Sign of Bubble? Low 2.35X Multiple for SimpliVity

HPE just announced the acquisition of SimpliVity for $650 million in cash. This is not a surprise in term of move as HPE has so many holes in the portfolio with the demolition of the HP empire as we knew it (HPE probably means that). Many people – analysts, press, competitors and partners – have anticipated this for several months now but it is a surprise in term of price. In other words why a so low price to acquire SimpliVity? It’s a super deal for HPE but it will also have an impact of future deals.

Note also that IBM bought in 2008 for a rumored $200 million de-dupe start-up Diligent, a company with same CEO as SimpliVity, Doron Kempel.

Let’s try to get some rationale behind this with market and industry information:

• First, the market size, based on several analysts’ reports and comments, is estimated at $2.4 billion in 2016 and it is forecasted to be around $6 billion by 2020 at a CAGR of 25% with two clear leaders Nutanix and SimpliVity.
• Second, SimpliVity raised its last round of $175 million in 2015 at a $1 billion valuation, and received $276 million in 4 rounds from 7 investors.
• Third, SimpliVity was listed as Leader in Gartner Magic Quadrant for Integrated Systems published in October 2016 with very positive comments: “Founded in 2009, SimpliVity has been one of the key players in the HCIS market, reaching 750 employees worldwide and doubling its year-over-year revenue with more than 6,000 systems shipped globally since 2013. SimpliVity has a reseller network of more than 1,000 partners in 73 countries, enabling the vendor to generate 50% of its sales outside of the America.“
• Fourth, SimpliVity was listed in the top right as a Leader as well with Nutanix in the Forrester Wave dedicated to HCI published in Q3 2016.
• And fifth, the Gartner Hype Cycle for Storage Technologies published in July 2016 has shown integrated systems with hyperconvergence in the peak of inflated expectations segment.

In other words and we all agree, HCI is a hot market segment and SimpliVity is an obvious leader, growing fast, while HPE is a promising player.

A bit of ratio
Let’s do a bit of calculation with a very obvious and common ratio based on public information. We’ll use the exit multiple Enterprise Value/Investment named EVI in the rest of the document.

• SimpliVity raised $276 million and the acquisition amount is $650 million so the EVI ratio is 2.35x, which is very low. Remember the company was founded in 2009, 8 years ago. We don’t give details for various investors but we do the math globally. In detailed it’s different for sure for KPCB or Accel Partners to name just a few investors in various rounds.
• In an article published in TechCrunch in December 2013, the average EVI ratio was 7.5x. Based on that the SimpliVity deal could have been a $2.07B transaction.
• And finally if I refer to a recent report published in France by Avolta Partners who has studied 1,000 startups, 650 investors and 497 deals in 2015, the average EVI ratio is 6.38x which means a SimpliVity exit level around $1.76 billion.

So this transaction has some mysterious roots.

What are the reasons behind?
In other term, the key question is “why accepting a so low transaction even in cash?”. Of course from an external point of view we don’t know the real reasons behind, we have to speculate a bit.

• We estimate the revenue of SimpliVity to be in the range of $150-187 million. If we use the revenue per employee generated by Nutanix in 2016 of $222,000, the approximate revenue for SimpliVity could be $166 million with a number of employee of 750 as the official number in June 2016. Now, if we consider a fast growing and successful company in a hot segment should produce around $250,000 per employee – even more than Nutanix – and with 750 employees again, the approximate revenue should be $187 million. So at that level of revenue we just estimated, why SimpliVity did not start the IPO process? A recent article by Chris Mellor mentioned this IPO plan for 2017.
• We don’t know the burn rate of SimpliVity and other figures… even some potential difficulties and an IPO was not probably the right path.
• It could be also some negative reactions by investors who don’t wish to invest money anymore at a very high valuation especially with Nutanix disappointment around $3.8-4 billion market value now.
• Is there any relation with Dell/EMC merge as this deal had and still has a huge market impact?

Some potential effect on the market

• It will probably have an impact on the market – do we live a bubble? – and companies valuation especially as this transaction belongs to a hot segment.
• If same multiples are now in mind, the exit strategy for some companies has to change. Founders won’t receive and expect high ratio. Companies in HP Pathfinder investment portfolio have to learn from that HPE move.
• It’s a super deal for HPE that will consolidate a already good position as leader in the related Gartner Magic Quadrant. HPE acquires an interesting installed base, good technology at a very attractive price and then gain credibility.
• For end-users, it should guarantee a longer product life. 
• For IBM, absent of the Gartner Magic Quadrant or Forrester Wave mentioned above, the company should react. 
• Same thing for Cisco or Oracle who need to adapt their strategy.
• And what about Nutanix? Will it be the next prey ?