BeyondTrust buys beyond its core market

Brenon Daly

Contact: Brenon Daly

Announcing its first acquisition since the September 2009 combination that created the current company, BeyondTrust recently picked up the assets of Lumigent. The deal adds Lumigent’s database monitoring to BeyondTrust’s core privileged identity management platform, so the purchase is a fairly logical step into an adjacent market. Terms weren’t disclosed, but we would guess that Lumigent didn’t sell for much more than the $4m of revenue that it generated last year. The company had been struggling in part because of a strategic misstep two years ago to go into the market for application governance, risk and compliance.

BeyondTrust paid for the Lumigent acquisition from its own treasury, even though it does have Insight Venture Partners as a backer. And the company is not done buying. We understand that it is likely to announce another two acquisitions this year. BeyondTrust can afford to do deals because it generates a fair amount of cash, running at a 35% EBITDA margin. The company recorded revenue of some $40m last year, up from $32m in 2009. Assuming those transactions go through, we gather that roughly half of the growth at BeyondTrust for 2011 would come organically, with the remaining half coming through M&A.

Heading in and out at Vector

Brenon Daly

Contact: Brenon Daly

Some eight months after the opening bid for RAE Systems was announced, it looks like Vector Capital continues to have the inside track in taking private the maker of gas detection monitors. The San Francisco-based buyout firm earlier this week raised its offer for RAE Systems to $2 per share, or roughly $120m. That marks the third time that Vector has bumped its bid in its competition with original bidder Battery Ventures.

Vector’s current offer adds some $25m to Battery’s initial price, and is more than twice the level where RAE Systems shares traded over the year leading up to the first announcement last September. Perhaps most crucially, RAE Systems executives, who own roughly 31% of outstanding shares, have thrown their support behind Vector by giving up shares for no consideration as well as rolling over a large portion of their equity holdings.

While Vector works to add RAE Systems to its portfolio, we understand that it may be looking to free up a spot there as well. Several market sources have indicated that Vector has retained Jefferies & Company to advise it on a possible sale of Corel. Running at more than $200m in sales, Corel has a number of products for graphics design, as well as WordPerfect and WinDVD, among other titles.

Vector has owned Corel since 2003, though it did sell a bit of the software company to the public in 2006 before buying back that chunk three years later. Given that Corel is a fairly large portfolio of mostly mature businesses, we suspect that the most likely buyer would be a fellow PE shop. However, the process is still in its early days, according to a source.

Looking past the losses at Carbonite

Brenon Daly

Contact: Brenon Daly

Is Wall Street ready to buy into a company that spends $1 on advertising to bring in just $2 in bookings? That’s one of the key questions around Carbonite, a fast-growing online backup vendor that just filed for its IPO. (We looked at Carbonite’s planned offering in an in-depth report, including projecting its likely valuation when it does hit the Nasdaq later this year.) Carbonite has more than doubled revenue in each of the past two years. And while that is an eye-popping growth rate, it has been fueled by an equally eye-popping spending on advertising.

Consider this: Carbonite shelled out $24m on advertising last year on its way to recording $54m in bookings. (For those of you who like old-fashioned, by-the-book accounting, the $54m in bookings in 2010 equaled a scant $39m in actual revenue for the six-year-old startup.) And to be clear, that $24m was straight advertising spending, which is just a portion of the $33m in sales and marketing spending that it rang up last year. Obviously, that’s not a sustainable ratio, at least not for a technology company that also needs to spend a few million dollars on servers and other equipment each quarter and hopes to run profitably. (For its part, Carbonite hasn’t posted anything close to black numbers.)

That’s not to say that Carbonite won’t be a hit with investors when it does go public. Bulls can point to the fact that the service has attracted more than one million paying users, and those that use it tend to stick with it. (Carbonite puts its retention rate at 97%.) And on the buyside of the IPO, Wall Street has been willing to look past red-stained income statements if the growth rates are high enough. As evidence, we might point to the mid-March offering of Cornerstone OnDemand, a company that has a similar financial profile to Carbonite, though it competes in a vastly different market. After pricing its offering above range and soaring onto the market, Cornerstone currently trades at about 18 times trailing revenue

Demandware to test demand in public market?

Brenon Daly

Contact: Brenon Daly

After a pair of billion-dollar deals over the past half-year removed two old-line e-commerce vendors from the Nasdaq, an on-demand startup is rumored to be looking to replenish the ranks on the public market. Several sources have indicated that Demandware has picked underwriters and is set to file its IPO paperwork shortly, with Goldman Sachs & Co and Deutsche Bank Securities running the books. The filing, if it comes, would continue a trend of offerings by relatively small subscription-based companies. Demandware is expected to do about $40m in revenue in 2011.

Founded in 2004 and based near Boston, the company provides an e-commerce platform for more than 150 customers, including Barneys New York and The Jones Group. Demandware’s investors include local VC firms General Catalyst Partners and North Bridge Venture Partners.

