Genesys boosts August PE totals with Interactive buy

Contact: Scott Denne

Genesys’ $1.4bn purchase of fellow contact-center software vendor Interactive Intelligence wraps up a busy August for private equity (PE). This month, PE firms and the companies they own, like Genesys, have racked up $14.5bn in deal value – almost half of August’s total tech M&A, according to 451 Research’s M&A KnowledgeBase.

Today’s transaction values Interactive at 3.3x trailing revenue. That’s a bit lower than the 4x multiple in both NICE’s acquisition of Interactive’s SaaS rival inContact earlier this summer and Genesys’ own $3.8bn post-money valuation on a minority investment from Hellman & Friedman last month. (That deal left a majority stake in the hands of Genesys’ earlier owners, Permira and Technology Crossover Ventures.) Interactive’s 14% revenue growth, compared with inContact’s 25%, accounts for much of the difference.

Genesys has recently set its sights on expanding beyond call-center software into broader customer experience applications to increase its single-digit annual growth. Yet today’s move is more of a consolidation play. It does, however, bring Genesys an asset whose SaaS business is growing – that product grew its revenue 43% year over year to $31m last quarter, accounting for about one-third of Interactive’s sales. Genesys also obtains a team that can help it target smaller customers – Interactive’s average revenue per customer is less than half of what Genesys takes in.

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Deals — not dollars — drive tech M&A in July

Contact: Brenon Daly

While tech acquirers weren’t especially ‘spendy’ last month, they certainly were busy. The number of tech, media and telecom (TMT) transactions announced in the just-completed month of July topped 420, a record level since at least the credit crisis, according to 451 Research’s M&A KnowledgeBase. Acquisitions last month by many of the major tech bellwethers – including Microsoft, Cisco, HP, IBM, Amazon and eBay – helped push deal volume about 40% higher than the average monthly total for the past three years.

It wasn’t just the big buyers, either. A number of smaller acquirers also stepped back into the market in July. Yahoo put up its first print of 2015 at the end of July, after inking 19 acquisitions last year. (The search giant had made 11 purchases by this time last year.) Additionally, Groupon, Callidus and Zillow all got on the board for the first time this year with July transactions. Meanwhile, both Time Inc and Accenture announced three deals last month.

The almost unprecedented activity translated into only marginal spending, however. Acquirers spent just $22.7bn on TMT transactions across the globe last month, according to the KnowledgeBase . While that roughly matches the average monthly spending for the post-recession period of 2010-14, it is the second-lowest monthly spending total for this year’s record romp, and is less than half the average value of deals announced monthly in the first half of 2015.

Of course, the July activity comes on the heels of record-setting spending in the April-June quarter. (See our full report on the blockbuster Q2, where the value of acquisitions announced hit an astounding $200bn, the highest quarterly level in 15 years.) While spending last month fell short of other recent months, it nonetheless keeps 2015 on track for a new post-bubble annual record. So far this year, TMT dealmakers have spent $345bn on transactions, just $70bn less than the record years of 2006 and 2007.

2015 monthly deal flow

Period Deal volume Deal value
January 2015 358 $11bn
February 2015 335 $48bn
March 2015 339 $61bn
April 2015 364 $46bn
May 2015 303 $122bn
June 2015 372 $33bn
July 2015 420 $23bn

Source: 451 Research’s M&A KnowledgeBase

Rapid7 rapidly nears 10-digit valuation in IPO

Contact: Brenon Daly

Despite Wall Street being a fairly inhospitable place for recent tech IPOs, Rapid7 came to market Friday with a stunning debut. The vulnerability management vendor priced its 6.45-million-share offering at an above-range $16 each, with the stock surging to about $25 once it hit the Nasdaq. With roughly 38 million (undiluted) shares outstanding, Rapid7 is valued at $950m.

That’s a fairly strong valuation for a company that will only put up revenue of slightly more than $100m in 2015. Rapid7 generated revenue of $77m in 2014, an increase of 28%. It picked up its sales rate in the first quarter of 2015 to 41%. (Even if the company maintains that accelerated pace, however, it would still post just less than $110m in sales this year.) Further, Rapid7 does business in the old-fashioned license/maintenance model, rather than the subscription model that Wall Street favors. (See our preview of the IPO.)

