A SaaS-y deal

Brenon Daly

Contact: Brenon Daly

Given the rich premium that Wall Street awards to on-demand software companies, it’s no wonder that vendors still hawking software licenses are looking to get into the business of selling software as a service (Saas). Of course, there are many obstacles in making that transition, ranging from internal (how to compensate sales staff) to external (how to communicate to investors). As a result, most old-line software companies offer only a tiny bit of their products on-demand, if they do at all.

The few vendors that have seriously tried to transition to the on-demand model have used both organic and inorganic approaches. Concur Technologies largely stayed in-house to create a ‘for rent’ version of its expense account software. (Wall Street has rewarded the company with an eye-popping valuation of 5.5x trailing 12-month revenue.) Meanwhile, Ariba more than doubled the on-demand portion of its business when it spent $101m for SaaS supply chain vendor Procuri in September 2007.

We mention all this as a (long-winded) way of saying that we don’t understand why Callidus Software didn’t take home on-demand vendor Centive, which had been on the block for some months. Callidus has been selling its sales compensation management products as a service for about three years, with on-demand shoppers accounting for one-third of its 180 total customers. A year ago, it acquired a small SaaS vendor, Compensation Technologies, for $8.3m to bolster its transition efforts. One source indicated that publicly traded Callidus was initially interested in smaller rival Centive, but didn’t follow through. Instead, last week Centive and its estimated $10m in revenue went to fellow startup Xactly Corp in an all-equity consolidation play. Callidus making a run at Xactly probably won’t happen, for reasons both personal and financial.

For starters, Xactly is too expensive for Callidus, a money-losing company that holds some $39m in cash. An equity deal is probably off the table, given Callidus’ paltry valuation. Its enterprise value is just $46m, less than half the $105m in sales it likely recorded in 2008. (Callidus reports fourth-quarter earnings on Tuesday.) Beyond the money, there’s also the complicating factor that most of Xactly’s executives used to work at Callidus before setting off on their own with an eye to knocking out their former employer with their on-demand model. If indeed the two sides do ever start talking, we might suggest that a family therapist be on hand, in addition to the bankers and lawyers.

Small-time means good time for M&A

-Contact Thomas Rasmussen

Smaller shoppers are increasingly perusing the proverbial deal aisle. As our 2008 Corpdev Outlook Survey conducted in December indicates, 2009 looks to be the year of small-time shoppers. When we delved further into the data to try to get a feel for what corporate development officials from various companies are thinking, we observed an interesting trend: While large firms said they were more likely to do divestures than acquisitions, small companies were significantly more bullish on M&A. (For our purposes, we classified small firms as those with fewer than 250 employees and large firms as those with 2,500 or more employees). In fact, it seems that large acquirers are a bit more wary of the economic realities than their smaller rivals, with some even leaving the market entirely. Corporate development officials at large companies were twice as likely to say the current economic recession is ‘very likely’ to depress deal flow compared to their brethren at small companies.

Anecdotal evidence of this trend reinforces that sentiment. Take Pegasus Imaging Corp, a privately held, employee-owned company founded in 1991 that is recognized for its host of enterprise and consumer-imaging products but mostly for its JPEG-imaging compression technology. After having been out of the market since acquiring its competitor TMSSequoia four years ago, it picked up Tasman Software and AccuSoft’s imaging business last week for an estimated combined cash value of about $30m. The small, privately held shop told us that the current environment is ripe for M&A, and we expect the two acquisitions to be the first of many this year. Meanwhile, serial shopper Avnet may be slowing down, despite having just announced its first deal of the year (last week, the mid-cap company spent an estimated $30m for Nippon Denso Industry, an electronics distributor based in Tokyo). Avnet announced six deals worth $385m in 2008, but recently indicated to us that it will take a much more cautious approach to shopping this year.

