PLATO sets sail for Archipelago

Contact: Thejeswi Venkatesh

Last fall, PLATO Learning failed in its bid to acquire Renaissance Learning even though it was ready to pay more than its competing bidder. (The reason: Renaissance’s majority shareholders felt employee interests would be better protected by selling to Permira Funds.) On Monday, the Thoma Bravo-backed online education company announced its biggest purchase since then, the acquisition of Archipelago Learning for $292m in cash. PLATO is unlikely to face similar problems in buying Archipelago, given that it has already received the support of fellow buyout firm Providence Equity Partners, which owns 46% of the target.

The transaction values Archipelago at 4.1 times sales, a handsome valuation compared with the 3.3x multiple that Renaissance received in its buyout. More interestingly, that’s almost twice the 2.1x multiple that PLATO itself garnered in its 2010 buyout by Thoma Bravo. In our view, however, Archipelago’s growth justifies the rich valuation. The company has grown from $18m in 2007 to $73m in 2011, an impressive compound annual growth rate (CAGR) of 42%, compared with the paltry 6% CAGR that Renaissance put up in the three years prior to its acquisition. Barclays Capital acted as financial adviser to Archipelago.

Security sector ripe for M&A

Ben Kolada

Contact: Ben Kolada

Thousands of security executives, bankers and investors descended on San Francisco last week for the annual RSA and America’s Growth Capital West Coast Information Security & Emerging Growth conferences. (Many of them also joined us at our executive-only breakfast last week.) Nearly 700 companies exhibited at the two conferences, and after speaking with many of these companies we walked away convinced that the number of M&A opportunities in enterprise security seem as large as ever.

Many of these companies saw explosive growth in 2011, and the forecasts are equally bullish for this year. One such company is network security analytics startup Solera Networks. Following RSA last year, we predicted that NetWitness would soon sell – we were right. This year, we expect NetWitness rival Solera to get some acquisition attention. We hear that the company generated just under $10m in sales last year, but is growing quickly. Although Solera’s current revenue is much smaller than what NetWitness generated in the year before its sale, we wouldn’t be surprised if its investors expect a comparable valuation. Including a recent $20m series D funding round secured in January, Solera’s investors have collectively put $51m into the company. NetWitness, on the other hand, had taken in just about $20m before its sale.

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In leap year, tech M&A falls

Ben Kolada

Contact: Ben Kolada

The extra business day in February did little to prop up tech M&A volume, as the number of deals announced last month dropped to one of the lowest levels seen in the past year. The 257 tech acquisitions we recorded in February was one-third less than January’s total and 17% less than the trailing 12-month average. Although it’s impossible to predict the volume and value of tech acquisitions, one explanation is the somewhat seasonality of the business. In eight of the past 10 years, we saw a rise in sequential January deal volume followed by a dip in February volume.

Even total spending came in below the annual average. While the total amount spent on tech acquisitions in February ($10bn) was more than double what we recorded in January, it was still about half the average of the trailing 12 months. However, February wasn’t a complete wash. On a positive note, many of the largest technology companies were active in M&A last month: Akamai picked up small front-end optimization startup Blaze Software, Apple bought Chomp, Cisco acquired Lightwire, its largest deal since Starent Networks in 2009, F5 Networks reached for Traffix Systems and Quest Software scooped up BlueFolder. Further, we recorded four billion-dollar transactions in February, compared with none the previous month.

Still, the sharp downturn in volume marks a stark contrast to what’s been happening in the equity markets. Last month, we wrote that behavior in the stock markets is one of the main influencers on big-ticket M&A, and that big-ticket deals set the tone for overall dealmaking. But while the Nasdaq composite index continued its steady rise, reaching its highest point since the stock market crashed in the early 2000s, tech M&A volume in February moved in the opposite direction.

For Vocus, a costly step into a new market

Brenon Daly

Contact: Brenon Daly

Even though Vocus got pummeled on Wall Street Wednesday after it announced the largest acquisition in the company’s history, the rationale for the purchase of iContact is fairly sound. (As it announced its Q4 results, Vocus also said it would basically be cleaning out its treasury to cover the iContact purchase. The deal helped to push shares of the PR management software vendor down 40% to their lowest level since early 2009.)

