A pause in Big Software’s ‘SaaS grab’

Contact: Brenon Daly

After years of trying to leap directly to the cloud through blockbuster acquisitions, major software vendors have been taking a more step-by-step approach lately. That’s shown up clearly in the M&A bills for two of the biggest shops from the previous era trying to make the transition to Software 2.0: Oracle and SAP.

Since the start of the current decade, the duo has done 11 SaaS purchases valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. However, not one of those deals has come in the past 14 months, as the two companies have largely focused on the implications of their earlier ‘SaaS grab.’

During their previous shopping spree for subscription-based software providers, Oracle and SAP collectively bought their way into virtually every significant market for enterprise applications: ERP, expense management, marketing automation, HR management, CRM, supply chain management and elsewhere. All of the transactions appeared designed to simply get the middle-aged companies bulk in cloud revenue, with Oracle and SAP paying up for the privilege. In almost half of their SaaS acquisitions, Oracle and SAP paid double-digit multiples, handing out valuations for subscription-based firms that were twice as rich as their own.

In addition to the comparatively high upfront cost of the SaaS targets, old-line software companies face particular challenges on integrating SaaS vendors as part of a larger, multiyear shift to subscription delivery models. Like a transplanted organ in the human body, the changes caused by an acquired company inside the host company tend to show up throughout the organization, with software engineers re-platforming some of the previously stand-alone technology and sales reps having their compensation plans completely overhauled.

The disruption inherent in bringing together two fundamentally incompatible software business models shows up even though the acquired SaaS providers typically measure their sales in the hundreds of millions of dollars, while SAP and Oracle both measure their sales in the tens of billions of dollars.

For instance, SAP is currently posting declining margins, an unusual position for a mature software vendor that would typically look to run more – not less – financially efficient. But, as the 45-year-old software giant has clearly communicated, the temporary margin compression is a short-term cost the company has to absorb as it transitions from a provider of on-premises software to the cloud.

Of course, the transition by software suppliers such as Oracle and SAP – painful and expensive though it may be – simply reflects the increasing appetite for SaaS among software buyers. In a series of surveys of several hundred IT decision-makers, 451 Research’s Voice of the Enterprise found that 15% of application workloads are running as SaaS right now. More importantly, the respondents forecast that level will top 21% of workloads by 2019, with all of the growth coming at the expense of legacy non-cloud environments. That’s a shift that will likely swing tens of billions of dollars of software spending in the coming years, and could very well have a similar impact on the market capitalization of the software vendors themselves.

Xactly exits

Contact: Brenon Daly

Two years after coming public, Xactly is headed private in a $564m buyout by Vista Equity Partners. The deal values shares of the sales compensation management vendor at nearly their highest-ever level, roughly twice the price at which Xactly sold them during its IPO. According to terms, Vista will pay $15.65 for each share of Xactly.

Xactly’s exit from Wall Street comes after a decidedly mixed run as a small-cap company. For the first year after its IPO, the stock struggled to gain much attention from investors. Shares lingered around their offer price, underperforming the market and, more notably, lagging the performance of direct rival Callidus Software. However, in the past year, as Xactly has posted solid mid-20% revenue growth, it gained some favor back on Wall Street. In the end, Vista is paying slightly more than 5x trailing sales for Xactly.

The valuation Vista is paying for Xactly offers an illuminating contrast to Callidus, which has pursued a much different strategy than Xactly. Although both companies got their start offering software to help businesses manage sales incentives, the much-older and much-larger Callidus has used a series of small acquisitions to expand into other areas of enterprise software, notably applications for various aspects of human resources and marketing automation. According to 451 Research’s M&A KnowledgeBase, Callidus has done seven small purchases since the start of 2014. For its part, Xactly has only bought one company in its history, the 2009 consolidation of rival Centive that essentially kept it in its existing market.

Although Xactly is getting a solid valuation in the proposed take-private, it’s worth noting that Callidus – at least partly due to its steady use of M&A – enjoys a premium to its younger rival with a narrower product portfolio. Even without any acquisition premium, Callidus trades at about 7x trailing sales. Callidus is roughly twice as big as Xactly, but has a market value that’s three times larger.

