Cisco’s storage M&A reboot

Scott Denne

Contact: Henry Baltazar, Liam Rogers, Scott Denne

Following an impulsive and failed marriage, Cisco has opted for a long courtship for its second commitment in the storage market. The networking giant has paid $320m for Springpath, a maker of hyperconverged infrastructure (HCI) software and a longtime Cisco partner.

Cisco led Springpath’s $34m series C round in 2015 and the next year launched its HCI appliance, HyperFlex, built with Springpath’s software. A patent infringement lawsuit brought by rival SimpliVity may have delayed the consummation of this deal, as its final status is still unclear. As we wrote in an earlier report, HyperFlex sold well and demonstrated an ability to bring new customers to Cisco. In a 451 Research Voice of the Enterprise survey, 18.3% of IT professionals were using Cisco HyperFlex, behind only converged offerings from VMware and Dell-EMC.

By contrast, its last foray into storage was the $415m purchase of all-flash array vendor WHIPTAIL, which offered a product that was meant to compete with several of Cisco’s then partners and had only gained traction with about one-quarter as many enterprises as Springpath has reached on Cisco’s servers, where it is exclusively sold.

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An unhappy anniversary for buyout shops

Brenon Daly

Contact: Brenon Daly

A decade ago, the financial world started its most recent journey toward ruin. Although the total collapse wouldn’t come for another year, the first tremors of the global financial crisis were felt in August 2007. At the time, few observers could have imagined that a bunch of bad bets made on shady mortgages could reduce some of the world’s biggest banks to heaps of rubble.

For some financial institutions, the destruction was self-inflicted. But others were simply collateral damage, counterparties to risky trades that they may not have fully understood but took on nonetheless. Whatever the cause, the result, which was just starting to be realized 10 years ago, was that everyone was in over their head.

As banks went into survival mode, the financial system dried up. Lenders, already worried about the bad debt on their books, stopped extending loans. It became a credit crisis, with whole chunks of the economy grinding to a halt. There was also a dramatic – if underappreciated – impact on the tech M&A market: the crisis effectively ended the first buyout boom.

Private equity (PE) firms were just hitting their stride when the crisis took away the currency that made their deals work: debt. Don’t forget that just months before August 2007, PE shops had announced mega-deals for First Data ($29bn) and Alltel ($27.5bn). Both of those acquisitions were $10bn bigger than any tech transaction ever announced by a financial acquirer up to that point.

Those deals turned out to be the high-water marks for PE at the time, with the water receding unexpectedly quickly. Of the 10 largest PE transactions listed in 451 Research’s M&A KnowledgeBase for 2007, only one of them came after August. More broadly, the last four crisis-shadowed months of 2007 accounted for just $7bn of the then-record $106bn in PE spending that year.

The late-2007 collapse in sponsor spending continued through 2008-09, as the recession broadened and deepened. The value of PE deals in both of those years dropped more than 80% compared with 2007, according to the M&A KnowledgeBase. The PE industry’s recovery from the credit crisis would take a long time, much longer than the relatively quick bounce-back in the equity markets, for instance. Overall spending by buyout firms wouldn’t hit 2007 levels again until 2015.

For more on the impact of PE activity in the tech market, be sure to join 451 Research for a special webinar on Thursday, September 7 at 1:00pm ET. Registration is free and available by clicking here.

NetApp taps Greenqloud for hybrid storage push

Scott Denne

Contact: Scott Denne

NetApp’s reach for Greenqloud marks its third deal of 2017 as the storage vendor climbs its way out of a rocky couple of years. With the purchase of the cloud management provider, NetApp turns 2017 into a busy – although thrifty – year for M&A.

According to 451 Research’s M&A KnowledgeBase, NetApp has never before bought more than two companies in a single year. The price it’s paying for Greenqloud hasn’t been disclosed, but the target has a modest headcount and raised little funding. In its other two transactions this year – Immersive Partner Solutions and Plexistor – NetApp shelled out less than $30m in cash (total). None of the three warranted a press release – instead they were announced via quarterly earnings calls.

After five years of revenue declines, NetApp’s sales are beginning to level off. In its last quarter (the first of its fiscal year), revenue rose 2% to $1.3bn and its profit increased by 2x. Part of its strategy for getting back to growth and improving margins has been a focus on flash storage with its last major acquisition, SolidFire ($870m).