Industry makeup of respondents

Industry Percentage
Infrastructure software 32.0%
Applications software 21.3%
Systems/hardware/semi 13.3%
Other 9.3%
Mobile 8.0%
Networking 6.7%
Services 5.3%
Telecommunications 4.0%

Source: The 451 Group Tech Corpdev Outlook Survey, December 2008

Mr. Fixit sells again

Brenon Daly

Contact: Brenon Daly

Known as a turnaround guy for most of his career, Joe Cowan didn’t actually have too much fixing up to do at his latest posting as chief executive of content management vendor Interwoven. After he took over Interwoven’s top post in early April 2007, the business hummed along with sales growth in the mid-teens and solid profitability. Under Cowan’s leadership, shares of Interwoven dropped just 9%, less than one-quarter the decline posted by the Nasdaq over that same period. And never mind the southbound performance of shares of rival Vignette.

Cowan’s work at Interwoven stands in sharp contrast to earlier postings at Baan and Manugistics, scandal-tainted companies with declining sales and heavy losses. However, the end result of most of his engagements has been the same: a sale of the company. As a testament to the difference in the relative health of the two most-recent exits that Cowan has helped broker, consider that Interwoven is getting valued at twice the price-to-sales multiple of Manugistics. Viewed another way, Interwoven sold for almost 19x EBITDA, compared to closer to 13x EBITDA for Manugistics. We understand that Cowan will be staying on at acquirer Autonomy Corp after the close of the deal, at least for a bit.

CEO Joe Cowan: A tale of two exits

Date Target Acquirer Deal value Price/TTM sales
April 2006 Manugistics JDA Software $211m 1.4x
January 2009 Interwoven Autonomy $775m 2.8x

Source: The 451 M&A KnowledgeBase

Interplay between M&A and IPO

Brenon Daly

Contact: Brenon Daly

With the IPO calendar essentially blank right now – and likely to stay that way as long as the Nasdaq keeps lurching downward – companies that are both of size and mind to go public are using the pause to do a little shopping of their own. These transactions tend to be smaller plays, typically rounding out the company’s existing portfolio. (We would contrast these tuck-in deals with the larger consolidation plays that companies make so they can get big enough to paper their S-1. Of course, those deals only work when the public market is receptive. For instance, Convio acquired a rival that was about half its size in hopes of bulking up and going public. It pulled its IPO paperwork last August.)

Last summer, we noted that NetQos inked a small buy on its way to what we expect will be a larger sale of its equity to the public, whenever the market returns (it was the first deal by the network performance management vendor in some two-and-a-half years). In a similar situation, Tangoe last week announced that it was picking up mobile device management startup InterNoded.

The deal, which was Tangoe’s third purchase in less than two years, certainly wasn’t done to boost revenue. InterNoded posted sales of about $4m in 2008; meanwhile, Tangoe is anticipating about $60m in 2009. Tangoe has raised some $20m in VC, along with an undisclosed slug of debt. But the company, which is running in the black, doesn’t appear to have any immediate plans to raise capital (even if that were possible right now). We understand that it hasn’t met with bankers, much less held a bake-off.

Barracuda bites again

Brenon Daly

Contact: Brenon Daly

A ravenous eater, Barracuda Networks has now gobbled up four companies in the past 14 months. (And that doesn’t even count the privately held security company’s unsolicited bid in May for publicly traded Sourcefire, the Snort vendor.) Barracuda’s latest bite is backup and recovery company Yosemite Technologies. The company will be lumped in with the technology Barracuda picked up in November 2008 when it bought another backup vendor, BitLeap.

As we have chronicled, Yosemite evolved from a tape-based backup vendor to a disk-based one, and then added technology for continuous data protection for notebooks and laptops with the acquisition of early-stage FileKeeper. We understand that Yosemite, under the leadership of storage veteran George Symons, had been investing heavily in commercializing the technology. However, we suspect that fully realizing the value of the FileKeeper technology would have likely required another round of funding, which is tough to come by these days.

