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Last Update: 04-Oct-18 10:01 ET
Cloudera, Hortonworks Merger Looking Like a Win-Win as Both Stocks Surge (CLDR)
In a major M&A event last night, "big data"
competitors Cloudera (CLDR 19.11, +2.03, +11.89%) and Hortonworks (HDP 24.62, +2.74, +12.52%) announced that they have
entered into a definitive agreement to combine the companies in an all-stock
merger of equals. With CLDR and HDP opening higher by circa 16%,
it's safe to say that investors are very much in favor of this deal. It's easy
to see why. The merger essentially eliminated a major competitor for each
company while creating a unified, dominant player in the data management,
analytics, and machine learning arena.
From a financial standpoint, the merger looks very attractive as well. More on that below. But first, here are some details on the transaction, as well as some background on each company:
Under the terms of the transaction, CLDR stockholders will own approximately 60% of the equity of the combined company while HDP stockholders will own approximately 40%. HDP stockholders will receive 1.305 common shares of CLDR for each share of HDP stock owned, which is based on the 10-day average exchange ratio of the two companies’ prices through October 1, 2018. The companies have a combined fully-diluted equity value of $5.2 bln based on closing prices on October 2, 2018.
As noted above, CLDR and HDP have been primary competitors, going head-to-head in the data management industry. Both companies are also highly focused on the data analytics and machine learning side of the market as well. For instance, CLDR's open source platform allows for third party programs and languages to be integrated -- including Spark and Python -- enabling real-time data streaming and advanced analytics. And HDP's Hadoop data management tool is able to aggregate all types of data, including new unstructured data types such as click-stream data, geo-location data, sensor data, and data generated by emails and other file types. A Hadoop cluster stores this massive amount of data through commodity servers and local storage while using open source software distribution. On top of that, its in-house generated architecture creates multiple ways of interacting with the data, including structured query language (SQL) processing, real-time processing, and traditional batch data processing.
So, as you can see, the two businesses are quite similar and complementary. In the press release last night, the companies commented that the combination will expand the market opportunity for Hortonworks DataFlow and Cloudera Data Science Workbench while accelerating opportunities in IoT (Internet of Things), streaming, data warehouse, hybrid cloud, and machine learning/AI.
From a strategic standpoint, the merger certainly looks like a good fit. The financial implications suggest the same. Specifically, CLDR and HDP expect the combined companies to generate $720 mln in revenue, with an improved margins profile. Furthermore, it is expecting to achieve over $125 mln in annual cost synergies as the two combine resources and eliminate over-lapping expenses. The combined company is also expected to generate substantial cash flow of $150 mln in CY20, with no debt and $500 mln in cash on the books which it can use to fuel even more growth -- either organically or through another acquisition.
On top of all this, the valuation still looks pretty reasonable. A combined equity value of around $5.8 bln would put the the P/S at around 8x expected FY19 revenue. For a dominant company with strong growth potential, expected margin improvement, and significant cash flow generation, CLDR/HDP still doesn't look expensive despite the surge higher today.
To conclude, this transaction is one of those rare mergers where it seems very positive for both companies involved as the main competitor was eliminated for each, and the combined entity is now a major force in the data management space.
From a financial standpoint, the merger looks very attractive as well. More on that below. But first, here are some details on the transaction, as well as some background on each company:
Under the terms of the transaction, CLDR stockholders will own approximately 60% of the equity of the combined company while HDP stockholders will own approximately 40%. HDP stockholders will receive 1.305 common shares of CLDR for each share of HDP stock owned, which is based on the 10-day average exchange ratio of the two companies’ prices through October 1, 2018. The companies have a combined fully-diluted equity value of $5.2 bln based on closing prices on October 2, 2018.
As noted above, CLDR and HDP have been primary competitors, going head-to-head in the data management industry. Both companies are also highly focused on the data analytics and machine learning side of the market as well. For instance, CLDR's open source platform allows for third party programs and languages to be integrated -- including Spark and Python -- enabling real-time data streaming and advanced analytics. And HDP's Hadoop data management tool is able to aggregate all types of data, including new unstructured data types such as click-stream data, geo-location data, sensor data, and data generated by emails and other file types. A Hadoop cluster stores this massive amount of data through commodity servers and local storage while using open source software distribution. On top of that, its in-house generated architecture creates multiple ways of interacting with the data, including structured query language (SQL) processing, real-time processing, and traditional batch data processing.
So, as you can see, the two businesses are quite similar and complementary. In the press release last night, the companies commented that the combination will expand the market opportunity for Hortonworks DataFlow and Cloudera Data Science Workbench while accelerating opportunities in IoT (Internet of Things), streaming, data warehouse, hybrid cloud, and machine learning/AI.
From a strategic standpoint, the merger certainly looks like a good fit. The financial implications suggest the same. Specifically, CLDR and HDP expect the combined companies to generate $720 mln in revenue, with an improved margins profile. Furthermore, it is expecting to achieve over $125 mln in annual cost synergies as the two combine resources and eliminate over-lapping expenses. The combined company is also expected to generate substantial cash flow of $150 mln in CY20, with no debt and $500 mln in cash on the books which it can use to fuel even more growth -- either organically or through another acquisition.
On top of all this, the valuation still looks pretty reasonable. A combined equity value of around $5.8 bln would put the the P/S at around 8x expected FY19 revenue. For a dominant company with strong growth potential, expected margin improvement, and significant cash flow generation, CLDR/HDP still doesn't look expensive despite the surge higher today.
To conclude, this transaction is one of those rare mergers where it seems very positive for both companies involved as the main competitor was eliminated for each, and the combined entity is now a major force in the data management space.