Another part of the company’s strategy, unusual among storage OEMs, is its expansion of hybrid cloud storage capabilities. NetApp’s desire to push its cloud connections forward drove both today’s deal and its pickup in May of Immersive Partner Solutions, which makes hybrid cloud monitoring software. Greenqloud brings NetApp a team that’s been offering public cloud management since 2010, and its Qstack product gives NetApp the technology architecture to expand its delivery of cloud services.

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

Microsoft tones its HPC cloud with Cycle Computing

Scott Denne

Contact: Scott Denne, Csilla Zsigri

In an effort to extend Azure into a potentially lucrative corner of the cloud market, Microsoft picks up Cycle Computing, a company that enables HPC applications in multi-cloud environments. Microsoft’s move fits with a larger trend of cloud providers building and buying software assets to attract those applications with the most appetite for compute and storage.

Cycle Computing has more than a decade of experience orchestrating, provisioning and managing HPC and other intensive computing applications across multiple environments. First developed to take advantage of grid computing, it has more recently launched CycleCloud, and joined Microsoft’s Accelerator program in 2016.

HPC is about three to five years behind enterprise computing when it comes to new technology adoption – the applications are generally more sophisticated, and engineers are conservative. Yet the HPC cloud market is accelerating, and compute- and data-intensive applications in areas such as big data, machine learning, deep learning and IoT are also moving to the cloud. We believe that Microsoft is taking advantage of these trends and is looking to use Cycle Computing’s technology to enhance Azure’s current data-processing capabilities and build virtual supercomputers in the public cloud.

By investing in HPC and other data and analytics applications, Microsoft makes Azure fertile soil for new workloads. According to 451 Research’s Voice of the Enterprise Cloud Transformation survey, 21% of data and analytics workloads will move to public clouds in the next two years, a larger share than any category excepting web and media deployments, which, not coincidently, is where Amazon has focused its recent M&A with acquisitions of Thinkbox Software and Elemental Technologies.

Moreover, that same survey showed that IT departments have a greater threshold for price increases for mission-critical data analytics workloads. Almost half (44%) said they would be willing to pay an additional 26-50% to ensure quality of service, compared with just 30% who would pay such an increase for web workloads.

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

Grand Junction buy shows that Target’s digital strategy goes through its stores

Scott Denne

Contact: Scott Denne

While Walmart is attacking Amazon by air with its Jet.com asset, Target is planning a ground assault. Its acquisition of Grand Junction marks Target’s reentry into the tech M&A market after a nearly three-year absence. And although the price is likely modest – the target only has a dozen or so employees – it aligns with the big box retailer’s expansion strategy.

The deal adds to the list of steps Target is taking to adapt its business to the growth in digital shopping by leveraging its physical assets to improve fulfillment (both in cost and quality of service). The company has worked with Grand Junction on its first experiment with running same-day delivery out of one of its Manhattan locations. It’s also opening a new distribution facility designed to test supply chain and logistical innovations, integrating its existing stores with its digital supply chain and launching 100 new small-format locations.

Even its previous tech acquisition, PoweredAnalytics, expanded its physical capabilities by analyzing data to adjust the in-store experience. Its focus on adapting its physical assets to digital shoppers makes Target’s M&A strategy unique. Walmart, for example, has gone after established e-commerce businesses, starting with Jet.com, to build a niche in online retail in areas like fashion where Amazon hasn’t yet made its mark. Other traditional retailers and consumer goods vendors have bolted on firms that bring them into new markets, such as Barnes & Noble Education’s recent reach for student media provider Student Brands or Whirlpool’s pickup of recipe site Yummly.

Although retailers and consumer goods companies still make up just a fraction of overall tech M&A, their activity has grown as they encounter an accelerating pace of store closures and bankruptcies as shopping shifts to online channels. According to 451 Research’s M&A KnowledgeBase, those buyers have spent $4.7bn across 22 tech transactions in 2017, the same pace as last year’s record level of dealmaking.

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

Unready to step on the stage, Blue Apron is unlikely to step off

Brenon Daly

Contact: Brenon Daly

Welcome to Wall Street, Blue Apron, but what are you doing here? That’s a question making the rounds among a few investors Thursday as the meal delivery outfit publicly reported financial results for the first time since its IPO. And how were Blue Apron’s numbers? Well, suffice to say that the company’s shares, which have been underwater since the offering in late June, sank even further. In roughly six weeks as a public company, Blue Apron has lost nearly half of its value.

