Category: application software

Silver Creek comes out golden in sale

Brenon Daly

Contact: Brenon Daly

Although terms weren’t disclosed in Oracle’s reach for Silver Creek Systems earlier this week, we suspect the startup can claim something that not one of the nine companies that Oracle gobbled up in 2009 can say: it garnered an above-market valuation in the deal. The trade sale also undoubtedly generated a decent return for Silver Creek’s backers, which hasn’t been the case in many recent sales of VC-backed companies.

A pretty lean operation, Silver Creek has raised some $14m since its restart as a data-quality vendor back in 2002 and hasn’t needed to raise money since 2005. We believe Oracle may have ended up paying twice the amount that Silver Creek raised, since we understand there was at least one other bidder. The acquisition essentially formalizes an OEM relationship that the two companies have had since April, as my colleague Krishna Roy noted in her report on the transaction.

Whatever price Silver Creek ended up getting, it’s a notable uptick from last summer, when we were writing about how a startup in a similar market had pulled off an improbable deal that – if everything falls into place and full earnouts are earned – might just make its backers whole again. (See our earlier item on Exeros’ gamble and ultimate sale to IBM.) Also keep in mind that Big Blue only picked up some of the assets of the data discovery startup, not the whole company and its employees, as is the case with Oracle’s reach for Silver Creek. All in all, Oracle’s purchase of Silver Creek is yet another sign that the tech M&A market continues to rebound, even if it hasn’t yet fully recovered.

Charting the market

Brenon Daly

Contact: Brenon Daly

To get a sense of the relative health of the overall M&A market, it’s often more revealing to look at a specific sector and chart the valuation fluctuations over time. Take the highly visible – and rapidly consolidating – market for governance, risk and compliance (GRC) software. (Or, as my colleague Paul Roberts would have it: GRC stands for governance, risk and consolidation.) Since GRC straddles a number of technology areas (security, BI, performance and policy management, and others), it’s natural that we’ve seen a steady flow of deals across this sector. (We highlighted that in a report last spring where we offered our own (admittedly weak) take on the GRC acronym: ‘Get Ready for Consolidation.’)

Conveniently enough, we’ve seen a number of GRC deals inked recently that encapsulate the state of the broader space. (This isn’t meant to be a comprehensive tally of deal flow in the sector, but rather a selection of illustrative transactions.) Back when the markets were soaring in 2006, SAP paid an estimated 10 times trailing sales for Virsa Systems. By late 2007, the multiple that Sun Microsystems paid for Vaau had come down to an estimated 7x trailing sales. (Incidentally, Sun announced that purchase right as the Nasdaq, which had been at its highest level since early 2001, began a protracted slide that ultimately cut the index by more than half. It still hasn’t recovered to the level of November 2007.)

A year later, the multiple had been cut in half, with Thomson Reuters paying an estimated 3x trailing sales for Paisley. The upheaval in the early part of last year put even more pressure on valuations, with McAfee paying just 2.5x trailing sales for Solidcore Systems. And then on Monday, EMC announced that it was making its own GRC play, reaching for industry veteran Archer Technologies. While terms weren’t disclosed, we’re pretty confident that Archer’s valuation rebounded from the level that Solidcore got just six months ago. We understand that Archer finished last year with about $32m in sales, and would guess that it sold at a price in the neighborhood of $200m, meaning they got twice the multiple Paisley got a year ago.

And the Golden Tombstone goes to …

Brenon Daly

Contact: Brenon Daly

We survey corporate development executives every year to get a sense of their shopping plans for the next 12 months. We’ll have a full report on the survey when we return from our holiday break in early January, but the headline finding is that two-thirds of the respondents expect the pace of M&A at their firms to pick up in 2010, compared to just 5% who see the rate tailing off. We would note that bullishness is echoed by technology investment bankers, who we also recently surveyed. (See our full report on the tech bankers’ survey.)

