Guidewire’s Cyence experiment 

Scott Denne

Contact:Scott Denne, Scott Crawford, Garrett Bekker

Guidewire Software has printed its most significant deal to date with the acquisition of Cyence, a provider of risk analytics. Not only does the $275m price tag ($265m net of cash) make it Guidewire’s largest transaction so far, it extends the acquirer’s ambitions as an insurance software provider in a way that none of its previous purchases have.

Cyence applies data science to the monitoring of cyber and other data relevant to understanding the nature and impact of technology risk. The company enables insurers to price policies for new lines of business around emerging risk. Cybersecurity insurance is the first application for the technology – reputational insurance and others will come later.

This isn’t Guidewire’s first foray into analytics, as it picked up EagleEye Analytics last year in a $42m deal. In that transaction, the company obtained analytics tools that directly complemented its insurance workflow suite (underwriting management, claims processing, billing). With Cyence, it plans to play a role in the creation of new insurance products, a significant expansion in the value proposition that built Guidewire over the past decade and a half – replacing legacy insurance systems with modern software and (more recently) SaaS.

Expanding a company’s value proposition doesn’t come cheap. Guidewire will pay $140m in cash and $125m in stock (a small portion of which will be reserved for an earnout). Founded in 2014, Cyence has an annual revenue run rate of about $15m, putting the multiple well beyond the 4x trailing revenue Guidewire paid in its only other $100m-plus deal, the $160m acquisition of claims management SaaS vendor ISCS in December 2016.

Guidewire isn’t the only player looking to help insurance providers price emerging risks lurking on company balance sheets. Vendors focused on third-party tech risk such as BitSight and Prevalent have targeted the cyber-insurance market as well, which also drove FICO’s acquisition of QuadMetrics in June 2016.

Union Square Advisors advised Guidewire on the deal.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

ForeScout looks ahead to Wall Street

Brenon Daly

Contact: Brenon Daly

For all the ‘next generation’ hype throughout much of the information security (infosec) market, 17-year-old ForeScout represents a bit of a throwback. For instance, ForeScout has been around twice as long as the other infosec company to make it public this year, Okta. Further, its business is primarily tied to old-line boxes, while Okta and other startups of a more-recent vintage have pushed their businesses to the cloud.

That comes through in the numbers. At ForeScout, sales of products (physical appliances, mostly) still accounts for about half of the company’s revenue. The remaining half comes from maintenance fees, with just a sliver of professional services revenue. There’s no mention in ForeScout’s IPO paperwork of ‘bookings’ or ‘billings’ or any other business metric favored by companies delivering their offering through a newer subscription model

While not flashy, ForeScout’s business model works. (There aren’t too many startups that are generating a quarter-billion dollars of revenue and increasing that by one-third every year.) ForeScout posted $167m in sales in 2016, and $91m in the first half of 2017. (Growth over that period has been consistent at roughly 33%.) Assuming that pace holds through the end of 2017, ForeScout would put up about $220m in revenue, or roughly triple the amount of sales it generated in 2014.

However, in our view, much of that performance has been more than priced into the company, which secured a $1bn valuation in the private market. That said, we also don’t imagine that ForeScout will be one of those unicorns that stumbles when it steps onto Wall Street. (Post-IPO valuations for recent offerings from Snap, Blue Apron, Cloudera and Tintri are all lingering below the level they secured from VCs.)

ForeScout likely won’t enjoy anywhere near the platinum valuation that Okta commands. (The cloud-based identity vendor currently trades at a market valuation of $2.7bn, or 11x this year’s forecast revenue of $245m.) Instead, to value ForeScout, Wall Street might look to another product-based infosec provider, Fortinet.

The two companies don’t exactly line up, either in terms of strategic focus or scale. (Fortinet generates far more revenue each quarter than ForeScout will all year, while ForeScout is growing about twice as fast as Fortinet.) Nonetheless, Wall Street currently values Fortinet at roughly 4.3x current year’s revenue. Slapping that valuation on ForeScout would get the company to a $1bn valuation, but not much higher.

451 Research subscribers can look for a full report on ForeScout’s filing later today.

Tech M&A: Questions about the quarter

Brenon Daly

Contact: Brenon Daly

Boosted by a September surge, spending on global tech acquisitions in the just-completed Q3 soared to the highest quarterly total of 2017. In fact, the $119bn worth of tech deals tallied by 451 Research’s M&A KnowledgeBase during the July-September period only slightly trailed the total amount spent during the first six months of 2017. Big prints dominated recent deal flow, with both of this year’s largest transactions coming in September. More broadly, Q3 accounted for six of the 10 biggest deals so far this year.

