Category: application software

A very happy birthday to LogMeIn

Brenon Daly

Contact: Brenon Daly

Exactly a year ago, LogMeIn hit the public market with an offering that has done what IPOs are generally expected to do. The debut priced at the top of its range ($14-16), raised a goodly amount of money ($107m, from 6.7 million shares at $16 each) and has held up solidly in the aftermarket. In its year as a public company, LogMeIn stock is up some 80% from its offer price, and more than 40% from its first-day close – twice the return of the Nasdaq over the same period. It currently sports an outsized market valuation of some $660m.

As we were wishing the on-demand remote connectivity vendor a happy birthday, we couldn’t help but be struck by the fact that if LogMeIn were trying to go public just a year later, the offering would almost certainly look less attractive. We’ve noted that three of the recent tech IPOs (Motricity, Convio and TeleNav) have all priced below their expected ranges. (The discounting was fairly dramatic in the case of Motricity, which ended up raising just half the amount that it originally planned.)

Also, as we discussed in a special report on the IPO market, offering sizes have been coming down. LogMeIn was able to raise more than $100m, despite finishing the previous year at about $50m. (Granted, looking at a subscription-based company in terms of revenue – rather than bookings – isn’t the most accurate financial picture.) In comparison, Tripwire, which recently put in its prospectus, is half again as big ($74m in 2009 revenue) as LogMeIn. But the security management provider is looking to raise just $86m.

A potential quarter-billion dollar M&A hangover for JDA

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Contact: Brenon Daly

The cost of JDA Software’s purchase of i2 Technologies just got a lot steeper. A jury has found that i2 software failed to do what it was supposed to do for department store chain Dillard’s. The case goes back a decade, long before JDA picked up the supply chain vendor. (The $568m acquisition, which we called a buyout-style play, closed in December 2009 after a very rocky process that played out during the depth of the credit crisis.)

As part of its decision, the jury awarded Dillard’s a whopping $246m: $8m of that for direct damages and $238m in punitive damages. JDA says it will appeal the verdict. Regardless of outcome – and how much JDA has to pay – the company has already lost in the court of Wall Street. Investors sliced $215m, or 20%, off JDA’s valuation on June 16. (Shares of the supply chain management vendor are now changing hands at about 10% lower than they were when the deal closed, compared to a 5% gain in the Nasdaq over the same period.)

With JDA on the hook for a quarter-billion dollars (at least potentially) because of legal problems at an acquired company, it joins a dubious list of buyers that have gotten burned. Most notably, SAP picked up software maintenance provider TomorrowNow in early 2005 as a way to siphon off some of the rich maintenance stream that Oracle collects for supporting its application. Oracle sued SAP, alleging that TomorrowNow illegally downloaded information about Oracle’s support program ‘and then used that data to service its own customers.’ SAP has since shuttered the division. It looks likely that the Oracle-SAP case will go to trial later this year.

Looking at Lawson

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Contact: Brenon Daly

What was shaping up as an explosive showdown between Carl Icahn and Genzyme has been defused ahead of today’s board meeting at the biotech company. By adding two nominees selected by Icahn to the expanded board of directors, Genzyme avoided the full-blown proxy fight that had been brewing. With that matter settled, we wonder if Icahn will turn his attention to his newest tech investment – Lawson Software.

The gadfly investor owns stock and options equaling about 15.6 million Lawson shares, or roughly 9.7% of the old-line ERP vendor. As is often the case in his investments, Icahn says he will push for moves that maximize shareholder value, which could include a sale of the company. However, we would note that in his recent role as shareholder activist, Icahn hasn’t succeeded in putting his holdings in play.

Although he helped spur the sale of BEA Systems in early 2008, his more recent agitation hasn’t necessarily resulted in M&A. Among other holdings, Icahn has owned or currently owns stakes in Yahoo, Motorola and Mentor Graphics – all of which still trade on their own. Likewise, we suspect Lawson will remain independent, even if Icahn pushes for a sale.

For starters, the company isn’t cheap. Shares have tacked on 60% over the past year – twice the return of the Nasdaq and three times the gain of Oracle over the same period. That gives Lawson a market capitalization of $1.3bn. (It holds roughly the same amount of cash and debt, so Lawson’s enterprise value is also about $1.3bn.)

