No longer a faded garment, Blue Coat to hit the public market

Brenon Daly

Contact: Brenon Daly

More than four years after going private, Blue Coat is set to make a return to the public market. But the company that put in its IPO paperwork is very different from the one that beat a hasty retreat from Wall Street. The resurrected Blue Coat is cleaner, more stable and throws off more cash. And, most dramatically, it’s growing at a healthy mid-teens percentage rate, while the old version was shrinking. The reboot of Blue Coat, which has been accomplished under private equity (PE) ownership, will pay dividends as it makes its debut.

The original Blue Coat, which was founded 20 years ago, was a bit of a faded garment when its initial PE owner, Thoma Bravo, got its hands on it. As noted, revenue was declining as the company stumbled from its network performance origins into Web security, while not doing either particularly well. (451 Research surveys of customers at the time of Blue Coat’s leveraged buyout showed that respondents had a largely unfavorable view of the company, with many indicating they planned to cut their spending with it.) That corporate uncertainty was compounded by churn in the corner office, as three CEOs came and went in just the 18 months leading up to Blue Coat’s LBO.

The company is now squarely focused on network security, while also spending liberally to step into securing the cloud. This growth is crucial because the cloud has effectively expanded the perimeter of a network, and many legacy network-based security products – from some of Blue Coat’s contemporaries – have proven ineffective at addressing cloud and mobile use cases. That helps explain why the company has rung up a $400m bill for SaaS security, acquiring both Perspecsys and Elastica last year.

Blue Coat has taken these strategic steps while roughly tripling cash-flow generation and increasing revenue by about two-thirds. Some caveats, however, are needed when comparing the current financial performance at the company with its earlier numbers. In its prospectus, Blue Coat has put forward several non-GAAP measures as key metrics, including ‘adjusted revenue’ and ‘adjusted EBITDA.’ Although 451 Research relies on GAAP figures, there are compelling reasons – notably the deferred revenue write-downs, which are essentially an accounting exercise – that make it understandable why the company favors those nonstandard measures. With those disclaimers, Blue Coat reports adjusted revenue of $775m and adjusted EBITDA of $223m for its most recent fiscal year, which ended in April. Regardless of the measure, however, it’s fair to say that the new Blue Coat is a whole lot bigger and throws off more cash than it ever has before.

After much of the initial cleanup at Blue Coat was done under Thoma Bravo, the buyout shop sold the company to current owner Bain Capital last March. (As an aside, we would note that Thoma Bravo – despite having one of the biggest buyout portfolios in the tech industry – still hasn’t taken a portfolio company public.) Bain Capital paid $2.4bn, and looks certain to see its blue-hued portfolio company hit the market at north of $3bn.

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Thoma Bravo Qliks ‘buy’ on $3bn analytics deal

Mark Fontecchio

Contact: Mark Fontecchio

Qlik, widely discussed as a potential target, has gone private, selling to private equity (PE) firm Thoma Bravo. The price tag is $3bn, making it the largest analytics acquisition we’ve seen and the biggest in BI since a trio of firms were taken off the market nearly a decade ago.

The enterprise value – 4.2x Qlik’s trailing revenue – comes in below the 4.7x median for all $1bn+ BI deals in the past decade, according to 451 Research’s M&A KnowledgeBase. The difference in this case is the buyer. All other $1bn+ BI transactions were done by strategic, not financial, acquirers. Thoma Bravo and other PE shops typically don’t offer valuations as rich as strategic buyers. It’s also worth noting that this is the second-highest multiple Thoma Bravo has paid on a $1bn+ purchase – the largest was 9.1x for SolarWinds last year, a deal it did in concert with Silver Lake Partners.

In many ways, Qlik is in a stronger position as a private company than it was operating as public one. Its strategy of crafting an analytics platform to cater to the dual and often conflicting needs of IT and business users is a solid one. But it needs further execution. Fulfilling it without the quarterly scrutiny that goes with being publicly traded should provide Qlik with the chance to win back some of the momentum it has lost, as the core market in which it has operated has been swamped by competitors.