Spending on tech transactions in September hit its highest monthly level since October 2016, coming in twice as high as the average of the previous eight months of the year, according to the M&A KnowledgeBase. Yet even with that spike, the value of announced deals so far in 2017 has slumped to the lowest level for the opening nine months of any year since 2014. (The just-completed quarter reverses a particularly light Q2, which recorded the lowest quarterly value of transactions in four years.) At this point in the year over the past three years, tech acquirers, on average, had handed out $360bn – a full $100bn more than the roughly $260bn worth of announced spending so far in 2017.

Boosted by a September surge, spending on global tech acquisitions in the just-completed Q3 soared to the highest quarterly total of 2017. In fact, the $119bn worth of tech deals tallied by 451 Research’s M&A KnowledgeBase during the July-September period only slightly trailed the total amount spent during the first six months of 2017. Big prints dominated recent deal flow, with both of this year’s largest transactions coming in September. More broadly, Q3 accounted for six of the 10 biggest deals so far this year

However, focusing on the top end of the market in September, there’s some question about whether the recent momentum for momentous deals will continue through the final quarter of the year. A number of significant prints, including both of Q3’s biggest transactions, appear to be uncharacteristically large purchases done in unusual circumstances. We look at some of the reasons for that – as well as some of the imp lications of this new development – in our full report on Q3 tech M&A, which will be available to 451 Research subscribers later today.

 

Exclusive: A deal for Datto?

Brenon Daly

Contact: Brenon Daly

A unicorn is rumored to be on the block, with several market sources indicating that disaster-recovery startup Datto is looking for a buyer. We understand that Morgan Stanley is running the process. While Datto secured a $1bn valuation in a growth round of funding two years ago, we are hearing that current pricing would add a solid – but not exorbitantly rich – premium to that level.

According to our understanding, early discussions with buyers have bids coming in at about $1.3bn for Datto. Our math has that rumored price valuing the 10-year-old startup at 6.5x this year’s sales of roughly $200m. (Estimates in 451 Research’s M&A KnowledgeBase Premium, which features in-depth profiles and proprietary insight about specific privately held startups, indicate that Datto generated $160m in sales last year, up from $130m in 2015. Click here to see Datto’s full profile in our M&A KnowledgeBase Premium.) The company sells its backup and recovery products to SMBs, with virtually all sales going through the channel.

With its scale and business model, Datto appears almost certain to end up in the portfolio of a private equity (PE) firm, assuming the company does trade. There is precedent. Datto’s smaller rival Axcient was consolidated by eFolder earlier this summer in a transaction that was at least partially backed by financial sponsor K1 Investment Management.

More broadly, PE shops, which have never had more money to spend on tech in history, have been increasingly looking to the IT infrastructure market to make big bets. Already this year, buyout shops have announced three deals valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. Unlike those targets, which were all owned by fellow PE firms, Datto founder Austin McChord still holds a majority stake in his company.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

When the chips are down 

Scott Denne

Contact: Scott Denne

After two years of record consolidation among semiconductor companies, M&A has deteriorated as fewer sizeable targets remain. The two most recent significant sales in the chip industry show that suitable buyers are just as lacking as the sellers in both deals ink uncertain transactions. In the largest chip transaction of the year, Toshiba has agreed to a $17.9bn sale of its flash memory business to an unwieldy syndicate – meanwhile, Imagination Technologies sold itself off in two separate deals (worth $800m) aimed at avoiding objections from US regulators.

Toshiba finds itself forced into the sale of its flash business to raise capital following the bankruptcy of its nuclear subsidiary – certainly not ideal conditions for a sale. Yet the winning bidder for the second-largest maker of flash memory, a syndicate led by Bain Capital, raised legal objections from Western Digital, a flash storage vendor that has a joint venture (JV) with Toshiba.

There are questions about how well the group could manage the asset, even if the buyer manages to get the transaction over the finish line – an uncertain prospect given the spat with Western Digital. The investor group (Bain, Apple, Dell, Toshiba, Seagate, SK Hynix and three others) called and abruptly cancelled a press conference on the deal. A squabble over media strategy doesn’t bode well for setting a coherent course for a business with $7bn a year in revenue.

Earlier this week, UK-based Imagination Technologies announced that it will sell most of its business to Canyon Bridge Capital Partners, a China-funded private equity firm whose proposed takeover of Lattice was recently shot down by the Trump administration. Imagination is selling its US-based MIPS business to Tallwood Venture Capital in hopes of avoiding such a fate.

