Category: divestitures

Technicolor turns to Cisco to keep pace with ARRIS

Scott Denne

Contact: Scott Denne

Technicolor fends off the danger from a merger of two rivals with a deal of its own. And what a deal. Technicolor will pay $600m for Cisco’s set-top box hardware unit – a mere 0.3x projected 2015 sales – and become a business that generates more than $3bn in set-top box revenue. Still short of the pending combination of ARRIS and Pace, but close enough to ensure that Technicolor won’t lose that battle based on scale alone.

Aside from the valuation – ARRIS’s purchase put a 0.8x trailing multiple on Pace – the two deals are quite similar. By tying up with Cisco, Technicolor gets broader exposure to the North American cable market to complement its European satellite base; ARRIS bought Pace in large part to boost its non-US sales.

Cisco’s set-top box unit needs some tuning – the cause of the lower multiple. In its previous fiscal year, sales of service-provider video infrastructure dropped by $812m, primarily due to lower set-top sales. In the first three quarters of the current fiscal year, the category slipped $271m, with the company once again blaming set-tops. Technicolor will pay Cisco $450m in cash and $150m in newly printed equity (with a lock-up commitment), and give the networking vendor a seat on its board.

It’s not just competition from ARRIS. Technicolor needs scale to continue to compete for the largest deals among service providers, which are themselves consolidating. According to 451 Research’s M&A KnowledgeBase, the past 12 months alone have seen seven acquisition of television service providers valued at more than $1bn.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

eBay auctions off Enterprise unit

Scott Denne

Contact: Scott Denne

Just days away from spinning off its PayPal division, eBay inks a deal to divest eBay Enterprise, its e-commerce software and services business, to a consortium of private equity (PE) firms for $925m. The Enterprise unit was formed through the 2011 acquisitions of fulfillment service GSI Commerce and e-commerce software vendor Magento, as well as a smattering of smaller software purchases.

The transaction is valued at 0.8x trailing revenue – a number that’s familiar to Sterling Partners, one of the PE firms leading the deal. Sterling snagged Innotrac, a similarly sized order fulfillment provider, in 2013 at a nearly identical multiple. It’s worth noting that eBay Enterprise comes with a broader software portfolio than Innotrac did. In addition to Sterling, Permira Funds, Longview Asset Management and Innotrac itself are also participating in the buyout.

Valuations of e-commerce software companies have been somewhat subdued in the M&A market lately. Google’s 2013 pickup of channel intelligence at just over 4x trailing revenue appears to be the recent high-water mark. Multiples on the public markets, however, tend to be more generous, with Demandware and the newly public Shopify garnering above 15x.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

With its IT divestiture, Acxiom is all about marketing

Scott Denne

Contact: Scott Denne

Acxiom pulls the trigger on a divestiture that was three years in the making. The marketing data services company has sold its IT services business to a consortium of private equity investors for $140m in cash upfront. Though IT services is no longer a fit for Acxiom’s growth strategy, the length of time and the complexity of the deal speak to some lingering alignments between its current focus and its soon-to-be-former IT services business.

In addition to the upfront cash, Charlesbank Capital Partners and M/C Partners are on the hook for an additional $50m earnout over the next three to five years, based on customer retention and EBITDA milestones. Acxiom will also take a 5% share of the profits of the new company once the paid-in capital has been returned. Acxiom will continue to own three of the datacenters from the IT business, which will pay their former parent for colocation, while Acxiom will pay for managed services from those three facilities, which still house portions of its marketing data division.

The unit generated $215m in trailing revenue and $86m in EBITDA for the previous fiscal year (EBITDA figures for more recent periods haven’t been published yet). That puts it below the multiples we typically see in a managed services acquisition. A perfect comp for this transaction, however, is tough to find. For one, it’s a divestiture, and those usually trade lower – and roughly in line with the revenue multiple on this deal. Also, there’s the fact that Acxiom is holding three of the datacenters, on top of the earnout and profit-sharing agreements. Finally, mainframes are a substantial component of this business, which is, obviously, not typical in today’s managed services transactions.

