Broadcom goes wide in $5.5bn Brocade buy

Contact: Scott Denne

Broadcom continues its strategy of buying a sustainable portfolio of semiconductors with the $5.5bn acquisition of Brocade. The target’s fiber-channel storage networking chips drew Broadcom’s interest, yet those chips account for very little of the value. Broadcom plans to recoup the difference when it sells Brocade’s IP networking business after the deal closes.

The company formerly known as Avago has run this play before. Shortly after the purchase of Broadcom last year (the transaction that gave the company its current name and much of its bulk), it divested bits of that vendor, including its Internet of Things (IoT) connectivity line. Broadcom’s strategy is to buy products that have long-term stability. IoT chips that are chasing an early-stage opportunity that’s possibly lucrative and certainly capital-intensive don’t fit. It also shed parts of LSI following its pickup of that firm at the end of 2013.

Yet today’s all-cash acquisition brings Broadcom into new – and risky – territory. In previous divestitures, it was selling semiconductor and component businesses that it wasn’t comfortable owning. The Brocade IP networking business is hardware and software. And in today’s deal, it’s not looking to unwind a secondary asset. IP networking is a major component of the target’s business.

Consider this: Broadcom shaved $1.1bn from the $6.6bn price tag on LSI by shedding two semiconductor business lines. Of the $5.5bn ($5.9bn in enterprise value) that it’s paying for Brocade, it’s presumably seeking a sale to bring back more than half of that given that the IP products unit accounts for about half of the revenue and all of the growth. That could prove to be challenging, given that Ruckus Wireless, a Wi-Fi provider that generates about one-third of Brocade’s IP sales, was on the market less than seven months ago and the top bidder in that process, Brocade, is no longer in the acquirer pool. And if Broadcom can’t find a buyer at a satisfactory price, it will be forced to retain a business that competes with many of its OEM customers.

Broadcom’s reach for Brocade values the target at 2.6x trailing revenue. According to 451 Research’s M&A KnowledgeBase, that’s the median multiple across all of its acquisitions over the past four years. On the other hand, storage networking specialists usually sell at or below 1x, making this deal look a bit pricier. Broadcom would have to divest the IP networking division for $3bn or more to get the effective multiple on today’s transaction into that range.

Evercore Partners advised Brocade on its sale. We’ll have a full report on this deal in tomorrow’s 451 Market Insight.

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Tech M&A this summer is a really big deal

Contact: Brenon Daly Kenji Yonemoto

It’s been a blockbuster summer for blockbuster deals. Since July, tech acquirers have announced more transactions valued at $1bn+ than any quarter since the recent recession. 451 Research’s M&A KnowledgeBase has tallied a record 33 ‘three-comma deals’ here in Q3, significantly above the average of roughly 20 transactions per quarter over the past two years. Overall, big-ticket purchases, which had a median value of $2.2bn, account for a staggering $130bn of the roughly $150bn in total spending on tech M&A this quarter.

The billion-dollar prints this summer came from across the IT landscape, according to the M&A KnowledgeBase, with three semiconductor deals valued at more than $1bn, the largest SaaS transaction in history and the biggest exit for a VC-backed startup in two and a half years. Another source that has (rather unexpectedly) contributed to deal flow at the top end of the market recently has been divestitures. Fully one-quarter of the $1bn+ deals in Q3 involved the sale of divisions of larger companies, such as Hewlett Packard Enterprise shedding its software unit and Intel divesting a majority stake of McAfee. (Several of the billion-dollar transactions announced in Q3, such as the HP Software and McAfee deals, effectively involve unwinding previous billion-dollar acquisitions.)

451 Research will publish a full report on M&A activity in Q3 early next week. But the headline for the quarter is certainly the record number of big prints, which helped push spending to the third-highest quarterly total since the end of the recession, according to the M&A KnowledgeBase.


Source: 451 Research’s M&A KnowledgeBase

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Baking in security isn’t a good recipe for Intel

Contact: Brenon Daly

Intel’s multibillion-dollar experiment in bringing security in-house and baking it into its silicon is over. The chipmaker announced plans to mostly unwind its six-year-old acquisition of McAfee, which stands as the largest information security (infosec) transaction in history. However, Intel’s divestiture of a majority stake of its infosec division is being done at a substantial discount to the original purchase.

