High Multiples for IT Operations & Management M&A
Broader adoption of disruptive technologies in the IT Operations & Management sector continues to drive high growth opportunities for vendors and high multiples on both M&A and capital markets valuations. In the waning weeks of July rather than winding down for the dog days of summer, vendors focused on solutions addressing the automation of the operations of data centers were quite busy.
On July 19th, BMC announced its acquisition of RealOps, a vendor of run book automation solutions. While the value of the deal was not disclosed, analysts have estimated a transaction value in the $50 to $60 million range, comparable to the approximately $53 million Opsware paid to acquire competitor iConclude in March of this year. Neither RealOps nor iConclude have disclosed their revenues at the time of these transactions but analyst estimates have generally been in the $5 million range which, if correct, would translate into deal multiples around 10x.
Four days later (July 23rd), HP announced its intentions to acquire Opsware at a share price that reflected a 40% premium to the most recent trade and which translates into an enterprise value of approximately $1.6 billion or roughly 15x Opsware’s revenue for the twelve months prior to the deal.
Shortly after that, on July 25th, BladeLogic a competitor to Opsware and a partner of RealOps, priced its initial public offering at $17 per share. The value of the shares surged over 40% in the first day of trading to $24. At that price, the implied enterprise value of BladeLogic is approximately $550 million or around 12x BladeLogic’s revenue for the twelve months prior to the IPO.
While the market has been strong for infrastructure software recently, the multiples of these three related transactions compare quite favorably to the median revenue multiple of around 4x for all infrastructure software transactions in the Updata Advisors proprietary deal database over the past 18 months. Why are the multiples so high? For the same reasons we have been pointing to in our most recent newsletter – growth and sector leadership. Opsware grew revenues between fiscal 2006 (ending Jan 31) and fiscal 2007 at a rate of 66%. BladeLogic exceeded that with a year over year revenue growth rate for the quarter prior to its IPO of 131%. iConclude and RealOps are two of only a handful of vendors addressing an emerging area core to broader data center automation – run book automation.
As a proof that this trend didn’t end in July, during a two day span in mid-August VMware priced its highly anticipated IPO (and began trading at an enterprise value around 20x the last twelve months revenues) and Citrix announced its acquisition of XenSource (a competitor to VMware with revenues of less than $5 million) for approximately $500 million. Growth is once again the underlying theme here. VMware’s revenues were growing 90% annually in the quarter prior to the IPO and Citrix has claimed it expects XenSource revenue to grow to over $50 million in the next year.
Given the fact that we are still early in the adoption of broader data center automation, we do not expect the trend of high multiple transactions involving disruptive technologies enabling data center automation to end any time soon.