Juniper’s security business needs protection

Scott Denne

Contact: Scott Denne

Over the past year, Juniper Networks shaved $111m of revenue – or 16% – off its security business, capping a three-year period that has seen that unit decline 25%. Unless it makes a move to offer more up-to-date products, there’s little reason to expect the division to stop shrinking. According to a survey by TheInfoPro, a service of 451 Research, the same amount of Juniper’s security customers said they plan to spend less with the vendor as said they would spend more (22%). Compare that with 2013, when only 11% planned to spend less and 44% planned to spend more.

Juniper’s security portfolio consists of network perimeter defenses (firewalls, VPN, intrusion prevention, etc.) and has been slow to adopt emerging technologies, such as next-generation firewalls. The founders of Palo Alto Networks, which pioneered next-gen firewalls, initially wanted to build the company at Juniper; however, they left and now Palo Alto is a quarter or two away from being larger than Juniper’s security business.

Meanwhile, Juniper spends conservatively on M&A – it hasn’t spent more than $300m on a deal in almost nine years and has only crested $100m three times since then – so we don’t expect it to make a big, splashy Sourcefire-like acquisition. Even so, the flood of venture money going to security creates an abundance of targets that match its spending profile.

Cloud application control technologies would make a good fit with Juniper. There are several startups in this space, including Adallom, Netskope and Skyhigh Networks, that are developing technologies that promise more nuanced control of SaaS apps compared with what next-gen firewalls typically offer today. As the services are offered, in part, through a network-based appliance, they would fit Juniper’s product portfolio. We expect Juniper’s competitors to get in this game in a year or so, making it possible that Juniper would try to regain some ground with a move in this market.

On the other hand, Juniper’s overall business is healthy: revenue grew 7% last year to $4.67bn, with a $439m profit on the strength of its router sales. With new CEO Shaygan Kheradpir, who’s been on the job for about a month, management may decide that it’s not worth the trouble to keep its promise to return the security division to growth this year. While it’s too early to say what moves he’ll make, his resume as the COO and CTO of Barclays and before that, CTO and CIO of Verizon, which accounted for 10% of Juniper’s revenue in several recent quarters, suggests that Kheradpir was brought in to protect the company’s existing relationships, rather than expand into new markets.

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451 Research Tech M&A Outlook webinar

Brenon Daly

Contact: Brenon Daly

The momentum that drove tech M&A spending to a post-recession record level in 2013 is continuing to roll into this year. In just the first three weeks of January, we’ve already seen blockbuster transactions such as Google’s effort to reach inside your home with its $3.2bn purchase of Nest Labs; the largest-ever tech acquisition by a Chinese company (Lenovo’s pickup of IBM’s x86 server business); and VMware going mobile, inking the biggest deal in its history by paying $1.54bn for AirWatch.

But what does the rest of 2014 look like? What broad-market trends are likely to continue to impact deal flow this year? And what specific drivers are expected to shape M&A and IPOs in some of the key enterprise IT markets, such as SaaS, mobility and information security? Well, we’ll have a few answers for you as we look ahead in our annual Tech M&A Outlook webinar. The hour-long event is scheduled for Tuesday, January 28 at 1:00pm EST, and you can register here.

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IBM shifts x86 biz to Lenovo

Scott Denne

Contact: Scott Denne John Abbott

IBM sheds its x86 server business in a $2.3bn sale to Lenovo, continuing its record-breaking streak of divestitures. When the deal closes, Big Blue will have rid itself of a division that generated $4.6bn in revenue last year and, like most x86 server businesses, experienced declining revenue.

Asset sales generally go for about 1x revenue, and hardware and pure services businesses are usually valued below that. Still, at 0.5x revenue, the deal comes toward the low end of IBM asset sales, but it’s still far better than the last time these two companies met at the M&A table. In 2005, Lenovo acquired IBM’s PC business for just 0.16x sales. Only once has Big Blue sold a business for more than $250m and collected more than 1x revenue.

IBM’s largest divestitures

Date announced Asset Acquirer Valuation Revenue multiple
January 23, 2014 x86 server business Lenovo $2.3bn 0.5x
April 17, 2012 Retail store solutions Toshiba TEC $850m 0.7x
January 25, 2007 Printing systems division Ricoh $1.42bn 0.7x
December 7, 2004 PC business Lenovo $1.75bn ~0.16x
June 4, 2002 Hard drive operations Hitachi $2.8bn 1.4x

Source: The 451 M&A KnowledgeBase

The sale lines up with several of IBM’s strategic ambitions. For one, it helps free the company to be a cloud services provider, instead of having to sell x86 servers to service providers while simultaneously competing with them. However, in some ways the move could complicate that effort, as Lenovo, which will be the primary supplier of x86 technology to IBM, may not be able to make the required R&D investments that will keep its products at the cutting edge. The Lenovo business model relies on volume shipments and won’t bear heavy R&D spending.

