Category: IPO

The IPO pipeline just got even drier

Brenon Daly

Contact: Brenon Daly

Scratch another company off the list of potential IPO candidates for 2011. Managed security services provider (MSSP) SecureWorks got snapped up by Dell on Tuesday for what we understand was a table-clearing bid. (Subscribers can see our full report on the transaction, including our estimated price for SecureWorks.)

The trade sale comes two years after the MSSP was putting the final touches on its prospectus. That offering, which got derailed when the Credit Crisis knocked the equity markets for a loop, was set to be led by Merrill Lynch and Deutsche Bank. (Merrill Lynch, which got picked up by Bank of America later in 2008, got the print on the sale.) We understand that SecureWorks was getting ready to dust off the prospectus, update the numbers and (finally) get it on file with the SEC later this year.

Instead, Dell moved quickly to secure the deal, which will serve as the foundation for its security offering. We gather that talks only really got going after Thanksgiving, going exclusive almost immediately. And Dell had to pay up for that. Of course, Dell could consider its pickup of SecureWorks a bargain, compared to the last dual-track company it acquired. Recall that Dell paid an eye-popping $1.4bn, or 10 times trailing sales, for EqualLogic back in November 2007. The storage vendor, which had formally put in its prospectus, generated almost exactly the same amount of revenue as SecureWorks.

Laying out a dual track for Conerstone

Brenon Daly

Contact: Brenon Daly

If current IPO candidate Cornerstone OnDemand is looking for a company to model itself on – at least in terms of the offering and after-market trading – it could do a lot worse than SuccessFactors. Both vendors sell human capital management (HCM) software, and both sell it on a subscription basis. Further, both companies were relatively small (sub-$40m in revenue) and running deeply in the red when they put in their paperwork. Not that it has mattered in the case of SuccessFactors. Shares in the company have tripled from the offer price, giving it an eye-popping market valuation of $2.3bn.

Whether Cornerstone will enjoy an equally remarkable run as a public company remains to be seen. (The company, which initially filed in September, would probably be looking at pricing in the first half of next year.) But in a recent report, we wonder if Cornerstone will even make it to the Nasdaq at all. The reason? The M&A market for HCM vendors has been hot lately. Spending on deals in the market so far this year is running at three times the level of both 2008 and 2009. And valuations, for the most part, continue to come in at above-market multiples.

In the report, we speculate on two potential buyers: one that’s obvious (ADP) and one that’s more of a stretch (salesforce.com). Cornerstone has some traits that would clearly appeal to both, as well as some that make a trade sale to either would-be acquirer less likely. ADP, which has already purchased a half-dozen HCM providers, currently has a five-year reselling agreement with Cornerstone, and even holds rights to some warrants in the startup. However, a closer reading of Cornerstone’s prospectus indicates that the early returns from that reselling arrangement haven’t been encouraging, with the two sides feuding over whether or not ADP has hit the agreed-upon sales targets and is, therefore, entitled to warrants that could be worth several million dollars.

Unlike ADP, which has a demonstrated interest in and appetite for HCM deals, salesforce.com is a much more speculative buyer for Cornerstone. But it’s a pairing that is perhaps not as farfetched as it might seem. After all, salesforce.com has long said that it wants to be relevant to all employees at a business, not just to those in sales. Buying Cornerstone would immediately give salesforce.com a high-profile presence in the HCM market, opening up an opportunity that far exceeds its core CRM market. Of course, a major acquisition like this would go against the direction that salesforce.com has taken as an open, all-inclusive platform provider.

Exits lead up and down for General Catalyst

Brenon Daly

Contact: Brenon Daly

Talk about a mixed pair of exits. Venture firm General Catalyst Partners is faced with an unusual situation of the sale of one portfolio company almost undoubtedly slashing the valuation of another portfolio company that just filed for an IPO. The trade sale could even derail the offering, although that’s probably not likely.

The specifics: Boston-based General Catalyst (and more specifically, partner Joel Cutler) has backed both ITA Software, a maker of flight search tools, and Kayak.com, an online travel site. In July, ITA agreed to a $700m sale to Google (although the close of the deal has been hung up by concerns over the search giant potentially having too much influence in the flight search market). And then just this week, Kayak.com put in its paperwork to go public. General Catalyst is the single largest owner of Kayak.com, holding about 30% of the equity.

