Category: application software

Signing off on a deal

Brenon Daly

The bear just keeps grumbling – and we don’t mean the bear market. Instead, we’re talking about the all-the-rage bear hugs that companies are giving each other. The latest: Nuance Communications’ $40m unsolicited offer for Zi Corp. (Incidentally, the new hostilities come as a pair of previous unsolicited deals – Cadence Design Systems’ run at Mentor Graphics and Electronic Arts’ move on Take-Two Interactive – head toward largely civil conclusions.)

Nuance’s offer is a classic opportunistic squeeze play, right down to the timing. The acquisition-hungry company launched the bid just hours after Zi reported second-quarter results that did nothing to shore up its already weak standing on Wall Street. (Among the lowlights for Zi: Sales in the second quarter fell by one-third, and it burned through half its cash, which fell to just $2.6m from $5m at the beginning of the year.)

Still, Nuance sees some value in Zi, and Chris Hazelton, who heads up The 451 Group’s Mobile Practice, agrees. He notes that Zi’s handwriting-recognition technology would complement Nuance’s existing mobile offering. Handwriting recognition is particularly important in Asia, where symbols rather than letters are used in many writing systems. Of course, Asia is also a booming market for mobile products.

Nuance has already shown that it’s ready to go shopping in the mobile market. About a year ago, it spent $265m for Tegic Communications to get a keypad technology platform. And make no mistake, mobile is becoming an increasingly important slice of business for Nuance, which was formerly known for basic speech recognition on PCs. In Nuance’s most-recent quarter, revenue in its mobile business grew more than twice as fast as overall revenue, and the company projected that the division would account for 20% of total sales in the current fiscal year, up from just 13% last year.

We wouldn’t be surprised in the least if Nuance ended up ahead of its projection for its mobile business. The reason: We fully expect it to acquire Zi, which would add about $15m to the top line. Zi doesn’t want to sell – and told Nuance as much in an SEC filing – but we wonder how long the money-burning company can fend off Nuance. We’re guessing most Zi shareholders, who saw the stock sink to just 30 cents earlier this month, would like Zi to use its handwriting technology product to sign off on Nuance’s bid of 80 cents per share.

Selected unsolicited tech deals

Date launched Bidder Target Status
Aug. 2008 Nuance Zi Corp Zi has declined to negotiate
June 2008 Cadence Design Mentor Graphics Cadence dropped bid last week
May 2008 Barracuda Networks Sourcefire Sourcefire has declined to negotiate
March 2008 EMC Iomega EMC closed acquisition a month later
Feb. 2008 Electronic Arts Take-Two Interactive EA dropped tender offer, but talks continue
Feb. 2008 Microsoft Yahoo Microsoft dropped bid after three months

Source: The 451 M&A KnowledgeBase

What’s brewing at Cisco?

Brenon Daly3 Comments

Although Cisco chief executive John Chambers has thrown cold water on speculation about a large acquisition, the market continues to buzz about possible deals by the networking giant. Observers who think Cisco is big-game hunting point to a number of unusual moves from the company, which – with a bit of reading between the lines – appear to suggest something big is brewing.

For starters, they point to the fact that Cisco has largely stepped out of dealflow, inking just two deals so far in 2008. (We recently noted Cisco’s conspicuous absence, just a day before it announced its $120m purchase of network device configuration vendor Pure Networks.) In comparison, this time last year Cisco had inked nine acquisitions. Additionally, Cisco has drastically scaled back its share repurchase program, perhaps suggesting the company is stockpiling cash for a big deal.

Of course, most of the rumors have concerned a possible pairing of Cisco and EMC, largely so Cisco could get its hands on VMware. (EMC sports a market capitalization of $30bn.) This comes on the heels of earlier rumors that Cisco might be looking at Citrix, largely so it could get its hands on XenSource.

We have a new name to toss into the Cisco M&A rumor mill: McAfee, which has a $6bn market cap. Speculation has recently surfaced that the networking company is eyeing the largest IT security pure play, a combination that would allow Cisco – for the first time – to have control over endpoints. It would pick up a solid portfolio of security products from McAfee, notably encryption and port and device control offerings, as well as potentially salvaging Cisco’s disastrous NAC effort. (And as an added bonus with the deal, Cisco could stick it to Symantec. Cisco has little love for Symantec.)