The IPO for Demandware would come at a time of consolidation in the e-commerce industry, with big buyers paying big prices. Late last year, Oracle acquired Art Technology Group for $1bn, paying the highest price that ATG shares had seen since 2001. (ATG, which was founded in 1991, counted more than 1,000 customers.) And then earlier this year, eBay handed over $2.4bn for GSI Commerce. That stands as the largest Internet transaction since February 2008.

Updata secures a bargain from CA

Brenon Daly

Contact: Brenon Daly

When CA Technologies ‘partnered’ with Indian outsourcing firm HCL Technologies to try to offload its security business in November 2007, we termed the move a ‘kind-of, sort-of’ divestiture that was unlikely to fit well with either party. Three and a half years later, the full divestiture is finally done: CA sold it to Updata Partners last week. Although terms weren’t disclosed, we understand that Updata is paying only about $10m for the business, a price that reflects just how much the division had suffered under the joint venture. The roughly $50m in sales at the unit is less than half the level it was at the time of the CA-HCL accord.

The fact that CA got any money for its security assets surprised some. We hear from several participants that at least one bidder put forward a ‘cashless’ offer, offering to take the unit off of CA’s hands for only the assumption of liabilities. (We gather that there was some interest in the business from a few of the larger, privately held security vendors, while from the financial world, both Platinum Equity and Symphony Technology Group were rumored to be bidders.) However, the deal was a very complicated one, not the least of which because there were some questions about the revenue sharing with HCL.

The split ownership, exacerbated by uneven commitments from the two sides, meant that the security business itself was rather starved, particularly for sales and marketing support. (It didn’t help that the division focused on consumers and small businesses, while its corporate parent, CA, targets enterprises. CA will continue to sell enterprise security offerings, which is primarily its identity and access management software.) Out from under the untenable ownership structure, the security unit will likely enjoy renewed focus and resources from its soon-to-be owners at Updata as the buyout firm tries, first, to stabilize the business and then ultimately get it growing again. The deal should close next month.

Autonomy picks up piece of rock from Iron Mountain

Brenon Daly

Contact: Brenon Daly, Nick Patience

Announcing its first acquisition in almost a year, Autonomy Corp has picked up Iron Mountain’s digital assets in a surprisingly rich purchase of a castoff business. Autonomy will pay $380m in cash for the units, which include backup and recovery, e-discovery and digital-archiving software. The transaction effectively unwinds Iron Mountain’s acquisitions of Mimosa Systems and Stratify, deals the records giant had done as a hedge against the digitization of information. As my colleague Nick Patience writes in his report on the move in tonight’s Daily 451, the divestiture puts Iron Mountain almost entirely back in the business of storing cardboard boxes.

For Autonomy, we suspect that the main reason for the purchase is the division’s customer base of 6,000 as well as the six petabytes of data those customers have stored. (Autonomy already has e-discovery and archiving technology, so would be less interested in those Iron Mountain products.) Viewed in that light, the purchase price of $380m, or more than 2.5 times projected revenue in 2011, seems a bit steep. That’s particularly true when we consider that Iron Mountain was under the gun from big shareholders to dump the digital division. On the news, Iron Mountain shares inched a bit higher Monday afternoon, and have now added one-third in value since the beginning of the year.

Tripwire pulls the plug on its IPO

Brenon Daly

Contact: Brenon Daly

Almost exactly a year after Tripwire formally filed its IPO paperwork, the security vendor has opted for the other exit, a trade sale. Thoma Bravo, a buyout shop with a number of other security and management companies in its portfolio, expects to close the acquisition of Portland, Oregon-based Tripwire this month. Terms weren’t disclosed but we understand that Thoma Bravo is paying about $225m. The decision by Tripwire to sell isn’t a surprise, any more than the fact that a buyout shop is its new owner.

If it had gone ahead with its IPO, we suspect that Tripwire would have had a rough go of it as a public company. Wall Street looks for growth, and while Tripwire has put up steady growth, it hasn’t been explosive growth or particularly valuable growth, at least in the eyes of portfolio managers. In 2010, Tripwire bumped up its overall top line 16% to $86m, primarily driven by increases in maintenance revenue and, to a lesser degree, consulting work. Collectively, those lines of business, which now represent more than half of Tripwire’s total revenue, rose 25% in 2010 – three times the rather anemic growth rate of 8% in license sales. (License sales actually flatlined in both the third and fourth quarters of 2010.)

The lagging license sales certainly wouldn’t have helped the company attract interest from strategic buyers. We noted earlier that nearly four years ago Tripwire came very close to selling to BMC. Since it filed its prospectus, we’ve heard that both Quest Software and CA Technologies looked at Tripwire. Still, in our view, Tripwire has a financial profile that should fit well inside a PE portfolio: some 6,000 customers; seven consecutive years of revenue and operating income growth; a rock-steady – and growing – maintenance stream of about $40m; and roughly $10m in cash flow per year.

