Tech companies find it hard to bid against Wall Street

Brenon Daly

Contact: Brenon Daly

Tech companies are increasingly being outbid for the startups they want to acquire by a deep-pocketed rival that hasn’t been heard from in a while: Wall Street. In our recent survey of corporate development executives, nearly half of the respondents (46%) reported that they expected the IPO market to offer more competition in 2014 for target companies. In the seven-year history of the 451 Research Tech Corporate Development Outlook Survey, the threat of dual tracking has never been ranked that high.

A quick look at some of the platinum valuations being lavished on recent IPOs certainly helps explain why startups are looking to exit to the public market rather than sell out. By our count, roughly a dozen tech companies that went public this year – representing, astoundingly, about half of the entire IPO class of 2013 – currently trade at a valuation of greater than 10 times trailing sales. A few recent debutants have been bid up by public investors to the point where they are trading at more than 30x trailing sales.

Looking ahead to next year, corporate development executives, who represent the main buyers in the tech M&A market, expect to see a record number of new offerings. On average, respondents guessed that 29 tech companies would go public in 2014. That’s higher than previous years, when the forecast has ranged basically from the low- to mid-20s. (You can see more on the IPO market outlook, as well as M&A activity and valuation forecast, in our full report on this year’s survey.)

Projected number of tech IPOs

Period Average forecast
December 2013 for 2014 29
December 2012 for 2013 20
December 2011 for 2012 25
December 2010 for 2011 25
December 2009 for 2010 22
December 2008 for 2009 7
December 2007 for 2008 25

Source: 451 Research Tech Corporate Development Outlook Survey

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

Blue Coat plays in sandbox with Norman Shark

Scott Denne

Contact: Scott Denne Wendy Nather

After coming up empty in its efforts to secure funding, Norman Shark opts for an acquisition by Blue Coat. Many venture capitalists question whether sandboxing technology, which isolates suspicious code before it can execute on an endpoint, can sustain a large independent business, especially in a market where they’ll run up against FireEye’s freewheeling sales and marketing spending.

Fellow sandboxing vendor Invincea was able to pull together a $16m series C funding round this week, an effort that took up most of this year. Bromium had better luck with its $40m series C round, which we understand came with a $380m valuation.

We gather that Norman Shark anticipated revenue of $5m in 2012 while it was seeking capital for the business, though it’s not clear if it met or surpassed that goal. The purchase of the 50-person company is likely far smaller than Blue Coat’s recent acquisitions of Solera Networks (451 M&A KnowledgeBase subscribers can click here for our estimated valuation on that deal) and Crossbeam Systems (click here for estimate). We’d also note that this transaction is the second sandboxing acquisition announced this week, after Invincea said Monday that it had scooped up Sandboxie sometime earlier this year.

Broadly speaking, there’s demand among security providers to add new ‘advanced malware detection’ capabilities, which include sandboxing and behavioral analysis, as a way to compensate for what antivirus is missing. FireEye raised awareness of this new breed by going public in September, though malware analysis M&A activity had been going on for a while.

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

Hostway hopes to rekindle growth with Littlejohn LBO

Scott Denne

Contact: Scott Denne Liam Eagle

Hostway’s sale to private equity firm Littlejohn & Co. comes in the middle of the company’s transition from traditional shared hosting toward cloud and managed services. That transition, which began in 2010, makes it a good match for Littlejohn, which has little experience in tech, but plenty in complex situations like this one.

Though terms of the deal were not disclosed, we hear Littlejohn paid roughly 7x EBITDA for Chicago-based Hostway (subscribers to The 451 M&A KnowledgeBase can see our full valuation estimate, including price, here ). That’s just under the median 8x that hosting and managed service providers have fetched this year, according to our database. The lower multiple reflects the challenges that remain for Hostway: it doesn’t have the scale of larger cloud or managed service vendors, nor does it have the high-touch services of larger hosting suppliers, and customers are increasingly opting for one or the other.

With Littlejohn’s fresh capital, Hostway can start growing the business again. While it has exceeded $100m in annual revenue (relatively rarified air in the hosting business), it dipped below that mark in the past several years as it backed off some of its international efforts. That, mixed with some customer attrition, has caused revenue to drop to about $60m in the trailing 12 months. Cowen and Co. served as financial adviser to Littlejohn, while DH Capital banked Hostway.

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

Semiconductor M&A: bigger, fewer deals

Scott Denne

Contact: Scott Denne

Semiconductor deals keep getting bigger as the industry consolidates and the startups vanish. More buyers are looking for big targets where they can make significant cuts to operating expenses, rather than young companies that can bring them new products or revenue growth – largely because such young companies no longer exist. Avago Technologies’ $6.6bn purchase of LSI is a prime example.

