HP moves into PaaS, containers with Stackato purchase

Scott Denne

Contact: Scott Denne Jay Lyman

After a muted presence in M&A over the past few years, HP has set a stronger pace for acquisitions in 2015 by printing its fourth deal with the pickup of Stackato, ActiveState’s PaaS business. HP’s earlier deals of the year filled gaps in security (Vaultive) and networking (Aruba Networks and ConteXtream) – this transaction plugs two holes in its cloud offering.

HP was among the few enterprise cloud providers that did not have its own PaaS play. With Stackato, HP obtains an enterprise, polyglot private PaaS that also benefits from its basis in the open source Cloud Foundry software and community. Furthermore, the deal gives HP a much-needed stake in the container space through Stackato’s integration and support for Docker and containers.

Valuations in the PaaS sector have been a mixed bag, and there’s been little M&A activity. A couple of companies (Heroku and Tier 3) were taken out early in transactions valued above $100m. The market has also seen some tuck-ins (AppFog and dotCloud). Though terms of HP’s Stackato buy aren’t known, we noted early last year that Stackato was approaching a $10m run rate.

HP’s move comes amid the convergence of IaaS and PaaS. Other acquisitions, customer demand for IaaS-like experience in PaaS, deeper enterprise pushes from the likes of Amazon and Google via PaaS, and software from a number of providers have all contributed to a blurring of the lines, particularly when it comes to managing PaaS and IaaS, which is increasingly integrated. With its existing IaaS software in HP Helion (based on OpenStack), along with the acquired Eucalyptus, HP can now join the IaaS PaaS party by pairing with Stackato.

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Technicolor turns to Cisco to keep pace with ARRIS

Scott Denne

Contact: Scott Denne

Technicolor fends off the danger from a merger of two rivals with a deal of its own. And what a deal. Technicolor will pay $600m for Cisco’s set-top box hardware unit – a mere 0.3x projected 2015 sales – and become a business that generates more than $3bn in set-top box revenue. Still short of the pending combination of ARRIS and Pace, but close enough to ensure that Technicolor won’t lose that battle based on scale alone.

Aside from the valuation – ARRIS’s purchase put a 0.8x trailing multiple on Pace – the two deals are quite similar. By tying up with Cisco, Technicolor gets broader exposure to the North American cable market to complement its European satellite base; ARRIS bought Pace in large part to boost its non-US sales.

Cisco’s set-top box unit needs some tuning – the cause of the lower multiple. In its previous fiscal year, sales of service-provider video infrastructure dropped by $812m, primarily due to lower set-top sales. In the first three quarters of the current fiscal year, the category slipped $271m, with the company once again blaming set-tops. Technicolor will pay Cisco $450m in cash and $150m in newly printed equity (with a lock-up commitment), and give the networking vendor a seat on its board.

It’s not just competition from ARRIS. Technicolor needs scale to continue to compete for the largest deals among service providers, which are themselves consolidating. According to 451 Research’s M&A KnowledgeBase, the past 12 months alone have seen seven acquisition of television service providers valued at more than $1bn.

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Rapid7 rapidly nears 10-digit valuation in IPO

Brenon Daly

Contact: Brenon Daly

Despite Wall Street being a fairly inhospitable place for recent tech IPOs, Rapid7 came to market Friday with a stunning debut. The vulnerability management vendor priced its 6.45-million-share offering at an above-range $16 each, with the stock surging to about $25 once it hit the Nasdaq. With roughly 38 million (undiluted) shares outstanding, Rapid7 is valued at $950m.

That’s a fairly strong valuation for a company that will only put up revenue of slightly more than $100m in 2015. Rapid7 generated revenue of $77m in 2014, an increase of 28%. It picked up its sales rate in the first quarter of 2015 to 41%. (Even if the company maintains that accelerated pace, however, it would still post just less than $110m in sales this year.) Further, Rapid7 does business in the old-fashioned license/maintenance model, rather than the subscription model that Wall Street favors. (See our preview of the IPO.)

Rapid7’s direct rival, Qualys, sells subscriptions only. It is about half again as big as Rapid7, tracking to a mid-20% growth rate that would result in almost $170m in revenue for 2015. (For what it’s worth, Qualys turns a profit while Rapid7 runs deeply in the red.) Wall Street values Qualys at $1.25bn, or 7.4x projected 2015 sales. That’s a full turn lower than the 8.6x projected 2015 sales that Wall Street is currently handing to Rapid7.

The premium valuation for Rapid7 stands out even more because virtually all of the other enterprise tech IPOs have all been discounted recently. The main reason: uncertainty on Wall Street. A just-published survey by ChangeWave Research, a service of 451 Research, found that more than half of the retail investors they surveyed are less confident about the direction of the US stock market than they were just in April. The 53% response, which tied a record for the survey, was six times higher than the percentage who said they were more confident about Wall Street. Keep in mind, too, that uncertainty tends to hit unknown, unproven companies – like IPOs – much harder than established tech names.

