Category: divestitures

AMD now faces a fabless future

Contact: John Abbott

Advanced Micro Devices is now officially a fabless semiconductor company. Under the leadership of its recently installed CEO Rory Read, AMD has renegotiated the terms of its agreement with GLOBALFOUNDRIES (GF), finally relinquishing its stake in the chip-manufacturing arm that it originally spun off at the end of 2008. It’s a complex arrangement, but the net result is that AMD no longer has to buy from GF and is free to play the market. That’s good for a number of reasons, not least being that problems ramping up 32nm and 28nm production at GF last year delayed the launches of both AMD’s Fusion graphics processors and Opteron CPU product rollouts, hurting its competitiveness against rivals Intel and NVIDIA and directly hitting its bottom line.

AMD isn’t likely to use that trump card straight away. The company says it has no current plans to dual-source its Fusion APUs (the combined CPUs and GPU semiconductors that are crucial to its future), and it has agreed to set up a framework with GF to negotiate prices for wafer fabrication in 2013 – but that doesn’t mean it won’t be looking hard for better deals elsewhere, just as other fables semiconductor firms do as part of their daily business. AMD must be hoping that its freedom to go elsewhere will provide enough incentive for GF to stick more closely to its deadlines in the future. AMD already has a close relationship with GF rival Taiwan Semiconductor Manufacturing Company, which acts as a second source for Fusion chipsets – and that relationship might well be deepened.

What does AMD lose along with its manufacturing arm? Preferential pricing, of course, because it was buying its wafers at cost from GF, and these will now be subject to a negotiated fixed-price contract, dependent on volumes. In SEC filings, AMD says it now expects to spend $1.5bn for wafer fabrication with GF in 2012 (up from $904m in 2011). On the other hand, it will spend less on R&D on the manufacturing side ($71m in 2012, down from $79m last year) – and nothing on capital manufacturing assets for the fab, which cost it $34m in 2011.

GLOBALFOUNDRIES, based around AMD’s original manufacturing facility in Dresden, Germany, was spun off with financial help from Advanced Technology Investment Company (ATIC) and Mubadala Development, both investment arms of the Abu Dhabi state. They took a 67% stake between them – ATIC 44.4% and Mubadala 19.3%. But in late 2009, ATIC announced the acquisition of Chartered Semiconductor for an enterprise value of roughly $4bn and set about combining it with GF, diluting AMD’s stake in the process. Further investments in a new facility in upstate New York took AMD’s stake below 10% by the end of last year.

Now AMD has transferred the remaining capital stock that it was holding in GF, 1.06 million shares worth $278m, back to the fab itself. Along with the stake goes the remainder of a five-year exclusive manufacturing arrangement. To get out of these commitments, AMD will pay GLOBALFOUNDRIES $425m over the next two years – an amount effectively replacing cash incentives that AMD had agreed to pay the fab in 2012 under the old agreement. The $278m and $425m payments will be recorded as a one-time charge on AMD’s Q1 balance sheet.

Cable & Wireless Worldwide may lose independence

Ben Kolada

Contact: Ben Kolada, Thejeswi Venkatesh

Just two years after parent company Cable & Wireless Group split itself into two businesses, the consumer division Cable & Wireless and the business services unit Cable & Wireless Worldwide (CWW), CWW may once again find itself as part of a larger organization. Vodafone confirmed Monday that it is in talks regarding the possible acquisition of CWW. The deal, which is rumored to be valued at roughly $1bn, should be welcome news to CWW’s investors, who have seen the company’s stock plummet by two-thirds in the past year.

Independent CWW, which provides fixed lines that link to wireless transmitters and switches, among other voice and data services, has fared poorly since the split, as revenue flatlined and the company issued several profit warnings. However, exploding Internet usage on mobile phones has caused renewed interest in CWW. Vodafone, which is light on its fixed-line capacity in the UK, would likely use the acquisition to enable more bandwidth availability for its mobile users. Vodafone will be able to take advantage of CWW’s vast infrastructure to backhaul its own cellular services, rather than rely on third-party operators. CWW’s investors are hopeful that the deal will come to fruition, with shares of the telco closing the trading day 30% higher. Vodafone has until March 12 to make a decision on the acquisition.

