Sophos rides the endpoint-network convergence wave with SurfRight deal

Scott Denne

Contact: Scott Denne Eric Ogren

Sophos has made its first acquisition as a public company with a $32m deal for endpoint security player SurfRight. The purchase adds behavioral endpoint threat detection to its current drive to unify its network- and endpoint-security products. Sophos recently launched its XG Firewall, a product that aims to share data between its cloud endpoint products and its network-security products, in order to synchronize security strategies.

Sophos has picked up a few endpoint-security companies since becoming a semi-frequent acquirer in 2011, although it hasn’t spent much more than $10m on past deals. Advanced endpoint detection, such as the signatureless variety championed by SurfRight, doesn’t come cheaply. In recent years, we’ve seen Palo Alto Networks pay $200m for Cyvera and F5 Networks spend $92m for Versafe – both targets were putting up modest revenue at the time.

Several security companies are looking to merge endpoint and network security into a single offering. That’s something that Sophos hopes will be particularly appealing to its base of midsize customers, most of which have limited capabilities to deploy multiple security point solutions.

One of the hallmarks of a behavioral endpoint security approach is that you don’t have to know all the gory details of an attack to know that one program should not be manipulating the memory of another. The ability to detect memory-oriented threats, such as those commonly introduced by browsers, without reliance on signatures is a key technology that Sophos is acquiring along with the rest of SurfRight. After integration with its Heartbeat features, Sophos will have an enhanced early-warning capability to coordinate endpoint and network responses to advanced threats.

Holland Corporate Finance advised SurfRight on the transaction. Look for a full report on this deal in tomorrow’s 451 Market Insight Service.

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

Atlassian debut pushes past private valuation

Scott Denne

Contact: Scott Denne

Atlassian debuts on Wall Street with a first-day pop and strong valuation. A 30% jump from its IPO price makes the SaaS vendor one of the few venture-backed companies to go public this year at a premium to its private-market valuation. Atlassian boasts a market cap of $5.6bn in current trading, compared with a $3.5bn valuation in a private round last year.

The offering feeds Wall Street’s nearly insatiable appetite for growth, with Atlassian boosting revenue 50% to $353m in the year leading up to its IPO. More importantly, the Australia-based collaboration software provider appeals to investors with more discriminating tastes. Atlassian has been in business since 2002 and spent the vast majority of that time as a bootstrapped company. Accordingly, it’s posted a profit in each of the past 10 years as it spends less than 20% of revenue on sales and marketing. Altogether, Atlassian is certainly not the typical fare that’s served up by venture capitalists.

While Atlassian’s profitable growth was a factor in today’s valuation, the lesson isn’t that Wall Street demands black ink from companies before they will buy. (Unprofitable SaaS vendors Workday and ServiceNow both trade at similar multiples to Atlassian.) Instead, when it comes to IPOs, public market investors are seeking the ‘next big thing’ rather than a speculative roll of the dice. Atlassian has more than doubled revenue over the past two years to a level where it is generating more quarterly revenue ($101m in the quarter ended in September) than some other recent IPO candidates post in an entire year.

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

ClearSaleing has been anything but for eBay Enterprise

Scott Denne

Contact: Scott Denne

Recently divested eBay Enterprise sheds another asset as the former e-commerce unit of eBay sells ClearSaleing, its advertising attribution business, to Impact Radius. This is the second divestiture from eBay Enterprise since it was acquired by a syndicate of private equity firms in July. Last month, it sold its CRM division to Zeta Interactive.

Algorithmic attribution recently led Convertro, Adometry and MarketShare to substantial exits. Though ClearSaleing was far earlier to market than those companies, it has floundered since 2011 under the ownership of GSI Commerce (which was later acquired by eBay). Impact Radius offers a number of products for tracking marketing data and performance, including an attribution offering. With this deal, it adds algorithmic capabilities that enable it to forecast and model the combined impact of marketing and advertising spend across multiple channels.

Although algorithmic attribution has generated a great deal of interest, there are a number of roadblocks to the technology gaining widespread acceptance. The first is the technical challenge of gathering all of the necessary price and performance data across channels and linking those together via a combination of definitive and probabilistic linkages. The second is the cultural challenge of getting an entire marketing organization onboard with a new set of metrics – metrics that have potentially negative consequences for marketing divisions that were happy to gauge their success on narrow metrics such as last-click attribution and demographic reach.

