Category: divestitures

PE: which door is marked ‘exit’?

Brenon Daly

by Brenon Daly, Jason Schafer

After chalking up some 17 purchases under the ownership of a private equity (PE) consortium, ViaWest has been bought by another PE firm. Oak Hill Capital Partners will pick up the 11-year-old managed hosting provider, which currently operates 16 datacenters and counts 1,000 customers. Although financial details of the transaction were not disclosed, we estimate the purchase price at around $420m. That works out to about 4.2 times trailing revenue and about 10 times cash flow for ViaWest, according to our understanding. (My colleagues at Tier1 Research estimate that roughly 70% of ViaWest’s revenue comes from its colocation business, with the remaining 30% coming from managed services.)

The deal, which should be completed this quarter, caught our eye because it is yet another recent sponsor-to-sponsor transaction that we estimate is valued in the hundreds of millions of dollars. Almost exactly two months ago, Francisco Partners flipped RedPrairie to New Mountain Capital for what we understand was roughly the same price as ViaWest. The sale of the supply chain management vendor came even though it had filed a few months before that to go public.

While there’s certainly nothing wrong with buyout shops swapping assets, it’s hardly the sign of a healthy exit environment for PE firms. Of course, there is one gigantic counterpoint to that: NXP Semiconductors, owned by Bain Capital and KKR, filed last week to sell $1.15bn worth of shares on the NYSE. The buyout tandem picked up the chip maker in 2006, when it was spun off of Royal Philips Electronics. We’re certain that a lot of fellow financial buyers, which also took home chip companies during the LBO boom in 2006-07, will be following NXP’s offering very closely.

Phoenix sheds FailSafe

Brenon Daly

Contact: John Abbott

Phoenix Technologies announced at the start of the year that it was putting its plans to expand beyond the core BIOS software business on hold, and hired GrowthPoint Technology Partners to find a buyer for its non-strategic technology assets. A short time later, CEO Woodson Hobbs was out the door, followed soon after by CFO Richard Arnold. Ironically, Hobbs was originally hired in September 2006 to turn the company around, and his first task back then was to rebuild the BIOS business after Phoenix had lost its way through diversification. It appears that Hobbs fell into the same trap by putting too much effort into HyperSpace, a hypervisor that was being positioned as the basis for an OS for netbooks. Tom Lacey, who previously worked at Applied Materials Inc and before that Flextronics, took over as CEO in February.

Now a buyer has been announced for the first of Phoenix’s unwanted assets: FailSafe, a theft-loss protection and prevention system for laptops, and the associated Freeze computer locking system. The acquirer is security tools provider Absolute Software and the price tag is $6.9m. (This is Absolute’s second acquisition in five months: last December it spent $9.6m on the assets of Pole Position Software, primarily for the target’s LANrev asset management package). Phoenix is still trying to offload HyperSpace itself as well as the eSupport.com line of online PC diagnostics tools.

Since the need for a new OS to run on netbooks now appears to be fading away, HyperSpace could conceivably be utilized by vendors addressing the desktop virtualization market. However, the largest players here – VMware, Citrix and Microsoft – are working with their own hypervisors and are unlikely to want another. Interestingly, Phoenix has filed a patent-infringement lawsuit against startup DeviceVM, the developer of the SplashTop lightweight Linux OS. DeviceVM has licensing deals in place with netbook and laptop makers Asus, Hewlett-Packard, Lenovo, LG Electronics, Acer and Sony.

New CEO Lacey claims that excellent progress is being made on refocusing Phoenix back onto its BIOS business. At the end of fiscal 2009 (ending September 30), the noncore products made up less than 10% of Phoenix’s $67.7m in revenue, an overall decline of 8% over 2008. That means core BIOS sales are back down to the same level as they were in fiscal 2006, despite the acquisition of direct rival General Software Inc in July 2008. In its most recent first quarter, the company posted revenue of $15.6m (down from $17.4m in Q1 2009) and a profit of $1.1m (including a one-off $7.1m income tax refund). Phoenix has cash on hand of $27.9m.

Yahoo: glad for the greenbacks

Brenon Daly

Contact: Brenon Daly

Completing its second divestiture in less than a month, Yahoo said Wednesday that it was selling its online help-wanted site HotJobs to Monster Worldwide. Yahoo will get $225m in cash for HotJobs, roughly half the $436m the search engine paid for the job-listing site back in December 2001. The original acquisition called for Yahoo to cover the purchase with half cash and half stock. On the divestiture, we’re pretty sure Yahoo is glad terms called for straight cash.

