Complexity bolsters valuations for infrastructure software 

Contact: Scott Denne

Companies looking to exit the infrastructure management space broke records in 2016, although it was enthusiastic entrants that pushed up totals last year. Acquisitions of companies that provide tools to run IT infrastructure finished 2017 at a level that’s abnormally high on strong valuations.

Purchases of infrastructure management targets finished 2017 with $8.5bn in spending across 92 deals. According to 451 Research’s M&A KnowledgeBase, both are down from the record value and volume of transactions in 2016 ($14.8bn on 121 acquisitions). Despite the high-level decline, 2017 was a stronger environment for exits in the category.

More than any other buyer, Cisco set the tone for infrastructure management M&A as two of its purchases account for half of 2017’s deal value. The company opened the year with the $3.7bn acquisition of AppDynamics, valuing the would-be public company at more than 17x trailing revenue, the highest multiple ever paid for a software vendor with more than $50m in revenue. It followed that deal with the $610m pickup of SD-WAN specialist Viptela, a smaller company that it bought at an even higher multiple.

Above-average valuations weren’t limited to Cisco. Among the 10 largest transactions in the space, only one acquisition – Clearlake’s purchase of perennial target LANDESK – came in at less than 3.5x trailing 12-month revenue. A year earlier, three of the top 10 fell below that mark, including 2016’s two largest deals – the divestitures of HPE and Dell’s software units.

Those higher multiples came as hardware providers and legacy management firms sought to expand subscription revenue from products that help customers grapple with an increasingly complex IT environment. That same trend could well fuel infrastructure management M&A this year as infrastructure, software and data look to become more distributed and cloudy.

Workloads are heading to the cloud en masse, whether it takes the form of SaaS, IaaS, private clouds or any other type. According to 451 Research’s Voice of the Enterprise: Cloud Transformation, Workloads and Key Projects 2017 survey, between 2017 and 2019 the amount of IT workloads running on the cloud is expected to increase to 60% from 45%. In that same study, 33% of respondents told us that within two years they would be sharing workloads and business functions across multiple clouds. While the underlying IT infrastructure is becoming interchangeable, the tools for managing it all are becoming indispensable.

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Small software buys big, but…

Contact: Brenon Daly

The little brothers of the software industry have stepped in front of their bigger brothers in the M&A market. Medium-sized public software companies have been inking uncharacteristically large acquisitions this year, even as the well-known vendors have been fairly reserved. And while these midmarket software firms have been big spenders recently, the deals are often missing a zero or even two compared with prices the industry bellwethers have paid in years past for some of their purchases. That has helped knock overall software M&A spending to its lowest level in four years, according to 451 Research’s M&A KnowledgeBase.

As an example of the shift in buyers, consider Oracle. The software giant has averaged at least one transaction valued at more than $1bn each year over the past decade, according to the M&A KnowledgeBase. Yet this year, it hasn’t gotten anywhere close to doing a 10-digit deal, and, in fact, hasn’t announced any acquisitions since April. On the other side, several software companies that have only a fraction of the size and resources of Oracle have thrown around a lot more money on recent transactions than they ever have before. A few prints captured over the past few months in the M&A KnowledgeBase clearly show the trend of M&A inflation among the midmarket software buyers:

-At $275m in cash and stock, Guidewire Software’s reach for Cyence in October is $100m more than the SaaS provider has ever spent on any other transaction.
-Both of the largest purchases by security software vendor Proofpoint have come in the past month. Its $60m pickup of Weblife.io in late November and $110m acquisition of Cloudmark in early November compare with an average price tag of just $20m on its previous 12 deals done as a public company from 2013-16.
-Doubling the highest amount it has ever paid in a transaction, serial acquirer CallidusCloud spent $26m for Learning Seat earlier this month.
-In a pair of deals announced earlier this year, RealPage dropped more than a quarter-billion dollars on both of its targets, after not spending more than $100m on any of its previous two dozen acquisitions.
-Upland Software announced in mid-November the purchase of Qvidian for $50m, which is twice as much as the software consolidator has spent on any of its other nine acquisitions since coming public in November 2014.

These deals by midmarket software vendors (as well as other similarly sized buyers) go some distance toward making up for the missing big names. Yet they won’t fully cover the shortfall this year. Partially due to this change in acquirers, spending on software M&A in 2017 is tracking roughly one-third lower than it has been over the previous three years, according to the M&A KnowledgeBase.

