Onapsis on the block?

Contact: Brenon Daly

Enterprise application security startup Onapsis quietly kicked off a sale process about a month ago, according to our understanding. Several sources have indicated that Onapsis, which focuses on hardening security for SAP implementations, has hired UBS to gauge interest among buyers. And while there undoubtedly will be acquisition interest in the startup, Onapsis may ultimately prove to be a bit of a tough sell. The reason? The most obvious buyers for the company don’t typically pay the type of valuations that Onapsis is thought to be asking.

In many cases, the heavy-duty SAP systems that Onapsis helps secure were implemented by one of the big consulting shops. So at least theoretically, it’s not a big leap to imagine one of these consultancies buying Onapsis and offering its platform, exclusively, to help safeguard these mission-critical systems and the data they generate. (Indeed, Onapsis already has partnerships with many of the big consulting firms, including KPMG, PWC, Accenture and others.) While that strategy may be sound, M&A always comes down to pricing. And that’s why we would think it’s probably more likely than not that eight-year-old Onapsis remains independent.

According to our understanding, Onapsis is looking to sell for roughly $200m, which would be twice the valuation of its September 2015 funding. The rumored ask works out to about 8x bookings in 2016 and 4.5x forecast bookings for this year. For a fast-growing SaaS startup, those aren’t particularly exorbitant multiples. Yet they may well price out any consulting shops, which have typically either picked up small pieces of specific infosec technology or just gobbled up security consultants. Any reach for Onapsis would require a consulting firm to pay a significantly richer price than the ‘tool’ or ‘body’ deals they have historically done.

Rackspace pivots to private

Bruised by a fight in the clouds, Rackspace has opted to go private in $4.3bn leveraged buyout (LBO) with Apollo Global Management. The company, which has been public for eight years, is in the midst of a transition from its original plan to sell basic cloud infrastructure, where it couldn’t compete with Amazon Web Services, to taking a more services-led approach. Terms of the take-private reflect the fact that although Rackspace has made great strides in overhauling its business, much work remains.

Leon Black’s buyout shop will pay $32 for each share of Rackspace, which is exactly the price the stock was trading at a year ago. Further, it is less than half the level that shares changed hands at back in early 2013. Of course, at that time, Rackspace was growing at a high-teens clip, which is twice the 8% pace the company has grown so far this year.

In terms of valuation, Rackspace is going private at just half the prevailing market multiple for large LBOs so far in 2016. According to 451 Research’s M&A KnowledgeBase, the previous nine take-privates on US exchanges valued at more than $500m have gone off at 4.4x sales. (See our full report on the record number – as well as valuations – of take-privates in 2016.) In comparison, Rackspace is valued at just slightly more than 2x trailing sales: $4.3bn on $2bn of revenue, with roughly the same amount of cash as debt.

More relevant to Rackspace as it moves into a private equity (PE) portfolio is that even as the company (perhaps belatedly) transitions to a new model – one that includes offering services on top of AWS, Azure and other cloud infrastructure providers that Rackspace once competed against – is that it generates a ton of cash. Sure, growth may be slowing, but Rackspace has still thrown off some $674m of EBITDA over the past year.

The company’s 33% EBITDA margin is even more remarkable when we consider that Rackspace, which has more than 6,000 employees, is relatively well-regarded by its customers for its ‘fanatical’ support of its offerings. While we could imagine that focus on customer service as competitive differentiator might set up some tension under PE ownership (people are expensive and tend not to scale very well), Rackspace has the advantage of having built that into a profitable business. In short, Rackspace is just the sort of business that should fit comfortably in a PE portfolio.

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Mimecast sets stage for IPO

Contact: Scott Denne

Mimecast’s business is best described in the same language as the enterprise email systems it has grown up managing: reliable, but not very exciting. The 12-year-old provider of archiving, management and security of business email is prepping for an IPO, and the prospectus published in pursuit of that shows a company that, at least for the last few years, has put up steady numbers.

For its most recent fiscal year (ended March 31, 2015), Mimecast posted $116m in revenue, up 31% from the year before and just one percentage point higher than its growth during the previous period. Gross margins in 2014 came in at 68% – the same level as the previous two years – and operating expenses as a percentage of overall revenue have ticked down 10 percentage points in each of the last two years, helping the company trend toward profitability.

What has fluctuated is foreign currency. Nearly two-thirds of Mimecast’s revenue comes from currencies other than the US dollar. In 2014 that brought it a $5m gain, pushing it slightly into the black. The previous year, currency changes led to a $5m expense, contributing to a $16m loss.

When it comes to the valuation the company might fetch, we look at Proofpoint as the best indicator of where Mimecast might trade. The quasi-competitor posts similar gross margins and a similar growth rate to Mimecast, and is valued at 10x trailing revenue. Even though Proofpoint has far steeper losses, its growth is coming off a revenue base that’s about twice Mimecast’s, and it has built up a fair amount of goodwill (and a 4x increase in its share price in the three-and-a-half years since its IPO) with investors through a series of positive revenue announcements and upward adjustments of revenue guidance. Given those factors, we would expect Mimecast to price below the 10x mark by a few turns, likely in the 5-7x trailing revenue range.