But adding iContact to the Vocus portfolio at least gets the company into the faster-growing market of email marketing. Consider the relative growth rates on the two sides of the deal: Vocus increased revenue 19% to $115m in 2011, while iContact’s sales grew 25%. Granted, iContact is growing off a smaller base, but a quick look around the rest of the industry also shows that email marketing is outstripping Vocus’ core business.

For instance, Emailvision, which is only slightly smaller than Vocus, grew 55% to $90m in sales last year. (The European email marketing vendor went private in mid-2010.) Meanwhile, ExactTarget and Constant Contact outgrew Vocus in 2011, even though they are nearly twice as big. In fact, ExactTarget posted a stunning 54% growth rate last year, which pushed sales to $207m. We understand that snappy rate is likely to come up next week as ExactTarget gets ready to hit the public market. ExactTarget filed its IPO paperwork only late last November.

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

A harsh focus on Vocus

Brenon Daly

Contact:  Brenon Daly

Investors erased more than one-third of the market value of Vocus on Wednesday after the on-demand PR management software provider announced the largest deal in its history. Vocus said Tuesday evening that it will hand over $179m in cash and stock for iContact, a transaction that will add email capabilities to Vocus’ marketing suite. The purchase of iContact, which effectively cleans out the treasury at Vocus, is more than three times larger than all of the company’s previous acquisitions combined.

One way to look at the deal: Vocus effectively paid twice for the transaction. In addition to the $179m in consideration it will hand over to iContact’s backers, Vocus also gave up another $170m on the Nasdaq. The stock, which has ranged from the low teens to the low 30s over the past year, changed hands at about $14 on Wednesday.

Deep-pocketed acquirers could bid up capacity-planning valuations

Ben Kolada

Contact: Ben Kolada

In a recent report, my colleague Rachel Chalmers discusses opportunities for some of the largest IT firms to fill holes in infrastructure management capacity planning through M&A. However, if bidding increases for the remaining startups in this sector, valuations could rise above the current estimated $100m record set by VMware’s Integrien acquisition.

Capacity planning is similar to performance monitoring. However, monitoring can only tell you what happened in the past, or at best, what’s happening now. Capacity planning requires you to have some idea of what will happen in the future. We’ve seen some dealmaking in this sector already, with each of the primary precedent transactions being valued well above the market average. However, many of the remaining potential acquirers have very deep pockets and intense bidding by this group for the decreasing pool of available targets could elevate valuations. Chalmers’ report cites Oracle, HP, IBM and Microsoft as still missing some capacity-planning capabilities – these four firms have a combined $100bn in cash and cash equivalents in their war chests. Click here for the full report, which includes current market valuations and details some of the most likely acquisition candidates.

Shakeout looming in MDM sector?

Ben Kolada

Contact: Ben Kolada

The crowded mobile device management (MDM) sector is likely to see a shakeout in the near future. By one account, there are already more than 80 firms vying for space in the growing MDM market. As the sector’s more notable vendors increasingly advance ahead of the competition, we expect laggard firms will either shutter their doors or be picked off one by one in small bolt-on technology acquisitions. But as the sector narrows, the future may shine brighter for firms that are making names for themselves.

As the smartphone and tablet take more overall computing share from laptops and desktops, the need for MDM will accelerate. Increasing adoption of tablets, in particular, is driving MDM demand. According to a report by ChangeWave Research, the survey arm of 451 Research, 23% of respondents said they plan on purchasing tablets for their employees in the first quarter of 2012, up from just 5% in the fourth quarter of 2010.

As the largest acquirers continue to consolidate the software stack, we expect to see them move into the MDM market. IBM has already announced a couple such acquisitions, picking up BigFix in July 2010 for an estimated $400m and Worklight in January for an estimated $70m. Dell and BMC are also expected to be eyeing this market, and would likely look at the frontrunners – firms like AirWatch, BoxTone, Good Technology, MobileIron and Zenprise, to name a few – as their top acquisition choices. But these firms aren’t likely to be had for cheap. We’ve already heard rumors that one of them is looking for a $400m-plus exit, and that another was previously in the sights of a $250m deal. Meanwhile, valuations will likely rise as these vendors continue growing. In 2011, Zenprise tripled its headcount, while MobileIron doubled its employee base. AirWatch’s headcount hit 400 last year, and it expects to double that this year.