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ServiceNow adds some smarts to the platform with DxContinuum

Contact: Brenon Daly

Continuing its M&A strategy of bolting on technology to its core platform, ServiceNow has reached for predictive software startup DxContinuum. Terms of the deal, which is expected to close later this month, weren’t announced. DxContinuum had taken in only one round of funding, and appears to have focused its products primarily on predictive analytics for sales and marketing. ServiceNow indicated that it plans to roll the technology, which it described as ‘intelligent automation,’ across its products with the goal of processing requests more efficiently.

Originally founded as a SaaS-based provider of IT service management, ServiceNow has expanded its platform into other technology markets including HR software, information security and customer service. Most of that expansion has been done organically. ServiceNow spends more than $70m per quarter, or roughly 20% of revenue, on R&D.

In addition, it has acquired four companies, including DxContinuum, over the past two years, according to 451 Research’s M&A KnowledgeBase. However, all four of those acquisitions have been small deals involving startups that are five years old or younger. ServiceNow has paid less than $20m for each of its three previous purchases. The vendor plans to discuss more of the specifics about its DxContinuum buy when it reports earnings next Wednesday.

ServiceNow’s reach for DxContinuum comes amid a boom time for machine-learning M&A. We recently noted that the number of transactions in this emerging sector set a record in 2016, with deal volume soaring 60% from the previous year. Further, the senior investment bankers we surveyed last month picked machine learning as the top M&A theme for 2017. More than eight out of 10 respondents (82%) to the 451 Research Tech Banking Outlook Survey predicted an uptick in machine-learning M&A activity, outpacing the predictions for acquisitions in all individual technology markets as well as the other four cross-market themes of the Internet of Things, big data, cloud computing and converged IT.

Salesforce: Try before you buy

Contact: Brenon Daly

When it comes to M&A, Salesforce likes to go with what it already knows. More than virtually any other tech firm, the SaaS giant tends to acquire startups that it has already invested in. Overall, according to 451 Research’s M&A KnowledgeBase, Salesforce’s venture arm has handed almost one of every five deals to the company. Just this week, it snapped up collaboration vendor Quip – the eighth startup backed by Salesforce Ventures that Salesforce has purchased.

For perspective, that’s twice as many companies as SAP Ventures (or Sapphire Ventures, as it has been known for almost two years) has backed that have gone to SAP. (We would note that the parallel between SAP/Sapphire Ventures and Salesforce Ventures doesn’t exactly hold up because the venture group formally separated from the German behemoth in January 2011.) Still, to underscore SAP/Sapphire Ventures’ nondenominational approach to investments, we would note that archrival Oracle has acquired as many SAP/Sapphire Ventures portfolio companies as the group’s former parent, SAP, according to the M&A KnowledgeBase.

Salesforce’s continued combing through its 150-company venture portfolio comes at a time of uncertainty and a bit of anxiety about the broader corporate venture industry. It isn’t so much directed at the well-established, long-term corporate investors such as Salesforce Ventures, Intel Capital, Qualcomm Ventures or Google’s investment units. Instead, it’s the arrivistes, or businesses that have hurriedly set up investment wings of their own over the past two or three years as overall VC investment surged to its highest level since 2000. (They seem to have been infected with the very common Silicon Valley malady: Fear of Missing Out.) It’s hard not to see a bit a froth in the corporate VC market when Slurpee seller 7-Eleven launches its own investment division, 7-Ventures.

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Pricing out an alternate reality for Salesforce-LinkedIn

Contact: Brenon Daly

An enterprise software giant trumpets its acquisition of an online site that has collected millions of profiles of business professionals that it plans to use to make its applications ‘smarter’ and its users more productive. We’re talking about Microsoft’s blockbuster purchase of LinkedIn this week, right? Actually, we’re not.

Instead, we’re going back about a half-dozen years – and shaving several zeros off the price tag – to look at Salesforce’s $142m pickup of Jigsaw Data in April 2010. Jigsaw, which built a sort of business directory from crowdsourced information, isn’t exactly comparable to LinkedIn because it mostly lacked LinkedIn’s networking component and because the ultimate source of information for the profiles differed at the two sites. However, the rationale for the two deals lines up almost identically, and the division that Salesforce created on the back of the Jigsaw buy (Data.com) runs under the tagline that could be lifted directly from LinkedIn: ‘The right business connection is just a click away.’

