Category: divestitures

Telefónica nabs cloud hosting firm acens Technologies

Ben Kolada

Contact: Ben Kolada

Consolidation between the telecommunications and hosting industries continued today with Madrid-based telco Telefónica purchasing cloud hosting and colocation provider acens Technologies from buyout shop Nazca Capital. Although this deal seems to be just another in the long line of telco-hosting pairings, it actually represents one of the biggest foreign consolidations that we’ve seen.

Terms of the transaction weren’t disclosed, though public reports claim that Telefónica shelled out approximately €75m ($110m) for the hosting vendor. With some loose math based on applying acens’ historical growth rate to the €30m ($43m) in revenue that Nazca claims acens generated in 2009, we estimate that the company’s 2010 total revenue was likely in the ballpark of €35-40m ($46-53m). If our estimates are correct, that price-to-sales valuation would be slightly less than what Nazca paid for acens in January 2007, though it would still represent a nearly 100% return on capital in just four years. We’ll have more context on this deal, including analysis from our cloud infrastructure and hosting colleagues at Tier1 Research, in a full report in tomorrow’s Daily 451.

A tale of two e-discovery deals

Brenon Daly

Contact: Nick Patience

Last week was more or less bookended with two acquisitions in the e-discovery market, with Autonomy Corp picking up Iron Mountain’s digital assets on Monday and Symantec buying Clearwell Systems on Thursday. Autonomy and Symantec share a market but little else between them. Both are experienced acquirers – having made, collectively, 50 deals over the past decade – but each company chooses its targets and executes acquisitions in very different ways.

Autonomy often buys rivals simply to remove them from the market. Or it inks deals to obtain customer bases or move into adjacent sectors, and it often swoops in on companies at the last minute (as it did with Zantaz in 2007). The purchase of Iron Mountain’s divested business has all four of those characteristics. Iron Mountain was a direct rival in the e-discovery and archiving segments, while it also provided a backup and recovery business, which is a new area for Autonomy. The buyer also netted 6,000 customers, although there is some overlap. Autonomy took out Verity back in 2005 to remove a competitor and picked up Zantaz to get into the archiving space. The vendor is known for being aggressive in integrating companies, which often leads to a lot of people quickly moving on after being acquired, and we expect both people and products to be removed rapidly here.

Symantec’s M&A strategy is still somewhat shaped by its misguided attempt to add storage to its core security offering with the acquisition of Veritas in 2004. (That deal remains Big Yellow’s largest-ever purchase, accounting for more than half of the company’s entire M&A spending.) Of course, that transaction happened more than a half-decade ago and a different management team was heading the company.

Still, that experience – along with the constant reminders about the misstep from Symantec’s large shareholders – appears to have made the company more considered in its approach. For example, it had been working with Clearwell in the field as well as at the product development level for more than two years before the deal. However, we don’t think Big Yellow could have waited much longer to add some key e-discovery capabilities to boost its market-leading (but aging) Enterprise Vault franchise. We suspect that is why Symantec paid such a high premium for Clearwell, valuing the e-discovery provider at 7 times sales – more than twice the multiple Autonomy paid in its e-discovery purchase.

Clearwell had been on a growth tear since its formation at the end of 2004 and the firm helped define the e-discovery space, starting with early case assessment and then systematically moving into other segments of the e-discovery process. We get the feeling that management may have wished to have waited another year or so before being bought. We think they would have relished the chance to turn Clearwell into something substantial and possibly take it public; the fact that no bankers were used on either side indicates that Clearwell was not actively shopping itself around. But some offers are just too good to turn down.

Updata secures a bargain from CA

Brenon Daly

Contact: Brenon Daly

When CA Technologies ‘partnered’ with Indian outsourcing firm HCL Technologies to try to offload its security business in November 2007, we termed the move a ‘kind-of, sort-of’ divestiture that was unlikely to fit well with either party. Three and a half years later, the full divestiture is finally done: CA sold it to Updata Partners last week. Although terms weren’t disclosed, we understand that Updata is paying only about $10m for the business, a price that reflects just how much the division had suffered under the joint venture. The roughly $50m in sales at the unit is less than half the level it was at the time of the CA-HCL accord.

