Category: application software

Epiq’s expensive e-discovery deal

Brenon Daly

Contact: Brenon Daly

Announcing the largest e-discovery deal in some three-and-a-half years, Epiq Systems said earlier this week that it will borrow $100m to acquire Encore Discovery Solutions, a service provider for law firms. (My colleague Nick Patience has the full details on the acquisition.) The rationale is fairly straightforward: Epiq wanted to shore up its presence in the western US, so it reached for Phoenix-based Encore. That sort of geographic consolidation happens all the time – but it rarely happens at the kind of valuation that Epiq is paying in its services play.

Encore had generated some $40m in revenue, according to Epiq, meaning it’s trading at 2.5 times sales. That’s a fairly high multiple for a services shop, which typically have lumpy – and concentrated – revenue. (That goes double for a market like e-discovery that is largely driven by unpredictable events like lawsuits.) Unlike Epiq, Encore didn’t have its own e-discovery software, instead licensing it from other vendors. Clearly, however, the lack of IP didn’t hurt Encore’s price.

More representative of the e-discovery market is probably Unify Corp’s purchase last summer of Daegis. Unify paid $37.5m, or 1.6x sales, for Daegis, which generates about half of its sales from tools and the other half from associated services. But from Epiq’s view, the purchase of Encore sets up a relatively low threshold for a return (it is borrowing at around 3.5%) and adds bulk to a business that has a fair amount of momentum. Epiq said recently that its e-discovery business has posted five straight quarters of growth, finishing 2010 with sales at the unit up 45% to a record $81m.

Multiples match on Lawson and Epicor

Brenon Daly

Contact: Brenon Daly

If nothing else, we now know the clearing price for ‘vintage’ ERP companies. (Or more accurately said, we know the proposed clearing price.) That’s at least one conclusion we can draw from the highly unusual situation where there are two deals going on simultaneously for two of the industry’s larger players, Epicor Software and Lawson Software. The two planned acquisitions – representing, collectively, $2.8bn of spending – line up almost exactly in several key metrics.

The numbers: the equity value of Apax’s offer for Epicor is $976m, with an enterprise value (EV) of $1.1bn. On an EV basis, that works out to about 2.5 times trailing sales and roughly 5x maintenance revenue. That mirrors very closely the takeout valuation that Lawson received in an unsolicited bid last month from PE-backed Infor Global Solutions, which it is currently reviewing. Lawson is being valued at 2.4x trailing sales and about 4.5x maintenance revenue. Even on an EV/EBITDA basis, the valuations are not all that dissimilar: Epicor garnering a 20.5x valuation, compared to Lawson’s 15.4x.

Apax goes double or nothing in big software bet

Brenon Daly

Contact: Brenon Daly

Apax Partners is going double or nothing in the latest addition to its software portfolio. The buyout firm plans to spend a total of $2bn to put together a pair of old-line ERP vendors, Epicor Software and Activant Solutions. And it is very much a ‘paired’ deal. In fact, according to terms, Apax closing its Activant purchase is a precondition of its planned take-private of Epicor.

That said, neither Apax’s purchase of Activant from its current private equity (PE) owners nor the buyout of Epicor should present much of a problem to get closed this quarter. But it does underline the necessity of cost ‘synergies’ in a deal (or in this case, two) for a mature company. (We noted that fact in the very similar proposed take-private of Lawson Software.)

If the double-barreled deals go through (as we assume they will), it would mark the end of a two-and-a-half-year effort by Elliott Associates to get Epicor sold. The hedge fund accumulated a 10% stake in Epicor in 2008 and then floated an offer of $9.50 for each remaining share of Epicor. It later trimmed that to $7.50 per share as the software company’s outlook deteriorated. (Epicor’s total revenue dropped 16% in 2009, and sales in 2011, while expected to increase, are still forecasted to come in below the level of 2008.) Apax is set to pay $12.50 per share for Epicor – an offer that Elliot has signed off on.

Lawson: silence, suitors and synergy

Brenon Daly

Contact: Brenon Daly

If Lawson Software had held its scheduled call later this afternoon to discuss its third-quarter earnings report, we suspect that attendance would have been a bit higher than usual. Instead, the old-line ERP vendor scrapped it, citing the two-week-old unsolicited offer from industry consolidator Infor Global Solutions. (Those sorts of things tend to happen to companies that count Carl Icahn as their largest shareholder.) Lawson, advised by Barclays Capital, has said only that it is reviewing the proposal.

While Lawson’s silence is entirely understandable from a company that’s been put in play, it did nothing to dampen investor speculation that another suitor would show up. The stock, which has traded above the $11.25-per-share bid since it was launched, inched a little higher to $12.14 in Thursday afternoon activity. Lawson shares haven’t seen these levels since March 2002.