Also, the x86 business has low margins and shrinking revenue; unloading it will help Big Blue reach its goal of $20-per-share annual earnings by 2015. According to surveys by TheInfoPro, a service of 451 Research, customer spending on IBM servers has moved backwards a bit, with 36% of its customers in 2013 stating they would spend less on IBM servers during the following year, up from 23% and 27% in 2012 and 2011.

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AirWatch brings to VMware what few deals have before: revenue

Scott Denne1 Comment

Contact: Scott Denne

Aside from being its largest deal to date, the $1.54bn acquisition of MDM company AirWatch marks another milestone for VMware. While the rationale aligns with its other recent transactions, AirWatch itself does not. VMware typically acquires tuck-ins or early, promising technologies that bring it little revenue.

VMware’s dealmaking in the past two years has reflected its ambition to cover more of the IT stack. Working from a foundation in server virtualization, VMware extended into storage (picking up Virsto Software for $184m), networking (grabbing SDN startup Nicira for $1.26bn) and endpoints (buying Wanova, Desktone and now AirWatch).

Virsto was only doing a few million in sales by our estimate, Nicira was just starting to work with customers, and Wanova had just begun to grow its sales when it was taken out. Not so with AirWatch, which VMware expects will add $75m in revenue in 2014 (assuming a late Q1 close). In fact, according to an analysis of The 451 M&A KnowledgeBase, VMware has only twice in its history picked up companies with more than $25m in sales (Shavlik Technologies and SpringSource), and most have been far below that mark.

While $75m isn’t enough to immediately move the needle – VMware expects to post about $6bn in 2014 – it’s not surprising that the potential for a larger sales boost would appeal to VMware as it doesn’t put up the growth rates it once did, especially in software license revenue (as we noted earlier). License revenue grew just 9% in 2013, compared with 13% in 2012 and 31% the year before that.

VMware anticipates that there’s still plenty of upside in AirWatch and the MDM market, a thesis that aligns with our own surveys. According to TheInfoPro, a service of 451 Research, MDM is the top security concern, with 18% of respondents indicating that it was one of their top three pain points. In those same surveys, AirWatch moved up over BlackBerry to third place in 2013, from fourth a year earlier, as the most implemented MDM and mobile device security categories.

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Best Buy backs out of tech M&A market with mindSHIFT sale

Scott Denne

Contact: Scott Denne

Here’s something that is selling at Best Buy: its own acquisitions. With the divestiture of mindSHIFT Technologies, Best Buy has now sold every tech business it has bought since 2007. During better days, the electronics retailer experimented in tech by buying a few companies as it sought possible synergies with its retail outlets. Now that its core business is facing harder times, it has abandoned that strategy, with the SMB-focused MSP being the latest to go in a sale to Ricoh.

Best Buy acquired mindSHIFT in November 2011 for $167m to capture more of the SMB market by coupling the MSP with Geek Squad, its in-store services group and its lone remaining technology buy. The rationale mirrors Best Buy’s $97m acquisition of IP phone service provider Speakeasy, which it divested at the end of 2011. Napster, the online music service it bought for $121m in 2008, a year after Speakeasy, was also intended to attract new customers. That business was sold in pieces to Rhapsody International.

MindSHIFT appears to have grown as part of Best Buy: at the time of the sale it had 5,400 customers and 500 employees, and today it boasts 6,900 customers and 650 employees (terms of the sale to Ricoh and mindSHIFT’s current revenue weren’t disclosed). Given Best Buy’s current problems with shrinking sales and its track record of buying businesses that turned out to have little relevance to its core, we don’t anticipate that Best Buy will be back in the tech M&A market anytime soon.

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The buyout bonanza

Brenon Daly

Contact: Brenon Daly

As corporate acquirers work through an increasingly fractured tech landscape, their financial rivals are finding a bonanza of opportunities there. In particular, private equity (PE) firms got busy picking up castoff businesses and unloved companies in a spree of multibillion-dollar transactions in 2013. That sent spending by PE firms in 2013 to a post-recession record, both for the absolute amount spent as well as the proportion of PE dollars in overall spending on acquisitions. Fully one out of every four dollars handed out in tech M&A consideration came from buyout shops – nearly twice the level of any post-recession year.

