Category: application software

The dual-track is back

Brenon Daly

Contact: Brenon Daly

Derailed by the bear market for much of the past two years, the ‘dual-track’ is back. Witness Wednesday’s purchase of Gomez by Compuware. The application performance management vendor got snapped up for $295m after being on file to go public for some 17 months. But as this trade sale indicates, the dual-track is no longer necessarily a path to riches. In fact, Gomez sold for about half the multiple that other dual-track companies garnered in recent deals.

That’s by no means a knock on Gomez, which got a relatively handsome valuation of 5.5 times trailing revenue in its sale to Compuware. Instead, it’s simply a reflection of how much the equity markets have come down. Keep in mind that a buyer looking to take out a company that’s already filed for an IPO effectively has to outbid the public market. Obviously, the lower the indexes, the less an acquirer has to bid; the opposite is also true.

Back when the markets were buoyant, dual-tracking companies could pull off a double-digit multiple if they opted to sell. For instance, EqualLogic sold to Dell in November 2007 for 12x trailing sales, just three months after filing its IPO paperwork. (We would note that the timing of EqualLogic’s sale for $1.4bn in cash was impeccable. The Nasdaq promptly went on a nearly uninterrupted slide for the next 18 months that cut the index in half.) And even when the market was dropping, mobile software provider Danger Inc still got picked up by Microsoft for nearly 9x trailing sales. Danger filed its prospectus in mid-December 2007, just two months before Microsoft snagged the company.

Of course, both of those previous dual-track deals were inked when the Nasdaq was higher than it currently is. And if we compare the valuation that Gomez got with other publicly traded SaaS companies, 5.5x trailing sales for an unprofitable, relatively small on-demand company starts to look pretty enticing. Add to that instant liquidity in the form of cash, rather than locked-up shares, and that’s a bid that most backers would hit every time.

Nuance adds to a shrinking business

Brenon Daly

Contact: Brenon Daly

The latest acquisition by serial shopper Nuance Communications is a bit of a blast from the past. On Monday, Nuance said it will hand over $54m in equity for eCopy in a move that bolsters its imaging business unit. (Revolution Partners banked eCopy while Needham & Co advised Nuance, as it did in the company’s purchase of SNAPin Software a year ago.) The pickup of eCopy, however, snaps a string of deals that Nuance has used to build out its mobile and healthcare business lines.

If you didn’t realize that Nuance had an imagining unit, you could be forgiven. Although the company has its roots in that technology, it has largely left that market behind. (The current Nuance is actually the product of a mid-2005 marriage of Nuance Communications and ScanSoft, the name of which should give you some idea of its business.) In fact, through the first three quarters of the current fiscal year, the imaging unit represents just 7% of Nuance’s total revenue.

And that slice is only getting smaller. So far this fiscal year, sales in the imaging unit shrank a staggering 20%, while the vendor’s other two divisions (mobile and healthcare) both grew and overall revenue rose 12%. Since the imaging business appears to be little more than an afterthought inside Nuance, we’re surprised to see the company double down on the unit with the eCopy acquisition. That’s actually a reversal of the direction of deal flow at the division that we would have suspected. We could certainly see a situation where Nuance divests its imaging business, ditching its past and focusing on mobile and healthcare for future growth.

‘She got the ring, I got the finger’

Brenon Daly

Contact: Brenon Daly

As every country and western crooner knows, relationships can build you up but they can also break you down. (Suggested listening: ‘I Fall to Pieces’ by Patsy Kline.) That’s as true in love as it is in business, as my colleague Kathleen Reidy notes in a new report. Specifically, she takes a look at the future for StoredIQ, which got dumped by EMC last month when the tech giant acquired rival company Kazeon for its e-discovery offering. (Suggested listening: ‘She Got the Ring (and I Got the Finger)’ by Chuck Mead.)

