Category: IPO

The ‘new normal’ in new offerings

Brenon Daly

Contact: Brenon Daly

Back in the third quarter of 2009, when the economy had pulled through the worst of the recession, we floated the idea that we looked likely to be entering a ‘new normal’ period for tech M&A. The term had been used to characterize a number of segments of the financial world, and we took it to mean that spending on deals wouldn’t be as low as it was earlier in the year, but it wouldn’t be anywhere near as high as it once was, either.

In recent weeks, it has struck us that our new normal description could also extend to another market that has seemingly recovered from the knock it took in last year’s recession: IPOs. In many cases, the new issues that are coming to market are lighter raises and less richly valued than the ones that came before the US economy slumped into its worst decline since the Great Depression. Even companies that once planned to hit the public market but then had to withdraw and, eventually, re-file their paperwork have done so with their eyes on smaller exits.

Take Convio. When the company, which makes on-demand software for nonprofits, initially filed its S-1 back in August 2007, it planned to raise some $86m. It filed another set of IPO papers earlier this year, planning to raise $58m. The one-third cut in offer size comes despite the fact that Convio finished 2009 almost half again the size it was in 2007 ($63m in 2009 revenue, compared to $43m in 2007). GlassHouse Technologies and Fabrinet are two other examples of vendors that also cut the size of their offerings in their latest efforts to go public.

As for initial valuations, we seem to be entering a new normal phase for debutants, as well. For instance, Meru Networks set its expected price range of $13-$15 per share earlier this month. Assuming it prices at the high end of the range, the wireless LAN provider, which will have just 14.9 million shares outstanding after the offering, would start its life on the Nasdaq at a market cap of just $223m. That’s just 3x the $70m in revenue it recorded in 2009. In comparison, rival Aruba Networks trades at more than 5x trailing sales.

A Coremetrics sale to salesforce.com?

Brenon Daly

Contact: Brenon Daly

Could this be a case of history repeating itself? A Web analytics vendor pulls out at the last minute of a technology conference at a boutique bank, and then announces that it has agreed to a richly priced sale of the company. That’s the way it played out last fall with Omniture at ThinkEquity’s conference. And at least part of that has happened with Coremetrics this week at Pacific Crest Securities’ Emerging Technology Summit. (Coremetrics was slated to present at the event Thursday morning, but canceled its appearance, officially because the presenter was ill.)

Of course, there’s been a lot of M&A buzz around Coremetrics in recent weeks, with at least two sources indicating that the company had retained Goldman Sachs to represent it. As to who might be a buyer for the Web analytics shop, we come back to one name: salesforce.com. We understand that the CRM giant was acutely interested in Omniture and, according to some sources, was the cover bidder in that process. (Omniture, of course, ultimately sold to Adobe in a somewhat puzzling pairing.)

Coremetrics’ analytics would fit neatly with salesforce.com’s sales and marketing offering. Both are also SaaS companies. And, as we noted last month, the profitable company, which has about $1bn in cash available, has announced plans to raise another $500m in a convertible offering. Altogether, that’s plenty of cash to cover a potential purchase of Coremetrics, which would probably go for several hundred million dollars. And if the Coremetrics sale parallels the Omniture sale in that the analytics company goes to a somewhat unexpected buyer, we might put forward Autonomy Corp as a possibility, as my colleague Nick Patience did in a recent report. The acquisitive British vendor also recently announced plans to raise a slug of money.

No-go IPO for RedPrairie

Brenon Daly

Contact: Brenon Daly

Scratch another name off the list of IPO candidates. RedPrairie, which had filed to go public in late November, instead sold on Tuesday to buyout shop New Mountain Capital. The sale moves the supply chain management software vendor from one private equity portfolio to another. (We understand that the two book runners on the proposed offering – Bank of America Merrill Lynch and Credit Suisse Securities – both advised RedPrairie on the deal.) In mid-2005, Francisco Partners acquired the company for $237m and subsequently rolled up another half-dozen smaller shops. Ahead of the proposed offering, Francisco owned 90% of RedPrairie.

The trade sale of RedPrairie isn’t all that surprising. (Nor, for that matter, was the fact that it put in its prospectus. We noted a month before the company officially filed to go public that it was getting close to an offering.) Looking at the financial profile of RedPrairie, it was hard to see Wall Street getting too excited about the vendor. Undoubtedly, it is profitable and hums along at a decent 20% EBITDA margin. But the top line leaves a lot to be desired.

Revenue at RedPrairie dropped 12% in the first three quarters of 2009, with license sales declining twice that level. In the first three quarters of last year – which was, admittedly, an extremely tough time to sell enterprise software – RedPrairie sold just $27m of software licenses. Meanwhile, rival JDA Software was able to generate twice as much license revenue ($60m) during the same time frame. JDA even managed a slight increase in sales of its software, compared to a double-digit percentage decline at RedPrairie.

