Springtime stirrings in tech IPO market

Brenon Daly

Contact: Brenon Daly

With US equity markets hitting all-time highs and volatility sinking to post-recession lows, Wall Street appears ready to embrace new issues. Even the fitful offering of smart grid vendor Silver Spring Networks, which had been collecting dust as the company’s revenue declined over the past year, found buyers earlier this week. However, few observers would put Silver Spring forward as a ‘tech’ IPO, much less an offering that should necessarily be emulated.

But we won’t have to wait long for a bellwether for the sector. Both Model N and Marin Software are expected to price their IPOs next week, a pair of offerings that could create a cool $1bn in market value. And coming behind those debutants are a host of companies hoping to hit the market this summer, including Violin Memory, SilkRoad Technology and Tableau Software. (Of the trio, data-visualization provider Tableau looks to be the next ‘hot’ enterprise IPO, and will almost assuredly command a double-digit valuation when it begins trading.)

The rumored offerings by all three of those enterprise tech vendors have come through a so-called ‘confidential filing,’ a recent regulatory change by the SEC that allows companies to put in their IPO paperwork – and work through the inevitable revisions – without disclosing the filing until they are ready to hit their roadshow. Most companies are opting to file on the quiet – but not all of them. Somewhat confusingly, for instance, Marketo publicly announced that it had privately filed. And earlier this week, agile development shop Rally Software Development put in its paperwork for all the world to see.

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Silver Spring (finally) makes it to Wall Street

Contact: Tejas Venkatesh

A year and a half after first filing its IPO papers, Silver Spring Networks has finally debuted on the public markets. The smart grid network company sold 4.75 million shares at $17 each, raising $81m and creating $750m in market value. The stock then promptly surged about 30% in its first hour of trading today.

The amount raised is only half the amount Silver Spring originally planned to raise when it filed its S-1 in the summer of 2011. It also pales in comparison to the money the company had already raised in the private markets. In its 11-year history, Silver Spring previously raised $330m in equity and debt capital from Foundation Capital, Kleiner Perkins Caufield & Byers and other firms.

Despite the first-day pop in trading, Silver Spring has attracted some bearish sentiment. For starters, the company, which has a high degree of customer concentration, reported that revenue actually declined 17%, year over year, to $197m in 2012.

Nonetheless, the offering valued Silver Spring at 3.8x trailing sales. That appears to be a fairly rich valuation, at least compared with recent acquisitions and even current trading multiples in the sector. In May 2011, Toshiba acquired energy management systems provider Landis+Gyr for $2.3bn, or 1.4x sales. Energy control networking platform vendor Echelon currently garners a market valuation of less than 1x sales. However, when we compare the three vendors, Silver Spring is the only pure-play smart grid network company.

Silver Spring’s valuation is also a recognition of the business opportunity in front of it. The company’s business rationale is straightforward: energy is an expensive and essential resource, for which demand is rising and supply is constrained. Silver Spring offers an IP-based network infrastructure that connects devices on a power grid, providing timely information to utilities and helping reduce energy costs and waste. Its hardware and software also allows utilities to bill consumers in an automated fashion, eliminating the need for manual reading of meters. Goldman Sachs and Credit Suisse, which also advised Landis+Gyr on its sale, led the offering, with Silver Spring trading under the ticker ‘SSNI’ on the NYSE.

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Cadence bulks up IP business with $380m Tensilica buy

Contact: Thejeswi Venkatesh, John Abbott

Cadence Design Systems on Monday reached for configurable silicon intellectual property vendor Tensilica for $380m in cash. Not only is this Cadence’s biggest acquisition, it is also paying the highest valuation in its M&A history. Tensilica generated $44m in sales in 2012, valuing the company at 8x trailing sales. The purchase bulks up Cadence’s IP business, pushing it over the $100m mark. Previous IP acquisitions include Denali Software in May 2010 (for verification IP) and Cosmic Circuits just last month (for silicon IP).

Its exit did not come easy for Tensilica. The IP core vendor raised roughly $100m in six funding rounds in its 16-year history. Investors include Foundation Capital, Altera and Cisco, among others. Tensilica makes money through license fees for its IP and also via royalties on unit volumes its customers sell. The company’s client list includes marquee tech names such as Intel, Broadcom, Cisco and Samsung. Qatalyst Partners advised Tensilica on the transaction.

Tensilica’s data-plane-processing units are programmable and allow customers to develop customized system on a chips (SoCs) and differentiate themselves in the mobile and wireless network infrastructure markets. These IP cores are complementary to standard processor architectures from companies like ARM Ltd, a fact highlighted by a quote in the PR from the microprocessor provider itself. Potential overlap between ARM and the EDA giants as they move further into the silicon IP and SoC business is a sensitive point.

