Category: application software

Metastorm in the market in a big way

Brenon Daly

Contact: Brenon Daly

If Metastorm does re-paper an S-1, it will be a much larger company than the one that filed for an IPO last year. (The business process management (BPM) vendor put in its paperwork in mid-May and then pulled it in mid-September.) The growth will come both organically and from acquisition, CEO Bob Farrell said Monday during a presentation at the JMP Securities Research Conference.

In terms of organic growth, Farrell projected that the company would ring up about $90m in revenue this year, up from about $77m in 2008. Additionally, Farrell said he expected to add to the company’s top line with a shopping trip. We understand Metastorm has three term sheets out for possible acquisitions, with one possibly closing in the summer. One of the potential deals could double the company’s revenue. Farrell said his company has considered outside funding for a purchase, which is how it covered its 2007 acquisition of Proforma.

In terms of target markets, Metastorm is looking in several areas, including risk and compliance, collaboration and document management. In terms of possible BPM-document management transactions, we would note that we recently heard of deal flow going the other way. Open Text, having consolidated much of the content management market, said it may well look to buy its way into the BPM market.

Just how far has the CDP market fallen?

Brenon Daly

by Brenon Daly, Henry Baltazar

In the days before the big storage vendors turned continuous data protection (CDP) into a feature rather than a stand-alone product, investors in CDP startups could still make decent returns. Both Kashya and Topio raised about $20m in VC backing, and ended up exiting for eight times that amount. Kashya sold to EMC for $153m in cash in May 2006 while Topio, which wisely blended CDP with heterogeneous replication in its offerings, went to NetApp for $160m in cash a half-year later. (Of the two deals, NetApp-Topio has been the underwhelming transaction. NetApp recently shuttered the SnapMirror for Open Systems product line that it picked up with Topio.)

Since those paydays, however, CDP valuations have plummeted. Symantec acquired assets of Revivio for an estimated $20m in November 2006, while Double-Take Software handed over just $8.3m for TimeSpring Software in late 2007. But even those deals seem rich when we consider BakBone Software’s recent reach for CDP startup Asempra Technologies. Under terms of the deal, BakBone is shelling out just $2.1m for Asempra, which had raised $36m from its backers. To add insult to injury, BakBone is paying for the acquisition mostly in equity, with $1.7m of the price tag covered by its illiquid, Pink Sheets-traded paper. We would note that Asempra’s owners are getting 3.8 million shares of BakBone, which typically only trade about 30,000 shares each session.

Select CDP transactions

Date Acquirer Target Price
May 2009 BakBone Software Asempra Technologies $2.1m
December 2007 Double-Take Software TimeSpring Software $8.3m
November 2006 Symantec Revivio $20m*
November 2006 NetApp Topio $160m
May 2006 EMC Kashya $153m
March 2006 Atempo Storactive Not disclosed

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

Buying back stock, rather than buying up companies

Brenon Daly

Contact: Brenon Daly

For a risk-averse company like IBM, it’s always preferable to buy a known than an unknown. At least that’s one way to read its decision to pass on taking home Sun Microsystems at any cost and instead put its money toward repurchasing a slug of its own equity. The recently announced $3bn buyback works out to just under half the amount that Big Blue was reported to have been ready to hand over for Sun.

That’s a fundamentally sound – if conservative – allocation of capital for IBM, a dividend-paying member of the Dow Jones Industrial Average. Nonetheless, it didn’t stop Sun’s winning suitor, Oracle, from tweaking Big Blue, saying it only got involved after IBM ‘failed’ to close the deal. For the record, we would note that since the ‘failure,’ IBM shares have moved higher while Oracle stock is essentially flat with where it was when the acquirer announced its bid. Of course, that verdict is based on just three weeks of trading.

