Category: M&A

Stock-rich Imperva buys Skyfence for $60m

Scott Denne

Contact: Scott Denne

Imperva leverages its expensive stock to make its first major acquisition, picking up Skyfence Networks for $60m, consisting of just $2.8m in cash. Public markets value Imperva at 10x trailing revenue and its stock has more than doubled since its IPO in late 2011, outpacing the growth in its sales over that time. The deal is reminiscent of FireEye’s purchase in January of Mandiant. At $1bn, that transaction was far larger, though it was also about 90% stock and made possible by FireEye’s eye-popping valuation: 62.6x trailing revenue.

Imperva holds enough cash that it could have done the deal without a rich stock price, though it’s unlikely it would have. The purchase is small, though it is still more than 8x the free cash flow Imperva generated last year. Skyfence didn’t post any revenue and with Tomium Software’s mainframe security assets (the other acquisition Imperva has announced), Imperva will add $11m in operating expenses this year.

What Imperva is getting is a product that pads its strong position in the Web application firewall market. According to surveys by TheInfoPro , a service of 451 Research, Imperva is the second most implemented vendor in the space (behind F5), with 32% of customers reporting they intend to spend more on those products in 2014, up from just 24% in 2013.

The transaction marks the first entry of an established security player into the cloud application control market, something we expect to see more of this year as there’s no shortage of emerging companies in this space and it’s complementary with next-generation firewalls (a case we laid out in our ‘2014 M&A Outlook – Enterprise Security’). With the rich multiples that public and private security vendors command these days, lots of stock could trade hands.

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Lowered guidance from 3D Systems could lead to fewer M&A prints

Scott Denne

Contact: Scott Denne

An updated and reduced earnings outlook from 3D Systems suggests the 3-D printing market is developing slower than anticipated, which could slow the recent streak of acquisitions in the space.

Due in part to higher-than-expected costs for its acquisitions and less consumer demand for its products, earnings will be about 13% lower in 2013 than the guidance it gave last quarter. The company says its bets on marketing, product development and acquisitions haven’t produced results as quickly as anticipated. It now expects revenue to be $513m-514m, just a hair below the midpoint of its earlier forecast.

As the most active acquirer in the space, any new caution from 3D Systems will slow 3-D printing deal flow. Since the start of its recent spree in 2011, 3D Systems has acquired 18 companies, including seven in the last 12 months. It’s not the only reason deals are up in 3-D printing: Overall, there have been 24 acquisitions in that time (including more than $1bn in spending from 3D Systems’ competitor Stratasys), and none in the nine years prior, according to analysis of the 451 M&A KnowledgeBase.

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WPP’s advertised target keeps tech deal streak alive

Scott Denne

Contact: Scott Denne

Ad agency holding company WPP looks poised to continue its two-year streak of digital advertising acquisitions, having printed its 19th deal in the past 12 months and its second so far this year by picking up Bannerconnect, a maker of optimization and visualization technology for real-time ad campaigns.

WPP announced purchases of 18 tech companies in 2013 and 20 in 2012, compared with 20 in the four years before 2012. The splurge comes as WPP added to its earlier target for digital revenue and now expects that portion of its business to generate 40-45% of its total sales within the next five years. Digital’s share of WPP’s overall revenue grows 1.5 percentage points a year, meaning that the company could only achieve the low end of the target at its current digital growth rate. Last year, digital accounted for 33% of its $16.5bn in revenue.

While WPP isn’t the only agency holding company getting more active on the digital front, it’s the most aggressive acquirer among its peers, according to an analysis of The 451 M&A KnowledgeBase. The only other agency holding company that comes close to matching WPP’s volume of tech transactions is Publicis Groupe, whose future as a tech acquirer is uncertain as it’s in the process of merging with Omnicom Group, which hasn’t announced a tech acquisition since July 2013.

