Category: IPO

Should Cisco dial up eBay’s Skype?

Contact: Thomas Rasmussen

In eBay’s recent report on second-quarter results, the online auction house announced a somewhat disappointing performance in its two core businesses, Payments and Marketplaces, but did see strong results from a surprising source: Skype. The VoIP service increased year-over-year revenue by 25%, while overall sales declined as the legacy Marketplaces revenue sank 14%. Skype revenue hit $170m in the quarter, bringing sales for the division over the past year to $587m. The service is closing in on a half-billion users, finishing June with 481 million users. All in all, that’s a solid performance for a unit largely considered the bastard child of the Silicon Valley auction giant.

However, that certainly isn’t enough to keep Skype inside eBay. The acquisition, which eBay has admitted overpaying for and has written down a huge chunk of the $3.2bn cost, remains largely irrelevant and immaterial to its core e-commerce business. The service has never been integrated into auctions – much less adopted by buyers and sellers – at a level anywhere close to what was planned when eBay picked up Skype four years ago. It stands as the company’s largest-ever purchase and a stark reminder of an ill-conceived deal by the earlier leadership of Meg Whitman. Current CEO John Donahoe has been clear that eBay is returning to its roots, and Skype won’t be a part of that.

So where will Skype go? We see the VoIP vendor on a dual track. It could well get spun off in an IPO. (Provided, of course, that the catastrophe at Vonage hasn’t poisoned the market for VoIP companies.) Or, Skype could look for an acquirer, although we wonder how deep the pool could be for potential buyers that could write a $2bn or so check for it. But we do have one possible interested party: Cisco. Granted, this is a proposal from left field and we’re not suggesting that talks between the companies are going on or anything. However, there is some indication that such a pairing might not be too farfetched. Cisco has increasingly been bulking up its consumer division and its strategy around the media-enabled home is finally starting to come to fruition. Video plays a big part of those plans, and the firm has been talking about expanding its TelePresence offering from the enterprise to the home. An acquisition of Skype with its enormous and growing user base and proven technology on desktops and mobile devices would do just that, and would fit well with its M&A strategy of picking up market adjacencies.

Turning down the trade sale

Brenon Daly

Contact: Brenon Daly

Since the Wall Street crisis erupted last fall, the M&A advice most companies have gotten has been not to sell unless they absolutely have to. That sentiment has quieted overall dealmaking activity, as well as pressured valuations across the board. It turns out that not even promising startups could escape the malaise. Later this afternoon, Tim Miller, our head of financial markets, will present our findings on the status of the AlwaysOn Global 250 to the seventh annual Summit at Stanford University. One key finding about the AO 250 startups: only 12 companies sold in the year since the previous conference, which is just half the number in each of the three previous years. Tech giants that have picked up AO 250 startups since the last conference include CA Inc, Omniture, Nokia and Hewlett-Packard.

While the number of trade sales declined notably for AO 250 companies, there was a significant pickup in the other exit option, an IPO. Three AO 250 companies managed to make it to the public markets over the past year, creating an aggregate market valuation of some $2.5bn. Those offerings came despite talk about the IPO window being closed. Further, all of them are trading above their issue price even though the broader market has been rather inhospitable lately. The Summit at Stanford opens Tuesday and runs through Thursday afternoon. For more details on the conference, see the event page.

A ‘paper’ windfall in LogMeIn IPO

Brenon Daly

Contact: Brenon Daly

One of the investment banks that profited the most from Wednesday’s strong debut of LogMeIn wasn’t even on the prospectus. Instead, it was in the prospectus. McNamee Lawrence, an advisory shop with no underwriting business, realized a tidy little $2m windfall from the IPO.

Heading into the offering, McNamee Lawrence held some 99,000 shares in LogMeIn that it picked up in late 2004 for helping to place the startup’s series A funding round, as well as other advisory work. McNamee Lawrence took a small amount of money off the table, selling some 21,000 shares at the $16 initial pricing of LogMeIn. That netted the bank about $336,000. It still holds some 78,000 shares, which had a paper value of about $1.6m, based on the price of LogMeIn shares on Thursday afternoon.