The fact that CA got any money for its security assets surprised some. We hear from several participants that at least one bidder put forward a ‘cashless’ offer, offering to take the unit off of CA’s hands for only the assumption of liabilities. (We gather that there was some interest in the business from a few of the larger, privately held security vendors, while from the financial world, both Platinum Equity and Symphony Technology Group were rumored to be bidders.) However, the deal was a very complicated one, not the least of which because there were some questions about the revenue sharing with HCL.

The split ownership, exacerbated by uneven commitments from the two sides, meant that the security business itself was rather starved, particularly for sales and marketing support. (It didn’t help that the division focused on consumers and small businesses, while its corporate parent, CA, targets enterprises. CA will continue to sell enterprise security offerings, which is primarily its identity and access management software.) Out from under the untenable ownership structure, the security unit will likely enjoy renewed focus and resources from its soon-to-be owners at Updata as the buyout firm tries, first, to stabilize the business and then ultimately get it growing again. The deal should close next month.

Autonomy picks up piece of rock from Iron Mountain

Brenon Daly

Contact: Brenon Daly, Nick Patience

Announcing its first acquisition in almost a year, Autonomy Corp has picked up Iron Mountain’s digital assets in a surprisingly rich purchase of a castoff business. Autonomy will pay $380m in cash for the units, which include backup and recovery, e-discovery and digital-archiving software. The transaction effectively unwinds Iron Mountain’s acquisitions of Mimosa Systems and Stratify, deals the records giant had done as a hedge against the digitization of information. As my colleague Nick Patience writes in his report on the move in tonight’s Daily 451, the divestiture puts Iron Mountain almost entirely back in the business of storing cardboard boxes.

For Autonomy, we suspect that the main reason for the purchase is the division’s customer base of 6,000 as well as the six petabytes of data those customers have stored. (Autonomy already has e-discovery and archiving technology, so would be less interested in those Iron Mountain products.) Viewed in that light, the purchase price of $380m, or more than 2.5 times projected revenue in 2011, seems a bit steep. That’s particularly true when we consider that Iron Mountain was under the gun from big shareholders to dump the digital division. On the news, Iron Mountain shares inched a bit higher Monday afternoon, and have now added one-third in value since the beginning of the year.

eBay bids high for GSI

Ben Kolada

Contact: Ben Kolada

In its largest deal in the past half-decade, eBay is set to acquire e-commerce vendor GSI Commerce for $2.4bn. The company hasn’t made such a move since September 2005, when it forked over $2.6bn for VoIP provider Skype. And while hindsight shows that eBay certainly overpaid for that property, on an equity value basis, this transaction actually carries the highest bid eBay has offered. (We would also note that this pending acquisition is the largest Internet deal since February 2008.)

Although the deal represents a fairly standard price-to-sales valuation, it carries a hefty share price premium that makes the 40-day go-shopping clause more of a formality than anything else. The $29.25-per-share cash offer values GSI at 1.6 times its trailing sales, in line with other public takeovers, but it represents a premium of 51% over GSI’s closing share price on Friday and the highest price its shares have seen since July 2010. That’s more than twice the premiums eBay offered for Gmarket in April 2009 and Shopping.com in June 2005. The valuation is actually slightly higher when considering that eBay isn’t interested in the entire company. As per terms of the deal, which is expected to close in the third quarter, eBay will divest GSI’s licensed sports merchandise business and 70% of its ShopRunner and Rue La La assets to a newly formed company led by GSI founder and CEO Michael Rubin.