Yearly tech deals by largest agency holding companies

Ad holding company 2014 YTD 2013 2012 2011
WPP Group 2 18 20 10
Publicis Groupe 1 13 10 7
Omnicom Group 0 1 2 0
Interpublic 1 3 3 1
Dentsu 0 4 0 2

Source: The 451 M&A KnowledgeBase

WPP’s tech deals, for the most part, have been small. Bannerconnect generated $5.7m of revenue last year and plista, its other 2014 acquisition, is even smaller. Given its recently stated digital target and its reliance on M&A for growth (acquisitions were responsible for growing the business 3.3% through the first half of 2013, compared with 2.4% for organic growth), we expect WPP to continue or expand the pace of deals, especially in emerging markets where it has a similar 40-45% revenue goal, and explore larger digital deals that can impact its revenue.

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TiVo transitions toward software with $135m Digitalsmiths acquisition

Scott Denne

Contact: Scott Denne

TiVo puts its disproportionately large treasury to work, picking up Digitalsmiths for $135m in cash, in a deal that furthers its aims of becoming a software business. Following years of patent-infringement battles over its live TV recording patents, the company had accumulated just over $1bn in cash and securities ahead of this transaction.

Now that most of the patent-licensing deals that built up that cash are behind it, TiVo is transitioning from a reliance on patent-licensing fees and set-top box sales toward a software-focused business, with cable companies as its main customers. The amount of cash at its disposal and its changing business model has had plenty of bankers eager to pitch potential acquisitions to the company, despite TiVo’s conservative history. The company hasn’t made a purchase since its $20m acquisition of ad analytics company TRA in July 2012 and before that you’d have to go back to March 2005, when it picked up a portfolio of patents from IBM.

Digitalsmiths, which sells content discovery software for cable providers and set-top manufacturers, lines up with two of TiVo’s priorities. As a SaaS offering, it helps TiVo move one more step away from its roots as a set-top box vendor and toward a software business. It also provides another offering for cable customers as TiVo looks to rely less on direct-to-consumer sales.

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Juniper’s security business needs protection

Scott Denne

Contact: Scott Denne

Over the past year, Juniper Networks shaved $111m of revenue – or 16% – off its security business, capping a three-year period that has seen that unit decline 25%. Unless it makes a move to offer more up-to-date products, there’s little reason to expect the division to stop shrinking. According to a survey by TheInfoPro, a service of 451 Research, the same amount of Juniper’s security customers said they plan to spend less with the vendor as said they would spend more (22%). Compare that with 2013, when only 11% planned to spend less and 44% planned to spend more.

Juniper’s security portfolio consists of network perimeter defenses (firewalls, VPN, intrusion prevention, etc.) and has been slow to adopt emerging technologies, such as next-generation firewalls. The founders of Palo Alto Networks, which pioneered next-gen firewalls, initially wanted to build the company at Juniper; however, they left and now Palo Alto is a quarter or two away from being larger than Juniper’s security business.

Meanwhile, Juniper spends conservatively on M&A – it hasn’t spent more than $300m on a deal in almost nine years and has only crested $100m three times since then – so we don’t expect it to make a big, splashy Sourcefire-like acquisition. Even so, the flood of venture money going to security creates an abundance of targets that match its spending profile.

Cloud application control technologies would make a good fit with Juniper. There are several startups in this space, including Adallom, Netskope and Skyhigh Networks, that are developing technologies that promise more nuanced control of SaaS apps compared with what next-gen firewalls typically offer today. As the services are offered, in part, through a network-based appliance, they would fit Juniper’s product portfolio. We expect Juniper’s competitors to get in this game in a year or so, making it possible that Juniper would try to regain some ground with a move in this market.

