Category: application software

Dealing with a legacy

Brenon Daly

Justly or not, acquisitions go a long way toward shaping a CEO’s legacy. (If you don’t believe us, just ask Jerry Levin, who sold Time Inc for what turned out to be a pile of wampum, in the form of overinflated AOL equity.) With Monday’s announcements that two major tech CEOs are on their way out, we pause to look at how deals – or lack of deals – will shape their respective legacies.

Let’s start with Symantec’s John Thompson, who will leave the storage and security giant by the end of its current fiscal year next April. Under his nearly decade-long leadership, Symantec shares rose some 500%, compared to a flat performance over the same period in shares of rival McAfee and a 40% decline in the Nasdaq. However, the one blemish on his record is Symantec’s largest-ever deal, its $13.5bn purchase of Veritas. (Thompson guided Symantec through more than 40 other acquisitions during his tenure.) Symantec shares peaked at about the time the company announced the deal, and have given back most of the gains they had piled up since mid-2003.

And then there’s Yahoo’s once-and-future king, Jerry Yang. We’re guessing history will be less kind to the man who turned down Microsoft’s offer of at least $31 for each share of Yahoo. Shares of the foundering search giant briefly dipped into the single digits earlier this month. However, they jumped almost 10% on Tuesday as Wall Street applauded the imminent departure of Yang, who has overseen the incineration of some $20bn of shareholder value since he reassumed the top spot at Yahoo in June 2007.

Aside from the ‘relief rally’ for Yang’s move, Yahoo shares also got a boost from speculation that the turnover in the corner office makes a deal with Microsoft more likely. We have our doubts about that. Instead, we’d focus on what the CEO change at Symantec means for deal activity. Our bet: Incoming CEO Enrique Salem will unwind several large chunks of the Veritas business, perhaps starting with NetBackup. As recently as last summer, Thompson said ‘nothing’ from the under-performing Veritas portfolio was for sale. Salem will set the company’s line on that in the future, and we wouldn’t be surprised to see NetBackup or other storage assets find their way onto the block.

Salesforce.com for sale?

Brenon Daly2 Comments

Ever since Barack Obama won the US presidential election two weeks ago, Silicon Valley has started its own little parlor game about the incoming administration. (And make no mistake, the Valley is one of the most insular places on the planet, which makes these guessing games fun for those in certain zip codes.)

The specific gossip? Who will fill the cabinet-level position of CTO that Obama promised to create while campaigning. Early conjecture centered on Google’s Eric Schmidt, who recently replied, ‘Not it.’ Over the weekend, The Wall Street Journal reported that Oracle’s top lieutenant Chuck Phillips may be in the mix. (Phillips already did a stint of public service in the US Marines before diving into the public markets.)

We cite the rumor-mongering about Oracle’s president because we want to add our own bit of wild speculation: If Phillips leaves Oracle, a deal for Salesforce.com will move closer. We understand from a number of sources that Phillips has effectively vetoed a purchase of the on-demand CRM vendor, even though CEO Larry Ellison has indicated several times that he’d like to pick up the company, if just to jump-start Oracle’s own software-as-a-service (SaaS) offering. (An acquisition would also help Oracle widen the gap with rival SAP, which has stumbled with its own SaaS offering for midmarket companies, which it calls Business ByDesign.)

Of course, we still like Google as a buyer for Salesforce.com. That’s even more the case since the company has seen its stock price cut in half over the past year. (It sports a current market capitalization of $3.1bn, compared to projected sales in the current fiscal year of $1bn.) Wall Street will get an update of Salesforce.com’s business on Thursday, when it reports fiscal third-quarter results. Sales for the quarter are expected to come in at about $275m.

Push-back on the markdown

Brenon Daly

Rather than the current M&A market being a place where buyers and sellers meet on more or less equal footing, current deals clearly show that acquirers have the upper hand (if you’ll forgive the mixed anatomical metaphor). We’ve already noted how some would-be buyers have pushed for ‘recalibrations’ in deal prices and, for the most part, have gotten these discounts.

However, one target isn’t just sitting by for a markdown. I2, which agreed to be acquired by JDA Software Group in mid-August, has told its bargain-minded buyer that it plans to hold to the original terms of the deal. Under those terms, i2’s common shareholders would pocket $14.86 for each share. (There are also payments to satisfy i2 convertible holders, giving the proposed transaction an enterprise value of $346m.)

