Author: Brenon Daly

Making sense of the M&A market

Brenon Daly

Contact: Brenon Daly

It’s been tough to read the markets in 2012. On Wall Street, although all of the major US equity market indexes are still in the green for the year, uncertainty has been ticking steadily upward, with the CBOE VIX recently touching a high for the year.

Those crosscurrents are also being seen in the M&A market: In the recent M&A Leaders’ Survey from 451 Research and Morrison & Foerster, more than half of the respondents said they are busier with activity such as networking, meetings and negotiations around deals so far this year than in either of the two previous years. (That was twice as high as the percentage that said general activity has tailed off.) Yet in terms of actual M&A spending, the total for January-May 2012 is lower than the same period in both 2011 and 2010.

To help decipher the market and – more importantly – get a sense of where it’s heading for the rest of 2012, please join Brenon Daly, 451 Research’s head of M&A, and Robert Townsend, co-chair of Morrison & Foerster’s Global M&A Practice, for an exclusive webinar on Thursday, May 31 at 1:00pm EST/10:00am PST. Register now for this free webinar.

Bazaarvoice buys a down-market voice with PowerReviews

Brenon Daly

Contact: Brenon Daly

Having just minted its public market shares three months ago, Bazaarvoice put them to use in a big way on Thursday. The company, which provides an online customer review platform, announced plans to acquire smaller rival PowerReviews in a deal valued at $152m – $121m of the consideration coming in stock, with the remaining $31m in cash. Terms give PowerReviews control of roughly 10% of Bazaarvoice’s total equity.

The transaction represents a significant bet on being able to move down-market, expanding Bazaarvoice’s voice-of-customer platform to SMBs. To get a sense of the discrepancy in size, consider this: PowerReviews has more customers (1,100) than Bazaarvoice (737), but only slightly more than one-tenth the revenue.

As with any platform, the value increases as the number of users increases. So the play for scale is a relatively sound motivation for Bazaarvoice’s first-ever acquisition. But we would have to add that the scale isn’t necessarily coming cheap. Bazaarvoice is valuing each dollar that PowerReviews generated last year at about $13, while the public market values each dollar that Bazaarvoice generated at roughly $9. Obviously there are differences in the size of the businesses – not to mention the takeout premium – but it’s worth noting the valuation gap nonetheless.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Does the next social media marketing deal involve Involver?

Brenon Daly

Contact: Brenon Daly

In acquiring Vitrue, Oracle joined a crowded field of big-name vendors that are looking to stay relevant as social networking sites increasingly become marketing channels. Spurred by this trend, Adobe shelled out $400m late last year for Efficient Frontier, while IBM picked up Tealeaf Technology earlier this month. The total spending for just these three deals is likely in the neighborhood of $1bn.

And the total may be growing. A market source has indicated that Involver may be the next social marketing platform that gets acquired. Word is that Microsoft was close to buying Involver but it was unclear if those talks were still live. To date, Microsoft has made mostly small steps into social networking, such as taking a tiny 1.6% stake in Facebook in 2007 and very quietly launching its own social network – ‘so.cl,’ pronounced ‘social’ – just over the weekend. Could the software giant be looking at a bigger move into the hot sector, with a marketing management platform as its play?

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

SAP’s platinum payouts

Brenon Daly

-Contact: Brenon Daly

Even though SAP has historically been a reluctant buyer, it hasn’t hesitated to throw around big numbers as it has picked up its M&A pace over the past half-decade. The German giant announced its latest top-dollar acquisition on Tuesday, paying roughly $4.5bn for Ariba (on an equity value basis). The supplier relationship management vendor hasn’t traded that high in more than a decade, as the first Internet bubble was deflating.

The purchase of Ariba continues SAP’s practice of paying high prices to clear deals. For instance, its offer for SuccessFactors last December matched the highest level that company’s shares had ever hit, and likewise, when it erased Sybase in 2010, it did so at a high-water mark for that stock. (Incidentally, the collective bill for those three transactions, which have been done in just two years, is more than $14bn.)

In terms of valuation, Ariba basically splits the difference between SAP’s two recent big software deals. Based on SAP’s valuation of Ariba at $4.3bn, the German giant is paying 8.6 times the roughly $500m that Ariba generated over the trailing 12 months (TTM). In comparison, it valued SuccessFactors at 11.3x TTM revenue and Sybase at 4.8x TTM revenue. (The relative valuation of each of those vendors primarily reflects their growth rates: Sybase was growing at a single-digit percentage, while Ariba is clipping along at nearly 40% and SuccessFactors was topping 50%.)