We were thinking back on Jigsaw’s acquisition – which, at the time, stood as the largest transaction by Salesforce – as reports emerged that the SaaS giant had been bidding for LinkedIn, but ultimately came up short against Microsoft. Our first reaction: Of course Benioff & Co. had been in the frame. After all, the two high-profile companies have been increasingly going after each other, with Salesforce adding a social network function (The Corner) to the directory business at Data.com and LinkedIn launching its CRM product (Sales Navigator). And, not to be cynical, even if it didn’t want to buy LinkedIn outright, why wouldn’t Salesforce use the due-diligence process to gain a little competitive intelligence about its rival?

As we thought more about Salesforce’s M&A, we started penciling out an alternate scenario from the spring of 2010, one in which the company passed on Jigsaw and instead went right to the top, acquiring LinkedIn. To be clear, this requires us to make a fair number of assumptions as we revise history with a rather broad brush. Further, our ‘what might have been’ look glosses over huge potential snags, such as the fact that Salesforce only had $1.7bn in cash at the time, and leaves out the whole issue of integrating LinkedIn.

Nonetheless, with all of those disclaimers about our bit of blue-sky thinking, here’s the bottom line on the hypothetical Salesforce-LinkedIn pairing at the turn of the decade: It probably could have gotten done at one-third the cost that Microsoft says it will pay. To put a number on it, we calculate that Salesforce could have spent roughly $9bn for LinkedIn back in 2010, rather than the $26bn that Microsoft is handing over.

Our back-of-the envelope math is, admittedly, based on relatively selective metrics. But here are the basics: At the time of the Jigsaw deal (April 2010), fast-growing LinkedIn had about $200m in sales and 150 million total members. If we apply the roughly $60 per member that Microsoft paid for LinkedIn ($26bn/433 million members = $60/member), then LinkedIn’s 150 million members would have been valued at $9bn. (Incidentally, that valuation exactly matches LinkedIn’s closing-day market cap on its IPO a year later, in May 2011.)

On the other hand, if we use a revenue multiple, the hypothetical valuation of a much-smaller LinkedIn drops significantly. Microsoft paid about 8x trailing sales, which would give the 2010-vintage LinkedIn, with its $200m in sales, a valuation of just $1.6bn. (We would add that other valuation metrics using net income or EBITDA don’t make much sense because LinkedIn was basically breaking even at the time, throwing off only a few tens of millions of dollars in cash.)

However, LinkedIn would certainly have commanded a double-digit price-to-sales multiple because it was doubling revenue every year at the time. (LinkedIn finished 2010 with $243m in revenue and 2011 with over $500m in sales, while Salesforce was increasing revenue only about 20%, although it was north of $1bn at the time.) By any metric, LinkedIn would have garnered a platinum bid from Salesforce in our hypothetical pairing, as surely as it got one from Microsoft. But on an absolute basis, the CRM giant would have gotten a bargain compared to Microsoft.

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

Will Zuora play in Peoria?

Contact: Brenon Daly

Like several of its high-profile peers, Zuora is trying to make the jump from startup to grownup. That push for corporate maturity was on full display this week at the company’s annual user conference. Sure, Zuora announced enhancements to its subscription management offering and basked in the requisite glowing customer testimonials at its Subscribed event. But both of those efforts actually served a larger purpose: landing clients outside Silicon Valley. In many ways, the success of Zuora, which has raised a quarter-billion dollars of venture money, now hinges on the question: ‘Will it play in Peoria?’

When Zuora opened its doors in 2008, many of its initial customers were fellow startups, which were already running their businesses on the new financial metrics that the company not only talked about but actually built into its products. Both in terms of business culture and basic geography, Zuora’s deals with fellow subscription-based startups represented some of the most pragmatic sales it could land. But as the company has come to recognize, there’s a bigger world out there than just Silicon Valley. (As sprawling and noisily self-promoting as it is, the tech industry actually only accounts for about 20% of the Standard & Poor’s 500, for instance.) We have previously noted Zuora’s efforts to expand internationally.

