Wrapping a ‘blue coat’ around SaaS apps

Brenon Daly

Contact: Brenon Daly

For the second time in about three months, 20-year-old infosec vendor Blue Coat has bought its way into the cloud, paying an astronomical multiple for cloud application control startup Elastica in a $280m deal. Paired with its recent purchase of Perspecsys, Blue Coat has rung up a $400m bill in building out an offering to help secure SaaS applications. That makes it the biggest buyer in this nascent market.

We view the pickups of Perspecsys and Elastica as a bit of a portfolio update and refresh ahead of what we expect to be an IPO for Blue Coat in early 2016. As one of the few large-scale infosec providers, Blue Coat has attracted acquisition interest in recent years. Before its take-private in late 2011, the company was rumored to have drawn a bid from HP. More recently, Raytheon was thought to be considering a run at Blue Coat before nabbing fellow PE-owned network security firm Websense instead. Earlier this year, Blue Coat’s original PE owner, Thoma Bravo, sold the company to Bain Capital. (Incidentally, Goldman Sachs worked Blue Coat’s LBO as well as the secondary transaction.)

Subscribers to 451 Research can see our report on this deal – including valuation, market context and integration outlook – on our website later today and in tomorrow’s 451 Market Insight.

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

SMB focus is the only Constant in Endurance’s latest deal

Scott Denne

Contact: Scott Denne Liam Eagle

Endurance International pushes its M&A efforts into a new bracket with the $1.1bn purchase of email marketer Constant Contact. Endurance has printed dozens of acquisitions since its founding, though nothing of this magnitude: since 2002, its median deal size was only $44.9m across 13 transactions, according to 451 Research’s M&A KnowledgeBase. It’s not just the size of the deal, though – Endurance is also departing from the past in terms of strategy.

Previously, the company focused exclusively on obtaining customers by bolting on other Web hosting vendors. With Constant Contact, it’s adding a new set of services to sell to its existing base – as well as indicating to the market that there’s a larger universe of acquisitions that it can now consider.

Constant Contact’s sale comes at the tail end of a flurry of email marketing M&A earlier this decade – and at a decidedly lower multiple than most. At the high end of outcomes, ExactTarget and Responsys were able to land enterprise valuations above 7x trailing revenue, whereas Constant Contact is fetching just 2.6x.

Growth accounts for some of the difference in valuations. ExactTarget and Responsys were putting up quarters of 37% and 26% year-over-year growth, respectively, prior to their exits, while Constant Contact is coming off a quarter of 13% growth. Also, SMB-focused firms like Constant Contact tend to garner conservative valuations. In its sale to Vocus in 2012, iContact, a smaller SMB email marketer, landed just 3.5x TTM revenue after a year of 25% topline growth.

Endurance International’s largest deals since 2002

Date announced Target Description Deal value
November 2, 2015 Constant Contact SMB marketing apps $1.1bn
July 13, 2012 HostGator Web hosting $299.8m
September 9, 2013 Directi Web Technology Web hosting $105m
July 22, 2011 Dotster Web hosting $62.9m

Source: 451 Research’s M&A KnowledgeBase

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TV ecosystem turns to M&A as viewers change channels

Scott Denne

Contact: Scott Denne

Television’s unassailable position at the top of the media pyramid is under assault. Audience attention shifting to digital media and advertisers following suit are bearing down on TV revenue, just as they’ve decimated print and radio. The largest slice of the advertising industry will be up for grabs in the next few years as big-budget brand advertisers seek new ways to reach the mass scale of audiences that are becoming increasingly rare on television.

Networks have long struggled with the sting of flat advertising revenue. For Viacom and Disney, two of the country’s largest programmers, you have to go back to 2011 to find a year where ad revenue posted anywhere near double-digit growth. An unexpected subscriber exodus from ESPN this summer left Disney with a rough Q2 earnings report and caused a major selloff in media stocks. And as viewers continue to drift from traditional TV, the networks and the cable companies that distribute their content are turning to M&A to hold onto their ad revenue – at Viacom and Disney alone, there’s $13bn in annual revenue at stake (much more if you include carriage fees and licensing sales).

The cable operators have been actively scooping up tech assets to help grow revenue through this transition. The major networks, however, have been relatively muted and their efforts so far are insufficient to stem the flow of billions of ad dollars into other channels. As the infrastructure for reaching audiences changes, they risk becoming disintermediated as advertisers seek ways to reach audiences without a large-scale media buy directly from the networks.

