Category: application software

Is Kana buying time before it gets bought?

Brenon Daly

by Brenon Daly, China Martens

The showdown that has been brewing around Kana Software for months was supposed to come to a head today. Hedge fund KVO Capital Management had been planning to put forward a director for election at the company’s annual meeting, which was originally scheduled for July 15. Instead, Kana pushed the meeting back. Not by a week or two, or even a month, but until December 1. KVO is the largest shareholder in Kana, with some 3.4 million shares, or 8% of the company.

Although Kana has postponed its annual meeting, we can’t help but wonder if the customer service software vendor is merely buying time until it can get bought. That’s certainly what some shareholders have speculated about the company, which trades at just 0.5x revenue. (And we’ve been saying that for nearly three years.) On its own, there’s little to be bullish about at Kana, a money-burning shop that has been relegated to the Bulletin Board since December 2006. But it does have at least one valuable piece to its business: a deep, long-term relationship with IBM. We suspect Big Blue would be the first call Kana would make if it continues to get pushed for a sale.

Of course, IBM has repeatedly said that it doesn’t want to be an application software vendor. (Saying and doing are two different things, however. Several of its largest acquisitions were for straight application vendors, such as Cognos and FileNet.) In any case, the two firms have had an OEM arrangement for the past seven years, and we understand from a source inside Kana that IBM-related sales have exceeded their quota in recent years. Kana has also baked a fair amount of Big Blue software (notably DB2) into its offerings. So integrating the technology wouldn’t be a challenge in this hypothetical pairing. And financially, IBM has plenty of resources to share with Kana, which would be a nice change of pace for the struggling microcap company. Kana has largely lived off equity and debt offerings over the past 12 years, having run up an astounding $4.3bn in accumulated deficit since its founding.

A ‘paper’ windfall in LogMeIn IPO

Brenon Daly

Contact: Brenon Daly

One of the investment banks that profited the most from Wednesday’s strong debut of LogMeIn wasn’t even on the prospectus. Instead, it was in the prospectus. McNamee Lawrence, an advisory shop with no underwriting business, realized a tidy little $2m windfall from the IPO.

Heading into the offering, McNamee Lawrence held some 99,000 shares in LogMeIn that it picked up in late 2004 for helping to place the startup’s series A funding round, as well as other advisory work. McNamee Lawrence took a small amount of money off the table, selling some 21,000 shares at the $16 initial pricing of LogMeIn. That netted the bank about $336,000. It still holds some 78,000 shares, which had a paper value of about $1.6m, based on the price of LogMeIn shares on Thursday afternoon.

Granted, the holdings of McNamee Lawrence are only a tiny slice of the overall 21.4 million LogMeIn shares outstanding. And the firm’s stake is a fraction of the major owners of LogMeIn, Prism Venture Partners and Polaris Venture Partners. Prism holds shares worth about $80m, while Polaris, which sold $7.4m worth of shares in the offering, still owns a chunk valued at about $59m.

Still, the shares represent a nice windfall for McNamee Lawrence. (In addition, some of the firm’s partners put money individually into LogMeIn in the company’s seed round in early 2004.) Of course, the practice of taking paper as payment was pretty common across all kinds of service providers back in the Bubble Era, when startups routinely handed out options and warrants to cover bills from banks, lawyers and even landlords. After so many people got burned by taking worthless options and warrants in the early 2000s, however, cash returned as the currency of choice.

Imaging an alternative exit for LogMeIn

Brenon Daly

Contact: Brenon Daly

With LogMeIn set to price its IPO later today, the next ‘buyer’ of the company will be public market investors. The on-demand vendor will sell 6.7 million shares in an offering that’s being led by JPMorgan Chase and Barclays Capital. LogMeIn set an initial range of $14-16 per share, implying a market capitalization of $300m-340m. It will likely price above that range, and we expect strong demand for LogMeIn shares once they start trading under the ticker ‘LOGM’ on the Nasdaq.