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

New insight on rapidly emerging IoT M&A activity

Brenon Daly

Contact: Brenon Daly

With the number of Internet of Things (IoT) acquisitions in 2015 already topping the total from the past two years combined, 451 Research has launched a dedicated channel for our qualitative and quantitative research in this rapidly emerging market. The IoT channel is the first addition to our 14-sector research dashboard, which we unveiled last summer.

The new channel covers the full scope of IoT, focusing on 10 primary ‘building block’ technologies that are increasingly enabling the digitalization and virtualization of huge swaths of the physical world. These trends – spanning from edge technology to core technology – have also sparked unprecedented M&A activity in the IoT sector, not only in terms of number of prints and spending on them but also the variety of buyers.

Essentially, any company that has a ‘thing’ and wants to create actionable business intelligence from it can be viewed as a potential IoT acquirer. According to 451 Research’s M&A KnowledgeBase , we have already seen companies as diverse as Google, adidas, Cisco and even farm machinery maker Deere & Company all ink IoT acquisitions. Even as those buyers have helped push spending on IoT deals up a staggering 100-fold in the past four years, the sense is that shopping in this market has only just begun.

For insight and forecasts on both activity and valuations around M&A in the IoT market, be sure to check out our new IoT channel.

IoT M&A

Year Deal volume Deal value
YTD 2015 81 $21.3bn
2014 61 $14.4bn
2013 21 $454m
2012 15 $767m
2011 18 $201m

Source: 451 Research’s M&A KnowledgeBase

November: a middling month for M&A

Brenon Daly

Contact: Brenon Daly

Although the number of tech deals in November dropped to the second-lowest monthly total so far in 2015, the aggregate value of last month’s transactions landed smack in the middle of announced M&A spending levels this year. The $39.3bn worth of spending on tech, media and telecom (TMT) acquisitions in the just-finished month is the median monthly amount for 2015, with five months coming above that amount and five below. Meanwhile, the number of prints in November came in at just 317, about 12% lower than the average rate in the previous 10 months, according to 451 Research’s M&A KnowledgeBase.

By definition, the lower-than-average M&A volume but straight-down-the-middle spending level means last month saw a fair number of big prints. Indeed, the KnowledgeBase tallied 10 transactions with an equity value of at least $1bn announced in November. (That brought the year-to-date total for billion-dollar-plus deals to 74.) However, not one of last month’s acquisitions topped $6bn. For context, in the previous 10 months, we had seen 14 transactions worth at least $6bn.

Looking within deal flow at the top end of the tech M&A market, we can see that much of it came from old-line consolidation. Five of the six largest acquisitions featured buyers reaching for targets that operate in the same market. For instance, videogame maker Activision Blizzard announced plans to pay $5.9bn for fellow videogame maker King Digital Entertainment, while the ever-maturing semiconductor industry saw a pair of 10-digit deals last month.

November’s solid spending level pushed this year’s post-Internet bubble record for M&A spending even higher. With still a month to go, the 2015 total for global TMT M&A spending has already topped $560bn, according to the KnowledgeBase. That works out to $140bn higher than the previous full-year record in 2007. Viewed another way, this year’s level has already added on a full quarter’s worth of spending from the previous record level.

Monthly M&A activity, 2015

Month Deal volume Deal value
November 317 $39bn
October 384 $113bn
September 378 $33bn
August 333 $27bn
July 435 $23bn
June 380 $35bn
May 311 $123bn
April 369 $47bn
March 340 $61bn
February 339 $49bn
January 358 $11bn

Source: 451 Research’s M&A KnowledgeBase

For tech giants, it’s ‘buy bye’ as divestitures hit record

Brenon Daly

by Brenon Daly

Tech giants are having garage sales like never before. What were once viewed as ‘strategic’ businesses at Symantec, Nokia, Intel and others have been placed out on the curb for sale at a record pace in 2015. So far this year, according to 451 Research’s M&A KnowledgeBase, tech companies that trade on US exchanges have already divested $59bn worth of assets. That’s the highest-ever amount for divestitures, and twice the average full-year total over the past decade.