We recently published our full outlook for M&A as the networks and service providers that make up the traditional TV ecosystem look to adapt to the growth of digital video. Subscribers to 451 Research’s Market Insight Service can access it here.

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

Survey: the already weak tech IPO market looks even weaker in 2016

Brenon Daly

Contact: Brenon Daly

Despite 2015 being one of the weakest markets for tech IPOs in recent years, respondents to the M&A Leaders’ Survey from 451 Research and Morrison & Foerster don’t expect a rebound in 2016. (See our full report on the survey.) In fact, more than four out of 10 (43%) forecast a further slowdown in public offerings next year, compared with three out of ten (29%) expecting a pickup in IPO activity. That’s a direct reversal of the already weak sentiment from the previous survey just last April.

By our count, only a half dozen enterprise tech companies have come to market on US exchanges so far this year. More alarmingly, the companies that have made it public in 2015 have continued to get roughed up on Wall Street. Half of this year’s debutants (Box, Apigee and Xactly) are currently trading below the valuations that venture investors put on them. (Similarly, Good Technology abandoned its yearlong effort to go public and instead took a relatively low-multiple sale in September that valued it at less than private-market investors had in previous funding rounds.)

With the IPO market likely to be an unwelcoming place in 2016, a dispiritingly painful reception could be waiting for those late-stage companies aiming to raise capital once again in the private market rather than on Wall Street, according to our survey respondents. A staggering seven out of 10 anticipate that the valuations of late-stage funding will decline next year, compared with just 5% who project up-rounds. Another way to view the incredibly bearish forecast from our survey respondents is that for every one person from the tech M&A community who expects the privately held high-fliers to continuing soaring to higher valuations, 14 respondents predict gravity to set in.

See our full report on the survey results, which includes the outlook for IPOs as well as a near-term forecast for M&A activity and valuations.

IPO market outlook

Survey date Forecast increase Stay the same Forecast decline
October 2015 29% 28% 43%
April 2015 41% 32% 27%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

The end of a bull run in tech M&A?

Brenon Daly

Contact: Brenon Daly

After sprinting at a record rate of M&A spending in 2015, tech dealmakers and investment bankers are planning to catch their breath. In the just-completed M&A Leaders’ Survey from 451 Research and Morrison & Foerster, a record low percentage of respondents forecasted an uptick in their acquisition activity over the next six months, while a record high number predicted a decrease.

Overall in the latest edition of the survey, the bulls were only slightly less bullish, while the bears were dramatically more bearish. The 44% of tech acquirers projecting an acceleration in M&A is only a handful of points below the previous low-water mark, but the 24% indicating a slowdown is more than twice the average negative forecast over the previous seven surveys.

Now in its eighth edition, the M&A Leaders’ Survey from 451 Research and Morrison & Foerster has now registered two ‘outlier’ results – one on the upside, back in spring 2014, and in the current survey, one on the downside. Back in our April 2014 survey, a record 72% of respondents forecasted an acceleration in M&A activity. That clear indication by the main tech buyers and their advisers to get busier did indeed come through in the prints. In the six quarters since that record forecast, the average quarterly spending on tech M&A stands at $120bn, almost exactly twice the average quarterly spending in the preceding six quarters, according to 451 Research’s M&A KnowledgeBase.

In our just-completed survey, we now have a similar – though inverse – significant deviation in responses. Recall that one-quarter of respondents predicted a decline in M&A activity through next spring, which is by far the highest level we’ve ever seen. The wisdom of the crowd, which comes through in our survey results, more or less accurately anticipated the start of a bull run in tech M&A a year and a half ago. In the latest survey, the crowd’s sentiment appears to have swung in the other direction. We’ll have a full report on the latest M&A Leaders’ Survey from 451 Research and Morrison & Foerster on our website later today and in tomorrow’s 451 Market Insight.

M&A spending outlook for the next six months

Survey date Increase Stay the same Decrease
October 2015 44% 32% 24%
April 2015 61% 30% 9%
October 2014 48% 36% 16%
April 2014 72% 24% 4%
October 2013 50% 43% 7%
April 2013 54% 27% 19%
October 2012 49% 34% 17%
April 2012 59% 33% 8%

Source: M&A Leaders’ Survey from 451 Research / Morrison & Foerster

Securing an IPO pipeline

Brenon Daly

Contact: Brenon Daly

As we saw in the recent lackluster debut of Pure Storage, there isn’t much demand on Wall Street for new offerings. The fast-growing storage startup became only the fifth enterprise tech vendor to go public in 2015. Virtually all of the tech IPOs, including Pure Storage, have broken issue, often falling below the valuation they achieved as private companies, when they were smaller and more speculative investments. However, there is one exception to the generally dismal tech IPO market: information security.

