Right out of undergrad I worked as an investment banking analyst in the technology group at Morgan Stanley. I entered banking at a very interesting time in the life of the tech industry; it was the late summer of 2002, the Nasdaq was about to reach six year low’s, IT spending was a ways from seeing any kind of recovery and technology companies were not interested in doing any financings or acquisitions until they had a clearer vision of the market. Needless to say, my first year in banking was not overly exciting.
However, the market slowly began to recover and, starting in the second half of 2003, deal flow picked up. And it was at that time that I had the opportunity to work on a wide range of deals, many of which turned out to be very meaningful within the industry. The most notable deals were Google’s IPO and VMware’s sale to EMC.
With all the talk and hype around both companies recently, I feel very fortunate to have been able to work with Google and VMware and their respective management teams at relatively early stages of the companies’ lives. Not only are these companies two of the better (revenue, ebitda) growth stories in recent history, but each company also transformed their industry. And I continue to be amazed by the value created by both companies.
Beyond the huge returns seen by their VCs, both deals have continued to create astronomical returns following their respective transactions in 2004 (Google’s IPO was in August 2004, while VMware sold to EMC in January 2004). Here’s a summary of the companies’ value creation since then:
Google
IPO price: $85.00
30-day avg price: $652.89
Return since IPO: 7.7x
CAGR since IPO: 88%
VMware
EMC purchase price: $625mm
30-day avg mkt cap: $39.7bn
Return since acq.: 63.5x
CAGR since acq.: 195%
(On a side note, this past July, Intel and Cisco made investments of $218.5mm and $150mm at valuations of $8.74bn and $9.375bn, respectively. In just four short months, those investments have already produced unrealized returns of 4.5x and 4.2x, respectively.)
While the current valuations for Google and VMware may feel some pressure in the coming months, the fundamentals on both companies are astounding. Over the past five years, both companies have revenue CAGRs of over 100% (see chart below). At their scale, that is a pretty amazing figure. Further, each company is producing ebitda margins between 30 – 50%.
What’s most amazing to me is the synergy realized through EMC’s acquisition of VMware. As a stand-alone company, VMware was seeing very strong growth and would have likely expected $120 – $150mm in revenue in 2004 (which would have been 60 – 100% y/y growth). However, the demand for their virtualization software was still higher than they could fulfill, and by leveraging EMC’s salesforce, distribution and brand, VMware was able to blow out their top line and reach nearly 200% year-over-year growth.
EMC’s acquisition of VMware has to be viewed as one of the best acquisition stories of all time.
(For a very prophetic post written back in October 2006, read Briand Berliner’s VMware as LBO Opportunity for EMC?)