Avago obtains a business that, last quarter, saw revenue decline 3% year over year to $607m but has better margins than Avago’s, something the acquirer plans to improve further by cutting $200m in annual operating costs out of the combined company in the second year following the deal’s close. At an enterprise value of $5.94bn, the transaction values LSI at 2.5x trailing 12-month revenue, higher than the 1.8x median multiple this year for vendors in its market.

Until the past few years, semiconductor suppliers had a pool of startups that could provide them with revenue growth (or at least the potential for growth with new products). Venture capitalists, however, have abandoned that space as the costs of building a chipmaker have soared and public market multiples for those businesses have stagnated. For the most part, chip startups are now extinct, and that’s unlikely to change anytime soon as almost all venture firms have refocused or eliminated partners that formerly specialized in chips.

That has led to an inverse relationship between the value and volume of deals in this sector: the median size of semiconductor purchases has been rising as the total number of such transactions has fallen. This year, the median price paid for a semiconductor provider rose to $75m, higher than it’s been in a decade and up from 2012 ($54m) and 2011 ($39m), according to The 451 M&A KnowledgeBase.

semi2

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

With a booming market ahead of it, Nimble’s IPO pops on day one

Scott Denne

Contact: Scott Denne

Banking on the growth of the hybrid storage market, hungry investors sent Nimble Storage’s shares surging almost 50% above its IPO price for a market cap of $2.3bn in its first day as a public company. It is currently valued at a whopping 21.7x trailing sales.

Hybrid storage arrays like those Nimble sells combine flash and hard-disk drives in the same device, giving customers a better ratio of price to performance than traditional disk storage. Today the market is dominated by incumbents that have simply replaced disk drives with flash drives, rather than creating a new file system from scratch to accommodate both types, as Nimble has done.

A look at data collected by TheInfoPro, a service of 451 Research, shows that Nimble and its market are poised for more growth. This year the number of storage administrators who said they would spend more money on hybrid storage systems than they did a year earlier increased 27% compared with 18% who said the same thing last year.TIPfor1213KBI

Our surveys also show Nimble accelerating within that market. While incumbents EMC and NetApp topped the list of vendors being implemented in the survey, Nimble was the highest ranked among the private, stand-alone companies. In 2012, it didn’t even get mentioned as a player in that category.

Continue reading “With a booming market ahead of it, Nimble’s IPO pops on day one” →

Marketo buys Insightera to expand automation pitch to CMOs

Scott Denne

Contact: Scott Denne Matt Mullen

In its first deal as a publicly traded company, Marketo spends $19.5m to pick up Insightera, a website automation vendor that deepens its portfolio of marketing automation offerings and gives it technology that its larger competitors don’t yet have.

Marketo is shelling out about $6m in cash, with the remainder in stock, for Insightera, an early-stage company that raised $6.5m in series A funding last summer. The target’s technology enables customers to personalize the content of their websites for each visitor – a technology that many startups, including Demandbase, Dynamic Yield and Causata (acquired by NICE Systems in August), are developing while other large marketing software providers stick to email and social for their automation offerings.

While Marketo faces intense competition in the wake of consolidation in this market, its focus on selling straight to CMOs is an advantage. The acquisition of Insightera provides another product that directly serves that audience. While salesforce.com became a major competitor with its purchase of ExactTarget, it’s approaching marketing software as an extension of CRM. Likewise, Oracle sees marketing as part of a bundle to be sold to CIOs, rather than a stand-alone marketing sale.

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

Network Instruments sale is Thoma Bravo’s third tech exit in as many weeks

Scott Denne

Contact: Scott Denne

While most of the country has been pounded by snow, Thoma Bravo has been making it rain. With today’s sale of Network Instruments to JDS Uniphase for $200m in cash, the private equity firm has announced exits for three portfolio companies in as many weeks.

Two of those deals were turned around relatively quickly and without the bolt-on acquisitions that typically follow a Thoma Bravo investment. The firm owned Network Instruments for less than 18 months, during which time the network performance equipment provider hadn’t announced a single purchase. Though Thoma Bravo’s ROI is unknown, it seems that JDSU was eager to own the asset – the transaction is JDSU’s largest in seven years and at 5x trailing revenue it is the highest multiple we’ve seen the company pay, according to The 451 M&A KnowledgeBase.

Last week, Thoma Bravo landed a five-month flip of Digital Insight that added $625m to the company’s value when NCR agreed to buy it for $1.65bn. The week before, Thoma Bravo sold Roadnet Technologies, formerly known as UPS Logistics, to Omnitracs for well over $100m (subscribers can see our specific price estimate and valuation by clicking here).

The firm could chalk up another exit soon, as it is rumored to be shopping enterprise content management vendor Hyland Software for an asking price of $1.2bn.

