Inorganic Growth – Page 135 – The 451 Take on Tech M&A

What to do with webOS?

November 21, 2011 Brenon Daly

Investors can only hope that Hewlett-Packard doesn’t announce any ‘bold, transformative steps’ this afternoon like it did the last time it discussed its quarterly financial results. Recall that it was just mid-August when the tech giant unveiled a dramatic overhaul of its business: looking to jettison its $40bn PC division while simultaneously closing the largest acquisition in the software industry in seven years. And, to make matters worse, HP announced those moves in the same breath as it said it would fall short of its earnings projections for the third straight quarter.

Given that the makeover had the dubious distinction of being both overdue and ill-conceived, it’s probably not surprising that it was doomed. (As, it turned out, was the chief architect of those plans, Leo Apotheker.) The company had shed as much as $20bn in market value at one point because of the strategic stumbles, although it is ‘only’ down about half that amount now.

Part of the recent recovery has come from the fact that HP has stabilized, at least in some regards. There was no lingering, interminable Yahoo-style search for a replacement when Apotheker got dumped; instead, the company moved Meg Whitman into the corner office in quick order. Also, rather than see through the sale of its PC business – a divestiture that would have only brought pennies on the dollar, if it could have been done at all – HP reversed course and said it plans to remain in the PC business.

Of course, there’s still uncertainty hanging over one key aspect of its Personal Systems Group: webOS. As we see it, HP has four basic options for the business, which supplies operating systems to tablets and smartphones. It could keep webOS and put real investments behind it, even though, in the short term, those efforts might not produce much return. HP could shop webOS to a device maker, which might benefit from an integrated hardware and software product or, at the least, cut the manufacturer’s reliance on Google’s Android. Alternatively, rather than try to sell webOS as an ongoing entity, HP could slim it down to simply a portfolio of patents and put that on the block. And finally, if it can’t sell webOS in any fashion, it could just follow in the footsteps of Nokia and its Symbian OS, and punt the software into the open source community in hopes of gaining developer support with a wider range of webOS devices.

Big money, behind closed doors

November 18, 2011 Brenon Daly

Contact: Brenon Daly

Who needs to go public when there’s so much late-stage money sloshing around out there? That question hit us in the head this week after two startups announced, separately, that they were each raising $50m in new funding. First, it was marketing automation vendor Marketo saying it pulled in $50m in a new round led by Battery Ventures and then on Thursday, vulnerability management company Rapid7 also drew in that amount from Technology Crossover Ventures.

The latest round for Marketo, which effectively doubles the amount of capital it has raised, is particularly noteworthy. After all, Marketo has seen two of its main rivals track to the public market. Eloqua is currently on file for a $100m offering, while Responsys went public in late April, an offering that raised $79m.

In the case of Responsys, it may well consider itself fortunate that it raised money when it did. The company recently indicated that business through the end of the year is likely to be substantially slower than it had been. The warning knocked the stock about 25% below where it priced in April and half the level it had hit in the summer.

And the next IT security IPO is…

November 17, 2011 Brenon Daly

Contact: Brenon Daly

From what we hear, investors won’t have to wait anywhere close to another two years for an IPO by an information security vendor. In fact, a pair of companies is set to put in their paperwork, with at least one prospectus possibly filed yet this year. Those offerings would follow last week’s strong debut of Imperva, which was the first IPO in the information security sector since Fortinet hit the market in November 2009.

Since then, however, a half-dozen other security providers that we might have expected to go public – both those formally on file, as well as ones in the ‘shadow’ pipeline – have been snapped up in trade sales or have scrapped IPO plans. So which companies are likely to make it through the ongoing wave of consolidation and actually hit the public market?

Several sources have indicated that both AVG Technologies and AVAST Software have picked their underwriting teams and should be filing prospectuses in the coming weeks. In addition to similar timing on their IPOs, the two companies actually have a fair number of traits in common: both trace their roots back more than 20 years to Prague, and both are primarily known for their ‘freemium’ antivirus offering. Additionally, both AVG and AVAST boast that their products have been downloaded more than 100 million times.