Rapid7’s direct rival, Qualys, sells subscriptions only. It is about half again as big as Rapid7, tracking to a mid-20% growth rate that would result in almost $170m in revenue for 2015. (For what it’s worth, Qualys turns a profit while Rapid7 runs deeply in the red.) Wall Street values Qualys at $1.25bn, or 7.4x projected 2015 sales. That’s a full turn lower than the 8.6x projected 2015 sales that Wall Street is currently handing to Rapid7.

The premium valuation for Rapid7 stands out even more because virtually all of the other enterprise tech IPOs have all been discounted recently. The main reason: uncertainty on Wall Street. A just-published survey by ChangeWave Research, a service of 451 Research, found that more than half of the retail investors they surveyed are less confident about the direction of the US stock market than they were just in April. The 53% response, which tied a record for the survey, was six times higher than the percentage who said they were more confident about Wall Street. Keep in mind, too, that uncertainty tends to hit unknown, unproven companies – like IPOs – much harder than established tech names.

To see how that has pressured other newly listed companies, consider the two enterprise tech vendors to brave the IPO market in the US last quarter: Apigee and Xactly. Both have been roughed up on Wall Street, and are currently underwater. The muted reception extended to Sophos, the only other infosec provider to come public in 2015. That company, which listed on its home London Stock Exchange, accepted an extremely conservative value as it sold shares to the public for the first time. For some perspective, consider this: although Sophos is nearly five times larger than Rapid7, its market value only slightly exceeds Rapid7’s freshly printed valuation.

Wall Street confidence July 2015

Francisco dives into network monitoring with Procera take-private

Contact: Mark Fontecchio, Scott Denne

Emerging opportunities in the network monitoring space lead Francisco Partners to make its first foray into networking and its largest solo purchase in eight years as the investment firm swoops in to buy Procera Networks, a deep-packet inspection vendor that was being hounded by activist investors.

Network monitoring and visibility was a significant driver of M&A activity in 2014, including Ixia’s $190m reach for Net Optics (with a similar multiple to today’s deal) and multibillion-dollar acquisitions of Riverbed and Danaher’s networking performance business. The sale of Procera is the largest in this category so far this year, but not the only one. Last month, Lookingglass Cyber Solutions picked up Procera competitor CloudShield.

As we highlighted in our 2015 M&A Outlook, we anticipate that smaller players in this space will continue to consolidate amid the convergence of application performance management, network performance management and network visibility. Though consolidation is coming, that’s not to say the market has matured. In the latest networking survey by TheInfoPro, a service of 451 Research, network monitoring was cited as a top pain point by 19% of network admins, up from 13% a year earlier.

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451 Research’s M&A KnowledgeBase tutorial: Search themes

Contact: Adam Phipps

We have posted a tutorial detailing the ability to search 451 Research’s M&A KnowledgeBase by technology themes, in addition to sector, to locate emerging or disruptive technologies that may be spread across multiple 451 categories. For example, Singtel’s pickup of Trustwave has a target theme of cybersecurity, Cisco’s Embrane acquisition has the seller tagged with SDN/NFV, and Neilsen’s eXelate buy is categorized as big data. Meanwhile, search cloud computing deals to find SolarWinds’ Librato purchase, and find Microsemi’s reach for Vitesse in the Internet of Things category.

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Nokia nabs Alcatel-Lucent in latest massive telecom deal

Contact: Brian Partridge

Nokia has acquired Alcatel-Lucent for $16.5bn. The deal brings together former rivals and changes the competitive landscape for the next generation of converged broadband telecom infrastructure. We also think it could incite a new wave of dealmaking among telecom infrastructure suppliers, most notably Ericsson.

The all-stock transaction, expected to close in the first half of next year, will create a combined company with top or near-top market share in several categories, including LTE, fixed broadband infrastructure, IP routing, subscriber data management and customer experience management. Both companies have aggressively pursued SDN/NFV competencies, with Alcatel-Lucent strong in SDN and Nokia being a leader in early implementations of NFV.

Traditional fixed and mobile voice telephony services have steadily declined. Demand for fixed and mobile broadband Internet services has helped fill the gap, but massive network traffic increases have driven incremental revenue growth for operators. These market dynamics have created an environment where bundled fixed voice, broadband and video ‘triple play’ and mobile ‘quad play’ services are imperative to maintain operator profitability and customer stickiness – but they require architectural convergence (to IP networks) to efficiently support them. Against this industry backdrop, Nokia and Alcatel-Lucent bring several complementary assets to the table that will position the new company well to serve traditional customers (telcos) as well as create some new opportunities to sell to large enterprises and Internet vendors.

