Cisco closes in on OpenDNS

Brenon Daly

Contact: Brenon Daly

In its third-largest IT security acquisition, Cisco will pay $635m in cash for OpenDNS to shore up its threat-detection and -prevention portfolio. The deal comes a year after the networking giant participated in the 10-year-old startup’s series C funding round. (The $35m investment announced last May brought the total amount raised by OpenDNS to $51m.)

The purchase continues Cisco’s practice of paying rich multiples as it shops in information security. According to 451 Research’s M&A KnowledgeBase , Cisco has now acquired 18 security companies in the past decade and a half, mostly smaller startups. (All but three of those transactions cost the networking giant less than $200m.) We would note that although Cisco’s security business generates less than 5% of its total revenue, infosec acquisitions have accounted for 16% of the company’s overall M&A activity since 2002.

In its other large infosec purchases, Cisco paid $2.7bn, or nearly 11x trailing sales, for Sourcefire and $830m for IronPort Systems, which works out to slightly more than 8x trailing revenue. OpenDNS generated about $40m in trailing bookings and was on pace to double annual bookings to roughly $60m for full-year 2015.

That would mean Cisco is paying about 15x trailing bookings for fast-growing OpenDNS. Obviously, the price-to-revenue multiple for OpenDNS would be higher than that, likely falling in the neighborhood of twice the valuation that Cisco paid in its two other significant infosec deals. The valuation of the network security vendor stands out even more considering the recent focus in the IT security industry on endpoint protection, which has resulted in valuations there being pushed to historically high levels. Cisco expects to close the pickup of OpenDNS by the end of its first fiscal quarter, which wraps in October.

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In a time of sky-high infosec valuations, Sophos goes for down-to-earth debut

Brenon Daly

Contact: Brenon Daly

The tech IPO market is so quiet these days that even those companies that do manage to go public do it understatedly. Consider the almost under-the-radar offering from Sophos, a giant in the infosec market that nonetheless raised a relatively small $125m on the London Stock Exchange (LSE) last Friday. Compared with the noisy funding events we’re accustomed to seeing in this current frothy investment environment, the Sophos IPO was almost refreshingly reserved.

Sophos has been around for 30 years, which makes it positively middle-aged relative to many flashy startups that still haven’t seen the ink dry on their business plans. Also, Sophos was born and raised in the UK, several time zones – and even more distant culturally – from the epicenter of tech hype in Silicon Valley. To illustrate, Sophos spends less than 40% of its revenue on sales and marketing, about half the level of some US-based IT firms (e.g., Apigee, Box) that have also come public in 2015.

Yet even as Sophos runs a business that’s clipping along at nearly a half-billion dollars in revenue, it raised the same amount of money that some startups one-tenth its size have landed from private investors. Another way to look at it: The $125m that Sophos raised in its IPO is also less than half the amount collected by Etsy, which is smaller than Sophos, in its April IPO.

And Sophos is raising money at a very down-to-earth valuation, compared with some of the sky-high valuations garnered by both public and private infosec vendors. Sophos started life on the LSE at a market cap of about $1.6bn, roughly 3.5x its trailing sales of $447m. That’s a sharp discount to many of the infosec providers trading on the NYSE and Nasdaq. For example, Proofpoint, Qualys, FireEye and Imperva, among others, all trade at more than 10x trailing sales.

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Splunk explores SIEM market with Metafor acquisition

Scott Denne

Contact: Scott Crawford Dan Raywood Scott Denne

Splunk has made its third acquisition with the pickup of anomaly-detection startup Metafor Software. With this deal, Splunk will add fewer than 15 employees to its roster. And, although terms of the deal haven’t been disclosed, the acquisition (like its previous purchases) is likely modest. Splunk paid $21m in its acquisition of Cloudmeter at the end of 2013, and $9m for BugSense earlier that year.

That doesn’t mean it can’t have an outsized impact on Splunk. The deal expands two related core functionalities into the portfolio (machine learning and anomaly detection), which will raise its profile among both IT operations management and security buyers keen to broaden and improve capabilities for detecting unexpected or malicious activity.

The acquisition raises the bar for competitors in both IT operations management and security. Challengers such as LogRhythm and AlienVault are reshaping the competitive landscape for SIEM incumbents such as HP ArcSight. Meanwhile, IBM has gained considerably from Q1Labs capabilities, which were originally differentiated through network flow-based anomaly detection. Improved SIEM performance was a good deal of the rationale behind McAfee’s (now part of Intel) 2011 acquisition of NitroSecurity. All in this space are further challenged today by a number of emerging security-analytics plays that expand capabilities in security information management performance and volume in a variety of ways.

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Western European MTDC M&A is on a ‘raised floor’ in 2015

Mark Fontecchio

Contact: Mark Fontecchio

Western Europe has seen landmark datacenter consolidation thus far this year – a trend we predict will continue in the near future. Data regulation requirements, increasing demand for high-quality datacenter space and latency concerns are three factors driving M&A in the datacenter market in 2015.

