Talend to test the waters on Wall Street

Scott Denne

Contact: Scott Denne

European data-integration company Talend has set its sights on a US listing. Should Talend make it to the public markets, it would become the second venture-backed tech IPO of the year. Last week’s offering by Twilio showed that Wall Street still has an appetite for growth stocks – it currently trades at more than double its IPO price. Talend does little to satisfy that hunger. While Talend and Twilio both posted accelerating growth rates last year, Talend’s topline jumped just 21%, compared with Twilio’s 88%.

Talend’s unveiled IPO prospectus shows that it put up $76m in revenue last year, amid signs that growth is accelerating as subscription revenue increases and services fees hold steady. Subscription revenue rose 27% to $63m while services fees stayed flat at $13m. That pushed its growth rate up three percentage points from 2014’s figure and caused the topline to grow 34% year over year (YoY) in the first quarter. Losses have persisted. Talend has generated a net loss of $19-22m for each of the three years covered by the filing. Its first-quarter numbers show a similar trajectory for 2016.

A secondary sale of the company’s stock last summer valued the business at about $250m. At that level, the company would trade at 3x trailing revenue. We would expect it to price up from that level. Yet it’s hard to envision Talend trading at a multiple beyond that of its open source compatriot Red Hat. For comparison, the latter company garnered a 5.5x multiple on 18% growth YoY last quarter and trailing 12-month revenue of $2.1bn. Talend’s valuation could also be pulled down by fears over the ‘Brexit’ decision, as more than half of its revenue comes from the EMEA region.

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Cisco puffs up M&A totals with CloudLock buy

Scott Denne

Contact: Scott Denne

Cisco continues its aggressive streak with the $293m purchase of CloudLock. The networking equipment giant has spent $2.2bn on five deals since the start of the year – its busiest first half since 2012. It’s not just the amount of spending that marks the aggressive streak. Cisco has been paying healthy multiples. Today’s transaction values the cloud security vendor at over 10x trailing revenue: its acquisitions of cloud application manager CliQr and early-stage chip startup Leaba Semiconductor were also likely above that multiple.

To pick up CloudLock, a cloud application security broker, Cisco needed to continue to pay a high multiple, as several deals in that segment have gone off at a premium. Adallom and Elastica were able to fetch above $200m when they sold to Microsoft and Blue Coat, respectively. Both were only starting to generate revenue. Skyfence was able to get $60m from Imperva before earning a dime in revenue.

Cisco has been particularly active in security M&A. In addition to CloudLock, it paid $452m for Lancope and $635m for OpenDNS, both at above-market multiples. There’s good reason for that. Security is the company’s second-fastest-growing segment, up 17% to $482m in sales last quarter. The macro trends are in its favor. According to our most recent Voice of the Enterprise: Information Security survey, 62% of all IT managers expect security budgets to increase over the next 12 months.

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The June boom for tech M&A

Brenon Daly

Contact: Brenon Daly

With a week still remaining in June, spending on tech M&A this month has already matched the total value of all transactions announced over the previous three months combined, according to 451 Research’s M&A KnowledgeBase. A parade of big-ticket deals, including 11 valued at more than $1bn, has pushed June spending by tech acquirers to its highest monthly level since last October.

Of course, the summer parade is headed by Microsoft’s massive $26.2bn acquisition of LinkedIn in mid-June – a single transaction that exceeds the full monthly spending in all but one month so far this year, according to the M&A KnowledgeBase. But this month’s robust activity has extended beyond just the blockbuster Microsoft-LinkedIn pairing and also includes:

  • The largest-ever online gaming deal, with Tencent paying $8.6bn for a majority stake in Supercell.
  • Thoma Bravo announcing the biggest take-private of the year, paying $3bn for Qlik.
  • Symantec inking the second-largest information security deal with its $4.7bn reach for Blue Coat Systems.
  • Salesforce paying $2.8bn – reflecting a 60% premium and double-digit valuation – for Demandware, the biggest SaaS transaction in nearly two years.

More broadly, the colossal spending month of June lifts 2016 above what had been shaping up as a middling year for M&A. (In the January-May period, spending came in less than half the level of the first five months of 2015.) Including the June bonanza boosts total year-to-date spending to about $180bn, putting it on track for the third-highest-spending year since the end of the recession.