IBM isn’t the only firm spending cash on its own shares rather than the equity of other vendors. Citrix, which hasn’t announced an acquisition in more than a half-year, recently said it plans to buy back some $300m of stock. Even when Citrix does do deals these days, they tend to be tiny purchases. Since acquiring XenSource in August 2007, Citrix has made just four small technology plays. We would chalk that up to the fact that Wall Street has been underwhelmed with Citrix’s purchase of XenSource, its largest-ever deal. And that doesn’t appear likely to change. At last week’s Synergy 2009 conference, Citrix barely mentioned M&A.

What’s the return on Borland’s M&A?

Brenon Daly

Contact: Brenon Daly

Looking a bit closer at Micro Focus’ $75m acquisition earlier this week of Borland Software, my colleague John Abbott noted that the British company was essentially picking up the Segue Software business that Borland itself bought three years ago. Borland paid $100m, or an enterprise value (EV) of $86m, for the testing and quality assurance tools vendor, which worked out to about 2.3x EV/trailing 12-month (TTM) sales. The purchase of Segue in February 2006 came as part of a larger overhaul of its business, which included Borland ditching its developer tools division.

Fast-forward three years, and Segue is being valued by Micro Focus at just 80% of the amount that Borland paid for it. If we look at Borland’s overall EV of just $67m, the contrast is even starker. Micro Focus is paying a mere 0.7x EV/TTM sales for Borland, which is just one-third the multiple that Borland shelled out for Segue. This isn’t to pick on Borland or knock it for agreeing to sell itself for $1 per share, which is probably as good an outcome as it could have hoped for.

However, the valuation gap does highlight a larger problem in realizing value through M&A. Consider that since 2002, Borland – under various chief executives – has spent more than $300m on nearly a dozen deals. And yet, when all of the firm’s dealmaking was priced by another market participant (in this case, Micro Focus), the aggregate value was actually two-thirds lower. Granted, Borland was shopping in a different time than our current recession, which has obviously pushed valuations down these days. (And the valuation decline is nowhere near as drastic as we’ve seen elsewhere in the market, such as the bankruptcy of Nortel Networks, a company that was once worth more than $200bn.) Still, it’s always worth noting the price a company pays when it buys and the price it gets when it ultimately sells.

Select Borland acquisitions

Date Target Equity value
February 2006 Segue Software $100m
October 2002 TogetherSoft $185m
October 2002 Starbase $24m

Source: The 451 M&A KnowledgeBase

Comings and goings on US exchanges

Brenon Daly

Contact: Brenon Daly

The flurry of M&A announcements on Wednesday not only boosted trans-Atlantic shopping totals so far this year by nearly 20%, it also continued the trend of thinning the ranks of US public companies. The pair of Nasdaq-listed firms that got erased on Wednesday (Borland and Vignette) brings the number of acquisition announcements of US public tech companies to some 22 so far this year.

To be clear, that sum is made up of deal announcements, not closed transactions. So it includes offers that have been rejected by the would-be target (Emulex) as well as bids where the terms are still in play (SumTotal Systems). Against that, we have had only a minimal ‘repopulation’ of the US exchanges. Just three tech companies – none of which is a true IT vendor – have gone public this year. That’s about to change with SolarWinds, which is expected to hit the market in a week or two. (And on the consumer Internet side, OpenTable set the terms of its planned IPO on Thursday.)

We would also note that Wednesday’s ‘twofer’ of Borland and Vignette is actually the third time in the past month that two deals for US public companies have been announced in a single day. The other days: April 20, with Oracle-Sun Microsystems and Trilogy-Autobytel, and April 13, with Thoma Bravo’s bid for Entrust and Image Holdings’ reach for InFocus. In terms of banking, JP Morgan Securities did the double Wednesday, advising both Borland and Vignette on their sales to Micro Focus and Open Text, respectively. But the bank is doing its part to add back public companies, leading the SolarWinds offering.

