Category: divestitures

Take two for SunGard Availability Services

Ben Kolada

Contact: Ben Kolada

SunGard recently disclosed that it is taking a second look at divesting its Availability Services (AS) division. The company first attempted to shed the AS segment in 2004, but the move was canceled when SunGard was acquired by a consortium of private equity firms. The unit contributes slightly more than one-quarter of SunGard’s total revenue, and, like the rest of SunGard’s business lines, has seen a decline in sales. However, the AS division has proven more resilient than the remainder of SunGard’s businesses; the revenue of those three units combined has dropped nearly 8% in the first nine months of this year, compared to the same period last year.

Meanwhile, sales at the company’s AS division fell only about 3%, due in part to declining demand for disaster recovery (DR) services. If cut free, we expect that the independent SunGard AS could focus on and invest in its managed hosting, cloud and colocation businesses, which, over time, would more than offset losses from its traditional DR services. In particular, the division’s managed hosting services have considerable room to grow, as we project that global revenue for that segment will increase 20.8% in 2011.

SunGard AS is already investing in cloud and managed hosting services, as well as refining its geographic focus. We recently wrote about the division extending the capability of its cloud computing platform to provide an enterprise cloud service, and noted the appointment of Andrew Stern, former CEO of managed hosting provider USi, to its chief executive seat. As part of its geographic realignment, the company sold its South African operations two years ago and acquired Irish managed hosting provider Hosting 365 this past March.

Symantec still struggling with storage

Brenon Daly

Contact: Brenon Daly

Symantec gives its latest quarterly update on business after the closing bell Wednesday, with Wall Street wondering if the company will ever emerge from its ‘Veritas hangover.’ The storage business, which Symantec picked up in its $13.5bn purchase of Veritas in late 2004, has long weighed on Big Yellow’s overall performance. The division posted the sharpest revenue decline at Symantec’s three business units in the previous fiscal year, and was the only one that shrank again in the first fiscal quarter. The storage business will likely shrink again in the just-completed second fiscal quarter.

None of that, of course, is new. In fact, more than two years ago, we noted how Symantec was busy knocking rumors about unwinding any of the underperforming Veritas assets. But ever since rival McAfee sold to Intel, the paltry valuation of Symantec has come into sharp relief. Consider this: Symantec generates three times the sales of McAfee ($6bn vs. $2bn) but garners less than twice McAfee’s valuation (current market cap of $12.5bn vs. McAfee’s $7.7bn equity value in its sale to Intel).

Perhaps that valuation discrepancy alone accounts for the market buzz we’ve heard recently that Symantec may be (once again) considering shedding Veritas. That move has been looked at a number of different times, in a number of different ways, over the years.

Most recently, we heard a variation on it that had the storage business going to EMC in return for the RSA division and some cash. Another rumor had the business landing at a buyout shop. (Although shrinking, the storage business is still Symantec’s largest unit, and runs at the highest margin in the company. It generates more than $1bn in operating income.) Whatever the destination, it may well be time for Symantec to acknowledge that its grand experiment of a combination of storing and securing information hasn’t gone according to plans. Wall Street has certainly given that verdict, having clipped Symantec shares in half since the Veritas deal was announced.

PE firm Marlin buys BIOS provider Phoenix Technologies

Brenon Daly

Contact: John Abbott

Perhaps it was inevitable. Following the firing of CEO Woody Hobbs earlier this year and the subsequent divestment of three noncore businesses, BIOS maker Phoenix Technologies has itself been acquired. Los Angeles-based private equity firm Marlin Equity Partners offered $3.85 per share, giving the proposed deal an equity value of $139m. (Phoenix held $40m of cash, giving the transaction an enterprise value of $99m). The bid represents a 27% premium over Tuesday’s closing price.

Despite its recent troubles, and the seemingly cyclical nature of its business that has resulted in regular boom and bust periods, Phoenix remains by far the independent market leader in the core systems software marketplace, in particular BIOS software, as required by all Wintel PCs. BIOS remains a vital point of control for OS and desktop management. But under pressure from Intel and open source alternatives, the company has tried on numerous occasions – without any noticeable success – to diversify. That has usually resulted in Phoenix taking its eye off the ball of its core business, which entails maintaining relationships with the big PC vendors as well as the white-box original design manufacturers (ODMs) from Taiwan.