As the company gets set to realize that exit (after more than 17 months on file with the US Securities and Exchange Commission), we thought about where it might have looked had it opted for the other possible exit, a trade sale. We’re not suggesting that LogMeIn was dual-tracking by any means. In fact, although it kept its S-1 alive while so many other tech companies pulled their IPO paperwork, that move wasn’t driven by desperation. LogMeIn doesn’t actually need the proceeds. It is heading into the offering with no debt and $27m in cash on its books, having generated cash for the past nine quarters. Even on a GAAP basis, the firm has been profitable for the past three quarters.

Thus, LogMeIn doesn’t need the offering any more than it needs a trade sale. And to be clear, we hadn’t heard that the company was pursuing anything other than an IPO. Nonetheless, as we did some blue-sky thinking, we quickly came up with two deep-pocketed companies that would have been very smart to nab LogMeIn before it went public. Keep in mind, too, that the two primary rivals to LogMeIn are GoToMyPC and WebEx Communications, firms that have been snapped up by tech giants Citrix and Cisco, respectively.

So here’s our hypothetical short list of possible buyers for LogMeIn. Symantec already has several products that compete with LogMeIn (notably, PC Anywhere), but it is a key partner for LogMeIn. And Big Yellow has shown that it is ready to go shopping to bolster its software-as-a-service business. It paid $695m, or almost 5x trailing 12-month sales, for MessageLabs last October, its largest deal in more than a year and a half. Alternatively, Dell knows all about picking up companies just before they go public. It paid a double-digit multiple for its push into storage with the $1.4bn EqualLogic purchase in November 2007. However, Dell has also done a quartet of deals to build out its services offerings, some of which are offered by LogMeIn and others that are complementary. In addition, the customer profiles of the two vendors would synch pretty well, since LogMeIn gets roughly 80% of its revenue from the SMB market.

June gloom

Brenon Daly

Contact: Brenon Daly

Whether or not the rebound got ahead of itself, the market has certainly tightened up this month. And no, we’re not talking about the equity market. (Although the sentiment is applicable there, as well, with the Nasdaq recently dipping to its lowest point in a month.) Instead, we’re talking about the M&A market. After a furious start to the second quarter, dealmaking has slipped back to the sluggish pace we saw in the first few months of 2009.

A quick glimpse at the numbers: In both April and May, we saw some 250 deals worth about $20bn in each month. So far this month, we’ve had about 205 deals worth a scant $8bn. With just three business days to go in June, we’re looking at spending being down about 60% from what it was in each of the first two months of the quarter.

We’ve also noticed the recent return of a trend that we saw more often in the opening months of 2009: the involuntary sale. In both large and small transactions, sellers have increasingly found themselves forced to take any offer that comes in. We noted that this week in the startup world, as LucidEra was turned over to a workout firm to sell its carcass. And on a larger scale, bankrupt Nortel Networks gave up on ever emerging as a viable company and began the painful process of liquidation sales. The first deal gives some sign of the resignation: Nortel sold its most valuable unit for what is likely to be less than 1x cash flow.

Second-quarter deal flow

Period Deal volume Deal value
April 2009 263 $21bn
May 2009 242 $19bn
June 2009 205 $8bn

Source: The 451 M&A KnowledgeBase

UPDATE: Borland gets higher bid

Brenon Daly

In a note sent out to clients before the market closed Thursday, we speculated that Borland was likely to get a bid that topped its existing agreement with Micro Focus. (See the full post.) Shortly after the market closed, Borland indicated an unidentified suitor (Company A) raised its bid to $1.25 for each share of Borland, eclipsing the $1.15 per share that the boards of both Borland and Micro Focus have agreed to. Borland shareholders had been scheduled to vote on the deal, which was originally announced May 6, on July 22. The identity of Company A wasn’t revealed. In our earlier post, we noted our suspicions that the bidder might be Embarcadero Technologies, a portfolio company of Thoma Cressey Bravo. However, one informed source has subsequently told us that is not the case.

A new bid for Borland?

