The SecureWorks IPO: delayed, downsized and discounted

Brenon Daly

by Brenon Daly

So much for the comeback of the tech IPO market. Although SecureWorks did manage to make it public on Friday, the managed security service provider – along with its 17 underwriting banks – had to trim both the size and price of its offering to get investors interested. In afternoon trading on the Nasdaq exchange, SecureWorks shares were changing hands around its offer price of $14, which is lower than the range it laid out earlier.

Recent enterprise tech IPOs*

Company Date of offering
Box, Inc Jan. 23, 2015
GoDaddy April 1, 2015
Apigee April 24, 2015
Xactly June 26, 2015
Rapid7 July 17, 2015
Pure Storage Oct. 7, 2015
Mimecast Nov. 20, 2015
Atlassian Dec. 10, 2015
SecureWorks April 22, 2016

*Includes Nasdaq and NYSE listings only

SecureWorks’ underwhelming debut comes as the first enterprise tech offering since Atlassian hit the market in December. In the intervening months, concerns about slowing economic growth have swept through the world’s equity markets. Here in the US, the Nasdaq Composite Index dropped 15% in the first six weeks of this year. During that bear market, tech companies prudently opted not to continue with their offerings, much as a ship captain would not choose to set sail in stormy seas.

However, by late April, as SecureWorks launched its delayed offering, the storm had mostly passed. The Nasdaq has recovered its losses from earlier in the year, and Wall Street was no longer shaky ground. An April survey of individual investors by ChangeWave (a subsidiary of 451 Research) showed a dramatic turnaround in sentiment: Only one-third of respondents to our April survey said they were ‘less confident’ in the stock market than they were three months ago. That was just half the level at the start of 2016, and the lowest reading in more than a year. On the other hand, almost one-quarter of the respondents indicated they are feeling ‘more confident’ in Wall Street, which was the most-bullish reading we’ve had in three years.

So SecureWorks wasn’t necessarily heading out into stormy weather. Yet it still had to give up a fair amount to get public, which doesn’t seem to make much sense. (And Wall Street is nothing if not rational and judicious.) Sure, the company is unprofitable. But red ink has never stopped investors from buying, even when a company counts its revenue in the tens of millions of dollars but its net losses in the hundreds of millions of dollars. (For the record, SecureWorks is nowhere near that level, having lost $72m on revenue of $340m in its most-recent fiscal year, which ended in January.)

If SecureWorks’ so-so IPO wasn’t entirely due to the broad market or the company, maybe it had something to do with the offering itself. The basics of the SecureWorks IPO could be summarized like this: An established tech company acquires a fast-growing startup, then spins off a minority stake of a class of equity that effectively gives shareholders no voice in the direction or outcome at the company. That’s virtually the same structure as the VMware IPO, which hasn’t necessarily been kind to the company’s minority shareholders.

CW wall street April 2016

Lexmark prints a sale

Scott Denne

Contact: Scott Denne

Lexmark sells to a syndicate of China-based companies for $2.5bn in cash following six years and $2bn invested to transform itself from a printer supplier into an enterprise content management (ECM) software vendor. Despite that spending, its business continued to deteriorate and a series of earnings and guidance disappointments sent it looking for the proverbial ‘strategic alternatives.’

Seine Technology Group leads the acquisition consortium through its subsidiary, Apex Technology – a maker of printer cartridges. Siene also owns Pantum International, a printer and printing services company. Private equity firms PAG Asia Capital and Legend Capital are also participating. Including Lexmark’s debt, the deal values the target at $3.6bn, or 1x trailing revenue – well below the median multiple (1.5x) for hardware providers in the past 24 months, according to 451 Research’s M&A KnowledgeBase. That’s a particularly sorry comparison considering that 15% of Lexmark’s $3.5bn in annual revenue comes from software, where multiples are usually higher.

Lexmark’s printer business has been in steady decline for a few years, dropping 12% last year. Today’s sale aims to reverse that by growing the business in Asia, where Lexmark has little presence at the moment. Lexmark’s software business has grown dramatically via M&A, yet its organic growth doesn’t impress. Enterprise software sales jumped 81% last year to $534m, although most of that was due to a half year of ownership of Kofax ($298m in TTM revenue at the time of its purchase) and its first full year as owner of ReadSoft ($119m in TTM). In the fourth quarter, its software business grew just 5% sequentially. Today’s deal comes as Lexmark is halfway through restructuring those acquisitions, which largely consisted of overlapping products, to improve profits.

Goldman Sachs advised Lexmark on its sale, while Moelis & Company banked the buyers.

What happened to Alphabet’s M&A bets?

