Category: divestitures

UBS: You buy us?

Brenon Daly

As it reported an ‘unsatisfactory’ loss of hundreds of millions of dollars, UBS AG also said Tuesday that it will carve off its investment banking business. The move represents a retreat from the ‘universal bank’ model the Swiss giant has pursued. And despite management’s statements, it makes a sale of the banking unit more likely. (Just as Time Warner splitting AOL’s legacy Internet access division from its online advertising business clears the way for a sale of the dial-up unit. That is, if there are any AOL subscribers left to sell.)

Washed away by the gallons of red ink spilling from the investment banking department is that UBS actually has a fairly robust advisory business, particularly for transatlantic tech deals. In terms of deal value, it ranked fifth in our recent league tables covering transactions between North America and the EU from mid-2007 to mid-2008. The previous year, UBS placed fourth. (An executive summary of the report is available here; download the full report here.)

Far and away, UBS was the busiest bank, advising on 13 transatlantic transactions over the past year. Both Lehman Brothers and Deutsche Bank advised on eight transactions. And UBS has kept its momentum, already claiming another tombstone since we closed our survey period on June 30. (UBS served as sole adviser for IBM in its purchase of Paris-based ILOG for $340m.) But given how things stand now, the next big deal UBS advises on could be the sale of its own banking business.

Selected UBS-advised transatlantic deals

Date Acquirer Target Price
July 2008 IBM (sole UBS mandate) ILOG $340m
April 2008 Apax Partners TriZetto Group (sole UBS mandate) $1.4bn
Feb. 2008 Reed Elsevier (co-adviser UBS) ChoicePoint $4bn
April 2008 Diodes (sole UBS mandate) Zetex Semiconductors $176m

Source: The 451 M&A KnowledgeBase

Ailing AOL no closer to a sale

Although CEO Jeff Bewkes and his Time Warner (TWC) cohorts put a positive spin on the company’s second-quarter results Wednesday, we’d sum up the call as bafflingly uneventful. The company highlighted gains in its TV and movie operations, while remaining virtually silent on its plans for AOL’s legacy Internet access business. If anything, the news concerning the ailing AOL division worsened, with Time Warner indicating that the AOL split is not set to occur before early 2009. The lack of urgency on the part of Bewkes amid declining AOL subscriber count and revenue is extremely disheartening.

Subscriber count at the legacy AOL division fell to 8.1 million subscribers from 10.9 million a year ago. This continues the trend of a year-over-year decline of an average 20-25% since 2003. For the first time in AOL’s history, revenue from advertising tops revenue from its subscription business ($530m and $491m, respectively). Operating income for the AOL division is $230m, one-third of which we estimate comes from subscriptions. This is in contrast to Earthlink (ELNK), which has seen its operating income steadily increase quarter-over-quarter for the past year. EarthLink’s operating income from its most recent quarter was $64m, despite having only 3.3 million subscribers. Clearly, AOL is failing to properly make money from its subscribers. We suggest the company turn the business over to someone who can do that as soon as possible.

Fortunately, there appears to be a suitor for the AOL legacy business. EarthLink CEO Rolla Huff has said he’s ready to discuss a deal. Time Warner should take him up on that immediately. If AOL’s subscriber base continues to decline (and there is no reason to believe it won’t), by the time Bewkes is ready to negotiate a sale, it will be in the six million range. Our advice to Bewkes: Put together a deal book on AOL and get out of the subscription business while you can.