Perhaps inevitably, Oracle’s name has surfaced as a potential buyer. While Lawson isn’t particularly cheap, it’s also not particularly expensive. Its current market cap of $2bn works out to about 2.6 times projected sales of $770m for the current fiscal year and roughly 15x EBITDA. Another way to look at it: the market values Lawson at about 5x its maintenance revenue. (For comparison, Epicor Software trades at 1.7x sales and roughly 3x maintenance revenue.)

For buyout shops, Lawson’s valuation is already at the upper end of the range that could still deliver a decent financial return, we would think. Of course, Infor is owned by a private equity firm, Golden Gate Capital. But in terms of bidding, Infor is more of a strategic buyer than a financial one when it comes to ‘synergies.’ After all, privately held Infor already has the corporate infrastructure in place to run a $2bn business, roughly three times the size of Lawson.

The ever-increasing appetite of salesforce.com

Brenon Daly

Contact: Brenon Daly

Salesforce.com just keeps taking bigger bites. The company announced Wednesday that it will hand over $326m ($276m in cash and $50m in stock) for social-media monitoring company Radian6. Not only is it salesforce.com’s highest-priced acquisition, it also likely brings more revenue than any other deal the company has done, at least based on our estimates for previous transactions and the company’s guidance for Radian6. Salesforce.com indicated that the Canadian startup would contribute about $50m in sales during the current fiscal year, which is about two months old.

The purchase, which is expected to close by July, also puts an exclamation point on the changes in dealmaking at salesforce.com. The 11-year-old SaaS pioneer stayed out of the M&A market for the first half of its corporate life. And even when it started doing deals in 2006, the first half-dozen or so acquisitions were all small, valued in the low tens of millions of dollars. Salesforce.com only started announcing major purchases last year, with its $142m reach for Jigsaw Data followed by its $249m takeout of Heroku.

As sizeable as the deal is inside saleforce.com, it also looms pretty large inside the burgeoning social CRM market. Consider this: at roughly one-third of a billion dollars, salesforce.com’s pickup of Radian6 is more than 50 times larger than the acquisition of another social CRM startup just last week. Privately held Meltwater Group paid just $6m for JitterJam to bolster its social CRM offering, which the company hopes to be a $100m business within three years.

Oracle has gone silent

Brenon Daly

Contact: Brenon Daly

While investors will be tuning in for Oracle’s Q3 report after the market’s close today, we can’t help noting that there hasn’t been much news from the consolidator recently. It has yet to announce a deal in 2011, an uncharacteristic dry spell for a company that averaged an acquisition every six weeks in each of the past two years. In Q1 2010, Oracle announced three transactions and even in the recession-wracked Q1 2009, the software giant announced a pair of deals – but nothing so far this year.

In fact, Oracle has been out of the market since it spent $1bn on Art Technology Group in early November, nearly five months ago. And it’s not just Oracle that’s currently on the M&A sidelines. Fellow big-name buyers such as Microsoft, Symantec, EMC and Nokia have all yet to open their accounts in 2011. Even serial shopper IBM was also on that list until earlier this week, when it announced its purchase of Tririga

Cornerstone: the newest — and priciest — HCM vendor

Brenon Daly

Contact: Brenon Daly

So much for the ‘debut discount.’ Cornerstone OnDemand hit the market Thursday at an eye-popping valuation, going against the recent trend toward conservative pricing for new issues. The human capital management (HCM) vendor priced its shares at $13 each, above the indicated range of $9-11 each. (Goldman Sachs & Co and Barclays Capital are leading the IPO.) By early afternoon Thursday, the stock was changing hands at about $19.

The offering gives Cornerstone one of the richest valuations of any recent IPO. At $19 per share, the company’s market cap is roughly $900m. That’s 15 times trailing bookings (not sales) and likely in the neighborhood of 9x projected bookings. (Our math: Cornerstone reported 2010 bookings of $61m, up 74% from the previous year. Assuming that the growth rate comes down a smidge to 60-65% for 2011, that would put Cornerstone’s full-year bookings at $100m, give or take.)

Cornerstone’s valuation vastly outstrips what the market says rival Taleo is worth, and even puts it ahead of SuccessFactors, which had been the HCM industry’s ‘favorite child.’ (That’s been the view on Wall Street, anyway.) SuccessFactors, which went public in late 2007, currently garners a $2.7bn market cap, roughly 10.5x trailing bookings and about 8x projected 2011 bookings. We should note that both SuccessFactors and Taleo are about four times the size of their newest rival on the public market. But for now, both of them are looking up at Cornerstone.