To see how that has pressured other newly listed companies, consider the two enterprise tech vendors to brave the IPO market in the US last quarter: Apigee and Xactly. Both have been roughed up on Wall Street, and are currently underwater. The muted reception extended to Sophos, the only other infosec provider to come public in 2015. That company, which listed on its home London Stock Exchange, accepted an extremely conservative value as it sold shares to the public for the first time. For some perspective, consider this: although Sophos is nearly five times larger than Rapid7, its market value only slightly exceeds Rapid7’s freshly printed valuation.

Wall Street confidence July 2015

eBay auctions off Enterprise unit

Scott Denne

Contact: Scott Denne

Just days away from spinning off its PayPal division, eBay inks a deal to divest eBay Enterprise, its e-commerce software and services business, to a consortium of private equity (PE) firms for $925m. The Enterprise unit was formed through the 2011 acquisitions of fulfillment service GSI Commerce and e-commerce software vendor Magento, as well as a smattering of smaller software purchases.

The transaction is valued at 0.8x trailing revenue – a number that’s familiar to Sterling Partners, one of the PE firms leading the deal. Sterling snagged Innotrac, a similarly sized order fulfillment provider, in 2013 at a nearly identical multiple. It’s worth noting that eBay Enterprise comes with a broader software portfolio than Innotrac did. In addition to Sterling, Permira Funds, Longview Asset Management and Innotrac itself are also participating in the buyout.

Valuations of e-commerce software companies have been somewhat subdued in the M&A market lately. Google’s 2013 pickup of channel intelligence at just over 4x trailing revenue appears to be the recent high-water mark. Multiples on the public markets, however, tend to be more generous, with Demandware and the newly public Shopify garnering above 15x.

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Digital Realty peers into new business with Telx purchase

Mark Fontecchio

Contact: Mark Fontecchio

Digital Realty Trust (DRT) buys Telx Group, moving into the interconnection business and adding a services element to the primarily REIT company. DRT is paying $1.9bn to acquire Telx from private equity firms ABRY Partners and Berkshire Partners, a price that represents a valuation increase of 5-6x over what Telx sold for to ABRY/Berkshire in 2011, according to 451 Research’s M&A KnowledgeBase.

This takes DRT into a more services-oriented business, shifting its strategy and putting it into direct competition with one of its key tenants, Equinix. The services aspect will reduce margins yet provide higher revenue per square foot. In that respect, it has some similarities to a deal in May, when REIT firm QTS Realty Trust paid $290m for Carpathia Hosting to move up the stack.

Telx has 20 facilities, mainly in top US markets, with a total of 1.3 million gross square feet of space. DRT has a similar global footprint to Equinix but is missing interconnection options outside of the US. We wonder if Interxion could also be a potential target, in the ‘you might as well go big or go home’ philosophy. Picking up Interxion – recently left at the altar when would-be acquirer TelecityGroup was bought by Equinix – would provide DRT interconnect assets in Europe as well.

There have been 16 interconnection/peering deals dating back to 2002, according to the KnowledgeBase. Telx – with its sales to GI Partners, ABRY/Berkshire and now DRT – has been by far the biggest target, accounting for three of those 16 transactions and almost 95% of the disclosed and estimated value.

Bank of America Merrill Lynch and Morgan Stanley advised Digital Reality, while DH Capital and Barclays Capital banked the sellers. For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Selligent turns to HGGC to fund overseas expansion

Scott Denne

Contact: Scott Denne Matt Mullen

HGGC buys a majority stake in Selligent as the European marketing automation vendor aims to move into overseas markets. As part of the acquisition, HGGC will add capital to Selligent’s balance sheet, giving the company much-needed ammunition as it enters a crowded US market where it’s virtually unknown.

The company generates less than one-third of the revenue that publicly traded players in this space such as Marketo and HubSpot (which are more B2B-focused vendors) put up. It’s also facing competition from large enterprise software providers such as salesforce.com, Adobe and, most recently, NetSuite (with its acquisition of Bronto Software ), which have all invested hundreds of millions to carve out a lead in marketing automation.

Still, Selligent has several reasons to be optimistic about its expansion. The 25-year-old company has posted profitable growth for several years, it has a product portfolio that’s as deep as any of its competitors’ (as we discussed in a recent report), it has successfully moved into several European markets, and it managed a transition to a SaaS-based business without raising additional outside capital.

Jordan Edmiston Group advised Selligent on its sale.

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Avast scores virtual mobile infrastructure deal

Mark Fontecchio

Contact: Mark Fontecchio

Virtual mobile infrastructure (VMI) sees some M&A activity, with Avast Software picking up Remotium. One of the top IT security concerns for mobility is securing corporate data on individually owned devices, according to 451 Research’s survey of IT decision-makers in June. Remotium’s VMI SaaS alleviates that by providing employees access to corporate applications and data without them residing on mobile devices. The move helps Avast’s push into enterprise mobility security and opens up the potential for more M&A in the sector.

Remotium is one of a handful of startups – along with a couple big players – that is providing VMI, as we noted in April. The technology includes a virtual machine on a remote server that provides users access to mobile apps on their devices, giving employees a way to work with enterprise apps without having any corporate data on the end device. While VMI M&A has been virtually nonexistent up to now, some money has started to flow into the space – Remotium rival Hypori, for example, has raised almost $14m in the past year for its VMI software.

