Two strikes and counting for acquirers of Zimbra

Brenon Daly1 Comment

Contact: Brenon Daly

Having already bounced around inside two tech giants before bouncing out of them altogether, Zimbra is now on its third owner in the past seven years. Telligent Systems, a relatively small VC-backed startup, has picked up the back-end email technology provider from VMware, which – in turn – had picked up the castoff business from Yahoo. Although terms weren’t released, we would guess Telligent spent a fraction of the $450m that the two previous buyers handed over for Zimbra.

With two tech giants having already whiffed on their ownership of Zimbra, however, we can’t help but wonder if Telligent’s purchase will be strike three for the once-promising company. The reason we ask is because in each of the deals, Zimbra was acquired in order to be something that it’s not.

For Yahoo, its mid-2007 purchase of Zimbra represented a way to counter Google Apps, which, at the time, was just starting to make its way into universities, small businesses and the service-provider market. Yahoo hosted hundreds of millions of unpaid consumer email accounts, but hadn’t been able to expand into businesses.

Yahoo’s efforts with Zimbra didn’t have any more success than the next owner, VMware. In early 2010, the infrastructure software giant made an ill-advised move into the application layer with Zimbra’s messaging and collaboration products. It has largely retreated from those efforts, divesting both Zimbra and SlideRocket as part of a larger corporate restructuring announced earlier this year.

And now it’s Telligent’s turn to see what it can do with Zimbra. From the outset, we would note that the stakes are much higher for Telligent than for either of the two previous acquirers. Both Yahoo and VMware, which do close to $5bn in annual sales, could absorb the financial impact of a questionable deal that didn’t work out. Privately held Telligent, which we estimate might generate $20m this year, doesn’t have that cushion. (Further, it may not have the brand equity to survive because Telligent is taking the unusual step of using the name of the acquired business for the surviving company.)

Telligent will have to stretch to blend its enterprise social networking products – hyped as real-time, collaborative and far more interactive than plain old email – with Zimbra. Simply put, the approaches come from different eras. Even a company as well-versed in software as Microsoft has recognized that and has adapted its M&A program accordingly. Although Microsoft dropped $1.2bn on social networking startup Yammer a year ago, the software giant only recently started integrating the Web 2.0 company with a select few stalwart programs such as SharePoint and Office, despite the connection between the applications.

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Schneider reaches for Invensys with $5bn proposal

Contact: Andy Lawrence, Tejas Venkatesh

In what could be its largest acquisition in seven years, energy management giant Schneider Electric is proposing to acquire Invensys for $5bn. Although as old as the railways, the industrial automation equipment and software vendor has modernized its product portfolio through divestitures and investment in growing markets, making it a prized target for bidders with deep pockets.

Schneider’s interest in Invensys is mostly about scale, filling out its product lines, and helping build up a base of offerings for its growing interest in software and services. The acquisition of Invensys would bolster its products in monitoring, metering and control software – products that Schneider could deploy across its divisions. Invensys generated $2.7bn in revenue for the year ended March 31.

The offer comes a year after Schneider Electric indicated that it would step up acquisitions to fill out its product portfolio. Although Schneider has been relatively quiet on the M&A front in recent years, the company has a successful history of inorganic growth. Invensys could be another feather in its cap, provided rivals like Emerson Electric don’t get into a bidding war. Siemens, Emerson, ABB and GE are all considered potential suitors for Invensys.

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Western Digital buys a VeloBit chaser for its sTec flash acquisition

Contact: Tim Stammers, Tejas Venkatesh

Following hard on the heels of its pickup of flash hardware vendor sTec, disk drive giant Western Digital has announced the purchase of flash software specialist VeloBit. Like sTec, VeloBit will become part of Western Digital’s wholly owned disk drive subsidiary Hitachi Global Storage Technologies (HGST). VeloBit’s software is complementary to flash drives sold by HGST and sTec, and the acquisition underlines Western Digital’s ambitions in the flash market.