Trans-Atlantic transactions take off

Brenon Daly

Contact: Brenon Daly

It was a big and busy day on Wednesday for British companies shopping in the country’s former colony across the Atlantic. Collectively, the three deals boosted the total disclosed value of acquisitions by UK-based firms so far this year by nearly 20%. For starters, LSE-traded software vendor Micro Focus picked up one full Nasdaq-listed company and bits of another US public company, spending a total of about $155m. Taken together, the simultaneously announced deals are the second-largest transaction announced in 2009 by a UK-based buyer. Adding to that, British defense giant QinetiQ reached for a well-funded security startup in a deal that features a handsome valuation and a pretty rich possible earn out.

In the more significant purchase, Micro Focus picked up long-ailing Borland Software for $1 per share, or an equity value of about $75m. In the same breath, it also scored a business line from Compuware for $80m. Micro Focus says the addition of Compuware’s application testing/automated software quality (ASQ) unit will help bolster its existing ASQ offering, a suite of tools that it sells under the Data Express name.

One of the more interesting aspects of Micro Focus’ double-up deal is that the company tapped Arma Partners to run both processes. (The transaction was headed up by Arma’s Paul-Noël Guély, along with Keith Robinson, Varun Sunderraman and Graham Smith.) Arma has served as a kind of house bank for Micro Focus, advising on four of the company’s past five deals. On the other side of the table, Updata Advisors worked with Compuware on its divestiture and JP Morgan Securities advised Borland. We’ll have a full report on the moves by Micro Focus in Thursday’s 451 Group sendout.

In a separate transaction, QinetiQ (through its North American arm) moved deeper into the cyber-intelligence world by buying Cyveillance. Terms call for QinetiQ to hand over $40m upfront, along with a possible $40m earn out over the next two years. Cyveillance, which we understand didn’t use a banker, generated sales of about $10m in 2008. Look for a full report on the relatively richly valued transaction in tonight’s 451 Group MIS email.

Second time’s a charm for I-many?

Brenon Daly

Contact: Brenon Daly

As it reported its first profit since going public in 2000, I-many also said Wednesday that it will be going private in a $36m buyout by LLR Partners. The Philadelphia-based buyout shop – led by Greg Case, who joined LLR from Apax Partners last fall – offered 43 cents for each share of I-many. (Montgomery & Co banked I-many, with Rob Louv, John Cooper and Joe Morgan handling the mandate.) We understand that a number of other private equity firms looked at I-many, with the process picking up momentum at the end of last year.

While the proposed acquisition is slated to close this summer, it still has to clear a few hurdles. For starters, terms can change if I-many’s cash holdings dip below $8m before the deal closes. The company, which held $9m in cash at the end of the first quarter and expects to generate cash every quarter this year, said in a conference call that the $8m requirement is a ‘conservative’ level. So it shouldn’t have trouble hitting that. Indeed, I-many shares were trading in line with LLR’s offer on Thursday.

The other big obstacle is a shareholder vote. Since the offer represents a 70% premium over where I-many’s shares were trading before the bid, one might think that a sign-off is automatic. But I-many’s shareholders have already shot down one offer. In December 2004, Selectica bid some $70m for I-many. That offer didn’t make it through because I-many’s shareholders said it undervalued the company. Indeed, a year and a half later, I-many shares had doubled.

The end of 2007, however, proved to be the high-water mark for shares of I-many. From more than $3, they dropped to a low of about a dime late last year. The company was in danger of getting delisted from the Nasdaq, which would have accelerated the payment of the notes that it sold in December 2007. According to terms, note holders have agreed to hold off on that, and will redeem them when the deal closes.

A bid and a raise for SumTotal

Brenon Daly

Contact: Brenon Daly

The sum total of all interested parties in SumTotal Systems may well be greater than the two that have already disclosed themselves. At least that’s the thinking among investors – or rather, speculators – in the learning management software vendor. Recall that earlier this month, Vista Equity Partners tossed the struggling company an unsolicited offer of $3.25 for each share. (Vista is being advised by Union Square Advisors.) As we noted, the bid included a ‘go-shop’ provision.