The divestitures are the latest indication of the seismic changes currently sweeping the IT landscape. In some cases, the moves have simply unwound earlier acquisitions that never generated the level of returns the buyer had hoped. Accordingly, buyers-turned-sellers in those situations almost invariably take a bath on the deal, like Nokia selling its mapping business in August for $2.7bn after shelling out $8.1bn for Navteq eight years earlier.

Those ‘coming and going’ divestitures are a fairly standard part of any corporate portfolio review, taking place in virtually every economic cycle. What has elevated divestiture activity in 2015 to record levels is the unprecedented corporate overhauls of many tech giants. That has put more parts in play. For instance, eBay dumped two sideline divisions when it sold PayPal last summer.

Even more dramatically, Hewlett-Packard, which cleaved itself into two $50bn-revenue companies a few weeks ago, has punted five businesses this year – as many divestitures as it had done, collectively, over the previous half-decade, according to the KnowledgeBase. Its latest move to unload TippingPoint sparked additional rumors that HP might look to shed another piece of its security portfolio, ArcSight. That business has been relatively dormant within HP since the mid-2010 acquisition, despite the steady growth in the security information and event management market.

Looking ahead, the divestiture pipeline appears even fuller for 2016. A number of vendors have already indicated that they are looking to sell off businesses, including Citrix, Intuit and Teradata. In addition to the disclosed plans, there’s speculation that Intel could unwind its McAfee unit. (Last summer, Intel ended its experiment with API management, discarding Mashery after owning it for about two years.) And then there’s a long list of assets that Dell might look to divest to help cut the cost of the tech industry’s largest deal, provided it does indeed close. We could certainly envision several ‘pearls’ in EMC’s ‘string of pearls’ being on the auction block, including RSA and Documentum. If they do sell, both the content management and security businesses would be billion-dollar divestitures.

Divestitures by US-listed tech companies

Year Deal volume Deal value
YTD 2015 141 $59bn
2014 151 $43bn
2013 172 $30bn
2012 190 $23bn
2011 123 $19bn
2010 148 $21bn
2009 214 $26bn
2008 136 $23bn
2007 138 $14bn
2006 137 $51bn
2005 144 $18bn

Source: 451 Research’s M&A KnowledgeBase

Managing valuation isn’t just for Square(s)

Scott Denne

Contact: Scott Denne

By mismanaging valuation expectations, Square’s management risks turning what would otherwise be an immense success into a spectacle. Its IPO priced well below the valuations it garnered as a private company, which should lead to plenty of schadenfreude aimed at Square and fellow ‘unicorns’ that let valuations get ahead of reality.

That being said, it’s important to note that Square has accomplished something amazing. The company has shown that design and innovation can challenge even the most stodgy and mature markets – point-of-sale systems, in this case. In the span of five years it grew revenue from nothing to $1bn annually – uncommon growth by any measure. And from a financial and strategy standpoint, the company appears well positioned for continued – if slower – growth as it scales.

Unfortunately for Square, having gotten ahead of itself on valuation creates substantial problems. The company priced below its initial range of $9-11 per share and though it’s up above $13.50 in early trading, its market cap sits at $4.4bn compared with $6bn in a private funding a year ago. Recruiting and retaining executives will now become more difficult. And Square has introduced a narrative of hubris, failure and miscalculation into what had been an unadulterated success story.

Ideally, an IPO should be nothing more than a capital-raising event. In reality, it’s a major milestone that, for good reason, is often compared with a wedding – it should only be about the marriage, though in reality more money is spent on ensuring that the guests have the right perception of the marriage. Guests at Square’s wedding today just found out that the bride (management) and groom (public markets) have a fundamentally different view about where this marriage is heading.

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

InfoSec startups wonder: why bother with Wall Street?

Brenon Daly

Contact: Brenon Daly

Why bother with Wall Street? An increasing number of tech startups – particularly those in the red-hot information security market – are saying ‘thanks, but no thanks’ to going public, and instead raising IPO-like rounds from private investors. So rather than an IPO for security startups being an ‘initial public offering,’ it stands for ‘inflated private offering.’

