Category: application software

Oracle-Sun: a system on the cheap

Brenon Daly

Contact: Brenon Daly

Oracle’s big step into the hardware market comes at a relatively small price. In buying Sun Microsystems, Oracle is paying just one-tenth the valuation that it paid in its other multibillion-dollar acquisitions. The difference: the other purchases added software vendors with increasing sales and solid profitability, while Sun provides neither of those. Sun revenue is likely to slip about 10% in the current fiscal year, which ends in June, and the company has lost money in three of the past four quarters.

Still, the valuation drop-off is striking. Sun had generated some $13.3bn in trailing 12-month (TTM) revenue. Based on an offer that gives Sun an enterprise value (EV) of $5.6bn, Oracle is paying just 0.42x Sun’s TTM sales. In the four other acquisitions worth more than $1bn that Oracle has inked, the company has paid between 3.7x EV/TTM (Hyperion Solutions) and 5.2x EV/TTM sales (BEA Systems.)

Oracle’s multibillion-dollar deals

Date Target Equity value EV/TTM sales
December 2004 PeopleSoft $10.46bn 3.9x
January 2008 BEA Systems $8.5bn 5.2x
April 2009 Sun Microsystems $7.4bn 0.46x
September 2005 Siebel Systems $5.85bn 4x
March 2007 Hyperion Solutions $3.3bn 3.7x

Source: The 451 M&A KnowledgeBase

Preemptive consolidation in financial IT?

-Contact Thomas Rasmussen

With reports indicating that IBM has pulled its multibillion-dollar offer for Sun Microsystems, the second-largest deal of the year so far is the $2.9bn all-equity purchase of Metavante by Fidelity National Information Services (FIS) announced in early April. (Yesterday, Express Scripts announced that it will fork over $4.7bn for WellPoint’s NextRx subsidiaries.) In fact, we recently noted that the first quarter closed without a single transaction worth more than $1bn. It was the first time a quarter passed without a 10-digit deal since we began keeping records in January 2002. This transaction consolidates two active acquirers. Metavante and FIS have together inked more than 30 purchases over the past five years: FIS has completed 18 deals worth north of $7bn (excluding this pickup), while Metavante has closed 15 to the tune of about $1.4bn.

The combined FIS and Metavante will have revenue of $5.1bn, about $300m in cash after the transaction closes, and free cash flow of about $700m. However, though the management of the new company outlined its healthy cash flow as means for making further acquisitions, we don’t expect them to step immediately back into the market as the giants work on integrating the blockbuster deal. (We would note that both FIS and Metavante were out of the market in 2008.) Instead, we expect near-term consolidation to likely come from the firm’s two remaining large competitors Fiserv and First Data Corp, which Kohlberg Kravis Roberts took private for $30bn two years ago. Additionally, we could see Oracle and IBM using their vast cash reserves to buy their way into this sector. In fact, FIS and Metavante said in their conference call discussing their planned transaction that one of the reasons they were getting together was to stave off the expected competition from Oracle and Big Blue. So who might be of interest to any of these buyers? We suspect smaller players such as Jack Henry & Associates or even payments competitors TeleCommunication Systems and S1 Corp could well become targets.

Financial IT M&A by the now three largest buyers since 2002

Acquirer Number of deals Total deal value
FIS-Metavante 42 $12.7bn
First Data Corp 20 $9bn
Fiserv 28 $5.3bn

Source: The 451 M&A KnowledgeBase

PE firm calculates SumTotal

Brenon Daly

Contact: Brenon Daly

A half-decade ago, a pair of struggling public companies joined together in an effort to capitalize on the fragmented e-learning market. Click2Learn.com and Docent, which had beat up on each other for years, merged into a single company under the name SumTotal Systems. (Shareholders of Click2Learn held 52% of the combined entity, with Docent shareholders owning the rest.) The merger did little to help SumTotal’s performance on the Nasdaq. Since the pairing, which closed in mid-March 2004, the stock had dropped from above $8 to a low of $1.33 last month.

Earlier this week, Vista Equity Partners floated a bid of $3.25 for each of the 31.8 million shares of SumTotal outstanding. The buyout firm owns about four million SumTotal shares, or about 12.6% of the total. Vista started to accumulate its position in September, when the stock was just under $5, according to US Securities and Exchange Commission filings. Vista is the company’s largest shareholder. In addition, the second-largest holder, Discovery Group, has indicated that it wants SumTotal to sell the business. For its part, SumTotal (advised by RBC Capital Markets) has said only that it is reviewing the offer.