On the other hand, Juniper’s overall business is healthy: revenue grew 7% last year to $4.67bn, with a $439m profit on the strength of its router sales. With new CEO Shaygan Kheradpir, who’s been on the job for about a month, management may decide that it’s not worth the trouble to keep its promise to return the security division to growth this year. While it’s too early to say what moves he’ll make, his resume as the COO and CTO of Barclays and before that, CTO and CIO of Verizon, which accounted for 10% of Juniper’s revenue in several recent quarters, suggests that Kheradpir was brought in to protect the company’s existing relationships, rather than expand into new markets.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

451 Research Tech M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

The momentum that drove tech M&A spending to a post-recession record level in 2013 is continuing to roll into this year. In just the first three weeks of January, we’ve already seen blockbuster transactions such as Google’s effort to reach inside your home with its $3.2bn purchase of Nest Labs; the largest-ever tech acquisition by a Chinese company (Lenovo’s pickup of IBM’s x86 server business); and VMware going mobile, inking the biggest deal in its history by paying $1.54bn for AirWatch.

But what does the rest of 2014 look like? What broad-market trends are likely to continue to impact deal flow this year? And what specific drivers are expected to shape M&A and IPOs in some of the key enterprise IT markets, such as SaaS, mobility and information security? Well, we’ll have a few answers for you as we look ahead in our annual Tech M&A Outlook webinar. The hour-long event is scheduled for Tuesday, January 28 at 1:00pm EST, and you can register here.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

AirWatch brings to VMware what few deals have before: revenue

Scott Denne1 Comment

Contact: Scott Denne

Aside from being its largest deal to date, the $1.54bn acquisition of MDM company AirWatch marks another milestone for VMware. While the rationale aligns with its other recent transactions, AirWatch itself does not. VMware typically acquires tuck-ins or early, promising technologies that bring it little revenue.

VMware’s dealmaking in the past two years has reflected its ambition to cover more of the IT stack. Working from a foundation in server virtualization, VMware extended into storage (picking up Virsto Software for $184m), networking (grabbing SDN startup Nicira for $1.26bn) and endpoints (buying Wanova, Desktone and now AirWatch).

Virsto was only doing a few million in sales by our estimate, Nicira was just starting to work with customers, and Wanova had just begun to grow its sales when it was taken out. Not so with AirWatch, which VMware expects will add $75m in revenue in 2014 (assuming a late Q1 close). In fact, according to an analysis of The 451 M&A KnowledgeBase, VMware has only twice in its history picked up companies with more than $25m in sales (Shavlik Technologies and SpringSource), and most have been far below that mark.

While $75m isn’t enough to immediately move the needle – VMware expects to post about $6bn in 2014 – it’s not surprising that the potential for a larger sales boost would appeal to VMware as it doesn’t put up the growth rates it once did, especially in software license revenue (as we noted earlier). License revenue grew just 9% in 2013, compared with 13% in 2012 and 31% the year before that.

VMware anticipates that there’s still plenty of upside in AirWatch and the MDM market, a thesis that aligns with our own surveys. According to TheInfoPro, a service of 451 Research, MDM is the top security concern, with 18% of respondents indicating that it was one of their top three pain points. In those same surveys, AirWatch moved up over BlackBerry to third place in 2013, from fourth a year earlier, as the most implemented MDM and mobile device security categories.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

The buyout bonanza

Brenon Daly

Contact: Brenon Daly

As corporate acquirers work through an increasingly fractured tech landscape, their financial rivals are finding a bonanza of opportunities there. In particular, private equity (PE) firms got busy picking up castoff businesses and unloved companies in a spree of multibillion-dollar transactions in 2013. That sent spending by PE firms in 2013 to a post-recession record, both for the absolute amount spent as well as the proportion of PE dollars in overall spending on acquisitions. Fully one out of every four dollars handed out in tech M&A consideration came from buyout shops – nearly twice the level of any post-recession year.

The record in 2013 was driven by mammoth deals that haven’t been seen since prelapsarian days. Three of the 10 largest transactions in the entire tech sector last year involved PE shops. More broadly, cash-rich buyout firms showed they were ready once again to do big deals, targeting overlooked and out-of-favor public companies or huge units at tech giants that are shedding businesses as they seek elusive growth. There were plenty of big-ticket examples of both of these types of transactions in PE deal flow last year.

