Dell’s down, but still dealing

Brenon Daly

Contact: Brenon Daly

Undeterred by a sharp slump in business, Dell continues to shop. Just a day after reporting an 11% decline in fiscal Q3 revenue, the tech giant on Friday reached for infrastructure automation startup Gale Technologies. Gale should help bolster Dell’s recently launched Active System Manager (ASM) by adding an automation layer above the hypervisor, extending ASM beyond on-premises enterprise systems to support hybrid clouds.

The addition of Gale makes sense for Dell both operationally and competitively. The acquisition furthers Dell’s push toward ‘convergence,’ pretty much the only area of the company’s business that is expanding. (Through the first three quarters of this fiscal year, the servers and networking business unit has increased revenue 9%, compared with a 9% decline in total revenue at Dell.) The transaction also matches a similar purchase by Cisco of Cloupia just one day earlier.

However, beyond the Gale acquisition, there are growing questions about the broader M&A program at Dell. Although the company has been spending steadily to buy into markets beyond its historic PC business, the results have yet to show up in its top line.

Granted, the purchases are part of a multiyear transition and it may be too soon to expect full returns on them. But, with Dell shares bumping along at their lowest level since the end of the recession, Wall Street is getting impatient with the company’s turnaround. The stock has dropped 40% over the past year.

Over the past two years, Dell has spent more than $7bn on M&A, expanding into areas such as storage, security, services and software. And yet, despite that not-insignificant financial outlay, Dell is shrinking. The company is likely to put up about $57bn in sales in this fiscal year, which wraps at the end of January. That would be roughly $5bn, or 8%, less than it generated in the previous fiscal year.

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Ruckus debuts amid equity market uncertainty

Contact: Tejas Venkatesh

Even as the equity markets have been roiled by uncertainty and slowing corporate growth recently, Ruckus Wireless made it public on Friday. After pricing at the high end of its indicated range of $13-15, the stock edged lower in midday trading. Nevertheless, the Sequoia Capital-backed wireless provider raised $126m and debuts at a market cap of $1.1bn, valuing it at 5.7 times trailing sales. The robust value creation comes at a time when network operators are looking to Wi-Fi networks to offload data traffic that is crowding their wireless 3G and 4G/LTE networks.

With its Wi-Fi wares, Ruckus is capitalizing on concerns about how to handle the rapid expansion of traffic generated by mobile devices. High-performance wireless is clearly in high demand and Ruckus specializes in large-scale deployments that suit high-volume and high-density applications.

And Ruckus’ growth reflects that market opportunity. The 10-year-old company has more than doubled its top line in less than two years, going from $75m in calendar-year 2010 to $194m for the 12 months ended September 30. And even while ramping up sales and marketing, Ruckus has been running solidly in the black for two years. It raised $76.1m in venture funding from Sequoia Capital (which holds a 24% stake) and Motorola Mobility Ventures (5.4% stake), among others. Goldman Sachs and Morgan Stanley were lead underwriters on the offering.

Ruckus has established itself as a distinct player in the crowded Wi-Fi market, and competes against bigger vendors like Cisco Systems, Ericsson, Hewlett-Packard, Motorola Mobility and Aruba Networks. Unlike Cisco and HP, Ruckus builds its devices using standard chipsets from Qualcomm’s Atheros and then uses its own intellectual property to more effectively manage the radios and data operations to improve performance.

The wireless startup’s successful offering comes less than a year after its archrival BelAir Networks was snapped up by Ericsson. While both companies were born at the same time in 2002, Ruckus was clearly the more successful of the two. BelAir had 120 employees at the time of its sale and Ruckus has five times that number, at 606.

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NetApp drops a bit of cash on CacheIQ

Brenon Daly

Contact: Brenon Daly, Simon Robinson

Tucked into NetApp’s fiscal second-quarter release Wednesday afternoon was the company’s first acquisition in about a year and a half. The storage giant reached for NAS acceleration startup CacheIQ, bringing more technology for its flash fight with rival EMC. The deal is being positioned as an IP play, and although NetApp doesn’t plan on developing CacheIQ’s existing product line, the technology looks set to add crucial performance capabilities to its emerging scale-out clustered storage strategy.

The fact that CacheIQ’s technology is key to NetApp is reflected in the price that we understand the company paid for the Austin, Texas-based startup. The valuation didn’t quite make it to the gravity-defying level that EMC paid for pre-revenue, all-flash array startup XtremIO back in May, but CacheIQ did more than OK on its exit. (Subscribers to The 451 M&A KnowledgeBase can click here to see our official estimate on terms of the transaction.)