CEO Scott Howe and his team have spent nearly four years reshaping Acxiom into a digital marketing and data services provider from its roots in offline marketing data. Part of that involved splitting up the back end of the IT services business, as well as making several divestitures. It also inked its largest acquisition, last year’s $310m purchase of LiveRamp, which brought it technology that enables online and offline data matching, bringing new relevancy to its legacy offline marketing data business. With today’s divestiture, Acxiom’s entire revenue now comes from marketing data and services.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Atos’s Xerox buy is no Bull

Scott Denne

Contact: Scott Denne

France-based outsourcer Atos reaches across the pond with the $1.1bn pickup of Xerox’s IT outsourcing (ITO) business. The purchase price values the target at 0.7x 2014 revenue, which is above Atos’ norm. The outsourcing and managed services provider has been a bargain hunter in its biggest acquisitions. In fact, you have to go all the way back to 2003 to find a deal where it paid 0.5x trailing revenue – everything disclosed since then has been below that.

For its last big buy – France-based hardware maker and outsourcing shop Bull – Atos paid $847m, or an enterprise value of 0.3x revenue. Before that it ponied up $1.1bn for Siemen’s ITO unit, valuing the target at a mere 0.2x revenue (on top of that it took cash from Siemens to cover the cost of lost contracts, delayed projects and layoffs).

All that’s not to say Atos wasn’t shopping carefully with this transaction. For one thing, Xerox’s ITO business posted revenue growth in the high single digits in each of the past three years, unlike those earlier purchases. Also, the multiple it’s paying for Xerox’s ITO unit is just a hair lower than the 0.85x median multiple on similarly sized ITO deals over the past 24 months, according to The 451 M&A KnowledgeBase. Finally and most importantly, Xerox brings Atos into the US market in a big way. Nearly all of Xerox’s ITO customers are in North America, whereas only 7% of Atos’ business comes from that region.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

NetApp carves SteelStore out of Riverbed

Brenon Daly

Contact: Brenon Daly

NetApp’s first acquisition in more than a year and a half comes with a bit of a twist. The storage giant is only a few months removed from a period in which hedge fund Elliott Management was stirring for changes at the company. Having largely settled with the activist investor, NetApp has now picked up a division carved out from Riverbed Technology, which is currently being targeted by Elliott.

Terms call for NetApp to pay $80m for Riverbed’s SteelStore cloud storage gateway. The size of the business, which was formerly known as Whitewater, wasn’t disclosed. However, our understanding is that it was generating less than $10m in sales. Only 26 employees are going over to NetApp as part of the deal.

SteelStore was part of Riverbed’s broader portfolio expansion, an effort that hasn’t really paid off for the company. Some 70% of Riverbed’s revenue still comes from its core WAN optimization unit. The slowdown in that business is one of the main drags on Riverbed, which recently forecasted that sales in the current quarter may be flat.

However, according to our understanding of the transaction, it wasn’t driven by Riverbed, which is currently exploring ‘strategic alternatives,’ looking to jettison a non-core business. Instead, we gather that NetApp went after the division. Neither side used a financial adviser.

That dynamic may help explain the relatively rich valuation of the deal. (Though we would note that both EMC and Microsoft also paid princely multiples in their purchases of cloud storage gateways.) Also, price-to-sales multiples tend to get exaggerated by companies posting only tiny revenue.

And to be clear, virtually all of the cloud storage gateway startups are generating tiny sales. In a recent study of IT professionals at midsized and large enterprises conducted by TheInfoPro, a service of 451 Research service, only 4% of participating companies had deployed cloud storage gateways – a figure that was essentially unchanged from a similar TIP study in 2013. (See our full report .) With the cloud storage market still very much in its early stages, we would argue that a gateway startup is more at home in a storage vendor like NetApp than in a networking provider like Riverbed.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

For Symantec, the spinoff is just the start

Brenon Daly

Contact: Brenon Daly

After a decade of uneasy – and ultimately unfulfilling – marriage, Symantec has finally served divorce papers to its ill-matched partner, Veritas. In going solo, Big Yellow will return to its roots as a stand-alone information security company while spinning off the smaller information management (IM) business at some point before the end of next year.

The separation means that Symantec’s long-suffering shareholders will continue to own Veritas, which cost them a record $13.5bn worth of stock nearly a decade ago. (Since the acquisition closed in mid-2005, Symantec stock has returned just 10%, while the Nasdaq has doubled during that period.) Or more accurately, we should say Symantec shareholders will continue to own the lower-valued IM division until it can finally be sold.