The record in 2013 was driven by mammoth deals that haven’t been seen since prelapsarian days. Three of the 10 largest transactions in the entire tech sector last year involved PE shops. More broadly, cash-rich buyout firms showed they were ready once again to do big deals, targeting overlooked and out-of-favor public companies or huge units at tech giants that are shedding businesses as they seek elusive growth. There were plenty of big-ticket examples of both of these types of transactions in PE deal flow last year.

In terms of take-privates, Dell obviously topped the list. (Though the MBO stands as the largest PE deal since 2007, we would note that the transaction accounted for less than half of last year’s total PE spending. Even excluding the Dell MBO, spending on buyouts handily topped each of the annual totals since 2008.) Yet, three other LBOs also topped $1bn last year. Add to that, there were massive carve-outs and divestitures that boosted spending totals, including Qualcomm selling its Omnitracs unit to Vista Equity Partners and Intuit punting its financial services unit to Thoma Bravo, among other transactions.

PE activity

Year Deal volume Deal value Percentage of overall tech M&A spending
2013 184 $61bn 25%
2012 161 $25bn 14%
2011 204 $29bn 13%
2010 143 $27bn 14%
2009 103 $13bn 9%
2008 107 $17bn 6%
2007 150 $103bn 24%

Source: The 451 M&A KnowledgeBase

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AOL won’t try to Patch up its content strategy

Scott Denne

Contact: Scott Denne

Four years ago, upon buying Patch Media, a network of local news and information websites, AOL’s CEO declared that local content would be a core focus for AOL. Now, after failing to make the unit profitable, the company is handing a majority stake and management of the Patch business to Hale Global.

The deal shows that AOL is not only rethinking its local content strategy, it’s also rethinking the entire content strategy that’s driven its dealmaking for many years as the company increasingly favors advertising infrastructure over its content assets (blogs, news, video). Patch is AOL’s second divestiture of a content asset since the start of the year and its fifth such move in the past 12 months.

Prior to beginning this round of divestitures, AOL spent $1.4bn on 24 content companies, including social networks, photo-sharing sites and popular blogs, over a five-year span, according to The 451 M&A KnowledgeBase. Those deals have come to a halt since the divestitures began and AOL’s only acquisition in the meantime was its $465m reach for video ad tech vendor Adap.tv, its biggest transaction since the $850m purchase of social network Bebo, which it has since sold (for pennies on the dollar, we might add).

Ad tech revenue is growing faster than any other AOL business and is well on its way to becoming the company’s largest division. Its revenue from enabling the buying and selling of ad inventory grew to $149m in its most recent quarter, up 32% from the year-earlier period. Advertising revenue from its own properties (largely powered by in-house technology) grew only 4%. Even in the quarter before buying Adap.tv, AOL’s ad tech revenue was still its fastest-growing segment, with year-over-year growth of 9%.

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‘Cloudy’ outlook for performance management M&A

Scott Denne

Contact: Dennis Callaghan

The emergence of the cloud as a deployment option for IT performance monitoring tools is spurring a wave of M&A activity in this space as a new group of vendors emerges as consolidators. After a slow start last year, the market picked up with the take-privates of BMC Software in May and Keynote Systems in June. Those were followed by several smaller deals, including two by Idera (Precise Software and CopperEgg), which hadn’t done a deal since 2010, and Splunk’s first acquisitions (BugSense and Cloudmeter).

We don’t expect it to end there: IT performance management is a target-rich environment flush with venture-backed startups, such as Catchpoint Systems and several others that could likely end up as part of a larger organization. Also, some of the vendors involved in 2013’s deals figure to be acquisitive this year. BMC, for example, was a consolidator as a public company, and we expect to see more of the same from it under its PE consortium. Thoma Bravo companies almost always become acquirers, and we expect Keynote to explore expanding its performance monitoring capabilities from the last mile in, as opposed to the inside-out pattern we normally see in this space.

Subscribers to 451 Research can access our longer report, including analysis of additional likely acquirers and targets, by clicking here.

