Rocket Fuel takes off on debut

Scott Denne

Contact: Scott Denne Tejas Venkatesh

Adtech company Rocket Fuel created fireworks on the public markets today, first debuting at the high end of an already upwardly revised range and doubling shortly thereafter. The offering creates $1.8bn in market value, and highlights investors’ hunger for a combination of growth and technology differentiation.

Rocket Fuel generated $160m in revenue for the year ended June 30, up roughly 135% from the same period last year, valuing the company at a handsome 11.6x trailing sales. In its filings, the company emphasized its use of artificial intelligence and complete automation of ad buying. That makes it unique from other demand-side platforms, which work more like a Bloomberg terminal for ad buying, and that seems to appeal to investors seeking an adtech business that’s based on technology, rather than an arbitrage of buying ad inventory and reselling it at a higher price.

That growth and tech combination is resulting in the superior valuation compared to recent adtech IPOs like Tremor Video, Marin Software and Millennial Media, all of which trade at less than 6x trailing sales. For instance, Millennial, which is comparable to Rocket Fuel in revenue run rate, trades at just 3x trailing sales.

Rocket Fuel’s offering is good news for larger rival Turn, which is planning its own IPO. We believe the nine-year-old startup is generating roughly $250m in revenue and is likely to file its paperwork early next year.

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Amid accounting review, Veeco buys Synos for up to $185m

Scott Denne

Contact: Scott Denne

Veeco Instruments is making a huge bet at an unusual time. The company is paying $70m in cash for atomic laser deposition systems provider Synos Technology, with earnouts potentially raising the total cost of the acquisition to $185m. Meanwhile, Veeco is undergoing an internal accounting review and hasn’t filed financial results in nearly a year.

Instead of acquiring an unproven company, Veeco should have bought itself an abacus. The company hasn’t filed financial results since the third quarter of 2012 as it reviews whether it recognized revenue on its metal organic chemical vapor deposition devices in the appropriate periods. The review could result in a shift in revenue to different periods. When it did report, it wasn’t pretty. Trailing revenue at the time fell 45% from the prior year, to $595m.

However, if Veeco can successfully integrate Synos and the target can meet its earnout milestones, the rewards would be substantial. Synos, which sells equipment that enables the manufacturing of flexible displays on cell phones, just began shipping its first product earlier this year. Nonetheless, Veeco anticipates that it will ship $80m in product next year, followed by $200m in 2015.

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Sometimes M&A begets M&A

Scott Denne

Contact: Scott Denne

TIBCO Software has acquired BI vendor Extended Results to bolster its Spotfire data visualization business, which it bought for $195m in 2007. After five years of organically growing Spotfire, Extended Results is TIBCO’s third Spotfire add-on this year. Its growing interest in the sector likely comes from both competitive M&A pressure and the market’s overall growth.

Extended Results offers BI software that enables executives to access key metrics on their mobile devices. The target provides TIBCO Spotfire with a mobile delivery mechanism for its visualization products. Terms of the deal weren’t disclosed, but we know TIBCO has so far spent a total of $85m to purchase businesses complementary to Spotfire. Extended Results had 50 employees. Cascadia Capital advised the company on its sale.

To a degree, we believe the transaction was driven by competitive M&A pressure in data visualization, as well as the sector’s growth potential. For example, QlikTech, one of TIBCO Spotfire’s biggest rivals, got into data visualization in May with the $7.6m acquisition of NComVA. Meanwhile, other tech firms have been active here this year, with Salesforce.com buying EdgeSpring, Datawatch picking up Panopticon Software and Pentaho reaching for Webdetails. And for a market check, Tableau Software, the largest stand-alone data visualization software provider, is expected to double its revenue this year, to $258m.

TIBCO’s BI and data visualization M&A

Date announced Target Deal value
September 18, 2013 Extended Results Not disclosed
June 11, 2013 StreamBase Systems $52m
March 25, 2013 Maporama Solutions $6.9m
July 8, 2008 Syndera $1m
June 19, 2008 Insightful Corp $25m
May 1, 2007 Spotfire $195m

Source: The 451 M&A KnowledgeBase

Hightail buys Adept Cloud to stay ahead of cloud security concerns

Scott Denne

Contact: Scott Denne

Hightail acquires secure file-transfer startup Adept Cloud, a unique move in an industry that has focused on usability over security. But the deal could also become a precedent as security concerns start surfacing in cloud buying decisions, forcing some companies to look to M&A to remain relevant.