AT&T’s loss is Verizon’s gain

Ben Kolada

Contact: Ben Kolada

In the land of multibillion-dollar telco mergers, sometimes the piecemeal approach is more effective than a one-and-done deal. AT&T attempted to leap over the competition with its proposed $39bn acquisition of T-Mobile USA; however, the world’s largest telecom company fell flat on its face. In failing to secure the T-Mobile takeover, AT&T is on the hook for a hefty $3bn cash breakup fee and must share spectrum in 128 cellular markets with its still-independent competitor. The spectrum loss is of particular irony, considering the primary driver for the T-Mobile purchase in the first place was the target’s spectrum assets.

Rather than pursue another long-shot acquisition, AT&T should focus on smaller spectrum purchases. That’s precisely what its competition has done. While AT&T spent months attempting to persuade politicians and federal regulators to approve the T-Mobile deal, which would have combined the second- and fourth-largest wireless carriers in the US, Verizon was dutifully seeking out smaller spectrum buys. Just this month, the company announced a pair of spectrum transactions worth a combined total of nearly $4 billion – the same price as the pretax charge AT&T will take in the fourth quarter (that charge includes the $1bn book value for the spectrum agreement with T-Mobile). Meanwhile, AT&T still hasn’t received FCC approval for its $1.9bn acquisition of certain Qualcomm spectrum licenses, which was announced back in December 2010.

A potentially expensive missed call

Brenon Daly

Contact: Brenon Daly

With AT&T’s planned purchase of T-Mobile USA now looking increasingly unlikely to close, we may have to take an eraser to our deal totals for 2011 – a very big eraser. Like most other M&A databases, The 451 M&A KnowledgeBase tallies transactions by their date of announcement rather than close. (However, we do note when the transaction is officially complete in our deal records, where relevant.) And recent regulatory developments in AT&T’s proposed consolidation of T-Mobile, which was announced eight months ago, appear to indicate the $39bn pairing may not get consummated.

If that happens, the total M&A spending for 2011 will decline by a full 17%. The planned purchase, which is the largest telco transaction in a half-decade, is three times the size of the next-largest deal announced so far this year, Google’s $12.5bn proposed purchase of Motorola Mobility.

Another way to look at it: AT&T’s $39bn cash-and-stock purchase of T-Mobile roughly equals the average monthly M&A spending around the globe for two full months so far this year. Without the big telco deal, the total value of all 2011 transactions is likely to come in just slightly below the $226bn we recorded in 2004. If that’s where spending does indeed land this year, it would represent an uptick of about 28% compared to 2010 full-year total of $172bn.

What to do with webOS?

Brenon Daly

Contact: Brenon Daly, Chris Hazelton

Investors can only hope that Hewlett-Packard doesn’t announce any ‘bold, transformative steps’ this afternoon like it did the last time it discussed its quarterly financial results. Recall that it was just mid-August when the tech giant unveiled a dramatic overhaul of its business: looking to jettison its $40bn PC division while simultaneously closing the largest acquisition in the software industry in seven years. And, to make matters worse, HP announced those moves in the same breath as it said it would fall short of its earnings projections for the third straight quarter.

Given that the makeover had the dubious distinction of being both overdue and ill-conceived, it’s probably not surprising that it was doomed. (As, it turned out, was the chief architect of those plans, Leo Apotheker.) The company had shed as much as $20bn in market value at one point because of the strategic stumbles, although it is ‘only’ down about half that amount now.

Part of the recent recovery has come from the fact that HP has stabilized, at least in some regards. There was no lingering, interminable Yahoo-style search for a replacement when Apotheker got dumped; instead, the company moved Meg Whitman into the corner office in quick order. Also, rather than see through the sale of its PC business – a divestiture that would have only brought pennies on the dollar, if it could have been done at all – HP reversed course and said it plans to remain in the PC business.

Of course, there’s still uncertainty hanging over one key aspect of its Personal Systems Group: webOS. As we see it, HP has four basic options for the business, which supplies operating systems to tablets and smartphones. It could keep webOS and put real investments behind it, even though, in the short term, those efforts might not produce much return. HP could shop webOS to a device maker, which might benefit from an integrated hardware and software product or, at the least, cut the manufacturer’s reliance on Google’s Android. Alternatively, rather than try to sell webOS as an ongoing entity, HP could slim it down to simply a portfolio of patents and put that on the block. And finally, if it can’t sell webOS in any fashion, it could just follow in the footsteps of Nokia and its Symbian OS, and punt the software into the open source community in hopes of gaining developer support with a wider range of webOS devices.

