On deals and dealmakers.
PUTTING THE SILICON IN SILICON VALLEY
Today we have another installment in Term Sheet’s series of interviews with dealmakers at the tech industry’s most active acquirers. Cisco is an acquisition machine, having done nearly 200 deals in its history. The company’s last minute acquisition of AppDynamics in January is arguably the most exciting deal of 2017. Yesterday, the company announced its second deal of the year, paying $610 million acquisition of Viptela, a cloud-based SD-WAN company based in San Jose. (My colleague Jonathan Vanian has more about that deal here.)
I spoke with Rob Salvagno, head of corporate development and Cisco investments, about Viptela, valuations, “needle-moving M&A,” and why Cisco is one of the few players still investing in silicon. Here’s an excerpt:
Term Sheet: What was so compelling about Viptela, and how does it fit into Cisco’s strategy?
Rob Salvagno: We’re seeing a big inflection point in the market. I would make it analogous to some of the changes we saw in the data centers five-plus yeas ago when SDN was a big trend within the data center. We have been following this market transition for awhile. We have made some other investments in the space. We felt now was the time the market itself has reached an inflection point. Cisco has some of its own offerings in the space, but we felt we needed to accelerate and complete our portfolio and that’s what attracted us to Viptela.
Have you invested in any companies that compete with Viptela?
The SD-WAN space has attracted a lot of venture money, so I want to say there are more than a dozen companies we are tracking in this space. We made an investment in a company called VeloCloud 18 months ago. It’s a big space. We felt Viptela was best suited for what we wanted to own.
How do they feel about this?
I can’t comment on how they might feel but we make lots of investments and acquisitions under the same team here at Cisco. I think it puts us in a good position to figure out whether it’s a market for Cisco to participate in and whether it may be the best choice for us. VeloCloud is a good company, it’s a great team, and that’s why we made the investment. It’s a multi-billion market and an exciting opportunity for many vendors, not just Cisco and Viptela.
Viptela’s co-founder is ex-Cisco, as is its new CEO. How much does that play into your M&A decisions?
I would say the biggest factor is the culture in general. When we talk about doing acquisitions, the team is absolutely critical for us. It’s the most important factor, sowe do want to see a strong cultural fit and that’s one of the things that made us feel like Viptela was the right choice for us.
In February one of the analysts covering you said the company needs “needle-moving M&A” and that the old playbook of tuck-in acquisitions wouldn’t work.
When I talk about transformational deals, I talk about opportunities that represent a certain scale, but also a certain capability that they’re bringing Cisco from a market or tech standpoint. If I spoke to some historical examples, I would say historical examples for Cisco are deals like Sourcefire, OpenDNA, Jasper and now AppDynamics. We have done one transformational deal a year. That could accelerate or pull back depending on what we see around specific opportunities.
That’s not the mega-scale. We believe there are so many challenges with mega-scale M&A. These are on average $1-$2-$3 billion deals, and we have a proven model to make those successful at Cisco.
The analyst I mentioned also suggested Cisco could double down on data center infrastructure or take a hard pivot toward software, or dive deeper into cybersecurity. Which of those are most appealing?
Software is definitely a focus and security is one of those six priority areas and has probably been one of our most active areas. All of those 16 acquisitions but one were software-centric. The only one that wasn’t was Leaba Semiconductor, which was silicon. Everything else was pure software or pure software-centric. For security, we have acquired three security companies in the last 12 months.
Any particular sectors?
Within the Internet of Things, connected vehicles is one example. Within collaboration, we’re looking at how AI and machine learning can be adopted. Within security we’re looking at the intersection of security and other are like IoT leading to the need for technology in areas that didn’t exist a few years ago.
And silicon is a key area where we differentiate. A lot of traditional venture industry has really pulled back from silicon investing. They view more attractive opportunities. What makes Cisco’s strategic investment approach unique is that we invest in opportunities that are both tied to our business today or are focused on next horizon opportunities. So for Cisco, Silicon is a core differentiator for our business today. We are investing there and we have a themed fund around silicon specifically.
How big is that fund?
We have not publicly stated the amount, but across the different thematic areas, it totals north of $300 million. Over the last 12 to 18 months, probably about half a dozen silicon and optics investments.