In addition to getting their outlook for the coming year, we also ask corporate development executives to pick a single deal that stood out to them as the most significant transaction of the year. The 2009 winner? Oracle’s still-pending $7.4bn acquisition of Sun Microsystems. Larry Ellison’s big gamble on hardware received twice as many votes as the second-place transaction, Hewlett-Packard’s reach for 3Com last month. (HP won the award last year for its purchase of services giant EDS.) Third place was claimed by EMC’s aggressive grab of Data Domain.

From our perspective, it’s fitting that Oracle’s purchase gets the coveted Golden Tombstone for 2009. (As an aside, it’s unintentionally accurate to be referring to ‘tombstones’ in connection with deals this year, if just because the M&A market was as quiet as a cemetery.) After all, 2009 has been characterized by transactions that are cheaper but take longer to close than in years past. Oracle, which announced the purchase of Sun in April but still hasn’t gotten full approval for it, is paying just 0.6x trailing sales for the faded tech giant. It was that kind of year for M&A, and one we’ll gladly put behind us. Here’s to a healthy and happy 2010 when we return from a much-needed break.

Golden Tombstone winners

Year Transaction
2009 Oracle’s $7.4bn purchase of Sun Microsystems
2008 HP’s $13.9bn acquisition of EDS
2007 Citrix’s $500m XenSource buy

Source: The 451 Corporate Development Outlook Survey

Kana: bidding while the cash burns

Brenon Daly

Contact: Brenon Daly

The progression from spurned bidder to shareholder activist isn’t all that unusual. But it is unusual when the party smarting is a publicly traded company, and decides to express its agitation through press releases. Yet, that’s exactly how Chordiant Software is venting its frustration over not landing Kana Software, with Chordiant telling the world earlier this week that it plans to vote its shares (amounting to 4% of the total equity outstanding) against the proposed sale of Kana’s operating business to midmarket buyout firm Accel-KKR. Chordiant followed that up on Thursday evening with a new cash-and-stock offer that values Kana higher than the buyout bid.

All of this comes just days before shareholders are slated to vote on Accel-KKR’s offer (the vote is scheduled for Wednesday). Kana’s board continues to recommend that shareholders back the planned transaction, which would effectively carve the business out of Kana and leave only a shell company in its place. We have noted that it’s an imperfect structure, but one that probably serves the fundamentally flawed firm reasonably well. Of course, some shareholders (including Chordiant) don’t agree, and should vote however they want. We would only note that while the two sides argue, Kana continues to burn cash. At the end of its most-recent quarter (ending September 30), the company was down to just $1.8m (it started the year with $7m). While the cash burn is nothing new for Kana, which has lost $4.3bn since its inception, it could become pressing: Kana noted in its proxy that it has a $5.4m debt payment coming due in 2010.

Microsoft (officially) pals up with Opalis

Brenon Daly

Contact: Brenon Daly

Two months after we first indicated that Microsoft was interested in Opalis Software, the software giant has indeed acquired the runbook automation (RBA) vendor. No terms were disclosed, but when we talked with sources in mid-October, the price being kicked around was $60m. Opalis was thought to be running at about $10m in revenue. We understand that Cowen Group banked Toronto-based Opalis.

The deal, now that it is official, comes after other fellow RBA startups were snapped up. In March 2007, Opsware (now part of Hewlett-Packard) spent $54m in cash and stock for iConclude, and four months later, BMC paid $53m for RealOps. As that wave of consolidation swept through the RBA market, Opalis positioned itself as an independent alternative to the offerings from the system management giants. That said, the vendor had been drawing closer to Microsoft. In late April, the two companies announced a joint technology agreement that saw, among other things, Opalis integrated into Microsoft’s System Center Operations Manager 2007 and System Center Virtual Machine Manager 2008 consoles.

More businesses on the block at LexisNexis?

Brenon Daly

Contact: Brenon Daly

When LexisNexis announced last month that it was selling off its HotDocs business, it got us thinking about other divestitures that the information provider may be contemplating. More specifically, we wonder if LexisNexis is considering reheating its effort to shed Applied Discovery. Not too long ago, we heard rumors that LexisNexis had hired a bank to help it unwind its $95m purchase of the Seattle-based e-discovery startup. LexisNexis picked up Applied Discovery in mid-2003.

