Category: IPO

A post-IPO shopping list for QlikTech

Brenon Daly

Contact: Brenon Daly, Krishna Roy

Bucking the trend of trimmed prices and broken issues for tech IPOs, QlikTech debuted on the market Friday with a strong offering. The analytics vendor sold 11.2 million shares at $10 each, above the $8.50-9.50 range the company had set. In their Nasdaq debut, shares of QlikTech continued higher, changing hands at around $12.50 in early-afternoon trading. With 75 million shares outstanding, that gives the company an initial market capitalization of some $940m. (That’s basically spot-on to where we expected the company to begin its life on Wall Street when the paperwork first came in.)

As the proceeds from the IPO make their way to QlikTech, we’ve put together a handy-dandy shopping list for the company. Not that we necessarily expect QlikTech to immediately step into the M&A market. After all, it’s got a pretty solid business running right now. In recession-wracked 2009, QlikTech managed an impressive 33% increase in revenue. Even more impressive, the company doubled that rate in the first quarter of this year. Perhaps mindful of not messing with a good thing, QlikTech hasn’t done any deals up to now.

Nonetheless, my colleague Krishna Roy recently noted that QlikTech is essentially a one-product company that competes against the enterprise software giants that sell analytics as part of a larger product suite. (IBM, Oracle and SAP combined to snap up all three primary BI vendors in a string of deals that, collectively, set them back $15bn.) Further, one of QlikTech’s key technological advantages that the company helped pioneer (in-memory analytics) has become much more commonplace. Both of those facts turn up the competition on QlikTech, which might benefit from looking out-of-house for some additional technology.

If so, one area where we could imagine QlikTech going shopping is in the predictive analytics market. The company already offers some predictive analytics with the inclusion of advanced aggregation features in the latest QlikView 9. But additional technology could make for an easy knock-on sale to existing customers. (That’s a key for QlikTech, which gets roughly 60% of its revenue from existing customers.) Two small startups that might fit the bill for QlikTech are Revolution Analytics and Rapid-I.

In the dark on Big Blue’s buys

Brenon Daly

Contact: Brenon Daly

At the risk of stepping into a Kantian dialectic on ‘materiality,’ we can’t help but comment on the fact that when IBM does a deal – even a semi-large deal – mum’s the word. So far this year, Big Blue has picked up two companies that were large enough to consider going public at some point, with each acquisition costing the company around $400m in cash (according to our estimates). Yet in both the purchase of Initiate Systems and BigFix, IBM declined to disclose the price.

Viewed from the Big Blue side, it’s understandable that a startup like Initiate or BigFix, both of which were generating less than $100m in sales, is hardly a significant addition to a tech giant that’s going to post about $100bn in sales this year. Further, even though $400m sounds like a lot of money to most of us, we have to remember that IBM generates that much in cash roughly every two weeks. So, the thinking goes, Big Blue is well within its rights to not disclose ‘immaterial’ transactions. (That’s a view shared by Apple, for instance, which we have taken to task in the past for being run more like a private fiefdom than a public company.)

However, as is often the case in arguments based on relativism, there’s a distinct lack of accountability in it. After all, IBM is spending other people’s money. Shareholders own the company and, at least theoretically, the executives and management at the company – including all those who had a hand in the deals – work for shareholders.

Not to get overly sanctimonious about it, but in deals like Initiate and BigFix, IBM’s true owners are in the dark about how their employees are spending their money. And we’re not talking about dipping into the petty cash jar, but emptying hundreds of millions of dollars from the corporate treasury. That seems to us to be a fairly significant event.

The Big Blue erasure

Brenon Daly

Contact: Brenon Daly

In addition to the current snarling bear market and the onerous regulatory requirements, we’ve noticed yet another hurdle IPO candidates have to clear to get to the public market: IBM. With last week’s purchase of BigFix, the tech giant has gobbled up two private companies this year that were both tracking for an IPO. In February, Big Blue snagged Initiate Systems, a master data management vendor that had filed to go public in late 2007 but pulled its prospectus in mid-2008.