SumTotal never got back to Vista on its offer, but it did throw its arms around a slightly richer one from Accel-KKR on Friday. The white knight bid $3.80 for each SumTotal share, valuing the company at about $124m, or $20m more than Vista’s offer. However, we would note that SumTotal shares have traded slightly above Accel-KKR’s offer price since the bid was unveiled. (On Monday afternoon, SumTotal stock was changing hands at $3.85.) Like Vista’s initial offer, Accel-KKR’s included a go-shop provision. On that front, it seems like the shopping may not be done for SumTotal.

Where might Omniture shop next?

-by Thomas Rasmussen, Kathleen Reidy

When we checked in with Omniture last month, we noted that it was likely to do a bit of shopping. My colleague Kathleen Reidy expanded on that recently with an in-depth report on the possible M&A moves by the analytics giant. Omniture has already shown itself ready to shop, having picked up five companies since its IPO in 2006. Those acquisitions, along with a solid organic growth rate, have helped to push up Omniture’s revenue seven-fold in the past three years. The company finished 2008 with $296m in sales. First-quarter results are due Thursday before the opening bell.

Having essentially consolidated its core market (except for a few private competitors), where might the giant shop next? We think a broader push into marketing automation seems a logical next step. Email marketing is one of the most active areas of Omniture’s Genesis ISV partner program. Potential targets in this space include Eloqua, a well-known and established player in marketing automation. The vendor pulled in an estimated $35m in revenue last year and has so far raised more than $40m in venture funding. Other potential targets include Silverpop, Right On Interactive and Marketbright. Like Mercado Software, which Omniture scooped up last October, all of these email marketing startups are Genesis partners.

Omniture’s acquisitions to date

Target Date Deal value Technology/Rationale
Mercado Software October 14, 2008 $6.5m Retail site search/merchandising
Visual Sciences October 25, 2007 $394m Web analytics market share
Offermatica September 7, 2007 $65m Multivariate testing
Touch Clarity February 14, 2007 $48.5m Behavioral targeting
Instadia January 18, 2007 $11.4m Web analytics market share – Europe

Source: The 451 M&A KnowledgeBase

A somewhat secure M&A market

Brenon Daly

Contact: Brenon Daly

With RSA set to open later this week, we thought we’d take a look back on deal flow since the trade show closed last year. Over the past year, we’ve seen some 83 acquisitions of security companies, with total spending of about $4.2bn. While that’s down from the comparable year-earlier period (April 2007-April 2008: 90 deals worth $5.2bn), the drop-off in security M&A has not been as steep as the overall decline in tech deals. In fact, the number of security transactions slipped just 7% from the previous year, compared to an 18% drop in the number of total tech M&A. Spending on security deals also fell less than the overall market.

Moreover, there are a number of trends that have emerged since the last RSA event that suggest security M&A may well remain healthier than the overall market. For starters, the big shoppers have done big deals. By our tally, Symantec has inked the largest security transaction since the end of last year’s RSA, paying $695m in cash to bolster its on-demand offering with MessageLabs. And McAfee checked in with the second-largest acquisition. Its $497m all-cash purchase of Secure Computing was its largest deal in a decade, and its only acquisition of a public company in at least seven years (excluding the pickup of Bulletin Board-listed Citadel Security Software in 2006).

In addition to the strategic vendors, we’re also seeing financial buyers – both through funds and PE-backed companies – looking to do deals. For instance, Sophos went back to its investors to help finance its $341m acquisition of Utimaco, the largest purchase by a privately held security company of a public counterpart. Also, Vector Capital took home Aladdin Knowledge Systems and, more recently, Thoma Bravo has a pending $114m offer for Entrust. Certainly there have been a few scrap sales, but that’s to be expected in an over-funded market like security. Overall, deal flow remains comparatively healthy in the security sector.