Category: Private Equity

Can Dell safeguard the VMware ‘crown jewels’ in EMC acquisition?

Brenon Daly

Contact: Brenon Daly

In announcing the largest-ever tech transaction, both Dell and EMC repeatedly assured the market that VMware, which has consistently accounted for an outsized chunk of EMC’s overall valuation, would retain its status as ‘first among equals’ in the EMC federation. Roughly speaking, VMware generates only about one-quarter of EMC sales, but accounted for three-quarters of the EMC’s overall value before the acquisition. VMware was rightfully termed the ‘crown jewel’ of the landmark transaction.

However, despite those intentions, VMware has nonetheless lost some of its luster due to the pending acquisition, at least in two key constituencies. Both IT buyers and Wall Street investors are more than a little bearish on Dell owning the virtualization kingpin. Since the acquisition was announced, VMware’s market value has fallen by as much as $5bn. (That decline is also pulling down the overall value of the transaction because part of the consideration is in the form of tracking stock.) VMware shares have slumped to their lowest level since mid-2013.

To understand why Wall Street is selling the Dell-EMC deal, we have to look to the ultimate arbiters of value for any company: customers. And based on 451 Research’s survey of nearly 450 IT decision-makers, Dell has a lot of work to do to ease the concerns that it will mishandle EMC and its ‘crown jewel.’ In our survey, four of 10 IT pros who currently buy EMC products, but do not buy Dell products, gave the proposed acquisition a ‘thumbs down.’ That was almost three times higher than the percentage of pessimistic Dell-only customers. The main reason cited by EMC-only customers for their bearishness? They still view Dell as dealing in commodity technology. Obviously, with that perception, it’s going to be extremely challenging for Dell to hit its target of $1bn ‘revenue synergies’ through its EMC acquisition.

VMW rev 2010-15

Barrage of blockbusters pushes tech M&A spending to post-Bubble high

Brenon Daly

Contact: Brenon Daly

Fittingly for a year that has seen an unprecedented number of blockbuster transactions, Dell’s $63.1bn reach for EMC pushed 2015 into record territory for recent spending on tech, media and telecom (TMT) transactions. According to 451 Research’s M&A KnowledgeBase, acquirers around the globe have spent $475bn on TMT deals so far this year. That handily tops the previous full-year total of $420bn from 2007, which had marked the highest level of spending since the Internet bubble burst in 2000.

Overall, 2015 has seen two of the three largest TMT transactions recorded in the KnowledgeBase over the past 15 years. In addition to Dell’s planned purchase of EMC, this year also featured Charter Communications’ $56.7bn acquisition of Time Warner Cable in May. Other big prints in 2015 include Avago’s $37bn pickup of Broadcom in May (the semiconductor industry’s largest-ever consolidation) and $17bn deals from both Intel and Nokia.

So far in 2015 we’ve tallied 63 transactions valued at more than $1bn in the KnowledgeBase. That exactly matches the number of billion-dollar deals during the same period in the previous record year of 2007. However, there’s a lot more money attached to this year’s transactions. The median price for each of the big prints in 2015 is $2.5bn, compared with just $2bn for each deal in 2007. Skewed by these blockbuster TMT transactions, M&A spending is now tracking to about $600bn for the full year. That would shatter 2007’s previous record for spending by a full 40%.

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

Dell looks to become ‘indelible’ IT vendor with EMC

Brenon Daly

Contact: Brenon Daly Simon Robinson

Announcing the largest tech deal since the Internet bubble burst, Dell plans to pay approximately $63.1bn for EMC. The debt-laden combination would create a sprawling IT giant with multibillion-dollar businesses in many of the primary enterprise technology markets, including storage, information security, IT services, servers and PCs. (For context, the combined Dell-EMC entity would be larger than Hewlett-Packard Enterprise (post-split), NetApp, Juniper Networks and Symantec combined.) Dell’s bold transformational transaction is not coming cheap, however. The company is valuing EMC significantly more richly than it valued itself when it went private two and a half years ago.

Further, Dell’s relatively pricey bulking up comes at a time when a number of rival enterprise IT vendors are slimming down. More to the point, several of these competitors are unwinding earlier blockbuster acquisitions they made in hopes of staying more relevant in a shifting IT market. The arrival of the public cloud has siphoned off billions of dollars that once flowed unimpeded to Dell, EMC and other first-generation technology firms. However, IT customers increasingly lack the appetite to buy, install and manage dozens of ‘piece parts’ and mold them into a cohesive whole. As a result, we can look at the combination of Dell and EMC as essential if the traditional IT model is to survive the onslaught from public cloud providers, most notably Amazon Web Services.