Assuming AVG and AVAST do indeed file and come public, they will likely benefit from two key trends on Wall Street. First, there is a clear demand among investors for security companies. Consider the fact that they are valuing Imperva at a rather rich level of nearly seven times 2011 sales, with Fortinet commanding an even higher valuation.

Second, there has been a notable shift toward the ‘consumerization’ of IPOs. Tech vendors that have debuted so far this year such as LinkedIn, Pandora Media, HomeAway, Zillow and, of course, Groupon have not only dominated headlines, they have also raised significantly more money in their offerings than pure enterprise offerings. Most notably, Groupon raised $700m in its hotly debated IPO. But LinkedIn also raised $400m and Pandora raised $240m, which is more than twice the amount Imperva garnered in its offering, for instance. We’ll have a full look at the rumored offerings by AVG and AVAST, along with a broader look at the information security market, in a special report in tonight’s Daily 451.

Symantec gets the better end of a ‘win-win’ deal

November 16, 2011 Brenon Daly

Contact: Brenon Daly

When a marriage dissolves, it’s typically a messy process with bitter recriminations and resentments over how to divide the results of lives pooled together. Not so with Symantec’s step out of its three-and-a-half-year-old joint venture (JV) with Huawei. Selling its 49% stake in the storage and security appliance JV to its Chinese partner for $530m brings both companies a number of advantages. And while we might be tempted to label it one of those mythical win-win transactions, a closer look at the deal shows that Big Yellow gets more of the ‘win’ than Huawei, at least in our view.

From a purely financial standpoint, Symantec exits the JV having more than tripled the valuation of the entity. As CFO James Beer noted on a call discussing the sale, Symantec is realizing an annualized internal rate of return (IRR) of 31%. (We might add that performance came in the face of the worst global economic slowdown since the Great Depression, and is roughly three times the return of the Nasdaq over the same period. The IRR is undoubtedly higher than the numbers put up by many of the late-stage investors and buyout shops over that time.)

Additionally, the terms don’t limit Symantec from expanding its business in China, either in terms of distribution or even in new agreements with other hardware providers. Meanwhile, Huawei will be paying Symantec OEM royalties from its contributions to products for the next seven years. (No amount was given for those payments.) That’s not a bad deal at all for Symantec, which was advised by Citigroup Global Markets while Morgan Stanley banked Huawei.

In a flash, Fusion-IO plans secondary

November 14, 2011 Brenon Daly

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Just eight months after first filing its IPO paperwork and a scant five months after debuting on the NYSE, Fusion-io has already indicated that there will be a lot more of its shares hitting the market in the coming days. The flash memory specialist plans to sell $100m worth of stock in a secondary, with insiders slated to sell another $250m. In its June IPO, Fusion-io raised more than $200m, selling over 10 million shares. In that offering, insiders sold only 1.5 million shares.

Even though other companies often get slammed for insiders ‘running for the exits’ when selling such a large slug of equity so quickly after the offering, Fusion-io stock barely moved when it announced the secondary. If nothing else, that was consistent with the vendor’s overall stunning aftermarket performance. It priced at $19, first traded in the low $20s and was flirting around $36 on Monday afternoon. And although the stock is highly volatile, with some 10% intra-day swings, it only dipped briefly below its offer price in late September. Overall, any investor who bought on the opening day in June is up about 50%, compared to a flat performance during that period on the Nasdaq.

In that way, Fusion-io is rather unique among the other enterprise technology firms that have gone public so far this year. Cornerstone OnDemand, which went public in March, hit the market at about $19. While Cornerstone held that level for its first four months as a public company, it has been underwater for the last four months. It is down about 25% while the Nasdaq has flatlined. Even more dramatically, Responsys has sunk to just half the level it first traded back in April. Although Responsys had been slipping steadily since early September, the online marketing vendor got buried last week when it warned – in just its third report to Wall Street – that sales in the final months of 2011 would increase only about one-third the rate that revenue had been growing.

Cloud deals arising from the fog

November 10, 2011 Ben Kolada

Contact: Ben Kolada

Going into the last day of the 9th Cloud Computing Expo, held in Santa Clara, California, we get the feeling that conference attendees will see an M&A shakeout within the next few years. To a degree, this dealmaking has already begun, with a small handful of exhibitors already having been scooped up, including a couple of firms that were acquired just last month. Meanwhile, the remaining vendors, most of whom are young startups, are scrapping to define and prove themselves for what they hope will someday be their own fruitful exits.