It was undoubtedly a big blow for StoredIQ, which had a longer-standing and deeper relationship with EMC than Johnny-come-lately Kazeon. EMC has been reselling StoredIQ under its SourceOne brand since 2008. But obviously, StoredIQ will be a bit of a third wheel following the Kazeon acquisition, and the relationship with EMC is effectively over. (Suggested listening: ‘If the Phone Don’t Ring, Baby, You’ll Know It’s Me’ by Jimmy Buffet.) While the official reason has never surfaced as to why EMC passed on StoredIQ in favor of Kazeon, we might chalk it up to the difficult task of parsing out revenue in any reselling agreement, and how to value those sales. That’s always tricky.

In any case, StoredIQ is moving on. (Suggested listening: ‘How Can I Miss You if You Won’t Go Away’ by Dan Hicks and His Hot Licks.) The eight-year-old startup has solid technology to identify and manage data that lives outside companies’ managed repositories, which is a key part of e-discovery. And StoredIQ may well be a good fit for Symantec, which also had a relationship with Kazeon and may now be in the market for a new partner. (Suggested listening: ‘I May Be Used (But Baby I Ain’t Used Up)’ by Waylon Jennings.)

Intuit mints a rich deal

-Contact Thomas Rasmussen, Brenon Daly

We might be inclined to read Intuit’s recent purchase of Mint Software as a case of ‘If you can’t beat ’em, buy ’em.’ The acquisition by the powerhouse of personal finance software undoubtedly gives the three-year-old startup a premium valuation. Intuit will hand over $170m in cash for Mint, which we understand was running at less than $10m in revenue. (Although we should add that Mint had only just begun looking for ways to make money from its growing 1.5-million user base.)

More than revenue, we suspect this deal was driven by Intuit’s desire to get into a new market, online money management and budgeting, as well as the fear of the prospects of a much smaller but rapidly growing competitor. (Intuit and Mint have been talking for most of this year, according to one source.) In that way, Intuit’s latest acquisition has some distinct echoes of its previous buy, that of online payroll service PayCycle. For starters, the purchase price of both PayCycle and Mint totaled $170m. And even more unusually, bulge bracket biggie Goldman Sachs advised Intuit on both of these summertime deals. (Remember the days when major banks would hardly answer the phone for any transaction valued at less than a half-billion dollars? How times change.) On the other side of the table in this week’s deal, Credit Suisse’s Colin Lang advised Mint.

Intuit M&A, 2007 – present

Date Target Deal value
September 14, 2009 Mint Software $170m
June 2, 2009 PayCycle $170m
April 17, 2009 BooRah <$1m*
December 3, 2008 Entellium $8m
December 19, 2007 Electronic Clearing House $131m
November 26, 2007 Homestead Technologies $170m

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

‘What’s up with Omniture?’

Brenon Daly

Contact: Brenon Daly

It wasn’t quite shouting ‘fire’ in a crowded theater, but an early Tuesday afternoon development at an investment conference concerning Omniture certainly sparked a firestorm of speculation. During the luncheon at ThinkEquity’s 6th Annual Growth Conference in San Francisco, word came out that Omniture had scrapped its presentation, which had been scheduled for 1:30 p.m. PST. Chief executive Josh James was slated to speak.

Immediately, the money managers began trying to read between the lines. Was the company in play, or had James just missed his flight or something like that? Speculation was flying around the lunch tables and hallways, with people pulling in all sorts of information. One guy noted that the company’s CFO didn’t show up at his scheduled presentation at Deutsche Bank’s technology conference on Monday, either. Another chimed in that maybe executives were delayed by the heavy thunderstorms in Salt Lake City, where Omniture is based. Meanwhile, both the price and trading in shares of Omniture was picking up, after just bumping along up to that point.