We understand that at various points during the process, which played out over the past 15 months, Yahoo considered taking a mix of cash and Monster equity or even Monster shares outright for HotJobs. That would have been a kick in the gut to Yahoo, which has had enough problems with its own equity in recent times. The reason? Monster stock dropped 12% on Thursday after the company came up short of Wall Street earnings expectations for the fourth quarter amid a 27% decline in revenue. Had Yahoo taken Monster shares, the $225m deal would be worth just $198m at the end of its first day.

More businesses on the block at LexisNexis?

Brenon Daly

Contact: Brenon Daly

When LexisNexis announced last month that it was selling off its HotDocs business, it got us thinking about other divestitures that the information provider may be contemplating. More specifically, we wonder if LexisNexis is considering reheating its effort to shed Applied Discovery. Not too long ago, we heard rumors that LexisNexis had hired a bank to help it unwind its $95m purchase of the Seattle-based e-discovery startup. LexisNexis picked up Applied Discovery in mid-2003.

According to one source, LexisNexis came close to selling Applied Discovery to the Silicon Valley-based buyout shop for about $70m, but talks collapsed during due diligence. Shortly after that, LexisNexis cut its asking price for Applied Discovery to basically half of the $95m that it originally paid for the company, but a second source indicated that the unit still didn’t generate much interest. The reason? Many would-be financial buyers are put off by the lumpy business in the e-discovery sector. Sales are typically driven by investigations or lawsuits, which can make it difficult to predict. Meanwhile, among the strategic buyers, many of the large information management vendors – including Autonomy Corp, Iron Mountain, Seagate and EMC, among others – have already announced acquisitions of e-discovery players.

freenet: getting paid to sell

Brenon Daly

Contact: Brenon Daly

In a time when nearly all divestitures are done on the cheap, freenet’s recent sale of its mass-market hosting business Strato generated an unexpectedly rich return for the German telco. In fact, freenet more than doubled its money in the five years that it owned Strato. Back in December 2004, freenet handed over $177m ($107m in cash, $70m in equity) to German network equipment provider Teles for Strato. When freenet shed Strato to Deutsche Telekom (DT) two weeks ago, it pocketed $410m. (Arma Partners advised freenet on the divestiture.)

On top of that return, of course, freenet will hold on to the cash that Strato generated while owned by freenet. That’s not an insubstantial consideration, given that Strato ran at an Ebitda margin in the mid-30% range. We understand that Strato was tracking to about $50m in Ebitda for 2009, up slightly from about $46m last year. Revenue at Strato was also expected to show a mid-single-digit percentage increase in 2009, despite the tough economic conditions in freenet’s home market of Germany. DT’s bid values Strato at roughly 3x trailing sales and nearly 9x trailing Ebitda. That’s a solid valuation for corporate castoffs, which typically garner about 1x trailing sales and maybe 4-5x Ebitda.

Freenet’s divestiture of the Strato hosting business to DT comes a half-year after it sold its DSL business to United Internet, a sale that was also banked by Arma. The company has been looking to shed businesses as a way to pay down the debt that it took on for its $2.57bn acquisition of debitel in April 2008. Since that landmark deal, freenet has focused its operations on mobile communications, and had been reporting the DSL and Strato businesses separately. We understand that there may be additional divestitures by freenet, but they will be smaller transactions for more ‘ancillary’ businesses.

Amid consolidation, Ixia opens its wallet

-Contact authors: Thomas Rasmussen, Steve Steinke

Historically, networking test and measurement vendor Ixia has never been much of a shopper. However, that has started to change this year as the Calabasas, California-based company reached for Catapult Communications in June for $105m as well as wrapped up its $44m acquisition of rival Agilent Technologies’ N2X product line earlier this month. For those keeping track, Ixia’s recent deals represent some 85% of all M&A spending at the company since 2002. (We would note that the pickup in dealmaking, coincidentally or not, has come since a European private equity investor joined the firm’s board and its strategic planning committee in October 2008.) Having recently assumed the role of consolidator, the small-cap vendor ($425m market capitalization) says it still has about $85m in cash after its recent purchases and is still pursuing deals. Who might be next?