Under terms, Intel will retain a 49% stake in the infosec business, which will revert to the McAfee name, with private equity firm TPG Capital acquiring a 51% stake. The buyout shop will pay $1.1bn in cash and assume $1bn in debt. (The co-owners of McAfee plan to raise a total of $2bn in debt, with $1bn of that held by TPG and $1bn held by Intel.) Altogether, the transaction gives McAfee an enterprise value of $4.2bn, compared with an enterprise value of $7bn for McAfee in Intel’s mid-2010 puzzling purchase.

Sales at Intel’s infosec unit totaled $1.1bn in the first half of this year, according to the company. Annualizing that amount would put revenue at $2.2bn, meaning McAfee is valued at less than two times sales in its divestiture. That’s a relatively low multiple for infosec companies. In its 2010 purchase, for instance, Intel paid roughly 3.5 times sales for McAfee. Furthermore, rival Symantec currently trades at roughly the same 3.5x multiple.

Intel’s divestiture of McAfee, which had been rumored for some time, underscores the fact that infosec is an industry in transition. The move means that two of the largest and longest-standing security companies have undergone dramatic corporate overhauls since just the start of the year. Back in January, Symantec sheared off its Veritas storage business so that it could focus entirely on security. It then followed that up in summer by announcing the second-largest infosec transaction, according to 451 Research’s M&A KnowledgeBase. Symantec paid $4.65bn for Blue Coat Systems, an acquisition that, unusually, installed Blue Coat executives into the top three spots at the acquiring company.

Dell-EMC closes, but there’s still dealing to be done

Contact: Brenon Daly

Whenever a newly joined couple move in together, there are always a few items that just don’t fit as the two houses are merged into one. These things can range from minor overlapping bits (dishes that don’t quite match) to bulky odd-lot items (that rather ugly plaid couch that was hidden away in a corner of the basement). Invariably, the domestically blissed couple has to sort through their stuff to figure out what’s coming and what’s going.

As Dell and EMC officially close their union today, the process of sorting out their combined house assumes a new urgency. (See our full coverage of the transaction.) Of course, the two companies have already begun rationalizing their holdings in anticipation of coming together, most notably with Dell raising more than $5bn over the past half-year by shedding ill-fitting divisions. These divestitures have essentially involved Dell unwinding earlier acquisitions that didn’t deliver promised returns, notably Perot Systems, as well as Quest Software and SonicWALL.

We suspect the next bit of unwinding will likely come from Dell reversing EMC’s previous acquisition of Documentum. (This move has been mulled for several years, but now seems more likely as Dell takes on tens of billions of dollars of debt to pay for the largest-ever acquisition in the tech industry.) Somewhat like Veritas within Symantec, Documentum has never really fit inside EMC. It is even harder to see the strategic rationale for the content management software inside Dell, which has sold off most of its software assets. Dell is (once again) focusing on hardware, with product revenue accounting for roughly three-quarters of the combined company revenue of $74bn.

Documentum serves as the main piece of EMC’s Enterprise Content Division (ECD), a $600m unit that is a bit lost inside a $24bn company. (We would note that ECD accounts for just 2.5% of overall revenue at EMC – exactly the same portion of revenue generated at Dell by its software business, which was divested in June.) ECD would represent less than 1% of the combined company revenue, likely relegating it even further to an ‘afterthought’ sale.

That won’t help ECD, which is already slowly shrinking inside EMC. Unusually for a software company, product sales account for only about one-quarter of the division’s revenue, with the remaining three-quarters coming from maintenance and support. Still, ECD is able to put up very respectable gross margins in the mid-60% range. That financial profile, which represents a mature and somewhat sticky offering, fits well with private equity requirements. So we could see Documentum going to a buyout shop, which is where Veritas landed, as well as Dell’s own software division.