Select performance management M&A, 2013

Date announced Acquirer Target Deal value
May 6 PE consortium BMC Software $6.9bn
June 24 Thoma Bravo Keynote Systems $395m
July 2 Idera Precise Software Solutions Not disclosed
July 9 Idera CopperEgg Not disclosed
July 9 Kaseya Zyrion $50m*
September 16 Splunk BugSense $9m
September 19 AppDynamics Nodetime Not disclosed
October 8 SolarWinds Confio Software $103m
November 5 SolarWinds AppNeta Undisclosed investment
December 9 SmartBear Software Lucierna Not disclosed
December 10 Splunk Cloudmeter $21m

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

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Search giant searching for new markets

Scott Denne

Contact: Ben Kolada Scott Denne

In a decade and a half Google built itself into the world’s largest advertising company, though more recently it’s been branching far and wide into new markets. Yesterday the search giant spent $3.2bn of its cash on Nest Labs, a smart-home device company best known for its thermostat. It’s the latest in a line of schizophrenic dealmaking, including Google’s rollup of robotics startups, a smattering of facial-, speech- and motion-recognition businesses, a few book publishers and the $1bn pickup of a mapping application that’s only tangentially related to its core business.

In fact, the last time Google bought a company that directly related to its core business of search, display and video advertising was its mid-2011 purchase of AdMeld. That was 60 deals ago, according to an analysis of The 451 M&A KnowledgeBase.

We’d note as well that Google’s track record of capitalizing on acquisitions outside of advertising is less than stellar. It shelled out $12.5bn for Motorola Mobility in 2012 and while that company already faced headwinds when Google got involved, its annual mobile phone revenue has halved under Google’s watch (the same amount as BlackBerry, for what it’s worth). Surveys by ChangeWave Research, a service of 451 Research, show that only 4% of smartphone buyers plan to buy Motorola, a number that hasn’t changed meaningfully under Google’s watch.

However, with rising interest in consumer hardware and more types of consumer devices becoming Internet-connected every day, we’d expect Google to continue to pay attention to this emerging market. Putting two and two together, Google could next make a move on smart scale and nutrition device maker The Orange Chef. Its VC arm was an investor in Nest and is still an investor in Orange Chef.

Select recent, unusual Google acquisitions

Date announced Target Primary sector Abstract Deal value
January 13, 2014 Nest Labs Systems / Controls / General Smart thermostat systems provider $3.2bn
December 14, 2013 Boston Dynamics Systems / Other Humanoid robots and software Not disclosed
December 4, 2013 Industrial Perception Systems / Controls / Industrial automation 3D-vision-guided robots and software Not disclosed
December 4, 2013 Meka Robotics Systems / Other Humanoid robot design and manufacturing Not disclosed
October 2, 2013 Flutter Application software / Graphics and design/CAD Motion and gesture recognition software $40m*
August 30, 2013 WIMM Labs Mobility / Mobile devices / Other Android-based watch and applications Not disclosed
July 22, 2013 SR Tech Group (patent portfolio) Application software / Speech recognition Speech recognition software and development Not disclosed
October 3, 2012 Viewdle Information management / Info retrieval / Other Facial-recognition software provider $30m**
August 15, 2011 Motorola Mobility Mobility / Mobile devices / General Mobile device provider $12.5bn
July 22, 2011 PittPatt Information management / Info retrieval / Other Facial recognition software provider $38m*

Source: The 451 M&A KnowledgeBase *Reported deal value **451 Research estimate

In a shift, Groupon using cash in its acquisitions

Scott Denne

Contact: Scott Denne

Apparently more confident in its financial footing, Groupon is moving away from pure stock to using more cash in its acquisitions. The company’s $43m purchase of flash-sales site ideeli, announced today, follows its November pickup of TicketMonster as its largest cash outlays for acquisitions to date. The shift in preferred deal consideration comes as Groupon’s losses are diminishing.

While its spending on ideeli isn’t going to dent Groupon’s roughly $1bn in cash that it built up mainly from its IPO and substantial venture funding, the transaction is yet another departure from the company’s past deals, which were paid for mainly in stock. The purchase follows the $260m – including $100m of cash – acquisition of TicketMonster in November. For comparison, Groupon spent only $61m of cash on its previous 33 deals (and in 2010 it actually added $3m in cash to its books through dealmaking).

Like TicketMonster , the purchase of ideeli subtracts from Groupon’s bottom line but adds to its top. The target generated $115m in sales in its fiscal 2013, which ended in February, and recorded a $30m operating loss.

The change in preferred deal consideration comes as Groupon’s losses continue to shrink, now coming in below $100m over the past 12 months. While that’s not a historic low, it’s less than half what it posted in its first year as a public company.

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