QlikTech looks likely to click on the market

Brenon Daly

Contact: Brenon Daly

Even though the public market has been fairly choppy lately, there seems to be no shortage of companies willing to step into the uncertain waters. We’ve seen a number of recent IPO filings, as companies get their final 2009 numbers in order and look ahead to a possible summer offering. The problem is that few of the would-be debutants actually look all that attractive. Included in the current lineup of IPO candidates are a deeply money-losing company that will stay in the red for at least the next two years (Tesla Motors) and a barely baked company that generated a grand total of $36,000 in revenue last year (Vringo).

Those IPO candidates, along with most of the rest of the recent vintage, hardly approach the caliber of offerings of SolarWinds and Fortinet, among other companies that made it public last year. But we understand that may be about to change as rumors indicate that one of the stronger private tech companies has set its underwriting lineup. QlikTech has picked bankers and will look to put in its IPO paperwork shortly, according to several sources. (Morgan Stanley, CitiGroup and JPMorgan will reportedly be running the books on the offering.)

We noted a possible future offering more than two years ago, coming off a year when the analytics provider increased revenue 80% to $80m. QlikTech followed that up with $120m in revenue for 2008, and we understand that the vendor actually boosted its top line again in 2009. If indeed QlikTech does file its S1 and eventually manages to go public, it will help to replenish a bit of the market that got picked over pretty thoroughly. Recall the shopping spree by tech giants back in 2007 that saw BI vendors Hyperion Solutions, Business Objects and Cognos all get erased from the public markets. The collective tab for that BI shopping spree: $15bn.

Will Iron Mountain soon be sipping a Mimosa?

Brenon Daly

Contact: Brenon Daly, Kathleen Reidy, Simon Robinson

For what was once a fairly staid Old Economy business, Iron Mountain has done a better job than most companies in acclimating itself to the digital age. The records management vendor has accomplished that with eight acquisitions over the past half-decade, picking up technology for online backup and e-discovery, among other offerings. The $158m purchase of e-discovery provider Stratify stands, in many ways, as Iron Mountain’s marquee acquisition for its digital business. It has maintained the Stratify name and, last November, turned its whole digital subsidiary over to Ramana Venkata, the founder and former CEO of Stratify.

After that purchase in October 2007, Iron Mountain stayed out of the market for more than two years, despite many adjacent sectors that it could buy its way into. (And, from what we remember of the past two recession-wracked years, prices for startups weren’t particularly steep.) The M&A drought ended last month with the pickup of a San Francisco-based services company, Legal Imaging Technologies, that provides electronic document conversion. Terms weren’t disclosed.

But now we wonder if that small buy might be followed by a large deal. Several sources have indicated that Iron Mountain may be looking to snare a digital-archiving startup. It had relied on its partnership with MessageOne, but since that company’s acquisition by Dell, Iron Mountain has moved on, partnering with Mimecast last April. The partnership – combined with the fact that both businesses deliver their offerings through a subscription model – makes an acquisition of Mimecast by Iron Mountain a logical fit.

However, the market has been buzzing recently with another possible pairing for Iron Mountain – Mimosa Systems. Although Mimosa has talked in the past about going public this year, we have always thought that an acquisition of the company was more likely. (It has raised $50m in backing and, according to one source, was tracking to about $40m in bookings last year.) While Mimosa’s technology is highly regarded, the fact that it’s on-premises rather than on-demand would pose some integration challenges. However, it does have an emerging cloud story that would likely be of interest to Iron Mountain.

More than one way to market

Brenon Daly

by Brenon Daly

Apparently, UPEK really wants to be a public company. It put in its IPO paperwork back in mid-2007, only to pull it in March 2008. Unlike other former filers, however, the biometric security vendor hasn’t dusted off its S-1 in an attempt to hit the public markets. (In the past week, both Convio and GlassHouse Technologies have re-filed to go public.) Instead, UPEK wants to get on the Nasdaq by picking up a rival that already trades there.

UPEK lobbed an unsolicited offer at AuthenTec on Friday that basically envisioned consolidating the two companies, which make fingerprint sensors, into a single business. Equity ownership would be evenly divided between the two sides. For its part, AuthenTec has been a public company since mid-2007, although its shares have lost some three-quarters of their value in that time. On Monday, AuthenTec, advised by America’s Growth Capital, rejected UPEK’s ‘highly dilutive and speculative transaction.’

Is IBM about to ‘initiate’ a major MDM purchase?

Brenon Daly

Contact: Brenon Daly

Although we recently noted that SAP may be considering a major master data management (MDM) move, we understand that the next buyer in the market may actually be IBM. We’ve heard from several sources that Big Blue is close to announcing an acquisition of Initiate Systems. If the deal does indeed happen, Initiate would substantially boost IBM’s offering for the healthcare industry. Despite being competitors, Initiate and IBM Global Services have been longtime partners for healthcare projects. The transaction could happen as soon as this week, we’re told. And we gather that it’ll come at a rather rich valuation for Initiate.