Lawson ‘Infor-med’ of unsolicited offer

Brenon Daly

Contact: Brenon Daly

In the middle of last year, we penciled out a takeout scenario for Lawson Software that gave the old-line maker of ERP software an equity value of about $1.7bn. Turns out we were off by just $100m. On Friday, the acquisitive, private equity-backed rollup machine Infor Global Solutions floated an unsolicited $1.8bn offer for Lawson. The target said only that it has retained Barclays Capital to advise it on the process.

We thought Lawson might find itself in play because activist shareholder Carl Icahn had taken about 10% of the company’s stock and started talking about ‘maximizing shareholder value.’ (Some of that has already showed up in Lawson’s recent stock chart. When Icahn revealed his stake last summer, shares were changing hands at about $8 each, compared to the $11.25 offer from Infor. We would note that the stock traded through the bid on Monday, hitting a high of $12.87 before settling down at about $12.25 in afternoon activity.)

In many ways, Lawson presents something of an easy target for Icahn and the would-be buyout group. License revenue has slipped in both of the company’s quarters so far this fiscal year. Meanwhile, it has been deemphasizing its consulting services, which is still one-third of total sales. So that business is dropping, too. The only growth has been seen in Lawson’s maintenance revenue. That business runs at an 80% gross margin, one of the main reasons Lawson generates so much cash.

Over the past four quarters, Lawson has thrown off some $116m of EBITDA on $745m of sales, a healthy 16% margin. If we put that trailing performance against Infor’s bid, Lawson is garnering a not-too-shabby multiple: 2.4 times sales and 15x EBITDA. Infor’s bid represents the highest price for Lawson stock in nine years, and would be CEO Charles Philips’ first deal since coming over from Oracle last October.

Big Data means Big Dollars for VCs

Brenon Daly

Contact: Brenon Daly

Just since last summer, the data-warehousing industry has seen a wave of consolidation sweep most of the sizable startups into the portfolios of larger vendors. While dramatically reshaping the industry, the concentrated dealmaking has also generated outsized returns for venture firms that have put money into some of the startups that are tackling the problems of ‘big data.’ By our calculation, the four recent data-warehousing exits – on average – have been 10-baggers for their backers.

The eight-month M&A spree started last July, when EMC reached for Greenplum. Two months later it was IBM’s turn to take out Netezza, the sole data-warehousing startup that had actually made it to the public market in recent years. In mid-February, Hewlett-Packard reversed its long-held strategy to stay with internal data-warehousing development and gobbled up Vertica Systems. And then just last week, the granddaddy of the industry, Teradata, snagged Aster Data Systems.

This run of deals has been a welcome development for venture capitalists, who have been starved recently for moneymaking exits. Consider this: the quartet of data-warehousing startups that have been snapped up have returned some $2.5bn to their investors, an astonishing 10 times the $245m that they collectively raised. (The total funding for the startups comes from The 451 M&A KnowledgeBase, which recently added venture information to many of the deal records.) Taking a dime and turning it into a dollar is a pretty nifty trick – and it’s one that most VCs haven’t been able to pull off across any sector of enterprise IT in a long, long time.

Select recent data-warehousing deals

Date announced Acquirer Target Price VC raised by target
March 3, 2011 Teradata Aster Data Systems $295m $57m
February 14, 2011 HP Vertica Systems $275m* (excluding earnout) $25m
September 20, 2010 IBM Netezza $1.8bn $73m
July 6, 2010 EMC Greenplum $400m* $90m

Source: The 451 M&A KnowledgeBase *451 Group estimate

A public signoff from McAfee

Brenon Daly

Contact: Brenon Daly

After nearly two decades in some form or another as a public company, McAfee all but certainly reported its quarterly results to Wall Street for the final time on Tuesday morning. The company’s sale to Intel is expected to close in the coming weeks, a deal that will bring the largest stand-alone security vendor under the ownership of the largest semiconductor maker. For 2010, McAfee reported sales of $2.1bn and cash from operations of $595m. It didn’t hold a conference call because of the imminent close of its sale to Intel. (We suspect that the company won’t miss that quarterly ritual.)

The unexpected acquisition, which received our Golden Tombstone award as the most significant transaction of last year, was supposed to have already closed. When the $7.7bn deal was announced in mid-August, the companies indicated that they expected it to close before the end of 2010. It got overwhelming clearance from McAfee’s shareholders in early November, with 1,500 ‘yes’ votes for every one ‘no’ vote. US regulators signed off on the transaction in December.

But it took another month for European regulatory authorities to give their blessing – and they did so only conditionally. Among other things, Intel had to assure the European Commission that it won’t prevent other security providers from working on its chips and that the vendors will be able to use ‘functionalities’ of Intel’s products in the same way that McAfee is able to. While Intel may not be thrilled about making concessions to the EC, at least the six-month-old deal isn’t getting bogged down there. Remember that it took Oracle some nine months to close its purchase of Sun Microsystems, largely because of European regulatory concerns.