John Katsaros

McAfee's Big News

Monday McAfee announced its plans to acquire full-disk encryption software maker SafeBoot for $350M in cash just days before SafeBoot was about to complete its IPO.  It's a bold move for McAfee's new CEO Dave DeWalt and it's more or less his announcement that he's planning on broadening McAfee's focus. SafeBoot is one of the leaders in the $400+M mobile encryption market and McAfee's 125M endpoints should be an ideal way to grow this franchise. What's more, McAfee says it's planning to integrate SafeBoot technology with its Data Loss Prevention (DLP) product line -- last year McAfee acquired Onigma and used it as the basis for its DLP product family -- which probably will be the impetus for others in the DLP space to add encryption to their client side products -- and in the process broadening up that category to Data Protection (no "L" anymore).

Disappointment?

If you blinked, you might have missed this one. Last month, Oakley Networks announced that it was being acquired by Raytheon. This has the appearance of another ho hum acquisition in the Data Loss Prevention market, even more surprising when you consider that just a few years ago Oakley Networks was number one in market share, mostly due to a very large order it had with a federal government agency that valued Oakley's DVR-like feature set. This acquisition (selling out to a large government contractor) gives the impression that Oakely was not able to make the transition from government applications to the commercial world. We can't remember ever referring to Raytheon in our world of infrastructure players, but we welcome one and all. Rumors are flying around that there are still more liquidity events in the DLP/ILP world that are about to be announced. So we've dusted off our updated Hall of Fame list (yes, we just used it in August). But with the recent news about McAfee's $350M acquisition of SafeBoot, we'll probably evolve this to become the Data Protection Hall of Fame table.

DLP/ILP Hall of Fame

Date	Acquiree	Acquirer	Amount	Estimated Sales Multiple
10/06	Onigma Ltd	McAfee	$20	?
12/06	Port Authority	Websense	$90	20x+??
8/07	Tablus	EMC/RSA	???	???
9/07	Oakley Networks	Raytheon	???	???
Total			$110+M

F5 Grabs Acopia (Cisco Grabs Neopath)

That industry consolidation thing has clear struck the file virtualization space (our conjecture is that datacenter virtualization will be highly disruptive to storage business as well). F5 acquired Acopia Networks after Cisco had gobbled up NeoPath . NeoPath had an $11M funding round in May of 2006 including Cisco has a strategic investor. It's like the Victor Kiam Remington shaver story on TV ("I liked the company so much I bought it"). Cisco has taken all the NeoPath products off the market (not that they had lots of customers) so we'll have to wait a while to see what their ultimate intent is. Cisco apparently passed over Acopia leaving it for F5 to acquire. Acopia was founded by Cheng Wu, the founder of Arrowpoint (the load balancing company which butted heads with F5 in the early days of the market and that Cisco ultimately bought for $6B+ in the Dot Com hey day). Acopia had created an innovative and useful solution that let customers create a virtualization abstraction between the file systems that servers see and the underlying storage subsystems that are used. When we last talked to Acopia they were selling product to prestigious customers but hadn't yet solved the replicated volume sales problem and almost certainly needed more money to really grow the enterprise market. F5 provides that sales platform and Acopia broadens their product offering as they compete with the likes of Cisco, so all that makes sense. You've got to wonder whether F5's sales and marketing strengths can be extended into the storage arena. The stock market didn't like the acquisition much trimming F5's market cap by roughly the amount they paid (treating it like a $200M+ expenditure for something of no value). Financial analysts worry about the integration of these bi-costal entities. In any case, lots more evidence that virtualization is hot -- hot -- hot!

End Game?