If the Toshiba deal stands up to multiple legal challenges from Western Digital – the company claims Toshiba has limited rights to transfer ownership of a JV between the two companies – it will nearly double the size of semiconductor M&A this year to $44.2bn, a pace that’s less than half of last year’s, according to 451 Research’s M&A KnowledgeBase.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

A pause in Big Software’s ‘SaaS grab’

Brenon Daly

Contact: Brenon Daly

After years of trying to leap directly to the cloud through blockbuster acquisitions, major software vendors have been taking a more step-by-step approach lately. That’s shown up clearly in the M&A bills for two of the biggest shops from the previous era trying to make the transition to Software 2.0: Oracle and SAP.

Since the start of the current decade, the duo has done 11 SaaS purchases valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. However, not one of those deals has come in the past 14 months, as the two companies have largely focused on the implications of their earlier ‘SaaS grab.’

During their previous shopping spree for subscription-based software providers, Oracle and SAP collectively bought their way into virtually every significant market for enterprise applications: ERP, expense management, marketing automation, HR management, CRM, supply chain management and elsewhere. All of the transactions appeared designed to simply get the middle-aged companies bulk in cloud revenue, with Oracle and SAP paying up for the privilege. In almost half of their SaaS acquisitions, Oracle and SAP paid double-digit multiples, handing out valuations for subscription-based firms that were twice as rich as their own.

In addition to the comparatively high upfront cost of the SaaS targets, old-line software companies face particular challenges on integrating SaaS vendors as part of a larger, multiyear shift to subscription delivery models. Like a transplanted organ in the human body, the changes caused by an acquired company inside the host company tend to show up throughout the organization, with software engineers re-platforming some of the previously stand-alone technology and sales reps having their compensation plans completely overhauled.

The disruption inherent in bringing together two fundamentally incompatible software business models shows up even though the acquired SaaS providers typically measure their sales in the hundreds of millions of dollars, while SAP and Oracle both measure their sales in the tens of billions of dollars.

For instance, SAP is currently posting declining margins, an unusual position for a mature software vendor that would typically look to run more – not less – financially efficient. But, as the 45-year-old software giant has clearly communicated, the temporary margin compression is a short-term cost the company has to absorb as it transitions from a provider of on-premises software to the cloud.

Of course, the transition by software suppliers such as Oracle and SAP – painful and expensive though it may be – simply reflects the increasing appetite for SaaS among software buyers. In a series of surveys of several hundred IT decision-makers, 451 Research’s Voice of the Enterprise found that 15% of application workloads are running as SaaS right now. More importantly, the respondents forecast that level will top 21% of workloads by 2019, with all of the growth coming at the expense of legacy non-cloud environments. That’s a shift that will likely swing tens of billions of dollars of software spending in the coming years, and could very well have a similar impact on the market capitalization of the software vendors themselves.

SAP breaks buying slump 

Scott Denne

Contact: Scott Denne

SAP becomes a buyer again, inking its first substantive transaction in three years with the acquisition of customer identity manager Gigya. The company sat out a flurry of M&A activity among its peers last year. Now the extensive role that identity plays in digital marketing has brought it back to the market.

Last year, Salesforce and Oracle gorged on acquisitions as the latter made the largest ever SaaS deal with the $9.5bn purchase of NetSuite and the former did the most sizeable transaction in its history with the $2.8bn reach for Demandware. In contrast, SAP printed seven deals last year, although none larger than $25m, according to 451 Research’s M&A KnowledgeBase. And, per its annual report, the company spent just $112m of its cash on those transactions. Media reports put the price of Gigya above $300m. The target has more than 300 employees and had raised in excess of $100m in venture capital.

Gigya develops software that enables enterprises to collect data that customers declare in online registration forms and social signups and to link that with CRM and other sales, marketing and commerce applications. SAP Hybris, its e-commerce and marketing software business, has expanded its personalized marketing and customer experience capabilities, a project that’s difficult to execute without a single source of customer identity information, such as that built by Gigya, a longtime Hybris partner.

The rationale for this deal resembles the reasons behind Salesforce’s 2016 purchase of Krux. Yet whereas Salesforce was looking to obtain a hub of data for customer acquisition, Gigya’s tools are designed to help marketers manage customer data to expand customer relationships and has capabilities beyond marketing and into security and privacy.

Goldman Sachs advised Gigya on its sale.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Another ‘down round’ IPO?

Brenon Daly

Contact: Brenon Daly

Another unicorn is set to gallop onto Wall Street, as MongoDB has put in its IPO paperwork. The open source NoSQL database provider plans to raise $100m in the offering, on top of the $311m it drew in from private-market investors over the past decade. As has been the case in other recent tech offerings, however, some of those later investors in MongoDB may well find that the IPO represents a ‘down round’ of funding.