The rub in the two exits comes because Kayak.com relies heavily on ITA for sending business its way. (According to the prospectus, ITA has accounted for 42% of airfare query results so far this year.) Of course, Google would have every reason not to continue to send that search traffic to Kayak.com if the ITA purchase goes through. So for General Catalyst, it would be nice to pocket the proceeds from a $700m sale of ITA, but probably not if it comes at the cost of Kayak.com’s valuation.

Is GeoLearning the next to go?

Brenon Daly

Contact: Brenon Daly

While the employment market may still be sluggish, the market for software that helps companies with their employees is bustling. We recently noted that both the number of deals and spending in the human capital management (HCM) market so far this year is rivaling the records set when the overall M&A market was much healthier. Add to that, there’s even an HCM vendor that’s eyeing the other exit: Cornerstone OnDemand filed to go public two weeks ago, one of the few tech companies that’s willing to brave the chilly IPO market.

As to what’s the next likely deal in the HCM market, recent indications have pointed toward a sale of GeoLearning. (We understand that the Des Moines, Iowa-based company has retained Raymond James & Associates to advise it on a process.) Founded in 1997 by current CEO Frank Russell, GeoLearning sells its learning management software (LMS) through both a hosted and on-demand model to more than 700 customers. In February 2008, GeoLearning took in its first and only institutional money – a $31m investment from Volition Capital, which was known as Fidelity Ventures at the time.

A little more than a month ago, fellow LMS startup Learn.com got snapped up by Taleo for $125m. Sources have indicated that ADP may have been the initial bidder for Learn.com, looking to add to the half-dozen HCM acquisitions the services giant has already done. We would expect ADP to at least look closely at GeoLearning. But from our perspective, the more likely acquirer for GeoLearning is SuccessFactors. The two companies have had an integrated offering on the market for more than four years, and continue as close partners. We gather that GeoLearning is slightly larger than Learn.com, which was running at about $30m in sales.

OpenTable booking seats at negotiating table in Europe

Brenon Daly

Contact: Brenon Daly

Often when a company takes its business to a foreign country, something gets lost in translation. EBay found that as it looked to expand its online auctions internationally, and on a smaller scale, OpenTable ran into some of that as well. Roughly two years ago, the San Francisco-based online restaurant reservation service pulled out of both Spain and France. Even now, OpenTable’s international operation contributes only about 6% of total revenue as it burns money.

So, perhaps the thinking in its recent transatlantic move is: If you can’t beat them, buy them. In its first acquisition for geographic expansion, OpenTable said last week that it will pay $55m in cash for toptable.com, a UK reservation site. (Frankly, we have been expecting a move across the ocean by OpenTable since its IPO.) OpenTable has had its offering in the UK since 2004, but the company has acknowledged that the UK is its most competitive market.

While the acquisition should help bolster its presence there, we should note that OpenTable operates in a very different way than toptable.com. OpenTable looks to replace a restaurant’s existing reservation book, which is typically a pen and some paper, with the company’s proprietary electronic reservation book. On top of that one-time installation fee, OpenTable then charges a monthly subscription fee as well as making money each time a diner sits down at a restaurant table that was booked through the service. In contrast, toptable.com – along with other services that use the ‘allocation’ model – simply moves some of the available reservations online, with reservations there then recorded in whatever system the restaurant is currently using.

One advantage that toptable.com has, according to OpenTable, is that its approach is ‘lighter’ in that it doesn’t require an upfront hardware purchase. OpenTable is considering taking toptable.com and its allocation approach back into continental Europe, where toptable.com had started to move. If that organic expansion from its inorganic acquisition doesn’t take off, look for OpenTable to buy again. Germany, where OpenTable has had operations since 2007, looks like another market where OpenTable might want to reserve a few seats at the negotiating table.

A Big Blue move into the data warehousing market

Brenon Daly

Contact: Brenon Daly

A little more than three years after Netezza debuted on the NYSE, the data-warehousing vendor is being erased from the Big Board at basically twice its valuation at the time of its IPO. Under terms, IBM is handing over $27 in cash for each share of Netezza, which went public at $12 in July 2007. However, after the strong debut, which valued the company at around $1bn, gravity set in on Netezza shares. They spent most of 2008 and all of 2009 under the $12 offer price.

