LifeLock takes its lumps in IPO

Brenon Daly

Contact: Brenon Daly

The post-IPO slide of LifeLock highlights yet another case of overinflated private market valuations. The identity theft prevention vendor has had a tough run since its debut on the NYSE on Wednesday. LifeLock priced at $9 per share, which was below its expected range, and has never traded above that level in the aftermarket. In mid-Thursday afternoon trading, shares were changing hands at about $8.10.

That decline has brought LifeLock shares to nearly the same level they were when the company sold equity more than two years ago. In May 2010, Industry Ventures paid $7.88 per preferred share of LifeLock in a series E round. That’s only a 3% discount to LifeLock’s current market price.

Obviously, both valuations are just ‘moment in time’ prices. And in this particular moment, consumer names in nearly all markets are out of favor on Wall Street. Recall that consumer Internet security provider AVAST Software pulled its IPO paperwork in late July after not being able to get a valuation it wanted.

As we look back on recent IPOs in the security market, we are reminded that where a company starts out isn’t necessarily where it ends up. For instance, enterprise security vendors Sourcefire and ArcSight both had underwhelming IPOs, trading underwater before going on a tear on Wall Street. In the end, ArcSight got taken off the board in September 2010 at four times its offering price. Meanwhile, Sourcefire is currently trading at three times the level at which it first sold shares to the public in early 2007, compared with a 30% return over that period for the Nasdaq.

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

After failed sale, T-Mobile returns as buyer

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

After failing to sell its T-Mobile USA subsidiary last year to AT&T for $39bn, Deutsche Telekom has pivoted from trying to exit the T-Mobile business to pushing it even deeper into the US market. The company announced on Wednesday that T-Mobile USA has reached a merger agreement with low-cost competitor MetroPCS in an intricately structured deal.

MetroPCS’s shareholders will receive $1.5bn in cash and 26% of the combined company. While that looks straightforward at first glance, the deal is structured as a reverse acquisition.

MetroPCS will pay its shareholders $1.5bn in cash (it ended the second quarter with $2.3bn in its treasury) and halve the number of shares outstanding by performing a 1-2 reverse stock split. MetroPCS will then acquire all of T-Mobile’s stock in exchange for a 74% stake in the combined company, leaving MetroPCS’s shareholders with a 26% holding. Though MetroPCS is technically the surviving entity, it will assume the T-Mobile name and will continue to trade publicly in the US.

The combined company is projecting 2012 pro forma combined revenue of just shy of $25bn. For comparison, the US’s third-largest cellular provider, Sprint, is expected to put up about $35bn in sales this year.

A bit of irony here is that analysts expected that the previously planned AT&T-T-Mobile merger would reduce competition and increase prices. However, in announcing their merger, T-Mobile and MetroPCS repeatedly claimed that the combined company would be a ‘value-focused’ provider – a pretty way of saying that it would be a low-cost carrier.

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

A double-dip for tech M&A

Brenon Daly

Contact: Brenon Daly

Three-quarters of the way through 2012, tech M&A activity is looking a lot like recession-plagued 2009. Spending on deals around the globe so far this year has slid to just $115bn, a decline of more than one-third compared with the same period last year and 20% lower than Q1-Q3 2010. The dealmaking slump comes amid a solid bull market for equities, with the Nasdaq up some 20% so far this year.

Looking ahead, the rate for the first three quarters puts the full-year 2012 on track for about $150bn in total M&A spending. Assuming that pace holds, that would roughly match the level of 2009 and would represent less than half the amount spent on tech acquisitions in each year from 2005-08. (We’ll have a full report on Q3 M&A activity in tomorrow’s Daily 451.)

The disconnect between the M&A and stock markets, which historically have been tightly correlated, suggests that activity in one of the markets doesn’t necessarily reflect fundamentals. If we had to guess which one is less rooted in reality, we would probably start with the Nasdaq, which has been trading above 3,000 since early August. The tech-heavy index hasn’t been at that rarified level in 12 years.

And yet, the run has come even as corporate earnings rates have slowed, the European debt picture remains unresolved and the US economy faces huge uncertainty around both elections and the potential expiration of measures that have stimulated the economy in recent years (the so-called ‘fiscal cliff’).

Of all the concerns that are keeping corporate buyers out of the market right now, we suspect that the lackluster earnings outlook is the main reason. We expect to hear more about that in two weeks or so, when the third-quarter earnings season kicks off in earnest.

But as one indication of how the reports might go, consider that a recent survey by ChangeWave Research, a service of 451 Research, of more than 2,600 corporate employees indicated that one of every three (33%) predicted that Q3 sales at their company would come in below plan, compared with just one in five (19%) who projected that their company would top expectations. The percentage seeing sales at their companies falling short has risen steadily throughout 2012. On the other side, the percentage seeing stronger-than-expected sales in Q3 is at its lowest level since the summer of 2009.

