‘One HP’? Not any longer

Brenon Daly

Contact: Brenon Daly

In the largest-ever corporate overhaul of a tech company, Hewlett-Packard said Monday that it will split its business in half. The 75-year-old company, which had recently marketed itself under the tagline ‘One HP,’ will separate its broad enterprise IT portfolio from its printer and PC unit within a year. Each of the two stand-alone businesses (Hewlett-Packard Enterprise and HP Inc.) will be roughly the size of rival Dell, booking more than $50bn of sales annually.

Increasing those sales, even under the new structure, will be challenging. In discussing the planned separation, HP executives emphasized that the move comes at the end of a three-year ‘fix and rebuild’ phase at the company. During that time, HP’s top line has shrunk more than 10%. It has already laid off 36,000 employees, and said Monday that the final number of employee cuts may reach as high as 55,000. And HP has virtually unplugged its M&A machine, even as rivals such as IBM and Cisco continue to buy their way into new, faster-growth markets.

Through the first three quarters of its current fiscal year, HP has flatlined. The company indicated that will continue into its next fiscal year, which starts in November. While HP didn’t offer specific growth rate targets or forecasts for the stand-alone companies – once they get on the other side of the hugely disruptive separation – executives noted that the two businesses would be more ‘nimble’ and ‘responsive’ than they would be together.

That may well be, but the two businesses will also be burdened by higher costs individually than they currently face. ‘Dis-synergies’ such as higher supply and distribution costs, as well as supporting two full corporate structures, will shrink cash flow, which has been the key metric for Wall Street’s evaluation of HP’s mature business. Still, HP will throw off several billion dollars of free cash flow.

Some of that cash appears to be earmarked for M&A, although spending there will be a distant afterthought behind dividends and share repurchases. (And HP executives were quick to add that any deals would be ‘return-driven’ and ‘disciplined.’) But even stepping back into the market for acquisitions represents a dramatic shift at HP. After all, it was a series of poor acquisitions – most notably Autonomy but also services giant EDS – that partially forced the prolonged restructuring that culminated in this planned separation.

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Demanding exits on the demand side

Scott Denne

Contact: Scott Denne

While companies that help publishers sell ad space have commanded high multiples in recent transactions, businesses on the demand side haven’t seen similar outcomes. With few obvious buyers in that latter category of ad tech, the situation is unlikely to change in the next quarter or two.

Businesses like LiveRail, SpotXchange, FreeWheel Media and Nexage, which sell yield management, ad exchanges and other supply-side tools to help publishers make the most of their inventory, have commanded premiums of 6-10x trailing revenue in transactions well north of $100m. On the demand side, companies that place advertisements have seen fewer big deals, and those that have happened came in at lower multiples, like the 1.3-3.7x trailing multiples in sales for firms such as Adconion and Conversant, similar to the multiples of demand-side players on the public markets.

Why the disconnect between exits for companies that enable the buying and those that enable the selling of digital media? There are, of course, vertical- and company-specific factors that account for some of the difference in valuations. In the big picture, there is just a larger pool of companies, from Internet giants to traditional media companies and broadcasters, that are comfortable with the business of selling ad space – but historically, only ad agencies have been in the media-buying business, and they’re not buying tech companies.

Long term, the exit window for these demand-side players will open up because there are many high-growth businesses with more than $100m in revenue in this category, such as Turn, MediaMath, DataXu and Quantcast. With the exception of WPP Group, ad agencies have preferred to be customers, rather than owners, of media-buying tech – and that situation isn’t likely to change until they see a credible threat from ad-tech companies selling directly to customers traditionally served by agencies.

Over time, we expect enterprise software companies to drift beyond marketing software and into paid media, as the line between paid and earned marketing begins to blur. But today, most aren’t comfortable being in the media business.

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IPO = Interminable Private Offerings

Brenon Daly

Contact: Brenon Daly

For one pair of money-burning companies, IPO no longer stands for Initial Public Offering – instead, it’s Interminable Private Offerings. Unable to graduate to Wall Street, both Box and Good Technology have retreated, returning hat in hand to the ranks of late-stage investors for their next round of life-sustaining capital.

Good Technology, a mobile management software consolidator that has never come close to turning a profit, drew in another $80m on Wednesday. That comes almost three months after collaboration software vendor Box – a startup that spends more on sales and marketing than it takes in as revenue – pulled in $150m. (Tellingly, Box’s latest round was reportedly done at a flat valuation.)

Taken together, Good Technology and Box have now raised more than $800m in funding from private sources. In comparison, Good Technology had hoped to raise $100m from public investors, while Box plans a $150m offering, scaled back from an original $250m.

The new fundings are a clear setback to both Good Technology and Box, which have been on file to go public since May and March, respectively. Further, it may well give pause to other companies that were looking to Wall Street to subsidize their free-spending ways. After all, an S-1 is an expensive, time-consuming and very revealing bit of paperwork.

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News Corp nabs home-listing site Move

Scott Denne

Contact:Scott Denne

News Corp has picked up online realty company Move Inc at 37% above the company’s 30-day stock price average. Despite the premium, the media company could have more of a fixer-upper on its hands than the price would suggest.

