CommVault Growth Seen Trumping Price for Buyers: Real M&A
CommVault Systems Inc. (CVLT)’s sales growth from data-management software could be enough to spur companies such as International Business Machines Corp. to pursue what would be the industry’s most expensive deal in a decade.
The software provider’s sales are projected to rise 33 percent in the next two years, faster than 81 percent of similar-sized peers, according to data compiled by Bloomberg. Raymond James Financial Inc. says those growth prospects could attract suitors to a $3.7 billion company that trades at a higher earnings multiple than 96 percent of the infrastructure software industry, the data show.
CommVault’s foothold in data management may lure IBM, according to Royal Bank of Canada, while Piper Jaffray Cos. says competitor EMC Corp. (EMC) also could seek a deal to bolster its backup and recovery software offerings. Even without a premium, CommVault’s enterprise value relative to earnings before interest, taxes, depreciation and amortization is already higher than the multiple paid for any similar-sized U.S. data- management company since 2003, data compiled by Bloomberg show.
“The growth is one of the more appealing parts to it,” Eric Martinuzzi, a Minneapolis-based analyst at Lake Street Capital Markets LLC, said in a telephone interview. “That accretes so well for big companies looking to grow their earnings next year and the year after. If the technology is compelling enough, the earnings multiple paid or even the revenue multiple paid, can be thrown out the window.”
David West, senior vice president for worldwide marketing and business development for Oceanport, New Jersey-based CommVault, said the company doesn’t comment on deal speculation.
“Our mission is to drive financial performance by consistently providing the industry’s most innovative products, services and support,” he said in an e-mailed statement. “It is clear that the industry continues to validate our strategy.”
CommVault, formed in 1988 as a development group within Bell Labs, sells software that helps customers including Dell Inc., Levi Strauss & Co. and medical-record provider Cerner Corp. (CERN) store and handle large amounts of data.
Shares of CommVault have risen more than fivefold since the company’s September 2006 initial public offering and reached a record $84.20 last month as the software provider’s sales gained every year and investor speculation mounted that it could become a takeover target.
Today, CommVault shares fell 5.4 percent to $76.41.
Analysts project CommVault, which completed its fiscal year on March 31, will report annual revenue of $491 million when it releases its results, according to data compiled by Bloomberg. That’s more than triple what it generated the year it went public, the data show.
Sales are projected to increase another 33 percent during the next two years, according to analysts’ estimates. That will outpace growth at 81 percent of infrastructure software companies valued at more than $1 billion, data compiled by Bloomberg show.
CommVault is “growing faster than the market they’re playing in,” Rajesh Ghai, a Dallas-based analyst at Craig- Hallum Capital Group LLC, said in a phone interview. “It’s got some pretty attractive technology.”
While a purchase of CommVault “wouldn’t be cheap,” larger technology companies could still be attracted to its expertise in data management and the growth potential in storing and analyzing large batches of information, said Michael Turits, a New York-based analyst at Raymond James.
“Data and analytics are becoming increasingly more strategic to companies” as they grapple with floods of information, Turits said in a phone interview. “This is a pretty complex area, not one where it is easy to build and enter yourself.
“For a number of other large technology companies, this is a hole in their portfolio,” he said.
For an acquirer, CommVault is also attractive because its products have been built internally with a single code source, in contrast to companies such as Autonomy Corp., which grew through acquisitions, said Robert Breza, a Minneapolis-based analyst at RBC. Hewlett-Packard Co. (HPQ), which purchased Autonomy in 2011 for $10.3 billion, took an $8.8 billion write down on the deal last year, citing accounting missteps including premature or improperly recorded revenue.
A takeover of CommVault would be “less complicated to go through because it is an organic-driven company,” Breza said in a phone interview.
Suitors for the software maker may include IBM, said Breza and Andrew Nowinski, a Minneapolis-based analyst at Piper Jaffray.
Ginni Rometty, chief executive officer of Armonk, New York- based IBM, said last month that so-called big data services would be a top priority this year.
James Sciales, a spokesman for IBM (IBM), said the company doesn’t comment on speculation when asked whether it would be interested in taking over CommVault.
EMC, which sells products that compete with CommVault, still lacks software that’s as comprehensive as that of its smaller rival and could also be interested in buying the company, Nowinski said.
“It wouldn’t surprise me if EMC also entered the mix and said they need to improve their own back-up product or portfolio,” he said in a phone interview. CommVault has “arguably the best product in this space.”
Lesley Ogrodnick, a spokeswoman for Hopkinton, Massachusetts-based EMC, said the company doesn’t comment on speculation when asked whether it could be interested in a deal for CommVault.
While larger companies may covet CommVault’s technology, the company’s steep price tag would likely deter buyers, said Craig-Hallum’s Ghai.
CommVault’s enterpise value yesterday was 43 times the software maker’s Ebitda in the last 12 months, higher than 96 percent of infrastructure software peers, according to data compiled by Bloomberg.
That multiple is already triple the median of 14 paid in U.S. data-management software deals valued at more than $500 million and would be the highest since EMC’s 2003 purchase of Legato Systems Inc., the data show. Even based on estimated profit for the year that ends in March 2014, CommVault is valued at 25 times Ebitda.
“Valuation is probably the only stumbling block as far as buying these guys is concerned,” Ghai said.
Still, a buyer eager to obtain CommVault’s technology and growth prospects might be willing to pay a high multiple to secure a deal, said Martinuzzi of Lake Street.
When EMC -- a potential buyer for CommVault -- purchased Legato 10 years ago in an all-stock deal, the $1.3 billion price valued the software maker at 75 times Ebitda, the data show.
In CommVault, “what you’ve got is this wonderful company that’s grown organically,” Martinuzzi said. In terms of price, “if somebody wants this asset bad enough, that is not going to be a barrier.”
-- With assistance from Sarah Frier in New York. Editors: Beth Williams, Sarah Rabil
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