Are you the only game in town? If you’re a silicon startup, how many doors do have to knock on?
You may have 30 different venture funds focused around areas like big data or data centers, but you have a much smaller subset when you talk about venture firms that would make silicon investments. There are still financial VCs and we partner with them, and you will likely see all of them in the opportunities we invest in.
Why have venture investors pulled back from silicon investing?
As process technologies for basic development have become more and more expensive, it’s just harder in terms of capital requirements and other challenges to build a silicon startup today than it may have been five to ten years ago. The second piece is there has been a lot of consolidation in the industry and that adds to a different market environment. We’re just one part of the market ecosystem and we believe it’s a long game.
What doesn’t appeal to you?
Companies that require an expensive go-to-market engine, or aren’t thinking cloud-centric from the start. Those to me would be the two red flags. You need to be cloud-ready. Thinking about cloud at the onset is a requirement today. If it requires you to build a traditional sales force in order to market your technology, the level of capital required to get there is going to make you uncompetitive with other models out there.
THE LATEST FROM FORTUNE...
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• Ken Griffin fantasizes about breaking up the big banks.
The man who will fight fake news on Facebook. Sent to prison by secret algorithms. Howard Marks warns against private equity financial engineering. The whole world is now a message board. Wilbur Ross says Syrian missile strike was “after-dinner entertainment.”
• Truck Alliance, a China-based truck logistics platform also known as Guiyang Huochebang Technology Co, is near an agreement to raise about $156 million, according to Bloomberg. Baidu Capital will lead the round. Read more.
• ServiceChannel, a New York-based facility maintenance management software platform,raised $54 million in funding. Accel led the round.
• Orbital Insight, a Palo Alto, Calif.-based geospatial analytics company, raised $50 million in Series C funding. Sequoia Capital led the round, and was joined by Envision Ventures, Balyasny Asset Management, Geodesic Capital, ITOCHU Corporation and Intellectus Partners. Existing investors GV, Lux Capital and CME Ventures participated.
• Fornova, an Israel-based web scanning technology company, raised $17 million in series B funding. Deutsche Telekom Capital Partners led the round, and was joined by Waypoint Capital. Existing investor JAL Ventures participated.
• One, Inc, a Folsom, Calif.-based insurance software and payments provider, raised $15.5 million in funding. American Family Ventures and Centana Growth Partners co-led the round. Existing investors AXA Strategic Ventures and MassMutual Ventures participated.
• Bitfusion, an Austin, Texas-based application software technology startup, raised $5 million in Series A funding, according to TechCrunch. Vanedge Capital led the round, and was joined by Sierra Ventures. Existing investors Data Collective, Resonant VC and Geekdom participated. Read more.
• Twine Data, a New York-based mobile data company, raised $4.5 million in Series A funding from undisclosed investors.
• Morty, a New York-based automated mortgage marketplace, raised $3 million in funding. Thrive Capital led the round. Investors SV Angel, Techstars, FJ Labs, Corigin Ventures, and MetaProp participated.
• CreatorIQ, a Culver City, Calif.-based influencer marketing enterprise software provider, raised an undisclosed amount in Series A funding. Affinity Group led the round.
HEALTH AND LIFE SCIENCES DEALS
• Magenta Therapeutics, a Cambridge, Mass.-based stem cell transplantation biotechnology company raised $50 million in Series B funding. GV led the round. Existing investors including Atlas Venture, Third Rock Ventures, Partners Innovation Fund and Access Industries participated.
• Advanced Cardiac Therapeutics, a Santa Clara, Calif.-based medical device company, raised $45 million in new equity funding. Ajax Health led the round, and was joined by New Enterprise Associates and Questa Capital Management.
• Calysta, a Menlo Park, Calif.-based an alternative feed ingredient manufacturer, raised $40 million in Series D funding. Mitsui & Co. led the round, and was joined by Temasek. Existing investors Cargill, the Municipal Employee Retirement System of Michigan, Walden Riverwood Ventures, Aqua-Spark and Pangaea Ventures.
• Teewinot Life Sciences Corp, a Tampa, Fla.-based developer of cannabinoid-focused therapeutics, raised $12.3 million in Series B funding. Tuatara Capital led the round.