Granted, the holdings of McNamee Lawrence are only a tiny slice of the overall 21.4 million LogMeIn shares outstanding. And the firm’s stake is a fraction of the major owners of LogMeIn, Prism Venture Partners and Polaris Venture Partners. Prism holds shares worth about $80m, while Polaris, which sold $7.4m worth of shares in the offering, still owns a chunk valued at about $59m.

Still, the shares represent a nice windfall for McNamee Lawrence. (In addition, some of the firm’s partners put money individually into LogMeIn in the company’s seed round in early 2004.) Of course, the practice of taking paper as payment was pretty common across all kinds of service providers back in the Bubble Era, when startups routinely handed out options and warrants to cover bills from banks, lawyers and even landlords. After so many people got burned by taking worthless options and warrants in the early 2000s, however, cash returned as the currency of choice.

Imaging an alternative exit for LogMeIn

Brenon Daly

Contact: Brenon Daly

With LogMeIn set to price its IPO later today, the next ‘buyer’ of the company will be public market investors. The on-demand vendor will sell 6.7 million shares in an offering that’s being led by JPMorgan Chase and Barclays Capital. LogMeIn set an initial range of $14-16 per share, implying a market capitalization of $300m-340m. It will likely price above that range, and we expect strong demand for LogMeIn shares once they start trading under the ticker ‘LOGM’ on the Nasdaq.

As the company gets set to realize that exit (after more than 17 months on file with the US Securities and Exchange Commission), we thought about where it might have looked had it opted for the other possible exit, a trade sale. We’re not suggesting that LogMeIn was dual-tracking by any means. In fact, although it kept its S-1 alive while so many other tech companies pulled their IPO paperwork, that move wasn’t driven by desperation. LogMeIn doesn’t actually need the proceeds. It is heading into the offering with no debt and $27m in cash on its books, having generated cash for the past nine quarters. Even on a GAAP basis, the firm has been profitable for the past three quarters.

Thus, LogMeIn doesn’t need the offering any more than it needs a trade sale. And to be clear, we hadn’t heard that the company was pursuing anything other than an IPO. Nonetheless, as we did some blue-sky thinking, we quickly came up with two deep-pocketed companies that would have been very smart to nab LogMeIn before it went public. Keep in mind, too, that the two primary rivals to LogMeIn are GoToMyPC and WebEx Communications, firms that have been snapped up by tech giants Citrix and Cisco, respectively.

So here’s our hypothetical short list of possible buyers for LogMeIn. Symantec already has several products that compete with LogMeIn (notably, PC Anywhere), but it is a key partner for LogMeIn. And Big Yellow has shown that it is ready to go shopping to bolster its software-as-a-service business. It paid $695m, or almost 5x trailing 12-month sales, for MessageLabs last October, its largest deal in more than a year and a half. Alternatively, Dell knows all about picking up companies just before they go public. It paid a double-digit multiple for its push into storage with the $1.4bn EqualLogic purchase in November 2007. However, Dell has also done a quartet of deals to build out its services offerings, some of which are offered by LogMeIn and others that are complementary. In addition, the customer profiles of the two vendors would synch pretty well, since LogMeIn gets roughly 80% of its revenue from the SMB market.

That giant sucking sound on the US equity market

Brenon Daly

Contact: Brenon Daly

On the US equity markets Wednesday, it was one step forward, two steps back in terms of aggregate value of listed companies. As SolarWinds soared onto the NYSE, creating more than $800m of market value early in the day, Data Domain got picked up by storage rival NetApp. That deal, which is slated to close this summer, will erase some $1.75bn from the Nasdaq. That’s twice the amount added by SolarWinds.

Wednesday’s net outflow continues a long-running trend of a declining number of tech listings on the US public markets. Consider that since the last tech IPO (Rackspace’s offering on August 8, 2008), acquisitions of more than 50 US public companies have been announced. The total amount of market capitalization erased in those deals: $33bn. Considered another way, we would need 40 more SolarWinds-sized offerings to make up the deficit.

Is the IPO window open again?