However, if Dell does manage to sell Documentum, it would likely garner only about $1bn for the business. (For the record, EMC paid $1.8bn, mostly in equity, for Documentum in 2003.) That would value ECD at roughly 1.7 times sales, which is exactly the valuation Dell got when it unwound its own software business three months ago.

LogMeIn goes to GoTo

by Brenon Daly

Eight months after Citrix announced plans to spin off its GoTo business, the company has significantly bulked up the unit with the consolidation of rival online communications and support provider LogMeIn. The deal, which is structured as a tax-advantaged merger that values LogMeIn at $1.8bn, would increase GoTo’s revenue by about 50% to $1bn. It is expected to close early next year.

Terms of the Reverse Morris Trust transaction call for Citrix to own slightly more than half of the combined entity, holding 50.1% of the company with LogMeIn retaining the remaining 49.9%. Ownership notwithstanding, LogMeIn will have an outsized role in charting the future course of the $1bn SaaS giant.

Both the current CEO and CFO at LogMeIn will hold those respective roles at the combined firm, which will take LogMeIn’s current headquarters as its own. Further, LogMeIn will have five directors on the company’s board, with four coming from Citrix. We would attribute that weighting to the fact that LogMeIn has significantly outgrown the larger GoTo unit. In the just-completed second quarter, for instance, LogMeIn increased revenue about 28%, roughly twice the rate at GoTo.

At $1.8bn, the deal values LogMeIn at its highest-ever level. Over the past year, LogMeIn has generated $309m in sales, meaning it is being valued at 6x trailing sales. That’s a bit shy of the average of 7.5x trailing revenue paid for SaaS vendors in transactions valued at more than $1bn, according to 451 Research’s M&A KnowledgeBase. For instance, two months ago, Vista Equity Partners paid 8x trailing sales for Marketo, a smaller but slightly faster-growing marketing automation provider that, unlike LogMeIn, runs in the red.

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Dell’s discounted divestiture

Contact: Brenon Daly

Continuing its efforts to slim down before it gets massively bigger, Dell has announced plans to divest its software business to a buyout group led by Francisco Partners. The sale essentially unwinds Dell’s previous acquisitions of Quest Software and SonicWALL, which cost the company some $3.5bn. Although terms weren’t revealed, we understand that Dell will pocket $2.2bn from the deal.

The discount divestiture of the Dell Software Group (DSG), which generated some $1.3bn in trailing sales, comes less than three months after the company likewise sold its IT services unit, Perot Systems, for less than it originally paid. Dell’s portfolio pruning serves two purposes as it prepares to close its pending $63.1bn purchase of EMC. Divesting the software unit will not only raise some much-needed cash for Dell to cover the largest-ever tech acquisition, but will also clear out some software offerings that would overlap with the assets it is set to pick up from EMC/VMware, notably in the identity and IT management markets. EMC shareholders are set to vote on the sale to Dell next month, with the close of the transaction expected shortly after that. Similarly, Dell expects to complete the DSG divestiture in the late summer or fall.

Deferring to VMware as the software specialist for the combined entity makes financial sense for Dell. By and large, Dell’s software business has been a lackluster performer, unable to grow and running at single-digit operating margins. In comparison, VMware continues to increase its revenue (although at a lower rate than it once had) and operates twice as profitably as Dell’s software unit. And then there’s the matter of scale: VMware alone is five times as large as DSG.

Dell was a relative latecomer to M&A, only really starting to buy companies in 2007. While Dell was on the sidelines, for instance, EMC picked up more than 40 businesses, including RSA and, of course, VMware. Further, we would argue that if EMC hadn’t made the acquisitions it did during the early 2000s, Dell probably wouldn’t have bought the company. It certainly wouldn’t have had to pay anywhere close to the $63.1bn that it is set to hand over for EMC if the target hadn’t used M&A to expand beyond its core storage products.

DSG will be purchased by Francisco Partners, with participation from Elliott Management, a hedge fund better known for pushing businesses to sell than it is for buying them. (Indeed, Elliott took a small stake in EMC and then agitated for a sale of that company.) Francisco says this is its largest-ever deal. The DSG transaction comes as buyout shops are becoming increasingly busy with big prints. Including DSG, private equity buyers have now announced 14 acquisitions valued at more than $1bn since last June, according to 451 Research’s M&A KnowledgeBase.