AOL ISP divestitures

Announced Target Acquirer Deal value Price per subscriber
Oct. 2007 Albanian ISP business Telekom Slovenije $5.6m $2,489
Oct. 2006 UK ISP business Carphone Warehouse $712m $339
Sep. 2006 French ISP business Neuf $365m $730
Sep. 2006 German ISP business Telecom Italia $878m $366
Dec. 2005 Argentinean ISP business Datco $1m $67
Feb. 2004 Australian ISP business Primus $18m $200

Source: The 451 M&A KnowledgeBase

Sizing up Secure Computing

Brenon Daly

In many ways, Secure Computing’s divestiture of its authentication business to Aladdin Knowledge Systems raises more questions than it answers. Secure’s rationale for the sale is pretty simple: pay down some debt and get out of a sideline business that’s dominated by RSA and has a solid number two in Vasco Data Security. (For the record, Vasco is about four times the size of Secure’s SafeWord business and runs at a highly respected 25% operating margin.)

So it’s pretty clear why Secure was a willing seller (in fact, we hear that Secure had been a willing seller of the business for more than a year). Less clear is why Aladdin was a willing buyer of the property – at a relatively rich price of 2x sales, no less. Aladdin investors chose not to stick around for the company’s explanation of why it was willing to shell out two-thirds of its cash holdings for a product line in a cutthroat market. They fled the stock, trimming 14% off the price and sending Vasco to its lowest level since January 2004.

Of course, Secure has had an even rougher run of it on the market recently, as the company has come up short of Wall Street estimates for the past two quarters. Shares of Secure currently change hands lower than they have at any point during the past half-decade. Since the beginning of the year, the stock has shed 60%, a decline that recently cost longtime CEO James McNulty his job.

The long, uninterrupted slide in Secure’s valuation raises an even larger question about the divestiture: Was the sale of SafeWord just a prelude to an outright sale of the company itself? The numbers certainly don’t work against a deal. In fact, Secure is currently valued at basically 1x sales – just half the level it got for the divested property. (Usually, it’s the reverse, with corporate cast-offs getting sold at less than half the overall company’s valuation.)

Any planned acquisition, however, would probably have to go through Warburg Pincus, which holds the equivalent of about 7% of Secure’s common stock, going back to a financing deal it struck to help Secure buy CipherTrust in July 2006 for $264m. Warburg invested $70m at a time when Secure stock was trading at about 3x higher than it is now. With Warburg that far underwater on its holding, we can only imagine the pointed questions the private equity firm will ask Secure.

Will Earthlink acquire AOL’s ISP business?

In April we speculated that AOL (TWC) might be close to shedding its legacy ISP access business. We pegged the most likely acquirer as Earthlink (ELNK). In an earnings conference call this week, Earthlink CEO Rolla Huff echoed that sentiment, stating that he was bullish about combining its business with the AOL division.

Of course, interest from one party does not a deal make. But, given AOL’s burning desire to shed this dinosaur and completely rid itself of its ancient and tumultuous past, it is safe to assume that if the two parties can agree on terms, a deal might just materialize. The real question is how struggling Earthlink can come up with the estimated $1.5bn-$2.5bn it would take to acquire the AOL unit and its roughly nine million subscribers. Since Earthlink is one of few companies able and willing to make that acquisition, AOL does not exactly hold a lot of bargaining power. We think Earthlink might just get this at a bargain basement valuation closer to $1.5bn, just two times AOL’s cash flow from its ISP division.

Less than zero?

Brenon Daly

The company once known as MathSoft has been cancelled out by the following equation: 1 – 0.5 – 0.5 = 0. The firm made its first subtraction in early 2001, with the divestiture of its core technical calculations software business. That was followed up last week with the sale of the remaining chunk of the company – which sold data analysis software under the name Insightful Corp – to Tibco for $25m. (Along the way, Insightful further whittled off a small sliver of its business, some search assets it sold to Hypertext Solutions, which now does business as Evri, for $3.7m last year.)

If the name MathSoft seems only vaguely familiar, it’s because the old-line firm hasn’t existed for seven years, at least not under its original name and original business. Founded in 1984, the Massachusetts-based company emerged as MathSoft two years later. And while it’s too soon to say whether Tibco’s tiny purchase of Insightful will pay dividends, the former had better hope the acquisition goes smoother than the last one involving Insightful’s CEO. Before running Insightful, Jeff Coombs headed up marketing at Acta Technology – a startup selling ETL technology that was snapped up by Business Objects in mid-2002 for $65m.