Earlier this summer, however, Netezza shares started running. The run was fueled by strong second-quarter results that saw total revenue surge 45%, as well as lingering M&A rumors. (We noted in early July that we had heard EMC was interested in Netezza before it opted for rival data-warehousing vendor Greenplum. IBM’s bid values Netezza at twice the level it was trading at the time.)

As Netezza shares continued climbing to new highs on the market, the move whittled away the premium Big Blue is offering. Compared to the previous day’s close, IBM is paying just a 10% premium for Netezza. But judged against where Netezza was trading a month ago, the premium is 80%. We would add that Netezza shares have traded above the $27 bid since the open Monday morning. UBS advised IBM, while Qatalyst Partners advised Netezza.

Based on the enterprise value of $1.7bn given by IBM, the offer values Netezza at 8.9 times sales in its fiscal year that ended in January. (As a trading comparison, Teradata currently garners a valuation that’s about one-third that level.) At the end of its second quarter, Netezza guided Wall Street to expect about $250m in sales for the current fiscal year, meaning IBM is paying 6.8x projected sales. While that is a relatively rich valuation, it’s much lower than rival EMC paid in its big data-warehousing purchase. We understand that it handed over $400m for Greenplum, which was running at about $30m in sales.

Wall Street job pays off for Salary.com

Brenon Daly

Contact: Brenon Daly

Strictly from the view of the corporate treasurer’s office, Salary.com got paid while on Wall Street. The compensation management vendor went public at a valuation that – in rather short order – would never again be available to the company. The outsized chunk of money that it raised in its early 2007 IPO, which came right before the window for new offerings slammed shut, has helped fund its money-burning operations since then.

In its mid-February 2007 IPO, Salary.com sold 5.7 million shares at $10.50 each. Of that amount, 4.9 million came from the company, meaning it raised some $51m. (That relatively fat offering came despite the company only recording $23m in revenue in the year leading up to its IPO.) In the year after the debut, the stock basically traded at or slightly above the offer price. But in early February 2008, it broke issue and would never again change hands in the double digits. Kenexa bid $4.09 for each share of Salary.com.

The fact that Salary.com is getting taken off the Nasdaq at less than half the price that it came on the exchange underscores just how much Wall Street has backed away from risk. And, unfortunately for Salary.com – a tiny company that’s put up only red numbers – that has meant investors backing away from it. To get a sense of just how small Salary.com is, consider this fact: each year, the company generates about $40m in sales, roughly the amount that its acquirer, Kenexa, generates each quarter. And we can’t overlook the fact that its unprofitable operations had burned down its stash of cash to about $8m, compared to more than $20m last year.

So all things considered, the planned sale of Salary.com is not such a bad outcome for the vendor. It gets valued at about 1.6 times trailing sales, roughly matching the multiple in some other recent human capital management (HCM) deals. (For instance, we understand that ADP paid about $110m for Workscape earlier this summer, a transaction that valued the HCM vendor at about 1.8x trailing sales.) In any case, if Salary.com hadn’t gotten a Wall Street windfall in the form of an IPO, we’re fairly certain that the company would have had a much rougher go of it during the Credit Crisis, and probably wouldn’t even have fetched the $80m that it got in its sale to Kenexa, or any other buyer.

Google picks on the pipeline

Brenon Daly

Contact: Brenon Daly

As if the IPO process wasn’t already hard enough, candidates looking to go public have found a new obstacle: Google. For the second time in less than a year, the search giant has swung its considerable market heft against a would-be public company – likely trimming hundreds of millions of dollars in market cap from the IPO aspirants. That from a company with the informal motto of ‘Don’t be evil.’

Most recently, Google introduced Google Voice, an add-on to its Gmail offering that allows for free calls to anywhere in North America. If that sounds vaguely familiar, it’s because Skype has been in that business for about seven years now. On the back of that product, Skype filed its paperwork with the SEC earlier this month to go public, less than a year after being carved out of eBay. In the first half of 2010, Skype reported $406m in revenue, according to its S-1 filing.