Though Dell has been on a path to build a ‘better together’ story for almost a decade, it clearly hasn’t been enough. In its effort to buy its way out of the commodity PC business, the company stitched together a patchwork of properties. However, the resulting ‘big picture’ has still not materialized. Dell has lacked a core focus point, as well as the heft and scale in any one market to dominate. Further, it has so far not sufficiently penetrated the large enterprise segment, or moved beyond its two longtime key verticals of healthcare and the public sector. Against this backdrop, it’s easy to see the attraction of EMC, which brings large enterprise credibility in storage, perhaps the industry’s most focused and effective sales operation and, in VMware, still one of the most strategic entities on the market.

EMC’s attractiveness also shows through in the valuation that Dell is paying, if not when viewed against the broader tech M&A market than certainly when put against Dell’s own worth. According to terms, Dell is paying 2.5x trailing sales and 11.5x trailing EBITDA for EMC. For comparison, in orchestrating the take-private of his namesake company, Michael Dell and his consortium paid just one-quarter the price-to-sales multiple of EMC and half the cash-flow multiple. Dell’s LBO, which stands as the third-largest private equity tech transaction in history, valued the company at just 0.5x trailing sales and 5.2x trailing EBITDA.

Look for a full report on the proposed Dell-EMC pairing later today on our website and in tomorrow’s 451 Market Insight.

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

As black swans darken summer sky, Q3 tech M&A gets grounded

Brenon Daly

Contact: Brenon Daly

Tech acquirers’ confidence eroded unmistakably in mid-August as equity markets around the world got routed, with some indexes tumbling hundreds of points in a single session. As the economic outlook dimmed around the globe, valuations for buyers and their holdings dropped as well. If the stock market uncertainty didn’t knock buyers out of the tech M&A market entirely, it at least caused them to scale back their acquisitions. Just seven of Q3’s largest 20 deals came after the mid-August turmoil, according to 451 Research’s M&A KnowledgeBase. Spending in the back half of the quarter fell 20% compared with the first half.

Slowed by the mid-quarter bear market, spending on tech, telecom and media (TMT) transactions across the globe in the July-September period totaled $81bn. Although that amount is a fairly representative quarterly total for 2013-14, it represents a dramatic slowdown from earlier this year. Q3 spending stands at less than half the level of M&A spending in Q2 and one-third lower than Q1, which kicked off 2015’s record run. On a comparative basis, the value of acquisitions in both Q1 and Q2 surged about 50% from the same quarters in 2014, while spending in the just-completed Q3 declined 21% compared with Q3 2014.

Viewed more expansively, the Q3 slowdown might have pushed back the date when spending in 2015 on TMT transactions sets a new post-bubble record, but the record will nonetheless fall this year. (Indeed, if this summer had simply continued the average monthly M&A spending we had seen in the first half of the year, 2015 would have already topped the recent record of $420bn set in the prelapsarian year of 2007.) As it stands, dealmakers have spent $407bn on TMT acquisitions so far this year, just a few big prints shy of the highest level of spending since 2000, according to 451 Research’s M&A KnowledgeBase.

See our full report on both M&A and IPO activity in Q3, as well as a look ahead to activity through the rest of 2015.

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

Recent quarterly deal flow

Period Deal volume Deal value
Q3 2015 1,115 $81bn
Q2 2015 1,056 $205bn
Q1 2015 1,032 $120bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

After a time on NYSE, Solera is back in private hands

Brenon Daly

Contact: Brenon Daly

In a sort of private equity (PE) ‘homecoming,’ auto insurance software provider Solera Holdings plans to sell itself for $3.7bn in cash to buyout firm Vista Equity Partners. The net price for Solera, which has been a debt-fueled acquirer since its founding a decade ago, is pegged at $6.5bn by Vista.

Although it has been listed on the NYSE since 2007, Solera has PE-backed carve-out roots. The company has had a sometimes-contentious relationship with Wall Street. Investors have taken issue with how much Solera’s executives have paid themselves, in addition to a slumping stock price that had nearly been cut in half from its early 2014 highs to recent lows.