If we assume the company will generate about $350m in maintenance revenue in its current fiscal year, Lawson currently trades at 3.7 times its maintenance revenue. A conservative 30% premium on top of Lawson’s current valuation would add $400m to the price, for a total cost of $1.7bn or nearly 5 times maintenance revenue. That valuation isn’t overly rich, but it is probably at the high end of the range that a financial-minded buyer could make work.

IBM analyses Coremetrics, makes a deal

Brenon Daly

Contact: Brenon Daly

We were close on our earlier rumor-mongering on Coremetrics, but tapped the wrong buyer. Four months ago, we heard that the Web analytics firms was in play and had retained Goldman Sachs to represent it. (And, indeed, Goldman did advise Coremetrics in the process.) On June 15, IBM said it was picking up Coremetrics for an undisclosed amount. Originally, we thought salesforce.com made the most sense as the buyer for Coremetrics.

It’s not hard to imagine that IBM’s desire for Coremetrics increased significantly after its two most-recent acquisitions, Sterling Commerce and Cast Iron Systems. For instance, Coremetrics would give much more insight into the activities on the business-to-business network that Big Blue picked up three weeks ago when it paid $1.4bn for Sterling Commerce. Coremetrics has some 2,100 customers.

Even with this deal done, we still think Coremetrics would have been a natural fit for salesforce.com, and would have given a significant boost to the company’s effort to diversify from its legacy sales force automation (SFA) business. Sales of that product still account for two-thirds of overall company revenue.

Salesforce.com recently indicated it was willing to go shopping to increase its non-SFA business, reaching for business directory provider Jigsaw Data. At $142m in cash, the price of Jigsaw was more than salesforce.com spent, collectively, on its previous seven acquisitions. Who knows, maybe salesforce.com will turn to fellow analytics firm Webtrends, which is owned by buyout shop Francisco Partners. Incidentally, one of Francisco’s founding partners, Sandy Robertson, serves on salesforce.com’s board of directors.

Deltek deal shows Atlantic trade winds are blowing

Brenon Daly

Contact: Brenon Daly

As the hackneyed old phrase goes, there is opportunity in crisis. We were musing on that as we watched the euro plummet at the end of last week to a four-year low against the dollar. With countries such as Greece, Portugal and, most recently, Hungary unable or unwilling to run balanced books, much of the continent looks shaky. Reflecting the worries caused by the ballooning debt in many countries, the euro has shed 15% of its value compared to the US greenback.

While it is undoubtedly a tough time for many of our cousin countries across the Atlantic, some US companies might be having a different take on this period of European malaise: it’s a great time to do some opportunistic shopping. For starters, US buyers are getting a nice little discount thanks to the dollar. If, for instance, a US-based company was eyeing an acquisition in Europe that would have run it $150m at the start of the year, the current cost is less than $130m. And don’t forget that a lot of US companies have a lot of wampum sitting over in Europe that can’t be brought home without a heavy tax hit.

There’s also the fact that the recession hasn’t actually ended for many of the European companies, at least not based on their stock prices. Consider the smartly frugal bit of shopping that Deltek Systems did late last week. The project management software vendor had been looking to expand across the Atlantic, and found a handy bargain in picking up Danish ERP provider Maconomy. (Deltek was advised by Arma Partners.)

In its largest acquisition ever, Deltek will pay around $72m in cash for Maconomy. Even though the premium is substantial (Deltek’s offer is more than triple where Maconomy shares traded a year ago, and twice the price of the stock at the beginning of the year), the valuation of the target is actually lower than that of the acquirer. On an enterprise value basis, Deltek itself trades at about 2.1 times trailing sales, while it is paying just 1.5 times trailing sales for Maconomy. (And again, the valuation of the Danish software firm includes a generous premium.) Bargains like that may well get the trade winds blowing again across the Atlantic.

Imagining ‘what if’ on Tripwire

Brenon Daly

Contact: Brenon Daly

As we were skimming through Tripwire’s recently filed IPO paperwork, we couldn’t help but wonder ‘what if….’ Specifically, we were wondering what the company would be like if it had gone for the other exit and taken the rumored offer from BMC more than three years ago. At the time, Tripwire was only about half the size it is now and nowhere near as profitable. But with the benefit of hindsight, it’s almost certain that Tripwire would have been valued at a much richer multiple in a trade sale during a time when M&A dollars were flowing freely (late 2006-07) than by going public in the current bearish environment.

