Microsoft adds Adallom

Brenon Daly

Contact: Adrian Sanabria Brenon Daly

Continuing its accelerated shopping spree, Microsoft has reached for infosec startup Adallom. Although terms weren’t released, reports from newspapers in Israel, where Adallom has its roots, peg the price at $250m-320m. Assuming those reports are reasonably accurate, the acquisition would be larger than our understanding of the Aorato buy last November. Aorato stands as Microsoft’s most recent security purchase, and the technology will run alongside the just-acquired technology from fellow Israeli company Adallom.

The Adallom pickup fills a gap between cloud-based IAM and third party SaaS products, allowing Microsoft customers to add much broader control over user authorization and activity within internal (Office 365) and third-party SaaS applications such as Salesforce, Workday and Google Apps. This extension of user permissions and directory services creates a layer of monitoring and control not previously possible in the traditional enterprise. Also, with Office 365 as one of the most popular services for vendors such as Adallom to enhance, Microsoft now has the opportunity to offer much greater control, visibility and security to existing customers.

Microsoft’s purchase of Adallom is the tech giant’s twelfth transaction of 2015, which is twice as many as it has averaged in the same period each year over the past half-decade. Moreover, virtually all of the companies that Microsoft has snagged this year have been relatively small startups. (All but one of the startups acquired in 2015 has raised $50m or less in total funding.) In years past, Microsoft has typically announced a 10-digit deal (e.g., Nokia devices, Yammer, Skype) along with the technology tuck-ins. Of course, that shift to smaller targets might have something to do with the billion-dollar write-downs Microsoft has made on several of its larger acquisitions inked under previous CEO Steve Ballmer.

Recent Microsoft M&A activity

Period Number of announced transactions*
January 1 – September 8 2015 12
January 1 – September 8 2014 7
January 1 – September 8 2013 7
January 1 – September 8 2012 5
January 1 – September 8 2011 3
January 1 – September 8 2010 0

Source: 451 Research’s M&A KnowledgeBase *Excludes purchases of domain names and IP addresses

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BlackBerry sweetens its own turnaround

Scott Denne

Contact: Scott Denne Chris Hazelton

BlackBerry looks to right another ship with the $425m cash acquisition of Good Technology. Brimming with confidence following the comeback from its own near-sinking, BlackBerry is taking on the mobile management software vendor, which was poised for a public offering earlier this year, yet never pulled the trigger – instead, it added another $80m in private financing to its then-dwindling cash pile.

BlackBerry is transforming itself from a device maker to a mobile security software provider for enterprises. Good is a leading mobile security vendor, but the two companies have often clashed when it comes to mobile messaging. With the future in supporting and securing mobile apps, Good is further along on this route when it comes to iOS and Android. This deal offers BlackBerry a major opportunity to catch up to and surpass the competition. Good has more than 2,000 ISV- and customer-developed apps, which now gives BlackBerry one of the largest mobile app ecosystems. There may be some overlap in customers, but BlackBerry did experience a long period of customer migration, and some of that went to Good. In effect, BlackBerry might be buying back former customers.

Good posted decent growth last year, racking up $211m in revenue for an increase of 32%. However, its losses were excruciating, at $95m for the year, and losses the previous two years were in the same neighborhood. While spending heavily on topline acceleration isn’t rare among its peers, Good didn’t have much to show for it once you take into account that one-third of that revenue came from its legacy consumer products and intellectual property licenses, two segments that were not expected to be meaningful contributors in the long term – more so today as BlackBerry was Good’s most significant licensee.

We’ll have a full report on this transaction in our next 451 Market Insight.

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Family drama at VMworld

Brenon Daly

Contact: Brenon Daly

Even before he talked products or markets, VMware CEO Pat Gelsinger kicked off his comments to Wall Streeters at his company’s annual conference with a moment of ‘family time.’ In this case, it was to defend the current corporate parentage, with EMC owning a super majority of VMware as part of a larger ‘EMC Federation.’

Gelsinger essentially said that the way things are now in the EMC family is the way they should be. He went on to knock down rumors that he was planning – or even considering – any changes in the current corporate structure, specifically singling out recent reports about a kind of fratricide by VMware in which his company would take over EMC. ‘Better together’ is the family motto.

Not everyone agrees, however. Some critics, such as the kind that buy small chunks of stock in a company and then try to tell it what to do, counter that the current structure actually inhibits growth in the family.