Vista’s unsolicited offer for SumTotal has more than a few echoes of Vector Capital’s recent grab of Aladdin Knowledge Systems. Both unsolicited bids came from San Francisco-based PE shops that had amassed a large stake in each company. Both valued the targeted company at less than 1x trailing sales, on enterprise value. (And somewhat unusually, both offers included ‘go-shop’ provisions.) There is one crucial difference, however, between the two targets: SumTotal isn’t profitable, and in fact has never turned a profit. Altogether, it has rung up an eye-popping $353m in accumulated deficit.

IBM-Sun: Nothing but March madness?

Brenon Daly

Contact: Brenon Daly

Maybe the speculation around IBM buying Sun Microsystems was nothing more than a bit of March Madness. When reports surfaced last month that a deal could be in the works, Sun’s long-ailing shares soared from about $5 to nearly $9 in a single session. (At the time, we also looked at what a potential pairing of the tech giants might mean.) And it wasn’t just sporadic trading that powered the mid-March move. More than 160 million Sun shares traded the day after The Wall Street Journal carried its report on initial talks, meaning volume was eight times heavier than average.

It turns out that anybody who bought the stock from then until last Friday is now underwater. (Or to continue our NCAA basketball terminology, they’ve had their bracket busted.) Both the WSJ and The New York Times reported Monday that a deal – even at a lowered price – may be off the table. Sun shares gave up one-quarter of their value in Monday afternoon trading, falling to about $6.50 each. Volume was again several times heavier than average.

Amid all these reports of tough negotiating and ‘recalibrated’ deal terms, we’re reminded of the five-month saga of one public company buying another public company last year. In mid-July, Brocade Communications unveiled a $3bn offer for Foundry Networks, paying nearly all of that in cash and only a tiny slice in equity. As the equity markets plunged last October, the two sides agreed to lower the deal value to $2.6bn by trimming the cash price and removing the equity component. (Brocade shares had been cut in half during the time from the announcement to the readjustment.)

Now, the combined Brocade-Foundry entity, which has existed since mid-December, has a total market capitalization of just $1.5bn. In fact, my colleague Simon Robinson recently speculated that Brocade may be attracting interest from suitors. One of the names that has popped up? IBM, which would get an instant presence in the networking market. And if Big Blue is done with Sun (as reports suggest), then perhaps the company will just shift its M&A focus.

Will mobile payment startups pay off?

-Contact Thomas Rasmussen, Chris Hazelton

In 2006 and 2007, mobile payment startups were a favorite among venture capitalists. The promise of dethroning the credit card companies by bypassing them had VCs and strategic investors throwing hundreds of millions of dollars after such startups. During this time, a few lucky vendors managed to secure lucrative exits. Among other deals, Firethorn, a company backed with just $14m, sold to Qualcomm for $210m and 3united Mobile Solutions was rolled up for $70m as part of VeriSign’s acquisition spree. Recent prices, however, haven’t been anywhere near as rich. Consider this: VeriSign unwound its 3united purchase last month, pocketing what we understand was about $5m. Similarly, Sybase picked up PayBox Solution for just $11.4m, while Kushcash and other promising mobile payment startups have quietly closed their doors.

Last week, Belgian phone company Belgacom took a 40% stake in mobile payment provider Tunz. Tunz has taken in a relatively small $4m in funding since launching in 2007, but with VCs sidelined, we believe this investment was a strategic cash infusion to keep alive the company behind Belgacom’s mobile payment strategy. It may well be a prelude to an outright acquisition. With valuations clearly deflated and venture capitalists nowhere to be seen, we believe mobile service providers are set to go shopping for payment companies. Who might be next?

Yodlee, mFoundry and Obopay are three companies that have made a name for themselves in the world of mobile banking and payments. Each has secured deals with the major banks and wireless companies, but still lacks scale. Further, all of them are facing increased competition from deep-pocketed and patient rivals such as Amazon, eBay’s PayPal and Google’s CheckOut. Still, we believe they are attractive targets for wireless carriers or mobile device makers, who are increasingly on the lookout for additional revenue streams.