Brenon Daly

Contact: Brenon Daly

Nearly a month after Micro Focus and Borland announced their planned combination, a pair of after-the-fact bidders pushed Micro Focus to reach a little deeper into its pockets for the application lifecycle management vendor. Now we’re hearing that one of the mystery suitors may well come back with a higher offer. As it stands, Borland shareholders are set to vote on Micro Focus’ bid of $1.15 in cash for each Borland share, or a total of some $92m, on July 22.

However, several sources have indicated that one unidentified party that previously floated a range of $1.10-1.20 per Borland share may well be preparing a bid that would top the existing offer from Micro Focus. The identity of that suitor has never been revealed, and is referred to as ‘Company A’ in the proxy filings. (We suspect, but have not confirmed, that Company A could be Embarcadero Technologies, which went private two years ago in a $200m buyout by Thoma Cressey Bravo. Following a split, TCB now goes by the name Thoma Bravo.) The proxy adds that Company A originally approached Borland with an unsolicited offer in June 2008, and has been more or less present during the process since then. Borland has dismissed several rounds of interest by Company A because of questions about its ability to pay for the deal.

While Company A may or may not come back with a higher offer, the other suitor that emerged after Micro Focus and Borland agreed to their deal – an unnamed private equity firm referred to as ‘Company E’ – will not be dusting off its bid, according to the proxy. Company E has never been identified, but we have a pretty strong suspicion that it could be a recently launched investment firm in the Boston area called 2SV Capital. Calls to the firm weren’t returned.

Certainly, a number of signs point to 2SV Capital as one of Borland’s mystery bidders. Two of the three partners in the firm certainly know the Borland business well, having worked together on the sale of Segue Software in early 2006 to Borland. (As we noted in a recent report on the pending sale of Borland, the Segue business is essentially the main reason why Micro Focus is interested in Borland.) 2SV Capital founder Richard Vieira, who was then working for Jefferies & Co, advised Segue, which was at the time headed up by Joe Krivickas, on the sale to Borland. (Krivickas recently joined Vieira at 2SV Capital.) If indeed 2SV Capital were interested, we suspect the buyout shop wouldn’t have needed to spend too much time on due diligence, given their understanding of the business.

End of a (Lucid)Era

Brenon Daly

Contact: Brenon Daly, Krishna Roy

After unsuccessfully trying to find a buyer for several months, LucidEra has turned itself over to a workout firm to sell off the patents and whatever else has value at the once-promising on-demand business intelligence (BI) vendor. We understand that CEO Robert Reid and the company’s board members have left LucidEra, replaced by Diablo Management Group. DMG, which got the mandate last week, has sole fiduciary control at LucidEra. A scrap sale, if it occurs, is likely within the next two months or so.

It’s a stunning fall for LucidEra, which was arguably the most visible startup in the market. Certainly, cofounder and former CEO Ken Rudin was one of the loudest – if not the loudest – evangelist for on-demand BI. (Rudin served as CEO until last July, when he assumed the role of chief marketing officer and turned the company over to Reid.) The company had raised some $23m from Crosslink Capital, Benchmark Capital and Matrix Partners over two rounds. We would note that if DMG does manage to sell LucidEra, the startups’ creditors will be first in line for payment, with any remaining funds then available to investors. LucidEra doesn’t have many creditor claims, but there are some.

In many ways, what initially allowed LucidEra to get going ultimately proved to be its undoing. From the beginning, the vendor tied its fate to Salesforce.com, specifically offering a pipeline reporting and analytics feature for the on-demand CRM vendor. That essentially made LucidEra an after-market add-on for Salesforce.com customers, which limited its market and always prompted questions about why Salesforce.com wouldn’t just offer that technology. It also got us wondering in a report two months ago why Salesforce.com wouldn’t just acquire LucidEra. That may still happen. If it does, however, Salesforce.com will be picking up just a fraction of what LucidEra had been when they last discussed a deal. And it will be paying just a fraction of the price, as well.