The cloud computing market is real and growing. My 451 Market Monitor colleagues, who have the tedious task of sizing the cloud market, estimate global cloud revenue (excluding SaaS) at $9.8 billion for 2011, with nearly 40% revenue growth expected in 2012. Many players in this sector have already taken note of its potential and acquirers’ interest, resulting in an increase in both deal sizes and deal volume for cloud vendors. According to The 451 M&A KnowledgeBase, so far this year a record 465 transactions claimed some aspect of cloud. That’s nearly double what we saw in the same period last year. (To be honest, many of these acquired companies are about as cloudy as snake oil, but there are real cloud deals being done. Platform Computing and Gluster, which both announced their sales last month, sold for an estimated combined deal value just shy of $450m.)

However, in terms of revenue, most of the cloud startups we spoke with haven’t yet really proven themselves commercially. But as these firms transition their focus from product development to marketing and sales, their growth will attract more and more suitors. And double-digit revenue isn’t exactly a requirement for a successful exit, as both the recent CloudSwitch and Cloud.com takeouts proved. Though we understand that none of these companies are looking to sell just yet, we wouldn’t be surprised if cloud-enablement providers such as OnApp, Abiquo and Nimbula are picked off one by one within the next few years. And we were reminded yet again that open source networking and routing vendor Vyatta could someday see a real offer from Dell, though the IT giant would likely face a competing bid from Cisco.

Imperva: the strong, silent type

November 9, 2011 Brenon Daly

Contact: Brenon Daly

As far as tech IPOs are concerned, the two latest offerings could hardly be more different. Last week, we had the debut of Groupon – the daily deals site that is either the next Amazon or the next Pets.com, depending on the point of view. The debate around Groupon raged loudly and publicly, dominating last week’s financial news broadcasts and financial sites. In contrast, Imperva quietly crept onto the public market on Wednesday, with little fanfare. (The company didn’t even get to ring the opening bell on the NYSE, where it started trading today. Instead, it’ll be doing the honors on Thursday.)

For all of the differences in attention for the two companies, however, there’s one important similarity: performance. Both offerings priced above their expected range and then surged in trading. Groupon, which has created more than $15bn in market value, is still above water. In its offering, Imperva has also put up a strong debut. The data security vendor priced its five-million-share offering at $18 each, above the expected range of $14-16. In midday trading, Imperva stock was changing hands at $24.50. With more than 22 million shares outstanding, Imperva’s offering created more than a half-billion dollars of market value.

Best Buy buys outside the box

November 7, 2011November 8, 2011 Brenon Daly

Contact: Brenon Daly

Best Buy continues to buy outside the box. The consumer electronics giant, which has more than 1,000 big-box stores, announced a pair of deals Monday that add to its emerging businesses that have been responsible for most of the company’s recent growth. In the larger of its purchases, Best Buy will pay $1.3bn to pick up full ownership of its US and Canadian mobile phone business, which had been run as a joint venture with British retailer Carphone Warehouse Group. Additionally, Best Buy will pay $167m for mindSHIFT Technologies, a managed service provider that has about 5,400 small business customers.

The transactions continue a revamp of Best Buy, which started out life as an audio equipment store in 1966. More recently, it has made several acquisitions to expand beyond its historic business. For instance, it bought Geek Squad in 2002 to provide helpdesk support for customers. Service revenue, which has been bolstered by Geek Squad, currently accounts for 7% of the roughly $50bn in sales Best Buy will record this year, and it’s one of the few business lines that has actually increased same-store sales so far this year.

While the Geek Squad pickup has paid off for Best Buy, others have been disappointments. The retailer paid almost $700m for mall-based CD retailer Musicland in 2001, just as the business got ambushed by online music. More recently, it spent $97m in a puzzling purchase of Speakeasy, an Internet service provider. And then there’s the $121m acquisition in September 2008 of Napster. While some of those M&A missteps may have hurt Best Buy, they’ve been nothing like the stumble by its main rival, Circuit City. The company, which pioneered the electronic superstore model, got liquidated in 2009.