In fact, Obopay received a large investment from Nokia last week as part of its $70m series E funding round. Nokia’s portion is unclear, but Obopay tells us the stake gives Nokia a seat on its board. (Additionally, we would note that this investment comes directly from Nokia, rather than its venture arm, Nokia Growth Partners, as has typically been the case). This latest round brings Obopay’s total funding to just shy of $150m. Although we wonder about the potential return for Obopay’s backers in a trade sale to Nokia, the mobile payment vendor would clearly be a great complement to Nokia’s growing Ovi suite of mobile services. (We would also note that Qualcomm put money into Obopay and considered acquiring the company, but instead went with Firethorn.) Likewise, Yodlee and mFoundry’s roster of strategic investors and customers reads like a short list of potential buyers: Motorola, PayPal, Alltel (now Verizon), along with other large banks and wireless providers. Yodlee says it has raised more than $100m throughout its 10-year history, and mFoundry has reportedly raised about $25m.

Back-of-the-envelope thinking on Red Hat-Oracle

Brenon Daly

Contact: Brenon Daly

If Oracle was seriously planning a bid for Red Hat (and we have our doubts about such a pairing), then Larry Ellison had better be prepared to reach deeper into his pocket. Following Red Hat’s solid fiscal fourth-quarter report, shares of the Linux giant jumped 17% to $17.60 on Thursday. That added about a half-billion dollars to Red Hat’s price tag, with the company now sporting a fully diluted equity value of some $3.5bn.

Looking back at the nine US public companies that Oracle has acquired this decade, we would note that Oracle has paid an average premium of 14% above the previous day’s closing price at the target company. (Note: We excluded the two-year-long saga around PeopleSoft.) If we apply that premium, which we acknowledge is crudely calculated, to Red Hat, the company’s equity value swells to $4bn, or about $21 per share. That’s essentially where Red Hat shares changed hands in August, before Wall Street imploded.

On the other side of the table, Red Hat recently cleaned up its balance sheet, which certainly makes it a more palatable target. (Again, we don’t think the company is in play, much less took the steps to catch Oracle’s eye. More so, that it was just good fiscal practice.) Specifically, Red Hat paid off all of its debt and finished its fiscal year, which ended last month, with $663m in cash and short-term investments. That would be a nice ‘rebate’ for any potential buyer, in the unlikely event that Ellison or anyone else reaches for Red Hat.

Oracle M&A: real and rumored

Brenon Daly

Contact: Brenon Daly

Since 2005, Oracle has notched an average of about an acquisition per month each year. Generally speaking, the deals can be sorted into three main buckets: broad horizontal technology purchases, small technology tuck-ins and equally small purchases of companies selling applications for specific industries. Fittingly for a busy buyer, Oracle has one of each of those types of transactions either done or ready to get done. At least, those are the rumors.

First, let’s start with an acquisition that Oracle has announced. On Monday, the vendor said it will pay an undisclosed amount for Relsys, a 22-year-old company that makes safety and risk management software for the pharmaceutical industry. Oracle’s purchase of the Irvine, California-based company comes after it made similar buys for software vendors that serve specific industries, including telecommunications, insurance, retail, utilities and others.

Turning to the speculative transactions, we heard a month ago from several sources that Oracle was interested in picking up Virtual Iron Software. As an example of a technology acquisition, Virtual Iron would add Xen management capabilities to Oracle, which already has a Xen-based hypervisor. And on a larger scale, the market has been buzzing with talk this week about whether Oracle might be mulling a bid for Red Hat. (The open source giant, which reports earnings after today’s close, has seen its shares double since late November.)

While Oracle has reached for open source vendors in the past (Sleepycat Software and Innobase) and still lacks an OS offering in its portfolio, we have doubts that it would make a play for Red Hat. The main reason: Larry Ellison has maintained that his company does not need to have a Linux distribution of its own since it provides support for Red Hat via its Unbreakable Linux program, which was launched in late 2006.

Select platform acquisitions by Oracle

Date Target Price Market
January 2008 BEA Systems $8.5bn Middleware
May 2007 Agile Software $495m Product lifecycle management
March 2007 Hyperion Solutions $3.3bn Business intelligence
November 2006 Stellent $440m Content management
September 2005 Siebel Systems $5.85bn CRM
December 2004 PeopleSoft $10.46bn ERP

Source: The 451 M&A KnowledgeBase

Oracle’s stimulus package

Brenon Daly

Contact: Brenon Daly

One way to read Oracle’s novel announcement on Wednesday that it will start paying a dividend is that after years of handing out money to shareholders of other companies in the form of acquisitions, it will dole out some to its own investors. Word that the software giant will pay a dividend for the first time comes after a quarter in which Oracle acquired just one company, mValent. It was the lowest quarterly total for the company in recent memory, and compares with the shopping spree in the same quarter last year that saw it take home BEA Systems for $8.5bn, among other deals.