The activist hedge funds have a point, given that VMware stock has basically flatlined over the past five years while the S&P 500 Index has nearly doubled. (The underperformance stands out even more when we consider that a half-decade ago, VMware was running at less than $1bn in quarterly revenue. It now puts up more than $1.5bn in sales each quarter. There aren’t too many S&P 500 companies that are two-thirds bigger now than they were in 2011. Most, including EMC, have only slightly grown.)

Given that Elliott Associates, an activist hedge fund that has already successfully pushed to reshuffle EMC’s board of directors, effectively crashed the VMworld party, it’s not unreasonable to expect even more changes in the EMC Federation. (Remember, too, that the ‘standstill’ agreement between Elliott and EMC expires this month.) There may well be some family drama before the year is out.

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Black swans roil tech M&A market

Brenon Daly

Contact: Brenon Daly

During the six-year bull run on Wall Street, corporate treasuries have been as flush with cash as executive offices have been flush with confidence. Put those two factors together and we have the makings of an M&A boom like the one that has put spending on tech acquisitions so far this year already twice as high as it was in the recession years.

Remove either of the crucial components of cash and confidence, however, and deals don’t get done. It’s hard to go shopping when your head is spinning with volatility and your guts are clenched in uncertainty. That hesitancy comes through clearly when we look at the prints for August.

In the first two weeks of the month, it was business as usual. Private equity shops and corporate buyers around the globe announced 172 tech, media and telecom (TMT) transactions with an aggregate value of $21.6bn, according to 451 Research’s M&A KnowledgeBase. In the two weeks that followed, as black swans flew above the equity markets around the world, dealmakers announced just 145 acquisitions worth $4.6bn. As uncertainty erased trillions of dollars of stock market capitalization over the past two weeks, spending on M&A plunged almost 80%.

Heavily skewed to the first half of the month, August spending totaled $26.2bn, which is roughly half the average amount for the previous seven months of 2015. Yet even with the mini-recession in tech M&A since mid-August, spending on 2015 deals overall is still tracking to its highest level since 2000. Through eight months of the year, dealmakers have announced transactions valued at about $375bn, roughly $45bn short of the $420bn recorded in 2007.

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Wall Street confidence July 2015

 

 

 

LANDesk lands a new dashboard with Xtraction acquisition

Brenon Daly

Contact: Brenon Daly

In its first acquisition in almost a year, LANDesk picks up existing partner Xtraction Solutions in an effort to make data more visible for the systems management vendor’s clients. The two companies have been partners for more than a year, with a handful of joint customers using Xtraction’s dashboards. Although terms weren’t disclosed, we understand that LANDesk paid in the low tens of millions of dollars for Xtraction, which had only a dozen or so employees and no outside funding.

In addition to data visualization (think, ‘BI for IT operations’), the deal is also important because it expands the sources of data that can be represented. Most IT environments are a hodgepodge of technology from various vendors and vintages. Xtraction has 50 connectors built for many of the larger IT management providers, including HP, Microsoft, BMC and ServiceNow. Another area where LANDesk might look to expand Xtraction’s reporting technology is IT security, where dashboards are increasingly being used to help make sense of the streams of reports about the ever-expanding number of vulnerabilities faced by businesses.

Xtraction is the sixth purchase LANDesk has made since private equity firm Thoma Bravo carved out the systems management vendor from Emerson Electric five years ago. Since then, according to our understanding, LANDesk has added about $100m to its top line while nearly tripling its cash flow. The company says it has plenty of cash in treasury – not to mention a deep-pocketed owner in Thoma Bravo – to continue to add pieces to its IT management platform.

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Cross MediaWorks drawing BlackArrow at evolving TV ecosystem

Scott Denne

Contact: Scott Denne

BlackArrow becomes the latest acquisition target as legacy media businesses seek ways to cope (and maybe even benefit) from the secular shift in television viewing habits. The 10-year-old maker of technology for delivering ads into video-on-demand streams has sold to Cross MediaWorks, a reseller of local TV ad inventory.

BlackArrow’s platform enables cable and other TV service providers to sell ads into DVR and other forms of streaming video (across both Internet Protocol and QAM standards). In addition to the ad-insertion products, BlackArrow has developed a number of capabilities that should benefit Cross MediaWorks in packaging together ad inventory, including software for affiliate stations to manage their inventory – which could have applications for Cross to sell to networks and use internally – as well as an audience management platform to enable customers to develop targeted media plans.