Consider the standout offering from Rapid7 . Since debuting three months ago, the threat-detection provider has not only delivered a tidy return to its earlier investors, but has also traded relatively strongly in the aftermarket. And it is doing all that while maintaining a rather rich valuation. Investors value Rapid7 at about $840m, roughly 8x the $100m or so in sales this year that the company will put up.

As with any market that indicates demand, supply will look to satisfy that demand. We understand there are at least three information security firms currently on file and hoping to go public before the end of the year:

  • Veracode: The code-scanning startup is rumored to have picked J.P. Morgan Securities to lead its offering. We gather the company ran a dual-track process, but is now set to go public. It raised a late-stage round about a year ago, bringing its total to about $120m.
  • LogRhythm: The SIEM vendor has navigated through the consolidation that has thinned the number of sizable independent vendors to just a handful. An IPO from LogRhythm would come almost eight years after rival ArcSight went public.
  • SecureWorks: We noted in May that Dell’s managed security service division is looking at spinning off a minority stake of the company. The move would give SecureWorks currency to pick up other MSSPs, as well as (possibly) raise money for Dell as it looks to pay for the largest-ever tech acquisition.

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

Buyout barons pay up in big tech prints

Brenon Daly

Contact: Brenon Daly

Once again, the buyout barons are paying up in their big bets. The latest example of private equity (PE) largess came in the proposed SolarWinds take-private, with Silver Lake Partners and Thoma Bravo teaming up on a $4.5bn offer. That’s a fairly steep price for a company growing sales in the high teens to about $500m this year. On a cash-flow basis, SolarWinds is getting a vertigo-inducing valuation of 27x EBITDA.

While SolarWinds’ valuation is certainly richer than other significant PE deals, this year has nonetheless seen financial buyers ready to pay above-market prices. For instance, Informatica, which put up about $1bn in sales, went private earlier this year for more than $5bn. On a smaller scale, we understand that’s exactly the same valuation Thoma Bravo paid in its purchase of privately held healthcare analytics vendor MedeAnalytics.

Altogether, the PE shops involved in the 10 largest transactions in 2015 have paid an average of 3.4x trailing sales, according to 451 Research’s M&A KnowledgeBase . (To be clear, that’s based on the enterprise value of the targets.) For comparison, that’s a full turn higher than the average valuation for big PE prints over the previous three years. Of course, buyers in the previous years didn’t necessarily have to worry about an imminent raise of interest rates, which might be spurring some of the activity now.

Significant PE deal valuations, 2012-15*

Year Average enterprise value/sales ratio Select transactions
YTD 2015 3.4x SolarWinds LBO, Informatica LBO, Solera Holdings LBO
2014 2.9x TIBCO LBO, Riverbed LBO, Compuware LBO
2013 2x Dell LBO, BMC LBO, Active Network LBO
2012 2.4x Getty Images, Misys LBO, Ancestry.com LBO

Source: 451 Research’s M&A KnowledgeBase *Average enterprise value-to-sales ratio of the 10 largest transactions in each of the years

Mimecast sets stage for IPO

Scott Denne

Contact: Scott Denne

Mimecast’s business is best described in the same language as the enterprise email systems it has grown up managing: reliable, but not very exciting. The 12-year-old provider of archiving, management and security of business email is prepping for an IPO, and the prospectus published in pursuit of that shows a company that, at least for the last few years, has put up steady numbers.

For its most recent fiscal year (ended March 31, 2015), Mimecast posted $116m in revenue, up 31% from the year before and just one percentage point higher than its growth during the previous period. Gross margins in 2014 came in at 68% – the same level as the previous two years – and operating expenses as a percentage of overall revenue have ticked down 10 percentage points in each of the last two years, helping the company trend toward profitability.

What has fluctuated is foreign currency. Nearly two-thirds of Mimecast’s revenue comes from currencies other than the US dollar. In 2014 that brought it a $5m gain, pushing it slightly into the black. The previous year, currency changes led to a $5m expense, contributing to a $16m loss.

When it comes to the valuation the company might fetch, we look at Proofpoint as the best indicator of where Mimecast might trade. The quasi-competitor posts similar gross margins and a similar growth rate to Mimecast, and is valued at 10x trailing revenue. Even though Proofpoint has far steeper losses, its growth is coming off a revenue base that’s about twice Mimecast’s, and it has built up a fair amount of goodwill (and a 4x increase in its share price in the three-and-a-half years since its IPO) with investors through a series of positive revenue announcements and upward adjustments of revenue guidance. Given those factors, we would expect Mimecast to price below the 10x mark by a few turns, likely in the 5-7x trailing revenue range.