And it isn’t like Google just stumbled on the idea of Google Voice as a ‘Skype killer,’ or however it thinks of the offering. From our vantage point, Google has set a deliberate course of M&A to acquire bits of useful technology and engineers for a VoIP offering. The company reached for Global IP Solutions in May after picking up On2 Technologies last year, a deal that required Google to top its initial bid. So Google clearly wanted to be in this market, and was willing to buy its way into it.

This bit of sharp-elbowed competition comes after Google made an even more drastic entrance last November into the turn-by-turn navigation market. Just two days before TeleNav, one of the largest mobile navigation vendors, put in its IPO paperwork, Google announced that it would be offering turn-by-turn directions. Although the service would be available on only a very limited number of devices, Google’s price was hard to beat. (It was free.) Granted, TeleNav has run into trouble (no pun intended) of a different sort since it listed on the Nasdaq. But the company seemed almost destined for difficulties after being born under a bad moon, thanks to Google.

A clear return and ‘cloudy’ outlook for Tripwire’s only deal

Brenon Daly

Contact: Brenon Daly

Exactly a year ago, Tripwire made its first and only acquisition in its 14-year history, picking up the assets of Activeworx. The tiny startup added log management technology to Tripwire, an IT configuration and compliance vendor. The deal itself, which only set Tripwire back about $3m, was a fittingly quiet purchase of a company that had lived a pretty quiet life. On Thursday, Tripwire took that technology to the cloud.

Although Tripwire actually closed its pickup of Activeworx last August, it only began talking about its log management offering, which is based on the acquisition, earlier this year. It also only began selling its log management offering earlier this year. As it was rolling out the offering, we noted that the log management market looked awfully crowded. But so far, Tripwire appears to be getting a solid return on its Activeworx buy. From a standing start, Tripwire’s Log Center business has generated about $2m of license sales in the first two quarters of 2010. (And to be clear, that’s GAAP revenue, as listed in the company’s latest amendment to its S-1 filed with the SEC, not some loosey-goosey figure that has been rounded way up.)

Granted, the Log Center contribution is still a small slice of the $18m in total licenses it has sold over the same period, and an even smaller portion of the $40m it tallied as total first-half 2010 revenue. But for a new product introduction, that’s a strong start out of the gate. And today, Tripwire announced a partnership with Terremark through which the datacenter provider will now be offering Log Center to its clients. The on-demand compliance and security arrangement between the two companies marks the first cloud offering from Tripwire.

Having its inaugural acquisition already producing revenue at a strong clip, we suspect that Tripwire will look to return to the market. The only question in our mind is what corporate structure Tripwire will have when it goes shopping again. Will it remain a privately held company, or will it see through its IPO filing and join the ranks of the Nasdaq-listed companies? Or will it – as we have speculated in the past – get snapped up by a larger vendor? From what we’re hearing now, however, a Tripwire trade sale is looking less likely than earlier in the summer. From our perspective, two of the companies that would head any list of likely buyers for Tripwire (McAfee and Hewlett-Packard) have their own M&A events to sort through right now.

IntraLinks limps onto the market

Brenon Daly

Contact: Brenon Daly

It turns out that the third time is not the charm for IntraLinks, at least not in terms of its initial valuation as a public company. IntraLinks cut the price for the 11 million shares it is selling to $13 each, down from the $14-16 range it had set. That means the company is raising $143m, some $22m less than it would have if it priced at the midpoint of its initial range. That’s a key consideration because unprofitable IntraLinks was counting on the IPO proceeds to help it pay down debt.

But at least it did manage to get public, unlike the times it filed back in 2000 and 2005. We recently noted how much more grown up IntraLinks looks now compared to its earlier S-1s. One kicker: when it originally filed in 2000, the company ran at negative gross margins compared to the fairly respectable 65% it notched in 2009. Although IntraLinks still isn’t printing black numbers, it’s come a long way from 2000, when it lost five times more money than it even brought in as revenue.

The weaker-than-expected pricing continues a trend that we’ve seen in most tech offerings so far this year: Motricity, Broadsoft, TeleNav, Convio and others have all priced below their range – and all of them are trading lower in the aftermarket. (The one exception to this weakness is QlikTech. The offering, which we indicated would be a hot one, priced above its range at $10, and is now trading at $15.) For its part, IntraLinks first traded at $13 and basically stuck around that level in its debut.