Instead, Yosemite opted for a sale to Barracuda. Terms weren’t disclosed, but a Barracuda insider once characterized the company’s approach to M&A to us this way: ‘We don’t mind picking through the boneyard.’ Barracuda has already built a powerful distribution channel to SMBs, so it just wants more products to push through that. With data protection covered, where might Barracuda look next? Our bet is that it is still interested in WAN traffic optimization (WTO). As we have noted, Barracuda CFO David Faugno knows the market well, having served as the top numbers guy at WTO vendor Actona Technologies before its sale to Cisco.

Barracuda’s deals

Date Target Rationale
September 2007 NetContinuum Web application security
November 2008 BitLeap Backup and recovery
November 2008 3SP SSL VPNs
January 2009 Yosemite Technologies Backup, data protection

Source: The 451 M&A KnowledgeBase

Salesforce.com’s service play

Brenon Daly

Contact: Brenon Daly

Heading into Thursday‘s luncheon hosted by Salesforce.com, there was a fair amount of speculation that the software-as-a-service (SaaS) stalwart would be using the event to announce a new acquisition. The company employed the same setup to disclose its purchase of tiny content management startup Koral in April 2007. The rumors turned out to be off the mark a bit, as the luncheon instead focused on Salesforce.com’s rollout of a new customer service offering. There is a link to M&A, however. The offering unveiled, Service Cloud, got a substantial boost when the company picked up privately held InStranet last August.

InStranet stands as Salesforce.com’s largest acquisition in its 10-year history, but one insider told us the deal almost didn’t happen. Salesforce.com paid $31.5m for InStranet, which we understand was about twice the amount of sales the French company booked in the year leading up to the transaction. But Salesforce.com wasn’t the first bidder for InStranet, according to one source. SAP had moved pretty far along during M&A discussions with InStranet before Salesforce.com entered the picture. Marc Benioff’s buyers buttoned up the purchase in just three months, the source added.

And then there were five: Salesforce.com’s acquisition history

Announced Target Deal value Target description
August 2008 InStranet $31.5m Customer service automation
October 2007 CrispyNews Not disclosed Community news, website development
April 2007 Koral $7m* Web content management
August 2006 Kieden Not disclosed Search engine marketing management
April 2006 Sendia $15m Wireless application developer

Source: The 451 M&A KnowledgeBase *451 Group estimate

Quest shops again, virtually

Brenon Daly

Contact: Simon Robinson, Brenon Daly

A year after closing a deal with Vizioncore that got Quest Software into the storage virtualization market, the company went shopping again this week. The systems management company picked up some of the assets of venture-backed MonoSphere, most notably its Storage Horizon product. This is a storage analysis and reporting tool designed to help storage managers assess the capacity optimization of their existing multivendor arrays so they can reclaim unused capacity and project future requirements more accurately. Storage Horizon will slot into Quest’s portfolio for managing storage in virtualized server environments, which is currently sold under the vOptimizer Pro brand.

As part of Quest, MonoSphere may well have the opportunity to deliver on the promise of its technology. (It was that potential that attracted some $41m in backing from Intel Capital, ComVentures and Lightspeed Venture Partners.) On its own, MonoSphere didn’t have much to show for itself. That’s a familiar story concerning other storage-reporting specialists, which often find that large enterprises are hesitant to buy such tools from small vendors, especially when their existing suppliers are happy to offer similar functionality for little or no cost. But with Quest, which counts more than 100,000 customers and expects to report some $730m in 2008 revenue, MonoSphere may be able to land customers that had previously slipped through its hands.

Xing the Atlantic

-Contact Thomas Rasmussen

In 2008, online social networking was the buzzword of choice. But as is the case with most tech bubbles, it imploded nearly as quickly as it ballooned. The year that started with a bang (Bebo’s record $850m sale to AOL in March and Plaxo’s sale to Comcast for an estimated $150m in May) ended with a whimper. Several smaller social-networking companies sold in fire sales, resulting in severe VC write-downs. And we expect this to carry on well into 2009.

