Thoma Bravo gets better than face value from Compuware

Scott Denne

Contact: Scott Denne

At first glance, the $2.5bn take-private of Compuware looks like a fairly typical (though larger) Thoma Bravo deal – the private equity firm has bought many aging, but profitable, tech companies for multiples that are similar to this transaction. After stripping away the results for Covisint, the services business that it’s unloading as part of the deal, the terms look quite different.

The acquisition values Compuware at $10.92 per share, but that includes the 80% stake that Compuware holds in Covisint, a former subsidiary that Compuware took public last year, which will be distributed to Compuware shareholders ahead of the close. That per-share price gives Compuware a 3.1x trailing revenue valuation and 21.5x enterprise value to EBITDA multiple – both are on the high end of what Thoma usually pays.

Since Thoma isn’t actually paying for Covisint, stripping out that company’s financial performance and implied value makes Compuware a relative bargain. After backing out Covisint’s low revenue and high operating expenses, the EBITDA multiple drops to 12.3x, well below the median 17.4x for a Thoma Bravo take-private, not to mention the 22.3x it put up for Compuware rival Keynote Systems last year, according to the The 451 M&A KnowledgeBase.

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Summer ends with M&A hot streak

Scott Denne

Contact: Scott Denne

As summer turns to fall, tech M&A shows no sign of cooling off. In August, we’ve seen the value of disclosed and estimated acquisitions double from last year to $29.74bn on 290 transactions, matching last year’s total.

As in the rest of this record year, telecom consolidation drove the total up, as Telefonica’s $9.83bn purchase of Brazil’s Global Village Telecom accounted for a full third of the value of August’s announced transactions.

Though telecom was the biggest contributor, there were five other $1bn+ deals this month from multiple sectors, such as gambling technology and payments. Compare that with two $1bn+ acquisitions last August, neither of which crossed $2bn. Rounding out the list of this month’s largest transactions were a pair of gaming companies, FunPlus and Twitch, which were both just shy of the $1bn mark.

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VMware needs more ‘Know Limits’, less of ‘No Limits’

Brenon Daly

Contact: Brenon Daly

As VMware lowers the curtain Thursday on its annual gathering of customers and partners, we have a suggestion for planning VMworld 2015: come up with a better tagline than this year’s conference. The slogan ‘No Limits’ was inescapable at this week’s confab, graffitied onto walls and parroted by most VMware executives. Undoubtedly, the focus-grouped message was meant to convey the image of VMware standing as a central provider in an IT landscape of boundless resources, all flowing together seamlessly.

The reality, of course, is not quite so idyllic. (Just ask anyone at VMworld who has gone hand to hand in the past with some of the company’s management products, which have now been further complicated by being bundled together in vRealize Suite.) Enterprise technology is messy and prone to breaking down. The solution to that complexity isn’t to add more.

Rather than pushing the idea of No Limits, VMworld would have been more responsibly taglined ‘Know Limits.’ We acknowledge that our tweak on the slogan knocks some of the enthusiasm out of it. And when a company needs to come up with $1bn of net new revenue next year (taking the top line from basically $6bn in 2014 to $7bn in 2015), enthusiasm is a key selling point.

The kicker on VMware’s selection of No Limits as its central message to the 22,000 attendees of its annual confab is that the company should know that there are indeed limits to technology. In fact, at last year’s VMworld the company was only just dusting itself off after having hit some limits of its own. It found out, for instance, that it wasn’t an application software vendor, so it divested SlideRocket and Zimbra as part of a larger reorganization in the first half of 2013.

There’s no doubt that VMware is a far healthier company at this year’s VMworld than it was at last year’s event. (For the record, the 2013 VMworld tagline was ‘Defy Convention.’) We would argue that the company is healthier because it replaced its freewheeling, expansive operations with a more focused and disciplined approach to business. (In other words, VMware imposed some limits on itself.) Strategically, it pared down its portfolio and simplified it into three distinct offerings. The net result? VMware is growing 50% faster in the two quarters leading into this year’s VMworld than in the two quarters heading into last year’s confab.

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HubSpot markets a potential IPO

Scott Denne

Contact: Scott Denne Matt Mullen

HubSpot takes the covers off its financial performance by filing its S-1. Like many recent SaaS IPOs, the documents show strong growth but steep losses. The company points to the nearly untapped market for its software ? and our surveys indicate that this is indeed the case, but HubSpot and its competitors will have to continue to spend heavily to build that opportunity.