There’s little doubt, in our view, that the spinoff is an interim step. It allows the unit to put up a few quarters of stand-alone performance, perhaps even get some growth back in the IM business. But even as it stands, the division generates more than a half-billion dollars of operating income each year. A buyout shop could certainly make the leverage work on a business like that, particularly once it was ‘optimized.’ (Overall, Symantec spends some 36% of revenue on sales and marketing, even as its sales flatline.)

While the IM business is ultimately likely to land in a private equity portfolio, we would note that we heard an intriguing rumor as Symantec was working through this process. The rumor essentially had Symantec trading its IM unit to EMC for its security division, RSA.

On paper, the swap makes sense, allowing each of the tech giants to focus on their core businesses. According to our understanding, however, talks didn’t get too far along because of the valuation (the Veritas business is about twice as big as RSA) and because of the tax hit that the companies would take due to the asset swap. (As it is, the spinoff of Veritas is tax-free to Symantec shareholders.) And now, of course, EMC is under pressure to undertake a corporate restructuring of its own.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

Can tech companies wearing sensible shoes be nimble?

Brenon Daly

Contact: Brenon Daly

As the tech giants get more and more gray hair on their heads, they all seem to desperately want to be young again. How else to explain the impetuous plan by the sensible shoe-wearing Hewlett-Packard to separate its enterprise and consumer businesses, with the stated goal of making the two independent companies more ‘nimble?’ Do the architects of the plan somehow think that cutting in half a 75-year-old company will create two businesses in their late 30s?

Remember, too, that about three years ago, HP initially dismissed a similar (but smaller-scale) plan to spin off just its PC business. At the time, executives said HP was ‘better together,’ citing low supply costs, improved distribution and easier cross-selling from the broad HP portfolio.

So why the change of heart that will result in a messy disentanglement taking about a year to implement, costing billions of dollars and resulting in as many as 10,000 additional job cuts? We suspect the fact that HP sales are now 10% lower than when it dismissed that spinoff plan may have something to do with it. (As we noted earlier, HP is basically splitting itself into two companies roughly the size of Dell, which itself had a massive and contested change in corporate structure last year as it sought a ‘fresh start’ through a $24bn leveraged buyout (LBO).)

In addition to HP – Silicon Valley’s original startup – a number of other tech industry standard-bearers have found (or likely will find) themselves under pressure to radically overhaul their corporate structure in pursuit of growth. Some of these have already been targeted by activist hedge funds, while others are still on a watch-list:

  • CA Technologies: Revenue is declining at the 38-year-old company, but it still throws off a ton of cash, trading at less than 10 times EBITDA. Its size and financial profile make it a textbook LBO candidate.
  • EMC: Already under pressure by an activist shareholder to ‘de-federate’ its business, EMC has staunchly resisted calls for change with a variation on the ‘better together’ theme. (But then, so did eBay until recently.) With VMware, it owns one of the most valuable pieces of the IT vendor landscape.
  • Symantec: After a decade of trying to marry enterprise storage and security, a corporate divorce seems likely at some point. (The three CEOs the company has had in the past two years have all kicked around such a separation.) Meanwhile, the topline is flat and Symantec trades at a discount to the overall tech market at just 2.5 times sales.
  • Citrix Systems: In business for a quarter-century, Citrix rode the wave of client-server software to a multibillion-dollar market value. However, despite numerous acquisitions and focus, it has yet to fully capitalize on the next wave of software delivery, SaaS. That business currently generates about 25% of total revenue at Citrix but is only slightly outpacing overall growth, despite industry trends. Citrix stock has been flat for the past four years, while the Nasdaq has nearly doubled during that period.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

‘One HP’? Not any longer

Brenon Daly

Contact: Brenon Daly

In the largest-ever corporate overhaul of a tech company, Hewlett-Packard said Monday that it will split its business in half. The 75-year-old company, which had recently marketed itself under the tagline ‘One HP,’ will separate its broad enterprise IT portfolio from its printer and PC unit within a year. Each of the two stand-alone businesses (Hewlett-Packard Enterprise and HP Inc.) will be roughly the size of rival Dell, booking more than $50bn of sales annually.