Cut the CDN already, InterNap

Ben Kolada

Contact: Ben Kolada

We’ve long covered InterNap Network Services as both a potential target and a datacenter services vendor with disappointing earnings. With what’s likely to be another underwhelming quarter (the company reports Q3 results after the bell today), we take yet another look at what can be done to save this barely floating ship.

At this point, InterNap has got to unload some of its non-core assets. The company’s IP services segment, made up of interconnection and CDN services, is dragging on its total revenue (revenue from this segment fell 8% last year). However, interconnection is among the core services for hosting providers, so we’d suggest just divesting its CDN assets. Now may in fact be the best time to start weighing this option, given recent positive developments in the CDN sector. Akamai Technologies, the largest CDN provider, reported earnings yesterday that showed revenue grew 11% in Q3 from the year-ago period. And earlier this month, Japanese telco KDDI announced that it was taking an 86% equity stake in CDNetworks in a deal that gave the target an implied equity valuation of $195m. Even though growth had stalled at Seoul-based CDNetworks, the company was still able to command a 2x price-to-sales valuation (which stands in stark contrast to mostly disappointing valuations in the CDN sector).

Cutting some of the fat from InterNap’s business could make the company more palatable to prospective acquirers. However, the lack of growth is likely to prevent interest from most telcos. Instead, at this point buyout shops may be the most interested acquirers. Not only does InterNap have some of the characteristics PE firms prefer (it has very little net debt and consistently generates healthy cash flow), the company’s price is still within reach of some of the larger firms. Applying a simple 30%-per-share premium would put its price in the ballpark of $400m. For comparison, last year we saw financial firms announce a trio of deals each valued at $400m or more.

The ever-rising costs of HP’s makeover

Brenon Daly

Contact: Brenon Daly

The bill for Hewlett-Packard’s makeover just keeps climbing. Even beyond the $10bn that has been erased from the market valuation of the company since announcing its unprecedented reorganization, the ailing giant is facing some real cost in the coming days.

For starters, it’s on the hook for $11.7bn to cover its pending purchase of information management vendor Autonomy Corp. That’s no small amount. In fact, it stands as the largest price paid for a software company in seven years. (And it’s one of the richest, valuing Autonomy at almost 12 times trailing sales, while HP itself currently trades at just 0.4x sales.) On top of that, there’s also the $1bn charge that’s looming for the shutdown and restructuring of the ill-fated webOS business.

But both of those costs are likely to be chump change compared to the losses that HP likely faces in getting rid of its Personal Systems Group (PSG) – assuming the company even finds a buyer for its desktop and laptop business. Recall that HP paid roughly $25bn in stock for Compaq, a consolidation move that made HP the largest single vendor of PCs. If it is able to sell that division now, we figure HP would be lucky to get about $5bn for it, or roughly one-fifth the amount it originally paid. (See our full report on HP and the rest of the PC industry.)

In calculating the potential purchase price for PSG – and this is strictly on a back-of-the-envelope basis – we looked back on what IBM got when it divested its PC business back in late 2004. Big Blue’s business was generating about $9bn in sales, and Lenovo paid just $1.75bn in cash and stock, plus the assumption of debt. HP’s PC business is slightly more than four times larger, so applying that loose multiple gets us into the neighborhood of $7bn.

However, a couple of factors will undoubtedly put some pressure on the multiple for HP. First, we would argue that IBM had a much more valuable brand with its ThinkPad line than the HP/Compaq brand. But far more important than those specific concerns around brands is the fact that the broader PC market has eroded significantly in the half-decade since Big Blue divested its business. To get a sense of just how far the PC market has fallen, consider the results from the most recent survey of consumers from our sister company, ChangeWave Research. Earlier this month, just 7% of respondents indicated that they expected to buy a laptop in the coming 90 days, with just 3.5% indicating that they planned to buy a desktop.