Rather than specifically look at the top line or the mess of red ink that Blue Apron reported for its second quarter, it might be worthwhile to focus on a broader point that might have been lost in the quarterly song and dance: Blue Apron probably should have never come public in the first place. The five-year-old company was simply not mature enough to join the NYSE.

But since Blue Apron — needing the cash — went through with the offering, it finds itself in the very awkward position of casting around to find a way to be a sustainable business, and doing it in front of the whole world. Everyone gets to see all of the missteps: the sequential decline in customers and orders, the costs rising faster than sales, the employee layoffs. It’s a bit like a teenager going through the clumsy, fitful process of growing up while on a stage.

However, the company doesn’t appear to going anywhere, with CEO Matt Salzberg saying Blue Apron is committed to building ‘an iconic consumer brand.’ And he’s taken steps toward that goal. Although the IPO very much represented a ‘down round’ for Blue Apron, it nonetheless adds nearly $280m to its treasury. That buys a fair amount of time, as does the company’s dual-class structure of shares, which effectively makes it impossible for shareholders — who, don’t forget, are the actual owners of Blue Apron — to force it to consider any strategies from outside.

For both financial and philosophical reasons, an imminent sale of Blue Apron is unlikely. Nonetheless, we would hasten to add that at its current valuation, shares are priced to move. Wall Street currently values the company at about $1bn, which we could use as an approximate enterprise value (EV) for any hypothetical transaction. (By our rough-and-tough math, we assume that backing out Blue Apron’s cash from the purchase price would be offset by an acquisition premium.)

At roughly $1bn, Blue Apron’s net cost would be less than the $1.1bn it will likely put up in sales this year. That’s a smidge below the average EV/sales multiple of nearly 1.3x in the handful of internet retailers that have been erased from Wall Street since the start of 2015, according to 451 Research’s M&A KnowledgeBase. As those exit multiples suggest, merely becoming an iconic consumer brand doesn’t necessarily pay off.

Disney nabs BAMTech in $1.6bn play for streaming services

Scott Denne

Contact: Scott Denne

At the dawn of the internet, Bill Gates famously said, “Content is king.” For most of the 20 years since then, that sentiment seemed like a sick joke to content makers in print and music who saw their markets eviscerated by Google, Apple and other tech vendors. Now Walt Disney is paying $1.6bn to find out if the adage is finally coming true.

Facing fleeing customers from its cable networks and having handed over online distribution of its films to Netflix, Disney is aiming to take back direct control of its content by building out its own streaming services through its ownership of BAMTech. Disney will spend $1.6bn to purchase 42% of BAMTech, adding to the 33% stake it previously bought in the video-streaming services spinoff of Major League Baseball.

Its desire to own – rather than just be a customer of – BAMTech shows that Disney sees value not only in building its own streaming services but also in enabling other studios to do the same. In that respect, its strategy aligns with those of the major tech companies, most of which have made a push for original content through expensive licensing deals and original content production.

With the pending launch of its own streaming services (it plans to unveil one for sports and one for its entertainment library), Disney hopes to build a direct distribution channel that will generate more value for its content – both in terms of fees and of having direct data about its customers and their viewing preferences – than what the combination of Netflix, MSOs and advertisers are able to pay. Disney watched as the economics of print and music flowed to digital distribution channels. But in buying BAMTech, Disney is making a bet that quality content will reign supreme in video.

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

An M&A break for chip vendors

Scott Denne

Contact: Scott Denne

Intel’s $15.3bn acquisition of Mobileye, which closed today, extended a wave of big-ticket semiconductor deals into 2017, but only barely. Since that transaction’s announcement, only one other $1bn-plus chip purchase has printed, putting 2017 on pace to have the fewest such deals since 2013. There’s little indication that the rate of big semi acquisitions will pick up through the rest of the year.

Toshiba is currently seeking to sell its flash business, which would easily fetch more than $1bn and bring this year’s total of 10-digit purchases to three, leaving it far below recent category totals. Last year’s largest chip transactions – Qualcomm’s $39.2bn reach for NXP Semiconductors (a deal that an activist investor is pushing to renegotiate) and SoftBank’s $32.4bn pickup of ARM – featured two among the 11 companies that fetched more than $1bn. The previous year saw nine such companies get bought.