Navigating for relevance in a changing landscape

-Email Thomas Rasmussen

It’s becoming increasingly evident that once-dominant makers of personal navigation devices, such as Garmin and TomTom, have lost their way. They have seen billions of dollars in market capitalization erased as smartphone manufacturers have encroached on their sector, largely through M&A. Consider the most-recent example of this trend: Research in Motion’s acquisition of startup Dash Navigation earlier this month.

RIM’s buy is more of a catch-up move than anything else. Rival Nokia has already spent the last few years – and several billion dollars – acquiring and building a dominant presence in the location-based-services (LBS) market. And let’s not forget about the omnipresent Google. Starting with its tiny 2005 purchase of Where2, the search giant has quietly grown into a LBS powerhouse that we suspect keeps even the larger players up at night.

The Dash Navigation sale may well signal the start of some overdue consolidation, a trend we outlined last year. Specifically, we wonder about the continued independence of TeleNav, Telmap and Networks in Motion. TeleNav, for instance, is the exclusive mapping provider for the hyped Palm Pre through Sprint Navigation. But with the trend for open devices, we wonder how long that will be the case.

ECM: And then there was one…

Brenon Daly

Contact: Brenon Daly

With the US government having blessed on Friday the pending marriage between Open Text and Vignette, the only remaining obstacle in the $310m pairing is a vote by Vignette shareholders next month. And we expect pretty quick approval of the offer from Vignette’s long-suffering shareholders, who had seen their shares lose half their value in the half-decade preceding Open Text’s move. Over that same period, Open Text stock had gained about 16%, handily outperforming the 15% loss posted by the broader Nasdaq Index. (Share price is important in this transaction because Open Text is paying roughly one-third of the bill for Vignette in equity. Open Text stock is up nearly 10% since the deal announcement.)

If, as expected, Vignette shareholders sign off on the sale in their July 21 vote, the deal would mark the second major enterprise content management (ECM) vendor taken off the board in 2009. In January, Autonomy Corp announced a somewhat unexpected move into ECM by shelling out $775m in cash for Interwoven. That transaction closed in mid-March. The recent pairings continue a trend of major consolidation in the ECM market that started back in 2003, with EMC buying Documentum for $1.8bn. IBM, Oracle and Hewlett-Packard have also announced ECM deals of their own, pushing the announced value of acquisitions in the sector to $9.4bn since January 2002. For those of you keeping score at home, the one notable enterprise software company that hasn’t made an ECM move of its own is SAP. Of course, SAP just happens to be the largest partner for Open Text. So if the German giant does look to make a buy, we have a pretty good idea of who it might call.

Hey Larry, wanna buy a bridge?

Brenon Daly

Contact: Brenon Daly, Krishna Roy

Although Oracle announced the purchase of Conformia Software on Wednesday, the market is currently buzzing with speculation that the tech giant has closed – but not yet announced – a much larger transaction. Several sources have indicated that Oracle has acquired GoldenGate Software. The two companies have had a deep relationship for some time and while a deal has been kicked around in the past, talks stalled because GoldenGate always priced itself higher than Oracle was willing to spend. We haven’t heard what Oracle ended up paying for GoldenGate, which we understand was generating slightly more than $100m in trailing sales.

In many ways, this rumored deal echoes IBM’s purchase of DataMirror two years ago. In that transaction, Big Blue paid $161m, or 3.3x DataMirror’s trailing 12-month (TTM) revenue. Of course, 2007 was a high-water mark for recent valuations, both on the Nasdaq and among VC-backed companies. (GoldenGate has received a reported $33m from Summit Partners.) According to our analysis of data from the 451 M&A KnowledgeBase, VC-backed companies sold for a median valuation of 6.2x TTM in 2007, compared to just 2.8x TTM sales so far this year.

If Oracle is indeed picking up GoldenGate, the acquisition should enable the database giant to compete more effectively with IBM’s Information Server and other data management offerings from Big Blue. GoldenGate’s technology would give Oracle the opportunity to extend its data migration, high-availability and real-time integration capabilities to non-Oracle environments. GoldenGate already provides data migration capabilities for Siebel applications and real-time integration for Oracle’s data warehouse, for example, so there’s already technical integration in place.