Microsoft pays a princely premium for Skype

Ben Kolada

Contact: Ben Kolada

In its largest-ever deal, Microsoft announced today that it is buying VoIP provider Skype for $8.5 billion in cash. This is the third time Skype has changed hands since 2005. Microsoft claims that the deal is yet another move in its long line of real-time communications initiatives, but we suspect that the true intent, and more so the price, was driven by a desire to keep the hot property out of the hands of search rival Google, which is expanding its own communications prowess.

That Skype attracted Microsoft should come as no surprise, since the company has consistently garnered more than its fair share of attention in its eight-year history. Since its founding in 2003, Skype has been acquired by eBay, sold to a consortium of private equity investors led by Silver Lake Partners, filed for an IPO, rumored to have been a target by Facebook and Google and is now being scooped up by Microsoft. Its three trade sales combined have totaled more than $13bn in deal flow.

Indeed, Facebook and Google’s rumored involvement in the bidding process would certainly have contributed to the stellar valuation. Consider this: on an equity value basis, Microsoft is paying nearly twice as much as Skype received in its previous two trade sales combined. When factoring in the assumption of cash and debt, the offer values Skype at nearly 11 times its 2010 revenue, and 34x last year’s adjusted EBITDA. And while the price paid represents a fraction of the $50bn in cash and short-term investments Microsoft held at the end of March, it should be high enough to prevent a competing offer from Google alone. A topping bid from Big G would most likely exceed $9bn – or one-quarter of the total cash and short-term investments the search giant held at the end of March.

Skype’s suitors

Date announced Acquirer Deal value
May 10, 2011 Microsoft $8.5bn
September 1, 2009 Silver Lake Partners/Index Ventures/Andreessen Horowitz/Canada Pension Plan (CPP) Investment Board $2.03bn
September 12, 2005 eBay $2.57bn

Source: The 451 M&A KnowledgeBase

Quest builds up vWorkspace with RemoteScan buy

Ben Kolada

Contact: Karin Kelley, Ben Kolada

In its latest desktop virtualization and management play, Quest Software has announced that it is purchasing the assets of imaging device management vendor RemoteScan. The deal lands Quest more healthcare accounts, mostly in North America, but the company plans an aggressive push into European markets next.

Quest will integrate eight-year-old RemoteScan’s assets, including all of its employees, with its vWorkspace group. The tiny target was launched in 2003 with RemoteScan for LAN, but has since been focusing most of its efforts on RemoteScan Enterprise and RemoteScan Universal. The deal gives vWorkspace one more competitive feature – wide driver support for imaging devices in LAN-based VDI and terminal services environments. Most of RemoteScan’s customers are in healthcare, although the vendor claims some traction in financial services and insurance markets. The products work with Windows Terminal Server and Citrix’s XenDesktop and XenApp, and support all other virtualized LAN environments using Microsoft’s RDP and Citrix’s ICA graphics-remoting technology.

Terms of the deal weren’t disclosed, but we understand that RemoteScan has had considerable success over the years, having lined up some 20,000 customers, with particular strength in the medical vertical. Since it hasn’t taken any institutional funding that would propel its growth, we bet that its revenue is still in the single-digit millions. And while Quest generally pays in line with broader market valuations, RemoteScan could have gotten somewhat of a premium, since companies that are successful in targeting the medical vertical typically get higher-than-average valuations.

Taking chips off the table

Brenon Daly

Contact: Brenon Daly

A half-decade after financial buyers did their best to sweep up the semiconductor industry, it’s now the fellow corporate acquirers’ turn to continue the dealmaking. On Wednesday, Applied Materials Inc announced that it would hand over $4.9bn for Varian Semiconductor Equipment Associates. The deal between the chip equipment makers comes on the heels of two other multibillion-dollar transactions in the semiconductor sector earlier this year: Texas Instruments’ reach for analog chip maker National Semiconductor and Qualcomm’s bid to expand beyond cellular chips with its purchase of Atheros Communications.

All three of this year’s significant chip acquisitions rank among the 10 largest deals in the industry. However, all of the corporate transactions are still looking up at the buyouts done by private equity (PE) shops back when credit was cheap and easy. In fact, the total spending on the trio of landmark deals so far this year ($15bn) is less than the $17.6bn take-private of Freescale Semiconductor by a PE consortium in 2006.

Of course, bigger isn’t necessarily better. And we suspect that corporate buyers would hope to be at least a little more successful with their acquisitions than the buyout club has been with Freescale. Although Freescale is currently on file to once again be a public company, the buyout has been a tough one for its owners. Much of that difficulty stemmed from the fact that the PE shops put nearly $10bn of debt on the company. (It paid more than a half-billion dollars last year to service the debt.) Meanwhile, under its new ownership, Freescale is actually smaller than it was before the buyout.