This trend toward big checks reached new heights this week with a $250m round raised by Tenable Network Security from Insight Venture Partners and Accel Partners. Yes, that’s right: a quarter-billion dollars in a single investment, with no SEC headaches, no public financial disclosure and very few stops on an abbreviated roadshow. If that kind of relatively hassle-free money is sloshing around the security landscape, why wouldn’t a company divert some of it to its own treasury?

And to be clear, that kind of money is available in infosec. So far this year, at least eight security startups have announced single rounds of funding that in years past would have only been available from Wall Street. In addition to this week’s whopper from Tenable, we also saw Illumio raise $100m in April, Zscaler raise $100m in early August, CloudFlare raise $110m in late September, Tanium raise $120m in early September, CrowdStrike raise $100m in mid-July and Okta and Netskope both raise $75m in early September.

Against this flurry of private-market fundings, we’ve seen just one infosec provider go public on US exchanges in 2015. In many ways, Rapid7’s decision to go ahead with its $100m IPO in June is almost endearingly recherché. But the out-of-step decision to go public also comes at a financial cost to Rapid7. Because of an inversion in conventional financing, the liquidity of Rapid7 shares and the transparency actually get discounted when compared with private-market fundings. Rapid7 isn’t even a unicorn, unlike the majority of still-private infosec startups that raised as much – if not more – than it did.

Classical economic theory holds that an imbalance such as this tends to correct over time. (The only open question is when, not if.) However, assuming we do return to a time when Wall Street is the primary – if not exclusive – source for, say, fundings of $100m or more, simply working through the existing backlog of infosec companies that have already done these big-money rounds in the private market could take several years. And, as we have seen in other markets that are temporarily distorted because of an overabundance of capital, working through that can be a painful process.

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

Webinar: What’s ahead for tech IPOs, M&A and all those unicorns?

Brenon Daly

Contact: Brenon Daly

After a record run for tech M&A, where do dealmakers see the market heading in the near term? Are they going to stay busy or catch their breath? And what do they expect to have to pay for startups in the transactions they make? What about the IPO market? And what’s going to happen to the ever-growing herd of unicorns over the next year?

For answers, join 451 Research and Morrison & Foerster on Thursday, November 12 at 10:00am PST for a webinar covering all of these topics and more. (Click here to register for the one-hour webinar.) We’ll be drawing on the findings from the latest M&A Leaders’ Survey from 451 Research and Morrison & Forester as well as highlighting trends in current market activity that have pushed spending on tech M&A to its highest level in 15 years. Already in 2015, buyers have shelled out more than a half-trillion dollars for deals they’ve announced. So the question remains: Where do we go from here?

Register now for a look at what’s behind the recent record and whether that will continue in 2016.

Unicorn outlook

Atlassian’s growth and profit likely to hold up on Wall Street

Scott Denne

Contact: Scott Denne

Atlassian brings investors an unfamiliar pairing: profitability and growth. The Australia-based maker of software for managing developer teams recently unveiled its IPO prospectus, which shows the company posted $353m in trailing 12-month revenue, up 50% from a year earlier. And that has come without the massive hit to profitability that most other software vendors have hoped investors would overlook.

The company posted a $7m profit in its last fiscal year (ending in June), driven down from $19m a year earlier by increased costs in marketing and product development. Atlassian spends far less – about 20% of revenue – toward sales than peers such as Workday and ServiceNow, which put up between one-third and half of revenue toward sales and marketing. The most recent two years marked Atlassian’s ninth and tenth consecutive years of profitability.

Atlassian appears far more stable than many of the recent crop of tech IPOs for whom the public markets seemed more like a last resort than an exit. The company consistently sees its sequential topline grow about 10% each quarter and annual revenue growth has actually accelerated a bit in the past few quarters. The stability comes from a shift toward more subscription revenue, which now generates 27% of sales, up from 19% two years ago. Licensing revenue and maintenance make up most of the remaining total, while sales from its third-party app marketplace doubled last year to $16m, contributing to the acceleration of revenue.

In a secondary stock sale last year, investors valued Atlassian at roughly $3.5bn. It should have little difficulty shooting past that mark in its debut. We’d expect the company to be valued at about $5bn, or 15x trailing revenue – the same level as Workday and ServiceNow, two larger SaaS providers with similar growth rates and no sign of profits.

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