In terms of take-privates, Dell obviously topped the list. (Though the MBO stands as the largest PE deal since 2007, we would note that the transaction accounted for less than half of last year’s total PE spending. Even excluding the Dell MBO, spending on buyouts handily topped each of the annual totals since 2008.) Yet, three other LBOs also topped $1bn last year. Add to that, there were massive carve-outs and divestitures that boosted spending totals, including Qualcomm selling its Omnitracs unit to Vista Equity Partners and Intuit punting its financial services unit to Thoma Bravo, among other transactions.

PE activity

Year Deal volume Deal value Percentage of overall tech M&A spending
2013 184 $61bn 25%
2012 161 $25bn 14%
2011 204 $29bn 13%
2010 143 $27bn 14%
2009 103 $13bn 9%
2008 107 $17bn 6%
2007 150 $103bn 24%

Source: The 451 M&A KnowledgeBase

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‘Cloudy’ outlook for performance management M&A

Scott Denne

Contact: Dennis Callaghan

The emergence of the cloud as a deployment option for IT performance monitoring tools is spurring a wave of M&A activity in this space as a new group of vendors emerges as consolidators. After a slow start last year, the market picked up with the take-privates of BMC Software in May and Keynote Systems in June. Those were followed by several smaller deals, including two by Idera (Precise Software and CopperEgg), which hadn’t done a deal since 2010, and Splunk’s first acquisitions (BugSense and Cloudmeter).

We don’t expect it to end there: IT performance management is a target-rich environment flush with venture-backed startups, such as Catchpoint Systems and several others that could likely end up as part of a larger organization. Also, some of the vendors involved in 2013’s deals figure to be acquisitive this year. BMC, for example, was a consolidator as a public company, and we expect to see more of the same from it under its PE consortium. Thoma Bravo companies almost always become acquirers, and we expect Keynote to explore expanding its performance monitoring capabilities from the last mile in, as opposed to the inside-out pattern we normally see in this space.

Subscribers to 451 Research can access our longer report, including analysis of additional likely acquirers and targets, by clicking here.

Select performance management M&A, 2013

Date announced Acquirer Target Deal value
May 6 PE consortium BMC Software $6.9bn
June 24 Thoma Bravo Keynote Systems $395m
July 2 Idera Precise Software Solutions Not disclosed
July 9 Idera CopperEgg Not disclosed
July 9 Kaseya Zyrion $50m*
September 16 Splunk BugSense $9m
September 19 AppDynamics Nodetime Not disclosed
October 8 SolarWinds Confio Software $103m
November 5 SolarWinds AppNeta Undisclosed investment
December 9 SmartBear Software Lucierna Not disclosed
December 10 Splunk Cloudmeter $21m

Source: The 451 M&A KnowledgeBase *451 Research estimate

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In a shift, Groupon using cash in its acquisitions

Scott Denne

Contact: Scott Denne

Apparently more confident in its financial footing, Groupon is moving away from pure stock to using more cash in its acquisitions. The company’s $43m purchase of flash-sales site ideeli, announced today, follows its November pickup of TicketMonster as its largest cash outlays for acquisitions to date. The shift in preferred deal consideration comes as Groupon’s losses are diminishing.

While its spending on ideeli isn’t going to dent Groupon’s roughly $1bn in cash that it built up mainly from its IPO and substantial venture funding, the transaction is yet another departure from the company’s past deals, which were paid for mainly in stock. The purchase follows the $260m – including $100m of cash – acquisition of TicketMonster in November. For comparison, Groupon spent only $61m of cash on its previous 33 deals (and in 2010 it actually added $3m in cash to its books through dealmaking).

Like TicketMonster , the purchase of ideeli subtracts from Groupon’s bottom line but adds to its top. The target generated $115m in sales in its fiscal 2013, which ended in February, and recorded a $30m operating loss.

The change in preferred deal consideration comes as Groupon’s losses continue to shrink, now coming in below $100m over the past 12 months. While that’s not a historic low, it’s less than half what it posted in its first year as a public company.

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