MongoDB maintains in its IPO

Contact: Brenon Daly

Despite a well-received IPO, MongoDB’s valuation basically flatlined from the private market to the public market. The open source NoSQL database provider priced shares at $24 each and jumped in mid-Thursday trading to about $30. The 25% pop on the Nasdaq basically brought MongoDB shares back to the price where the company sold them to crossover investors in late 2014.

MongoDB has slightly more than 50 million shares outstanding, on an undiluted basis. With investors paying about $30 for shares in the company’s public debut, that gives MongoDB a market cap of more than $1.5bn. It raised $192m in the public offering, on top of the $300m it raised as a private company.

That means Wall Street is valuing MongoDB, which will put up about $150m in the current fiscal year, at 10x current revenue. That’s a rather rich premium compared with the most-recent big-data IPO, Cloudera. The Hadoop pioneer, which went public six months ago, currently trades at about 6x current revenue. For more on MongoDB’s IPO, 451 Research subscribers can see our full report, including our sizing of the NoSQL database market, as well as an in-depth look at the evolution of the 10-year-old company’s technology and its competitors.

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

Exclusive: A deal for Datto?

Contact: Brenon Daly

A unicorn is rumored to be on the block, with several market sources indicating that disaster-recovery startup Datto is looking for a buyer. We understand that Morgan Stanley is running the process. While Datto secured a $1bn valuation in a growth round of funding two years ago, we are hearing that current pricing would add a solid – but not exorbitantly rich – premium to that level.

According to our understanding, early discussions with buyers have bids coming in at about $1.3bn for Datto. Our math has that rumored price valuing the 10-year-old startup at 6.5x this year’s sales of roughly $200m. (Estimates in 451 Research’s M&A KnowledgeBase Premium, which features in-depth profiles and proprietary insight about specific privately held startups, indicate that Datto generated $160m in sales last year, up from $130m in 2015. Click here to see Datto’s full profile in our M&A KnowledgeBase Premium.) The company sells its backup and recovery products to SMBs, with virtually all sales going through the channel.

With its scale and business model, Datto appears almost certain to end up in the portfolio of a private equity (PE) firm, assuming the company does trade. There is precedent. Datto’s smaller rival Axcient was consolidated by eFolder earlier this summer in a transaction that was at least partially backed by financial sponsor K1 Investment Management.

More broadly, PE shops, which have never had more money to spend on tech in history, have been increasingly looking to the IT infrastructure market to make big bets. Already this year, buyout shops have announced three deals valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. Unlike those targets, which were all owned by fellow PE firms, Datto founder Austin McChord still holds a majority stake in his company.

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Another ‘down round’ IPO?

Contact: Brenon Daly

Another unicorn is set to gallop onto Wall Street, as MongoDB has put in its IPO paperwork. The open source NoSQL database provider plans to raise $100m in the offering, on top of the $311m it drew in from private-market investors over the past decade. As has been the case in other recent tech offerings, however, some of those later investors in MongoDB may well find that the IPO represents a ‘down round’ of funding.

Any discount for MongoDB likely won’t be as steep as the discount Wall Street put on the previous data platform provider to come public, Cloudera. Investors currently value the Hadoop pioneer at $2.2bn, slightly more than half its peak valuation as a private company. For its part, MongoDB, which last sold stock at $16.72, has more than 100 million shares outstanding, giving it a valuation of roughly $1.7bn.

While not directly comparable, Cloudera and MongoDB do share some traits that lend themselves to comparison. Both companies have their roots in open source software, and wrap some services around their licenses. (That said, MongoDB has gross margins more in line with a true software vendor than Cloudera. So far this year, it has been running at 71% gross margins, compared with just 46% for Cloudera.) Further, both companies are growing at about 50%, even though Cloudera is more than twice the size of MongoDB.

Assuming Wall Street looks at Cloudera for some direction on valuing MongoDB, shares of the NoSQL database provider appear set to hit the public market marked down from the private market. Cloudera is valued at slightly more than six times its projected revenue of $360m for the current fiscal year. Putting that multiple on the projected revenue of roughly $150m for MongoDB in its current fiscal year would pencil out to a market cap of about $920m. Given its cleaner business model and less red ink, MongoDB probably deserves a premium to Cloudera. While MongoDB certainly may top the $1bn valuation on its debut, reclaiming the previous peak price seems a bit out of reach.