So far, we’ve seen very few acquisitions of security companies by cloud file-sharing providers. In fact, of the 18 combined acquisitions in the past four years by Hightail and its many competitors, the purchase of Adept Cloud is the first that’s focused on security technology.

The dearth of deals is a result of most vendors being more concerned with usability than security. Customers aren’t using these services for top-secret corporate data, so security isn’t at the top of their priorities, either. But that’s slowly changing. While no IT managers surveyed by TheInfoPro, a service of 451 Research, in the last half of 2012 cited security as a roadblock to implementing cloud technologies, 7% of respondents changed their mood in the survey done in the first half of this year.

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Mindful — and major — M&A by Mindjet

Brenon Daly

Contact: Brenon Daly

In its first major acquisition, Mindjet has handed over just less than one-third of its equity for Spigit, a social and innovation-focused front end to its collaboration platform. The deal comes as 20-year-old Mindjet continues its evolution from a Windows-based ‘brainstorming’ license software vendor to a multi-OS, subscription-based platform. That transformation – accelerated by the addition of Spigit – makes it a whole lot more likely that Mindjet will be in a position to join the ranks of public companies in a year or two.

According to our understanding, fast-growing Spigit will bump up Mindjet’s top line by about one-third. (Subscribers to The 451 M&A KnowledgeBase can click here to see our specific revenue estimates for Spigit.) Importantly, all of Spigit’s revenue is subscription, which fits with Mindjet’s efforts to transition to a fully SaaS business. Mindjet basically stopped selling perpetual licenses last year and is tracking to finish 2013 with subscriptions accounting for about 70% of total revenue.

Initially backed by Warburg Pincus, Spigit got re-capped earlier this year with PICO Holdings taking a majority stake of the company. Collectively, Spigit shareholders will own 30% of the combined company, and its 100 employees will account for almost the same ratio of the combined company’s 400 employees. Arma Partners advised Spigit on the sale.

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Extreme Networks doubles down with Enterasys

Contact: Tejas Venkatesh

In its first acquisition of a company in more than a decade, Extreme Networks announced the reach for a company its own size: fellow Ethernet switch vendor Enterasys Networks. While the $180m deal may seem aggressive at first glance, we see it more as an opportunistic buy designed to better compete in a market dominated by larger companies like Cisco and Huawei.

The deal values Enterasys, which generated $340m in sales for the year ended June 2013, at just 0.5x trailing sales. That’s a bargain price compared to the 1.2x multiple that Extreme currently garners on the public market. Further, the deal price is less than half of what Enterasys received in its takeover, when buyout firms Gores Group and Tennenbaum Capital Partners acquired the company in November 2005.

As a result of the deal, Extreme’s topline approximately doubles, and this should help the company compete better with larger firms, especially in winning large contracts. The two companies have almost no customer overlap, meaning the combined entity will instantly have more market breadth and a stronger sales force. We will have a full report on the transaction our next Daily 451 newsletter.

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Much more to do at Dell

Brenon Daly

Contact: Brenon Daly

After a tortuous, acrimonious and sometimes litigious seven-month process, Dell shareholders today approved the proposed $24.6bn take-private of the IT vendor. Now comes the hard part for the folks behind the third-largest tech leveraged buyout (LBO) in history: actually changing the trajectory at Dell.

We say that because the LBO doesn’t actually change much at the company. For the most part, the LBO is a financial event, rather than a strategic one. As a private company, Dell is simply going to continue plodding along its already planned transformation from ‘box maker’ to (ideally) a strategic supplier of IT products and services.

To be clear, however, this is not a new development at Dell. The handful of priorities that it has highlighted for its life as a private company – such as expanding its enterprise business, pushing further into emerging markets and redoubling its commitment to its sales channel – are all ones that it has put forward to shareholders since at least 2008. Dell would counter that its new ownership structure, with chief executive Michael Dell owning three-quarters of the company, will allow them to move quicker on that strategy.

That may be so, but we might suggest that it skims over the difficulties for any 110,000-employee company (public or private) to transform itself. After all, Dell has been steadily and consciously looking beyond its PC and laptop business for nearly the past half-decade, with limited success. In fiscal 2008, that segment contributed 61% of total Dell revenue, but that portion has only dropped to about 54% now.

And that’s despite spending more on M&A than it ever had in its history. Since 2006, the company has averaged about five acquisitions per year, according to The 451 M&A KnowledgeBase . Altogether, it has spent more than $12bn to get into new markets, including storage (EqualLogic, Compellent), services (Perot Systems), networking (Force10) and security (SonicWALL, SecureWorks). It’s also relevant to note for the soon-to-be-private Dell that shareholders footed the bill for that shopping spree.