The company was one of several startups that launched in the first half of the past decade to pursue the opportunity to bring some of the ad-targeting techniques of the Web into the world of television advertising. For most of its life, BlackArrow – as well as peers Canoe Ventures, INVIDI, Visible World and THIS TECHNOLOGY – was simply too early. Once reliably large, TV audiences were bleeding into DVR and across a larger pool of cable networks, but media buyers had yet to feel that they needed to buy differently to reach those audiences.

During that period, the company grew to a respectable business of about $20-30m in annual revenue, mostly through its capability to enable advertisements in DVRs. Now these once-early businesses are looking timely. In addition to today’s deal, Comcast took out both Visible World and THIS TECHNOLOGY earlier this year and Verizon paid $4.4bn to push AOL’s ad technology further into the TV ecosystem.

What’s changed is that viewers are fleeing traditional television for online video and video-on-demand services, the largest of which doesn’t even have advertisements in its content. As that happens, broadcasters and service providers need tools and technologies to optimize the audiences they have. Earlier this month, both Disney and Viacom fell short on quarterly earnings due to weakness in TV ad sales. And as surveys from ChangeWave Research, a service of 451 Research, show, the move away from paid TV services is gaining momentum.

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Seagate pushes up the stack with Dot Hill

Scott Denne

Contact: Simon Robinson Scott Denne

Seagate finally opened up its wallet a bit, paying $694m for storage-systems company Dot Hill Systems. With an enterprise value of $645m, Seagate values the target at 2.6x trailing revenue. While certainly not an industry record (and half a turn below the median for similarly sized storage deals), it’s a 79% premium on Dot Hill’s prior-day stock price. And the purchase marks a high for Seagate, which hasn’t broken the 1x TTM revenue mark on any hardware or systems vendor in at least a decade, according to 451’s M&A Knowledgebase.

The Dot Hill acquisition marks another notable step in Seagate’s transition from an HDD manufacturer into a broader supplier of data-storage products and services. Historically, HDD manufacturers have been reluctant to develop systems-level products, lest they tread too strongly on the toes of their major server and storage OEM customers. However, Seagate has been here before – in 2000 the company acquired storage systems specialist Xiotech for $360m. This was not a successful move, and Seagate later unloaded the company.

So why does Seagate think it can succeed this time around? A couple of things have changed the dynamic and emboldened the HDD suppliers. First, there are only two major HDD manufacturers remaining: Seagate and WD/HGST (with Toshiba a distant third). This effective duopoly means that the major storage/server OEMs have little choice when it comes to sourcing their HDDs (especially if they wish to dual-source). Second, and perhaps more significant, is the fact that large-scale and hyperscale datacenter operators (Internet/cloud giants, large service providers and even some large enterprises) are bypassing traditional storage systems approaches and direct-sourcing their HDDs from the manufacturers.

Perella Weinberg advised Seagate on the transaction, and Needham & Company and Morgan Stanley advised Dot Hill. We will have a detailed report on this transaction in tomorrow’s 451 Research Market Insight Service.

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Pure’s playbill

Scott Denne

Contact: Scott Denne

It’s a play we’ve seen before: an enterprise company ingests massive amounts of venture capital to fund eye-popping top-line growth before debuting on Wall Street for Act Two. This version stars Pure Storage, a darling of the all-flash array market. Leave the kids at home for this one – Pure is posting an obscene amount of growth and when the curtain rises, it’ll be seeking an equally obscene valuation.

Pure’s now-public IPO prospectus shows that the company finished its most recent fiscal year with $174m in revenue, fully 4x its sales from the previous year. On a trailing basis, it generated $224m in revenue and the most recent quarter showed a more modest 3x year-over-year growth. As one would expect, there’s a massive investment in sales and marketing underlying that growth. That investment appears to be paying off as its sales and marketing spending – $153m last year –is ratcheting down to 87% of its revenue, from 128% last year and 177% the year before.

As expected, Pure still posts huge losses: $183m last year, up from $79m the year before. Its trajectory, however, points to eventual profitability. Overall, its costs are coming down – at least as a share of revenue – and the margins on its products are making meaningful gains. In the most recent quarter, Pure reached a 64% gross profit on its product sales, up from 59% last year and 49% the year before. To put that in perspective, NetApp, a storage provider that’s about 30-times larger (for now), generated a 54% product margin last year.