I2 shares traded close to the bid up until Wednesday, when JDA told i2 it wanted the company to delay its shareholder vote. I2 went ahead and held the meeting as scheduled Thursday, with more than 80% of shareholders voting for the deal. The company says it has done everything it needed to do to close the deal and ‘expects’ JDA to do the same. The market doesn’t share that expectation. Instead, it anticipates that JDA will trim its bid. I2 shares dropped $4 on Wednesday and sank again on Thursday, closing at $9. That’s almost 40% below the original offer price. In case anyone is curious, terms call for a breakup fee of $15m or $20m, depending on the split.

A Freudian deal?

Brenon Daly

We’ve run a lot of different analyses on transactions, but AccessData’s proposed acquisition of Guidance Software is the first one we’ve ever subjected to Freudian analysis. What do we mean? Well, almost all of the executives at AccessData, a private data forensics software vendor, used to work at publicly traded Guidance. (AccessData’s CEO, COO and two VPs are former employees of the company they are now bidding on.)

After its initial bid a month ago was rebuffed, AccessData took public on Tuesday its offer of $4.50 for each share of Guidance. With about 23 million shares outstanding, the proposed transaction values Guidance at about $105m. However, debt-free Guidance holds $28m in cash, lowering the enterprise value of the bid to about $77m. Guidance is expected to record about $90m in sales this year. In comparison, AccessData is about one-third that size, primarily because it doesn’t have any services revenue.

We understand AccessData, which has never taken outside funding, plans to finance the deal internally, if it goes through. Guidance has rejected the bid. And, although AccessData has threatened to take its unsolicited proposal directly to shareholders, a tender offer is unlikely to go through unless it gets the blessing of one Guidance executive: Chairman and CTO Shawn McCreight, who founded the company and owns some 44% of its stock. If nothing else, AccessData’s bid will make Guidance’s third-quarter conference call on Thursday more interesting.

Inconsistent currencies

Brenon Daly

Throughout much of the year, the US dollar looked like lightweight paper. A buck basically bought you a loonie (as our northern neighbors call their dollar), and foreign exchange traders were heard shouting jokes about ‘the American peso.’ We noted the weak US dollar as one of the key reasons that total M&A spending by US acquirers dropped by about two-thirds from mid-2007 to mid-2008, while European shopping jumped by one-third (see report).

In the wake of the global financial crisis, however, the dollar has strengthened. To get a sense of that, consider the relative value of the US dollar when two Silicon Valley-based multinational tech giants went on shopping trips to Australia this year. Back when Hewlett-Packard made its play for records management vendor Tower Software in late March, the US dollar bought about A$1.10. A few days ago, when Oracle reached for Haley Limited, $1 bought A$1.60. That’s a lot more buying power for the once-humbled US dollar.

Smoothing the spread

Brenon Daly

With the stock market in turmoil, more than a few deals have seen a gulf widen between the current price of a would-be target and its proposed takeout price. So the question becomes: How to smooth the spread? Well, two different approaches – with wildly different results – seem to support the idea of disclosure, with more being better. Wall Street, apparently, is a little skittish these days.

A month ago, JDA Software took the unusual step of issuing a press release to assure Wall Street that it can actually pay for its PE-style acquisition of i2. Originally, JDA was banking on Wachovia to help fund its purchase. But as that bank came undone, Wells Fargo stepped in to join Credit Suisse as the lenders to JDA. That deal, which was launched in mid-August, goes to i2 shareholders a week from Thursday. Meanwhile, i2 shares are currently changing hands at about $14, compared to JDA’s bid of $14.86.

Contrast that clarity with the cloudy situation surrounding Brocade Communications’ planned purchase of Foundry Networks. When Brocade unveiled its ‘Cisco-killer’ acquisition in July, it said it would pay $18.50 in cash plus a sliver of stock for each Foundry share. The networking equipment maker’s stock traded near the bid until a disastrous decision Friday to delay its shareholder vote on Brocade’s offer, citing ‘recent developments.’

While the company may have had its hands tied about what it could say about these ‘developments,’ the ominous move spooked the market. Concerns immediately arose about Brocade being able to pay for the $3bn acquisition, given the tight credit market, as well as the SAN vendor perhaps knocking down its offer price. Shares are now changing hands at $13.36 – almost exactly where they were before Brocade launched its bid three months ago. We’ll see if the initial offer holds up when Foundry shareholders vote on the deal Wednesday afternoon.