Yet even as Dell has added all those new businesses – to say nothing of the collective billions of dollars in revenue from the acquired companies – it has not been able to grow. In fact, as the IT vendor gets set to step off the Nasdaq and go behind closed doors, it is going to be smaller and less profitable than it was before it kicked off its multibillion-dollar M&A program.

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IBM looks to make more from less

Scott Denne

Contact Scott Denne

IBM is selling its customer-care BPO services unit for $505m to SYNNEX in a deal that single-handedly erases revenue contributions brought by companies it has acquired this year. In other words, IBM is selling more revenue than it’s bought this year. (Specifically, the division that Big Blue just divested generated $1.2bn in sales.)

The divestiture, which is becoming increasingly popular throughout the tech industry, comes as IBM chases its stated goal of earning $20 per share by 2015. In addition to share buybacks and focusing on higher-margin businesses, another way it could get there is by shedding less profitable assets. The BPO services assets that SYNNEX is picking up were running on just about a 10% EBITDA margin. For comparison, the companies it has acquired this year were almost certainly promising much higher profitability potential.

That has resulted in a very lopsided deal flow at IBM. Since the start of 2012, Big Blue has sold off eight business units. In the entire decade before, the company did only 16 divestitures.

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Twitter gets mo’ advertising with MoPub

Scott Denne

Contact Scott Denne

In its largest acquisition, Twitter is spending about $350m in stock for mobile ad exchange MoPub. The bit of portfolio expansion into the fast-growing market comes as Twitter reportedly readies itself for an IPO, which is widely expected for next year. The deal brings Twitter instant access to two of the biggest trends in digital marketing – programmatic buying and mobile advertising.

Despite the growing popularity of those two trends, there are few companies focused on doing both. That scarcity likely contributed to the rich price Twitter is paying for a company that started selling less than two years ago. Aside from MoPub and its closet competitor, Nexage, there aren’t any notable ad exchanges dedicated to mobile. As interest in mobile advertising has grown, so has MoPub’s revenue, which we understand will be $20-25m in the current quarter.

This is the fifth mobile-related acquisition (out of nine total) by Twitter in the past 12 months. We would note that the breakdown in Twitter’s deal flow mirrors the activity of its users, 60% of which access the social network via a mobile device at least once a month.

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Western Digital keeps up its flashy spending

Scott Denne

Contact Scott Denne  Tim Stammers

Disk drive giant Western Digital is making its third – and largest – acquisition of a flash storage company this year, handing over $685m in cash for Virident Systems. The purchase brings the company’s total tab on spending in the fast-growing market to more than $1bn.

Earlier this year, Western Digital agreed to pay $340m for flash drive vendor STEC, as well as an undisclosed amount for VeloBit, an early-stage maker of software for boosting the performance of flash drives. That’s on top of the $4.25bn it spent in early 2011 on Hitachi Global Storage Technologies, a deal that was driven in part to help Western Digital get into the enterprise flash market.

Virident brings Western Digital PCIe flash cards (essentially flash drives that are used for high-performance applications) and related software. Virident is an early-stage company and Western Digital doesn’t expect it to be accretive until 2015. Subscribers to The 451 M&A KnowledgeBase can see our full record and estimates of Virident’s revenue.

The sinking cost of flash and rising demand for faster storage is leading to a growing market for enterprise flash at the expense of traditional hard disk. According to TheInfoPro, a service of 451 Research, 17% of IT departments plan to increase their spending on flash memory in servers (Virident’s specialty), up from just 8% that planned to do so in 2012.

Western Digital has been far more aggressive than its competition in the flash sector. For instance, SanDisk launched itself into the flash disk market two years ago with the $327m reach for Pliant Technology and, more recently, the $307m pickup of another flash disk provider, SMART Storage Systems. Western Digital’s main rival, Seagate, has yet to ink a deal in flash; however, it did make a $40m investment in Virident earlier this year.

Recent deals by disk drive companies

Date announced Acquirer Target Deal value
September 9, 2013 Western Digital Virident Systems $685m
July 10, 2013 Western Digital VeloBit Not disclosed
July 2, 2013 SanDisk SMART Storage Systems $307m
June 24, 2013 Western Digital STEC $340m

Source: The 451 M&A KnowledgeBase

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