In part because of the prolonged slide in its shares, Solera said in August that it was exploring ‘strategic alternatives.’ Vista is offering $55.85 for each Solera share, with the deal expected to close by early 2016. Shares of Solera have ranged from $70 at the start of 2014 to $36 at the start of August.

With an enterprise value of more than $6bn, the Solera take-private would be the second-largest PE transaction of 2015. However, the proposed transaction stands as the largest LBO of a vertical market software vendor, according to 451 Research’s M&A KnowledgeBase . Typically, PE shops buy software ‘platform’ companies that serve large numbers of customers across a variety of sectors. In recent years, horizontal software companies, such as Compuware, Informatica, BMC Software, TIBCO and others, have landed in PE portfolios.

The planned take-private of Solera continues a recent surge in PE spending. So far this year, buyout shops have announced transactions valued at $37.3bn, according to 451 Research’s M&A KnowledgeBase. That’s up about two-thirds from the same period in 2014, and twice the spending over the same time in 2012. It only trails the January-September level in 2013, which was skewed by the $25bn LBO of Dell.

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

LANDesk lands a new dashboard with Xtraction acquisition

Brenon Daly

Contact: Brenon Daly

In its first acquisition in almost a year, LANDesk picks up existing partner Xtraction Solutions in an effort to make data more visible for the systems management vendor’s clients. The two companies have been partners for more than a year, with a handful of joint customers using Xtraction’s dashboards. Although terms weren’t disclosed, we understand that LANDesk paid in the low tens of millions of dollars for Xtraction, which had only a dozen or so employees and no outside funding.

In addition to data visualization (think, ‘BI for IT operations’), the deal is also important because it expands the sources of data that can be represented. Most IT environments are a hodgepodge of technology from various vendors and vintages. Xtraction has 50 connectors built for many of the larger IT management providers, including HP, Microsoft, BMC and ServiceNow. Another area where LANDesk might look to expand Xtraction’s reporting technology is IT security, where dashboards are increasingly being used to help make sense of the streams of reports about the ever-expanding number of vulnerabilities faced by businesses.

Xtraction is the sixth purchase LANDesk has made since private equity firm Thoma Bravo carved out the systems management vendor from Emerson Electric five years ago. Since then, according to our understanding, LANDesk has added about $100m to its top line while nearly tripling its cash flow. The company says it has plenty of cash in treasury – not to mention a deep-pocketed owner in Thoma Bravo – to continue to add pieces to its IT management platform.

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

A parade of big prints pushes Q2 tech M&A spending to record level

Brenon Daly

Contact: Brenon Daly

Blockbuster transactions in the cable, semiconductor and networking equipment industries helped push Q2 spending on tech, media and telecom (TMT) acquisitions to its highest quarterly level in 15 years. In the just-completed quarter, the value of TMT deals across the globe topped an astounding $196bn. That shattered the previous quarterly record and is actually higher than three of the six full-year totals we’ve recorded in 451 Research’s M&A KnowledgeBase since the recent recession ended.

The record Q2 spending rate, which accelerated from an already strong Q1, was boosted by the largest-ever tech deal (Avago’s $37bn purchase of Broadcom) as well as the second-largest telecom transaction since 2002 (Charter Communications’ $57bn rebound deal for Time Warner Cable). On their own, either of those transactions would have been considered a reasonable amount of spending for a full quarter in recent years. Instead, the pair simply led an unprecedented parade of big-ticket deals announced from April to June. The 22 prints in Q2 valued at $1bn or more included eight transactions worth at least $4bn and four worth more than $15bn. All four of the largest deals announced so far in 2015 have come since April.

Taken together, M&A spending in the first two quarters of 2015 hit a high-water mark of $316bn. Although it’s highly unlikely that deal flow will continue linearly at its current record rate, it’s worth noting that spending on TMT for the full year is on pace for an almost unimaginable $630bn. For a bit of perspective, that would be a full $200bn more than the highest annual total since the Internet bubble burst in 2000. 451 Research will have a full report on recent M&A activity, as well as the IPO market, on Monday.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2015 1,018 $196bn
Q1 2015 1,027 $120bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

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

In a time of sky-high infosec valuations, Sophos goes for down-to-earth debut

Brenon Daly

Contact: Brenon Daly

The tech IPO market is so quiet these days that even those companies that do manage to go public do it understatedly. Consider the almost under-the-radar offering from Sophos, a giant in the infosec market that nonetheless raised a relatively small $125m on the London Stock Exchange (LSE) last Friday. Compared with the noisy funding events we’re accustomed to seeing in this current frothy investment environment, the Sophos IPO was almost refreshingly reserved.