VeloBit sells software that creates caches of hot or frequently demanded data in flash memory installed in servers, as well as in server DRAM. The market for such caching software is becoming crowded and competitive, but is still only nascent. In March, the three-year-old startup declared that its software had been installed on more than 500 servers worldwide. VeloBit raised $5.5m in total funding from Longworth Venture Partners, Fairhaven Capital Partners and undisclosed angel investors.

Caching software boosts the performance jolt achieved by installing flash drives in servers, and its current principal applications are VDI and performance-sensitive databases, as well as server virtualization. For the latter, the software can increase the number of virtual servers or VMs that can be hosted by a single physical server. As a result, caching software is very complementary to server-installed flash drives and PCIe cards – including those already sold by Western Digital’s HGST subsidiary, and by sTec.

Although sTec also sells caching software, Western Digital clearly sees extra value in VeloBit’s software, which incorporates what VeloBit claims is an unusually efficient way of predicting or identifying hot data. Wells Fargo advised VeloBit on its sale. Interestingly, Wells Fargo was on Western Digital’s side when the company acquired sTec three weeks ago.

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IBM shores up its mainframe technology with CSL buy

Contact: John Abbott, Tejas Venkatesh

IBM still occasionally feels the need to make acquisitions that supplement and update (or sometimes help protect) its venerable mainframe technology, even though the mainframe is mature to say the least, with nearly 50 years of history behind it. This time IBM has reached for CSL International, an Israeli company that specializes in virtualization management technology for the zEnterprise mainframe. IBM is seeing strong growth in Linux deployments on its mainframes, and virtualization management makes mainframes a viable platform for hosted cloud services.

CSL is privately held and terms were not disclosed, though Globes reported the value at roughly $20m. That appears reasonable given that nine-year-old CSL is a small company with less than 10 employees. The company’s CSL-WAVE software – which has been piloted at a large US government agency and has been deployed at several financial services firms – is intended to simplify the management of z/VM (the mainframe’s native hypervisor) when used in combination with Linux on System z – and nowadays just about every mainframe that ships includes Linux as well as the proprietary z/VM operating system. CSL has partnered with IBM in the past, but also has a partnership with CA Technologies, the future of which may now be uncertain.

CSL-WAVE is a drag-and-drop tool for creating, monitoring and managing virtual servers and connecting them with CPU, memory, storage and networking resources on the mainframe. The acquisition is a response to the rapid growth in Linux deployments on the mainframe – IBM reports that shipped capacity just about doubled year-over-year in the first quarter of 2013. Easier virtualization management for Linux also makes the mainframe a more viable platform for hosting cloud services. IBM touts the efficiency of running large numbers of virtual machines on the mainframe as its architecture enables very high utilization rates, approaching 100% of computing resources able to be utilized. Virtualization was pioneered on the mainframe architecture back in the 1960s.

IBM’s previous mainframe-related acquisition was that of Platform Solutions in July 2008. That deal was more about protection than advancing the technology. Platform had revived the concept of ‘plug-compatible mainframes,’ advocating the running of IBM’s z/OS on non-IBM hardware. It was fighting a legal battle with IBM at the time of the acquisition.

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RSA adds Aveksa, bolstering goverance and provisioning

Brenon Daly

Contact: Wendy Nather, Brenon Daly

The identity and access management (IAM) market has evolved far beyond hooking up Active Directory with cloud-based identity management and single sign-on to a whole realm of business context that needs to be addressed. To cover that, EMC’s RSA Security has acquired Aveksa, a ‘business-driven IAM’ vendor, adding to the security giant’s existing portfolio of authentication, analytics and governance offerings.

Much of RSA’s portfolio has come through a steady flow of M&A. The security division of EMC typically acquires one or two startups each year. We would note that deal flow is much slower than EMC’s other major division, VMware. Nonetheless, RSA has made significant moves in recent years, adding Silver Tail Systems (antifraud), NetWitness (event monitoring) and Archer Technologies (GRC), among others.