Goldman Sachs advised Thoma Bravo on the transaction, while Morgan Stanley banked Qlik.

Four biggest BI acquisitions

Date Acquirer Target Deal value
October 7, 2007 SAP Business Objects $6.8bn
November 12, 2007 IBM Cognos $5bn
March 1, 2007 Oracle Hyperion $3.3bn
June 2, 2016 Thoma Bravo Qlik $3bn

Source: 451 Research’s M&A KnowledgeBase

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For tech M&A, it’s more of the same in May

Brenon Daly

Contact: Brenon Daly

Tech M&A spending appears to be settling into a new normal. In the just-completed month of May, total spending on tech, media and telecom transactions across the globe came in at $21.2bn, according to 451 Research’s M&A KnowledgeBase. That marks the fifth straight month that spending has totaled about $20bn, a level of consistency rarely seen in the generally lumpy tech M&A market. For comparison, in the January-May period in each of the past three years, the highest monthly spending has been at least twice the lowest monthly spending.

May also marked another month of consistency in terms of deal value being concentrated at the top end of the market. Last month, the three largest transactions accounted for half of the total spending, according to the M&A Knowledgebase. That has been true for every month so far in 2016 except February. May’s big-ticket deals included CSC’s purchase of Hewlett Packard Enterprise’s services arm, which stands as the largest divestiture of 2016; Bell Canada’s consolidation of Manitoba Telecom Services; and Vista Equity Partners’ buyout of Marketo, the second-largest take-private of 2016.

Assuming the relatively uniform monthly spending holds for the remaining seven months of 2016, the full-year value of tech deals would come in at about $275bn. That would be less than half of the amount spent in 2015, which represented a 15-year high in M&A, and basically match the level of 2013.

Deal flow in 2016

Month Deal volume Deal value
May 305 $21.2bn
April 335 $19.6bn
March 334 $23.3bn
February 319 $29.2bn
January 378 $20.9bn

Source: 451 Research’s M&A KnowledgeBase

Vista Equity Partners picks up Marketo for $1.8bn

Scott Denne

Contact: Scott Denne

Three years after the peak of marketing software acquisitions, Vista Equity Partners pays $1.8bn in cash for Marketo. The waiting didn’t hurt Marketo. It fetched the second-largest price tag in a marketing automation deal – at $2.5bn, ExactTarget claims first – and at 8x trailing revenue, the valuation lands above the median 5.1x for marketing software transactions worth more than $250m, according to 451 Research’s M&A KnowledgeBase.

Marketo has a claim to that kind of multiple. Its peers – ExactTarget, Responsys and Neolane – all drew valuations in the 8x neighborhood, while Eloqua and Demandforce brought in 10x and 11x, respectively. Those earlier valuations, however, were predicated on synergies with strategic buyers. In hindsight, some of those were imagined synergies. Still, that kind of valuation becomes tougher to justify with a financial acquirer. More so when considering that Marketo has shown little sign of slowing down its spending or reaching profitability: it lost $72m on $224m in revenue over the past 12 months.

Worse still, Marketo has been moving upstream from the medium-sized business market toward the enterprise segment as it seeks continued growth – revenue grew 35% year over year last quarter. As it enters the enterprise arena, it has faced tough competition on pricing from Oracle and other larger software providers that can sustain substantial losses to win market share among CMOs. Valuations have trended much lower in recent months on big-ticket marketing deals than they were in the 2012-13 heyday. Small-business specialists Yodle and Constant Contact were both valued at about 2x, while EQT paid 5x for Sitecore, whose topline and growth are similar to Marketo’s.

That said, Vista Equity will pay slightly less than Marketo’s 52-week high and one could argue that it’s getting a bargain in that respect – it paid the same multiple for Cvent, the event-planning software vendor it took private earlier this year (also below the 52-week high). And it may turn out to be one if there is another wave of marketing software M&A as Marketo is one of only a handful of large, independent players in the sector.