As more people at the ThinkEquity conference started gossiping about Omniture, consensus grew that something big was brewing at the Web analytics firm. By the time the stock was halted, just ahead of the closing bell, speculation had shifted to certainty: Omniture was getting taken out. The only question was who was nabbing the company. For the record, not a single one of the hallway matchmakers picked Adobe Systems as the buyer. (Under terms of the deal, Adobe will hand over $21.50 per share, or $1.8bn, for Omniture.) Instead, the names that surfaced as potential acquirers of Omniture included Microsoft, Google and Salesforce.com.

M&A market timing at CA

Brenon Daly

Contact: Brenon Daly

After a two-year hiatus that ended last fall, CA Inc has returned to the market with newfound enthusiasm. With the vendor’s purchase on Monday of network performance management provider NetQoS, CA has now inked six acquisitions over the past 12 months. That comes after an extended period (September 2006 to October 2008) when the normally acquisitive company stepped out of the market entirely.

During that time, CA’s four large rivals (BMC, Hewlett-Packard, IBM and Symantec) announced a total of 61 transactions between them. Collectively, the quartet of buyers paid roughly 5.7 times trailing 12-month (TTM) revenue in the deals they did. (That’s the median valuation from the more than 20 transactions that either had terms disclosed or where we estimated the numbers.)

So from CA’s perspective, sitting out a period marked by historically high valuations might not be a bad thing at all. Consider this: CA’s purchase of NetQoS cost it $200m in cash, which worked out to 3.6x TTM sales. If we slap the prevailing multiple from the period CA was out of the market (5.7x TTM sales) onto CA’s most-recent deal, the price for NetQoS swells to $320m. Obviously, there were vastly different assumptions about growth rates in late 2006 and early 2007 than there are now, which goes a long way toward explaining the nearly 40% ‘discount’ that CA got by inking the NetQoS purchase on Monday rather than when the market was hot.

Informatica: Just dating or something more?

Brenon Daly

Contact: Brenon Daly, Krishna Roy

Is it just dating, or are they looking to get married? That was a question that Wall Street was kicking around last week after Hewlett-Packard and Informatica announced a deeper relationship. The new accord sees HP licensing a number of Informatica’s offerings so that it can provide its customers with data management products. HP is also supplying these same wares from Informatica as part of its existing consulting services for business intelligence (BI) and related arenas and pushing these combined offerings through its direct sales force. (My colleague Krishna Roy has a full report on the tie-up.)

The announcement, which came out last Tuesday, didn’t initially generate much speculation about the relationship between the two longtime partners. However, by Friday, Wall Street was reading much more into the joint agreement. Shares of Informatica rallied almost 7% on Friday, with volume more than three times heavier than average. (The rally continued a strong run by Informatica, which has seen its shares gain some 56% so far this year, vastly outpacing the 32% advance for the Nasdaq in 2009.)

However, both HP and Informatica have taken great pains to position themselves as independent software providers. Indeed, even as HP announced that it would be doing more with its relationship with Informatica, it also clearly said that it will continue to work with other data management and BI vendors. And on the other side, we noted that ‘neutrality’ may have come up in rumored talks last year between Informatica and Oracle. In any case, the independence and openness stand in contrast to the moves in this market by IBM – the rival that’s the primary target of the deeper HP-Informatica partnership. Big Blue spent $1.14bn in cash in March 2005 for Ascential Software, an acquisition that most observers would say hasn’t delivered.

Unexpected partners in e-discovery dance

Brenon Daly

Contact: Brenon Daly

After a flurry of more than a half-dozen e-discovery acquisitions from mid-2007 to mid-2008, deal flow has dried up in the sector. Buyers during the active period included companies that, broadly speaking, have an interest in storing, managing and searching electronic information, including such tech giants as Seagate Technology, Iron Mountain and Autonomy Corp. Collectively, spending on all the e-discovery deals in that one-year period topped $800m.