Other potential targets in the sector include Israel-based Nubo Software and California-based Sierraware. They and Hypori were about the same size as Remotium when we last checked, with 20-30 employees.

EMC’s core business no longer in sync with file sharing

Scott Denne

Contact: Alan Pelz-Sharpe Scott Denne

Storage giant EMC has announced that it is selling its enterprise file-sync/share (EFFS) product division, Syncplicity, to private equity (PE) firm Skyview Capital for an undisclosed amount. It’s the first PE deal in the EFSS world, and follows BlackBerry’s acquisition of WatchDox and the Box IPO. No doubt more deals are to come in this rapidly maturing sector.

Following the close of the transaction (expected later this month), EMC will retain a minority interest in the business it has owned for the past three years. Syncplicity was originally acquired by EMC at a price that seemed a bit expensive (see our estimate of that deal here ). Yet in the three short years since, Syncplicity has thrived within EMC. We estimate that its revenue has grown substantially during that period – in no small part due to EMC’s sales team (see our estimate of Syncplicity’s revenue here).

EMC already has multiple EFSS products, and this division, though doing well, wasn’t core to its overall business. So divesting it and gaining good hard cash in the process was logical. It is, however, a tough pill to swallow for the Syncplicity team, who had been given free rein to operate as a startup and did exceptionally well to make it one of the top players in its sector. Even so, EFSS is a small business for EMC and parting ways makes perfect sense.

We’ll have a more detailed report on this transaction in tomorrow’s 451 Market Insight.

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PayPal adds money-transfer business before eBay split

Mark Fontecchio

Contact: Mark Fontecchio

PayPal agrees to pay $1.1bn in cash for Xoom, an online money-transfer company with a large international and mobile presence. Xoom allows people to move money internationally, often done through mobile devices, while taking a service fee for each transaction. The deal allows PayPal stronger entry into the money-transfer market on the eve of its split with parent company eBay.

The $1.1bn deal value equates to $25 per share, about a 30% premium to what Xoom was trading for a month ago. Xoom’s revenue grew 30% to $160m in 2014, but it reported an operating income loss because of a one-time $31m charge due to criminal fraud targeting the company’s finance department. The incident led to Xoom’s CFO resigning. J.P. Morgan Securities advised PayPal on the transaction, while Qatalyst Partners advised Xoom.

PayPal is expected to spin off from eBay on July 17, about 13 years after it came under the auction site’s ownership. In that time, PayPal’s business has grown dramatically – for example, its $1.8bn in EBITDA last year was 10x its revenue when eBay bought it. The payments provider has made 10 acquisitions in that time, according to 451 Research’s M&A KnowledgeBase, with totals pending of $2.2bn. More than half of that amount has come just this year, as PayPal has readied itself for separation from eBay. Xoom is its biggest deal ever, while the $285m purchase of Paydiant in March signaled PayPal’s strong desire to get into the mobile payments business.

A parade of big prints pushes Q2 tech M&A spending to record level

Brenon Daly

Contact: Brenon Daly

Blockbuster transactions in the cable, semiconductor and networking equipment industries helped push Q2 spending on tech, media and telecom (TMT) acquisitions to its highest quarterly level in 15 years. In the just-completed quarter, the value of TMT deals across the globe topped an astounding $196bn. That shattered the previous quarterly record and is actually higher than three of the six full-year totals we’ve recorded in 451 Research’s M&A KnowledgeBase since the recent recession ended.

The record Q2 spending rate, which accelerated from an already strong Q1, was boosted by the largest-ever tech deal (Avago’s $37bn purchase of Broadcom) as well as the second-largest telecom transaction since 2002 (Charter Communications’ $57bn rebound deal for Time Warner Cable). On their own, either of those transactions would have been considered a reasonable amount of spending for a full quarter in recent years. Instead, the pair simply led an unprecedented parade of big-ticket deals announced from April to June. The 22 prints in Q2 valued at $1bn or more included eight transactions worth at least $4bn and four worth more than $15bn. All four of the largest deals announced so far in 2015 have come since April.

Taken together, M&A spending in the first two quarters of 2015 hit a high-water mark of $316bn. Although it’s highly unlikely that deal flow will continue linearly at its current record rate, it’s worth noting that spending on TMT for the full year is on pace for an almost unimaginable $630bn. For a bit of perspective, that would be a full $200bn more than the highest annual total since the Internet bubble burst in 2000. 451 Research will have a full report on recent M&A activity, as well as the IPO market, on Monday.

Recent quarterly deal flow

Period Deal volume Deal value
Q2 2015 1,018 $196bn
Q1 2015 1,027 $120bn
Q4 2014 1,028 $65bn
Q3 2014 1,049 $102bn
Q2 2014 1,005 $141bn
Q1 2014 854 $82bn
Q4 2013 787 $64bn
Q3 2013 859 $73bn
Q2 2013 760 $48bn
Q1 2013 798 $65bn
Q4 2012 824 $65bn
Q3 2012 880 $39bn
Q2 2012 878 $44bn
Q1 2012 920 $35bn

Source: 451 Research’s M&A KnowledgeBase

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