Sophos has been around for 30 years, which makes it positively middle-aged relative to many flashy startups that still haven’t seen the ink dry on their business plans. Also, Sophos was born and raised in the UK, several time zones – and even more distant culturally – from the epicenter of tech hype in Silicon Valley. To illustrate, Sophos spends less than 40% of its revenue on sales and marketing, about half the level of some US-based IT firms (e.g., Apigee, Box) that have also come public in 2015.

Yet even as Sophos runs a business that’s clipping along at nearly a half-billion dollars in revenue, it raised the same amount of money that some startups one-tenth its size have landed from private investors. Another way to look at it: The $125m that Sophos raised in its IPO is also less than half the amount collected by Etsy, which is smaller than Sophos, in its April IPO.

And Sophos is raising money at a very down-to-earth valuation, compared with some of the sky-high valuations garnered by both public and private infosec vendors. Sophos started life on the LSE at a market cap of about $1.6bn, roughly 3.5x its trailing sales of $447m. That’s a sharp discount to many of the infosec providers trading on the NYSE and Nasdaq. For example, Proofpoint, Qualys, FireEye and Imperva, among others, all trade at more than 10x trailing sales.

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

A steady Sophos now set to step on public stage

Brenon Daly

Contact: Brenon Daly

After an on-again, off-again march to the public market over the past decade, Sophos finally looks set to sell shares to the public for the first time. The 30-year-old, UK-based security vendor put in its paperwork last week for a $100m IPO on the London Stock Exchange (LSE). It was actually the second time the decidedly middle-aged Sophos filed to go public, and comes five years after it flirted with an IPO before selling a majority stake to Apax Partners instead.

During the half-decade in the private equity firm’s portfolio, Sophos has been a steady acquirer, picking up a company about every year. Its most recent deal, announced earlier this week, is the first time Sophos has acquired a cloud-based vendor. Sophos paid an undisclosed amount for email security and archiving startup Reflexion. The technology is expected to be integrated into Sophos Cloud later this year.

When Sophos does hit the LSE next month, we expect it to create a few billion dollars of market value. In its most recent fiscal year, which finished last March, Sophos increased revenue 18% to $447m. For comparison, Barracuda Networks – a diversified security provider that, like Sophos, serves the SMB market – posted an identical growth rate in its most recent fiscal year. (Although Sophos is growing off a revenue base that is more than half again as large as the $277m that Barracuda put up last year.) Since it went public in November 2013, Barracuda has doubled its market value to about $2bn.

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

A monster May for M&A

Brenon Daly

Contact: Brenon Daly

All three segments of tech, media and telecom (TMT) put up gigantic prints in May, pushing spending in the just-completed month to a level we’d typically see tallied over a half-year period in most post-recession years. The record monthly spending of $122bn was boosted by the largest-ever cable deal as well as the biggest pure tech transaction since the bubble burst. Both Charter Communications’ $56.7bn reach for Time Warner Cable and Avago Technologies’ $37bn purchase of Broadcom figure into the 10 largest TMT deals since 2002, according to 451 Research’s M&A KnowledgeBase

Undeniably, the two blockbuster prints dominated last month’s M&A, accounting for roughly three-quarters of the total spending. But even backing out those two acquisitions, spending came in at a robust $29bn, which is higher than the typical post-recession monthly average. More importantly, the activity spread to a broad number of markets, with billion-dollar-plus deals announced in May by hosting provider Equinix, ambitious telco Verizon and even EMC, which has found itself under scrutiny by activist shareholders, among others.

Last month’s astonishing level of spending – the only time in the past 13 years that monthly spending has topped $100bn – pushes total receipts for TMT M&A this year to $286m. That means that in just five months so far in 2015, acquirers have already spent more money on deals than they did for the entire year for every single year except one from 2009-14, according to the KnowledgeBase.

The one surprise from May, however, is the relatively shallow flow of deals. We tallied only 270 transactions, which stands as the lowest total for May since 2009. That’s down about 20% from the average of the preceding four months of 2015, and marks the first time in more than three years that we’ve seen a month-over-month decline in the number of prints.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 357 $11bn
February 2015 332 $48bn
March 2015 336 $61bn
April 2015 358 $44bn
May 2015 270 $122bn

Source: 451 Research’s M&A KnowledgeBase

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