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Calling Wall Street: Twilio looks to break the slump of VC-backed IPOs

Scott Denne

Contact: Scott Denne

Twilio has set itself up for the first venture-backed IPO of the year. The maker of communications tools and services for mobile app developers unveiled its prospectus showing solid revenue growth, mild losses (for a venture capital portfolio company) and a lack of long-term contracts that will make its future results challenging to predict.

The San Francisco-based company finished 2015 with $167m in revenue, an increase of 88% from a year earlier and a growth rate that’s 10 percentage points higher than 2014’s growth. Its losses increased to $36m from $27m. Losses, measured as a percentage of revenue, decreased to 21% from 30% as Twilio generated increasing revenue for each dollar of sales and marketing spending. Marketing spending will likely trend back up in the wake of the company’s IPO as it plans to invest in building its enterprise sales team to land more business within that sector.

Twilio will have to be successful in that strategy to keep growth near its historic pace. The company depends on a single customer for much of its revenue: Facebook’s WhatsApp accounted for 17%, or $28m, of last year’s sales. Meanwhile, its top 10 customers made up a combined 32% of its revenue – so aside from WhatsApp, those clients spent only an average of $3m on the platform. The average account outside the top 10 paid just $4,000 (some customers have more than one account). Unlike most SaaS vendors, the bulk of Twilio’s revenue – over 70% – is billed based on usage. Few accounts, including WhatsApp, have contracts with minimum spending levels – the company maintains just $6m in deferred revenue on its balance sheet.

The variability, lack of contracts and dependence on WhatsApp will weigh down the valuation and, we believe, push Twilio’s market cap toward the lower end of the spectrum among SaaS firms. The company seems to be aware of this and invented a non-GAAP financial metric (something that’s always worrisome to see) called ‘dollar-based net expansion rate’ that, no surprise, shows a growth rate that’s nearly twice that of its GAAP revenue.

RingCentral provides a good predictor of where Twilio’s valuation might fall when it hits the public markets. That company also offers voice and text communications services, although mainly to businesses. While RingCentral has a slower rate of growth – about 30% year over year – it posts more predictable revenue. As Twilio is seeking to do, it started at the low end of the market and has been pushing upstream. RingCentral trades at 4x trailing revenue and we would expect Twilio to fetch something in that neighborhood, giving it a market cap of about $750m on $192m in trailing revenue.

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HPE unloads services biz as outsourcing consolidation gains momentum

Scott Denne

Contact: Scott Denne Katy Ring

Hewlett Packard Enterprise (HPE) is looking to get out in front of a wave of consolidation in the IT outsourcing and services sectors by selling its services business to CSC for $6bn in stock and cash. The deal marks the latest and largest of HPE’s divestitures as the company shifts its focus toward building its software-defined infrastructure capabilities on the back of its legacy enterprise software and hardware group. In divesting its services division, the company risks losing one of its largest sales channels, although not selling the unit presents the same risk as HPE was unlikely to invest heavily in a line of business that’s outside its primary focus just to keep up with market consolidation.

CSC will hand over half of its equity (valued at $4.6bn before the announcement, although CSC stock jumped by one-third afterward) to HPE’s shareholders to acquire the services business. In addition, it will pay $1.5bn in cash to HPE and assume $2.5bn in liabilities, including pension payments and $300m in an outstanding bond taken out by EDS. The deal is structured as a Reverse Morris Trust, where HPE will spin off the target to its shareholders and sell it to CSC in a 50:50 merger, making it a tax-free sale. It values the unit at $8.5bn, or 0.4x trailing revenue – below the 0.6x that HP paid to buy EDS back in 2008.

Along with the cash and stock, CSC has agreed to maintain the level of purchases of HPE gear to service the target’s legacy customers for the next three years. This give HPE a window to maintain a major sales channel while bolstering its appeal to CSC and other major IT services providers, now that it will no longer be a competitor. HPE CEO Meg Whitman will have a seat on CSC’s board and HPE will name half of CSC’s directors.