Brenon Daly

Contact: Brenon Daly

With SolarWinds debuting on the public market Wednesday and OpenTable set to follow shortly, some observers have suggested these offerings mark a return of the IPO market. While it’s always healthy to have new issues, particularly after months and months without a technology IPO, we think it’s a bit overly optimistic to say either offering will kick off an IPO market like we had even two years ago. Certainly, there will be a handful of companies that make it out the window. But we don’t expect there to be a flood of new offerings.

That’s particularly true if we look at the astonishing numbers put up by SolarWinds. We doubt many other IPO hopefuls were able to generate anywhere near the $6m in net income in the first quarter that the network management software vendor recorded. In fact, we’re fairly certain that some companies thinking about putting in an S-1 won’t even generate as much profit in all of 2009 as SolarWinds did in one of the toughest economic quarters in recent history. Wall Street appears ready to reward the black numbers at SolarWinds. The company priced its offering at $12.50 per share, ahead of the initial range. With some 64.2 million shares outstanding, SolarWinds started life on the NYSE with a valuation of $803m, although it moved up above $900m in early trading Wednesday.

Nonetheless, the rich valuation at SolarWinds (8.6x 2008 sales) may well encourage a few companies to dust off their IPO paperwork and update numbers. One obvious candidate: NetQoS, a fellow Austin, Texas-based networking software company. (We noted last year that the company had done a bit of ‘portfolio round-out’ ahead of what we expected would be an IPO this year.) And Nimsoft is undoubtedly cheering for a warm reception for SolarWinds. Nimsoft offers essentially the same technology as SolarWinds but targets the midmarket, while SolarWinds sells primarily to small businesses. (Nimsoft was in the market earlier this week, picking up assets from Cittio to bolster its network monitoring product.) Since Nimsoft has only about half the revenue of SolarWinds, it’s probably a bit early for the vendor to plan a prospectus. Nonetheless, it’s always helpful to have a strong, richly valued comparable public company when considering an IPO.

One less obvious – but more intriguing – vendor that could be drawn out by a well-received SolarWinds offering is Barracuda Networks. Both firms have the same models of high-volume sales of software to small businesses, and both are currently running at over $100m in annual revenue. Barracuda is tight with its financials, but word is that the company is closer to $150m in sales right now. Even if it doesn’t have the same rich margins that SolarWinds enjoys, Barracuda would almost certainly be worth more than $1bn on the market.

Metastorm in the market in a big way

Brenon Daly

Contact: Brenon Daly

If Metastorm does re-paper an S-1, it will be a much larger company than the one that filed for an IPO last year. (The business process management (BPM) vendor put in its paperwork in mid-May and then pulled it in mid-September.) The growth will come both organically and from acquisition, CEO Bob Farrell said Monday during a presentation at the JMP Securities Research Conference.

In terms of organic growth, Farrell projected that the company would ring up about $90m in revenue this year, up from about $77m in 2008. Additionally, Farrell said he expected to add to the company’s top line with a shopping trip. We understand Metastorm has three term sheets out for possible acquisitions, with one possibly closing in the summer. One of the potential deals could double the company’s revenue. Farrell said his company has considered outside funding for a purchase, which is how it covered its 2007 acquisition of Proforma.

In terms of target markets, Metastorm is looking in several areas, including risk and compliance, collaboration and document management. In terms of possible BPM-document management transactions, we would note that we recently heard of deal flow going the other way. Open Text, having consolidated much of the content management market, said it may well look to buy its way into the BPM market.

Will OpenTable’s IPO lead to M&A?

-Email Thomas Rasmussen

Just three months after filing its initial IPO paperwork, OpenTable set the terms of its $46m offering last week. At the high point of the $12-14 range for its shares, the company would sport a valuation just shy of $300m, or about 6x trailing 12-month (TTM) revenue and 50x TTM EBITDA. For the past three years, OpenTable has grown revenue at a compound annual rate of about 43%. Despite skepticism about the IPO market and OpenTable’s prospects during a period when its primary customers (restaurants) are struggling, the online restaurant reservations service should debut on the Nasdaq under the ticker ‘OPEN’ in the next week or two. OpenTable’s offering comes as Solarwinds is also slated to go public, after its prospectus aged for more than a year.