Fixed on the market

Brenon Daly

Although the IPO market is closed right now, some VCs are nonetheless steering – and steeling – their portfolio companies for a public market payday. Of course, that often means passing up a trade sale, which holds out the appealing prospect of cash on close. But Menlo Ventures’ John Jarve pointed out in his talk at IBF’s early-stage investment conference that those sales can be shortsighted. Consider the case of portfolio company Cavium Networks.

Jarve says Cavium, which makes security processors for F5 and Cisco, among others, has attracted a number of suitors. One would-be buyer floated a $350m offer for the company. Instead, Cavium went public in May 2007. At its peak, it sported a market capitalization of nearly $1.5bn. Even in the midst of the current Wall Street meltdown, Cavium is still valued at $500m.

The Cavium tale sparked a round of (perhaps apocryphal) Silicon Valley chestnuts about companies that also passed on trade sales to remain independent: Cisco allegedly rejecting an $80m offer from 3Com and Google nixing a reported $1bn bid from Yahoo. One we can add to that list is Riverbed. Several sources have indicated that Cisco made a number of serious approaches to the WAN traffic accelerator, but was rebuffed. Riverbed, which at one point was valued at about $3.5bn, currently trades at a $740m market capitalization.

Symantec-Veritas without the strings

Brenon Daly

Where Symantec purchased, McAfee will partner. Having watched its major security competitor get bogged down with a storage acquisition, McAfee has opted for a low-risk partnership to tie its security products with storage. The largest stand-alone security vendor said Tuesday that it has struck an alliance with data management software provider CommVault. The initial integrated product, which will put CommVault’s storage resource management tool into McAfee’s ePolicy Orchestrator console, will be available next year.

With modest integration and no bundled products planned, we would characterize McAfee’s loose partnership with CommVault as ‘Symantec-Veritas lite.’ And the two sides have reason to be cautious, given the struggles Symantec has had with its $13.5bn purchase of Veritas. (Although he continues to back the deal, Symantec CEO John Thompson has said the market considers the combination a ‘purple elephant’ and is uncertain of how to value it.) Since the transaction was announced in December 2004, Symantec shares have lost about half of their value, compared to a 20% decline in the Nasdaq and a slight 5% dip in McAfee stock.

Marked-down leftovers

Brenon Daly

When Oracle snapped up Primavera Systems last week, we had to spare a thought for the surviving project and portfolio management (PPM) vendors. That thought almost became the start of a eulogy as we saw Primavera’s publicly traded rival get trounced on the Nasdaq and its direct competitor still out on the market seeking a buyer.

Let’s start with the biggest of the big, Deltek Systems. Since the company, which is majority owned by buyout firm New Mountain Capital, went public a year ago, its shares have lost three-quarters of their value. That has reduced Deltek’s market capitalization to just $190m. Deltek also carries about that same amount of debt, along with a stash of roughly $33m in cash. Altogether, Deltek’s enterprise value is around $350m. That for a company that will do about $300m in revenue this year, including approximately $100m in maintenance revenue, while running at a mid-teens operating margin.

Next is Planview, another privately held PPM vendor. The Austin, Texas-based company is roughly the same size as Primavera, running at about $175m. More than a few sources have indicated that Planview has been for sale for some time, but for whatever reason, it hasn’t found a taker. Not that we imagine it would be prohibitively expensive at this point. If Plainview went for the same valuation as Primavera, it would fetch $350m; pegging the purchase price to Deltek’s current multiple would put it closer to $200m. That’s mere pocket change for IBM, which we hear may have been interested in Primavera, a partner company.

Hedge fund goes tender on Epicor

Brenon Daly

The largest shareholder of Epicor on Wednesday took its unsolicited bid directly to shareholders, just one day after the ERP vendor nixed the offer. Two weeks ago, hedge fund Elliott Associates offered $9.50 for each share of Epicor, giving the proposed transaction a $566m equity value and $814m enterprise value. (Elliott says the all-cash bid is not conditional on financing.) Epicor officially shot down the proposal, asked shareholders to wait for its board to review the proposal. The tender offer is set to expire in a month, but can be extended. Elliott, which began buying the stock in June, owns 10% of the equity, plus a slug of convertible notes. Epicor shares closed Wednesday up 4 cents at $6.84.