Two consecutive record years of dealmaking in the category have left behind a dearth of targets for would-be buyers. According to 451 Research’s M&A KnowledgeBase, acquirers spent $116bn on chip vendors last year, breaking the previous year’s record of $90bn – a number that itself was more than double the previous record set in 2006. And since venture capitalists have been absent from the market for a decade, the pool of companies that could command such a price has shrunk notably.

For those potential targets that remain, a run-up in stock prices makes a surge of big deals seem unlikely. The 43% growth in the PHLX Semiconductor index in the past 12 months has outpaced the broader Nasdaq by 20 percentage points. Accelerating stock prices make companies less inclined to launch a sale process or divest large units and the rising multiples that come with a rising stock won’t appeal to buyout shops – the driving force behind this year’s tech M&A market.

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

Tremor Video shakes off its ad network roots with $50m divestiture

Scott Denne

Contact: Scott Denne

The dizzying number of vendors and dozens of subcategories of advertising technology have had many predicting for several years now an imminent wave of consolidation. Yet for the ad-tech vendors trading on US exchanges, specialization – not consolidation – has become the chosen strategy. Tremor Video has become the latest to adopt such a strategy by selling its video ad network to Taptica for $50m in cash.

Tremor, like Rubicon Project, which earlier this year divested its $100m acquisition of Chango, sees more opportunity to expand its relationships with ad sellers, rather than buyers, although the resemblance ends there. Rubicon is a longtime player in supply-side platforms (SSPs) and generates most of its revenue from that business. Tremor will shed most of its revenue with this deal – its remaining assets accounted for $29m of its $167m in 2016 sales.

While Tremor’s business with buyers has declined, its burgeoning SSP – a video ad exchange – expanded its top line by 84% in the past 12 months to $34m in trailing revenue. Without the weight of its buyside business, Tremor can leverage its newfound capital to invest in an anticipated growth in the supply of video advertising coming through over-the-top and connected TV channels.

That Tremor shed almost all of its revenue with little impact on its stock price – it was up about 2% at midday – speaks partly to the opportunities investors see for it to expand with a business model with software-like margins. It also speaks to just how little value investors place on ad networks that sell services to both sides of an ad sale.

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

Yelp delivers Eat24 to GrubHub in $288m deal

Scott Denne

Contact: Scott Denne

GrubHub has topped off a series of snack-sized deals with its largest acquisition in four years as it seeks to fend off burgeoning competition. Its latest move, the $288m purchase of Yelp’s Eat24 business, shows the food delivery incumbent getting creative in its M&A strategy as it pushes to build out network effects among multiple metropolitan areas before bigger companies sidestep into its market.

Today’s deal values the target at $150m more than Yelp paid for the property two-and-a-half years ago and comes with a valuation that’s in the neighborhood of 3x annual revenue. (Neither company disclosed Eat24’s revenue, but its gross sales imply revenue of $90-120m.) According to 451 Research’s M&A KnowledgeBase, that’s well above the median trailing revenue multiple of 1.4x for a public company divestiture in the past 24 months – a premium that’s more impressive considering that Yelp will continue to benefit from delivery orders placed through its restaurant directory.

In addition to the $288m in cash, Yelp’s restaurant reviews will link to delivery options from Eat24 and GrubHub, in exchange for collecting a fee for each order. With its previous deal, the pickup of 27 food delivery markets from Groupon’s OrderUp, GrubHub executed a similar arrangement to integrate its products into the seller’s platform. The company has been a frequent acquirer, inking three transactions so far this year on top of five over the past two years. But now it needs its acquisitions to do more than get it into new markets. Forging partnerships like the one it’s pursuing with Yelp could help pull more orders through its service, which should attract more restaurants, which should attract more orders.

While GrubHub is likely the largest online restaurant delivery company in the US today, it’s still early days for this market. By its own reckoning, 88% of people have never ordered food delivery online. GrubHub needs to work fast to expand and become the largest source of food orders in the markets it serves as other companies see an opportunity to enter this sector through ancillary strengths – Square is attempting to get in through its point-of-sale systems, Uber used its fleet of drivers and logistical prowess to launch UberEats and Amazon, with its demonstrated ability to destroy competitors in coveted markets, recently launched a restaurant-ordering service of its own.

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