According to one source, LexisNexis came close to selling Applied Discovery to the Silicon Valley-based buyout shop for about $70m, but talks collapsed during due diligence. Shortly after that, LexisNexis cut its asking price for Applied Discovery to basically half of the $95m that it originally paid for the company, but a second source indicated that the unit still didn’t generate much interest. The reason? Many would-be financial buyers are put off by the lumpy business in the e-discovery sector. Sales are typically driven by investigations or lawsuits, which can make it difficult to predict. Meanwhile, among the strategic buyers, many of the large information management vendors – including Autonomy Corp, Iron Mountain, Seagate and EMC, among others – have already announced acquisitions of e-discovery players.

Amex buys into the alternative online payments revolution

-Contact Thomas Rasmussen

As the first significant deal that adds online payments technology to a legacy payment platform, American Express’ recent $300m acquisition of Revolution Money essentially amounts to a shot across the bow of eBay’s PayPal and Google’s CheckOut. The relatively rich purchase of four-year-old Revolution Money also stands as the third-largest alternative online payments buy to date, trailing only eBay’s pickups of PayPal and Bill Me Later. We estimate that Revolution Money, which had taken some $100m in venture funding, was running at around $10m-$20m in sales.

The alternative payments market is both large and fragmented, and is likely to see substantial consolidation in the coming years. It is also a space that has had difficulties in establishing a coherent offering, with early efforts ranging from ill-conceived ‘sci-fi-esque’ biometrics offerings to SMS-based payment methods. Until recently, it has mostly been marred by failed startups, poorly executed acquisitions and fire sales. Nonetheless, thanks to the continuing success of PayPal and new alternatives (Google Checkout, among others), as well as the boom in online micro-transactions and an uptick in general online shopping, the sector is again gaining favor, particularly as a way to cut transaction costs.

Looking ahead, we believe Amex’s acquisition of Revolution Money will serve as a wakeup call to other legacy payments vendors as well as financial institutions that might now look to do some catch-up shopping of their own. This inevitable consolidation should serve as good news for some of the established startups in the industry such as mPayy, Moneta, eBillme and Secure Vault Payments, among many others. These firms could well find themselves getting some overdue attention in 2010 as alternative online payments continue to gain currency.

Navigating a decent exit

Brenon Daly

Contact: Brenon Daly

When we last checked in with Networks In Motion (NiM) two weeks ago, we noted that the turn-by-turn navigation vendor had just been stepped on by the not-so-gentle giant, Google. As it turns out, NiM’s valuation got stepped on a bit, too. The Aliso Viejo, California-based company sold itself Tuesday to TeleCommunication Systems for $170m. Terms call for TeleCommunication to hand over $110m in cash and $20m in shares, along with a $40m note. Raymond James & Associates advised TeleCommunication Systems while Jefferies & Co advised NiM on the transaction, which is expected to close by the end of the month.

The offer values NiM at 2.3 times 2009 revenue and 1.7x the company’s projected sales for next year, according to our understanding. NiM’s expectation of $100m in sales in 2010, representing 33% growth, strikes us as a bit aggressive. The reason? Google has started giving away a turn-by-turn navigation product for select Android devices that run on Verizon Wireless, the only network on which NiM currently offers its service. Although the threat of Google completely wiping away NiM’s business is grossly overblown, we suspect that it did put some pressure on the price of the company. NiM’s early focus on feature phones gave competitors such as TeleNav an early lead on smartphones such as BlackBerry and Windows Mobile. According to one rumor, T-Mobile and NiM had been close to a deal earlier this year. Without the ‘Google overhang,’ we could imagine that NiM would be selling for quite a bit more than the $170m that TeleCommunication Systems is slated to pay.