Brenon Daly

Contact: Brenon Daly

As part of an effort to provide more strategic focus as well as financial transparency, Google reorganized and renamed itself Alphabet last October. In the half-year since that change, the company has lived up to the ‘alpha’ part of its new moniker, handily outperforming the Nasdaq, which is flat for the period. But when it comes to ‘bet,’ it hasn’t been placing nearly as many M&A wagers as it used to.

So far in 2016, the once-prolific buyer has announced just two acquisitions, according to 451 Research’s M&A KnowledgeBase. That’s down substantially from the average of six purchases that Google/Alphabet has announced during the same period in each of the years over the past half-decade. (Nor do we expect this year’s totals to be bumped up by Google buying Yahoo, as has been rumored. That pairing would roughly be the sporting world’s equivalent of the Golden State Warriors nabbing the Los Angeles Lakers.)

The ‘alpha’ part of Alphabet is, of course, the Google Internet business, which includes the money-minting search engine, YouTube, Android and other digital units. This division generates virtually all of the overall company’s revenue and is the primary reason why Alphabet is the second-most-valuable tech vendor in the world, with a market cap of over a half-trillion dollars. For more on the company’s progress in dominating the digital world, tune in on Thursday for its Q1 financial report and forecast.

Google/Alphabet M&A

Period Number of announced transactions
January 1-April 18, 2016 2
January 1-April 18, 2015 6
January 1-April 18, 2014 8
January 1-April 18, 2013 4
January 1-April 18, 2012 4
January 1-April 18, 2011 8

Source: 451 Research’s M&A KnowledgeBase

Interwoven unwound: HP Inc sells its marketing unit to OpenText

Scott Denne

Contact: Scott Denne

HP Inc unloads some of the lesser bits of its regrettable acquisition of Autonomy with the $170m sale of HP Engage to OpenText. Many of the key pieces of Autonomy – acquired in 2011 for $11.7bn and shortly thereafter written down – remain with Hewlett Packard Enterprise (the software side following HP’s breakup). HP Engage includes most of the assets from Autonomy’s 2009 purchase of Interwoven.

At the time of the split of the original HP, the company hung out a ‘for sale’ sign by housing HP Engage – its customer experience and marketing software unit – within its printer division. Despite its seeming eagerness to unload those assets, HP scored a decent price. According to 451 Research’s M&A KnowledgeBase, the sale values the business at just a hair under 2x revenue and compares quite favorably with the 1.4x median multiple for divestitures from public companies over the past 24 months.

Still, the deal marks the culmination of a steep descent for Interwoven, which fetched $775m in its 2009 sale to Autonomy. With this transaction, OpenText adds content management (HP TeamSite), digital asset management (HP MediaBin), call-center management (HP Qfiniti) and website personalization (HP Optimost), among other capabilities. Along with iManage, which HP sold to the division’s management team last summer, HP has now offloaded Interwoven.

From the other side of the table, the move follows OpenText’s template. In HP Engage, as in many of its acquisitions, OpenText obtains a fading software asset that’s generating cash from a business that’s somewhat complementary and slightly overlaps with OpenText’s existing offering. The valuation falls a bit lower than the 2.3x median multiple on OpenText’s deals this decade – the company has never cracked the 3x mark.

Will Zuora play in Peoria?

Brenon Daly

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

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

Oracle crosses device matching off its shopping list

Scott Denne

Contact: Scott Denne

Oracle wastes no time matching Adobe’s cross-device announcement last month with one of its own as it acquires Crosswise, an Israel-based startup that sells data to enable advertisers to link disparate devices to a single anonymous profile. As digital advertising moves from its home base in the desktop into phones, tablets and connected televisions, cookies have lost most of their value as a mechanism for targeting and measurement. Any vendor selling marketing and advertising software for targeted campaigns must move beyond the cookie, and cross-device data providers like Crosswise offer the most obvious path to getting there.

Purchasing several marketing SaaS firms in the early part of the decade was Oracle’s initial foray into the world of marketing software. But following its 2014 reach for BlueKai, an audience management platform and data exchange vendor, all of the company’s efforts have been dedicated to building a digital advertising and marketing data offering. In addition to the pickup of BlueKai (see our deal value and revenue estimates for that transaction here), Oracle paid hefty amounts to buy offline retail data provider Datalogix (estimate) and a source of online behavioral data in AddThis (estimate).

The addition of Crosswise gives Oracle a stronger story around identity. The rationale behind its earlier purchase of Datalogix was to give its BlueKai software the data and infrastructure to form a better picture of consumer identity. Datalogix accomplishes this by taking data traditionally associated with direct mail (household demographics) and matching it with information from retail loyalty card programs and online behavior to form consumer identities that cross the online and offline worlds. Crosswise fills a significant gap in this by linking devices and enabling Oracle to offer a single set of data to power targeted ad campaigns and then measure the impact online and offline.