Limelight lightens its load

Ben Kolada

Contact: Ben Kolada

In a move to streamline its operations, Limelight Networks is divesting its EyeWonder assets to DG FastChannel. Although the deal comes at a considerable discount – DG’s $66m all-cash offer is only slightly more than half the amount that Limelight paid in cash and stock for EyeWonder less than two years ago – it should help the ailing CDN vendor focus on its core business. It could even pave the way for a sale of Limelight.

As my colleague Jim Davis notes, Limelight’s original decision to buy EyeWonder appeared strategically sound. The idea was that EyeWonder would funnel new customers to the Limelight CDN. That could have worked, but a missed development target meant that ad agencies were taking business elsewhere this year. As a result, revenue for the acquired company essentially flatlined. When Limelight picked up EyeWonder in December 2009, the target generated some $35m in trailing sales. The outlook two years later isn’t much better. New owner DG FastChannel indicated that it expects revenue from the acquired property to max out at $37m this year.

Wall Street appears to back the asset sale. Following the announcement, shares of Limelight closed the day up nearly 6% on volume that was almost triple the monthly average. Although the company has lost half its market value this year, due in large part to flat revenue growth and third-quarter revenue guidance that came in below analysts’ expectations, an opportunistic acquirer could swoop in to scoop up the company. Following the slide in share price, Limelight is sporting a market cap of just $300m. Add in the more than $100m of cash in its coffers and little debt, and the company could be had for relatively cheap for an opportunistic buyer.

Corel erases iGrafx from its portfolio

Brenon Daly

Contact: Brenon Daly

A decade after picking up iGrafx, the private equity-backed Corel firm has divested the business process management (BPM) software company to newly formed buyout shop The Limerock Group. The move should allow new focus and resources for iGrafx, which was always an odd fit inside Corel. For its part, iGrafx sold almost entirely to enterprises, while Corel is known as a home for many faded, second-rate consumer brands, such as WordPerfect and PaintShop.

Perhaps not surprisingly, the iGrafx business suffered from a bit of neglect inside Corel. At one point, we understand the business was generating about $20m in sales, although it is probably only running at about half that level now. One area that iGrafx will undoubtedly look to expand is around consulting and other services that tend to play a not-insignificant part of BPM deployments. IGrafx may look to build that up through internal development, or the newly capitalized company could tuck-in a small consulting shop.

The move by Limerock, a firm founded by the team that built and eventually sold NetQoS for $200m, comes after a number of big-name buyers have inked BPM deals of their own over the past two years. (Limerock was advised by Northside Advisors, while Pagemill Partners worked the other side.) Significant acquirers that have bought their way into the market since mid-2009 include IBM, Software AG, Progress Software and Open Text. Valuations for these BPM deals has ranged from roughly 1x sales to almost 6x sales. Given iGrafx’s slumping sales and its awkward fit inside Corel, we suspect the business would have likely traded at the low end of that range.

A longshot for Leo?

Brenon Daly

Contact: Brenon Daly

Hewlett-Packard is now, officially, Leo Apotheker’s company. Since his somewhat surprising appointment as HP’s chief executive last fall, Apotheker has been taking small steps while also dropping big hints that he would be recasting the tech giant. But few observers could have imagined the almost unprecedented scope of the transition that Apotheker laid out late Thursday: HP will be integrating the largest acquisition in the software industry in seven years while simultaneously looking into selling off its hardware business.

Wall Street appears to be skeptical that HP can pull that off, as shares in the company on Friday sank to their lowest level since mid-2006. (Incidentally, that’s just before Apotheker’s predecessor, Mark Hurd, took over the company.) On their own, either one of HP’s dramatic moves (working through the top-dollar acquisition of Autonomy Corp and possibly selling the world’s largest PC maker) would be enough to keep any company busy. Taken together, the combination appears doubly difficult. And that’s even more the case for HP, which, to be candid, has a spotty record on M&A.

Consider this: Autonomy will be slotted into HP’s software unit, which has been built primarily via M&A. But that division runs at a paltry 19% operating margin, less than half the rate of many large software companies, including Autonomy itself. And then there’s the $13.9bn HP spent in mid-2008 for EDS in an effort to become a services giant. So far this year, however, that business hasn’t put up any growth. And perhaps most damning is the fact that HP now doesn’t really know what it will do with its hardware business – a unit that largely comes from the multibillion-dollar purchases of Compaq Computer and Palm Inc.