IBM buys Fiberlink for $375 million (Update)

UPDATE: March 2014: A source familiar with the transaction tells me IBM paid $375 million for Fiberlink -- close to 10X revenues, and sweeter than my back-of-the-envelope estimate of $300 million (below).

EARLIER: IBM Corp. has agreed to buy Fiberlink, a phone-services firm that has lately specialized in smartphone and other mobile-device systems for corporate clients. IBM, like SAP, Oracle and other big business computing companies, is trying to keep up with corporate clients as they move away from personal computers and centralized systems toward smaller systems that serve smartphones, tablet computers and other hand-held devices through remotely-hosted (cloud) servers.

Fiberlink is based in Blue Bell and last year opened a Center City office to attract recent college grade engineers, programmers, salespeople.   "All Fiberlink employees will join IBM at close of deal, expected this year," including top executives Jim Sheward and Chris Clark, IBM spokesman Tod Freeman told me.  The firm, founded by Sheward and Paul Russell in 1992, has counted AstraZeneca and Independence Blue Cross among its big regional clients. Fiberlink raised $80 million in the mid-2000s frombackers including Silicon Valley-based TCV-Technology Crossover Ventures, GE, Goldman Sachs, and Radnor-based NewSpring Ventures. The company has been profitable and had already given back some cash to investors before the IBM deal.

"Mobile is becoming the primary way organizations communicate and transact – with employees, partners and customers," said Caleb Barlow, IBM director of mobile security, in an email statement. Fiberlink is the latest in a string of mobile-based acquisitions, he added.

The deal will add Fiberlink's MaaS360 "bring-your-own-device" data communications, reliability and security services offered clients to IBM's "Software as a Service" (SaaS) menu, acccording to Robert LeBlanc, IBM senior vice president for middleware. "The acquisition of Fiberlink will enable us to offer these expanded capabilities to our clients," he added in a statement. IBM's goal is "bringing all mobile resources together in one platform."

The companies won't say what IBM is paying for its latest acquisition. But given a few rules of thumb -- Fiberlink's growing staff of 400, up from 300 last year and 250 in 2011, and the growing-software-company rule of thumb of $120,000-$150,000 in annual revenue/employee, yields an estimate of recurring revenue of close to $50 million. Multiplying that by 6, the factor at the midpoint of the range investors say growing software firms have sold in recent years, yields a price of close to $300 million, which would put Fiberlink's sale in the ballpark with Procurian, the larger but less-rapidly-growing King of Prussia purchasing-software firm bought by Accenture from Wayne-based ICG last month for $375 million.

UPDATE: But an investment banker who wasn't part of the deal tells me $300 million sounds high: "Based upon my back of the envelope analysis, I'd place the purchase price for Fiberlink, at best, at $200 million. 

"My thinking is as follows : (1) Revenue base maybe $50 million (assuming 125k per employee) and further assume a 15% EBITDA [earnings pre-interest, tax, depreciation, amortization] margin. That places EBITDA at $7.5 million on $50 million of revenue. 

"Just using the Procurian transaction as a proxy, it sold for roughly 20x EBITDA -- a whopper [high multiple] -- so extrapolating [to Fiberlink as a smaller firm] would place an enterprise value of $150 million...  Using the Procurian multiple of revenue at 2.71, would place Fiberlink at $135 million or so.... 

"So my professional guesstimate was a deal at $130-$160 million. The Company had its fair share of issues but hung in and reinvested itself a few times." Sheward, he added, is "a very high order guy."