Pure’s last venture round, a $225m series F in April 2014, put a $3bn valuation on the company. No doubt it will be looking for a boost from that. To get a meaningful bump up, it will have to be valued at or above 15x trailing revenue. That’s a tough spot to hit, though not impossible. Recent high-flying hardware IPOs Arista Networks and Nimble Storage are both currently putting up about 7x off of comparably mild levels of growth (40-50%). For a better comp, you’d have to go back to the 2007 debut of Data Domain, whose growth was equally impressive, though slightly behind Pure’s, and whose IPO priced at 12x in a more sedated market for tech stocks.

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Datacenter consolidation hits a record pace as Europe gets more international

Scott Denne

Contact: Mark Fontecchio

Global datacenter consolidation in 2015 is on a tear, and the reason varies by continent. European MTDC suppliers on the hunt for regional diversity are printing an unprecedented increase in the number and value of deals, while North American providers are outpacing overall M&A volume as they move up the stack to offer more managed services.

Through the first seven months of this year, there have been 11% more tech deals compared with 2014, yet colocation and hosting transactions are up 49%, according to 451 Research’s M&A KnowledgeBase. Western Europe alone is up 67% in datacenter deal volume. Datacenter consolidation is clearly outpacing the rest of the field.

Western European datacenter deal value has skyrocketed more than the rest. Last year, 4% of all datacenter M&A value went to Western European targets; this year, it’s half. Equinix buying UK-based TelecityGroup accounts for most of that – the $3.6bn price is the largest datacenter transaction in the KnowledgeBase. As we have previously noted, one of the key reasons for all of the consolidation activity in Europe is because customers in traditional markets are seeking reach into locations where new builds are difficult. The highly fragmented European market still has many regional providers with significant pull in their locales. They are now being subject to M&A conversations as bigger players look to enter territories without building new facilities.

In North America, it’s different. While geo-based deals are still aplenty (e.g., CyrusOne’s $400m purchase of Cervalis ), more large transactions have focused on providers moving up the stack and offering additional managed services. Digital Realty’s reach for Telx and QTS Realty’s pickup of Carpathia Hosting are prime examples.

Biggest datacenter deals of 2015

Date announced Acquirer Target Target HQ Deal value
May 29 Equinix TelecityGroup Western Europe $3.6bn
July 14 Digital Realty Trust Telx Group North America $1.9bn
March 2 NTT Communications e-shelter Western Europe See estimate
January 14 Zayo Group Latisys North America $675m

Source: 451 Research’s M&A KnowledgeBase

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Deals — not dollars — drive tech M&A in July

Brenon Daly

Contact: Brenon Daly

While tech acquirers weren’t especially ‘spendy’ last month, they certainly were busy. The number of tech, media and telecom (TMT) transactions announced in the just-completed month of July topped 420, a record level since at least the credit crisis, according to 451 Research’s M&A KnowledgeBase. Acquisitions last month by many of the major tech bellwethers – including Microsoft, Cisco, HP, IBM, Amazon and eBay – helped push deal volume about 40% higher than the average monthly total for the past three years.

It wasn’t just the big buyers, either. A number of smaller acquirers also stepped back into the market in July. Yahoo put up its first print of 2015 at the end of July, after inking 19 acquisitions last year. (The search giant had made 11 purchases by this time last year.) Additionally, Groupon, Callidus and Zillow all got on the board for the first time this year with July transactions. Meanwhile, both Time Inc and Accenture announced three deals last month.

The almost unprecedented activity translated into only marginal spending, however. Acquirers spent just $22.7bn on TMT transactions across the globe last month, according to the KnowledgeBase . While that roughly matches the average monthly spending for the post-recession period of 2010-14, it is the second-lowest monthly spending total for this year’s record romp, and is less than half the average value of deals announced monthly in the first half of 2015.

Of course, the July activity comes on the heels of record-setting spending in the April-June quarter. (See our full report on the blockbuster Q2, where the value of acquisitions announced hit an astounding $200bn, the highest quarterly level in 15 years.) While spending last month fell short of other recent months, it nonetheless keeps 2015 on track for a new post-bubble annual record. So far this year, TMT dealmakers have spent $345bn on transactions, just $70bn less than the record years of 2006 and 2007.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 358 $11bn
February 2015 335 $48bn
March 2015 339 $61bn
April 2015 364 $46bn
May 2015 303 $122bn
June 2015 372 $33bn
July 2015 420 $23bn

Source: 451 Research’s M&A KnowledgeBase