With Aveksa, RSA will get a solid source of identity governance, user provisioning and access management to go along with its authentication business. RSA says that another reason for the acquisition was the speed with which Aveksa could be rolled out in the enterprise. The published claim is that roughly 70% of customers were up and running in production within four months – a far cry from traditional IAM infrastructures, which can take years to customize and deploy. (See our full report.)

SanDisk gets enterprise SMART with $307m buy

Contact: Tim Stammers

To bolster its enterprise business, flash giant SanDisk is acquiring enterprise flash drive specialist SMART Storage Systems for $307m in cash. SanDisk first entered the market for enterprise flash drives in 2011, with the purchase of SSD maker Pliant Technology for $327m. The pickup of SMART Storage should increase SanDisk’s SSD sales and bring the company revenue and OEM relationships, as well as intellectual property.

SMART Storage Systems generated sales of $25m for the quarter ended May 31, 2013. SanDisk indicated that the company was on a rapid growth trajectory. At a revenue run rate of $100m, the $307m price may seem low for a company that is growing quickly, owns competitive technology, and is operating in a fast-growing market. However, the company is operating in a very competitive sector that is heading for commodification, and as a result its prospects as a small, independent supplier are tentative at best.

We do not believe that the deal will significantly alter the landscape of the SSD market. Currently, that market is small and growing, but it is also crowded. This deal will, however, bring SanDisk increased visibility in the enterprise sector, as well as access to technology that it will be able to incorporate into its future products. For a full report on the transaction, subscribers can click here.

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Dialog Semiconductor pays $310m for iWatt

Contact: Tejas Venkatesh

A year after attempting to go public, iWatt has opted for the other exit, selling to fellow power management chip vendor Dialog Semiconductor for $310m in cash (plus contingent consideration of up to $35m). The deal should bolster Dialog’s product portfolio and expand its addressable market.

IWatt designs AC-DC converter chips and LED ICs. While iWatt’s AC-DC chips are used in portable chargers, Dialog’s power management ICs are embedded in mobile devices themselves. The target has grown at a healthy clip recently, wrapping up 2012 with $74m in revenue. That’s a 46% increase from the previous year.

The acquisition values iWatt at 4.1 times last year’s sales. That’s a premium valuation compared with the 3.4x sales valuation its chief rival Power Integrations currently garners in the public markets. IWatt’s superior growth definitely played into its higher valuation (Power Integrations grew just 2.2% last year).

IWatt tried to go public last summer, but the offering never made it to market. (The company even swapped out its lead underwriter – trading Deutsche Bank for Barclays – which is never a good sign.) It would have been fighting against a strong downdraft in the recent IPO market. The last three tech offerings have either priced below expectations or traded down significantly in the aftermarket.

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A return to the ‘new normal’ for tech M&A in Q2

Brenon Daly

Contact: Brenon Daly

After two straight quarters that each featured a single blockbuster transaction, tech M&A spending in the just-completed Q2 settled back into a more representative level for the post-recession era. Spending on acquisitions of tech, telecom and Internet companies around the globe from April to June totaled $46bn – essentially matching the value of deals in Q2 of last year as well as the quarterly average from 2010-2012. (Look for our full report on the Q2 M&A totals and trends later today on our website and in our next Daily 451.)

However, Q2 spending comes in about one-third lower than both the first quarter of this year and the final quarter of last year. The decline from mid-$60bn in both of those quarters to mid-$40bn in the just-completed quarter stems primarily from the fact that Q2 didn’t see a mega-transaction like the one that boosted totals in the other two quarters.

Both Q4 2012 and Q1 2013 featured single deals valued at more than $20bn, roughly the equivalent to the aggregate total of the four largest deals announced in Q2 2013. The $24bn proposed Dell buyout, announced in February, and Softbank’s $20bn reach for Sprint Nextel last October are the two largest transactions of the past half-decade.

Turning to deal volume, we would note that even as tech M&A spending returned to more representative post-recession levels in Q2, the number of transactions didn’t keep pace. In fact, overall quarterly deal flow plunged to its lowest level since the recession. From April to June, dealmakers announced just 751 transactions, a sharp 18% year-over-year decline. (Again, we’ll have a full report on Q2 M&A activity available later today on our website and in our next Daily 451.)