A restart that emerged from stealth only about a year ago, CacheIQ had drawn in just $10m in funding from angels. The company actually traces its roots back to another startup, StorSpeed, which first emerged in 2009 with a very similar value proposition around NAS acceleration, but then buckled as investors lost interest. CacheIQ acquired StorSpeed’s IP and a small number of its developers in July 2010. According to our understanding, Cache IQ had just started selling its products, with revenue still at only about $1m. We’ll have a full report on the deal in our next Daily 451.

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AOL’s MapQuest ‘Discovers’ Everlater

Ben Kolada

Contact: Ben Kolada

In a fairly rare M&A move, AOL has acquired online travel journal startup Everlater to expand its MapQuest offering into the travel industry. The announcement coincides with the launch of MapQuest Discover, an interactive travel planning and discovery tool. Although this appears to be AOL’s first acquisition specifically for MapQuest, it may not be the last.

Founded in 2008 and based in Boulder, Colorado, Everlater provides a free online travel journal for consumers, as well as a paid customer engagement and travel planning product called Concourse for companies in the tourism industry. The startup lists six employees on its site and had secured about $750,000 from incubator TechStars and venture firm Highway 12 Ventures. Terms of its sale were not disclosed.

The move by AOL is an attempt to reinvigorate its staid MapQuest mapping assets, with an apparent focus on consumers (MapQuest’s B2B licensing services revenue has been declining). The acquisition of Everlater also appears to be the first inorganic move AOL has made specifically to expand MapQuest beyond navigation to providing original travel content and planning features. (We’d note, though, that AOL has bought other local content companies, including Patch Media and Going Inc in 2009.)

To expedite the growth of MapQuest’s travel content and interactive features, AOL could do additional small acquisitions in the travel and tourism sector, similar to what TripAdvisor has done over the past half-decade. In the past five years, TripAdvisor has announced nearly a dozen travel-related acquisitions, including the recent pickups of Wanderfly, Where Ive Been and EveryTrail.

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Akamai bets on future growth from service providers with Verivue buy

Contact: Tejas Venkatesh, Jim Davis

In its quarterly results three weeks ago, Akamai reported impressive numbers driven by the media and entertainment vertical. Its acquisition of Verivue, a video-switching and delivery platform provider, signals a new path for continued growth in the segment.

Even though Akamai has been developing a licensed software solution for the service-provider market, the acquisition of Verivue’s technology (and engineering staff) helps get Akamai further along by virtue of having already been deployed in the field with companies like Cox Communications in the US and some smaller ISPs in the Asia-Pacific region.

Terms of the deal were not disclosed. Six-year-old Verivue has 60 employees and raised quite a bit of venture capital. Five venture firms and three strategic investors together funneled $85m into Verivue. Investors include Accel Partners, Matrix Partners and Comcast, among others.

The acquisition comes barely three weeks after Akamai reported its best quarterly results ever, with its top line increasing 23% year-over-year to reach $345m. Revenue from the media and entertainment segment grew fastest at 26%, driven in part by the Olympic games, when broadcasters used Akamai’s HD network to deliver high-quality video at scale.

j2 Global anxious for growth

Ben Kolada

Contact: Ben Kolada

Cloud communications vendor j2 Global has acquired 85-year-old media firm Ziff Davis Media for $167m, undoubtedly the biggest strategic stretch of the 40 acquisitions it has done. The announcement comes just two months after j2 was rejected in its attempt to buy online backup firm Carbonite. The rapid-fire M&A attempts, and the oddball pairing with Ziff Davis, give the impression that j2 will eagerly spend its cash to buy top-line growth.

Founded in 1927, Ziff Davis is a technology media firm, operating the websites PCMag.com, Geek.com, ExtremeTech.com, ComputerShopper.com and Toolbox.com (the latter two sites were acquired this year). It has been sliced and diced throughout its lifetime. According to The 451 M&A KnowledgeBase, in just the past three years Ziff Davis has done five divestitures.

Although j2 didn’t provide a clear rationale for the deal, it notes that the company has years of experience in digital media and online marketing and that this acquisition would expand that experience. It claims that its experience in this market comes from its own spending on advertising, as well as from its email marketing product, Campaigner, which j2 obtained only in December 2010 as part of its Protus IP Solutions purchase.

Reading deeper into the announcement, however, the primary rationale for this transaction seems simply to add to j2’s top line. With this acquisition, j2 expects its total revenue this year to exceed the top of its previously guided $345-365m range. Ziff Davis is expected to contribute $60m in revenue next year.

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Priceline gets KAYAK for a good price

Ben Kolada

Contact: Ben Kolada, Brenon Daly

For a price comparison website, KAYAK.com appears to be settling for a relatively low price in its purchase by online travel giant Priceline.com. At first glance, Priceline’s offer for KAYAK appears respectable. The $40-per-share bid is the highest KAYAK’s shares have seen in its short life on the Nasdaq. Using an enterprise value of $1.65bn, KAYAK is being valued at 5.8 times trailing revenue and about 5.6x full-year 2012 revenue.