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

A September slump for tech M&A

Brenon Daly

Contact: Brenon Daly

Summer is always a seasonally slow time for M&A. But this year, it’s like no one was even at their desks to do deals at all. With September wrapping up, spending on tech transactions around the globe is coming in at its second-lowest monthly total of 2012. Even compared with September 2011, it was quiet this month: Deal value dropped almost 40%, year-on-year, to just $5.8bn.

To put that paltry deal total into perspective, consider that earlier this year, Cisco dropped almost that much on a single transaction, handing over $5bn for British set-top box software provider NDS. Indeed, we tallied only one acquisition valued at more than $1bn in September, down from an average of about three 10-digit deals in each month so far in 2012. Altogether, the slump in September activity means that M&A spending has now dropped in seven of the nine months this year.

2012 monthly activity

Month Deal volume Deal value % change in spending vs. same month, 2011
January 340 $4.1bn Down 65%
February 266 $10.4bn Up 16%
March 292 $16.8bn Down 30%
April 277 $14.1bn Down 47%
May 310 $15.6bn Down 47%
June 291 $13.3bn Down 20%
July 336 $21.1bn Up 52%
August 277 $10.3bn Down 74%
September 266 $5.8bn Down 38%

Source: The 451 M&A KnowledgeBase

Stratus snaps up rival Marathon in opportunistic buy

Contact: John Abbott, Thejeswi Venkatesh

The writing was on the wall when Marathon Technologies sold off its patent portfolio to Citrix in September 2011. Finally, the high availability software company has been acquired by veteran fault-tolerant server vendor Stratus Technologies.

Terms of the transaction were not disclosed. Since its relaunch in January 2004 (when the company emerged from receivership), Marathon has raised roughly $34m from Atlas Venture, Longworth Venture Partners, Presidio Ventures and Sierra Ventures, including debt financing of $7m.

Stratus had no real need for Marathon’s technology, having developed its own high availability software four years ago. However, Marathon’s technology was more mature and had more customers. Stratus will gain an expanded customer base and potential buyers of its fault-tolerant hardware range, which was refreshed earlier this month with Intel E5 processors. Having partnered with VMware, Stratus now gets a chance to develop a partnership with Citrix, with which Marathon had a close relationship.

The focus of both high availability and disaster recovery has shifted to the virtualization layer – first VMware with Site Recovery Manager, and then Citrix and Red Hat, which are both developing native capabilities for their hypervisors. There are also younger independent replication suppliers such as InMage and Zerto coming out with hypervisor-based replication software. More recently, there’s been a further shift toward cloud infrastructure software stacks. We’ll have a full report on Stratus’ reach for Marathon in our next Daily 451.

Qualys looks to transition from a product to a platform

Brenon Daly

Contact: Brenon Daly

As it gets set to hit the public market later this week, the question for Qualys is whether the on-demand security vendor can make the transition from a product to a platform. The 13-year-old company is known primarily for its vulnerability management offering, which will account for the vast majority of the $100m or so of bookings it will generate this year.

But Qualys is acutely aware of the fact that it won’t get a premium valuation if it doesn’t expand beyond that. The company has already helped its own cause with the early steps it has made in expanding its portfolio. It recently noted that revenue growth is outpacing customer growth. (In the first half of this year it bumped up its overall top line by 22%, about 5 percentage points higher than its growth rate in 2011.)

Qualys has a number of advantages as it attempts to pull off the transition. For starters, the company sells its service entirely on a subscription basis, which makes it easier – both commercially and in terms of technology architecture – to add additional security offerings. Besides its vulnerability management product, Qualys already offers five other products around compliance, Web application security and other areas.

That approach has drawn in nearly 6,000 customers for the company, providing a broad base to sell new products into. Yet, as Qualys highlighted during its roadshow, the company has only begun its cross-selling efforts. Currently, only one out of five customers uses more than one Qualys product.

The underwriters for Qualys, led by J.P. Morgan Securities and Credit Suisse Securities, are likely to be conservative in their initial pricing of what would be the fourth information security vendor to go public in the past year. As it stands, the range is set at $11-13 per share. We expect Qualys to actually price above that on Thursday and then likely move higher in the aftermarket, as the previous trio of enterprise security offerings have done. Even with the expected bump, Qualys will likely only create about $500m of market value. However, if the company can emerge as a true platform, that will be just the starting point.

Hitachi Data Systems reaches for Cofio

Brenon Daly

Contact: Dave Simpson

In a surprise move, Hitachi Data Systems has announced that it is acquiring Cofio Software, which specializes in data protection. In our last report on Cofio, we noted that the small startup differentiates itself from most other data-protection vendors in that it combines under a single code base a variety of functions, including backup and recovery, multitiered (source and target) data de-duplication, real-time replication, virtual and physical server backup, remote-office backup, bare-metal disaster recovery and continuous data protection.