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Tech buyout shops play small ball

Contact: Brenon Daly

The pinched debt market so far this year has buyout shops scaling back their purchases, but doing more of them. Already this year, private equity (PE) acquirers have announced 68 transactions, with several larger firms such as The Carlyle Group and Vista Equity Partners having already put up two or three prints. The pace of PE activity is almost 20% higher than the start of the two previous years, according to 451 Research’s M&A KnowledgeBase.

However, spending on those deals has dropped dramatically, with the value of PE transactions so far in 2016 just half the average of the two previous years. Buyout shops have announced deals valued at $5.3bn since January 1, down from $9.7bn in the same period last year and $11.6bn during the same period in 2014, according to the M&A KnowledgeBase. To get a sense of how far the size has fallen, consider this: the biggest transaction so far this year would rank as only the sixth-largest PE deal printed during the same period of 2014 and 2015.

Fittingly, the biggest PE purchase so far this year is a divestiture (Airbus’ sale of its defense electronic business to KKR). Hewlett Packard Enterprise, CA Technologies and Intuit have also all sold divisions to buyout firms. The other notable driver of activity has been secondary transactions, where PE firms sell portfolio companies to other PE shops. Examples of these buyout-to-buyout deals in 2016 include Infogix and Sovos Compliance.

Taken together, the strategies that buyout firms have used so far this year are much more conservative than what we saw in the two previous years. (For instance, exactly a year ago, Informatica went private in a PE-backed transaction for $5.3bn, which valued the slow-growing data integration software provider at about 5x trailing sales and 25x EBITDA.) In many ways, this year’s activity simply reflects PE firms picking up smaller and less expensive targets, effectively doing deals with ‘walking around money’ rather than depending on lenders. But as those lenders (slowly) return to the market this year, we may well see buyout shops start to bag bigger targets once again.

PE-backed M&A

Period Deal volume Deal value
January 1 – April 7, 2016 68 $5.3bn
January 1 – April 7, 2015 53 $9.7bn
January 1 – April 7, 2014 61 $11.6bn

Source: 451 Research’s M&A KnowledgeBase

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One company’s trash is another company’s treasure

Contact: Brenon Daly

Corporate divestitures aren’t necessarily the castoffs they used to be. Increasingly, divisions that have outlived their usefulness inside large companies are getting shipped directly to other companies, bypassing the once-obligatory stop in a private equity (PE) portfolio. This trend of ‘strategic to strategic’ divestitures has been driven by dramatic changes in tech companies and their strategies – on both sides of the transactions.

On the ‘supply’ side, there have never been more divestitures by listed US tech companies than in 2015, according to 451 Research’s M&A KnowledgeBase. (See our full report on this year’s record level of activity.) Some tech companies – particularly those of a certain age – have sold off assets as part of a larger corporate reorganization. (For instance, Hewlett-Packard, which cleaved itself into two $50bn-revenue businesses in November, has shed five divisions this year – as many divestitures as it had done, collectively, over the previous half-decade, according to the KnowledgeBase.) In some cases, the push to divest has been sharpened by the ever-increasing agitation by activist hedge funds.

Meanwhile, on the ‘demand’ side, the fact that companies are dealing directly with other vendors on divestitures isn’t all that surprising when we consider how frequently they have been negotiating with each other on outright sales. (Consolidation, which corporate development executives told us in a survey last December would be the second-most-popular type of deal in 2015, is roughly akin to a scaled-out version of a divestiture.) Consolidation has reached an unprecedented level this year, with huge chunks of the IT landscape coming together.

Put that together, and publicly traded tech companies are increasingly finding themselves sitting across the negotiating table from other publicly traded companies. Carbonite, j2, CACI International, Raytheon, Trend Micro, Amdocs, Tangoe and others have all picked up businesses from fellow publicly traded companies in recent months, according to the KnowledgeBase.