As part of its attempt to gain a foothold in the larger economy, the company is reworking its product (specifically, its Zuora 17 release that targets multinational businesses) as well as its strategy. That might mean, for instance, Zuora going after a division of a manufacturing giant that has a subscription service tied to a single product, rather than just netting another SaaS vendor. Sales to old-economy businesses tend to be slower, both in terms of closing rates as well as the volume of business that gets processed over Zuora’s system, both of which affect the company’s top line.

In terms of competition, the expansion beyond subscription-based startups also brings with it the reality that Zuora has to sit alongside the existing software systems that these multinationals are already running, rather than replace them. Further, some of the providers of those business software systems have been acquiring some of the basic functionality that Zuora itself offers. For example, in the past half-year, both Salesforce and Oracle have spent several hundred million dollars each to buy startups that help businesses price their products and rolled them into their already broad product portfolios.

Zuora has attracted more than 800 clients and built a business that it says tops $100m. As the company aims to add the next $100m in sales with bigger names from bigger markets such as media, manufacturing and retail, its new focus looks less like one of the fabled startup ‘pivots’ and more like just a solid next step. Compared with a company like Box – which started out as a rebellious, consumer-focused startup but has swung to a more button-down, enterprise-focused organization that partners with some of the companies it used to mock – Zuora is facing a transition rather than a transformation.

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

CallidusCloud’s accretive acquisitions

Contact: Brenon Daly

With the $4m purchase of assets from ViewCentral, CallidusCloud has added on to one of its first add-on businesses. The company, which started life 20 years ago selling sales compensation management software, has used a bakers’ dozen deals since 2010 to expand its portfolio into software for employee hiring, marketing automation and on-the-job training. ViewCentral brings billing and payment technology to CallidusCloud’s learning management offering, a product that has its roots in the mid-2011 acquisition of Litmos.

By themselves, the small transactions, which have cost the company an average of just $5m a pop, aren’t all that significant. But collectively, they have expanded the market for CallidusCloud and given it the opportunity to increase high-margin revenue by selling additional products. (In 2015, the company said it did more than 80 multi-product deals.) CallidusCloud’s strategy of inorganic growth also stands in sharp contrast to rival Xactly, which has stayed out of the M&A market as it has maintained its focus on selling its core sales compensation management offering. (See our recent report on Xactly’s strategy and market position.)

Obviously, the M&A activity at the two companies isn’t the sole difference between CallidusCloud and Xactly, any more than it fully accounts for the relative valuation discrepancy between them. Still, it is worth considering how the acquisition-based portfolio expansion has paid off for CallidusCloud, at least in its standing on Wall Street. CallidusCloud currently garners twice the valuation of its smaller rival. (CallidusCloud trades at about $930m, or 4.4x times 2016 projected sales of $212m, compared with Xactly, which trades at $215m, or 2.3x times this year’s projected sales of $95m.) Further, since it came public last June, Xactly has shed about one-fifth of its value, while CallidusCloud shares are slightly in the green over that period.

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In the red-hot SaaS SI market, which is the next shop looking to sell?

 

Contact: Brenon Daly

With IBM picking up Meteorix, we hear there’s another Workday-focused SI currently on the market. CPSG, a Dallas-based shop, is slightly bigger than Meteorix, as well as much more profitable, according to our understanding. And it’s seeking a much richer valuation on its exit.

CPSG posted $25m in revenue in 2014, and the company is reportedly forecasting $35-40m for full-year 2015. Unlike other software implementation firms, however, CPSG throws off a fair amount of cash. It should generate more than $10m of EBITDA this year.

The growth and cash flow at CPSG have the company and its advisers at Robert W. Baird & Co. looking for a top-dollar exit. Current second-round bids are coming in at roughly $140m. (For comparison, subscribers to 451 Research’s M&A KnowledgeBase can see our estimate for the valuation IBM paid for Meteorix.)