2016 monthly tech M&A activity

Period Deal volume Deal value
June 1-24, 2016 287 $63.3bn
May 2016 317 $21.8bn
April 2016 338 $19.6bn
March 2016 335 $23.3bn
February 2016 319 $29.2bn
January 2016 378 $20.9bn

451 Research’s M&A KnowledgeBase

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The tech M&A ‘Brexit’

Brenon Daly

Contact: Brenon Daly

As the United Kingdom gets set to vote in a historic referendum on its membership in the European Union, we would note that a ‘Brexit’ has already been happening when it comes to tech M&A. The island’s trade relations with the 27 other EU countries are just a fraction of its domestic deals and its acquisition activity with its former colony, the US. It turns out that not many tech transactions flow across the Channel.

Over the past half-decade, just 164 UK-based tech companies have sold to companies based in fellow EU countries, according to 451 Research’s M&A KnowledgeBase. Proceeds from the EU shoppers have totaled only $7bn, with most of that ($4.9bn, or 70%) coming in a single transaction (France’s Schneider Electric picked up London-based Invensys in mid-2013). After that blockbuster, the size of UK-EU transactions drops swiftly, with just one other print valued at more than $300m.

Those paltry totals stand in sharp contrast to the UK’s transatlantic dealings. Some 597 British tech companies have been picked up by US-based buyers, with total spending hitting $57bn, according to 451 Research’s M&A KnowledgeBase. For perspective, that’s more than the $53bn that UK tech companies have paid for fellow UK tech companies in the same period.

Of course, the US and the UK share a primary language and a ‘special relationship’ – in the Churchill sense – that doesn’t extend to other EU countries. And the US has the world’s largest economy, along with the most-acquisitive tech companies, many of which have mountains of cash from European operations that they can’t bring back to the US without taking a significant tax hit. But still, when we compare US-UK and EU-UK acquisition activity, we can’t help but notice the union ties just don’t bind.

Acquisitions of UK-based tech companies since Jan. 1, 2011

Headquarters of acquiring company Deal volume Deal value
European Union 164 $7bn
United States 597 $57bn
United Kingdom 891 $53bn

Source: 451 Research’s M&A KnowledgeBase

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Dell’s discounted divestiture

Brenon Daly

Contact: Brenon Daly

Continuing its efforts to slim down before it gets massively bigger, Dell has announced plans to divest its software business to a buyout group led by Francisco Partners. The sale essentially unwinds Dell’s previous acquisitions of Quest Software and SonicWALL, which cost the company some $3.5bn. Although terms weren’t revealed, we understand that Dell will pocket $2.2bn from the deal.

The discount divestiture of the Dell Software Group (DSG), which generated some $1.3bn in trailing sales, comes less than three months after the company likewise sold its IT services unit, Perot Systems, for less than it originally paid. Dell’s portfolio pruning serves two purposes as it prepares to close its pending $63.1bn purchase of EMC. Divesting the software unit will not only raise some much-needed cash for Dell to cover the largest-ever tech acquisition, but will also clear out some software offerings that would overlap with the assets it is set to pick up from EMC/VMware, notably in the identity and IT management markets. EMC shareholders are set to vote on the sale to Dell next month, with the close of the transaction expected shortly after that. Similarly, Dell expects to complete the DSG divestiture in the late summer or fall.

Deferring to VMware as the software specialist for the combined entity makes financial sense for Dell. By and large, Dell’s software business has been a lackluster performer, unable to grow and running at single-digit operating margins. In comparison, VMware continues to increase its revenue (although at a lower rate than it once had) and operates twice as profitably as Dell’s software unit. And then there’s the matter of scale: VMware alone is five times as large as DSG.

Dell was a relative latecomer to M&A, only really starting to buy companies in 2007. While Dell was on the sidelines, for instance, EMC picked up more than 40 businesses, including RSA and, of course, VMware. Further, we would argue that if EMC hadn’t made the acquisitions it did during the early 2000s, Dell probably wouldn’t have bought the company. It certainly wouldn’t have had to pay anywhere close to the $63.1bn that it is set to hand over for EMC if the target hadn’t used M&A to expand beyond its core storage products.

DSG will be purchased by Francisco Partners, with participation from Elliott Management, a hedge fund better known for pushing businesses to sell than it is for buying them. (Indeed, Elliott took a small stake in EMC and then agitated for a sale of that company.) Francisco says this is its largest-ever deal. The DSG transaction comes as buyout shops are becoming increasingly busy with big prints. Including DSG, private equity buyers have now announced 14 acquisitions valued at more than $1bn since last June, according to 451 Research’s M&A KnowledgeBase.