• ReThink Medical, a San Francisco-based heart failure medical device manufacturer, raised $3 million in Series A funding. Emergent Medical Partners led the round. Investors Norwich Ventures and Launch Capital participated.
• Invo Healthcare Associates, a Jamison, Penn.-based provider of therapeutic services to children and adults with special needs, has raised an undisclosed amount in funding from The Jordan Company.
• TetraGenetics, an Arlington, Mass.-based biopharmaceutical company specializing in therapeutic proteins and vaccines, received an investment of an undisclosed amount from the JDRF T1D Fund. [This item has been updated to reflect the correct headquarters city.]
PRIVATE EQUITY DEALS
• Saba Software, along with Vector Capital, acquired Halogen Software (TSX:HGN), a Canada-based talent management software provider, for CAD $12.50 ($9.1) in cash per share.
• Gridiron Capital has made an investment of an undisclosed amount in LeafFilter, a Hudson, Ohio-based gutter guard manufacturer. Financial terms weren’t disclosed.
• Frontier Capital invested $40 million in Dinova, an Atlanta-based marketplace connecting business diners to restaurants.
• Balmoral Funds acquired the assets of MOOYAH Holdings, a Plano, Texas-based franchisor of fast-casual restaurants. Financial terms weren’t disclosed.
• Atlantic Street Capital has made a majority investment in GAT Airline Ground Support, a Fayetteville, Ga.-based outsourced airline services provider.
• Goldman Sachs Asset Management Petershill program has made a minority equity investment in Accel-KKR, a Menlo Park, Calif.-based private equity firm.
• Pembina Pipeline Corp (TSX:PPL), a Canada-based provider of transportation and services for the energy industry, will buy rival Veresen (TSX:VSN) in a C$9.7 billion ($7.1 billion) stock-and-cash deal, according to Reuters. The offer represents a 22.5% premium to Veresen’s closing price on May 1. Read more.
• Jonah Energy, an oil and gas operator producing property operator, has agreed to acquire natural gas and oil producing properties in the Jonah and Pinedale fields from LINN Energy for approximately $580 million.
• IAC/InterActiveCorp (Nasdaq:IAC) agreed to acquire consumer review website operator Angie’s List (Nasdaq:ANGI), a Indianapolis, Ind.-based consumer review platform. The deal values the company at about $500 million. The offer represents a 44.3% premium to Angie’s List’s closing price on May 1. Read more at Fortune.
• Exotic Automation & Supply acquired Sidener Engineering, a Noblesville, Ind.-based fluid power and safety products provider. Financial terms weren’t disclosed.
• Stagwell Media acquired Scout, a healthcare marketing communications company. Financial terms weren’t disclosed.
• SalonCentric, L’Oréal USA‘s salon distribution operation has agreed to acquire key assets from Four Star Salon Services, a New York-based full-service wholesale distributor. Financial terms weren’t disclosed.
• Guaranty Bancshares, a Mount Pleasant, Texas-based commercial bank, set terms for its initial public offering on Monday. The company plans to raise $54 million by offering 2 million shares at a price range of $26 to $28 apiece. It plans to trade on the Nasdaq under the ticker GNTY. Sandler O’Neill and Stephens Inc. are the joint bookrunners on the deal.
• Genstar Capital sold Tecomet, a Wilmington, Mass.-based high-precision manufacturing solutions provider, to Charlesbank Capital Partners. Financial terms weren’t disclosed.
• IK Investment Partners acquired Colisée Group, a Paris-based nursing home operator, for €236 million ($257.5 million) from Eurazeo. Financial terms weren’t disclosed.
FIRMS + FUNDS
• Fertitta Capital, a new private investment firm focused on consumer-facing companies in the tech, media and entertainment sectors, raised $500 million from Frank and Lorenzo Fertitta.
• Fifth Wall Ventures, a Los Angeles-based venture capital firm focus on real estate technology investments, raised $212 million for its inaugural fund.
• Consensus Capital Holdings, a Grand Rapids, Mich.-based lower middle market investment firm, has announced its formation.
• Jeff Hasselman joined Amazon Web Services as a venture capital business development manager. Previously Hasselman was with venture finance teams at Ares Management and Comerica Bank.
• Jake Petoskey joined ParkerGale Capital as a principal.
• Eric A. Shuey joined Revelstoke Capital Partners as an operating partner.