As we understand it, BigFix wasn’t nearly as close to an offering as Initiate. But the security management startup certainly had the financial profile to become a public company. (In fact, we’ve listed the Emeryville, California-based vendor as a possible IPO candidate in our outlook for the security market in each of the past two years.) BigFix was tracking to $65m in revenue for 2010, up from $52m in 2009, according to sources. (Bookings were closer to $85m last year.) The company also generated some $14m in free cash flow in 2009, a surprisingly large amount for a 13-year-old startup that had only raised $36m in venture backing.

In both of the deals, IBM paid a fairly rich multiple. Although terms weren’t disclosed, we understand that Big Blue handed over $425m, or 5.3 times trailing revenue, for Initiate. And we hear from multiple sources that IBM paid $400m, or nearly 8x trailing revenue, for BigFix. The multiple in both deals is substantially higher than the median price-to-sales multiple (1.8x) that we recently calculated for all tech transactions in the second quarter.

As a final thought, we highly (highly, highly) doubt that if either Initiate or BigFix came public right now, it would garner anywhere near a $400m valuation. (We recently put out a special report on the dreary IPO market.) More likely, skittish investors would discount the debut valuation to around $250m, give or take. Add in lockup periods and other considerations in an IPO that draw out the path to liquidity, and it’s no wonder both Initiate and BigFix took a rich, all-cash offer from IBM.

Big is back in Q2 M&A

Brenon Daly

Contact: Brenon Daly

Spending on tech M&A in the second quarter surged to the highest quarterly rate since the Credit Crisis erupted, driven by a return of some of the largest technology buyers. Overall, deal makers announced 773 transactions, with a total value of $62bn. The Q2 total, which represented a doubling of spending from the first three months of the year, topped the previous record in the ‘new normal’ environment by slightly more than 10%.

Fittingly for a new record, big tech names have figured prominently in M&A since April. For instance, SAP announced the largest transaction in the software industry in more than two years when it reached for Sybase in May, spending $6.1bn. Also in May, IBM put together its largest deal in two and a half years, paying $1.4bn for Sterling Commerce. Even telcos got into the act, with a pair of transactions valued at more than $10bn each in the second quarter.

Overall, four of the five largest acquisitions of the year were announced in the second quarter. That helped push the number of deals valued at $1bn or more announced in the second quarter to twice as many as the first quarter (14 transactions vs. 7). It’s also worth noting that with 21 10-digit transactions already announced in 2010, the full-year number of big-ticket purchases is almost certain to exceed the 33 deals valued at $1bn or more in both 2008 and 2009.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2010 773 $62bn
Q1 2010 847 $30bn
Q4 2009 818 $55bn
Q3 2009 758 $38bn
Q2 2009 777 $49bn
Q1 2009 622 $10bn
Q4 2008 724 $38bn
Q3 2008 733 $32bn

Source: The 451 M&A KnowledgeBase

A very happy birthday to LogMeIn

Brenon Daly

Contact: Brenon Daly

Exactly a year ago, LogMeIn hit the public market with an offering that has done what IPOs are generally expected to do. The debut priced at the top of its range ($14-16), raised a goodly amount of money ($107m, from 6.7 million shares at $16 each) and has held up solidly in the aftermarket. In its year as a public company, LogMeIn stock is up some 80% from its offer price, and more than 40% from its first-day close – twice the return of the Nasdaq over the same period. It currently sports an outsized market valuation of some $660m.

As we were wishing the on-demand remote connectivity vendor a happy birthday, we couldn’t help but be struck by the fact that if LogMeIn were trying to go public just a year later, the offering would almost certainly look less attractive. We’ve noted that three of the recent tech IPOs (Motricity, Convio and TeleNav) have all priced below their expected ranges. (The discounting was fairly dramatic in the case of Motricity, which ended up raising just half the amount that it originally planned.)

Also, as we discussed in a special report on the IPO market, offering sizes have been coming down. LogMeIn was able to raise more than $100m, despite finishing the previous year at about $50m. (Granted, looking at a subscription-based company in terms of revenue – rather than bookings – isn’t the most accurate financial picture.) In comparison, Tripwire, which recently put in its prospectus, is half again as big ($74m in 2009 revenue) as LogMeIn. But the security management provider is looking to raise just $86m.

