Why Google really spent $625 million on a company generating $92 million in revenue
.jp2)
That will be a relief to Apigee employees, whose morale was pretty low when the company went public in 2015.
And it will set in motion a plan by Google's new cloud boss Diane Greene to bolster its business and step up the fight with cloud superpower Amazon.
Although Google's largest acquisition of the year was widely viewed a means for the company to get its hands on specialized app developer technology, Greene appears to have seen something else in Apigee, a bruised enterprise cloud company with a turbulent past.
Hanging by a thread
Apigee's troubles go back to its 2015 IPO. Usually employees are thrilled when their startup graduates to the public markets because it means that they will soon be able to sell the shares they earned (often in lieu of higher pay).
But in this case, just before the IPO, Apigee told its employees that it was doing a massive 1-for-7.6 reverse stock split. Every 7.6 shares became a single share. That dashed many employees hopes of making a ton of money on the IPO.
"It was very demoralizing, the day before the IPO, they reverse split the stock by 8x. That was a jerk move to be very honest, but at the same time, the company wouldn't have IPO'd if they didn't do that," this person said.
None of the investors sold shares in the IPO either. They were under similar lock-up constraints as employees. That's not uncommon, especially with a soft and sketchy IPO market. IPO bankers don't want to flood the market with more shares when investors are lukewarm.
And then Apigee's IPO was not a stunning success. It was labeled an "IPO down-round," a company that went public at a lower valuation than its private investors had given it. It priced at $17 a share, valuing the company at $494.5 million. It's VCs had valued it at $600 million when it last raised cash in the summer of 2014.
On the first day of trading, the shares ended the day below its IPO price. And things tanked from there. By the summer of 2016, the stock was below $6.50 a share. When the lockup expired in October, 2015, shares were in the $10 range.
"Apigee has always been hanging on by a thread," this person told us. "Everybody was locked up and the market was very volatile. Existing VCs who had been in there for a long time, didn't really get a chance to really let their shares go. So Apigee had been looking for a buyer, basically since the day of the IPO."
And that means that when the shares crashed even further last winter, under $6 a share, prospective buyers like Microsoft or Amazon could have swept up Apigee for a practical pittance, a fraction of its IPO valuation.
But they didn't.
Enter a frustrated Google
Meanwhile, Google hired Diane Greene late last year to help it become cloud computing giant. Although Google had poached Amit Singh from Oracle a few years earlier, and he had been successfully nabbing big companies for Google Apps (renamed Google for Work under Singh and recently renamed G-Suite under Greene), Google really wasn't set up to be an enterprise cloud company.
While Greene says she is pleased with the progress, it's an open secret within the tech industry that Google is having a hard time landing big contracts with big customers the way Amazon and Microsoft are doing.
Some say that Google isn't even being invited to bid on those contracts.
On top of that, there are signs that Google's biggest marquee customer to date, Snap (parent of Snapchat) may soon be leaving Google to build its own data center, as it readies for an IPO. Snap has been hiring data center experts. And Snapchat is no longer featured prominently on Google's cloud customer pages.
And that's where Apigee can fits in.
Stepping stone
Google agreed to pay $625 million cash, $17.40 a share, a 6.5% premium over Apigee's previous closing price. This was Google's largest disclosed acquisition in 2016.
That was not an excessively high price. In October, Apigee announced annual revenue of $92,027 and a net loss of $41,512, with revenue growing by over 30% and losses narrowing over the previous year. That's a bit over 6x revenue, not untypical.
Still, it was a lot more than it would have paid just a few months earlier. It basically paid Apigee's final valuation before it went public, giving investors a face-saving, profitable exit.
Apigee offers a service for creating and hosting application programming interfaces (APIs). APIs allow computer program to work together, for instance, when a mobile app adds an appointment to your calendar, it's using the calender's API.
While Google can use Apigee's tech, the technology wasn't the real focus, the person with knowledge of the matter told us.
Of all the features Google needs to add to its cloud to catch up to Amazon and Microsoft, API hosting isn't top of the heap, this person says, although Amazon does offer its own. (But Amazon is miles ahead of every other cloud in terms of all the features it offers.)
Apigee has an experienced enterprise salesforce who have landed a long list of enterprise customers such as Allstate, AT&T, Burberry, First Data, Kaiser Permanente, Walgreens etc. All told, Apigee has more than 335 customers, it says.
More importantly, Apigee is a big AWS customer. Apigee's cloud service is built on Amazon's Web Service and a number of its customers also host their API apps on AWS as well.
Once Google moves Apigee to Google's cloud, it has a compelling inside sales track to convince 335 more enterprise customers to do the same.
And once these customers try Google's cloud for their API's, Google intends to be invited to bid for their other cloud needs.
If it works as planned, Google just might take its pocketbook out and buys some more cloud companies next year.
As Google's CEO Pichai Sundar said on CNBC last week: "And as we head into 2017, I expect cloud to be one of our largest areas of investment and headcount growth."
Apigee declined comment and Google did not respond to request for comment.