Several acquisitions of cross-device matching providers have left few available targets for the next round of would-be buyers. Most deals have been modest tuck-ins, such as purchases by privately held companies AppNexus, Lotame and Qualia Media. Oracle’s acquisition of Crosswise, a three-year-old startup with just $5m in funding, is likely a bit larger than those, yet far smaller than the most recent transaction in the category – Telenor’s $360m purchase of Tapad in February. Drawbridge, one of the pioneers and largest independent player in this segment, is the most visible target. Others include Adbrain and Augur.

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

Locally grown is not satisfying enough for Alibaba’s palate

Mark Fontecchio

Contact: Mark Fontecchio

Alibaba is aggressively looking to expand its e-commerce empire beyond China, and is spending heavily to do so – its latest investment being $1bn for a majority stake in e-commerce vendor Lazada. The acquirer, which has mostly limited its purchases to China, is beginning to look abroad as the growth of its local revenue slows.

Yesterday’s reach for about two-thirds of Lazada was its first for another online retail business, according to 451 Research’s M&A KnowledgeBase. A deal of that size for online retail is rare – we count just a handful of other $1bn+ transactions in the past 15 years in that space – making Alibaba’s move that much more significant in its international push. Singapore-based Lazada also operates in Indonesia, Malaysia, the Philippines, Thailand and Vietnam.

The challenge for Alibaba will be transforming Lazada into an operation as efficient as its own. While Alibaba has 5x as many employees as Lazada, it generates 61x the sales. And it’s profitable. Lazada’s losses, on the other hand, have grown at a faster clip than its revenue (sales increased 80% to $191m in the first nine months of 2015, but its adjusted EBITDA losses more than doubled). The pickup of Lazada follows shortly behind its participation in a $500m funding round for India-based Snapdeal.

Lower than expected growth is driving Alibaba’s expansion outside its home country. Its revenue last year grew 27% to about $12.8bn, below the 33% growth rate in 2014 and much lower than in previous years. Wall Street has pounded Alibaba’s stock for repeatedly not meeting analysts’ revenue projections, sending shares down 16% from its opening day price in September 2014. Growth is increasingly difficult for Alibaba to find locally – for example, the company is setting up thousands of rural service centers to cater to areas with little or no Internet access. Thus, it is looking beyond its borders to find it.

Credit Suisse Securities advised Alibaba on its acquisition of Lazada, while Goldman Sachs banked Lazada.

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Facebook’s success in mobile media can’t be left to F8

Scott Denne

Contact: Scott Denne

As Facebook opens its annual F8 developer conference today, it’s worth noting that while the company is clearly ascendant in mobile, it’s not dominant in digital media, where it is very much the challenger to Google. Facebook’s growth is impressive. Revenue spiked 44% to $18bn (80% of that in mobile) in 2015, a number it reported just after its 11th birthday: Google passed the $20bn mark in nine years and today is nearly quadruple that size. In the next phase of growth, where Facebook is positioning itself as a mobile media vendor, not just a social media vendor, Facebook faces a distinct set of challenges than Google was up against when it grew from its base in search to owning the Web.

Once Google sewed up the search market, it faced scant competition as it soaked up much of the digital advertising landscape and was the clear winner in the first phase of digital media. The same isn’t true of Facebook. It finds itself facing an incumbent in Google and its future lies in the outcome of a comparatively fluid media market. Now that it’s emerged as the dominant social media platform, the company is taking a subtler approach as it seeks to win the next phase of digital media. In addition to facing a strong incumbent, Facebook is saddled with higher expectations – its stock trades at 16x trailing revenue, while Google was valued between 5-6x at the same moment in its own history.

Facebook plans to own the next phase of digital media by offering measurement, metrics and distribution to enable advertisers and publishers to transition into mobile. The best indication of the difference in strategy is that while Facebook was widely expected to launch a media-buying platform along the lines of Google’s DoubleClick Bid Manager, its recent relaunch of Atlas instead focused on measurement and attribution. And most importantly, it focused on measurement of people and demographics, the lingua franca of today’s television business, not cookies and intent – the currency of display advertising. While Google made a mint dismantling the print media market, Facebook is pursuing a potentially more lucrative opportunity in capturing the shift of TV budgets to digital and hoping to do so wherever those dollars land – in-apps, in online videos, on its network or in any new format that could emerge from mobile.