Whether a deal materializes, or even is being considered, we would expect Cisco to emphasize security much more in the future. It recently handed the division over to Scott Weiss, who came with the January 2007 acquisition of IronPort Systems. A VC who has invested in Weiss’ companies over the years (Weiss also ran Hotmail) said he wouldn’t be surprised if Cisco turned over the entire business to Weiss when Chambers decides to step down.

Post-acquisition decapitation

Brenon Daly

The write-offs from wrong-headed acquisitions just keep coming. And we don’t mean just financial write-offs. Instead, we’re referring to the practice of a company’s board ‘writing off’ the executives who crafted a deal. This week’s high-profile example came when Alcatel-Lucent finally tossed overboard the two architects of ‘la grande fusion.’ Since that deal was announced in April 2006, the combination has incinerated some $20bn over shareholder value, leaving the telco equipment vendor with a market capitalization of just $13.6bn. (That’s less than the sales the company posted in 2007.) That two-year performance finally got Serge Tchuruk, the company’s chairman who represents the Alcatel side of the combination, and Patricia Russo, the Lucent legacy, shown the door.

This house-cleaning at Acaltel-Lucent comes just two weeks after AMD kicked Hector Ruiz upstairs. In virtually the same breath that AMD announced Ruiz would be relieved of his CEO post but continue as chairman, the company said it will divest much of the business it picked up with its $5.4bn purchase of graphics chip maker ATI Technologies. Announcing the deal two years ago, Ruiz said his combination offered ‘limitless’ possibilities for innovation. Instead, the future of AMD looks rather limited, in large part because of the $2.5bn it borrowed to cover its disastrous purchase of ATI. AMD’s total debt stands at $5bn, compared with just $1.6bn in cash.

Meanwhile, a chief executive who we’ve always thought must be on the hot-seat for a misguided acquisition appears to have gotten a bit of a reprieve this week. Symantec CEO John Thompson said Wednesday that fiscal first-quarter sales of its backup products outpaced overall revenue growth. That reverses the recent weakness in the company’s storage offering, which Symantec acquired with its $13.5bn purchase of Veritas in December 2004. Wall Street applauded the company’s report, with shares up about 10% since Wednesday. Still, Thompson has yet to recognize much value from the three-and-half-year-old purchase of Veritas. Symantec shares, which changed hands at $21.74 midday on Friday, are still about $6 below where they were when the company picked up Veritas. Perhaps that goes some distance to explaining the loose rumors this week that something big – possibly the much-discussed divestiture of the storage business or even an outright sale of the company – was brewing at Symantec.

Leading the acquisition

Deal Stock performance since deal Status of acquiring company CEO since deal
Symantec-Veritas, Dec. 2004 Down 35% John Thompson, CEO since April 1999, continues to serve
Alcatel-Lucent, April 2006 Down 61% CEO Russo and chairman Tchuruk ousted this week
AMD-ATI, July 2006 Down 77% Long-time CEO Hector Ruiz replaced in mid-July
Secure Computing-CipherTrust, July 2006 Down 51% Chairman and CEO John McNulty replaced in April

Source: Company reports, The 451 M&A KnowledgeBase

Netezza’s bogeyman

Brenon Daly

When Microsoft gets into a new market, the impact on the existing vendors tends to be in line with the software giant’s gargantuan size. After all, fears among startups over getting ‘Netscape-d’ have often been realized. That’s particularly true in the days before the convicted monopolist started putting on a softer face on its business. Gone are the days when Microsoft would threaten ‘to cut off the air supply’ of other companies, as it famously did to the Internet browser pioneer. Maybe it’s middle-aged softness at the 33-year-old company, but Microsoft’s bite often seems a little toothless these days. (Does anyone really think Microsoft – with or without spending $45bn on Yahoo – will be able to narrow the gap to Google in search advertising?)

Still, there was a moment last week when it appeared the Redmond, Wash.-based behemoth once again looked like it had the power to scare the bejesus out of a company (and its investors) by buying its way into a market. Last Thursday, as it was holding its annual meeting with Wall Street, Microsoft said it was purchasing Datallegro, a data-warehousing startup that we estimate was running at about $35m in sales. A market source indicated that rumors of the deal started percolating late Wednesday, a day before official word of the acquisition. Almost immediately, shares of data-warehousing vendor Netezza came under pressure. After hitting an intra-day high of $13.36 on Wednesday, Netezza stock slumped as much as 8% and closed basically at the low of the day. It opened even lower Thursday and sunk the entire day, finishing the session at $11.48. From its peak to its trough in those two sessions, Netezza lost 14%, with trading on Thursday about 50% busier than average.