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Can Dell safeguard the VMware ‘crown jewels’ in EMC acquisition?

Contact: Brenon Daly

In announcing the largest-ever tech transaction, both Dell and EMC repeatedly assured the market that VMware, which has consistently accounted for an outsized chunk of EMC’s overall valuation, would retain its status as ‘first among equals’ in the EMC federation. Roughly speaking, VMware generates only about one-quarter of EMC sales, but accounted for three-quarters of the EMC’s overall value before the acquisition. VMware was rightfully termed the ‘crown jewel’ of the landmark transaction.

However, despite those intentions, VMware has nonetheless lost some of its luster due to the pending acquisition, at least in two key constituencies. Both IT buyers and Wall Street investors are more than a little bearish on Dell owning the virtualization kingpin. Since the acquisition was announced, VMware’s market value has fallen by as much as $5bn. (That decline is also pulling down the overall value of the transaction because part of the consideration is in the form of tracking stock.) VMware shares have slumped to their lowest level since mid-2013.

To understand why Wall Street is selling the Dell-EMC deal, we have to look to the ultimate arbiters of value for any company: customers. And based on 451 Research’s survey of nearly 450 IT decision-makers, Dell has a lot of work to do to ease the concerns that it will mishandle EMC and its ‘crown jewel.’ In our survey, four of 10 IT pros who currently buy EMC products, but do not buy Dell products, gave the proposed acquisition a ‘thumbs down.’ That was almost three times higher than the percentage of pessimistic Dell-only customers. The main reason cited by EMC-only customers for their bearishness? They still view Dell as dealing in commodity technology. Obviously, with that perception, it’s going to be extremely challenging for Dell to hit its target of $1bn ‘revenue synergies’ through its EMC acquisition.

VMW rev 2010-15

Dell looks to become ‘indelible’ IT vendor with EMC

Contact: Brenon Daly Simon Robinson

Announcing the largest tech deal since the Internet bubble burst, Dell plans to pay approximately $63.1bn for EMC. The debt-laden combination would create a sprawling IT giant with multibillion-dollar businesses in many of the primary enterprise technology markets, including storage, information security, IT services, servers and PCs. (For context, the combined Dell-EMC entity would be larger than Hewlett-Packard Enterprise (post-split), NetApp, Juniper Networks and Symantec combined.) Dell’s bold transformational transaction is not coming cheap, however. The company is valuing EMC significantly more richly than it valued itself when it went private two and a half years ago.

Further, Dell’s relatively pricey bulking up comes at a time when a number of rival enterprise IT vendors are slimming down. More to the point, several of these competitors are unwinding earlier blockbuster acquisitions they made in hopes of staying more relevant in a shifting IT market. The arrival of the public cloud has siphoned off billions of dollars that once flowed unimpeded to Dell, EMC and other first-generation technology firms. However, IT customers increasingly lack the appetite to buy, install and manage dozens of ‘piece parts’ and mold them into a cohesive whole. As a result, we can look at the combination of Dell and EMC as essential if the traditional IT model is to survive the onslaught from public cloud providers, most notably Amazon Web Services.

Though Dell has been on a path to build a ‘better together’ story for almost a decade, it clearly hasn’t been enough. In its effort to buy its way out of the commodity PC business, the company stitched together a patchwork of properties. However, the resulting ‘big picture’ has still not materialized. Dell has lacked a core focus point, as well as the heft and scale in any one market to dominate. Further, it has so far not sufficiently penetrated the large enterprise segment, or moved beyond its two longtime key verticals of healthcare and the public sector. Against this backdrop, it’s easy to see the attraction of EMC, which brings large enterprise credibility in storage, perhaps the industry’s most focused and effective sales operation and, in VMware, still one of the most strategic entities on the market.

EMC’s attractiveness also shows through in the valuation that Dell is paying, if not when viewed against the broader tech M&A market than certainly when put against Dell’s own worth. According to terms, Dell is paying 2.5x trailing sales and 11.5x trailing EBITDA for EMC. For comparison, in orchestrating the take-private of his namesake company, Michael Dell and his consortium paid just one-quarter the price-to-sales multiple of EMC and half the cash-flow multiple. Dell’s LBO, which stands as the third-largest private equity tech transaction in history, valued the company at just 0.5x trailing sales and 5.2x trailing EBITDA.

Look for a full report on the proposed Dell-EMC pairing later today on our website and in tomorrow’s 451 Market Insight.

