What’s a Smarsh to do?

Ben Kolada

Contact: Ben Kolada

Depending on which way the bidding goes for systems management vendor Quest Software, Smarsh’s future could change considerably. The compliance-focused archiving startup announced in February that it sold a majority of its equity to Quest, just three weeks before its newfound parent became the center of an ongoing bidding war. But one side’s plans for Quest post-close may not include Smarsh.

After the closing bell Tuesday, Vector Capital joined Insight Venture Partners and Quest’s management in announcing that they had increased their offer for Quest to $25.75 per share, for a total deal value of about $2.24bn by our calculations. The revised bid tops a competing offer from an unidentified suitor – widely believed to be Dell – that was announced last week.

While all eyes are on Quest at the moment, the continued bidding casts a shadow over who will ultimately own Smarsh. Right now, the company is seen as more of a Quest investment rather than an operating business unit.

If Insight and the rest ultimately win Quest, Smarsh could be considered just another portfolio company for the private equity firms. However, if that unidentified bidder is Dell, and Dell ultimately wins, Smarsh could soon be cast off, since Dell already offers archiving products competitive to Smarsh. In 2008, Dell acquired MessageOne – a direct rival to Smarsh – for a whopping $155m. Dell also has its own archive storage system, the DX platform, based on software OEMed from Caringo. (However, we’d note that neither of these initiatives seems to have gone too far yet.)

Rather than worry about would could happen in the future, Smarsh is keeping itself busy in the present. The company has announced two acquisitions in the past month. In May, Smarsh bought Web content-archiving vendor Perpetually.com and on Tuesday it announced the purchase of compliance-focused website hoster AdvisorSquare, which targets the finance vertical. The deals should ramp up the company’s growth rate for 2012 and 2013. We estimate that Smarsh generated $20m in revenue last year, or about 30% year-over-year top-line growth.

Timeline

Date Event
February 14, 2012 Quest Software acquires 60% stake in Smarsh.
March 9 Insight Venture Partners and Quest management offer to buy Quest for $2bn.
May 16 Smarsh picks up Perpetually.com.
June 14 Unidentified bidder offers approximately $2.22bn for Quest.
June 18 Smarsh acquires AdvisorSquare from Symantec.
June 19 Vector Capital joins Insight and Quest management to buy Quest for approximately $2.24bn.

Source: The 451 M&A KnowledgeBase

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Box eyes a new round at $1bn valuation

Brenon Daly1 Comment

Contact: Brenon Daly

Box is back in the market. Several sources have indicated that the enterprise content management and collaboration startup is currently looking to raise $100m in new funding, on top of the roughly $160m it has already pulled in. Box’s valuation is said to be north of $1bn.

That’s a heady valuation for a company that’s likely to finish this year at about $60m, according to sources. The round (assuming it does get raised) comes at a time when competition is heating up for Box. For instance, Citrix has made a series of acquisitions to piece together an enterprise collaboration and file-sharing platform. (Those small deals came after Citrix was rumored to have missed out on acquiring Box at a price thought to be roughly $600m.)

Likewise, VMware has used small purchases to bolster its Project Octopus while its parent, EMC, recently reached for synchronization startup Syncplicity to expand its collaboration offering. Other tech giants have rolled out their own collaboration platforms through organic development, such as Google’s Drive, Microsoft’s SkyDrive and even Apple’s iCloud. (Additionally, Microsoft is adding much more cloud functionality to its SharePoint product in its next release, due out late this year or early next year.)

Box – along with dozens of other cloud- and drive-themed rival offerings – effectively provides centralized storage as well as a shared file system for all of the documents at an enterprise. As we see it, the seven-year-old company is currently facing two main challenges, and is likely to put at least some of its new funding toward these.

First, since Box is competing as an enterprise software vendor, it needs to hire more sales agents to land enterprise accounts. We understand that the company has added dozens of experienced enterprise sales agents and is looking to bring on dozens more. Second, Box needs to establish itself as a platform on which other software shops can develop additional applications and enhancements. Earlier this year, the company introduced a new API – its first in four years – to draw in more developers.