The deal comes just four months after rival MIPS Technologies sold itself to Imagination Technologies and Allied Security Trust for a combined $450m. CEVA, which unsuccessfully bid for that business against Imagination, is now the last remaining stand-alone company. Its revenue for 2012 dipped to $54m, down 11% compared with $60m in 2011. Cadence’s larger competitor Synopsys has been buying into silicon IP steadily since the acquisition of Virage Logic for $315m in June 2010. Virage had previously acquired ARC International for its configurable IP, a more direct rival to ARM. Both Cadence and Synopsys are looking to take advantage of faster growth rates beyond their mature EDA tools businesses.

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JDSU buys Arieso for location-specific telecom network intelligence

Contact: Tejas Venkatesh, Ben Kolada

JDS Uniphase has acquired UK-based Arieso, a provider of location-based telecom network intelligence software. The transaction is meant to help carriers alleviate bandwidth constraints caused by limited spectrum capacity.

Arieso provides location intelligence software that produces maps showing network traffic down to building-level resolution. This information, based on actual measurements from consumer devices, allows mobile operators to deploy small cells strategically or even offload traffic to Wi-Fi networks.

JDSU is paying $85m in cash for Arieso, which put up $27m in bookings last year. Assuming actual revenue is slightly below bookings, the deal probably values Arieso in the upper end of 3-5x revenue. That valuation is about one-quarter of what we estimate Intucell received in its sale to Cisco, but that valuation was certainly an outlier.

Perhaps a closer comparable would be Optimi’s sale to Ericsson in 2010 for $99m. We’ve previously heard the Optimi deal was valued at roughly 2-3x sales. Arieso raised $14.5m in funding from Add Partners Ltd and Qualcomm, among others. The company has marquee customers including AT&T, Telefónica and Vodafone. Arma Partners advised Arieso on its sale.

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Consolidating the Google Apps ecosystem

Ben Kolada

Contact: Ben Kolada

The Google Apps ecosystem saw continued consolidation on Wednesday as UK Google Apps developer and reseller Ancoris announced that it was acquiring Appogee for an undisclosed sum. Google and other enterprise apps providers are using resellers to target the SMB market, a strategy that has spawned a plethora of application systems integrators. Consolidation in this sector has taken off in the past few years and is providing extremely fast growth for some companies.

Application software OEMs, such as Google but also including salesforce.com, have focused their efforts on targeting the enterprise segment, and instead have used resellers to penetrate the SMB market. Meanwhile, cloud services are now affordable for SMBs, and millions have migrated away from their old premises-based systems to modern cloud services.

VARs like Ancoris and Cloud Sherpas add functionality to the apps they resell, such as multiple domain setup, administrative capabilities and more fleshed-out instant messaging capabilities. Essentially, they’re making paid Google Apps more suitable for SMBs by answering shortcomings not addressed by default by Google.

Increasing adoption of cloud services combined with consolidation has played out particularly well for Cloud Sherpas, which has acquired eight companies in the past two years, including two so far this year. The company’s CEO has publicly said he expects revenue to break $100m this year, up from about $75m last year and less than $1m in 2009.

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Lexmark’s Perceptive continues its buying spree

Contact: Alan Pelz-Sharpe

Perceptive Software, the document and content management division of printer giant Lexmark, continued its M&A spree Tuesday with the acquisitions of San Francisco-based Twistage and Seattle-based AccessVia for a combined total of $31.5m. Lexmark has now spent more than $600m buying software companies since it started its M&A machine in May 2010 with the purchase of Perceptive Software.

Twistage provides a cloud-based video ingestion and management system, and AccessVia sells retail industry point of sale-focused printing (signage) software. Both acquisitions come as a bit of a surprise because, previously, Perceptive had focused on building out document-centric case management and pure-play document management functionality, which extends Perceptive’s own heritage of providing document and form management capabilities to legacy business applications such as JD Edwards, PeopleSoft and SAP.

Twistage and AccessVia appear to take the firm in very new directions because they both could be described as providing Perceptive with more input and output options. Quite how these will be integrated – and leveraged by the firm – is unclear right now. We believe that Twistage mainly brings technology and AccessVia a substantial customer base, and will watch closely to see how this all pans out. But it’s likely that new industry-focused applications and solutions will come from a combination of these and existing technologies.

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What else will VMware sell?

Contact: Tejas Venkatesh

VMware is selling SlideRocket, the presentation creation and collaboration startup it acquired two years ago, to ClearSlide as it refocuses on its core business. The deal comes at a time of refocus for the virtualization giant, which in 2012 saw its growth rate decline to 22% – a full 10 percentage points lower than the previous year. (It also recently revealed plans to lay off some 900 employees.) As VMware returns to its roots, other assets that it acquired in recent years could also end up on the chopping block.