Although the services unit has shrunk under HPE’s ownership, it had become more profitable in recent quarters. Its top line declined 2% year over year in Q1, but the total value of its contracts and the value of new accounts were both up, suggesting that declines were leveling off. In the overall IT services space, a wave of consolidation will make that increasingly tough to maintain. According to 451 Research’s M&A KnowledgeBase, $27.8bn worth of IT services and outsourcing businesses have been sold this year, already topping last year’s tally and on pace to be the highest total value of such deals since 2007. All of that despite this year being among the lowest in IT services transaction volume.

HPE may have been slow to invest in its services business as the market for traditional IT outsourcing declines and the demand for newer, business application-focused services increases – however, CSC has shown no such hesitation. CSC has inked seven acquisitions in the past 12 months, including consolidation plays such as today’s move and the $720m pickup of Xchanging, as well as deals for new talent and tech, such as its recent acquisitions of SaaS specialists Fruition Partners and Aspediens.

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

Datacenter asset sales up sharply in 2016

Mark Fontecchio

Contact: Mark Fontecchio

Big datacenter companies are munching on the crumbs of their earlier feast. Massive datacenter consolidation in recent years has left the market with few large targets available, yet that doesn’t mean activity is dead. While overall hosted services M&A has dropped in value this year, the volume and value of asset acquisitions in that category has risen, according to 451 Research’s M&A KnowledgeBase. So far in 2016, big datacenter vendors are expanding their portfolios at a bite-sized pace.

Hosted services M&A value sits at $1.8bn year to date, off 53% from the same period last year. Yet asset sales are on pace to rise by a factor of 21 and account for 85% of 2016’s deal value, and have already surpassed the combined totals of 2014 and 2015. Even if you back out Equinix’s $874m divestiture this month of eight facilities to Digital Realty – an unusually large asset sale – such deals are still up 50% by volume and more than 8x in value.

Bolting on a few facilities at a time was always part of a multipronged strategy by the biggest datacenter operators, and it’s become more prominent as several of them have been taken off the market in the past couple years. Largest among them were Telx, Latisys and ViaWest in the US and TelecityGroup and e-shelter in Europe. With fewer sizable targets to pursue, providers have opted to purchase facilities singly or in small clusters, largely to expand geographically, resulting in transactions such as Digital Realty reaching for Equinix’s datacenters, CyrusOne paying $130m in a sale/leaseback deal for a facility in Illinois, Zayo buying a datacenter in Dallas and the always-active Carter Validus Mission Critical REIT purchasing facilities in Texas and Georgia.

We expect the trend to continue this year. While there are still some large potential whole-company targets, they are few and far between. Interxion is the most visible. Earlier this year, it was rumored to be in talks to sell to Digital Realty Trust. That provider’s recent acquisition of eight Equinix datacenters muted that talk. Meanwhile, Verizon divesting facilities from its Terremark buy in 2011, or CenturyLink shedding some of its datacenters, could make for big-ticket transactions.

Hosted services M&A YTD to 5-24-16

Content and data form foundation of Adobe’s M&A strategy

Scott Denne

Contact: Scott Denne

At its annual marketing user conference, Adobe laid out a strategy to extend throughout and beyond marketing by touching on every part of the customer experience with content and data offerings. The company has accumulated the biggest and broadest suite of marketing software products among any of its enterprise software peers. However, it will take many years for marketing software to become a mature segment. For Adobe to maintain its position, it will need to continue to expand its offerings.

Despite the hyperbole about the level of technology spending among CMOs, marketing software remains in an early – though promising – stage. Spending continues to rise and the landscape is fragmented. It will likely remain so as new forms of media and mobile devices continue to sprout. And with them, new methods of customer engagement and increasingly fragmented audiences and data sets. The exits of enterprise software vendors such as Teradata, Hewlett Packard Enterprise and SDL provide Adobe and other remaining incumbents with an opportunity to gain market share and push into emerging corners of this category.