Actually, that deal ended up costing Business Objects a fair bit more, in both money and time. The reason? Just a week after the deal was inked, ETL powerhouse Informatica filed a patent infringement case against Acta. That worked its way through the courts for the following four and a half years, until a jury decided a year ago to award Informatica $25m in damages. Tibco, too, has had courtroom headaches from one of its deals, picking up a company that was later sued in the widespread lawsuit over share allocations of IPOs in the bubble era. So both the buyer and seller in this deal have firsthand experience with negative additions through acquisitions. 

Subtraction from MathSoft

Date Event Price
Jan. 2001 Divestiture of core education products division $7m
August 2007 Surviving company Insightful sells search assets $3.7m
June 2008 Insightful sells to Tibco $25m

Source: The 451 M&A KnowledgeBase

Big Yellow’s purple elephant

Brenon Daly

Asked not too long ago to explain the slump in Symantec’s stock since acquiring Veritas three years ago, CEO John Thompson memorably called the combined company ‘a purple elephant.’ The allegorical description was a bit of a departure for the straight-laced, straight-talking ex-Big Blue executive, who went on to add that since Wall Street had never seen such a large security-storage company, it didn’t know how to value it. (Generally speaking, however, investors have known how to value it: lower. Since announcing the $13.5bn acquisition in December 2004, Symantec shares have shed about 22% of their value, compared to a 15% gain in the Nasdaq over that same time.)

The purple elephant has turned into a bit of a sacred cow, with Thompson defending the combination at every turn and forcefully knocking down any suggestion that Symantec should shed some of the Veritas assets. (Of course, Symantec already ditched Precise – an application performance management product that it inherited from Veritas – back in January.) Talk of possible divestitures surfaced last week following a research note from Cowen and Co analyst Walter Pritchard, who speculated that NetBackup and Data Center Foundation, a storage and server management product, may find their way onto the auction block. Not so, countered Thompson on Symantec’s first-quarter earnings call last Wednesday. The company has ‘no plans to divest anything – none.’ A senior corporate development guy at a company named as one of the possible buyers of the Foundation business told us recently that he hasn’t even been informally approached to gauge the company’s possible interest in Foundation, much less seen a book on the possible asset sale.

Of course, M&A is cyclical, to some degree tracking the overall economy. And we know this about dealmaking in a recession: When times get tight, ties get thin. We’ve already seen that most dramatically in the private equity world, whether it’s former buyout buddies taking each other to court or banks looking to get out of their lending agreements they’ve already signed. That same thinking (‘maybe we shouldn’t have done…’) is now hitting the C-suite. Consider the ongoing sell-a-thon at Time Warner, with the company planning to split off its cable services business, and, we speculate, finally putting AOL’s core US access business on the block. Or, there’s eBay entertaining the idea of jettisoning Skype Technologies, after writing down basically half of the $2.6bn purchase price. Or, if current reports are to be believed, Sprint Nextel may unwind the $39bn acquisition that has soured into a money-burning debacle. Although Thompson says Symantec isn’t a seller, this is clearly the climate in which companies are being pushed to reexamine their acquisitions. That could very well mean taking the knife to the purple elephant again.

Reversing deal flow

Company Assets Comment
Symantec NetBackup, Data Center Foundation, according to rumors Symantec says it’s not looking to sell.
Time Warner Cable services business, and (we speculate) AOL’s US access unit AOL has already shed ISP businesses overseas.
eBay Skype Technologies New CEO says next few quarters will determine if company keeps its overpriced acquisition.
Sprint Nextel Nextel WSJ reports this week that Sprint may unwind Nextel deal, and look to sell itself.
VeriSign Numerous units picked up in 20-company shopping spree VeriSign has already divested three businesses this year.