AT&T does Sprint a favor

Ben Kolada

Contact: Ben Kolada

If the rumors that Sprint was eyeing T-Mobile USA were actually true, then AT&T did its competitor a big favor by taking in the divested business. From our view, T-Mobile would have been a bigger bite, both financially and operationally, than Sprint could have swallowed. The transaction would likely have introduced a whole new set of tricky integration problems just at a time when Sprint is (finally) emerging from the set of problems it took on when it did its last big deal, the $39bn purchase of Nextel in late 2004. (Sprint shares have lost 80% of their value since that ill-fated acquisition.)

Sprint is already the only national carrier managing three different networks (CDMA, iDEN and WiMax), and the addition of T-Mobile would have added a fourth, bringing additional cost and complexity to the carrier’s operations. And while Sprint is moving back into the black, T-Mobile’s financial performance wouldn’t necessarily have helped that effort. (Don’t forget that the Deutsche Telekom subsidiary has long been a laggard, in terms of margins and subscriber growth, and is being divested for less than it was acquired.) While Sprint is adding subscribers and is finally growing revenue (2010 marked the first time in four years that it grew its top line), subscriber and revenue growth at T-Mobile have been flat.

Instead of T-Mobile, several of the remaining cellular properties in the US would fit better, both technologically and financially, with Sprint. While Sprint’s share price plummeted on AT&T’s news, stocks of regional cellular carriers such as MetroPCS and Leap Wireless soared on buyout speculation. Like Sprint, both are CDMA network operators, and both would provide Sprint with growing revenue and subscriber bases. And both companies are still within Sprint’s price range.

Even with M&A speculation inflating their valuations, MetroPCS and Leap currently sport $5.5bn and $1.1bn market caps, respectively. A cash-and-stock deal similar to AT&T’s T-Mobile acquisition could actually put both under Sprint’s ownership, since Sprint is sitting on $5.5bn in cash and short-term investments. And Sprint actually seems the most likely acquirer for these companies, even though Verizon is widely speculated to react to AT&T’s announcement with a deal of its own. Given the scrutiny that AT&T’s pending purchase of T-Mobile is expected to receive, we doubt that Verizon, currently the nation’s largest cellular carrier, could make a deal without regulators saying they’ve had enough.

Ma Bell’s mobile move

Brenon Daly

Contact: Brenon Daly

In the largest US telco deal in a half-decade, AT&T will hand over $39bn in cash and stock for T-Mobile USA. Assuming it goes through, the combination would create the country’s largest wireless provider, with some 130 million subscribers. The consolidation move, which has been a hallmark of AT&T over the past decade, would give the carrier one-third more wireless subscribers than second-place Verizon and more than twice the number of Sprint.

Clearly conscious of its increased market share, AT&T took a number of steps – both in language and in terms – to blunt criticism and concerns over the concentration. For instance, in its release AT&T tosses a sop to regulators by portraying this move as a step to connecting ‘every part of America to the digital age’ – a quote borrowed from President Obama and backed by the Federal Communications Commission. (The FCC and the US Department of Justice will likely cast a sharp eye on the planned deal, which AT&T hopes to close in a year or so.) And, in an effort to shore up populist support, AT&T highlights in its release that it is the only major wireless carrier to be a union shop. We can’t remember the last time a major acquirer trumpeted its union status in an M&A release.

Aside from the spin in the official release, the terms of the proposed transaction also appear to us to be structured with an eye toward knocking down as much uncertainty as possible. For instance, AT&T collared the $14bn in stock that it is set to give to T-Mobile USA’s parent Deutsche Telekom. (Although, at least based on Wall Street’s initial reaction, that wasn’t necessary as investors actually nudged the Dow component 1% higher.) But what really caught our eye was the stiff breakup fee: if AT&T has to walk away from the deal, it will be on the hook for a $3bn payment, as well as have to transfer an undefined chuck of spectrum to its would-be partner. That’s a lot of incentive to get it closed.