Any discount for MongoDB likely won’t be as steep as the discount Wall Street put on the previous data platform provider to come public, Cloudera. Investors currently value the Hadoop pioneer at $2.2bn, slightly more than half its peak valuation as a private company. For its part, MongoDB, which last sold stock at $16.72, has more than 100 million shares outstanding, giving it a valuation of roughly $1.7bn.

While not directly comparable, Cloudera and MongoDB do share some traits that lend themselves to comparison. Both companies have their roots in open source software, and wrap some services around their licenses. (That said, MongoDB has gross margins more in line with a true software vendor than Cloudera. So far this year, it has been running at 71% gross margins, compared with just 46% for Cloudera.) Further, both companies are growing at about 50%, even though Cloudera is more than twice the size of MongoDB.

Assuming Wall Street looks at Cloudera for some direction on valuing MongoDB, shares of the NoSQL database provider appear set to hit the public market marked down from the private market. Cloudera is valued at slightly more than six times its projected revenue of $360m for the current fiscal year. Putting that multiple on the projected revenue of roughly $150m for MongoDB in its current fiscal year would pencil out to a market cap of about $920m. Given its cleaner business model and less red ink, MongoDB probably deserves a premium to Cloudera. While MongoDB certainly may top the $1bn valuation on its debut, reclaiming the previous peak price seems a bit out of reach.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Google’s smartphone redial 

Scott Denne

Contact:Scott Denne

For a first marriage, it’s common to overlook a spouse’s flaws, harbor unrealistic fantasies about life together and spend unjustifiable sums on the wedding. A second marriage tends to be a more measured affair, with a conservative price tag and thoughtful evaluation of how the pairing fits into one’s broader life goals. The same applies to Google’s second purchase of a mobile phone company, as the search giant is paying $1.1bn for certain assets of HTC almost three years after unwinding its tie-up with Motorola Mobility.

While today’s deal marks a big commitment, it’s well short of the $12.5bn it spent for Motorola six years ago. Its reach for HTC differs from that earlier one – most of which it unwound in a 2014 divestiture to Lenovo – in more ways than price. With Motorola, Google envisioned itself becoming a marquee manufacturer of smartphones. This time, Google is making a more tactical move in the mobile market.

Google is obtaining the HTC team (and a license to related patents) that it used to build its Pixel phone, a collaboration that’s showing early signs of paying off. According to 451 Research’s VoCUL surveys, less than 1% of consumers with a smartphone own one made by Google, although the number planning to buy a Google phone sits near 3%. Even with those gains, Google’s phone business remains a long distance from matching Apple or Samsung.

But catching up to those companies, at least in hardware sales, isn’t likely the goal. Those same 451 surveys show that Google’s mobile OS, Android, has a larger market share than Apple’s iOS and more consumers prefer Android for future purchases. In that sense, the HTC pickup isn’t so much a break from its Motorola deal, but a continuation of the gains made from it.

Leading up to its acquisition by Google, Motorola’s sales were in a tailspin that continued after the transaction. Yet Google was able to build a broad ecosystem for Android during that time. That’s what it has in mind in nabbing the HTC team. Google is focusing its own hardware efforts on building high-end devices not mainly to sell devices but to showcase what’s possible with Android, making it easier for other hardware providers to develop functionality they’ll need in the competition against Apple, ensuring that Google’s software (and its cash-cow search engine) retains a place in the mobile market.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Retailers go shopping online 

Scott Denne

Contact: Scott Denne

It’s been a tough year for retail. More than a dozen retailers – the latest being Toys R Us – have filed for bankruptcy, while others – JC Penney and Macy’s, for example – have grappled with lower-than-expected sales and store closings. As they face the acute threat from online sellers, Amazon in particular, they have adjusted their acquisition strategies to be more ambitious in scale, yet narrower in scope.

According to 451 Research’s M&A KnowledgeBase, spending on tech M&A by retailers spiked this year and last, with each cresting above $4bn in spending, whereas each of the four years prior to that, total spending fell safely below $1bn. (Two deals – Walmart’s $3.3bn purchase of Jet.com and PetSmart’s $3.4bn reach for Chewy – account for most of that boost, yet even excluding those transactions, spending by retailers in 2016 and 2017 sits slightly higher than normal.)

Aside from the increase in spending, retailers have executed a shift in M&A strategy. Where they had once been inclined to pick up companies outside their core competency, buying websites, logistics or gaming companies, they’re now more likely to snag their online counterparts, as Signet Jewelers recently did – amid declining in-store sales – with its $328m acquisition of R2Net. As their customers have done more of their shopping online, retailers have done the same. This year and last, retailers printed more deals for e-commerce vendors than all other categories combined, a contrast to their earlier buying habits.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.