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

Can Dell safeguard the VMware ‘crown jewels’ in EMC acquisition?

Brenon Daly

Contact: Brenon Daly

In announcing the largest-ever tech transaction, both Dell and EMC repeatedly assured the market that VMware, which has consistently accounted for an outsized chunk of EMC’s overall valuation, would retain its status as ‘first among equals’ in the EMC federation. Roughly speaking, VMware generates only about one-quarter of EMC sales, but accounted for three-quarters of the EMC’s overall value before the acquisition. VMware was rightfully termed the ‘crown jewel’ of the landmark transaction.

However, despite those intentions, VMware has nonetheless lost some of its luster due to the pending acquisition, at least in two key constituencies. Both IT buyers and Wall Street investors are more than a little bearish on Dell owning the virtualization kingpin. Since the acquisition was announced, VMware’s market value has fallen by as much as $5bn. (That decline is also pulling down the overall value of the transaction because part of the consideration is in the form of tracking stock.) VMware shares have slumped to their lowest level since mid-2013.

To understand why Wall Street is selling the Dell-EMC deal, we have to look to the ultimate arbiters of value for any company: customers. And based on 451 Research’s survey of nearly 450 IT decision-makers, Dell has a lot of work to do to ease the concerns that it will mishandle EMC and its ‘crown jewel.’ In our survey, four of 10 IT pros who currently buy EMC products, but do not buy Dell products, gave the proposed acquisition a ‘thumbs down.’ That was almost three times higher than the percentage of pessimistic Dell-only customers. The main reason cited by EMC-only customers for their bearishness? They still view Dell as dealing in commodity technology. Obviously, with that perception, it’s going to be extremely challenging for Dell to hit its target of $1bn ‘revenue synergies’ through its EMC acquisition.

VMW rev 2010-15

Are customers buying the Dell-EMC deal?

Brenon Daly1 Comment

Contact: Brenon Daly

Michael Dell has had his say. Same with Joe Tucci. But are the customers of the Dell and EMC chief executives actually buying what the two companies are saying about the tech industry’s largest acquisition? Only one way to find out: ask them.

With the ink barely dry on the announcement of Dell’s record-breaking $63.1bn purchase of EMC, 451 Research’s Voice of the Enterprise surveyed almost 450 IT decision-makers to get their sense of what they liked about the transaction, what worried them and, most importantly, how the proposed combination would affect their IT spending. (See the executive summary of the survey results.)

Ultimately, the sentiment and intention voiced by customers – such as those we surveyed – will determine whether Dell-EMC builds itself into a true IT infrastructure and services powerhouse or, like so many other multibillion-dollar tech pairings, devolves into an unhappy, underperforming union. So what does the ‘buyside’ think about the deal?

  • Overall, three out of 10 respondents gave the mega-transaction a thumbs-up, compared with two out of 10 who voted it down. However, within that broad assessment, there was a clear division between the Dell and EMC camps. Dell-only customers (those that currently buy no products from EMC but do buy from Dell) were almost three times more likely to have a favorable view of the deal than EMC-only customers (40% vs. 15%).
  • Why are a plurality of EMC customers bearish about the company’s prospects inside Dell? For the most part, they still view Dell as dealing in commodity technology. More than four out of 10 EMC-only customers consider Dell primarily a PC supplier, and another 20% identify it as mainly a low-cost IT supplier.

As we look at the results of the survey, particularly the perception of Dell as a ‘box maker,’ we can’t help but think that some of the sharp divergence between the views of the two customer bases is attributable to the sharp divergence between the M&A programs at the two companies. To be blunt, Dell was late to the game, with a long-held institutional preference for organic development rather than inorganic expansion. In contrast, EMC liked to shop, spending more than $20bn on 100+ acquisitions over the past 15 years, according to 451 Research’s M&A KnowledgeBase.

In fact, by the time Dell (belatedly) got its M&A machine revving in mid-2007, EMC had already purchased many of the key components of its ‘federation’ business: Documentum, RSA and, of course, the crown jewel of VMware. One existential question – which, for the record, we didn’t ask our panel of IT buyers – was whether Dell would have even needed to buy EMC outright if it had picked up some of the other companies that were nabbed by EMC. Again, to see the responses to questions we did ask on the Dell-EMC combination, check out the executive summary.

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