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

451 Research’s annual M&A outlook survey

Brenon Daly

Contact: Brenon Daly

To many tech M&A market observers, the fact that deal flow in 2013 has dropped every single month this year – culminating in double-digit percentage declines from each of the past two years – is a bit puzzling. After all, companies have never had more money to put to work in M&A than they do now, and they are increasingly looking to acquisitions to provide whatever growth they can wring out of the ever-maturing IT market. And yet, deals haven’t happened.

Not to say ‘we told you so,’ but the notable ebb in the M&A market this year is exactly what the market told us last December would happen in 2013. A year ago, in the annual 451 Research surveys of dealmakers and their advisers, both groups clearly indicated that they expected to be less busy in 2013. Specifically, they predicted their lowest level of M&A activity since the end of the recession – a bearish forecast that has indeed come true. Deal volume in 2013 is tracking to its lowest full-year level since 2009.

In last year’s survey, fully one out of five corporate development executives – representing the main buyers in the tech M&A market – indicated that they expected to cut back on their dealmaking in 2013. (You can see our full report on those survey results.) An identical percentage of bankers, who are typically more optimistic, reported that their pipeline was drier than it had been. (You can see our full report on those survey results.)

So what should we expect for 2014? Well, that’s exactly what we hope to find out as we once again step in market with our annual M&A Outlook surveys. We always appreciate the time and insight that the M&A community gives to the surveys, and once again look to you to share with us the ‘wisdom of the crowds.’ If you are a corporate development executive, click here for this year’s survey; if you are a senior tech investment banker, click here for this year’s survey.

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

Verizon set to shake up CDN market with proposed EdgeCast buy

Scott Denne

Contact: Scott Denne Jim Davis

Verizon picks up EdgeCast Networks in a move that’s likely to shuffle market share and partnership arrangements in the CDN space. The deal will likely alter Verizon’s current partnership with Akamai, the largest CDN vendor.

We estimate the enterprise value of the transaction at $395m, making it the largest acquisition of a CDN company and valuing EdgeCast at about 2.9x the $135m annual revenue that it expects to have by the close of 2013. The deal values EdgeCast slightly below the 4.8x that Akamai fetches and roughly in line with the 3.1x median for CDN purchases in the past decade, according to The 451 M&A KnowledgeBase.

Akamai gets about one-fifth of its revenue from resellers. While it’s not clear how much of that comes from Verizon, it is clear that it will lose some revenue when that partnership ends. Despite that, this could be an opportunity for Akamai or other CDNs to land additional carrier partnerships as telcos that resell EdgeCast, including Deutsche Telekom and TELUS, may not be comfortable reselling a Verizon service – not to mention the multi-tenant datacenter providers that partner with EdgeCast and also compete with Verizon’s Terremark.

Getting into the CDN business brings Verizon another source of revenue to help offset its declining fixed-line revenue, a need that’s driven most of its M&A spending in the past couple of years as it has bought companies such as Terremark for $1.4bn, CloudSwitch for an estimated $80m and fleet management vendor Hughes Telematics for $612m. And that’s in addition to the $130bn it paid for the 45% of Verizon Wireless that it didn’t already own.

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

Cloudy skies for Cbeyond

Scott Denne

Contact: Scott Denne Al Sadowski

Cbeyond’s transition into cloud services is moving slower than planned – and slower than the deterioration of its legacy sales. Now the company, which was founded around IP connection services for small businesses, is contemplating whether to sell itself or pursue acquisitions to ignite its move to the cloud. We believe a sale is a more likely outcome of that review, given its limited M&A history, small amount of cash and depressed valuation.

In the most recent quarter, revenue from Cbeyond’s cloud services, including hosted applications, managed hosting and cloud PBX, grew 87% year over year to $17.8m, up only $1.7m sequentially. That’s not nearly enough to staunch the bleeding on its legacy business, where sales shrank by $16m, or 14% year over year, as cable providers like Time Warner Cable and Cablevision have encroached on that market, where it already faced heavy competition from incumbent carriers.

Cbeyond currently trades at 0.4x trailing 12-month revenue of $471m and 2.4x EBITDA, well below comparable companies such as CenturyLink (2.1x revenue, 5.2x EBITDA) and Windstream (2.3x revenue, 6.1x EBITDA). With a depressed stock price and only $25m in cash on its balance sheet, Cbeyond’s ability to make acquisitions is limited (though it does have options in the form of an untapped $75m line of credit).

In a sale, we believe Cbeyond would attract interest from a larger regional CLEC that would find Cbeyond’s core mid-Atlantic network a complement to its own. Other suitors may be midsized MTDC vendors considering their own datacenter interconnection backbone or perhaps hosting providers seeking an opportunity to become full-service ICT suppliers. A sale would certainly give a boost to shareholders. Over the past 24 months, the median multiple for communications services and Internet access businesses is 1.65x trailing revenue, according to The 451 M&A KnowledgeBase.

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