used
January 25, 2011 Kyte $5.7m GrowthPoint Technology Partners No adviser used

Source: The 451 M&A KnowledgeBase

Motricity’s equity activity

Brenon Daly

Contact: Brenon Daly

Although shares of Motricity have been trading on the Nasdaq since mid-June, it’s only been in the past few weeks that most of the action has taken place. We have already chronicled the difficult birth of the company, which had to trim both its offer size and price to go public. Debt-heavy Motricity ended up raising only half the amount that it expected in its June IPO.

Born under a bad moon, Motricity appeared destined to live out a life of quiet woe on the public market. And for the first three months, that’s exactly how it played out for the mobile data platform provider. Shares changed hands in the single digits. Then the stock took off, tripling from September to November. (That run was enough to tempt Carl Icahn, a significant shareholder in Motricity, to look to lighten his load in December. However, the activist investor pulled the planned secondary last week.)

For its part, the company has found its own use for equity: an acquisition. Earlier this week, Motricity picked up mobile advertising and analytics startup Adenyo for $100m upfront and (perhaps) another $50m in an earnout. Terms call for Motricity to use an unspecified mix of cash and stock to cover the bill. Adenyo, advised by Citadel Securities, did get a collar on shares as part of the final consideration. But for now, the once-volatile shares of Motricity have been holding steady at about $20 each, which is at the high end of the collar’s range.

Trustwave surfing toward an IPO?

Brenon Daly

Contact: Brenon Daly

After two IT security companies put in their IPO paperwork last summer, we’re hearing that Trustwave is almost certain to be the first filer in 2011. The PCI-compliance vendor is currently baking off, with the selection of bankers expected to be complete next week. The actual prospectus would likely be filed around April and the offering would hit later this year, according to several sources.

If the filing goes ahead as planned, Chicago-based Trustwave would join both SafeNet and Tripwire as security providers looking to join the ranks of public security companies. (Or in the case of SafeNet, rejoin the ranks of public security companies.) Our understanding is that Trustwave finished 2010 with roughly $125m in sales, and continues to generate cash. Depending on the timing of the offering, the vendor would likely come to market with a valuation in the neighborhood of a half-billion dollars, according to our quick, back-of-the-envelope math.

Founded in 1995, Trustwave has expanded far beyond its original focus on PCI auditing and remediation, largely through M&A. It has acquired seven companies in the past three years, most of them small firms that, for the most part, were having a tough go of it on their own. Trustwave then adds the acquired technology on top of its Linux platform (TrustOS) and offers it to customers either through an on-premises product or a managed service. All in, Trustwave counts some two million customers.