Select SAP transactions

Date announced Target Deal value Enterprise value/TTM sales multiple Bid
May 22, 2012 Ariba $4.5bn 8.6x $45 per share, highest price in 11 years
December 3, 2011 SuccessFactors $3.6bn 11.7x $40 per share, matching highest-ever price
May 12, 2010 Sybase $6.1bn 4.8x $65 per share, highest-ever price

Source: The 451 M&A KnowledgeBase

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase

Google finally cleared on its ‘defensive’ deal

Brenon Daly

Contact: Brenon Daly

Like any weapon, intellectual property (IP) can be wielded both for offense and defense. That’s worth remembering now that Google has basically been cleared to (finally) close its $12.5bn acquisition of Motorola Mobility, which it announced last August. The purchase adds some 17,000 Motorola Mobility patents to an ever-growing portfolio at Google, which has been a busy buyer of IP from IBM over the past year, as well.

In order to win regulatory approval in various jurisdictions around the globe, the search giant went out of its way to assure government bodies – as well as mobile handset manufacturers located around the world – that its Android operating system would remain freely available to all. More than a few of the 50-odd vendors that put out Android-based mobile devices expressed fear that Motorola phones and tablets might get ‘favorite child’ status from Google as the OS provider got into the hardware business in a big way.

But Google has eased those concerns (for now, at least) and seems to be focusing on shoring up the defense of Android so that other OEMs can use it without worrying about legal fallout. There’s a fair bit of irony in that, as Google itself is currently a defendant in a patent-related lawsuit that came about because a tech giant announced a multibillion-dollar deal in part driven by IP. Oracle purchased Sun Microsystems in 2009 – at the time referring to Java as the ‘most important’ software Oracle had ever acquired – and then brought a case alleging that Google infringed on Java copyrights and patents in mid-2010.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Facebook’s $16bn IPO: raised above the Valley

Brenon Daly

Contact: Brenon Daly

As IPOs go, Facebook is far more Silicon Valley than Wall Street. That was clear from the social networking giant’s roadshow this month, where 20-something CEO Mark Zuckerberg could hardly be bothered to meet with the institutional investors who do most of the buying of new offerings. (When Zuck did attend the meet and greets with the pinstripes, he wore a hoodie.) And if there was any lingering doubt about it, consider the fact that Zuck stayed at home at the company’s headquarters in Menlo Park, California rather than travel to New York City to ring the opening bell on Nasdaq.

And yet, Facebook is hardly representative of a Valley company – much less a Valley IPO. First, there’s the not-so-small matter of its $100bn market capitalization. But even beyond the valuation, the $16bn that Facebook just raised in its offering is probably more than all the tech companies that go public in the next three years or so will raise, collectively.

Our rough math: Facebook took in $16bn in today’s debut (of that amount, nearly $7bn will go to the company, with the remaining $9bn or so going to company executives and investors). In comparison, the typical tech IPO brings in, say, $100m or maybe $150m. In our surveys, investment bankers and corporate development executives have been consistently forecasting about 25 tech IPOs in each of the recent years. So assuming that rate holds – or even increases slightly – we’re still looking at roughly four years of IPOs to get to the more than 100 offerings to raise the same amount as Facebook.

Even a blockbuster IPO like Splunk had just a month ago raised just dimes compared with Facebook. Underwriters ended up selling 13.5 million shares in the enterprise data search firm at $17 each, which was roughly twice the price of the original range. That meant Splunk raised $321m in its IPO – or only about one-fiftieth the amount Facebook just raised.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

TriNet expands with ExpenseCloud

Brenon Daly

Contact: Brenon Daly

Throughout its history, TriNet Group has been a slow but steady consolidator. Perhaps the best-known play by the outsourced HR provider came three years ago, when it gobbled up publicly traded rival Gevity HR for $99m. In its most recent deal, however, the private equity-backed buyer has shifted gears a bit.

Rather than simply add more accounts through an acquisition, TriNet has added a nifty offering to its portfolio. The company recently picked up three-year-old startup ExpenseCloud, which helps automate the process around creating and reimbursing employee expenses. TriNet says the expense management offering will be available on its platform later this year.

Although, candidly, employee expense management sounds like a ho-hum market, the big player in this space – publicly traded Concur Technologies – has shown it can be a wildly valued one. The company’s shares currently change hands at their highest-ever level, putting its market valuation at a whopping $3.4bn. Concur recently projected that sales for its current fiscal year, which ends in September, would be in the neighborhood of $440m, meaning investors are valuing the company at 7.6 times this year’s projected sales.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Some unlikely M&A agitation against BMC

Brenon Daly

Contact: Brenon Daly

Having already agitated for the sale of at least five tech businesses over the past few years, Elliott Associates has set its sights on a significantly bigger target: BMC. The hedge fund said on Monday that it has acquired 5% of the systems management giant and will push for a sale of the company.

For its part, BMC retained Morgan Stanley to advise it on its defense against the unwanted approach and, more importantly, adopted a poison pill that makes any unsolicited deal highly unlikely to succeed. Nonetheless, the idea that BMC could get sold goosed the company’s shares, which added 9% in mid-Monday trading.