Consider the case of business-focused Xing, which finished last year with a $4.1m tuck-in of New York City-based socialmedian. When we checked in with Xing before the holiday break, M&A and attractive valuations were the dominant themes. We fully expect the company to follow up on this with more acquisitions in 2009, particularly as social-networking competition goes global. Based in Germany, Xing has used M&A to expand geographically. In addition to its US deal last month, in 2007 Xing picked up Spanish competitors eConozco and Neurona. Furthermore, we understand that Xing was one of the active bidders for Plaxo, which would have represented a significant drive into the US market. On the flip side, US social-networking giants Facebook and LinkedIn are actively trying to expand across the Atlantic.

For Xing, there are literally dozens of US business-focused vertical social networks that would fit in with its expansion strategy. And the company has the resources to do deals. (It’s the only significant publicly traded social-networking company, plus it holds $61m in cash, no debt and is cash-flow positive on roughly $50m in trailing 12-month revenue.) Companies that we think might make a good match for Xing include Fast Pitch, APSense, Zerodegrees, and, dare we say, even Twitter.

Social networking M&A fizzles

Period Total deals Total deal value
January-June 2008 29 $1.28bn
July-December 2008 28 $15m

Source: The 451 M&A KnowledgeBase

Polishing off Aladdin

Brenon Daly

Contact: Brenon Daly

After almost five months of sometimes-heated negotiations, buyout shop Vector Capital and Aladdin Knowledge Systems have agreed to take the authentication vendor private. The accord comes after two formal price adjustments (one up, one down) that left the final deal valued at $160m. Vector plans to slot Aladdin into SafeNet, which it acquired in March 2007 for $634m.

Vector’s two security purchases stand in sharp contrast to each other, since the SafeNet transaction went through with a minimum of histrionics. Consider that SafeNet took just five weeks to close, compared to the drawn-out battle for Aladdin, which included the threat of a proxy fight. Part of that may be explained by the relative valuation of the two deals. Vector paid about 2x trailing 12-month sales for SafeNet, twice the multiple it is paying for Aladdin. That discount compares to a roughly 40% slump in the Nasdaq during the time between the two acquisitions.

Dell’s deals

Brenon Daly

Contact: Brenon Daly

Dell picked up one services company last week, even as rumors were swirling that the company might be eyeing another, larger services deal. Dell said Friday that it would hand over $12m in stock to acquire four divisions from Allin Corp, an IT consulting shop that trades on the Nasdaq’s bulletin board. Allin, which is profitable, reported revenue of some $22m for the first three months of 2008.

The asset buy from Allin was Dell’s first acquisition in almost a year, following last February’s $155m purchase of MessageOne. However, rather than the Allin deal, the talk last week about Dell’s M&A was more focused on reports of whether the company is planning a play for storage-consulting firm GlassHouse Technologies. That company filed an S1 a little more than a year ago, but has only amended it once since then. GlassHouse was looking to raise $100m in the offering, which was slated to be led by Goldman Sachs.

While Dell has been active in building out its services portfolio through acquisitions (notably, Everdream and SilverBack Technologies in 2007), we would note that the company might face some difficulties in preserving impartiality at an independent GlassHouse if it were to pick up the storage consultant. The reason? Dell might be interested in pushing its own EqualLogic gear, which it bought in November 2007 for $1.4bn (which stands as the company’s largest-ever deal). Speaking of EqualLogic, there are a number of common threads that tie it to GlassHouse. Both companies are based in the Northeast, have nearly 30% of their equity owned by venture firm Sigma Partners and tapped Goldman to lead their offerings.

Recent Dell acquisitions

Date Company Deal value
January 2009 Allin Corp (assets) $12m
February 2008 MessageOne $155m
December 2007 The Networked Storage Company $31m
November 2007 Everdream Not disclosed
November 2007 EqualLogic $1.4bn

Source: The 451 M&A KnowledgeBase