Category: divestitures

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.

Credit crisis hits home for VeriSign

-by Thomas Rasmussen

In VeriSign’s 3rd quarter earnings conference call last night, interim CEO Jim Bidzos detailed its divesture progress. The gist: There is none.

It was essentially a repeat of its second quarter call. Bidzos insists that it is “this” close. He reiterated that one of the three non-core businesses is close to being divested, possibly before the end of the year (our money is on Communications). Bidzos offered up the reason for the holdup: The would-be acquirer needs financing. This is yet another unfortunate example of frozen credit markets hampering M&A.

Unclipping Click Commerce

Brenon Daly

It turns out that software doesn’t really fit in a toolbox, after all. Illinois Tool Works, which reports third-quarter earnings Thursday, said recently that it plans to divest its Click Commerce division. (With the process just beginning, we don’t expect ITW to say much about the divestiture during tomorrow’s call.) The move would unwind ITW’s puzzling purchase two years ago of the supply chain management vendor. It paid $292m in cash for Click Commerce in September 2006.

ITW is a 96-year-old company that makes everything from commercial ovens to industrial packing tape to arc welders. It has inked more than 50 acquisitions during each of the past two years, spending about $1bn in 2007 and $1.7bn in 2006. And the company is on pace for a similar number of deals this year, having notched 26 buys in the first two quarters. Acquisitions are key for ITW, since the additional revenue picked up represents virtually the only growth at the company. In 2007, its core business expanded just 1.8%.

In announcing the divestiture, ITW indicated that Click Commerce had sales of $67m last year. (That was down slightly from the $74m the company posted in the four quarters prior to the acquisition.) And although ITW hasn’t broken out updated cash-flow figures for Click Commerce, the company has, historically, been a profitable operation. (In the two quarters leading up to the acquisition, Click Commerce had run at a solid 24% operating margin.) We suspect that any number of buyout firms – perhaps those that missed the sale of i2, another big supply chain management company – would be interested in taking a look at the book on Click Commerce.

Returning to eBasics

-by Thomas Rasmussen

Despite its stock trading near a five-year low and plans to cut 10% of its workforce, eBay managed to go shopping last week, picking up a pair of companies for a total of $1.3bn. The auction giant spent $945m on Bill Me Later, an online payment processor popular among big-ticket retailers, and $390m on Danish classifieds giant Den Bla Avis. The acquisitions mark a return by eBay’s recently appointed CEO John Donahoe to a focus on the company’s core operations. It also brings into sharper relief the largest strategic misstep by Donahoe’s predecessor Meg Whitman: the purchase of Skype. We believe that will soon be remedied, with the newly refocused eBay divesting its communications division.

It’s clear why eBay would want to return to its roots, and why the Bill Me Later acquisition makes a lot of sense. (The purchase of Den Bla Avis is another step in the company’s international expansion strategy.) Bill Me Later is a complementary acquisition to eBay’s PayPal payments division, which unlike the Skype acquisition has paid off handsomely. The payments segment now represents more than 25% of total revenue, or $2.2bn for the past 12 months, while Skype only brought in about $475m, or roughly 6% of total revenue. (Remember that eBay paid just $1.5bn for PayPal but handed over $2.5bn for Skype.) So who might want to pick up the Skype business?

Just because eBay has struggled to realize a return on its acquisition of Skype doesn’t mean another owner, particularly one focused on communications, couldn’t do well with the property. With about 340 million registered users, Skype is the undisputed leader in VoIP. That commanding market share is likely to attract attention from the existing telcos. It is particularly enticing once you factor in what is happening in the mobile space right now and Skype’s position to dominate mobile VoIP. So far, the wireless telcos have been fighting to keep Wi-Fi, VoIP and other services they do not control or profit from off their handsets. This is a battle they are quickly losing (case in point: Android, BlackBerry and iPhone). Much in the same way that the legacy telcos were quick to adopt wireless technology when it was still in its infancy rather than cling to the wires, it makes sense to try to profit from the trend rather than fight it. Another likely bidder for Skype is Nokia, which has been an avid acquirer of mobile content in its bid to move away from strictly hardware. In addition, Google, Microsoft and Yahoo might consider picking up Skype, since all three of these companies have used acquisitions to enter the emerging mobile communications market.