The Motricity monstrosity

Brenon Daly1 Comment

Contact: Brenon Daly

Pulled prospectuses, cut terms and broken issues – it’s a singularly poor time for any company to go public. We’ve already chronicled the dispiriting ‘new normal’ for IPOs, with smaller offerings and lower valuations. But just when it seemed that the IPO market couldn’t sink any further, along came Motricity’s offering.

The debut last Friday from the mobile data platform provider had to be trimmed, both in the number of shares and the price. Originally, Motricity planned to sell 6.75 million shares at $14-$16 each. At the midpoint of the range, that would have netted the unprofitable company, which has rung up a total deficit of some $313m, about $100m.

Instead, Motricity managed to raise just half that amount. It ended up selling just five million shares at $10 each, raising just $50m. Since then, the newly public shares been underwater, having only changed hands in the single digits. How bad is that? Consider this: Motricity’s valuation as a public company ($350m) is less than the amount of money that it raised as a private company.

Is SafeNet looking to secure an IPO?

Brenon Daly

Contact: Brenon Daly

A little more than three years after it went private, SafeNet is looking to return to the public market. Several sources have indicated that the encryption vendor has lined up its underwriters and plans to file an S-1 in about two weeks. If indeed the offering goes ahead, it will face a market that is proving rather hostile to IPOs right now. (We recently looked at the dreary state of the IPO market in a special report.)

Through both organic and inorganic growth, the SafeNet that returns to the market will be about half the size of the one that stepped off the market. We understand that the company is running at about $450m in revenue, compared to about $300m in revenue in the year leading up to its leveraged buyout. While private, SafeNet did a handful of small deals as well as the contentious $160m take-private of Aladdin Knowledge Systems.

An IPO would mark a second straight exit for SafeNet’s owner, Vector Capital. The buyout shop sold its Register.com portfolio company last week, realizing a return of two and a half times its investment. Vector took the Web registration and design firm private in 2005, pared down the business, made it dramatically more profitable and then sold it to Web.com.

Also noteworthy about the rumored IPO by SafeNet is that the offering is being handled entirely by bulge-bracket banks. The book-runners are said to be JP Morgan Securities, Morgan Stanley and Goldman Sachs, with the offering co-managed by Bank of America Merrill Lynch and Deutsche Bank. Off the top of our heads, that’s the first tech IPO that we can think of that doesn’t have a regional or boutique bank also helping to bring out a company.

Imagining ‘what if’ on Tripwire

Brenon Daly

Contact: Brenon Daly

As we were skimming through Tripwire’s recently filed IPO paperwork, we couldn’t help but wonder ‘what if….’ Specifically, we were wondering what the company would be like if it had gone for the other exit and taken the rumored offer from BMC more than three years ago. At the time, Tripwire was only about half the size it is now and nowhere near as profitable. But with the benefit of hindsight, it’s almost certain that Tripwire would have been valued at a much richer multiple in a trade sale during a time when M&A dollars were flowing freely (late 2006-07) than by going public in the current bearish environment.

To be clear, that’s not a knock on Tripwire. As we highlight in our report on the proposed offering, the company has a solid growth story to tell Wall Street: six consecutive years of revenue growth, while generating cash in each of those years. Instead, it’s just a reflection of the dramatic change in the valuation environment over the past three years. Consider this: In March 2008, BMC paid roughly 11 times trailing sales and 9x projected sales for BladeLogic, a valuation that wasn’t at all out of whack for the fast-growing datacenter automation vendor. (It was actually lower than what Hewlett-Packard spent on Opsware, a BladeLogic rival.)

While we have no idea what kind of valuation BMC was kicking around for Tripwire at the time, we have to believe it’s above the multiple we have penciled out for the IT security and compliance vendor in its market debut. Because of the bear market, we figure Tripwire will probably come public at about $300m. If that initial valuation holds more or less accurate, it will value Tripwire at basically 4x trailing sales and 3x projected sales – just one-third the valuation that BladeLogic got in its sale.