Revenue in the third quarter declined 16% year over year to $13.7m, but Phoenix scraped together a small operating profit, its first since 2008. Ninety staff were cut during the quarter, taking the firm’s total down to 313. Future growth depends on the take-up from OEMs and ODMs of its latest product, SecureCore Tiano 2.0, which began shipping in late March. Phoenix claims 50 wins so far and is working on a further 80 projects for this design cycle. The first systems using the new version should reach the market in fiscal 2011.

Do-or-die time for LANDesk divestiture

Brenon Daly

Contact: Brenon Daly

It’s do-or-die time for the LANDesk divestiture, with the period of exclusivity with the most serious bidder set to expire Friday. Buyout shop Thoma Bravo is said to be the last remaining party at the table for the systems management vendor, which Emerson Electric has been trying to shed for more than six months. The current betting is that Thoma Bravo, which has done a half-dozen deals so far this year, will not take home LANDesk.

Thoma Bravo, of course, already has a play in this market – one that it got thanks to another public company divestiture. The private equity (PE) firm picked up the IT asset management division from Macrovision (now known as Rovi) in February 2008, renaming the business Flexera Software. Flexera has since bolted on four other businesses, including the purchase of ManageSoft in May. As my colleague Dennis Callaghan has noted, the hypothetical pairing of Flexera and LANDesk would bring some overlap, but would add technology for endpoint security management, service desk, remote control, power management and application virtualization that Flexera doesn’t have on its own.

While the combination makes sense strategically, we have heard that the process is snagged financially. Several sources have indicated that the asking price for LANDesk has come down from more than $300m early in the process to $250m now. (LANDesk sold for $416m back in April 2006 to Avocent, which was subsequently acquired by Emerson.) At the current level, LANDesk would be valued at more than eight times EBITDA, according to our understanding. That might prove a little rich for Thoma Bravo.

Buying and selling at Disney 2.0

Contact: Jarrett Streebin

If we look at the recent M&A moves by Disney, it’s clear what the media giant sees as its future. Just today, Disney divested its Miramax division, only days after its $563m purchase of social gaming startup Playdom. Taken together, these deals show that 86-year-old Disney is leaving the box office behind and betting big on social gaming.

Earlier this month, Disney bought its first social gaming company, Tapulous. The 30-person startup based in Palo Alto, California, specializes in mobile social games for Apple iPhone and Google Android devices. Playdom, which specializes in online social games, rounds out Disney’s offerings and provides it with roughly 38 million users, according to Playdom’s website. Combined, it’s likely that Disney will use Tapulous and Playdom to push its signature brands such as Marvel Comics, Pixar and ESPN to both mobile and online audiences.

It’s clear that Disney is recognizing what the rest of the industry has already seen: it has to buy its way into this market. Internet gaming acquisitions have gone through the roof this year. The 40 transactions year-to-date is more than twice the number (17) during the same period last year. Disney isn’t the only major buyer in the space, though. Playdom had inked a half-dozen deals of its own, and Electronic Arts dropped $300m on Playfish late last year, as well as reaching for IronMonkey Studios and J2Play within the last 12 months. The business of social games, although once stratified by a coterie of geeky developers, is quickly being consolidated by the major media and entertainment players.

Symantec to talk shop — and shopping

Brenon Daly

Contact: Brenon Daly

Although most of the attention in Symantec’s quarterly report Wednesday night will be focused on the top and bottom line, we expect the company’s recent shopping spree to also come up. The storage and security giant announced three acquisitions in its just-completed quarter – more deals than it did in all of 2009. The bill for Big Yellow’s almost unprecedented M&A activity in the quarter came in at $1.65bn. As we recently noted, Symantec on its own has accounted for one-third of the spending for all security deals so far this year.

