VMware Paid $449 Million for VeloCloud

Mergersfish

By: R. Scott Raynovich

The price of VMware's fourth-quarter, 2017 purchase of software-defined wide area networking (SD-WAN) vendor VeloCloud, which was not disclosed at the time of purchase, was recently revealed in a recent VMware 10-K filing to be $449 million.

This number has been of great interest to many players in Silicon Valley, especially the venture capitalists, management, and employees of SD-WAN companies. At the time of the deal, there was speculation that because VeloCloud had not disclosed the price, it was not blockbuster or unicorn valuation -- generally interpreted as more than $1 billion. This has now been revealed as fact. 

So how good of a price is it? It's not a bad price, but then again it isn't the $1 billion that VMware paid for software-defined networking (SDN) pioneer Nicira (now VMware NSX) in 2012. The VeloCloud purchase price is also less than the $610 million Cisco paid for SD-WAN rival Viptela. Here are the optimistic interpretations: It's the second-highest price paid yet for an SD-WAN startup. VeloCloud also deserves credit for exiting in a very competitive marketplace with more than 20 vendors, wherein the musical chairs game may start accelerating soon. The conclusions might be that VMware got a decent deal and VeloCloud cashed in. 

There are some other interesting tidbits in the data. What's interesting is what the VeloCloud price says about existing revenue projections in the marketplace. Some research and analyst firms had pegged VeloCloud at a $100 million run rate in 2017, but that does not jibe with the acquisition price -- nor with some details revealed in the filing. The VMware 10-K revealed that at the time of acquisition, only $44 million in customer contracts were counted as intangible assets:

"The identifialbe intanglible assets primarily include completed technology of $87 million and customer contracts of $44 million, with estimated useful lives of six to seven years."

It appears that some of the projections of VeloCloud's revenue in 2017 were a bit optimistic. That doesn't mean that VeloCloud, or other SD-WAN players, won't hit $100 million in revenue in 2018. Futuriom research indicates that a number of SD-WAN vendors will be breaking the $100 million revenue barrier in 2018, and VeloCloud is likely to be one of them (we'll reveal our findings next month in our 2018 SD-WAN growth report), along with players such as Aryaka and Silver Peak. But if VeloCloud was close to a $100 million run rate in 2017, as indicated by some analysts, neither the acquisition price nor the customer contracts disclosed as part of the deal back that up. A company growing at 100% with $100 million in revenue could have received a much higher multiple -- something more than 5X revenue, say sources familiar with Silicon Valley deals that Futuriom spoke to about this market. But if the revenue was less, it's harder to justify such a high price. 

The number itself is not set in stone. In fact, the VeloCloud purchase price could change, as the filing indicates there is an earn-out structure. The VMware 10-K reveals the following:

"The initial allocation of purchase price was based on a preliminary valuation and assumptions and is subject to change within the measurement period. VMware expects to finalize the allocation of the purchase price as soon as practicable and no later than a year from the acquisition date."

So, stay tuned, as the VeloCloud story continues to unfold!

The 10-K, filed at the end of March, also revealed that VMware paid an aggregate purchase price of $238 million for two other startups that it bought, Wavefront and Apteligent.