From our view, however, it’s highly unlikely that 32-year-old BMC, which has been public since August 1988, will get snapped up. The first – and most obvious – hurdle is the poison pill, or ‘shareholder rights plan’ in the company’s description. But even beyond that, there aren’t very many companies or (probably more relevantly) buyout shops that could write the $10bn or so check that it would take to clear BMC.

For a strategic buyer, we’ve always thought Cisco Systems would be the logical home for BMC. The two companies have partnered around the datacenter, with Cisco providing the gear and BMC serving up the management layer. However, the returns on that partnership haven’t been overwhelming, and Cisco has taken to acquiring small management vendors on its own over the past year and a half. (To bolster its management portfolio, Cisco has reached for startups such as LineSider Technologies, Pari Networks and newScale.) But Cisco, which reported weak financial results last week while also forecasting a ‘cautious’ IT spending environment, is hardly in a place to do its largest-ever acquisition.

That would leave private equity firms as the most likely acquirer of BMC. Those shops have been the buyers of the other companies that Elliott has put in play, including Epicor Software, Blue Coat Systems, Novell and others. However, the collective value of all those Elliott-inspired deals would likely be only half the size of a BMC purchase, which would be a whopper for any single firm. (That goes double because of the reserved credit markets right now.)

The last point underscores one of the other large problems with a BMC takeout: even though its shares have lost nearly 20% of their value over the past year, the company isn’t particularly cheap. It garners a $7.2bn market capitalization, so throwing a 35% premium on that takes the (hypothetical) acquisition price to about $10bn. That works out to about 4.6 times 2011 revenue (10x maintenance revenue) and more than 12x the $800m in cash flow from operations that BMC generated last year. Even with the $1.4bn cash ‘rebate’ from BMC’s treasury, any potential buyer is still looking at paying a double-digit cash-flow multiple for a single-digit grower.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

So far, so good for Astaro inside Sophos

Brenon Daly

Contact: Brenon Daly

When Sophos reached for Astaro exactly a year ago, the two companies lined up very well on paper: Both Europe-based security vendors go to market entirely through the channel, selling primarily to SMBs. Yet they both addressed different aspects of security, with Sophos shoring up endpoints and Astaro focusing on the network.

While the two approaches appear complementary, the infosec landscape is fraught with endpoint/network pairings that haven’t gone to plan. (That goes for M&A both on a large scale, such as IBM-Internet Security Systems, and a small scale, such as Sourcefire-ClamAV.) So what’s the verdict on Sophos’ purchase of the German unified threat management (UTM) vendor? So far, so good.

As a company, Astaro has been fully integrated into Sophos over the past year while also maintaining its historic growth rate of about 30%. (We understand that the UTM business is currently running at about $70m.) Astaro’s growth would basically match the rate of UTM kingpin Fortinet, although that company will do more than a half-billion dollars of sales in 2012.

Sophos is currently in beta with a product that combines Astaro’s UTM technology and Sophos’ core endpoint security offering. The integrated product is due this summer. That offering will hit the market just as Dell works through the integration of its purchase of UTM provider SonicWALL. That deal, which represents Dell’s largest security acquisition, closed Wednesday.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.

Facebook sucks the air out of the IPO market

Brenon Daly

Contact: Brenon Daly

All the breathless coverage of Facebook’s kickoff of its IPO roadshow bordered on the ridiculous, even for Wall Street. The reports flew as Facebook made its way along the well-trod path to becoming a public company, a journey that thousands of other companies have already made. But each step (even the most inconsequential) apparently merited coverage: Which door did CEO Mark Zuckerberg use to get into the meeting with potential investors? Did he wear his trademark hoodie as he met the button-down types?

Given this, it’s pretty clear that Facebook hasn’t left any room on the IPO stage for any other would-be debutant. That was underscored by the fact that – according to our understanding – another tech company was originally thinking about making the rounds to buyside institutions this week. Word was that Eloqua was loosely targeting mid-May for its roadshow, but understandably stepped back as the Facebook carnival rolled into town.

Whenever Eloqua does get a chance to tell its story to Wall Street, however, we think it’ll get a pretty good hearing from investors. The on-demand marketing automation vendor is growing about 40% annually (the rate in Q1 actually came in above that level, outstripping full-year 2011) and is likely to finish this year at roughly $100m in sales. It’s right on the cusp of profitability, too. Beyond that, Eloqua has a highly valued rival that recently made its debut: ExactTarget, which currently garners a market value of $1.6bn.

So it’s probably a prudent move by Eloqua and its underwriters not to try to compete with all the noise and flash from the once-in-a-generation offering from Facebook. After all, Wall Street isn’t known for its patience, much less a long attention span. Once Facebook does get listed, many investors will be off looking for the next shiny object.

For more real-time information on tech M&A, follow us on Twitter @MAKnowledgebase.