OpenTable has not disclosed how it will allocate the funds that it will raise in its offering. However, we believe it might be gearing up to make its first foray into M&A. One indication: the presence of Allen & Co as one of OpenTable’s four underwriters. Sure it had a hand in Google’s IPO, but Allen & Co is certainly known more as a media banker than a tech underwriter. OpenTable’s offering is being led by Merrill Lynch, with ThinkEquity and Stifel Nicolaus also on the ticket.

If OpenTable were to shop, we suspect it could well look to bolster its international operations. Since 2004, the San Francisco-based company has sunk millions of dollars into expanding outside the US, but has little to show for it. Its international business, which is burning money, accounts for just 5% of total sales. (The vendor recently pulled out of Germany and France.) We see a parallel between what OpenTable has run into in its unsuccessful international expansion and the early woes that its rich Web services cousin eBay experienced in trying to translate its business outside of its home market. After struggling to address foreign markets by just expanding its existing online auction service, eBay has been picking up local foreign sites that fit the nuances of business and culture in those markets. Ebay has spent billions of dollars lately buying its way into foreign markets.

Comings and goings on US exchanges

Brenon Daly

Contact: Brenon Daly

The flurry of M&A announcements on Wednesday not only boosted trans-Atlantic shopping totals so far this year by nearly 20%, it also continued the trend of thinning the ranks of US public companies. The pair of Nasdaq-listed firms that got erased on Wednesday (Borland and Vignette) brings the number of acquisition announcements of US public tech companies to some 22 so far this year.

To be clear, that sum is made up of deal announcements, not closed transactions. So it includes offers that have been rejected by the would-be target (Emulex) as well as bids where the terms are still in play (SumTotal Systems). Against that, we have had only a minimal ‘repopulation’ of the US exchanges. Just three tech companies – none of which is a true IT vendor – have gone public this year. That’s about to change with SolarWinds, which is expected to hit the market in a week or two. (And on the consumer Internet side, OpenTable set the terms of its planned IPO on Thursday.)

We would also note that Wednesday’s ‘twofer’ of Borland and Vignette is actually the third time in the past month that two deals for US public companies have been announced in a single day. The other days: April 20, with Oracle-Sun Microsystems and Trilogy-Autobytel, and April 13, with Thoma Bravo’s bid for Entrust and Image Holdings’ reach for InFocus. In terms of banking, JP Morgan Securities did the double Wednesday, advising both Borland and Vignette on their sales to Micro Focus and Open Text, respectively. But the bank is doing its part to add back public companies, leading the SolarWinds offering.

M&A rumors follow reality

Brenon Daly

Contact: Brenon Daly

There’s yet more proof that the M&A market is back. No, we’re not talking about the fact that April boasted the highest monthly deal spending since June, with some $21bn worth of announced transactions. We’re referring to something that’s far less quantitative: deal whispers.

Indeed, the traffic in M&A rumors has grown substantially in recent weeks, and many big names are popping up. It may just be a byproduct of the resurgent Nasdaq, which has risen one-quarter in value over the past two months. But it’s nonetheless worth noting that there’s M&A buzz once again, even if some of the gossip strikes us as highly unlikely.

For instance, last week saw reports of QLogic attracting interest from EMC. We have a hard time understanding why EMC would want to be a storage networking company, particularly when it’s been tightening its relationship with networking powerhouse Cisco Systems. Nonetheless, the market was kicking around that possible pairing as Broadcom was pushing its unsolicited offer for QLogic rival Emulex. (Of course, QLogic was in the market last week, but on the buy side. It picked up seven-year-old startup NetXen for $21m. QLogic says NetXen, which generated essentially no revenue over the past four quarters, will contribute $5m in sales in the coming year.)

And then there were whispers of a deal that we suspect is even more of a long shot: the word was that BMC may be looking to snag SolarWinds before the latter goes public. However, that rumored pairing seemed unlikely from the start. We wonder, for instance, how BMC, which targets big-ticket sales at large enterprises, would have much success selling SolarWinds’ inexpensive, downloadable software. (The average license sale at SolarWinds is less than $6,000.) Still, it’s worth noting that it has been some time since we heard the term ‘dual-track,’ even if that’s almost certainly not the case with SolarWinds.