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Pricing out an alternate reality for Salesforce-LinkedIn

Brenon Daly

Contact: Brenon Daly

An enterprise software giant trumpets its acquisition of an online site that has collected millions of profiles of business professionals that it plans to use to make its applications ‘smarter’ and its users more productive. We’re talking about Microsoft’s blockbuster purchase of LinkedIn this week, right? Actually, we’re not.

Instead, we’re going back about a half-dozen years – and shaving several zeros off the price tag – to look at Salesforce’s $142m pickup of Jigsaw Data in April 2010. Jigsaw, which built a sort of business directory from crowdsourced information, isn’t exactly comparable to LinkedIn because it mostly lacked LinkedIn’s networking component and because the ultimate source of information for the profiles differed at the two sites. However, the rationale for the two deals lines up almost identically, and the division that Salesforce created on the back of the Jigsaw buy (Data.com) runs under the tagline that could be lifted directly from LinkedIn: ‘The right business connection is just a click away.’

We were thinking back on Jigsaw’s acquisition – which, at the time, stood as the largest transaction by Salesforce – as reports emerged that the SaaS giant had been bidding for LinkedIn, but ultimately came up short against Microsoft. Our first reaction: Of course Benioff & Co. had been in the frame. After all, the two high-profile companies have been increasingly going after each other, with Salesforce adding a social network function (The Corner) to the directory business at Data.com and LinkedIn launching its CRM product (Sales Navigator). And, not to be cynical, even if it didn’t want to buy LinkedIn outright, why wouldn’t Salesforce use the due-diligence process to gain a little competitive intelligence about its rival?

As we thought more about Salesforce’s M&A, we started penciling out an alternate scenario from the spring of 2010, one in which the company passed on Jigsaw and instead went right to the top, acquiring LinkedIn. To be clear, this requires us to make a fair number of assumptions as we revise history with a rather broad brush. Further, our ‘what might have been’ look glosses over huge potential snags, such as the fact that Salesforce only had $1.7bn in cash at the time, and leaves out the whole issue of integrating LinkedIn.

Nonetheless, with all of those disclaimers about our bit of blue-sky thinking, here’s the bottom line on the hypothetical Salesforce-LinkedIn pairing at the turn of the decade: It probably could have gotten done at one-third the cost that Microsoft says it will pay. To put a number on it, we calculate that Salesforce could have spent roughly $9bn for LinkedIn back in 2010, rather than the $26bn that Microsoft is handing over.

Our back-of-the envelope math is, admittedly, based on relatively selective metrics. But here are the basics: At the time of the Jigsaw deal (April 2010), fast-growing LinkedIn had about $200m in sales and 150 million total members. If we apply the roughly $60 per member that Microsoft paid for LinkedIn ($26bn/433 million members = $60/member), then LinkedIn’s 150 million members would have been valued at $9bn. (Incidentally, that valuation exactly matches LinkedIn’s closing-day market cap on its IPO a year later, in May 2011.)

On the other hand, if we use a revenue multiple, the hypothetical valuation of a much-smaller LinkedIn drops significantly. Microsoft paid about 8x trailing sales, which would give the 2010-vintage LinkedIn, with its $200m in sales, a valuation of just $1.6bn. (We would add that other valuation metrics using net income or EBITDA don’t make much sense because LinkedIn was basically breaking even at the time, throwing off only a few tens of millions of dollars in cash.)

However, LinkedIn would certainly have commanded a double-digit price-to-sales multiple because it was doubling revenue every year at the time. (LinkedIn finished 2010 with $243m in revenue and 2011 with over $500m in sales, while Salesforce was increasing revenue only about 20%, although it was north of $1bn at the time.) By any metric, LinkedIn would have garnered a platinum bid from Salesforce in our hypothetical pairing, as surely as it got one from Microsoft. But on an absolute basis, the CRM giant would have gotten a bargain compared to Microsoft.

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Cavium nabs QLogic in latest billion-dollar chip deal

Scott Denne

Contact: John Abbott Scott Denne

Sixteen months after its direct rival and onetime parent Emulex was swallowed up by giant chipmaker Avago, QLogic is set to also become part of a more diversified silicon company. Networking and communications semiconductor firm Cavium has agreed to acquire QLogic in a deal that values the target at approximately $1bn. Over the past few years, Cavium has been showing an increasing interest in enterprise and cloud datacenter infrastructure, looking beyond networking into the server and storage sectors. It says there’s little product overlap and plenty of synergies in the combination. Cavium has taken a long, hard look at QLogic’s product portfolio and plans to immediately kill off several legacy product lines when the transaction closes to boost QLogic’s tepid growth into the double-digit range.

