The Troposphere

Feb 26 2010   11:20PM GMT

CA’s $100 million dollar cloud wager

CarlBrooks Carl Brooks Profile: CarlBrooks

On Wednesday $4 billion software provider CA bought 20-man 3Tera; analysts reported that CA had paid around 30 times the revenue valuation of the cloud software platform maker. Independent sources now confirm the price was a cool $100 million, terms (cash or stock) as yet undisclosed.

Gut-check this with simple math — 3Tera reported around 80 paying customers, largely small and mid-sized managed service providers (MSPs). They’d have to be paying around $40,000 a year on average, by no measure a startling price for an enterprise software installation, to bring in $3.2 million a year, which, multiplied by 30, brings us right around the reported $100 million.

That kind of valuation may make stock analysts cringe, since a) any firm that looks like it’s wasting its capital cannot be considered to have a sound growth strategy and b) Pets.com. But it’s a great get from the technology side.

Was $100 million too much to pay for 3Tera?

The short answer is no — it was a unique technology with a proven (albeit modestly) track record and it fit a piece of the puzzle CA wanted for cloud computing — point-and-click, one-size-fits-all infrastructure. It’s not like there were dozens of 3Tera’s floating around to spark a bidding war, and there’s not yet a bubble to artificially inflate the worth of cloud computing technology. CA simply decided it needed this and put cash on the barrel until 3Tera said yes.

However, the figure surely changes the story from “CA snaps up golden opportunity” to “CA just sunk a pile into a future scenario.” CA has $4 billion in revenue and approximately $1 billion in net tangible assets. It just invested a significant portion of that into a software company with 80 customers and a nice looking Web portal product (basically) and are betting that the enterprise appetite for private cloud will exceed predictions.

Conservative estimates for cloud spending over the next few years hover around $40-$50 billion, and 10-15% of the overall IT market.

By far the largest part of that cash will go right down the pipe to Software as a Service, leaving a very poor table indeed for infrastructure plays, especially when HP, IBM, and EMC/Cisco/VMware are sitting down to eat with you.

It’s quite possible that the enterprise appetite for what is now considered private cloud will become a big tent for enterprise IT overall, and make those kinds of figures look undercooked, but any way you slice it, CA has a lot riding on this buy. It’s certainly brightened the days of CEOs of small companies everywhere, I’ll say that much.

“3Tera’s impressive exit is validation of the tremendous opportunity facing all cloud startups,” said ubiquitous cloudketeer Reuven Cohen, who also makes cloud infrastructure platform software.

A new CA

On a brighter note, this is a definitive sign that CA has come around from the old days.

CA’s new acquisitions have been marked by caution, generosity(!) and foresight, and a good attitude towards the technology and the talent that’s coming in. Out of Oblicore, NetQoS, Cassatt and now 3Tera, I’m fairly sure the majority of those firm’s employees still work at CA if they desire to do so. CA spokesman Bob Gordon said that all twenty of 3Tera’s employees would stay on with CA and CEO Barry X Lynn will stay on for a transitional period.

Let’s compare that to, say, 1999, when CA would have systemically lured away or undersold all of 3Tera’s customers, bought up their building lease and cut off the heat, shot the CFO’s dog and then bought the company for $6 and a green apple before firing everyone by Post-It note and carving IP out of code like a irritable Atzec priest. On a Monday.

We’ve come a long way since then, for sure. Congratulations to both companies — to one for the windfall, the other for the bold commitment.

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