Financial terms of the transaction were not disclosed. The target had received about $4m in funding, and we estimate that it had roughly 140 customers.

Prior to reaching for Cofio, HDS had relied primarily on a reseller partnership with CommVault for its data-protection strategy. As such, the HDS-Cofio pairing is similar to Dell’s pickup of data-protection specialist AppAssure Software earlier this year. (Dell also had – and still does – a reseller relationship with CommVault.)

We see HDS’s acquisition of a data-protection player as a move to attain its own IP at a time when backup and recovery are becoming increasingly important as IT organizations virtualize more and more mission-critical applications. According to 451 Research, the market for data protection and high availability for virtualized environments will grow at a 43% CAGR through 2014.

HDS’s Cofio buy, along with Dell’s acquisitions of AppAssure and, soon, Quest Software, leaves only one major storage vendor without its own IP in data protection: NetApp.

Comments requested

Ben Kolada

Contact: Ben Kolada

Comment aggregation and social engagement startup Livefyre has been busy lately. The company recently moved into a larger office and just launched a new product. Meanwhile, its 29-year-old CEO is hitting the fundraising circuit, hoping to secure additional VC financing to propel its growth.

Livefyre was founded by Jordan Kretchmer in 2009 with the mission of aggregating comments from social networking outlets on publishers’ websites. However, the startup has expanded beyond that. Its StreamHub product, which recently made its commercial debut, provides a real-time blogging and chatting platform to publishers. It aggregates comments, videos and images from social networks using customizable widgets. The company is also making a push to expand beyond its publishing customer base toward brands.

Livefyre is serving a niche of the greater digital marketing industry, and its products still have room for improvement, but publishers and brands are already finding value in what it offers. The vendor’s partners include WordPress and Google. It’s projecting $10m in bookings for this year.

To aid future growth, Livefyre is taking its message to venture investors. To date, it has raised $5.3m in venture capital from Greycroft Partners, Cue Ball, Hillsven Capital, Zelkova Ventures and ff Venture Capital. Livefyre wouldn’t comment on the amount it’s hoping to secure in its C round, but by this stage companies typically look for $5-10m. The financing will be used for hiring, product development and marketing and sales. Livefyre expects to close the round by year-end.

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

A solid IPO for Trulia

Contact: Thejeswi Venkatesh

Amid the consumer tech IPO lull following the Facebook offering, real estate website Trulia enjoyed a solid opening on its first day as a public company. First, it priced a dollar above its indicated range, at $17 per share. Then, encouraged by its robust growth, investors bid up the stock further to $23 per share.

Trulia provides an online marketplace, delivered through the Web and mobile applications, that lets consumers and real estate professional connect with each other. Unlike traditional real estate websites like REALTOR.com, Trulia gives users detailed information on crime, commute and schools.

On the top line, the company has put up astonishing growth. In the 12 months ended in June, Trulia generated $51m in revenue, up from $38m in calendar year 2011. It makes money from a combination of advertising on its website and a freemium model for real estate professionals, with the latter accounting for more than two-thirds of its revenue.

The offering valued Trulia’s equity at $448m, or 8.8 times trailing sales, and the company currently garners a market cap of roughly $600m, or 12x trailing sales. That’s good value creation for Trulia, which has raised roughly $33m in venture capital from Accel Partners, Fayez Sarofim and Sequoia Capital. In addition to high growth, public investors were also surely encouraged by the broader housing recovery in recent months.

That’s not to say that Trulia couldn’t have done better. In recent weeks, its primary rival Zillow has traded close to 14x sales. In part, that can be explained by Zillow’s bigger size and outpaced growth. In the 12 months ended in June, Zillow doubled its sales, reaching $90m. But last week, Zillow filed a lawsuit against Trulia, alleging that the company infringed upon a home valuation patent. Trulia denies the allegations. While the eventual outcome is not yet known, investors likely factored that into the stock price.

Persistence pays off for Ramtron

Contact: Thejeswi Venkatesh

Chipmaker Cypress Semiconductor has finally snagged Ramtron. After more than a year of chasing its smaller rival, Cypress has announced a definitive agreement to acquire Ramtron for $110m. It is Cypress’ first acquisition in four years, and its largest ever. The deal comes after Ramtron’s board publicly rejected two previous increased offers.

While Ramtron’s shareholders were surely at the edge of their seats while the saga played out, they will be happy with the outcome. The final offer, which values Ramtron at 1.6 times trailing sales, is a handsome 25% more than Cypress’ initial public bid of $87.6m. And it was about 70% higher than where Ramtron shares were trading on their own before Cypress’ acquisition offer.

The outcome also reminds us of fellow chip designer Microsemi’s purchase of Zarlink in September 2011. After six months of courting and two rejections, Microsemi finally bought Zarlink for $525m. That represented a 15% premium over the initial bid.