Performance of select eBay acquisitions

Date of acquisition Target Deal value Current TTM revenue Current revenue to deal value multiple
September 12, 2005 Skype $2.5bn $475m 5.2x
July 8, 2002 PayPal $1.5bn $2.5bn 0.6x
October 6, 2008 Bill Me Later $945m $130m (projected for calendar year ending December 31) 7.2x
October 6, 2008 Den Bla Avis $390m $58m (reported) 6.7x

Source: The 451 M&A KnowledgeBase

Bygone buyouts

Brenon Daly

While overall tech spending on M&A has fallen about one-third so far this year, the once-bustling leveraged buyout (LBO) business has virtually disappeared. Just how much? It’s literally dimes instead of dollars. Buyout spending has plummeted from more than $100bn during the first three quarters of 2007 to just $12bn so far this year. That’s about the level of LBOs in 2004, before buyout shops were really looking at tech companies and before banks were comfortable lending for deals in the unproven and cyclical industry. (Of course, we have new problems in the credit market these days.)

Still, LBOs are getting done, despite the disappearance of debt and, in some cases, even the banks that were backing the buyouts. Earlier this week, for instance, Bedford Funding took home on-demand talent management vendor Authoria for $63m, the first of what we expect to be several deals by Bedford in the fragmented human capital management market.

Also, Nokia said earlier this week that it plans to sell its security appliance unit to an unnamed financial buyer. Several sources have indicated that one of the lead suitors for Nokia’s firewall and VPN business is Vector Capital. The San Francisco-based buyout shop already has experience with a security hardware company, having teamed with Francisco Partners to acquire WatchGuard Technologies, the maker of the Firebox UTM appliance for the midmarket, for $151m in July 2006.

PE deal flow

Period Deal volume Deal value
Q1-Q3 2004 38 $13bn
Q1-Q3 2005 42 $28bn
Q1-Q3 2006 67 $38bn
Q1-Q3 2007 102 $101bn
Q1-Q3 2008 67 $12bn

Source: The 451 M&A KnowledgeBase

Spending the ‘divestiture dividend’

Brenon Daly

On the same day it closed the divestiture of its authentication business, Secure Computing said it will pay $15m for Securify. The deal, which is expected to close in the fourth quarter, also has a potential $5m earnout. Secure said it plans to add Securify’s identity-based monitoring and control technology to its firewall. The majority of Securify’s customers are government, and Secure Computing plans to cross-sell into that market. Founded in 1998, Securify had raised more than $70m in VC. However, it only generated about $13m in revenue last year. Secure Computing indicated the acquisition would boost earnings next fiscal year.

Chipping away

Brenon Daly

It’s one down and (at least) one to go for AMD. The battered chip maker moved earlier this week to dump its digital TV (DTV) chip business to longtime partner Broadcom. AMD will pocket $193m in cash from the divestiture. Although the unit had been on the block for some time, AMD got a decent price for the cast-off. We understand the DTV unit was generating in the neighborhood of $150m in sales, meaning AMD got more than the typical ‘1x and done’ divestiture multiple. Further, we would note that the valuation of the DTV business at 1.3x sales is about twice AMD’s own price-to-sales valuation.

With one of the legacy ATI Technologies businesses off the books, AMD can move on to unwinding yet another part of that disastrous acquisition. (Since AMD spent $5.4bn in cash and stock on graphics chip company ATI two years ago, shares of the second-largest chipmaker for computers have plummeted 70%.) The next unit on the auction block: Processors for multimedia applications that run on mobile phones. Rival Intel made a similar move two years ago, selling its communications processor unit to Marvell Technology for $600m, which valued the unit at an estimated 1.5x sales. We suspect AMD would be perfectly happy with that kind of valuation in any divestiture of its mobile business. As to who might be on the other side of the deal, two companies come immediately to mind: Qualcomm is always on the lookout for more IP, and communications chipmaker Atheros has done three acquisitions in the past two years and is said to be looking for more.