Both Emulex and QLogic needed to become part of larger organizations to survive and prosper. Their key positions as suppliers to the server and storage OEM market made them highly desirable properties within more diversified chipmakers, where cross-selling opportunities are everywhere. And with increased activities focused on converged infrastructure, further opportunities are emerging. There is also a clear need for Cavium to diversify. Nokia and Cisco are its two biggest customers, while Alcatel-Lucent (now merged with Nokia) was its fifth-largest client. This isn’t quite as dangerous as it sounds, as there are many design wins spread across the different divisions of those vendors. However, it’s in Cavium’s best interest to extend its business at scale into the datacenter and storage sectors, and to diversify both its customers and revenue sources.

Cavium will pay $15.50 ($11.00 in cash and 0.098 of a share of Cavium) per QLogic share. The deal value is $1.4bn and after backing out QLogic’s cash, it gives the target an enterprise value of about $1bn. Combined, the companies generated $870m in revenue over the past 12 months, with just over half coming from QLogic. Cavium will fund the purchase with a $750m loan, $400m in new Cavium equity and the remainder in cash. The transaction is expected to close in Q3 2016.

This is the latest in a string of acquisitions that shows little sign of slowing, despite an overall deceleration of tech M&A this year. QLogic’s sale marks the eighth $500m-plus semiconductor deal of the year and puts 2016 on pace to best last year’s record tally of such transactions. The level of consolidation and remaining number of chipmakers that can command that kind of valuation point to an impending slowdown.

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PE shops: filling in the middle

Brenon Daly

Contact: Brenon Daly

After buying both small small and big companies, private equity (PE) firms have recently been filling in the middle, too. Since the start of May, buyout shops have been averaging a rapid-fire pace of one midmarket transaction every week, according to disclosed and estimated prices in 451 Research’s M&A KnowledgeBase. Further, the five recent deals, which collectively total $3bn in spending, span a wide range of PE transactions: take-privates, secondaries and cleaning out VC investors.

The activity in the midmarket, which we loosely define as deals valued at $200m-800m, comes amid a thawing in the credit market. As debt has become cheaper and more readily available, buyout shops have accelerated their big-ticket purchases. (All five of this year’s largest PE transactions have been announced in just the past two months. In many cases, these financial buyers have outbid strategic acquirers, a reversal of typical M&A roles.)

Now, the PE deal flow appears to be moving to involve targets valued in the hundreds of millions of dollars, not just 10-digit acquisitions. In recent weeks, we’ve seen Vista Equity Partners, Clearlake Capital Group and Accel-KKR all announce midmarket transactions. (Accel-KKR is particularly noteworthy because its $509m leveraged buyout of SciQuest marks the firm’s first take-private since the recession.)

One reason the financial buyers have lowered their sights is that they have been paying smaller multiples for smaller companies. With the exception of Vista’s purchase of Ping Identity, all of the midmarket deals have gone off at lower valuations than the significant billion-dollar transactions. For instance, buyout shops paid an uncharacteristically rich 8x trailing sales to acquire both Cvent and Marketo in recent weeks.

The surge in PE shopping at the top end of the market coupled with the more recent midmarket uptick has already put buyout spending in 2016 ahead of the January-June levels in any post-recession year except 2013. (That year’s total was skewed by the massive $25bn LBO of Dell.) Already in 2016, PE firms have announced 125 deals totaling $19.7bn in spending. That eclipses the half-year activity in 2015 and 2014, even though overall tech M&A spending this year is only about half the level of the two previous years.

Select recent midmarket PE transactions

Date Acquirer Target Deal value
June 1, 2016 Vista Equity Partners Ping Identity See 451 Research estimate
May 31, 2016 Accel-KKR SciQuest $509m
May 12, 2016 Clearlake Capital Group Vision Solutions See 451 Research estimate
May 31, 2016 Platinum Equity Electro Rent $323m

451 Research’s M&A KnowledgeBase

Big Yellow tries on a Blue Coat

Brenon Daly

Contact: Brenon Daly

Announcing the second-largest information security transaction in history, Symantec says it will pay $4.7bn in cash for Blue Coat Systems. The single purchase eclipses the amount Big Yellow has spent, collectively, on all of its two dozen information security acquisitions over the past decade and a half, according to 451 Research’s M&A KnowledgeBase. Strategically, the proposed pairing is essentially a large-scale combination of Symantec’s endpoint security with Blue Coat’s Web defense, an M&A trend that has mostly featured deals valued in the tens of millions of dollars, rather than billions of dollars.