Assuming CPSG does print, it would be the latest in a string of SaaS application implementation vendors to sell. Just in the past two months, we have seen three significant SIs snapped up by major service providers in a shopping spree that totals more than $600m. Moreover, these buyers are paying 2-3x their own valuations in their acquisitions, reflecting just how desperate they are to bulk up their practices in the fast-growing SaaS space.

Recent SaaS-focused SI M&A

Date announced Acquirer Target Description Deal value
August 11, 2015 CSC Fruition Partners ServiceNow SI See 451 Research estimate
September 15, 2015 Accenture Cloud Sherpas Salesforce, ServiceNow SI Not disclosed
September 28, 2015 IBM Meteorix Workday SI See 451 Research estimate

Source: 451 Research’s M&A KnowledgeBase

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Small ball M&A paying off for salesforce.com

Contact: Brenon Daly

When it comes to M&A at salesforce.com, starting small has yielded higher returns than going big. The SaaS giant has returned to the ‘buy and build’ strategy with its latest step into a new market with Analytics Cloud. The data visualization offering, which was unveiled this week at Dreamforce, was underpinned by the acquisition of EdgeSpring back in June 2013.

The $134m price notwithstanding, EdgeSpring stands as a small deal for salesforce.com. (We profiled EdgeSpring shortly after it emerged from stealth and a half-year before it was acquired. At the time, it claimed more than 10 paying customers and about 30 employees.)

Certainly, there were bigger targets for a move into the analytics market by salesforce.com, which will do more than $5bn in revenue this fiscal year and says it has a ‘clear line of sight’ to $10bn in sales. For instance, both Qlik Technologies and Tableau Software offer their data visualization software on salesforce.com’s AppExchange. With hundreds of millions of dollars in revenue, either of those vendors would have established salesforce.com as a significant player in the data analytics market as well as moving the company closer to its goal of doubling revenue in the coming years.

However, in that regard, a purchase of either Qlik or Tableau would be comparable with salesforce.com’s reach for ExactTarget in June 2013, which serves as the basis for its Marketing Cloud. The deal was uncharacteristically large, with salesforce.com spending more on the marketing automation provider than it has in all 32 of its other acquisitions combined. More significantly, salesforce.com has struggled a bit with ExactTarget, both operationally (platform integration and cross-selling opportunities) and financially (margin deterioration).

In contrast to that big spending, salesforce.com dropped only about one one-hundredth of the price of ExactTarget on InStranet in August 2008 ($2.5bn vs. $32m). The purchase of InStranet helped establish Service Cloud, which is now the company’s second-largest business behind its core Customer Records Management offering. And salesforce.com says the customer service segment is much larger than the market for its sales software.

Those divergent deals are something to keep in mind when salesforce.com buys its way into a new market. If we had to guess, we would expect the company to next make a play for online retailing (maybe call it Commerce Cloud?). If that’s the case, we might suggest that it look past the big oaks like Demandware and focus on the seedlings that can then grow up in the salesforce.com ecosystem.

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salesforce.com goes back to CRM

Contact: Scott Denne

salesforce.com retrenches in its latest acquisition – the $390m purchase of CRM vendor RelateIQ. Unlike past acquisitions that brought salesforce.com into new territories such as marketing (Buddy Media and ExactTarget) or mobile software development (Heroku), this deal takes out a small, fast-growing rival. Part of the reason why salesforce.com is looking closer to its core business with this transaction is likely because of the limited success it’s had in buying beyond CRM (which we covered in a recent report).

Though dwarfed in size by salesforce.com, RelateIQ was growing quickly. The 100-person company had only about 20 employees a year ago and recently scaled up its fundraising by landing a $40m series C round less than a year after the general release of its product. Though certainly generating less than $10m in revenue, we understand that RelateIQ had gained traction among SMBs, particularly in financial verticals, which played no small role in the $255m post-money valuation on its last round.

While the move is at least partially defensive, we would not be surprised to see salesforce.com play this one very aggressively, possibly even giving away a free version of RelateIQ to scoop up a bigger portion of the SMB market. Or even using RelateIQ’s interface and technology to tie together marketing and sales apps across its suite.

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