Two recent transactions in the tech sector show how growth through acquisition is often vital in increasing solutions sets and meeting shareholder expectations.
Insight acquires Datalink
It was announced that Insight Enterprises acquired data center management services company Datalink. In this move, Insight continues to move “upstream” by expanding their data center capabilities and offerings (e.g., maintenance and migration). This should increase their recurring revenue base upward of $100 million per year.
Notable deal valuation metrics include:
- 1.5x price to book value
- Enterprise Valuation (EV) to sales of .3x. This seems low on the surface; however, the
- EV to EBITDA is estimated at 10.6x’s
The deal seems to be a win-win for both firms as Insight continues to go broader and deeper with their solutions-based offerings. In addition, it needs inorganic revenue to grow as a publicly traded company and meet shareholder expectations.
It is also a good move for Datalink as the company has had a dip in recent revenues, and selling to Insight could be the best strategic alternative to enhance their value.
Insight appears to be poised for future growth not only with this acquisition but also through another capital infusion (amount undisclosed) in November 2016.
Cisco acquires AppDynamics
Cisco Systems acquired the application monitoring company AppDynamics. Cisco continues to pursue deals like this one to give their customers end-to-end insight and enhanced visibility across their technology solutions stack.
AppDynamics was planning to go public (IPO) at an anticipated offering price of $12 to $14 per share. The Cisco offer at $26 per share clearly doubles their valuation.
Notable deal valuation metrics include:
- $3.7B valuation with Cisco offer = $17.5x’s revenues
- $1.6B post-IPO valuation = 7.57x’s revenues
AppDynamics was already well capitalized, having raised approximately $300 million to date with an anticipated additional $188.5 million coming in with the upcoming IPO filed on December 26, 2016. This IPO now has been cancelled with Cisco making them an offer they couldn’t refuse.
The AppDynamics solution provides real-time insights into the application, user, and business performance. Cisco certainly plans to leverage this acquisition across their technology solutions stack so customers can make faster business performance decisions.
Impact going forward
Both these transactions show that tech companies are doing two things:
- Expanding their solution sets and offerings to go broader and deeper within their existing customer base and producing more recurring revenue and
- Meeting shareholder expectations.
This growth through acquisition strategy is one many companies the size of Insight and Cisco are taking because they know they can’t continue to grow organically forever.
Steve Pomeroy is the founder of Big Change Advisors, an M&A consulting firm in Los Angeles focusing on middle market companies in the IT services space. Since 1992, Big Change leaders have completed over 36 transactions including M&A, Capital Sourcing, and Public Offerings representing over $800 million in total transaction value. Big Change Advisors donates a percentage of all fees to help serve the homeless through the Los Angeles Mission. To request a free consultant, contact us.
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