Happy Early Memorial Day.

Once an ESP or marketing automation company declares itself for sale, there seems to be a mass exodus by investors, which sends up a red flag, (well in this case, a red & white striped flag). This past week there were rumblings about the potential suitors for Marketo. While it is rumored that German company SAP is the front-runner, there are many other potential suitors circling the marketing automation software company.

I will write another post in relative short order on other marketing automation companies that might be good acquisitions targets for tech giants looking to get into cloud-based automation. For this blog post, I will focus on Marketo.

We’re no longer living in an era where cloud based SaaS valuations are fetching 7 to 9 times multiples. SaaS valuations have dropped 57% this year, and we’re not even in June yet. While Marketo is a mature ESP, at an approximate run rate of 250M, there is some uncertainty in determining its real value to tech titans such as SAP, Oracle, Google, HPE, Microsoft, or Adobe.

Investors Shuffling

Potrero Capital Research purchased 233K additional shares in Marketo during the most recent quarter. The investment management firm now holds a total of almost 400K shares of Marketo. Its share of the company is valued at $10.9 million. Marketo makes up approximately 10.07% of Potrero Capital Research’s portfolio.

Potrero Research might know something we don’t, but let’s take a look at this list of Investors who have opted out or sold out of their positions in the MRQ:

• Trexquant Investment LP (Sold out Position)
• Penserra Capital Management (Reduced Stake)
• Norgus Bank (Sold Out Position)
• Nueberger Berman Group (Sold Out Position)
• Pier Capital (Reduced Stake)

With SaaS valuations on the decline and investors in an ambiguous position regarding Marketo, the company will most certainly not fetch a valuation as high as those of marketing automation companies put up for sale in recent years. It has been a relatively slow M&A period this year in our space. If Marketo sells, the terms will be a beacon for other deals to follow.

If I were an ESP or marketing automation company, I would focus on widening the account base right now rather than being acquired. In the last quarter, there were a number of down rounds, which are often a precursor to lower valuations.

Analysts and Volumes

Marketo was upgraded by Bank of America/Merrill to “Neutral” on May 5, 2016. Craig Hallum endorsed the company as a “Buy” on Apr 4, 2016.

When a marketing automation company begins to scale its core business by bringing on new accounts after a rigorous compliance check, you know their messaging volumes are going to grow. Having insight into these messaging volumes and the widening of the account base are benchmarks of a healthy marketing automation company. Some companies have built messaging volumes as high as 1B messages per day, while others are at a remarkable at 1B per month, or 1B per year. While the winning recipe includes message volume, it’s safe to assume, that the type of customer and size of customer are critical ingredients to a balanced account base. In our network, the average ESP or Marketing Automation company sends about 800M messages per month.

Of the 253 ESP/marketing automation companies in our network, 73.91% still remain private. So there are still a number of excellent choices for big investors who want to add a cloud-based ESP to their portfolio.

While SAP has purchased a few cloud-based companies in recent history, none are focused on cloud-based marketing-automation, which is why it’s considered a front-runner for the Marketo deal. A few years back, Oracle paid market price for both Eloqua and Responsys. At this time, I don’t think they will be bidding on Marketo, although a pitch could be forthcoming. Adobe spent a pretty penny for Neolane a couple of years ago and has actually built a formidable marketing cloud, so it has already filled the market segment that Marketo will bring to its buyer. Adobe may have an appetite for more however. NetSuite is another company that recently purchased a great ESP, Bronto Software. I don’t think they are looking to expand with a Marketo purchase. By the way, $200M for Bronto was a steal.

Google might be thinking about a series of deals aimed at buying cloud software companies to boost its reach with mid-market business customers and enhance its overall cloud and infrastructure business. Marketo fits the bill, reaching both large and mid-market customers, but I don’t think Marketo is in Google’s sweet spot.

In my opinion, HPE will be the next tech giant itching to get into the game and buy a cloud-based marketing automation company. All of the companies I have mentioned have healthy balance sheets and can afford to buy Marketo in an all cash deal.

With valuations softening among cloud-based marketing automation companies across the the board, Marketo will most likely to fetch a 3 times revenue multiple. That will be close to a 800M.

This post was inspired by the hundreds of ESPs in our network and Tomasz Tunguz at Redpoint Ventures.