To be clear, that’s not a knock on Tripwire. As we highlight in our report on the proposed offering, the company has a solid growth story to tell Wall Street: six consecutive years of revenue growth, while generating cash in each of those years. Instead, it’s just a reflection of the dramatic change in the valuation environment over the past three years. Consider this: In March 2008, BMC paid roughly 11 times trailing sales and 9x projected sales for BladeLogic, a valuation that wasn’t at all out of whack for the fast-growing datacenter automation vendor. (It was actually lower than what Hewlett-Packard spent on Opsware, a BladeLogic rival.)

While we have no idea what kind of valuation BMC was kicking around for Tripwire at the time, we have to believe it’s above the multiple we have penciled out for the IT security and compliance vendor in its market debut. Because of the bear market, we figure Tripwire will probably come public at about $300m. If that initial valuation holds more or less accurate, it will value Tripwire at basically 4x trailing sales and 3x projected sales – just one-third the valuation that BladeLogic got in its sale.

Who’s calling on Callidus?

Brenon Daly

Contact: Brenon Daly

Annual shareholder meetings are typically uneventful affairs, mixing equal parts of corporate glad-handing and self-congratulatory pabulum. The few bits of business that do get done are generally little more than corporate housekeeping, such as electing board members and signing off on auditing firms. And while that’s probably how the annual meeting for Callidus Software will go next Tuesday, we have picked up on some rumblings of discontent from the shareholder base of the sales performance management (SPM) vendor.

Shares of Callidus have basically been changing hands in the $2.50-3.50 range for the past year and a half. (On Friday afternoon, the stock traded at $3.10.) After going public at $14 in November 2003, the stock spent the next four months at around that level before dropping into the single digits, where it has remained ever since. At current prices, the company sports a market cap of nearly $100m.

With shares having been basically dead money, even as the market rebounded, investors are growing impatient with Callidus’ still-incomplete switch from a license-based software vendor to an on-demand model. Undeniably, the company has made progress in that difficult transition, but it has come up short in both its emerging SaaS business and its old-line business, particularly services.

That inconsistency hasn’t won it many fans on Wall Street, which is reflected in Callidus’ valuation. On a back-of-the-envelope basis, the company is trading at basically a $70m enterprise value, or just 1.4 times its 2010 recurring revenue (roughly $50m total, with $20m maintenance fees and $30m subscription revenue). It seems we aren’t the only ones struck by the rock-bottom valuation of Callidus. Several market sources have indicated recently that at least one would-be suitor has approached Callidus about a deal.

Our understanding is that Callidus has retained a banker and is still in the early stages of an initial market canvass. Obviously, that’s a long way from a completed transaction, which is the outcome many Callidus shareholders are hoping for. It’s also worth remembering that the company itself has a spotty track record in M&A. In late 2008, Callidus was lead bidder for SPM startup Centive, and stood to substantially accelerate its transition to SaaS with the acquisition. Instead, Xactly – a startup that’s run by a number of former Callidus executives – snatched away Centive in early 2009.

What’s new at Novell?

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Even though its shareholders aren’t overwhelmingly concerned with Novell’s financial numbers right now, the company will nonetheless be releasing results for its fiscal second quarter later Thursday afternoon. For what it’s worth, Wall Street expects earnings of about $0.07 per share on sales of $205m, representing year-over-year declines on both the top and bottom lines. (We should add that if Novell does manage to hit expectations, it will snap two straight quarters of earnings whiffs.)

But then Novell hasn’t traded on fundamentals for the past three months, ever since hedge fund Elliott Associates launched an unsolicited offer for the company. Novell, which is being advised by JP Morgan Securities, stiffed the bid, but did leave the door open to other ‘alternatives to enhance shareholder value.’ Since Elliott floated the offer, shares of Novell have basically changed hands at or above the $5.75-per-share bid.

As a decidedly mixed bag of businesses, Novell isn’t the cleanest match for any other company that might want to take it home. For that reason, most speculation around a possible buyer for Novell has centered on private equity firms. (The buyout shops are undoubtedly licking their chops at the prospect of picking up Novell’s $600m of maintenance and subscription revenue, not to mention the $1bn that sits in the company’s treasury.) However, we understand from a person familiar with the process that there are a handful of strategic buyers still interested in Novell.

If we were to put forward one potential suitor that could probably benefit more than any other company in picking up Novell’s broad portfolio of businesses, we might single out SAP. OK, we know it’ll never happen. (Never, ever.) But a hypothetical pairing certainly does go a long way toward filling a few notable gaps in SAP’s offering, while also making the German giant far more competitive with Oracle.