Slimmed-down LSI catches eyes on Wall Street

Brenon Daly

Contact: Brenon Daly

Wall Street’s vote on NetApp’s purchase of the Engenio division from LSI is pretty clear: the seller got the better end of the deal. On an otherwise tough day on the market Thursday, LSI shares were one of the rare spots of green on trading screens as investors backed the company’s move to focus more on its chips business. The stock closed up 3%, with volume was more than twice as heavy as average. On the other side, NetApp slumped 6% on trading that was four times heavier than a typical day.

The reaction comes after LSI, advised by Goldman Sachs, announced plans after the closing bell Wednesday to sell its Engenio external storage systems business to NetApp for $480m in cash. (Over the past decade, LSI had several plans to spin off that unit in an IPO, but never managed to get it done.) The deal, which is expected to close within 60 days, continues a run of divestitures that LSI has undergone, including shedding divisions serving mobility and consumer products.

We would note that Engenio is garnering a valuation of just 0.7 times sales, a smidge below the more typical 1x sales seen in many divestitures. (For instance, when LSI shed its mobility products unit in mid-2007, that business garnered 1.2x trailing sales.) Still, the discount doesn’t seem to have mattered to Wall Street.

Trapeze’s long road to an obvious home

Brenon Daly

Contact: Brenon Daly

Two and a half years after a head-scratching sale to an unexpected buyer, Trapeze Networks has finally landed where it pretty much should have gone in the first place: Juniper Networks. The networking giant said Tuesday that it will hand over $152m in cash for the WLAN gear maker, with the deal expected to close before the end of the year. The price is actually $19m (or 14%) higher than Trapeze fetched in its sale in June 2008 to Belden. (That’s a reversal from most divestitures, which typically return dimes on the dollar compared to the original acquisition price.)

Trapeze’s combination with Belden was a bit puzzling from the start, so it’s not surprising to see the company, which is primarily known for its wiring products, unwind its purchase of a wireless vendor. In fact, it’s only surprising that Trapeze went through a period of ownership at a company other than Juniper. After all, Juniper had an OEM arrangement with Trapeze and even put money into the startup’s series D round of funding. We gather that Juniper was close to taking home Trapeze before it sold to Belden, but the two partners got snagged on a final price.

Since Trapeze sold for the first time, there have been a handful of exits for other WLAN providers. Most notably, Colubris Networks got snapped up by Hewlett-Packard and Meru Networks actually made it to the Nasdaq. Meru went public at $15 per share, which has been basically the midpoint of its trading range since its debut in late March. The stock also currently trades at about $15, giving Meru an equity value of roughly $240m, or about three times 2010 sales. Incidentally, Bank of America Merrill Lynch both led Meru’s offering and advised Juniper on its pickup of Trapeze.

Windstream makes hosting splash among private equity waves

Ben Kolada

Contact: Ben Kolada

Windstream Communications bought into business services once again, this time picking up managed hosting, colocation and cloud computing provider Hosted Solutions. The deal is the first hosting play for Windstream, and shows that private equity buyers aren’t the only ones shopping in the sector.

Windstream is paying $310m in cash for Hosted Solutions, which posted $52m in trailing sales. The deal values Hosted Solutions at 12.7x its trailing EBITDA, and more than double the price that ABRY Partners paid for the company in April 2008. Hosted Solutions employs 125, and Windstream initially plans to retain the majority of those employees, though we expect there will be some corporate turnover as part of the integration.

Although telcos have gone shopping for colocation and hosting companies this year (with the most notable deal being CyrusOne’s sale to Cincinnati Bell), private equity firms have dominated the headlines. We recorded 10 hosting and colocation deals this year with deal values of at least $100m. Of this group, half of the targets went to private equity buyers, and four of those deals involved the target company simply jumping from one PE portfolio to another. Further, buyout shops, including firms both in the US and abroad, accounted for nearly half (46%) of the total spending for these 10 deals.

Top 10 hosting and colocation deals of 2010

Buyer category Number of acquisitions Percent of total spending
Private equity 5 46%
Hosting/colocation 3 32%
Telecommunications 2 22%
Total spending $3.8bn

Source: The 451 M&A KnowledgeBase