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Qualcomm scales power management with Summit Micro buy

Contact: Ben Kolada, Thejeswi Venkatesh

Adding to its power management product portfolio, semiconductor giant Qualcomm announced on Monday the acquisition of Summit Microelectronics, a designer of programmable power management and battery-charging semiconductors. The deal is meant to help Qualcomm further target increasing demand for battery management on smart devices.

Neither Qualcomm nor Summit disclosed terms of the transaction, but in March Summit issued a press release claiming that it hit record revenue and profits in 2011, and that fourth-quarter 2011 revenue doubled from the prior-year period. However, that alone shouldn’t impress too much. The company had to raise several rounds of funding throughout its 15-year lifetime to bring its products to market. While most venture-backed companies typically continue to fundraise only through to maybe a fourth, or D, round, Summit’s messy fundraising history continued at least through to an H round.

The acquisition is yet another step in feeding the demand for managing power on an ever-evolving group of power-intensive devices. As consumer electronics continue to advance, particularly in regard to HPC capabilities and high-resolution screens, battery management is becoming increasingly critical. In announcing the deal, Qualcomm points directly at this demand, noting that Summit’s chips are found in a variety of mobile phones, tablets and e-readers.

Traditional advertising firms busy buyers of online agencies

Contact: Brian Satterfield

In order to spread their clients’ messages to as many people as possible in every corner of the globe, old-line advertising firms are increasingly bolstering their online presence by acquiring purely digital agencies.

In the past three years, traditional companies have been the buyers in 86, or almost 20%, of the nearly 450 transactions we’ve recorded in the Web marketing and design sectors. As one might expect, several of the world’s largest publicly listed mega-agencies have been especially busy with buying their online counterparts.

In mid-May, Paris-based Publicis Groupe inked its fourth deal of the year when it reached into China for Longtuo, a Web marketing and design services provider with 200 employees. Publicis Groupe is certainly a steady user of M&A to build its international client base, having purchased 23 Web agencies in almost a dozen different countries since its first buy in 2006. In fact, Publicis Groupe had its busiest M&A year on record in 2011, with seven announced acquisitions, all of them in the Web marketing industry.

Nasdaq-listed WPP Group and its wholly owned subsidiaries have taken a similar approach to Web marketing and design deals, but on a slightly larger scale. Yesterday, WPP subsidiary JWT picked up India-based Hungama Digital Services, a Web marketing and design firm with a headcount of 110. Since 2005, the entities have combined to buy a total of 40 companies in nearly 20 countries. Up until 2008, WPP was almost exclusively focused on strengthening its Web design skills, but has since devoted most of its M&A firepower to acquiring companies primarily devoted to online marketing. Like Publicis Groupe, WPP is off to a busy buying start in 2012, having already made eight different purchases in the sectors via its primary business and six distinct subsidiaries.

One key way in which the two competitors have diverged is how often they are willing to spend big bucks. Publicis Groupe has made three $500m-plus plays, its largest coming in 2006, when it dropped $1.3bn on then-Nasdaq-listed Web design agency Digitas. Meanwhile, WPP has only publicly disclosed one deal value, its $649m purchase of Web developer 24/7 Real Media in 2007.

Cypress Semiconductor returns to M&A

Contact: Thejeswi Venkatesh

After staying out of the M&A market for four years, Cypress Semiconductor stepped back in earlier this week with an $87.6m unsolicited cash bid for ferroelectric RAM designer Ramtron International. However, this isn’t the first time that Cypress has tried to acquire its smaller rival. Cypress revealed that it tried to buy Ramtron’s equity last year for approximately the same amount, an offer the company flatly declined.

Cypress’ bear hug comes at a time when Ramtron has struggled to increase its business under existing management. Last year, the company generated sales of $66m, virtually unchanged from 2008. For its part, Cypress has seen its revenue increase at a healthy rate, going from $765m in 2008 to $995m in 2011. Cypress, which has asked Ramtron to respond to its offer by next week, has engaged Greenhill & Co as financial adviser while Needham & Co will advise Ramtron.