Adobe began its foray into digital marketing with acquisitions – first website analytics company Omniture (2009), and then website content management vendor Day Software (2010). Those two products currently sit at the core of Adobe’s marketing suite and much of the growth in its Marketing Cloud, which currently generates $1.4bn in trailing revenue, comes through the sale of them or cross-selling other offerings to customers that already use Adobe for analytics or content management.

As Adobe looks beyond marketing and toward becoming the data and content layer that powers the customer experience landscape, it could expand into areas such as e-commerce platforms, cross-channel attribution and customer data platforms. Subscribers to 451 Research’s Market Insight Service can access a full report on Adobe’s strategy, product portfolio, competitive positioning and potential targets in the marketing ecosystem.

Digital Realty buys eight datacenters from Equinix to expand European presence

Mark Fontecchio

Contact: Mark Fontecchio

Digital Realty Trust pays Equinix $874m for eight European datacenters that the target needs to unload as a condition of its antitrust clearance from the European Commission for its $3.6bn purchase of TelecityGroup last year (seven of the eight properties in today’s deal are Telecity facilities). Digital Realty, for its part, obtains an instant presence in central London along with a European retail colocation footprint to complement its $1.9bn Telx Group buy in the US last year.

With the move, Equinix sheds about 20% of the facilities and operational square footage that it picked up when it agreed to acquire TelecityGroup. Digital Realty is paying 13x projected 2016 EBITDA, suggesting that Equinix was able to fetch a decent price despite the urgency behind the sale.

Most facilities divested by Equinix are older and have a stable base of clients that include IT service providers as well as financial services, digital media and content companies. Digital Realty has also granted Equinix a future option to purchase two of its datacenters for $215m. Located outside of Paris, the two facilities total about 140,000 operational square feet, and Equinix already operates there under a leasehold agreement.

Today’s deal also creates challenges for Interxion, a multi-tenant datacenter vendor that was set to be purchased by Telecity before Equinix swooped in and bought the would-be acquirer. Digital Realty was high on the list of potential Interxion suitors, but has now shown that it has other options for spreading its business into Europe.

Greenhill & Co advised Digital Realty on today’s transaction, which is expected to close in Q3.

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Value investing: China’s newest export

Scott Denne

Contact: Scott Denne

As acquirers back down from last year’s frenetic pace of dealmaking, there’s one group that’s opening their wallets – buyers from China. The value of transactions from this cohort, like the rest of the market, is down from 2015 highs, coming in at $12bn compared with $21bn through the first four months of the year. Yet the volume of deals is set to outpace last year’s totals.

China coming into its own as a major economic power accounts for much of the momentum. Also, the broader M&A market has shifted toward value-based buys and away from growth. That’s a core element for many China-based businesses. And when they’re hunting for value, they’re homing in on North American targets. Through April, China-based tech vendors have printed 10 such deals for $9.3bn – those numbers are approximately double the pace of any other year in the past decade, according to 451 Research’s M&A Knowledgebase.

And in reaching for North American companies, China-based acquirers have been uniquely cheap. Only once in the past 10 years has the M&A KnowledgeBase recorded such a transaction coming in above 3x trailing revenue, with only four deals above 2x. This year is no exception. Lexmark, which was picked up by a consortium led by Apex Technology, was valued at $3.5bn, or 1x, making it the largest multiple of the year among American firms selling to China. The largest deal (and lowest multiple) was Tianjin Tianhai Investment Company’s purchase of Ingram Micro for $6bn, or 0.1x.

China’s stock markets have come down substantially over the past 12 months, although valuations there still trend high, leaving room for M&A arbitrage. Shares of Apex (Lexmark’s soon-to-be owner) most recently traded on the Shenzhen Stock Exchange at 13.5x, while Tianjin Tianhai (Ingram’s acquirer) trades at 13.2x.

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