A lot is happening in the Western European multi-tenant datacenter (MTDC) market outside of the big deals, with smaller regional players looking to grow their service portfolios and extend their reach across the continent with smaller facilities outside of major metros. We expect to continue to see increased M&A activity throughout Europe as the region recovers from the economic crisis.

According to 451 Research’s M&A KnowledgeBase, there were 19 datacenter hosting acquisitions in the first five months of 2015, compared with just seven in the same period last year. What’s more striking is the deal value – some $4.7bn this year compared with $1.2bn in all of 2014. To be sure, the deal value in Western Europe this year is inflated by Equinix’s $3.6bn reach for TelecityGroup. But datacenter M&A in the region has always been dominated by oversized transactions. In 2012-14, single acquisitions accounted for 78%, 57% and 68% of total deal value.

Read more about Western European MTDC in our recent market review.

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Comverse augments digital services portfolio with Acision purchase

Scott Denne

Contact:  Scott Denne Declan Lonergan

Comverse comes off the divestiture of its BSS division to make its largest – and only significant – acquisition in nine years. The mobile service systems vendor is paying $135m in cash, $75m in stock and a $35m earnout to acquire Acision. The deal carries an enterprise value of $367m – Comverse will take on $157m in Acision debt – and values the target at 1.9x trailing revenue.

The multiple is well below the median for software M&A, as Acision has struggled to diversify its business beyond SMS messaging. Comverse hasn’t been immune to those struggles. In fact, its business commands just 0.7x trailing revenue on the public markets. Comverse’s management anticipates that this deal will enable it to return to growth by 2017.

As mobile operators’ revenue from traditional voice, voicemail and SMS continues to decline, both Comverse and Acision have been pursuing strategies based on diversifying their own businesses to address the operators’ changing requirements. Acision has improved its competitiveness in mobile messaging while also steadily expanding into new areas such as white-label OTT apps and enterprise messaging. The fit with Comverse, which remains a leader in voicemail but is also expanding in digital services, should be good. Though there may be overlap in some operator accounts, the combined entity will be a strong and credible player in delivering a broad suite of communications and digital service products to operators in all major regions.

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

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Will 7 be the lucky number in latest security IPO?

Scott Denne

Contact: Scott Denne

Threat management vendor Rapid7 is heading toward its initial public offering with few financial metrics to excite prospective investors. The company posted $76.9m in revenue last year, representing 28% growth – only a hair lower than the 30% growth rate from a year earlier. While Wall Street welcomes predictability, not all revenue is created equal: low-margin professional services jumped 47% to $10.8m while product sales decelerated to 22% growth, accounting for 61% of total revenue.

The company posted a $32.6m loss in 2014 as its gross margins ticked down a few percentage points to 76% due to the rising costs of delivering services, while operating expenses grew at a faster rate than revenue. Particularly notable are Rapid7’s sales and marketing expenses, which jumped 54% – its largest increase in any of the past three years. Its most recent quarters are Rapid7’s silver lining: year-over-year revenue growth, both product and overall revenue, is accelerating in each of the past three quarters to finish up 41% in the first quarter of this year.

Qualys, a competing vulnerability management provider, is the best available comp for gauging Rapid7’s potential IPO valuation. Investors value that company at 9x trailing revenue. At that level, Rapid7 would post a $750m market cap. We believe, however, that the offering will price below that level. Qualys’ growth was a bit slower – 24% compared with Rapid7’s 28% – but off a baseline that’s nearly double the size. Qualys also hit that mark while scaling back sales and marketing spending as a percentage of its overall revenue and generating a $30.2m profit.

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A steady Sophos now set to step on public stage

Brenon Daly

Contact: Brenon Daly

After an on-again, off-again march to the public market over the past decade, Sophos finally looks set to sell shares to the public for the first time. The 30-year-old, UK-based security vendor put in its paperwork last week for a $100m IPO on the London Stock Exchange (LSE). It was actually the second time the decidedly middle-aged Sophos filed to go public, and comes five years after it flirted with an IPO before selling a majority stake to Apax Partners instead.

During the half-decade in the private equity firm’s portfolio, Sophos has been a steady acquirer, picking up a company about every year. Its most recent deal, announced earlier this week, is the first time Sophos has acquired a cloud-based vendor. Sophos paid an undisclosed amount for email security and archiving startup Reflexion. The technology is expected to be integrated into Sophos Cloud later this year.

When Sophos does hit the LSE next month, we expect it to create a few billion dollars of market value. In its most recent fiscal year, which finished last March, Sophos increased revenue 18% to $447m. For comparison, Barracuda Networks – a diversified security provider that, like Sophos, serves the SMB market – posted an identical growth rate in its most recent fiscal year. (Although Sophos is growing off a revenue base that is more than half again as large as the $277m that Barracuda put up last year.) Since it went public in November 2013, Barracuda has doubled its market value to about $2bn.