On its return to M&A, Cypress is focusing on a business it knows well: memory chips. The company has a blemished history in trying to expand its product offering through inorganic means. For instance, Cypress divested SMal Camera Technologies in 2007 for $11.4m, approximately one-quarter the $42.5m it paid for the company just two years earlier. Similarly, Cypress acquired FillFactory for $100m in the summer of 2004 but sold the division to ON Semiconductor in early 2011 for a mere $31.4m.

Select Cypress M&A

Date announced Target Deal value Focus
August 1, 2008 Simtek $46m High-speed memory chips
February 14, 2005 SMaL Camera Technologies $42.5m CMOS image sensor ICs
June 22, 2004 FillFactory $100m CMOS image sensors
October 20, 2003 Cascade Semiconductor $9.4m Memory semiconductor design
April 10, 2003 Micron (SRAM unit) Not disclosed Synchronous SRAM
January 08, 2002 Silicon Packets $24.5m 10Gbps framers

Source: The 451 M&A KnowledgeBase

Qualys eyes an IPO

Brenon Daly1 Comment

Contact: Brenon Daly

Late last year and even into this year, there were rumblings that Qualys may get taken out before it could get out. Rumors were flying that the vulnerability management vendor had attracted M&A interest from two well-heeled shoppers that have both done large information security acquisitions: Check Point Software and Dell.

A pairing with either of the rumored suitors would have made a great deal of sense, adding threat scanning and analysis capabilities to the would-be buyer’s existing portfolio. Check Point needs vulnerability management capabilities as a way to add more information about what happens inside the firewall. Meanwhile, Dell, through its SecureWorks acquisition, not only integrates Qualys’ reports, but also offers Qualys as a managed service.

According to our understanding, interest from both would-be suitors diminished as Qualys held out for a price approaching $1bn. (That would represent a valuation of about 10 times this year’s bookings for Qualys.) So Qualys is now tracking to an IPO, where it is probably likely to debut at a $600-700m valuation but could well grow into a billion-dollar valuation on its own. (See our full report on the Qualys IPO.)

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Spurred by JOBS Act, iWatt puts in its paperwork

Contact: Thejeswi Venkatesh

Taking advantage of the newly enacted JOBS Act, iWatt recently filed its IPO paperwork in an effort to raise $75m. The power management semiconductor designer has been around since 2000 and has raised more than $50m in venture funding over five rounds. For its next funding, it’s looking to be among the first wave of companies to make it to the public market under the new federal legislation, which lowers the disclosure requirements, among other changes, for IPO candidates. Barclays Capital and Deutsche Bank Securities are co-leading the IPO.

The company has grown at a healthy clip recently, with revenue nearly tripling from $18m in fiscal 2009 to $57m in the 12 months ending March 2012. However, that may not be enough to ensure a warm reception from investors. The concern? Competition. More than 80% of iWatt’s revenue comes from the highly fragmented AC/DC conversion market, where it competes with bigger players such as Power Integrations and Fairchild Semiconductor. The company, which counts Philips and Apple among its customers, says its product has better form factors and lower cost compared to its rivals.

Its chief rival, Power Integrations, currently garners an enterprise value-to-revenue multiple of just over three in the public markets. Slapping the same multiple on iWatt means that the company will debut with a meager market cap of $175m. (Of course, iWatt may well enjoy a premium over its main rival because of its growth rate. Power Integrations flatlined last year and is projected to only grow about 10% this year, while the much-smaller iWatt has bumped up sales more than 60% in each of the past two years.) On the other hand, Wall Street – particularly the big institutional investors – hasn’t shown much demand for any equities lately, much less a new offering from a tiny, unproven startup in a hotly competitive market.

Will hosting bankers follow the deal flow?

Ben Kolada

Contact: Ben Kolada

Acquisitions in the hosting and colocation sector, which dominated headlines in the first half of last year, have flatlined. Gone are the days of multiple nine- and 10-figure deals being done by telcos and buyout shops. PEER 1 Hosting’s NetBenefit acquisition, announced Wednesday, was welcome news for M&A advisers serving the hosting industry (particularly for Oakley Capital Corporate Finance, which banked NetBenefit), but as deal volume in the industry slows, some bankers are making the move to the SaaS sector.