Big Blue dials up a deal with Ma Bell

Brenon Daly

Contact: Brenon Daly

Sterling Commerce has had one of the more colorful and varied ownership histories in the software industry. Founded inside parent company Sterling Software, the business-to-business software vendor was then spun off through an IPO in the mid-1990s before being acquired by SBC Communications (now AT&T) in a Bubble-era deal that valued Sterling Commerce at $3.9bn.

For the past decade, it has been a largely unknown business inside Ma Bell. Although Sterling Commerce generates sales in the hundreds of millions of dollars, it amounts to less than 1% of AT&T’s revenue. AT&T doesn’t break out the financials for Sterling Commerce, but instead lumps the sales into a catch-all bucket of ‘Other.’  To give some idea of the importance of that category, consider that AT&T also accounts for revenue from its pay phones in Other.

We always assumed that some buyout shop would carve out the Sterling Commerce business from the phone giant and use it as a platform to roll up the fragmented business software landscape. (Sterling Commerce had done a few deals of its own, including its $155m purchase of order configuration vendor Comergent Technologies in November 2006.) Instead, Sterling Commerce said Monday that it will now be part of IBM.

Big Blue, which was advised by JP Morgan Securities, is paying just $1.4bn in cash for Sterling Commerce. The transaction, which is expected to close in the second half of 2010, is the largest by IBM in two and a half years. It also comes just weeks after Big Blue announced that it will look to once again be a busy buyer, indicating that it plans to spend $20bn on deals over the next five years. While that figure roughly matches the amount that IBM has spent on M&A over the previous half-decade, the majority of the spending was concentrated in 2005-07.

IPO woes

Brenon Daly

Contact: Brenon Daly

For the second straight time, a tech company hoping to come to market has scaled back the money it planned to raise. TeleNav, which started trading Thursday, originally planned to sell shares at $11-13. The mobile navigation service vendor then cut the range to $9-10 before ultimately pricing its seven-million-share offering at $8. The erosion on TeleNav’s terms comes two weeks after Convio also had to reduce the price tag on its IPO.

Of course, in the period between the two IPOs we saw an almost inconceivable market plunge that erased 1,000 points from the Dow Jones Industrial Average in just five minutes. (OK, the collapse might not be inconceivable, but it is proving to be inexplicable. Was it the black-box, high-velocity firms or just a bunch of ‘fat-fingered traders’ that bled the Dow last Thursday?) And while that uncertainty continues to weigh on the overall market, it’s basically stifling the IPO market. After all, if investors are fleeing from billion-dollar companies that are household names, are they really going to embrace unknown and unproven would-be debutants?

But as we note in a new report on the IPO market, Wall Street – as it often does – appears to have swung too far in its avoidance of risk. Investors have been demanding a ridiculously steep discount on the valuations of the companies that want to come public. Take the case of TeleNav, which closed its initial day of trading with a market cap of just $400m. If we back out the cash that TeleNav already held ($46m) along with the cash that it just raised ($45m), the company starts its life on Wall Street with an enterprise value of just $310m. By our back-of-the-envelope calculation, that’s just 2 times sales and 5 times cash flow – a slap-in-the-face valuation for a profitable company that’s growing sales at 50%.

When we look at the capital markets today, we aren’t particularly concerned with the day-to-day trading. Stocks go up and stocks go down, just as risk in the market (real or perceived) ebbs and flows. Nonetheless, it’s hard to look at the tech IPO market and not be struck by the fact that companies are putting together smaller offerings and debuting at notably lower valuations than they would have in the time before the US economy slumped into its worst decline since the Great Depression. And we don’t see that changing anytime soon.

Recent tech IPO events

Date Company Comment
May 2010 TeleNav Cuts expected range, and then prices below it
April 2010 Convio Prices below range, goes public at sub-$200m market cap
April 2010 SPS Commerce Debuts at sub-$200m market cap
April 2010 IntraLinks Files for $150m IPO, the third time it has filed an S-1
April 2010 QlikTech Files for $100m IPO
April 2010 Nexsan Postpones $55m IPO after setting initial range