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Ivanti keeps rolling along, adds RES Software

Contact: John Abbott, Brenon Daly

The rollup continues at Ivanti, the PE-backed company that itself is a bit of a rollup, created from the combination of LANDESK and HEAT Software in January. In its second acquisition under its new name, the Clearlake Capital portfolio company reached for user workspace management and IT automation firm RES Software. Although terms weren’t disclosed, subscribers to 451 Research’s M&A KnowledgeBase can see our deal record and proprietary estimate of the price and valuation in this transaction.

For years, RES fought it out in the virtual desktop management space with direct rival AppSense, while LANDESK, once part of Intel, tried to hold its ground in traditional desktop management. In 2010, Thoma Bravo stepped in to buy LANDESK from its then-owner Emerson Electric for $230m, supplementing it with a handful of smaller firms and topping it off with AppSense in March 2016. (While larger than RES, AppSense garnered basically the same multiple as RES in its sale to LANDESK. 451 Research M&A KnowledgeBase also has estimates for the AppSense sale.)

In January, Clearlake stepped in to buy LANDESK, a transaction that we understand valued the company at $1.15bn. The PE firm combined it with its own portfolio company, HEAT Software — itself a combination of FrontRange and Lumension — and eventually gave the cobbled-together infrastructure software giant its new name, Ivanti.

The rechristened company offers products in four main areas: client management, endpoint security, IT service and support software, and enterprise mobility management. Overall, it employs roughly 1,300. RES, with roughly 250 employees, adds complementary software tools. The startup is strongest in user workspace management and automation tools, but also has an enterprise app store, file sharing and synchronization, IT service management desk, and (most recently) endpoint security. RES also brings more of a European focus – the company was founded in Holland in 1999 and maintains a fairly strong business in the Benelux region.

From a technical point of view, it’s likely RES Automation Manager will be the most valuable asset that can be cross-sold to the rest of the Ivanti customer base. Virtual desktop management is a maturing space that’s now mostly dominated by Citrix, VMware, Microsoft, AWS and Google, alongside a growing set of desktop-as-a-service providers using technology from one or more of those companies. This broad competitive pressure weighed heavily on RES’s valuation, as surely as it did in the sale of rival AppSense a little more than a year ago.

No ray of sunshine from Cloudera IPO

Contact: Brenon Daly

As far as Wall Street is concerned, the outlook for the tech IPO market is still cloudy after Cloudera’s offering. Sure, the data analytics platform vendor priced shares higher than its underwriters expected and investors pushed the freshly minted stock about 20% higher in aftermarket trading on Friday. But that solid start isn’t likely to necessarily draw other startups to the public market because Cloudera’s capital structure got so uniquely inflated.

Few startups could even imagine – much less collect – an investment of three-quarters of a billion dollars from a single investor in a single round, as Cloudera did from Intel three years ago. The chipmaker paid up for the privilege, putting a ‘quadra unicorn’ valuation of $4.1bn on Cloudera. Altogether, Cloudera raised more than $1bn from private market investors, making the $225m raised from public market investors seem almost like lunch money.

And then there’s the small matter of valuation. In its debut, Cloudera is only worth about half of what Intel thought it was worth when it made its bet. (As we noted in our full preview of Cloudera’s IPO, Intel’s investment appears even more bubbly when we consider that, at the time, Cloudera was generating less than half the quarterly revenue it currently puts up and its operating loss actually topped its revenue.)

As a longtime corporate investor, Intel can chalk up the overpayment for the stake of Cloudera to ‘strategic’ considerations. (Much like the chipmaker effectively wrote off its massive bet on security, unwinding half of its underperforming acquisition of McAfee at roughly half the valuation it initially paid in the largest infosec transaction in history, according to 451 Research’s M&A KnowledgeBase.) Besides, Intel can afford it: the day that Cloudera priced its IPO – thus confirming Intel’s overpayment – the chipmaker reported that it earned $3bn in the first quarter of this year alone.

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VMware nabs Wavefront as infrastructure M&A hits new frequency 

Contact: Scott Denne  and Kenji Yonemoto

Responding to the need for new monitoring and management tools to match the growing adoption of infrastructure technologies such as containers and cloud, VMware has reached for Wavefront. The deal embodies the craving for the latest technologies in infrastructure management M&A through the start of the year.

That craving stands in stark contrast to last year, when divestitures and aging assets led to a record $15.3bn spent on infrastructure management targets, according to 451 Research’s M&A KnowledgeBase. Less than four months into the year, buyers have already shelled out $5.6bn, skewing toward younger and growing businesses fetching higher multiples.