Although valuations remain strong (PEER 1’s NetBenefit buy was done for 10 times EBITDA), deal sizes have shrunk. The median deal size so far this year is $34m, compared with about $50m in the year-ago period. Further, deal volume has flatlined. Annualizing year-to-date deal flow would mean that annual volume has plateaued from its peak in 2010. Volume may ultimately rise as private equity firms that announced hosting plays in the past few years look to exit those investments, and as US firms look overseas for deals. But investment bankers serving this industry aren’t content to wait.

While hosting bankers aren’t yet giving up on their core industry, some are already transitioning to targeting the SaaS sector. For example, one of the hosting industry’s front-running investment banks, DH Capital, recently partnered with SaaS Capital, a specialized commercial lender serving the SaaS sector. They recently worked together with existing investors to secure $12m in subordinated debt financing for SaaS security firm Alert Logic.

More hosting-focused investment banks may look to make this move as well, since the leap from hosting to SaaS banking is shorter than many would think. Hosting and SaaS businesses have similar operating models, such as recurring revenue and server-centric, hosted products. One more reason for the transition: the number of SaaS transactions is twice that of hosting acquisitions.

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Renewed rumors have BMC reaching for AirWatch in MDM play

Brenon Daly

Contact: Brenon Daly

The on-again, off-again rumors surrounding BMC and AirWatch are on again. Early word of the talks surfaced about a half-year ago, but we understand that a number of events may have interrupted discussions between the IT management giant and the mobile device management (MDM) startup.

For starters, BMC printed two transactions in January, including the purchase of Numara Software, a $300m acquisition that was the company’s largest deal in nearly four years. Additionally, Numara brought some rudimentary MDM capabilities from a tiny startup that it had acquired a couple of months before selling to BMC. Our understanding is that BMC is looking for more robust MDM technology than what it picked up with Numara, as well as its own purchase of tiny Aeroprise.

On the other side, valuations of MDM vendors have been skyrocketing. It was recently reported, for instance, that rival MobileIron raised its latest round at a valuation in the half-billion-dollar neighborhood. There was no word on what AirWatch would be going for.

However, any high-multiple acquisition could pose challenges – at least in terms of perception – for BMC, which has been under fire on Wall Street recently for its relatively paltry valuation. Last week, hedge fund Elliott Management bashed what it called ‘poor management execution’ at BMC, and renewed its call for a sale of the company. Elliott noted that BMC stock has underperformed both its rivals and the broader market recently.

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Google takes another swing at Office

Brenon Daly

Contact: Brenon Daly

Google has reached for the popular maker of mobile software suite Quickoffice, the fourth notable acquisition the company has made in its effort to take on Microsoft Office. Each of the purchases has given Google specific pieces of technology that have helped draw users away from Office, which stands as the dominant desktop productivity suite and has generated tens of billions of dollars of sales for Microsoft over the past two decades.

Looking to siphon off some of those incredibly high-margin sales, Google has scooped up startups offering online word processing (Upstartle with its Writely program), spreadsheet programs (iRows), as well as collaboration and sharing of Office documents (DocVerse). As it built on those deals over the past six years, Google has always pitched its offering – first in Google Docs, then in Google Apps and now in Google Drive – as a Web-based alternative to the largely desktop-based Office franchise. (Of course, Microsoft also offers a hosted, or cloud, version of its popular suite in the form of Office 365.)

With Quickoffice, Google is shoring up the technology around a productivity suite for the post-PC era, as Quickoffice is installed on more than 400 million devices. In addition to the broad user base, Google also gets some much-needed technology that should help iron out some of the wrinkles that can pop up when converting Microsoft Office documents to Google formats. Additionally, Quickoffice can run Office apps on the iPad, while Microsoft has yet to release an official version of Office for the rival tablet. (It is rumored to be working on one, however.)

While terms of the acquisition weren’t released, we would note that Quickoffice has a rather compelling business model, with an extremely low cost of customer acquisition. It gets paid by licensing its software suite to device makers and then generates business on top of that by upselling customers to subscription offerings. (We understand that ‘aftermarket’ business was running at about $5m a quarter recently.) Not bad for a business that was founded in 1996 inside the recently disappeared Palm Inc. For the record, Google has now acquired pieces of two wireless pioneers: Palm and Motorola Mobility.

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