The company’s focus in the near term is on its Pivotal Initiative, which brings together a number of ‘big data’ and cloud assets that EMC and VMware have acquired and developed to capitalize on the impact that cloud computing is having on emerging markets such as application development and big data.

Meanwhile, the focus placed here will come at the expense of some of VMware’s noncore assets. In its Q4 earnings call, the company said it would deemphasize SlideRocket as well as ‘other products’ not central to what customers value from VMware. That could mean that some outlier assets, such as Socialcast and Zimbra, may be available for sale. Any divestitures at VMware would also be eased, politically, by the fact that acquisitions were done during the tenure of former CEO Paul Maritz, who moved from the top spot at VMware to run the Pivotal Initiative last year.

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Taking advantage of the times

Ben Kolada

Contact: Ben Kolada

While the real estate industry overall is still hurting, M&A in the construction and facilities management software space is growing. Driving deal flow is the same factor that depressed the real estate market – the macroeconomy. Companies are continuing to seek new ways to cut costs, and increasing facilities’ efficiency is becoming a popular option. Growth, alongside fragmentation in the facilities management software sector, is leading to increasing consolidation.

Similar to trying to squeeze additional productivity out of employees, companies are now trying to squeeze additional efficiencies out of their facilities. In fact, as IBM stated in its acquisition of TRIRIGA, property and real estate are the second-largest costs to a business after employee compensation.

As a result, many vendors in the facilities and property management software segment are experiencing significant growth. Accruent, which claims to be the largest facilities management software provider, expects to grow revenue approximately 50% this year. (However, we’d note that M&A has helped the company’s upward revenue trajectory. Accruent has announced four acquisitions since 2011.)

The sector’s growth potential has even attracted some of the largest acquirers. IBM paid $108m for TRIRIGA in 2011 and last year Oracle acquired Skire’s assets. Beyond growth potential, vendors will consolidate the fragmented market, and acquire to add complementary offerings to their portfolios. Accruent, for example, bought Evoco in part to add construction management software to its existing facilities management software products.

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An unhappy anniversary for Vocus

Brenon Daly

Contact: Brenon Daly

It’s been exactly a year since Vocus rolled the dice on its largest-ever acquisition, and in the view of Wall Street the company has come up snake eyes. The February 2012 purchase of iContact, which nearly cleaned out Vocus’ treasury and caused a bit of acquisition indigestion, spooked investors. Since the deal, shares of the marketing software vendor have been nearly cut in half.

The decline has left the company a relative bargain in a market that has seen platinum valuations, both in terms of trading multiples and M&A valuations. Vocus garners a market cap of $285m, or just 1.4x its projected revenue of about $200m in 2013. That paltry valuation comes despite an accelerating bookings rate of roughly 20% forecasted for this year, about $25m of free cash flow generation and a reengineered suite of offerings serving a neglected segment of the market (midsized enterprises).

The last point is a key one for Vocus, which went public in 2005 as a single-product company. In its initial years, Vocus sold to PR firms, primarily helping them distribute their releases. In 2011, the company began expanding its portfolio, both through internal development and M&A. It acquired two small companies that year that brought technology around marketing on Facebook and Twitter. By the end of 2011, it had integrated those deals along with internal efforts into a single marketing platform.

Early sales for the integrated suite were encouraging for Vocus, reflecting the fact that marketing automation requires a number of offerings. (Many other players in this space – including ExactTarget, Marketo and Constant Contact – have all used M&A to build out a suite.) It then reached for iContact to add the outbound marketing piece of technology.

The acquisition, which bumped up Vocus’ revenue by about one-third overnight, required a fair amount of integration. Vocus says that work is behind it, and it can focus on selling its marketing suite. Assuming the company does hit its guidance of 20% bookings growth this year, it will mark the first time since 2008 that it has grown at that rate. Of course, Vocus was only generating about one-third the amount of sales then that it expects this year. And even then, Vocus shares traded higher than they do today.

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Rackspace acquires freshly launched ObjectRocket

Contact: Tejas Venkatesh

Rackspace has acquired MongoDB hosting specialist ObjectRocket, expanding its portfolio of database services to non-relational data. The move adds a NoSQL cloud database offering, and should improve Rackspace’s ability to compete with Amazon Web Services.

ObjectRocket launched January 15, just 42 days ago. The company had only raised a round of seed funding from an undisclosed set of investors. ObjectRocket’s cofounder and chief architect Kenny Gorman is one of only 35 MongoDB contributors and community members considered MongoDB Masters.

ObjectRocket is differentiated by a managed services approach, advanced features and focus on high performance. The deal is a natural fit for Rackspace, which already offers MySQL-based Cloud Databases for relational applications. Bringing ObjectRocket onboard adds the ability to support non-relational operational applications, for which MongoDB is emerging as the primary NoSQL database of choice. We’ll have a full report on the transaction in our next Daily 451.

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