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For tech giants, it’s ‘buy bye’ as divestitures hit record

by Brenon Daly

Tech giants are having garage sales like never before. What were once viewed as ‘strategic’ businesses at Symantec, Nokia, Intel and others have been placed out on the curb for sale at a record pace in 2015. So far this year, according to 451 Research’s M&A KnowledgeBase, tech companies that trade on US exchanges have already divested $59bn worth of assets. That’s the highest-ever amount for divestitures, and twice the average full-year total over the past decade.

The divestitures are the latest indication of the seismic changes currently sweeping the IT landscape. In some cases, the moves have simply unwound earlier acquisitions that never generated the level of returns the buyer had hoped. Accordingly, buyers-turned-sellers in those situations almost invariably take a bath on the deal, like Nokia selling its mapping business in August for $2.7bn after shelling out $8.1bn for Navteq eight years earlier.

Those ‘coming and going’ divestitures are a fairly standard part of any corporate portfolio review, taking place in virtually every economic cycle. What has elevated divestiture activity in 2015 to record levels is the unprecedented corporate overhauls of many tech giants. That has put more parts in play. For instance, eBay dumped two sideline divisions when it sold PayPal last summer.

Even more dramatically, Hewlett-Packard, which cleaved itself into two $50bn-revenue companies a few weeks ago, has punted five businesses this year – as many divestitures as it had done, collectively, over the previous half-decade, according to the KnowledgeBase. Its latest move to unload TippingPoint sparked additional rumors that HP might look to shed another piece of its security portfolio, ArcSight. That business has been relatively dormant within HP since the mid-2010 acquisition, despite the steady growth in the security information and event management market.

Looking ahead, the divestiture pipeline appears even fuller for 2016. A number of vendors have already indicated that they are looking to sell off businesses, including Citrix, Intuit and Teradata. In addition to the disclosed plans, there’s speculation that Intel could unwind its McAfee unit. (Last summer, Intel ended its experiment with API management, discarding Mashery after owning it for about two years.) And then there’s a long list of assets that Dell might look to divest to help cut the cost of the tech industry’s largest deal, provided it does indeed close. We could certainly envision several ‘pearls’ in EMC’s ‘string of pearls’ being on the auction block, including RSA and Documentum. If they do sell, both the content management and security businesses would be billion-dollar divestitures.

Divestitures by US-listed tech companies

Year Deal volume Deal value
YTD 2015 141 $59bn
2014 151 $43bn
2013 172 $30bn
2012 190 $23bn
2011 123 $19bn
2010 148 $21bn
2009 214 $26bn
2008 136 $23bn
2007 138 $14bn
2006 137 $51bn
2005 144 $18bn

Source: 451 Research’s M&A KnowledgeBase

Family drama at VMworld

Contact: Brenon Daly

Even before he talked products or markets, VMware CEO Pat Gelsinger kicked off his comments to Wall Streeters at his company’s annual conference with a moment of ‘family time.’ In this case, it was to defend the current corporate parentage, with EMC owning a super majority of VMware as part of a larger ‘EMC Federation.’

Gelsinger essentially said that the way things are now in the EMC family is the way they should be. He went on to knock down rumors that he was planning – or even considering – any changes in the current corporate structure, specifically singling out recent reports about a kind of fratricide by VMware in which his company would take over EMC. ‘Better together’ is the family motto.

Not everyone agrees, however. Some critics, such as the kind that buy small chunks of stock in a company and then try to tell it what to do, counter that the current structure actually inhibits growth in the family.

The activist hedge funds have a point, given that VMware stock has basically flatlined over the past five years while the S&P 500 Index has nearly doubled. (The underperformance stands out even more when we consider that a half-decade ago, VMware was running at less than $1bn in quarterly revenue. It now puts up more than $1.5bn in sales each quarter. There aren’t too many S&P 500 companies that are two-thirds bigger now than they were in 2011. Most, including EMC, have only slightly grown.)

Given that Elliott Associates, an activist hedge fund that has already successfully pushed to reshuffle EMC’s board of directors, effectively crashed the VMworld party, it’s not unreasonable to expect even more changes in the EMC Federation. (Remember, too, that the ‘standstill’ agreement between Elliott and EMC expires this month.) There may well be some family drama before the year is out.

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