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

 

IBM attempts to heal with healthcare

Contact: Mark Fontecchio

IBM adds two healthcare analytics software firms – Phytel and Explorys – to its portfolio. Last year, Big Blue said it would invest $1bn in Watson to expand its cognitive computing platform beyond beating Ken Jennings on Jeopardy! and better commercialize the technology. The investment was to focus on sectors where cognitive computing could have commercial success – among financial services, retail and others, IBM cited healthcare.

Phytel’s software analyzes patient data, integrating with providers’ electronic health record systems with the main goal of preventing hospital readmissions. The other deal is for Explorys, which integrates healthcare data from various sources and analyzes patient and provider information. Both will administer technologies to IBM’s Watson Health Cloud, which includes partners such as Apple and Johnson & Johnson and will allow doctors, researchers and insurance companies to dive into a massive trove of anonymized personal healthcare data.

Big Blue’s sickly revenue dropped 6% last year, and it sees the healthcare vertical as a way to help heal its top line. Hemorrhaging hardware sales and steady services declines leave software as the best opportunity for IBM to get out of intensive care, and healthcare is a good bet – according to ChangeWave Research’s recent corporate quarterly survey, healthcare is one of two sectors (IT software and services is the other) expected to see the most spending increases this year. Healthcare tech M&A is also humming along in 2015, on pace to stay even with last year’s volume after a 64% increase over 2013, according to 451 Research’s M&A KnowledgeBase.

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451 Research’s M&A KnowledgeBase tutorial: Finding venture-backed exits

Contact: Adam Phipps

We recently noted the imbalanced market for selling VC-backed companies with valuations over $1bn. 451 Research’s M&A KnowledgeBase can be used to identify those deals where the target (or even the acquirer) is venture-backed. Searches can be further refined by venture firm – a search of Accel Partners, for example, shows that firm having a strong start to 2015 by exiting investments in lynda.com and MyFitnessPal. Use our saved search of YTD venture exits, and also watch this short tutorial about finding venture capital information in the KnowledgeBase.

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

LinkedIn hooks its largest deal

Contact: Scott Denne

Though the acquisition of lynda.com is far larger than any of LinkedIn’s other purchases, it’s picking up an asset that shouldn’t be a drag on its financial performance and one that plays in a market where the company is comfortable. At $1.5bn (which includes $720m in stock), the deal is more than 8x the size of its Bizo buy, its previously largest transaction at $175m. Bizo, by comparison, was a complex (though we think smart) acquisition that brought LinkedIn into the ad network business and involved a significant change to the target’s low-margin business model.

Both LinkedIn and lynda.com have about 70% gross margins, both spend 35% of revenue on sales and marketing, and lynda.com has EBITDA margins in the 5-10% range, just under LinkedIn, which has posted a smidge over 10% in each of the past two years. However, at 20% year over year, lynda.com’s growth is a bit behind LinkedIn’s 45%. At 10x trailing revenue – a full three turns below LinkedIn’s own valuation – the deal looks like a bargain.

With today’s move, LinkedIn is obviously seeking more than matching financial performance. With lynda.com, LinkedIn has an opportunity to boost that 20% growth by marketing educational videos and courses to relevant customers on its network, and it increases its presence in higher education (higher ed and government account for half of lynda.com’s business), which is an important segment for LinkedIn as it looks to snag future professionals at an early stage in their careers. Also, when it integrates lynda.com’s educational materials, LinkedIn will get a better view into what its users want to do, not just what they do today.

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Digital commerce software’s second coming

Contact: Matt Mullen

Nearly 20 years ago, there was a burst of exuberance for digital commerce software companies, with commerce and Web vendors gaining attention and massive valuations. However, the sheer complexity and lack of market readiness meant that many ambitions remained unfulfilled.

Today the market is ready and though the complexity is still there, the urgency and potential rewards are now greater. Commerce technology is tricky stuff and those that want to add it are unlikely to want to build their own, making the remaining independent players ideal acquisition targets.

Many of the largest social business application providers (IBM, Oracle, SAP, etc.) have already put a stake in the ground in this market. And many will look for tuck-ins. Though a number of players are aging, the necessary partnerships and technologies they’ve built over the years are not easily replicated. There’s also an influx of venture capital into this market, particularly among SMB-focused companies that could make for compelling acquisition targets.

Look for a forthcoming report detailing the potential acquirers and targets in the digital commerce software space.

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