However, as easy as it may be to point to Microsoft’s competitive move as the reason for Netezza’s decline, the two events are linked only by coincidence rather than causality. According to two market sources, Netezza actually distributed shares back to its VCs, meaning the stock’s slump can be attributed to the supply side, rather than demand side. (There have been no SEC filings about the move, and calls to the company to verify the information weren’t immediately returned.) Maybe Microsoft isn’t the big, bad company we all thought it was?

A scratch-and-dent sale for Vignette?

Brenon Daly

With its shares currently bumping their lowest level in three years, Vignette has done little to help itself. In its second-quarter report Thursday, the dismaying decline in sales of its software continued. In the first half of 2008, Vignette has recorded just $20m in license sales, down from $30m in the first half of 2007. By way of understatement, CEO Mike Aviles acknowledged that Vignette’s software sales ‘are not where we want them’ but added additional marketing spending and recent changes in the company’s sales executives should help.

We’re not so sure those moves will help the struggling company. Vignette already spends one-third of its revenue on sales and marketing, and indicated that it may bump up that level for the rest of the year. (Not that the company has much insight into how business will run in the coming months. Consider its laughably broad guidance to Wall Street on its loss of the current quarter: It said it’ll lose something between 7 and 21 cents per share in the third quarter, representing a net loss in the period of $1.7-5m.)

One of the main reasons Vignette continues to struggle is that it’s going against some tough competition, including Oracle and IBM, as well as stand-alone content management players. For that reason, we could certainly see Vignette benefiting from being part of a larger company. And indeed, we’ve heard from two sources that the ongoing auction for Vignette has narrowed to two final parties. While we don’t know the specific names, we suspect Hewlett-Packard may well be one. (Don’t forget that the head of HP’s software division, Tom Hogan, knows Vignette intimately. Hogan served as CEO of the company from 2002-2006 before moving to HP.)

And the price for Vignette certainly isn’t prohibitive. With the stock having slid 40% over the past year, Vignette currently garners a market capitalization of just $280m. However, the debt-free company also has $90m in cash and equivalents in its bank account, lowering the net cost of Vignette to just $190m. That’s about the same level of sales it is likely to report this year. In the past, shoppers have paid 2.6 to 2.9 times enterprise value/revenue for their purchases of other publicly traded content management vendors. However, we doubt Vignette – with its slumping software sales and spendthrift marketing plans – will command that kind of multiple.

Selected significant content management deals

Date Acquirer Target Price EV/sales multiple
August 2006 IBM FileNet $1.6bn 2.6x
November 2006 Oracle Stellent $440m 2.9x

Source: The 451 M&A KnowledgeBase

Star-crossed companies?

Brenon Daly

Having already made a pair of profitable on-demand investments, venture firm StarVest Partners has decided to take a larger bite in its most recent software-as-a-service (SaaS) deal. The New York City-based firm recently led the majority acquisition of Iron Solutions, which provides online information about used farm and industrial machinery. (Want to buy a John Deere tractor? There are nearly 2,900 of them for sale on the Iron Solutions site.) StarVest put up $8.5m of the $15m for 90% of Iron Solutions, with the remaining money coming from Dublin Capital Partners, Spring Mountain Capital and GVIC Communications.

The deal caught our eye because StarVest was also an early investor in NetSuite, owning 5% of the company according to the S-1 filed ahead of NetSuite’s IPO in 2007. (StarVest’s other SaaS exit came when Dell paid $155m in cash for portfolio company MessageOne, an on-demand email archiving company run by Michael Dell’s brother.)

StarVest’s interest in NetSuite dates back to May 2000, when it led a Series C investment in the SaaS applications suite vendor together with Oracle head honcho Larry Ellison. (Ellison, of course, is the co-founder and majority owner of NetSuite.) Iron Solutions and NetSuite teamed up in October 2007 to provide industry-specific applications for agricultural equipment dealerships, and the on-demand player often uses that example to illustrate how its software can be tailored to a specific industry.