HubSpot generated $93.8m in revenue for the most recent 12-month period ? an impressive 46% increase compared with a year earlier, but growth is declining from the 50% the company posted in 2013 and the 81% in 2012. During that same period, it had a $35.7m net loss, a figure that only grew 34% year over year. While losses as a percentage of revenue continue to tick down, HubSpot is many years away from putting up annual profits (not that we expect a lack of profits to impact the offering).

A recent survey by ChangeWave Research, a service of 451 Research, revealed that only 24% of companies had either deployed or planned to immediately deploy any form of digital marketing technology. Among companies with 10-1,000 employees (HubSpot’s sweet spot), nearly two-thirds said they had no near-term plans to begin using digital marketing technology, highlighting that while there is certainly a sizable chunk of the market that has yet to be tapped, the job of persuading the majority of potential customers that such investments are worthwhile is an ongoing challenge.

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Gaming has Amazon Twitch-ing

Scott Denne

Contact: Scott Denne

Amazon reaches for Twitch, a website for watching and broadcasting videogame play, in a $970m deal that could benefit multiple parts of the Amazon empire. In picking up Twitch, Amazon could boost its Prime offering with original content while helping many other parts of the company, from its core retail sales to its advertising business and, of course, its gaming foray.

While Amazon Prime, its subscription media business, lags Netflix, it’s gaining ground fast. According to a June survey by ChangeWave Research, a service of 451 Research, 42% of subscribers to an alternative TV service chose Amazon, up from 33% a year earlier, and only half what Netflix garnered. That same survey also showed the impact of original content on those numbers – 20% of Netflix subscribers said they mostly use the service for original content, compared with just 4% for Amazon. To be clear, Amazon hasn’t indicated how or whether Twitch will be integrated with Prime, but it just bought itself billions of hours of unique content.

Twitch, with a substantial audience overseas, also provides an opportunity to grow Amazon’s media business beyond North America via sales of premium features such as ad-free viewing and larger uploads. Through the first half of 2014, Amazon’s international media revenue – the slowest portion of its business – grew just 5%, or about one-third the rate that unit grew in North America.

Owning Twitch also gives Amazon a fertile ground for entering the gaming market itself – an Amazon console has long been rumored and the company recently acquired game studio Double Helix Games. It also expands Amazon’s reach into a desirable demographic – young men – that it can sell to directly and leverage for its advertising business.

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As HP looks to set back into M&A market, who’s on its short-list?

Brenon Daly

Contact: Brenon Daly

Now that Hewlett-Packard is once again growing organically, we’re hearing that the tech giant is looking to grow inorganically once again, too. Several market sources have indicated in recent days that HP has pursued a large network platform play, as well as a smaller round-out for its application security portfolio.

Before we look at the specifics of each rumor, it’s worth noting the fact that any acquisition would be a dramatic reversal from the company’s recent stance. Since its disastrous purchase of Autonomy in mid-2011, HP has stepped almost entirely out of the M&A market, announcing just a pair of small transactions. For comparison, IBM has inked more than 30 deals in the same three-year period, according to The 451 M&A KnowledgeBase.

So who is HP supposedly eyeing? Well, both Blue Coat Systems and WhiteHat Security would bring a dash of color to the company.

Of the two rumored deals, we think the larger one – Blue Coat – is less likely, if just because a more measured return to dealmaking after a three-year hiatus would probably play better among investors, who have bid HP shares up to a three-year high. Blue Coat, with its diverse networking and security product portfolio and headcount of more than 1,400, would also pose a number of integration challenges to a company that is still working through the last big transaction it did. Furthermore, it would likely cost HP more than $2bn.

More reasonably, WhiteHat would likely cost HP only about one-tenth that amount and would be a relatively low-risk expansion to the company’s existing portfolio by bolstering its security services. HP already offers application security, a portfolio built primarily via M&A. HP acquired Web app testing startup SPI Dynamics in June 2007, and then added Fortify Software in August 2010. Fortify, which had a relatively strong partnership with WhiteHat before its sale, stands as one of the few recent deals that HP has done that has actually generated the hoped-for returns.