Increasing those sales, even under the new structure, will be challenging. In discussing the planned separation, HP executives emphasized that the move comes at the end of a three-year ‘fix and rebuild’ phase at the company. During that time, HP’s top line has shrunk more than 10%. It has already laid off 36,000 employees, and said Monday that the final number of employee cuts may reach as high as 55,000. And HP has virtually unplugged its M&A machine, even as rivals such as IBM and Cisco continue to buy their way into new, faster-growth markets.

Through the first three quarters of its current fiscal year, HP has flatlined. The company indicated that will continue into its next fiscal year, which starts in November. While HP didn’t offer specific growth rate targets or forecasts for the stand-alone companies – once they get on the other side of the hugely disruptive separation – executives noted that the two businesses would be more ‘nimble’ and ‘responsive’ than they would be together.

That may well be, but the two businesses will also be burdened by higher costs individually than they currently face. ‘Dis-synergies’ such as higher supply and distribution costs, as well as supporting two full corporate structures, will shrink cash flow, which has been the key metric for Wall Street’s evaluation of HP’s mature business. Still, HP will throw off several billion dollars of free cash flow.

Some of that cash appears to be earmarked for M&A, although spending there will be a distant afterthought behind dividends and share repurchases. (And HP executives were quick to add that any deals would be ‘return-driven’ and ‘disciplined.’) But even stepping back into the market for acquisitions represents a dramatic shift at HP. After all, it was a series of poor acquisitions – most notably Autonomy but also services giant EDS – that partially forced the prolonged restructuring that culminated in this planned separation.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

With one divestiture done, will Juniper cut the cord on Trapeze, too?

Brenon Daly

Contact: Brenon Daly

Having largely worked through an internal cleanup of its operations, Juniper Networks is now looking to shed some of those operations. The networking gear provider recently divested its Junos Pulse to private equity newcomer Siris Capital, pocketing an unexpectedly rich $250m for its mobile and network security division. With Junos Pulse off the books this quarter, we suspect that Juniper will now turn its attention to cutting the cord on Trapeze Networks.

The rumored divestiture of Trapeze (if it indeed comes to pass) would unwind Juniper’s $152m purchase of the WLAN gear provider back in November 2010. (Ironically, Juniper picked up Trapeze when it was divested by Belden.) Although Belden actually turned a (slight) profit on its ownership of Trapeze, we doubt that Juniper will come out ahead on any divestiture because Trapeze has lost much of its standing in the WLAN market. (Even Juniper seems to have acknowledged this, inking a rather involved partnership with WLAN rival Aruba Networks last month.)

Juniper’s moves come as the 18-year-old company faces pressure from activist hedge funds to pick up its performance. (Juniper shares have basically flatlined over the past decade, and have underperformed rival Cisco Systems more recently.) So far, Juniper has focused its efforts on its cost structure, cutting more than 400 jobs over the past year and consolidating its real estate holdings, for instance.

Fittingly for a company under scrutiny from Wall Street gadflies, Juniper’s cost savings have been put toward ‘shareholder friendly’ expenses, such as funding an increased share buyback as well as a newly announced dividend program. We would add that Juniper’s cash, which totals almost $4bn on hand, isn’t going toward M&A. The company hasn’t announced an acquisition in 2014. As things stand now, given Juniper’s focus on its financial operations, we could well imagine that the company will be a net seller – rather than buyer – of businesses this year.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.

SK Hynix plucks Violin’s PCIe biz

Scott Denne

Contact: Scott Denne

Violin Memory jumps out of the server-side storage business just a year after launching a PCIe flash product. The quick exit – a $23m sale of the division to SK Hynix – comes as Violin dedicates resources exclusively toward returning its storage systems business back to growth (minus the PCIe unit, sales fell 31% year over year to $17m in the most recent quarter).

Violin entered the flash PCIe fray just as serious competition emerged for all-flash storage systems, a dangerous time (as we pointed out in an earlier report ) for a small company with an early lead to divide its attention. Considering the market traction for server-side flash, it makes sense that Violin would jettison that business.

Violin got off to a respectable start in PCIe, hitting $5m in quarterly revenue by its third quarter of PCIe sales, but the market is littered with larger competitors and, as a whole, server-side flash products have attracted scant attention from enterprise buyers. According to surveys last year by TheInfoPro, a service of 451 Research, a full two-thirds of respondents said they had no plans to implement server-side flash. Only 18% of respondents had deployed the technology, up from 11% in the same survey a year earlier.

For more real-time information on tech M&A, follow us on Twitter @451TechMnA.