At $950m net of cash, the purchase values Move, which operates REALTOR.com, at 4x trailing revenue. That’s almost twice the value that competitor ZipRealty fetched earlier this year, although that company’s topline had been shrinking for some time, while Move is posting single-digit annual growth.

Although the price itself isn’t so much of a head-scratcher, the rationale is wishful thinking. News Corp rightly points out that online realty companies like Move have only captured a fraction of the real-estate marketing spend, but Zillow and Trulia are poised to capture most of that potential growth. Those two companies are each posting about 70% annual growth, and when the recently announced merger between the two closes, the combined company will have revenue that’s roughly double Move’s.

News Corp’s plan for ramping up Move’s growth is to use its media properties to help market Move’s listing services and realtor lead management tools. News Corp’s own results, however, suggest that its advertisements aren’t driving that much value: the company’s advertising revenue dropped 8% in its recently closed fiscal year.

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As growth flatlines, TIBCO taps out

Brenon Daly

Contact: Brenon Daly

Announcing the largest tech take-private in 16 months, Vista Equity Partners said it will acquire middleware and analytics software vendor TIBCO Software for about $4.3bn. The leveraged buyout (LBO) comes after the one-time highflier spent the previous several months exploring ‘strategic alternatives.’ Even though the LBO values TIBCO at a market multiple of some 4x trailing sales, the exit price is less than TIBCO fetched on its own this time last year. That reflects the difficulty the company has had in finding any growth recently.

Private equity (PE) firm Vista will pay $24 for each of the roughly 165 million TIBCO shares outstanding. At more than $4bn, TIBCO stands as the largest-ever purchase for Vista, more than twice the size of any check the PE firm has written in the past.

At an enterprise value of $4.3bn, TIBCO is going private at roughly 4x its trailing sales of $1.1bn. (Both sales and profit have declined through the first three quarters of TIBCO’s current fiscal year.) The multiple is slightly richer than the 3.6x sales that rival Ascential got from IBM almost a decade ago. For more of a current comp, rival Informatica – which is only a smidge smaller than TIBCO, but is still growing at double-digit rate – trades at roughly $3.7bn market value. Subscribers: Look for our full report on the transaction later on 451 Research.

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Common Yahoo M&A gossip lacks context

Scott Denne

Contact: Scott Denne

There’s no shortage of breathless ideas floating around about what Yahoo should do with its new-found Alibaba cash. The two most commonly touted are a $4bn purchase of AOL – an idea that now has the backing of an activist hedge fund – and buying Yelp (current market cap $5bn). While not impossible, there’s a common thread in both these ideas: they ignore Yahoo’s stated growth strategy and its past behavior.

Yes, Yahoo now has about $5-6bn in additional cash (half of which it said will be returned to shareholders), but it wasn’t strapped for capital before this. Over the last two years, its stock price rose 2.5x, giving it a $40bn market cap to spend with, and it ended last quarter with $2.7bn in cash. So, it has plenty of currency to make a big purchase, but hasn’t. In fact, CEO Marissa Mayer has only one major purchase in her tenure: the $1.1bn purchase of social media company Tumblr. Aside from that deal, the company hasn’t spent more than $500m on a deal since 2007, when it bought Right Media.

Under Mayer, Yahoo’s clear focus has been on expanding video and editorial content while transitioning to a mobile-first company, and the deals it has done this year reflect that. According to the 451 M&A KnowledgeBase, Yahoo bought nine, mostly mobile, companies in the first half of this year. And for that, it laid out an inconsequential $21m of its cash, according to its most recent quarterly report. Making one of the biggest deals in its history – to pair up with a company such as AOL or Yelp that is rooted in Web content and display advertising – would be an about-face.

With its IPO, Cyber-Ark floats on high water

Brenon Daly

Contact: Brenon Daly

It seems the record-setting Alibaba offering didn’t suck up all the IPO money on Wall Street after all. Although investors handed out a staggering $25bn to the Chinese e-commerce vendor last week, they stepped right back into the market to buy newly minted shares of Cyber-Ark on Thursday. And boy, did they buy.

Cyber-Ark, an Israel-based identity and access management (IAM) provider, sold 5.4 million shares at an above-range price of $16 each. Once free to trade, shares doubled. (In early afternoon trading under the ticker ‘CYBR’ the stock was changing hands at $32.20, having never dipped below $30 on its debut.) Cyber-Ark’s IPO stands as the first tech offering (aside from Alibaba) in some three months.

The strong demand for Cyber-Ark pushed it to a rather princely valuation. With roughly 30 million shares outstanding, the company’s market cap is nosing toward the magical $1bn mark. That stands out because Cyber-Ark, while profitable, will put up less than $100m in sales in 2014. Further, those sales are coming from old-fashioned license and support, rather than the more highly valued subscription delivery model. The company has been increasing revenue in the 30-40% range in recent quarters. (See our full report on Cyber-Ark’s filing.)