Corporate castoffs

Brenon Daly

Look who’s hitting the corporate garage sales these days – other corporations. While divestitures used to go most often straight to private equity shops, more than a few castoff businesses are now finding homes inside new companies. The latest example: AMD’s sale of its digital TV chip division Monday to Broadcom for $193m.

Given AMD’s struggles, as well as the fact that rival Intel has shed a number of businesses in recent years, the divestiture wasn’t a surprise. In fact, my colleague Greg Quick noted two weeks ago that AMD was likely to dump its TV chip business, naming Broadcom as one of the likely acquirers.

On the buy side, Broadcom joins fellow publicly traded companies Overland Storage, L-1 Identity Solutions and Software AG, among others, that picked up properties from other listed companies this year. That’s not to say that buyout firms have been knocked out of the market, despite the tight credit conditions. PE shops Vector Capital, Thoma Cressey Bravo and Battery Ventures have all taken businesses off the books of publicly traded companies in 2008.

Still, the activity by the corporate shoppers is noteworthy. And the list is likely to grow as more companies look to clean up their operations during the lingering bear market. The next name we may well add to the list is Rackable Systems, which said earlier this month that it is looking to shed its RapidScale business. (The divestiture would effectively unwind its acquisition two years ago of Terrascale Technologies, and comes after a gadfly investor buzzed Rackable for much of the year.)

As to who might be eyeing the assets, we doubt there are many hardware vendors interested in RapidScale, because they have either made acquisitions (Sun’s purchase of Cluster File Systems, for instance) or have partnerships (both EMC and Dell partner with Ibrix). However, a service provider could use the technology to enhance its storage-as-a-service offering. In a similar move, we’ve seen telecom giants like BT and Verizon pick up security vendors to offer that as a service. And finally, we’d throw out a dark horse: Amazon, which is one of Rackable’s largest customers, could use RapidScale’s clustered storage technology to bolster its S3 offering.

Half-billion-dollar communications division up for grabs

Newly appointed interim VeriSign CEO Jim Bidzos is picking up where former CEO Bill Roper left off. In a recent conference call, Bidzos (who founded the company) reiterated VeriSign’s plan to shed many of the businesses picked up by the company’s longtime chief executive, Stratton Sclavos. (The acquisition-frenzied CEO inked more than a half-dozen deals in both 2005 and 2006, in addition to several headline-grabbing purchases at the height of the Internet bubble.) We believe VeriSign’s next divestiture is imminent, with the sale of its Communications Services division likely to go through shortly.

We have speculated on this in the past, but some recent developments suggest that a sale is close at hand. VeriSign placed the division in discontinued operations a few months ago, according to recent SEC filings. The unit, which provides communications services such as connectivity, interoperability and mobile commerce, is the largest and most profitable of the company’s non-core business segments. It pulled in $568m for the previous year, ending June 30. That’s down from $579m for calendar year 2007 and $804m in 2006. The decline is mostly related to VeriSign’s divestiture of Jamba, since sales in the rest of the division have been flat. That stagnation stands in contrast to VeriSign’s core business, the Internet Infrastructure and Identity Services division, which increased revenue 20% in the most recent quarter.

As to who might be interested in VeriSign’s Communications Services division, we have learned that there is at least one strategic buyer at the table. In fact, a deal was supposed to be signed, sealed and revealed with the company’s second-quarter earnings. But the transaction was delayed when the potential acquirer took a closer look due to the continued softness in the economy. We expect the divestiture to close soon. The most obvious strategic buyer of the unit is a big telecom shop – namely, Verizon or AT&T. Private equity has also expressed interest in the unit. But since the mystery bidder is said to be strategic, we believe a telco will likely end up as the new owner of VeriSign’s Communications Services unit for a price in the neighborhood of $1bn.

VeriSign’s communications acquisition binge

Date Target Deal value
November 27, 2006 inCode Wireless $52m
March 20, 2006 m-Qube $250m
March 13, 2006 Kontiki $62m
February 13, 2006 3united Mobile Solutions $65.5m
January 11, 2006 CallVision $30m
January 10, 2005 LightSurf Technologies $270m

Source: The 451 M&A KnowledgeBase