One of the growing fields in the space is wireless network testing. Given Ixia’s desire for a larger presence in the segment, we think it could look to snap up a company here. Two interesting targets are privately held Metuchen, New Jersey-based Berkeley Varitronics Systems and Bandspeed of Austin, Texas. As for more traditional targets, we would point to competitors ClearSight Networks of Fremont, California, and Canada’s publically traded EXFO. EXFO currently sports an enterprise valuation of approximately $150m and would almost double Ixia’s revenue. Doubling down on EXFO might not be such a bad idea given that, despite its aggressiveness, Ixia is still relatively small compared to larger players such as JDSU and Spirent, which could look to do some consolidation in the space of their own.

Ixia’s historical acquisitions

Date announced Target Deal value
October 21, 2009 Agilent Technologies (N2X product line assets) $44m
May 11, 2009 Catapult Communications $105m
January 24, 2006 Dilithium Networks (test tool business assets) $5.1m
July 18, 2005 Communication Machinery $4m
July 14, 2003 NetIQ (Chariot product assets) $17.5m
February 15, 2002 Empirix (ANVL product assets) $5m

Source: The 451 M&A KnowledgeBase

Is IAC looking to sell Ask.com?

-Contact Thomas Rasmussen

It looks like acquisitive IAC/InterActiveCorp could be gearing up to undo its largest buy ever, Ask.com. At least Barry Diller’s opening remarks during IAC’s conference call last week seem to indicate a desire to explore the possibility. The New York City-based Internet media company has successfully expanded into a content giant by snapping up dozens of Internet properties. IAC has inked 36 deals worth more than $4.5bn since 2002. Many of those purchases have been tiny (Airfarewatchdog.com, for instance), but IAC did make a significant pickup when it handed over $1.85bn for Ask.com in March 2005.

However, we suspect that Ask.com hasn’t delivered the kind of returns that IAC had hoped for, since the search engine remains far behind Yahoo, Microsoft and Google in terms of usage. Still, with roughly 4% of US search market share, Ask.com would be a significant addition to any acquirer in the competitive scale-driven space, where every percentage point counts.

Though we won’t rule out a financial buyout, which would have more than a few echoes of the just-closed Skype carve-out, we think a strategic buyer for Ask.com makes more sense. Two obvious suitors spring to mind: Google and Microsoft. Although Google recently made its intentions for more acquisitions known and even signaled a willingness to do large deals again, we do not think it is likely to pick up Ask.com. Rather than make a consolidation play, we expect Google to continue to snare startups to offer additional services to existing users, while also bolstering its recent moves into new markets such as online video and mobile communications.

On the other hand, Microsoft has displayed a willingness to spend a lot of money in its game of catch-up with Google. With an acquisition of Ask.com coupled with its impending Yahoo deal, Microsoft could come very close to capturing one-third of all search traffic. While that would undoubtedly help Microsoft, a divestiture of Ask.com could also benefit IAC. Granted, it would mean slicing its revenue roughly in half, but IAC would have a cleaner story to tell Wall Street. And it could use some help in that area. Investors give a paltry valuation to the cash-heavy company, valuing the business at less than one times sales on the basis of enterprise value. IAC sports a $2.6bn market capitalization, but holds $1.8bn in cash.

IAC’s historic acquisitions and divestitures, 2002 – present

Year Number of acquisitions Number of divestitures
2009 5 4
2008 7 0
2007 6 0
2006 3 0
2005 3 0
2004 4 0
2003 4 0
2002 4 0

Source: The 451 M&A KnowledgeBase

A fittingly imperfect end for Kana

Brenon Daly

Contact: Brenon Daly

As liquidity events go, the just-announced sale of Kana Software is shaping up to be a pretty dry one for most shareholders. The customer service automation vendor said on Tuesday that it plans to sell its operating business to buyout group Accel-KKR for $49m and retain the publicly listed shell of a company as an acquisition vehicle. The proceeds from the sale of the business will flow to what essentially amounts to a special-purpose acquisition company, or SPAC, rather than long-suffering Kana shareholders. Shares of Kana have barely moved since the announcement, holding steady at around $0.75 each.