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

Cisco prints second OpenStack deal

Scott Denne

Contact: Al Sadowski Jay Lyman Scott Denne

Cisco ups its stake in Piston Cloud Computing by converting its earlier investment into full ownership of the business. The OpenStack ecosystem has seen a number of $100m+ exits in the past 12 months, including Cisco’s own $149m acquisition of Metacloud. The space has also seen a few tuck-ins and modest exits, such as EMC’s Cloudscaling buy and the closure of heavily funded Nebula. Though terms of this deal weren’t disclosed (nor were they in IBM’s just-announced Blue Box Group purchase), consolidation in OpenStack has clearly begun and still has a long way to go. According to 451 Research’s Market Monitor report on OpenStack , 56 of the 76 vendors in this sector generated less than $5m in 2014 revenue.

OpenStack continues to gain momentum among enterprise IT leaders. Now five years old, the project has evolved into a top priority for many IT professionals and suppliers. Cisco’s purchase of Piston Cloud removes a competitor to its Metacloud-based offerings and adds rare OpenStack engineering talent and intellectual property. The acquisition probably saved Piston Cloud from turning out its own lights as the small firm likely found it difficult to compete with larger players with much more sales capacity.

The transaction highlights a couple of things about the current OpenStack market. First, there is still a demand for and dearth of OpenStack talent and expertise. Piston Cloud’s staff is among the most experienced supporting large enterprise OpenStack deployments, which Cisco – a gold sponsor of the OpenStack Foundation – is interested in driving and supporting. Second, the deal highlights how the market is still largely in a services and support phase, whereby enterprise and service-provider customers, even large ones, need intensive support deploying OpenStack. The transaction may also signal that the Metacloud acquisition and integration has been successful for Cisco and helped encourage it to pull the trigger on the Piston Cloud pickup.

We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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A monster May for M&A

Brenon Daly

Contact: Brenon Daly

All three segments of tech, media and telecom (TMT) put up gigantic prints in May, pushing spending in the just-completed month to a level we’d typically see tallied over a half-year period in most post-recession years. The record monthly spending of $122bn was boosted by the largest-ever cable deal as well as the biggest pure tech transaction since the bubble burst. Both Charter Communications’ $56.7bn reach for Time Warner Cable and Avago Technologies’ $37bn purchase of Broadcom figure into the 10 largest TMT deals since 2002, according to 451 Research’s M&A KnowledgeBase

Undeniably, the two blockbuster prints dominated last month’s M&A, accounting for roughly three-quarters of the total spending. But even backing out those two acquisitions, spending came in at a robust $29bn, which is higher than the typical post-recession monthly average. More importantly, the activity spread to a broad number of markets, with billion-dollar-plus deals announced in May by hosting provider Equinix, ambitious telco Verizon and even EMC, which has found itself under scrutiny by activist shareholders, among others.

Last month’s astonishing level of spending – the only time in the past 13 years that monthly spending has topped $100bn – pushes total receipts for TMT M&A this year to $286m. That means that in just five months so far in 2015, acquirers have already spent more money on deals than they did for the entire year for every single year except one from 2009-14, according to the KnowledgeBase.

The one surprise from May, however, is the relatively shallow flow of deals. We tallied only 270 transactions, which stands as the lowest total for May since 2009. That’s down about 20% from the average of the preceding four months of 2015, and marks the first time in more than three years that we’ve seen a month-over-month decline in the number of prints.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 357 $11bn
February 2015 332 $48bn
March 2015 336 $61bn
April 2015 358 $44bn
May 2015 270 $122bn

Source: 451 Research’s M&A KnowledgeBase

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Avago buys Broadcom in huge chip deal

Mark Fontecchio

Contact: Mark Fontecchio

Go big or go home has been the mantra in the semiconductor business of late, and there is no better example than Avago Technologies’ $37bn reach for Broadcom today. The purchase price is more than double the next-biggest chip deal that we’ve tracked, with the combined company becoming one of the largest global suppliers of semiconductors.

With four transactions for nearly $45bn, Singapore-based Avago has become the most active acquirer in the semiconductor sector since 2013 in volume and value, according to 451 Research’s M&A KnowledgeBase. Its two largest – for Broadcom today and LSI in 2013 – have diversified Avago’s chip portfolio with storage and networking semiconductors so it is less reliant on the volatile wireless business. They have also followed the pattern of consolidation that has infected the entire semiconductor market, with buyers seeking big targets with opportunities to cut operating expenses. To wit: Broadcom brings in about 30% more sales than Avago, but its profit margin is 14 percentage points lower. Avago wants to reach a 40% margin on the combined entity, which is higher than either company alone.

The 39.1x multiple of Broadcom’s enterprise value over trailing EBITDA is almost three times the median EBITDA multiple on billion-dollar chip deals, according to the KnowledgeBase. Broadcom’s continued growing revenue and the paucity of remaining large semiconductors targets are two main factors in that higher-than-usual valuation. The deal includes $17bn in cash and the rest in Avago stock, with Broadcom shareholders owning about 32% of the combined business. Avago will fund the acquisition with $8bn in cash, $9bn in new debt and 140 million Avago shares worth $20bn. The transaction is expected to close early next year. Both boards have approved the deal, but it’s still subject to approval by regulators and shareholders.