Facebook’s bet is that once advertisers see that mobile works, more will shift to that medium and the company will be the largest beneficiary. It’s well positioned to do that. Nearly one billion people per month engage with the social network across multiple devices, making Facebook better positioned than anyone to link different devices into a common digital currency. The challenge in that strategy is that Facebook must not only be the dominant social network (to power its measurement capabilities), it must also remain the dominant mobile media provider – the money’s in selling the media, not the measurement.

That’s a more difficult and unpredictable path than the one it (or Google) faced in building out a browser-based business. Innovation and change is no longer limited to what can be done at a desk and on a PC. The mobile medium is still nascent. The next phase of digital media will play out across many types of devices (phones, TVs, watches and more to come), and many of those devices are part of consumers’ lives in a way that a TV set or PC never was. All of this makes the future of mobile media challenging to predict. Facebook’s need to own the unpredictable explains its wildly valued – though reasonable – purchases of Instagram, WhatsApp and Oculus VR and will be justification when the company bets on the next new media. Over the next two days, we’ll be watching to see what Facebook thinks that might be.

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

CallidusCloud’s accretive acquisitions

Brenon Daly

Contact: Brenon Daly

With the $4m purchase of assets from ViewCentral, CallidusCloud has added on to one of its first add-on businesses. The company, which started life 20 years ago selling sales compensation management software, has used a bakers’ dozen deals since 2010 to expand its portfolio into software for employee hiring, marketing automation and on-the-job training. ViewCentral brings billing and payment technology to CallidusCloud’s learning management offering, a product that has its roots in the mid-2011 acquisition of Litmos.

By themselves, the small transactions, which have cost the company an average of just $5m a pop, aren’t all that significant. But collectively, they have expanded the market for CallidusCloud and given it the opportunity to increase high-margin revenue by selling additional products. (In 2015, the company said it did more than 80 multi-product deals.) CallidusCloud’s strategy of inorganic growth also stands in sharp contrast to rival Xactly, which has stayed out of the M&A market as it has maintained its focus on selling its core sales compensation management offering. (See our recent report on Xactly’s strategy and market position.)

Obviously, the M&A activity at the two companies isn’t the sole difference between CallidusCloud and Xactly, any more than it fully accounts for the relative valuation discrepancy between them. Still, it is worth considering how the acquisition-based portfolio expansion has paid off for CallidusCloud, at least in its standing on Wall Street. CallidusCloud currently garners twice the valuation of its smaller rival. (CallidusCloud trades at about $930m, or 4.4x times 2016 projected sales of $212m, compared with Xactly, which trades at $215m, or 2.3x times this year’s projected sales of $95m.) Further, since it came public last June, Xactly has shed about one-fifth of its value, while CallidusCloud shares are slightly in the green over that period.

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

Tech buyout shops play small ball

Brenon Daly

Contact: Brenon Daly

The pinched debt market so far this year has buyout shops scaling back their purchases, but doing more of them. Already this year, private equity (PE) acquirers have announced 68 transactions, with several larger firms such as The Carlyle Group and Vista Equity Partners having already put up two or three prints. The pace of PE activity is almost 20% higher than the start of the two previous years, according to 451 Research’s M&A KnowledgeBase.

However, spending on those deals has dropped dramatically, with the value of PE transactions so far in 2016 just half the average of the two previous years. Buyout shops have announced deals valued at $5.3bn since January 1, down from $9.7bn in the same period last year and $11.6bn during the same period in 2014, according to the M&A KnowledgeBase. To get a sense of how far the size has fallen, consider this: the biggest transaction so far this year would rank as only the sixth-largest PE deal printed during the same period of 2014 and 2015.

Fittingly, the biggest PE purchase so far this year is a divestiture (Airbus’ sale of its defense electronic business to KKR). Hewlett Packard Enterprise, CA Technologies and Intuit have also all sold divisions to buyout firms. The other notable driver of activity has been secondary transactions, where PE firms sell portfolio companies to other PE shops. Examples of these buyout-to-buyout deals in 2016 include Infogix and Sovos Compliance.

Taken together, the strategies that buyout firms have used so far this year are much more conservative than what we saw in the two previous years. (For instance, exactly a year ago, Informatica went private in a PE-backed transaction for $5.3bn, which valued the slow-growing data integration software provider at about 5x trailing sales and 25x EBITDA.) In many ways, this year’s activity simply reflects PE firms picking up smaller and less expensive targets, effectively doing deals with ‘walking around money’ rather than depending on lenders. But as those lenders (slowly) return to the market this year, we may well see buyout shops start to bag bigger targets once again.

PE-backed M&A

Period Deal volume Deal value
January 1 – April 7, 2016 68 $5.3bn
January 1 – April 7, 2015 53 $9.7bn
January 1 – April 7, 2014 61 $11.6bn

Source: 451 Research’s M&A KnowledgeBase

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