From our view, the structure of the deal reflects a creativity born out of necessity. Essentially, the challenge that shaped the sale process at Kana, which has been playing out for several years, was how to realize value for a decidedly mediocre operating business, while at the same time preserve the value of the tax advantages accrued from having burned money ($4.3bn and counting) since the company opened its doors. (The sole ‘asset’ at the SPAC, besides access to the capital markets, is the $400m in credits to offset taxes on any profit generated at whatever company it does acquire.) While the deal goes some distance toward satisfying both goals, several disgruntled shareholders have charged that it doesn’t go far enough.

For starters, the shareholders point out that if the carve-out goes through, as is expected within three months, they will have nothing to show for the sale of ‘their’ company. Instead, their future returns will be determined by an unknown group that may – or may not – buy some yet-to-determined business. (So much for the Wall Street maxim of investing in management and markets.) Particularly galling to those shareholders stuck holding illiquid Bulletin Board equity is that two of the largest owners of Kana (hedge funds KVO Capital Management and Nightwatch Capital Management, which also has a board seat) got to exit their investments at an above-market price of $0.95 per share, with the possible addition of another $0.10 for each share on top of that.

Kana would probably counter that shareholders who don’t want to roll their ownership of the company into a SPAC are free to sell their shares. And we have little doubt that the vendor exhausted every opportunity to get some value from the business, since we know that the process has been grinding along fitfully for years. In the end, though, we can’t help but view the less-than-ideal transaction as a fittingly imperfect ending to a thoroughly flawed company. Or more precisely, a thoroughly flawed public company. Red ink-stained Kana went public in 1999 on less than $5m in aggregate sales, but within a year of the offering had topped $1,000 per share on a split-adjusted basis. As shareholders now argue about dimes on the firm’s Bulletin Board-listed stock, the end of Kana just seems pathetic.

Nuance adds to a shrinking business

Brenon Daly

Contact: Brenon Daly

The latest acquisition by serial shopper Nuance Communications is a bit of a blast from the past. On Monday, Nuance said it will hand over $54m in equity for eCopy in a move that bolsters its imaging business unit. (Revolution Partners banked eCopy while Needham & Co advised Nuance, as it did in the company’s purchase of SNAPin Software a year ago.) The pickup of eCopy, however, snaps a string of deals that Nuance has used to build out its mobile and healthcare business lines.

If you didn’t realize that Nuance had an imagining unit, you could be forgiven. Although the company has its roots in that technology, it has largely left that market behind. (The current Nuance is actually the product of a mid-2005 marriage of Nuance Communications and ScanSoft, the name of which should give you some idea of its business.) In fact, through the first three quarters of the current fiscal year, the imaging unit represents just 7% of Nuance’s total revenue.

And that slice is only getting smaller. So far this fiscal year, sales in the imaging unit shrank a staggering 20%, while the vendor’s other two divisions (mobile and healthcare) both grew and overall revenue rose 12%. Since the imaging business appears to be little more than an afterthought inside Nuance, we’re surprised to see the company double down on the unit with the eCopy acquisition. That’s actually a reversal of the direction of deal flow at the division that we would have suspected. We could certainly see a situation where Nuance divests its imaging business, ditching its past and focusing on mobile and healthcare for future growth.

Goldman regains its Midas touch

Brenon Daly

Contact: Brenon Daly

Goldman Sachs is having a September to remember, after an uncharacteristically quiet run throughout 2009. We noted in our mid-year league table report that Goldman, which topped our annual rankings 2005-07, had slipped to a distant seventh place in the first half of this year. Since the beginning of September, however, the bank has regained its Midas touch.

Goldman has worked on four tech deals announced so far this month, with a total equity value of $7.9bn. (The September spending accounts for some 60% of the value of all deals that Goldman has advised on so far this year.) The transactions: sole advisor to eBay on its $2bn Skype divestiture; advisor to Intuit on its $170m purchase of Mint; sole advisor to Adobe on its $1.8bn acquisition of Omniture; and sole advisor to Perot Systems in its (relatively richly priced) $3.9bn sale to Dell, which stands as the largest tech transaction in five months.

By way of a final thought on Goldman’s return, we’d note the unusual situation that popped up in the buy-side deals that Goldman worked last week. We can’t recall the last time we saw any bulge-bracket bank get a print one day (Intuit’s purchase of Mint) and then turn around the very next day and get a print that’s 10 times larger (Adobe’s purchase of Omniture).