Cyber-Ark is particularly richly valued when compared with other IAM providers, in both the IPO and M&A markets. It trades at more than twice the current multiple of Imprivata, which went public three months ago and is currently under water. (Imprivata focuses entirely on the healthcare market, while Cyber-Ark counts more than 1,500 customers across a range of industries.) Meanwhile, earlier this month, direct rival BeyondTrust got flipped to another PE portfolio in a deal that we estimate went off at about 3x trailing sales.

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Millennial adds mobile exchange in pickup of Nexage

Scott Denne

Contact: Scott Denne

Millennial Media turns to Nexage in a $107.5m acquisition to better position the mobile ad network into programmatic mobile advertising as it looks to return to growth. Most importantly, Nexage provides the publisher-facing pieces Millennial needs to offer a complete mobile ad stack that serves the entire ecosystem from advertiser to publisher – but it comes at a big price.

Nexage will cost Millennial $85m in stock and $22.5m in cash for the mobile-focused supply-side platform. For Millennial, that’s a hefty amount as it will have to print 37 million new shares (26% of the total outstanding post-close) and use up almost one-quarter of its cash. In return, it doesn’t immediately add much to the top line, as Nexage posted about $8m in trailing revenue. Roughly $45m in ads ran through its system, making it about one-sixth the size of Millennial (closer than Nexage’s revenue would suggest), but since Nexage is an exchange, rather than an ad network like Millennial, it only books as revenue the portion of the spending it keeps.

Millennial already faced competition from several dozen ad networks and DSPs, and with this deal will add a smattering of ad exchanges to that mix. But in one way, this purchase pivots it away from much of the competition in mobile. Most of the mobile ad-tech industry – especially the programmatic portion – is aimed at serving performance-based advertisements, particularly geared toward driving app downloads. While this is still part of Millennial’s business, it’s a shrinking segment and the company has turned to brand advertising to fill the gap. Nexage, with its focus on larger publishers, brings Millennial an inventory set that’s desirable to those advertisers.

GCA Savvian advised Nexage on the sale, while LUMA Partners advised Millennial.

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Concur is just the latest of SAP’s pricey plays in the cloud

Brenon Daly

Contact: Brenon Daly

Announcing the largest SaaS acquisition in history, SAP will pay $8.3bn for travel and expense management software provider Concur Technologies. The purchase comes as the German giant is on the hook for doubling its cloud revenue in 2015 – a corporate target that has driven SAP’s recent M&A.

In its 42-year history, SAP has announced seven acquisitions valued at $1bn or more, according to The 451 M&A KnowledgeBase . However, the five most recent deals have all been pickups of subscription-based software vendors. (SAP’s two consolidation plays for firms hawking software licenses came in 2007 and 2010, with Business Objects and Sybase, respectively.) The purchase of Concur is the Germany company’s largest acquisition, and the fifth-largest transaction in the software market overall.

More significantly, SAP is paying up as it tries to move to the cloud. Including the Concur buy, SAP has handed out a lavish multiple, on average, of 11x trailing revenue to its SaaS targets. (Obviously, revenue doesn’t fully reflect the economic value of multiyear contracts common at SaaS firms. But even on a more liberal measure of business activity such as bookings, SAP has paid double-digit multiples in its subscription-based acquisitions.)

The SaaS premium stands out even more when compared with the valuations SAP has paid for conventional license-based vendors. The purchases of both Business Objects and Sybase went off at slightly less than 5x trailing revenue, or half the average SaaS valuation. Further, SAP itself trades at less than half the valuation it has paid for its SaaS acquisitions.

SAP acquisitions, $1bn+

Date announced Target Software delivery model Deal value Price/revenue multiple
September 18, 2014 Concur Technologies Subscription $8.3bn 12.4
October 7, 2007 Business Objects License $6.8bn 4.7
May 12, 2010 Sybase License $6.1bn 4.8
May 22, 2012 Ariba Subscription $4.5bn 8.6
December 3, 2011 SuccessFactors Subscription $3.6bn 11.7
June 5, 2013 hybris Subscription $1.3bn 10.7*
March 26, 2014 Fieldglass Subscription $1bn* 11.8*

Source: The 451 M&A KnowledgeBase *451 Research estimate

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At the Wall Street box office, Alibaba is a blockbuster

Brenon Daly

Contact: Brenon Daly

In Hollywood, a blockbuster debut that is expected to help support the release of other films around the same time is known as a ‘tentpole.’ And while that phenomenon may have also played out in the IPO business in the past, no one is expecting the Alibaba debut later this week to help prop up other offerings. Quite the opposite, in fact.

To understand why, think of Alibaba as Godzilla (the monster, not the movie). The Chinese e-commerce giant is looking to come to market – backed by no fewer than 20 investment banks – and create almost a Facebook-size valuation overnight. The sheer size of Alibaba’s record-setting offering of some 320 million shares at (currently) $68 each basically pushes other IPO candidates outside the awning of any Alibaba tentpole.

With Alibaba and its underwriters looking to place billions of dollars of equity, buyers are unlikely to step right back in to buy smaller-ticket tech IPOs. That means solid offerings that are in process, such as Cyber-Ark and HubSpot, may initially open a bit soft at the box office that is Wall Street.

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