But as we look closer, we see that KAYAK is being valued only slightly higher than Priceline’s current trading valuation, and that’s excluding any takeout premium for the acquirer. With an enterprise value of roughly $28bn, Priceline trades at about 5.5x trailing revenue and 5.3x 2012 revenue. (Priceline shares, which have tacked on roughly 15% so far this year, were unchanged on the news of its largest-ever acquisition.)

Valuation – especially for the acquirer – is a key concern in this transaction because unlike most tech deals, Priceline is covering almost three-quarters of the cost of its purchase with equity. Under terms, Priceline will hand over $1.3bn in stock and $500m in cash for KAYAK. As mentioned, paying with paper is relatively rare these days, because cash is king when it comes to M&A. In fact, according to The 451 M&A KnowledgeBase, Priceline’s acquisition of KAYAK is one of only 12 deals done by US public acquirers so far this year where stock has accounted for more than half the total consideration.

Despite faster growth, KAYAK’s valuation is only slightly above Priceline’s

Company EV EV/2012 projected revenue 2012/2011 revenue growth
Priceline $28.03bn* 5.3 21%
KAYAK $1.65bn 5.6 31%

Source: The 451 M&A KnowledgeBase, 451 Research estimates. *Calculated as of 11/8/12.

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The campaigning continues, at least on Wall Street

Brenon Daly

Contact: Brenon Daly

The election may be over, but some campaigns are continuing. At least that’s what’s happening on Wall Street, where two would-be buyers are trying to sway the electorate (directors and shareholders) in order to close acquisitions of two Nasdaq-listed tech companies. Whether or not either of these unsolicited efforts actually comes to a vote, well, that remains to be seen.

In the newest case, j2 Global earlier this week put a bear hug on Carbonite, pitching a (nonbinding, preliminary) offer of $10.50 for each share of the consumer-focused backup vendor. (J2 already owns almost 10% of Carbonite, having picked up the stake for about $20m in the open market in recent weeks.) Carbonite, which has traded mostly lower since its August 2011 IPO, rejected j2’s bid.

Meanwhile, Actian is not giving up on its two-month-old effort to land Pervasive Software. Earlier this week, it added 50 cents per share, or about $10m, to its original bid for the data-integration vendor. The $9-per-share offer from the buyout-backed company that used to be known as Ingres values Pervasive at its highest level in more than a decade.

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Talking M&A, once again

Brenon Daly

Contact: Brenon Daly

It’s hard to get a read on the M&A market right now. For instance, many companies are struggling to put up any growth – and yet are still getting rewarded with above-market valuations. Meanwhile, overall M&A spending is currently running about one-quarter below last year, but we just recorded the single largest tech deal in a half-decade.

To get a view on the M&A market – from the actual participants in it – please join us Thursday, November 8 at 1:00pm EST for our semiannual webinar on the M&A Leaders’ Survey, a joint survey from 451 Research and law firm Morrison & Forrester. (451 Research subscribers can also see our full report on the recent survey.) To register for this free webinar, click here.

In the webinar, we’ll cover what’s happening in the market right now as well as the outlook for the next half-year, both in terms of M&A activity and valuations. We’ll also have specifics on where deals are getting hung up. In addition to the broad market overview from 451 Research, Morrison & Foerster will offer insight on key findings about term sheets, escrow and other fundamental parts of M&A agreements. Please join us for the webinar on Thursday at 1:00pm EST by registering here.

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

GFI may face IPO headwinds

Brenon Daly

Contact: Brenon Daly

Undeterred by a chilly reception to similar firms, GFI Software has put in its paperwork for a $100m IPO. The company, which is based in Luxembourg, sells a variety of infrastructure and collaboration services to the SMB market. GFI was originally founded in 1992 as an e-fax software vendor, and has steadily built out its portfolio through internal expansion and a handful of acquisitions.

However, it is still primarily known for its security offerings, with that product line accounting for about 60% of total revenue in 2010. Since then, the company has been rapidly expanding into other areas, most notably collaboration. In its prospectus, GFI said collaboration now generates almost one-third of all revenue.

Still, Wall Street may well put GFI into the bucket of ‘European IT security vendor.’ If that’s the case, it could hurt the company’s debut, because investors haven’t backed IPOs from other infosec firms from across the Atlantic. AVG Technologies, for instance, has never traded above its offer price since coming public in February. And AVAST Software had to pull its IPO paperwork in July.

Additionally, there are some concerns with GFI itself. The company’s growth rate has cooled so far this year, with revenue ticking up just 27% in the first half of 2012 after increasing 46% in 2011. (The falloff in billings growth has been even sharper.) Further, GFI is not profitable and has not been generating as much cash as it had been.

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