The Information Leak Prevention infrastructure sector makes you scratch your head and wonder how this whole thing plays out in the long run. Last year we wrote a series of reports on ILP/DLP technology and basically concluded that, while these products do interesting things, customers wanted more complete offerings that delivered important business value and that this market needed more time before it would ignite. Last week's acquisition of Tablus by EMC's RSA division seems to underscore this and may even point out that ILP technology is better viewed as extending the functionality of larger information management subsystems. Websense is taking this approach by integrating its recently acquired Port Authority product within a broader framework. The value of the EMC/Tablus transaction wasn't announced, which more often than not is a disappointing signal. Couple that with the ensuing discussions pointing out that Vontu's 2007 revenue number may be closer to $25M than to $50M has us all wondering about the short term health of this sector. With about 20 plus startups in this sector and more than $500M in venture investments, we're all expecting an exciting business to develop. As we've done before in other sectors, we'll be keeping score as newcomers enter into our DLP/ILP Hall of Fame.

 

DLP/ILP Hall of Fame

Date	Acquiree	Acquirer	Amount	Estimated Sales Multiple
10/06	Onigma Ltd	McAfee	$20	?
12/06	Port Authority	Websense	$90	20x+??
8/07	EMC/RSA	Tablus	???	???
Total			$110+M

Buzz Continues

There is still plenty of buzz around last month's acquisition of Postini by Google.  It's hard to believe that this is the only step that Google will make with regards to pushing itself into the enterprise e-mail space and it may be the biggest challenger that Microsoft's Exchange system has seen in awhile -- at least since the "good old days" when Microsoft became dominant in the e-mail sector after beating up on IBM/Lotus.  If you're of the camp that the proverbial other shoe(s) are yet to drop, then what will it (or they) be?  But the conversion to Exchange 2007 may be harder on customers than expected and may cause customers to sit tight or seek alternatives.  There are lots more functionality in the e-mail ecosystem which may make for interesting Google acquisition targets and, when you think of it, your e-mail system is such an important part of your workday (as well as being a repository for your long term memory), there are lots of valuable spaces for Google to expand into.  Or will Google instead go horizontally and push Postini's efforts in the "clean pipes" area to protect Web browsing.  With Google's money they can do both.

Security Mergers Keep On Coming

2007 is certainly shaping up to be the year for consolidation in the security industry so Thursday's announcement by Websense of its planned $400M acquisition of SurfControl is another milestone along this road. When he joined Websense as its CEO in January, 2006 after leaving McAfee, Gene Hodges indicated that he intended on making Websense a powerhouse in the security business. Since then the company has made some major moves including its partnership with Crossbeam to market a UTM proxy/cache security platform and its acquisition of Port Authority to move into the Information Leak Prevention market. The SurfControl acquisition will thrust Websense into the e-mail security space while adding an on-demand service -- SurfControl's BlackSpider on-demand e-mail security service which has lots of expansion potential. Most industry numbers showed Websense and SurfControl to be numbers 1 and 3 in the URL Filtering market, so their combined consolidation in this space should produce a much more profitable business. And finally, the SurfControl acquisition strengths Websense's ability to target small to medium size customers.

Akamai Makes a Move Toward the Enterprise Market

For years Akamai has wanted to increase its participation within the enterprise market.  Although they made reasonable strides in the enterprise space with services like Akamai Edge Control for improving corporate portal performance, the company never "nailed" the enterprise market.  We have believed it was only a matter of time till Akamai either acquired Netli or came out with an equivalent offering to Netli's NetLightening application optimization service.  That question was settled last week when Akamai spent $177M to acquire Netli. That's roughly 2% of Akamai's overall capitalization and a pretty reasonable price to pay considering how many top tier customers Netli has acquired over the years.  Netli's success as a startup wasn't clear back in 2001 when the company started.  Back then the Internet bubble was bursting and the last thing that investors wanted to do was invest in a services company.  Things were looking pretty bleak and most infrastructure investors were focused on ROI savings, not application optimization.  But, amazingly, Netli succeeded in first bringing online a reasonable application optimization service and, most importantly, signing up high profile companies like HP as their initial customers.  Netli CEO Gary Messiana kept the company focused on bringing in large scale enterprise customers and continuing the expansion of its enterprise service offerings.  Venture investors who funded the company with $47M stand to make a nice return.  At the end of the day, it's a pretty nice outcome for acquirer and acquiree.