One of the largest stand-alone MDM vendors, Initiate filed to go public back in November 2007, but withdrew its IPO paperwork the following summer. (Goldman Sachs was lead underwriter of the planned offering.) Shortly after it pulled its prospectus, it announced a $26m funding round that included strategic investments from both EMC and Informatica. However, we hear that the biggest competition for IBM’s rumored bid for Initiate may have come from the public market.

Given the very real prospect that Initiate could reheat its plans to go public, IBM would effectively have to top the valuation that Initiate could receive in an IPO and afterward. We understand that the company was running around breakeven and likely did just shy of $90m in 2009. (That would imply mid-teens growth from the $76m in revenue that Initiate recorded in 2008.) With that dynamic at play, Initiate may well garner 4.5-5x sales in the trade sale to IBM, according to sources.

Deals on the rebound

Brenon Daly

Contact: Brenon Daly

More than 100 people dialed into our webinar earlier today, joining us in a discussion of whether the tech M&A rebound is real. And while not everyone agreed that deals will flow smoothly – and voluminously – in 2010, there was a shared sense that the M&A recession of 2009 has mostly lifted. Still, a rebound is one thing, while recovery is something else entirely.

We have definitely seen the pace of dealmaking pick up so far in 2010. We noted earlier that we tallied 60% more deals in the first workweek of this year than during the same period last year, and both tech investment bankers and corporate development executives have forecast a busier year for M&A in 2010. If you’d like to get a copy of our slides from this morning’s webinar, send us an email.

Survey says: Companies ready to deal again

Brenon Daly

Contact: Brenon Daly

This year’s fast start to M&A activity by several of the big-name tech buyers (EMC, Cisco Systems, Apple and Oracle, among others) shouldn’t surprise us at all. After all, when we surveyed corporate development executives last month, two-thirds of them said they expected their firms to pick up the pace of dealmaking in 2010. That’s a far more bullish outlook than their projections last year, when the entire financial services industry and much of the broader economy appeared to be collapsing. At that time, some 23% of respondents said they expected to actually slow their acquisition activity amid all the uncertainty that loomed in the coming year. In our most recent survey, just 5% said they see a slowdown in dealmaking.

We’ll have a full report on the results of our annual 451 Group Tech Corporate Development Outlook Survey in tonight’s Daily 451 and 451 TechDealmaker sendouts. But we would add that the bullishness for M&A in the coming year expressed by our respondents extends far beyond just their projected activity. In both the types of transactions and even the structure of them, companies indicate that they have thrown off much of the conservatism and caution that characterized their outlook in late 2008 and are once again open to risk. And finally, they plan to be busy even though they tell us they’re likely to pay more in the deals they ink in 2010. It’s a dramatic turnaround from the previous year, so look for the full report on the survey tonight.

Projected change in M&A activity in the coming year

Year Increase Stay the same Decrease
2009 68% 27% 5%
2008 44% 33% 23%

Source: The 451 Group Tech Corporate Development Outlook Survey

The market and Meru

Brenon Daly

Contact: Brenon Daly

Having watched at least three of its rivals get acquired in recent years, Meru Networks is now aiming for the other exit: a public offering. The WLAN equipment maker filed its IPO paperwork on Friday for an $86m offering to be led by Bank of America Merrill Lynch, with co-managers Robert W. Baird & Co, Cowen & Co, JMP Securities and ThinkEquity. Meru plans to trade on the NYSE under the ticker MERU. (Incidentally, the company was one we put on our list of IPO candidates for 2010 in our recently published 2010 M&A Outlook – Security and networks.)

If Meru does manage to make it onto the public market, it will reverse the flow of deals in the sector. In recent years, a large publicly traded rival (Symbol Technologies) and two other competing startups (Colubris Networks and Trapeze Networks) have all been acquired. Those trade sales have valued the WLAN equipment vendors at a range of 2.1-3x trailing 12-month (TTM) sales.

We noted a year and a half ago that all of the transactions probably meant that Meru would have trouble finding a buyer, except among public market investors. Not that Meru hasn’t kicked around a possible sale in the past. Rumors have tied it to both Juniper Networks and Foundry. The Foundry relationship seems to have died off since Foundry sold to Brocade Communications. According to Meru’s S-1, Foundry/Brocade accounted for a full 35% of its revenue in 2007, but that level has fallen to less than 10% now.

With Meru aiming to hit the market in 2010, we suspect that it will be hoping to have a stronger offering than publicly traded rival Aruba Networks, which initially priced its shares in its March 2007 offering at $11 each. Although Aruba traded above the offer price for almost a year, it broke issue in February 2008 and has not traded above the initial price since then. That said, the stock is nearing that level, changing hands at about $10.65 in midday trading Tuesday. It has more than quadrupled in 2009. The dramatic rebound in Aruba shares has pushed the firm’s valuation to 4.6x TTM sales. Applying that same multiple to Meru’s $67m TTM sales gives the company a valuation of about $310m.