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2013 751 $46bn
Q1 2013 785 $64bn
Q4 2012 851 $64bn
Q3 2012 912 $39bn
Q2 2012 916 $44bn
Q1 2012 918 $34bn
Q4 2011 904 $44bn
Q3 2011 969 $64bn
Q2 2011 980 $76bn
Q1 2011 919 $45bn

Source: The 451 M&A KnowledgeBase

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Adobe back in the market for marketing, drops $600m on Neolane

Brenon Daly

Contact: Brenon Daly

In its second-largest acquisition for its Marketing Cloud, Adobe Systems says it will hand over $600m in cash for marketing automation (MA) vendor Neolane. The purchase of Neolane, which is expected to close in Q3, trails only Adobe’s pickup of Omniture for $1.8bn in 2009 in terms of spending on deals to build out its Marketing Cloud. Collectively, these transactions have cost Adobe more than $3bn.

Although Adobe declined to discuss Neolane’s financials, the Paris-based startup has said it generated 2012 revenue of $58m, which would put it at roughly the same size as rivals Marketo and HubSpot. In terms of valuation, however, Neolane is a good bit off of Marketo’s market cap of some $870m.

We would chalk up the disparity in valuation to two main reasons. First, Neolane’s on-premises business is about as large as its subscription business, while Marketo is a pure SaaS company. Further, we understand that Neolane grew about 40% last year, which is a solid rate but just half the pace of the free-spending – and deeply unprofitable – Marketo. Through midyear, we would pencil out that Neolane generated roughly $70m in trailing 12-month revenue.

Adobe’s MA move comes after many other tech giants have already snapped up MA vendors, including salesforce.com paying a record $2.5bn for ExactTarget earlier this month. Other tech giants that have made significant MA acquisitions include IBM (Unica), Teradata (Aprimo), Oracle (Eloqua) and Intuit (Demandforce). Valuations for those transactions have ranged from 4.4x trailing sales to 11x trailing sales.

Select marketing automation transactions

Date announced Acquirer Target Deal value Price-to-sales valuation
June 27, 2013 Adobe Neolane $600m 8.6x*
June 4, 2013 salesforce.com ExactTarget $2.5bn 7.6x
December 20, 2012 Oracle Eloqua $956m 9.7x
April 27, 2012 Intuit Demandforce $424m 11.4x*
December 22, 2010 Teradata Aprimo $525m 6.3x
August 13, 2010 IBM Unica $523m 4.4x

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

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IPO candidates feel the tremor

Contact: Tejas Venkatesh

Over the past few weeks, it appears sentiment on Wall Street has soured significantly. With the US Federal Reserve planning to wrap up bond purchases, the broader stock market volatility as represented by the CBOE volatility index hit its highest level all year earlier this week. As a result, unknown and unproven IPO candidates are bearing the brunt of that market uncertainty. That was evident today when both IT retailer CDW and video advertising network company Tremor Video priced below their indicated range. In CDW’s case, that came after the company had already cut the number of shares on offer by 16%.

For its part, Tremor Video sold 7.5 million shares for $10 each, below its indicated range of $11-13. In the process, the company raised $75m and debuted at an (undiluted) market cap of $485m. By midmorning, the stock headed further south and was changing hands on the NYSE at $9.50.

Tremor Video analyzes in-stream video content, detects user attributes and uses that information to optimize video ad campaigns for marquee brands like Procter & Gamble, Ford Motor and Walt Disney. The eight-year-old company, which raised about $120m in total funding, generated $113m in revenue for the year ended March 2013.

The sudden souring of sentiment is leading to a difference in expectations between investors and issuing companies. Tremor Video is the first advertising technology (adtech) IPO to price below its expected range. In its case, the performance of recent adtech IPOs didn’t help. Both Millennial Media and Marin Software are trading about 30% below their IPO price.

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