Dell uses M&A (again) to go it alone in storage

Brenon Daly

Contact: Brenon Daly

Dell’s reach for AppAssure Software continues the tech giant’s trend of using M&A to reduce its reliance on outside vendors for its $2bn storage business. Most notably, the purchase of Compellent two years ago – following its unsuccessful effort to land 3PAR – reduced Dell’s long-standing partnership with storage powerhouse EMC. In a similar vein, Dell’s acquisition Friday morning of AppAssure is likely to trim its business with data-protection specialist CommVault. (Dell is CommVault’s largest OEM partner, accounting for roughly 20% of that company’s total revenue.)

Terms weren’t revealed but we would expect that Dell paid more than $100m for AppAssure. (Whatever the amount, the deal almost certainly represents a sterling return for Bain Capital, which is AppAssure’s sole backer, having put just $6m into the five-year-old startup.) According to our understanding, AppAssure generated about $20m in 2011, triple the level from the previous year.

For comparison, CommVault stock currently trades near its all-time high. CommVault’s steady run has put the company’s valuation at an eye-popping $2.3bn, or nearly 6 times the expected $400m in revenue for its current fiscal year, which wraps up next month. Word of Dell’s purchase of rival AppAssure put some pressure on CommVault’s high-flying shares. On an otherwise bull-market day on Wall Street, CommVault stock dipped 4% on trading that was more than twice as heavy as average by early Friday afternoon. We’ll have a full report on this deal in tonight’s Daily 451.

Tangoe finds a European dance partner

Brenon Daly

Contact: Brenon Daly

Looking to increase its international business, Tangoe recently reached across the Atlantic for UK-based ttMobiles. The geographic expansion effort is a key initiative for Tangoe, which opened its European headquarters in Amsterdam less than a year ago. The company currently gets virtually all of its revenue from US-based customers, although a representative for Tangoe noted Wednesday that slightly more than one-quarter of the $16.8bn that flowed over its platform in the fourth quarter came internationally.

The purchase of ttMobiles is the third acquisition Tangoe has made since its IPO last summer. (And that’s on top of the five deals it inked as a private company.) Like most of its other acquisitions, the latest purchase by the communications lifecycle management vendor is a small one: Tangoe will hand over just $9m for ttMobiles. At the end of 2011, Tangoe was basically running at breakeven and had $43m in its treasury, mostly thanks to the IPO.

Tangoe expects ttMobiles to contribute $4.5m in revenue this year, meaning it is valued at basically 2 times projected sales. (For its part, Tangoe trades at more than 4x projected sales.) We understand that the company will continue to pursue deals that offer geographic expansion, as well as look to consolidate rivals to bulk up the number of customers it serves

A ‘logic’-al pairing as Alert Logic reaches for Amorlogic

Brenon Daly

Contact: Brenon Daly, Wendy Nather

In its first-ever acquisition, Alert Logic said Wednesday that it will hand over an undisclosed amount of cash and stock for Armorlogic. The purchase will bring application-layer security to the Houston-based MSSP. Up to now, Alert Logic has built its business on just two products: Threat Manager (a combination of vulnerability assessment, intrusion protection and other technologies) along with Log Manager.

That said, Alert Logic has built a tidy little business with its existing portfolio, finishing 2011 with sales of $21m, up slightly more than 40% over the previous year. It has accumulated more than 1,500 customers since setting up shop in 2002. Alert Logic indicated that it will cover part of the purchase by drawing on the $12.6m it raised in its series E funding round last April.

Although Armorlogic is small (only three employees and 70 customers), its Web application firewall (WAF) offering is selling into a hot market. As perhaps the cleanest proxy for the WAF sector, consider the princely valuation garnered by Imperva. Since its IPO last November, Imperva has steadily risen to a current market cap of about $750m. That’s almost 10 times the $78m in revenue it generated in 2011 and roughly seven times the revenue it’s likely to generate this year.