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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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Cisco prints second OpenStack deal

Contact: Al Sadowski Jay Lyman Scott Denne

Cisco ups its stake in Piston Cloud Computing by converting its earlier investment into full ownership of the business. The OpenStack ecosystem has seen a number of $100m+ exits in the past 12 months, including Cisco’s own $149m acquisition of Metacloud. The space has also seen a few tuck-ins and modest exits, such as EMC’s Cloudscaling buy and the closure of heavily funded Nebula. Though terms of this deal weren’t disclosed (nor were they in IBM’s just-announced Blue Box Group purchase), consolidation in OpenStack has clearly begun and still has a long way to go. According to 451 Research’s Market Monitor report on OpenStack , 56 of the 76 vendors in this sector generated less than $5m in 2014 revenue.

OpenStack continues to gain momentum among enterprise IT leaders. Now five years old, the project has evolved into a top priority for many IT professionals and suppliers. Cisco’s purchase of Piston Cloud removes a competitor to its Metacloud-based offerings and adds rare OpenStack engineering talent and intellectual property. The acquisition probably saved Piston Cloud from turning out its own lights as the small firm likely found it difficult to compete with larger players with much more sales capacity.

The transaction highlights a couple of things about the current OpenStack market. First, there is still a demand for and dearth of OpenStack talent and expertise. Piston Cloud’s staff is among the most experienced supporting large enterprise OpenStack deployments, which Cisco – a gold sponsor of the OpenStack Foundation – is interested in driving and supporting. Second, the deal highlights how the market is still largely in a services and support phase, whereby enterprise and service-provider customers, even large ones, need intensive support deploying OpenStack. The transaction may also signal that the Metacloud acquisition and integration has been successful for Cisco and helped encourage it to pull the trigger on the Piston Cloud pickup.

We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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‘One HP’? Not any longer

Contact: Brenon Daly

In the largest-ever corporate overhaul of a tech company, Hewlett-Packard said Monday that it will split its business in half. The 75-year-old company, which had recently marketed itself under the tagline ‘One HP,’ will separate its broad enterprise IT portfolio from its printer and PC unit within a year. Each of the two stand-alone businesses (Hewlett-Packard Enterprise and HP Inc.) will be roughly the size of rival Dell, booking more than $50bn of sales annually.

Increasing those sales, even under the new structure, will be challenging. In discussing the planned separation, HP executives emphasized that the move comes at the end of a three-year ‘fix and rebuild’ phase at the company. During that time, HP’s top line has shrunk more than 10%. It has already laid off 36,000 employees, and said Monday that the final number of employee cuts may reach as high as 55,000. And HP has virtually unplugged its M&A machine, even as rivals such as IBM and Cisco continue to buy their way into new, faster-growth markets.

Through the first three quarters of its current fiscal year, HP has flatlined. The company indicated that will continue into its next fiscal year, which starts in November. While HP didn’t offer specific growth rate targets or forecasts for the stand-alone companies – once they get on the other side of the hugely disruptive separation – executives noted that the two businesses would be more ‘nimble’ and ‘responsive’ than they would be together.

That may well be, but the two businesses will also be burdened by higher costs individually than they currently face. ‘Dis-synergies’ such as higher supply and distribution costs, as well as supporting two full corporate structures, will shrink cash flow, which has been the key metric for Wall Street’s evaluation of HP’s mature business. Still, HP will throw off several billion dollars of free cash flow.

Some of that cash appears to be earmarked for M&A, although spending there will be a distant afterthought behind dividends and share repurchases. (And HP executives were quick to add that any deals would be ‘return-driven’ and ‘disciplined.’) But even stepping back into the market for acquisitions represents a dramatic shift at HP. After all, it was a series of poor acquisitions – most notably Autonomy but also services giant EDS – that partially forced the prolonged restructuring that culminated in this planned separation.

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Much more to do at Dell

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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Cashing in on CDW

Contact: Tejas Venkatesh, Ben Kolada

Although CDW was taken private at the height of the prerecession bubble, when valuations were on the rise, its private equity (PE) owners, led by Madison Dearborn Partners and including Providence Equity Partners, may still profit handsomely from their investment. Based on our assumptions, the PE pair could record a profit of nearly $4bn on their investment. CDW filed its IPO paperwork last week.

Madison Dearborn announced that it was taking CDW off the Nasdaq in May 2007, at a valuation of about 1x trailing sales. At that time, the company was debt-free and generated $7bn in revenue in the preceding 12 months.

At the time of the take-private, CDW indicated that it expected $4.6bn of debt to be outstanding after the $7.3bn deal. Assuming all of that debt was used to finance the deal would mean that Madison Dearborn and Providence Equity would have invested just $2.7bn in equity.

If CDW reenters the public arena at the same valuation it was taken off (1x sales), then Madison Dearborn and Providence Equity’s investment will more than double. If CDW goes public at an enterprise value of $10.1bn (1x sales), backing out its $3.7bn of net debt would mean that the PE shops’ equity would have grown from $2.7bn at the time of the take-private to $6.4bn today.

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