Does StarVest’s simplification of the capital structure at Iron Solutions make a sale more likely, perhaps making the firm a broker in a deal between a pair of portfolio companies? (We would note that Oak Investment Partners recently played matchmaker in an inter-portfolio marriage of two SaaS companies.)

Speculation about a possible purchase of Iron Solutions by NetSuite may be a bit of a stretch. However, it’s worth noting that NetSuite’s only acquisition so far has been a vertical deal: the $31m purchase of OpenAir, which helped boost NetSuite’s services industry expertise.

Perhaps NetSuite could broaden the focus of Iron Solutions’ online marketplace, appraisal and valuation services to a much wider market. The applications vendor has already begun to offer applications tailored for light manufacturing and has voiced a desire to add in heavy manufacturing in the future. If it’s serious about those moves, NetSuite may well find that Iron Solutions’ equipment marketplace and other know-how come in handy. The two sides, and their backers, certainly know each other well enough.

Selected StarVest exits

Company Event
MessageOne Sale to Dell for $155m
NetSuite IPO in December 2007

TomorrowNot

Brenon Daly1 Comment

There will be no more tomorrows for TomorrowNow. SAP, which bought the software maintenance provider in January 2005, said Monday it’s shuttering the division. Even though the German giant is killing off TomorrowNow, the lawsuit involving its subsidiary will live on. Recall that Oracle sued SAP more than a year ago, alleging TomorrowNow illegally downloaded information about Oracle’s support program. (SAP initially acquired TomorrowNow as a way to siphon off some of the rich maintenance stream that Oracle collects for supporting its application. Ironically, SAP launched the program with the title ‘Safe Passage.’)

Since the original lawsuit was filed in March 2007, the scope of it has broadened. Oracle is now seeking $1bn in damages. With TomorrowNow facing that kind of a hit, it’s perhaps not surprising that SAP, which had been shopping the division for several months now, found no willing buyer. We can only imagine the lengths that SAP must have gone through to write around the potential $1bn liability in putting together a pitch-book for TomorrowNow. However SAP worded the ‘for sale’ ad, it failed to generate any interest, even with the person who probably knows more about the business than anyone else.

Seth Ravin, who founded and ultimately sold TomorrowNow to SAP, has since moved on and founded a similar business supplying discounted support for ERP applications, Rimini Street. Although Rimini Street may have looked at bulking up through acquiring TomorrowNow, reports indicated that the company passed on a deal. We can only imagine how much SAP wishes it go back in time and pass on the TomorrowNow deal, which has brought it so much trouble.

Troubled timeline

Date Event
Jan. 2005 SAP acquires TomorrowNow
March 2007 Oracle sues SAP, alleging illegal corporate espionage
Nov. 2007 SAP looks to sell off TomorrowNow
April 2008 Oracle expands lawsuit
Feb. 2010 Case scheduled to be heard in court

Courting deals

Brenon Daly

Just how often is legal discovery a form of M&A due diligence? We asked ourselves that question on July 2 when IBM shelled out an undisclosed amount of money for Platform Solutions (PSI) after the two companies had battled each other in the courtroom since late 2006. Big Blue’s initial suit alleged patent infringement, while PSI’s countersuit raised questions of antitrust concerns.

Of course, we would never suggest that Big Blue simply bought off PSI, using its vast cash reserves to quiet a critic. And even if that was IBM’s motivation, we can hardly fault the company for determining that money spent to move its mainframe business ahead through acquisition has a higher potential ROI than just writing checks to lawyers.

With that case closed (as they say in the courtroom), we wonder if a similar scenario will play out at i2 Technologies. As we’ve noted in the past, the supply chain software vendor has run into a heap of problems, prompting it a year ago to hire JPMorgan to advise it on ‘strategic alternatives.’ One of those problems got resolved recently when SAP agreed to fork over $83m to settle a nearly two-year-old patent infringement suit. (To put i2’s legal windfall into perspective, consider that the settlement is twice as much as the company has earned in the past two years combined.) While we initially figured a buyout shop as the likely acquirer for i2, we now wonder if the settlement from SAP is merely a down payment on an acquisition of i2.

Courtroom drama

Parties Legal issue Outcome
IBM-Platform Solutions Patent infringement IBM acquires PSI, undisclosed amount
SAP-i2 Patent infringement SAP pays $83m settlement, all charges dropped

Source: The 451 M&A KnowledgeBase and SEC

Location-based stalking?