Although terms for Oracle’s most-recent acquisition weren’t released, we understand that it paid less than $10m for mValent, a change and configuration management startup. Viewed in light of the announced dividend of a nickel per share, even assuming that Oracle paid $10m for mValent, the purchase price works out to just 4% of the cash that the company is set to return to shareholders next month. (With five billion shares outstanding, Oracle’s dividend bill will be $250m per quarter, or $1bn for the full year.)

Even though time and money can only be spent once (as the saying goes), merely committing to paying a dividend doesn’t necessarily take a company out of the M&A market. Look at Microsoft, which has been a dividend-paying company since the beginning of 2003. It has inked four of its five largest deals even as it handed back billions of dollars to its own shareholders. And that corporate largess has hardly imperiled the Redmond, Washington-based behemoth. It finished last year with more than $20bn in cash and short-term investments on its balance sheet.

Oracle’s M&A, by quarter

Period Deal volume Disclosed and estimated deal value
Fiscal Q3 (December-February) 2009 1 Estimated less than $10m
Fiscal Q2 (September-November) 2008 5 $455m
Fiscal Q1 (June-August) 2008 2 Not disclosed
Fiscal Q4 (March-May) 2008 2 $100m
Fiscal Q3 (December-February) 2008 4 $8.5bn
Note: Oracle’s fiscal year ends in May

Source: The 451 M&A KnowledgeBase

M&A at Accellos

Brenon Daly

Contact: Brenon Daly

Another supply chain management (SCM) rollup is getting rolling. Colorado Springs, Colorado-based Accellos has already closed four acquisitions and has a letter of intent in place for its fifth. Backed by a handful of private equity (PE) firms, Accellos began shopping back in October 2006 with the double-barreled purchase of Headwater Technology Solutions and Radio Beacon. The pair of deals gave Accellos $15m of combined revenue out of the gate. The company added one company in both 2007 and 2008.

As it was closing the purchase of Prophesy Transportation Solutions last September, Accellos also pulled in a $28.5m second round of financing. (That brought its total funding to $54m, although it still has $20m of that in the bank.) Accellos, which projects that it will wrap this year with some $45m in sales, says it’s only about halfway through its shopping spree. (It’s looking for companies with revenue of $4-8m.) The company indicated at this week’s Montgomery Technology Conference that it will probably need to close a total of 9-10 deals in coming years to hit its goal of more than $100m in annual sales.

If Accellos’ strategy sounds familiar, it’s because at least two other PE-backed companies have also set about rolling up the SCM market. Battery Ventures picked up HighJump Software for $85m last May, and then tacked on BelTek Systems Design last November and Insight Distribution Software a month ago. And since Francisco Partners acquired RedPrairie in May 2005, the company has inked seven acquisitions.

Bargains for SuccessFactors

Brenon Daly

Contact: Brenon Daly

Having organically built an on-demand business that cracked $100m in sales last year, SuccessFactors may be ready to do a bit of shopping. The switch comes a year after the human capital management (HCM) vendor told us that despite the company’s close ties to Jack Welch, it didn’t expect to do deals like the former General Electric chief executive.

But as valuations of smaller HCM players have been slashed, there may be some bargains out there that are too good to pass up, CFO Bruce Felt said recently. He added that the company has some $70m in cash and $33m in short-term investments. And in the fourth quarter of 2008, SuccessFactors generated operating cash flow for the first time, and the company indicated that would continue in 2009.

SuccessFactors would be looking to pick up technology, rather than make a large-scale consolidation move. (We would note that neither of the recent consolidation moves in the HCM market, Taleo’s $128.8m purchase of rival Vurv Technology and Kenexa’s $115m acquisition of BrassRing, has gone particularly well.) While SuccessFactors says it’s in the market, the company isn’t counting on deals to continue to boost its top line. It recently forecast 30% organic growth for this year. While that’s less than half as fast as it grew in 2008, it’s a pretty healthy clip during a recession.