And then, like the rest of the M&A market, e-discovery activity dropped off dramatically. In this vacuum, rumors started bouncing around. The main one, which we noted last October, had Symantec looking closely at Kazeon. The two companies have been partners for a year, with Kazeon able to integrate with Symantec’s Enterprise Vault and Enterprise Vault Discovery Accelerator. (We also did a broader matchmaking report on the sector right around that time.)

And while a pairing between Kazeon and Symantec may well have made sense, the e-discovery vendor ended up selling to EMC on Tuesday. (Terms were not disclosed, but one report put the price at $75m. We think that may well turn out to be a bit higher than the amount EMC actually paid, particularly since we understand that Kazeon was only running at about $10m in sales.) So we were a bit off on our pairing for Kazeon, just as we were off on our assumption that EMC would reach for its longtime e-discovery partner, StoredIQ. Undeterred by that, we find ourselves nonetheless wondering if StoredIQ will end up at Symantec. There’s certainly some logic to that pairing. But then again, that was also true for the other deals we came up with that never got signed.

NICE Systems double-dips on deals

Brenon Daly

Contact: Brenon Daly

Less than three months after indicating that it was looking to step back into the M&A market, NICE Systems announced two deals back-to-back. The Israeli company reached for Hexagon System Engineering on Monday, and followed that up immediately with the much more substantial purchase of Fortent. Together, the transactions run NICE’s tally of acquisitions to a baker’s dozen since 2002.

Hexagon will add location-based services technology for cell phones to NICE’s portfolio. NICE will hand over $11m in cash for Hexagon, which we estimate was generating revenue in the low single digits of millions of dollars. As an aside on this deal, we would note that it marks the first time that NICE has shopped in its home market. (Although Actimize, NICE’s largest target, was founded in Israel and still does much of its R&D there, Actimize had moved its corporate headquarters to New York City several years before NICE picked it up.) In its other acquisitions, NICE has been a bit of a globetrotter, buying companies based in Australia, the Netherlands, Germany, the UK and the US.

Meanwhile, NICE (through its Actimize subsidiary) will pay $73.5m in cash for Fortent. We estimate that Fortent was running at about $30m in revenue, with most of that coming from sales of its anti-money-laundering (AML) product. Actimize competed with Fortent in the AML market, but also offers products for fraud detection and trading compliance. Actimize, which NICE acquired in July 2007 for $280m, has now inked three deals as part of NICE. The Actimize business, combined with Fortent, is expected to top $100m in revenue next year, roughly triple where it was when NICE bought it two years ago.

Will Taleo exercise its M&A option?

Brenon Daly

Contact: Brenon Daly

Having crossed the anniversary of its acquisition of Vurv Technology earlier this summer, Taleo recently indicated that it is looking to return to the M&A market. (Shares of the human capital management vendor trade essentially where they did when the company closed its $128m consolidation play with Vurv, while the Nasdaq is down about 12% over that same period.) Taleo’s pickup of Vurv was its largest-ever transaction, roughly doubling the number of customers for the company. The success that Taleo has enjoyed with migrating Vurv users to its own platform stands in sharp contrast to the other main consolidation play by a publicly traded rival, Kenexa’s $115m reach for BrassRing in 2006.

If we had to speculate on Taleo’s next M&A move, we suspect it would involve exercising a kind of ‘call option’ that it has on a startup. What do we mean by that? Last summer, when Taleo had its hands full with Vurv, it also made a $2.5m equity investment in a Redwood City, California-based startup called Worldwide Compensation (WWC). So rather than take on another acquisition immediately, Taleo smartly structured its investment – its only such investment – to give it right of first refusal to pick up all of WWC at any time through the end of 2009.

The investment in WWC comes with a partnership that adds WWC’s compensation management offering to Taleo’s core performance management products. In the second quarter, Taleo reported that it had three joint deals with WWC involving enterprise customers. As pay-for-performance offerings get more widely adopted, we could certainly imagine a case where Taleo would want to bring WWC in-house. In that regard, we might view the WWC investment as just a ‘try before you buy’ arrangement for Taleo.