That said, it’s actually a decent exit for seven-year-old NiM. Although it’s getting an admittedly so-so multiple for its business, the company is providing a solid return for its backers, largely because it didn’t raise much money. It drew in a total of less than $20m, with Mission Ventures and Redpoint Ventures as early NiM backers and Sutter Hill Ventures joining in the third – and last – round of NiM funding in March 2006. (There was also some money from unnamed strategic investors.) Unlike rival TeleNav, NiM was unlikely to go public because of concerns about competition from Google. (TeleNav, which put in its IPO paperwork a month ago, isn’t immediately threatened by Google because the latter’s service isn’t yet available on TeleNav’s networks, AT&T and Sprint.) A solid (if not spectacular) trade sale of NiM in the face of growing competition from Google isn’t a bad bit of navigation for the startup at all.

Corel: ‘What a turkey’

Brenon Daly

Contact: Brenon Daly

As many of us get ready to sit down with friends and family for our annual Thanksgiving dinner on Thursday, our thoughts inescapably turn to poultry. When we look around at some of the deals out there right now, our thoughts also turn to poultry. For instance, whenever Corel comes up, we can’t help but think to ourselves, ‘What a turkey.’

By ‘turkey,’ we don’t just mean that Corel has been a second-rate software company and an even worse investment. (Although both are certainly true. Corel shares have never traded above the price at which they were spun off in mid-2006, and currently change hands at just one-quarter of that level.) But we also mean that since the grab-bag software vendor went private in mid-2003 with Vector Capital, Corel equity has been carved up like a Thanksgiving turkey. And now there’s a fight brewing over one of the drumsticks.

As we’ve chronicled in the past, Vector has been angling to repurchase the chunk of Corel that it spun to the public three-and-a-half years ago. Vector recently offered to repurchase the one-third of Corel shares that it doesn’t own at $4 each. While that was a bit higher than it initially offered in late October, the bid is substantially below its offer of $11 per share back in March 2008.

Vector’s effort received a new urgency this week when Corel warned that it runs the risk of falling below certain covenants and defaulting on its loans unless the sale to Vector goes through. The deadline for being in line with the covenants is November 30. The buyout shop contends, among other things, that the costs of Corel being a public company get in the way of making the necessary investments to keep the 24-year-old firm competitive. Corel’s investors aren’t necessarily buying that, at least not at the price offered by Vector. Corel shares have traded above the $4 bid for the past two weeks.

M&A ‘chatter’ around salesforce.com

Brenon Daly

Contact: Brenon Daly, China Martens

Official word from salesforce.com is that its recently announced Chatter product was developed in-house. And that would certainly be in keeping with the company’s history of staying away from M&A. Since it opened its doors a decade ago, salesforce.com has done just five tiny deals. The vendor certainly has one of the lowest ratios of total M&A spending (probably around $70m) to market capitalization ($7.7bn) of any of the big software vendors.

Nonetheless, there was some chatter (if you’ll pardon the pun) that salesforce.com may have acquired some technology from a small startup to shore up the recommendation engine portion of Chatter, a collaboration/social networking offering that’s slated to come out next year. The M&A speculation centered on a startup that perhaps provided some natural-language search capability. We would note that a small shopping trip by salesforce.com – if, indeed, there was one – to get some social networking/natural-language technology wouldn’t be without precedent. Rival CRM vendor RightNow tucked in HiveLive, which had just 25 customers, in a $6m deal last summer.

Whether or not salesforce.com went shopping for part of Chatter, it’s worth pointing out that the firm has used M&A as a way to go after Microsoft’s SharePoint in the past. In early 2007, the company picked up Koral, an early-stage content management startup that salesforce.com had effectively been incubating. (And on a smaller scale, several months after that, it quietly acquired a tiny social networking startup, CrispyNews.)

However, we’re guessing that those purchases, particularly the Koral deal, haven’t generated the returns that salesforce.com might have hoped. The vendor originally said that Salesforce Content – an add-on, extra-cost module based partly on Koral – could do to SharePoint (among other document management offerings) what salesforce.com did to Siebel in CRM. That hasn’t come close to happening. In fact, salesforce.com just announced that Content will be available free of charge to all customers.