The transaction will further boost Symantec’s standing as the largest independent security vendor. On a GAAP basis, the combined company would have sales of about $4.2bn. (For perspective, that’s twice the size of McAfee at the time of its sale to Intel in 2010.) Blue Coat recorded GAAP revenue of $599m in its latest fiscal year. However, because of accounting regulations, that figure excludes a fair amount of deferred revenue. In its IPO paperwork, Blue Coat offered a non-GAAP ‘adjusted revenue’ figure that included the written-off deferred revenue totaling $775m in its latest fiscal year. By either measure, Blue Coat would bump up the combined company’s top line by about 20%.

For Symantec, however, bigger has not necessarily proven to be better. Big Yellow only recently cleaved off its Veritas division, unwinding a decade-long effort to pair security with storage that ultimately failed to produce returns. Yet even on the other side of the tumultuous separation, revenue at Symantec shrank in its previous fiscal year by 9%, with the company forecasting that the contraction would continue in the current fiscal year. The instability has also played out in the corner office, with Symantec having run through three CEOs in the past four years. (Note: Symantec currently doesn’t have a permanent chief executive, although as part of the agreement, current Blue Coat CEO Greg Clark will take the top job at the combined company after the deal closes, which is expected by September. In that way, there’s also a bit of an ‘acq-hire’ aspect to the multibillion-dollar pairing.)

The move marks a rare case of a dual-tracking, with Symantec buying Blue Coat less than two weeks after the company revealed its IPO paperwork. And, as we look at Blue Coat’s valuation, we can’t help but think that Big Yellow had to outbid Wall Street to get this transaction done. Think about it this way: a little more than a year ago, current owner Bain Capital was able to purchase Blue Coat for $2.4bn – just half the price Symantec is paying. (Of course, last spring Symantec probably wasn’t in a position to do a major deal, as it was focused on the Veritas divestiture.)

At $4.7bn, Blue Coat is valued at 7.8x its trailing GAAP revenue of $600m. (Even if we view the transaction on the adjusted revenue of $775m, Symantec is paying 6x non-GAAP revenue. Continuing on those unorthodox financial measures, we would add that the acquisition values Blue Coat at slightly more than 20x trailing adjusted EBITDA.) Overall, those valuations are only slightly above the average of just under 7x trailing sales for information security deals valued at more than $1bn over the past 14 years, according to 451 Research’s M&A KnowledgeBase.

Largest information security transactions, 2002-16

Date announced Acquirer Target Deal value Deal valuation*
August 19, 2010 Intel McAfee $7.7bn 3.4x
June 12, 2016 Symantec Blue Coat Systems $4.7bn 7.8x
Feb 9, 2004 Juniper Networks Netscreen Technologies $4bn 14.3x
July 23, 2013 Cisco Systems Sourcefire $2.7bn 10.7x
March 10, 2015 Bain Capital Blue Coat Systems $2.4bn 3.8x

Source: 451 Research’s M&A KnowledgeBase *Price-to-trailing-sales multiple

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The software buyout boom

Brenon Daly

Contact: Brenon Daly

After playing small ball for the first few months of the year, buyout shops have begun taking bigger swings in the M&A market. That’s nowhere more evident than in the bustling enterprise software sector, where private equity (PE) firms have displaced their strategic rivals as the main buyers at the top end of the market.

According to 451 Research’s M&A KnowledgeBase, PE shops have been the acquirers in four of five enterprise software transactions announced so far this year valued at more than $1bn. (The big-ticket shopping list: the $3bn take-private of Qlik, the $1.8bn take-private of Marketo and the $1.7bn take-private of Cvent, as well as the $1.1bn purchase of Sitecore.) Set against this recent string of 10-digit deals by financial buyers, the only corporate acquirer to ink a similarly sized transaction is Salesforce with its $2.8bn reach for Demandware.

The fact that buyout barons are leading the current software shopping spree is a direct reversal of recent years. At this point last year, for instance, there were four software deals valued at more than $1bn, with corporate acquirers announcing three of them, according to the M&A KnowledgeBase. More broadly, PE firms typically account for only about 10-20% of overall M&A spending in any given year. So far this year in the software sector, however, PE shops have accounted for just less than half of announced spending.

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