While VMware hasn’t disclosed terms of the transaction, it’s likely paying a premium valuation as Wavefront, an early-stage company with about 50 customers, landed a $52m series B less than six months ago. The acquisitions of AppDynamics ($3.7bn) and SOASTA ($200m) – which like today’s deal, were done to improve the buyers’ ability to cope with new types of application deployments – have helped drive up multiples. The median multiple for the category stands at 4.2x trailing revenue this year, compared with 3.4x in 2016.

The pressure to pay up for these technologies could continue. Our surveys show that new forms of application deployment are rising among enterprises. In 451 Research’s most recent Voice of the Enterprise report, 48% of respondents expected their spending on cloud to increase by more than 11% in 2017 and similar surveys have shown a growing shift toward using containers and microservices in production, not just testing and development, environments.

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

Alteryx makes it two software IPOs in two weeks

Contact: Brenon Daly 

Data analytics vendor Alteryx has made its way to Wall Street, the second enterprise software provider to go public in as many weeks. The IPO, which raised $126m for the company, comes on the heels of a more-ebullient offering from MuleSoft. Together, the two oversubscribed IPOs indicate that the market for new offerings has rebounded from this time last year, when not a single a tech company made it public until late April.

Alteryx priced its shares at $14 each, and then edged higher to $15.50 on the NYSE during afternoon trading. With roughly 58 million (non-diluted) shares outstanding, the company is valued at about $900m. While MuleSoft more than doubled its private market valuation when it hit Wall Street, Alteryx’s IPO pricing is only slightly above the level it last sold shares to private investors in September 2015.

Although Alteryx debuted at a more modest valuation compared with MuleSoft, it did secure a double-digit multiple, albeit barely. Wall Street is valuing Alteryx, which recorded $86m in revenue last year, at 10 times trailing sales. That compares with about 16x for MuleSoft in its debut. The reason for the discrepancy? MuleSoft is more than twice as big and growing faster, increasing 2016 revenue by 71% compared with the 59% year-over-year growth for Alteryx. (Whether the comparison between the two vendors is fair or not, it is perhaps inevitable given the timing of their IPOs.)

In terms of future growth, Alteryx does face some challenges, as we have noted. Currently, the company focuses primarily on transforming and cleansing data and analyzing it using a combination of internally developed algorithms and functions based on the R open source computing statistical computing environment. Its own visualization and discovery capabilities are rather limited. Alteryx partners with Tableau, Qlik and Microsoft (Power BI) for this technology.

However, this partnership strategy could inhibit the company’s future expansion because visualization and data discovery are useful for attracting less-technical end users, which it will need to do to increase the number of users of its technology. Right now, Alteryx’s users are largely data analysts even though the company markets itself as a self-service data analytics vendor for technical and nontechnical end users.

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

MuleSoft gets a thoroughbred valuation in its IPO

Contact: Brenon Daly 

After a four-month shutout, the enterprise tech IPO market is back open for business. Infrastructure software vendor MuleSoft surged onto the NYSE, more than doubling its private market valuation. It sold 13 million shares at an above-range $17 each, and the stock promptly soared to $24.50 in late-Friday-afternoon trading. That puts the fast-growing company’s market valuation at slightly more than $3bn, twice the $1.5bn value that venture investors put on it.

MuleSoft’s debut valuation puts it in rarified air. Based on an initial market cap of $3.1bn, investors are valuing the company at a stunning 16.5x its trailing sales of $190m. That multiple is twice the level of fellow data-integration specialist Talend, which went public last July. Talend currently trades at a market cap of about $875m, or 8.3x its trailing sales of $106m. The valuation discrepancy indicates that investors are once again putting a premium on growth: MuleSoft is larger than Talend and – more importantly to Wall Street – it is growing nearly twice as fast. (See our full report on the offering as well as MuleSoft’s ‘hybrid integration’ strategy – what it is and where it might take the company in the future.)

The IPO netted MuleSoft $221m, or $206m after fees. That’s undoubtedly a handy amount, but we would note that it is still less than the $260m it raised, collectively, from private market investors. (Somewhat unusually, there are three corporate investors on the company’s cap table.) All of those MuleSoft backers are substantially above water on their investment following the IPO. That bullish debut is likely to draw more high-flying startups to Wall Street after a discouraging 2016, when only two enterprise tech unicorns went public. This year will likely match that number next month, when Okta debuts. The identity management startup revealed its IPO paperwork earlier this week, putting it on track for a mid-April debut.