The Dozen

The Netli acquisition by Akamai brings to an even dozen transactions in the "modern era" of the network acceleration and optimization space.  For those of you who like to count, here is our table.  Ten of these were private VC backed companies which were acquired for roughly $1.4B.  Ringing the bell is, of course, is Riverbed with its September 2006 IPO. 

Company	Liquidity Event	Outcome	Size	Date
Actona	Acquisition	Cisco	$82M	6/04
FineGround	Acquisition	Cisco	$70M	5/05
Netli	Acquisition	Akamai	$177M	2/07
NetCache (Netapp division)	Acquisition	Blue Coat	$30M	6/06
NetScaler	Acquisition	Citrix	$300M	6/05
Orbital	Acquisition	Citrix	$50M	8/06
Peribit	Acquisition	Juniper	$337M	4/05
Redline	Acquisition	Juniper	$132M	4/05
Riverbed	IPO	IPO	$1.83B (Market Cap)	9/06
Speedera	Acquisition	Akamai	$130M	3/05
Swan Labs	Acquisition	F5	$43M	9/05
Tacit	Acquisition	Packeteer	$78M	5/06
Acquisition Total			$1.4B

We've Got a case of bubble-itis and we're all happy (again)

And who said that the bubble couldn't strike twice in the same decade!  We've followed the spam bubble for three years and it continues to grow.  This time around it was Cisco's announcement that it would acquire IronPort for $830M.  Since March, 2004, we've counted eight anti-spam startup company acquisitions in excess of $1.6B.  Cisco's purchase price of IronPort accounts for about half of the total.  Coming just six months after Secure's acquisition of CipherTrust, the eight times sales purchase price either makes Cisco look high or Secure look like geniuses for getting such a good deal -- time will tell.  It's important to put these numbers in perspective -- the total market for spam add on product sales in 2006 was around $1B.  Cisco claims that the market is twice that size but maybe we're counting different things.  If the market is still growing fast, let's say 40% a year, then you're talking about a $5B market and, if Cisco's IronPort unit can grow its share above 30% then that's a tidy $1.5B annual revenue stream.  But cut that growth in half and you're left with annual sales five years out less than what they paid to get into the business.  In either event, right now there's plenty of champagne to go around -- investors in all of these anti-spam companies have made money -- some far more than others.  But investors in the 25+ other companies anti-spam companies may start worrying since they are now competing in a market where both Cisco and Microsoft each want to grow share.  With Secure Computing and Symantec holding sizable market share as well, the tier 2 and 3 players will soon start to struggle.  Here's our updated "Spam Hall of Fame" table.

Date	Acquiree	Acquirer	Amount	Estimated Sales Multiple
3/04	Corvigo	Tumbleweed	$38.5M	?
6/04	Brightmail	Symantec	$370M	7x
7/04	TurnTide	Symantec	$31M	?
7/05	FrontBridge	Microsoft	???	???
7/06	BlackSpider	SurfControl	$38M	5x
7/06	CipherTrust	Secure Computing	$279M	3.7x
1/07	IronPort	Cisco	$830M	8x
Total			$1.614+B

And SourceFire Makes Three

If you're like us, you worry about the fact that for the past five years the most preferred exit strategies of infrastructure startups has been "the buyout" where the startup sells itself to larger tech firms.  While acquisitions have led to many good exits, there are long term problems -- first, a buyout means that no new money comes into the business (or into the infrastructure sector) and second, at some point the big tech guys get the upper hand to keep acquisition prices low (Cisco has in a sense started doing that several years ago by buying many companies early, before their "B Rounds" when they are less expensive and don't have much of a sales force.  This "acquisition centric view" could be changing thanks, in large part, to three companies passing over the buyout path to go public.  Riverbed and Acme Packets both recently went public and combined raised nearly $200M in new capital.  Both have seen their stock prices rocket up from the IPO price -- Riverbed went from $9.75 to the $24 range and Acme Packets went from $9.50 to $18+ in just a few weeks.  And just a few days ago Sourcefire filed its registration with the SEC signaling its plans for an IPO.  Assuming that Sourcefire's IPO is also a success, then we'll have three infrastructure companies in the span of a few months re-opening the public market to infrastructure startups -- which could brighten the day for all of us.