Murata nearly brings Peregrine parity with IPO price

Scott Denne

Contact: Scott Denne

Murata Manufacturing’s $465m acquisition of Peregrine Semiconductor marks a tranquil end to the target’s two years as a public company. Peregrine went public at $14 per share two years ago this month and has agreed to sell to Murata for $12.50 per share. Though the price is a loss for its initial shareholders, it could have been far worse and the 76% premium from Peregrine’s price 30 days ago helps soften the blow.

Peregrine came through 2012 with a gain for shareholders, then a key OEM (rumored to be Apple) diversified its radio frequency component supply chain, sending the company’s stock down and contributing to stagnated revenue since the start of 2013. Peregrine is not the only semiconductor vendor that’s been hurt by an overreliance on one of the two major smartphone OEMs (Samsung and Apple). Earlier this year, Cirrus Logic snagged Wolfson Microelectronics in a $488m deal aimed at spreading out the customer base for its audio chips, and Audience, a Cirrus competitor, picked up Sensor Platforms for $41m to try to push its products beyond the smartphone market.

According to The 451 M&A KnowledgeBase, the premium for Peregrine’s stock is the highest for any chipmaker in the past 12 months, but Peregrine shareholders aren’t the only ones to get bailed out of a poor-performing semiconductor stock with a hefty premium. Avago Technologies’ $6.6bn purchase of LSI at 36% brought that company’s stock up to levels it hadn’t seen since 2006, and the 75% premium that M/A-COM Technology handed to Mindspeed Technologies shareholders helped level off a 36% drop in the target’s stock in 2013.

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VMware thinking long and short in CloudVolumes pickup

Scott Denne

Contact: John Abbott

With just 25 employees, CloudVolumes is a relatively small purchase for VMware, but one with big implications. By grabbing CloudVolumes, the virtualization vendor seeks an immediate boost to its desktop virtualization efforts and help in fending off a long-term threat from Docker.

The first version of its VMware View desktop virtualization software (a successor to VMware VDM) was introduced in 2008, but has taken longer than expected to gain momentum. VMware has made a handful of tuck-in acquisitions to bolster its desktop virtualization capabilities, including Desktone, Wanova and RTO Software. CloudVolumes provides a more efficient, cost-effective and easier to manage means of providing users with persistent virtual desktops.

While VMware is clearly keen to keep one step ahead of its direct competition, one of the biggest motivations behind this particular purchase may have been the huge rise of interest in Docker, the open source engine that automates the deployment of applications in lightweight, portable containers. Adding CloudVolumes, which virtualizes everything above the operating system (not just apps but also data, settings, libraries and user profiles), gets VMware similar capabilities.

We’ll have a more detailed look at this acquisition in tomorrow’s 451 Market Insight.

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Mad Mimi lands in GoDaddy’s inbox

Scott Denne

Contact: Scott Denne

GoDaddy swaps out its email marketing software as it heads toward a public offering. The Web hosting giant had an acquisitive streak last year, printing seven deals, but today’s purchase of Mad Mimi is only its second of 2014. That the transaction comes amid a relative M&A drought and replaces an existing product highlights the importance that GoDaddy places on email marketing capabilities – and rightly so.

Though there’s plenty of buzz around social and other corners of the marketing software business, email dominates digital marketing. According to a survey by ChangeWave Research, a service of 451 Research, 76% of respondents use or plan to use email marketing, 25 percentage points higher than any other category of marketing software. And while 41% plan to increase spending on digital marketing, only 2% expect to cut back.

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Google nabs Jetpac to defend mobile turf

Scott Denne

Contact:  Scott Denne

Google’s momentum in desktop advertising made it the dominant player in mobile. Now, facing encroachment from players like Yahoo and Facebook, the search giant is making acquisitions to add mobile capabilities. Google’s latest target is Jetpac, a three-year-old startup that built a recommendation app powered by contextual analysis of pictures across Instagram. The technology will be used to enhance the company’s mobile search and Google Now.

In the past year, Google has acquired about eight companies to bolster its mobile services. These include Emu, a mobile messaging platform that uses artificial intelligence to provide relevant information and recommendations based on the user’s location and interests, and Songza Media, a music streaming and playlist curation app.

Google’s competition hasn’t been idle in this time. Twitter has picked up companies like Namo Media and TapCommerce to improve its mobile ad products, while Yahoo bought Flurry to help scale its mobile ad efforts.

We’ll have a detailed report on Google’s Jetpac acquisition in tomorrow’s 451 Market Insight.

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