Consider this fact: some 70% of SAP apps that run on Linux run on Novell’s SUSE Linux Enterprise. Add in Novell’s additional technology around identity and access management, systems management, virtualization and other areas, and SAP’s stack suddenly looks a lot more competitive with Oracle’s stack. Again, an SAP-Novell deal will never happen, but the combination certainly does lend itself to some intriguing speculation.

Timeline: Novell in the crosshairs

Date Event Comment
March 2, 2010 Elliott Associates launches unsolicited bid of $5.75 per share for Novell The offer values Novell at a $2bn equity value but only a $1bn enterprise value
March 20, 2010 Novell rejects Elliott’s bid as ‘inadequate’ By our calculation, Elliott is valuing Novell at just 1.6 times its maintenance/subscription revenue

Source: The 451 Group

CDC Software’s rollup is rolling along

Brenon Daly

Contact: Brenon Daly

Since being spun off from its parent company less than a year ago, CDC Software has been rolling along with its planned rollup. It has done a half-dozen acquisitions of small, on-demand software companies to help expand its portfolio of ERP, CRM and supply chain management offerings. (It got bigger eyes earlier this year, when it made a short-lived run at fellow public company Chordiant Software.) In general, the technology has come from startups that have been passed over by the market. That’s certainly the case in CDC Software’s latest – and largest – acquisition, the purchase of TradeBeam last week.

Ten-year-old TradeBeam had burned through a mountain of venture backing and had snatched up the assets of three other vendors, but had struggled to actually build its business. (We understand that the company generated only about $9m in recurring revenue in 2009, and that projections for this year called for $10m in recurring revenue. That got the target around $20m in its sale to CDC Software, according to our understanding.)

Still, TradeBeam was able to develop some fairly useful software, thanks to its generous VC subsidy, that should fit well inside CDC Software. The company had two main product lines, which each accounted for about half of overall sales. TradeBeam sold global trade management software, which helps customers handle regulatory compliance and other aspects of the import/export business, as well as supply chain visibility, which provides additional capabilities around forecasting and collaboration with suppliers.

CDC Software’s recent acquisitions are part of a larger plan to slowly but steadily transition its business from selling software licenses to ‘renting’ software through a subscription model. Recurring revenue will still be a small slice of the overall $220m or so of revenue that the vendor is expected to put up this year. But if CDC Software can pull off its SaaS rollup strategy – and couple that with even a smidgen of organic growth – it could very well see a bump in its valuation. The transition to SaaS has certainly put a shine on the valuation of Concur Technologies and, to a lesser extent, Ariba. For its part, CDC Software, which is still majority owned by CDC Corp, trades at basically 1 times sales and 4x EBITDA.

Big Blue dials up a deal with Ma Bell

Brenon Daly

Contact: Brenon Daly

Sterling Commerce has had one of the more colorful and varied ownership histories in the software industry. Founded inside parent company Sterling Software, the business-to-business software vendor was then spun off through an IPO in the mid-1990s before being acquired by SBC Communications (now AT&T) in a Bubble-era deal that valued Sterling Commerce at $3.9bn.

For the past decade, it has been a largely unknown business inside Ma Bell. Although Sterling Commerce generates sales in the hundreds of millions of dollars, it amounts to less than 1% of AT&T’s revenue. AT&T doesn’t break out the financials for Sterling Commerce, but instead lumps the sales into a catch-all bucket of ‘Other.’  To give some idea of the importance of that category, consider that AT&T also accounts for revenue from its pay phones in Other.

We always assumed that some buyout shop would carve out the Sterling Commerce business from the phone giant and use it as a platform to roll up the fragmented business software landscape. (Sterling Commerce had done a few deals of its own, including its $155m purchase of order configuration vendor Comergent Technologies in November 2006.) Instead, Sterling Commerce said Monday that it will now be part of IBM.

Big Blue, which was advised by JP Morgan Securities, is paying just $1.4bn in cash for Sterling Commerce. The transaction, which is expected to close in the second half of 2010, is the largest by IBM in two and a half years. It also comes just weeks after Big Blue announced that it will look to once again be a busy buyer, indicating that it plans to spend $20bn on deals over the next five years. While that figure roughly matches the amount that IBM has spent on M&A over the previous half-decade, the majority of the spending was concentrated in 2005-07.