2 Comments

Nokia has been going navi-crazy lately. Last week, the Finnish conglomerate bought location-based social networking company Plazes for an estimated $30m. This comes as the company is wrapping up the largest acquisition in its history – the $8.1bn purchase of Navteq. We believe this is just the beginning for Nokia and others in the excessively hyped mobile location-based services (LBS) space. The question arising from this acquisition, as well as Vodafone’s $48.7m acquisition of Zyb in May, is what these acquisitions mean for the rest of the market. One implication is already clear: GPS technology has been commodified. (Just ask shareholders of Garmin, who have seen the stock skid to a two-year low.) With this technology popping up on dozens of devices, we expect hardware vendors to be even more active in snapping up LBS startups.

Nokia plans to roll Plazes into its Nokia Maps division, which itself was formed from the acquisition of gate5 in late 2006. It is part of Nokia’s overall strategy to have GPS technology play a large role in expanding beyond just being a mobile hardware company. Nokia claims it will sell upward of 37 million GPS-enabled handsets this year alone. The approaching worldwide release of the GPS iPhone, as well as Research in Motion’s push to include the technology in most of its BlackBerry devices, make it clear why high-profile backers such as KPCB and Sequoia Capital are so excited about LBS applications.

Beyond being a simple technology purchase, however, Plazes and other future deals will likely bring another important component to the apps: users. Despite their hype and position as leaders in the space, services such as Palego’s Whrrl, Loopt and Brightkite have fewer than a million users combined. Compare that to the hundreds of millions of users that ‘traditional’ social-networking sites such as Facebook and MySpace command, and one wonders what the hype is all about. By pairing up with larger companies, however, the services get instant access to millions of users. It is the technology and expertise that rumored suitors such as Facebook, Microsoft, Google and now the mobile carriers and hardware manufacturers are interested in. With continued consolidation, the fear of being left behind in a potentially important market will drive many to acquire first and ask questions later. Nokia might have just lit the fire in the M&A race to dominate the LBS market.

Seven signs of a consolidating LBS industry

Announced Acquirer Target Deal value
June 2008 Nokia Plazes $30m*
June 2008 Polaris Hughes Telematics $700m
May 2008 Vodafone Zyb $48.7m
October 2007 Nokia Navteq $8.1bn
July 2007 TomTom Tele Atlas $2.8bn
July 2007 Springbank Resources Location Based Technologies (fka PocketFinder) $50m
August 2006 Nokia gate5 $250m*

*estimated, Source: The 451 M&A KnowledgeBase

Bear market mauls debutants

Brenon Daly

The talking heads at the Nasdaq and the New York Stock Exchange generally define a bear market as a 20% decline from the index’s highs. And, as anyone who picked up a weekend newspaper knows, the markets have officially slumped into bear territory since peaking last fall.

Of course, an index is made up of individual stocks, with some getting more roughed up than others. Oracle has basically traded flat since the Nasdaq meltdown began last October; Microsoft has matched the index’s decline; and VMware has been hammered, plunging nearly three times the Nasdaq decline over the same period. (Another way to look at the meltdown in shares of VMware: At its peak, VMware stock was worth roughly the same amount as a barrel of oil at current prices. Now, you’d have to pony up nearly three shares of VMware to trade for that same barrel of oil.)

With investors not willing to take a chance on shares of existing companies, what chance do the shares of largely unknown and entirely untested IPO candidates have? The short answer is ‘zilch.’ Actually, it’s somewhat of an academic question as there hasn’t been a VC-backed IPO since ArcSight floated on the Nasdaq four months ago. (As we’ve written in the past, we wouldn’t be surprised to see ArcSight get gobbled up, with Hewlett-Packard a logical buyer, in our view.)

With the IPO window closed, corporate acquirers have even more leverage in negotiations. (In other words, don’t expect transactions going off at a double-digit price-to-sales multiple, like IPO candidate EqualLogic got from Dell last November.) We’ve already seen Initiate Systems scrap its proposed offering and go hat-in-hand to a gaggle of investors. Meanwhile, a handful of other S-1s from other companies are gathering dust at the SEC. And we hardly expect any movement during the third quarter. Given the parched IPO market and corporate acquirers in the doldrums, it’s going to be a long, hot summer for a few of these IPO candidates.