The biggest part of Symantec’s spending will go toward covering its purchase of the identity and authentication business from VeriSign, its largest transaction in more than a half-decade. (As a reminder, VeriSign’s business was running at about $370m, generating a very healthy $100m or so in cash flow each year.) Big Yellow has yet to close that deal, which was announced in mid-May, or offer specific financial projections for that business. Look for more information on that acquisition on the call tonight.

Symantec will be reporting its fiscal first-quarter results, which covers the second calendar quarter, after the closing bell. Analysts are projecting earnings of about $0.35 per share on revenue just shy of $1.5bn. However, we would note that rivals in each part of Big Yellow’s two main businesses have come up short of Wall Street expectations in their recent quarters. Two weeks ago, storage vendor CommVault indicated that sales had softened while just this morning, security rival Websense offered a disappointing earnings outlook. Websense shares were down more than 10% in midday trading.

LANDesk nearly done

Brenon Daly

Contact: Brenon Daly

After a nearly half-year process, Emerson Electric is close to having LANDesk off its books. Emerson, which picked up the systems management vendor when it acquired Avocent for $1.2bn last fall, classifies LANDesk as a ‘discontinued operation’ and hired Greenhill & Co to advise it on the divestiture. We understand that final bids are being submitted right now, and a deal announcement is expected in two weeks or so.

Although it’s unclear who will end up with LANDesk, several sources have indicated that the buyer is likely to be another company, rather than a buyout shop. (Corporate castoffs often land in the portfolios of PE firms for a period of ‘rehabilitation’ before being snapped up by another company. Indeed, that was the path for LANDesk, which was sold off by Intel in 2002 to a pair of PE buyers, Vector Capital and VSpring Capital, before being bought four years later by Avocent.) Of course, a PE buyer could pair the LANDesk property with an existing portfolio company to enjoy some of the cost savings that generally allow strategic buyers to outbid pure financial buyers.

In an earlier report, my colleague Dennis Callaghan highlighted a few potential buyers for LANDesk, including virtualization vendors, hardware companies and security firms. However, we understand that the obvious suitors in those sectors are no longer in the process: VMware and Lenovo, both of which have key partnerships with LANDesk, are said to have moved on.

Another corporate buyer that we can scratch off the list? Novell. Apparently, the company was aggressively courting LANDesk early in the process, including offering a rumored high price in exchange for exclusivity. Of course, Novell has other issues to contend with, and may well be a seller of the overall company rather than a buyer of other assets.

One last sale at VeriSign?

Brenon Daly

Contact: Brenon Daly

With VeriSign having somewhat unexpectedly shed its identity and authentication business to Symantec last week, we started to think about what other transactions might be coming from the former serial acquirer. What about this for a final deal? A sale of itself to a private equity shop. After all, the value of the company is hardly reflected at all on Wall Street.

To be clear, we’re not suggesting that there are any plans to take VeriSign private, at least not that we’ve heard making the rounds. Instead, we’re looking at a leveraged buyout from a strictly hypothetical view, given that the company has a number of appealing characteristics for any would-be financial buyer.

For starters, VeriSign is now a very clean story, with just the core registry business remaining. For all intents and purposes, the registry business, which handles all the .com and .net registration, is a legal monopoly. The business certainly enjoys monopoly-like operating margins of about 40%. VeriSign recently indicated that sales for 2010 (excluding the identity and authentication business) will be in the neighborhood of $675m. Loosely, that would generate about $270m in operating income at the company this year.

Fittingly for a cash machine, VeriSign has a fat treasury. At the end of the first quarter, it held nearly $1.6bn in cash. Add to that amount the $1.3bn that Symantec will be handing over for the divested businesses, and VeriSign will have about $3bn in cash banked. The vendor’s market cap is $5bn, giving it an enterprise value of just $2bn. That works out to just 3 times sales and a little more than 7x operating cash flow. (Granted, that’s without any acquisition premium.)

If we were a buyout shop or some other acquisitive-minded group, another way to look at it is that VeriSign’s remaining registry business currently trades at a discount to the security business that it just got out of. And that’s despite the fact that the registry business is far more profitable and faster-growing than the security business. (In 2009, VeriSign’s naming business increased revenue 12%, four times the rate of growth of the security business.) Maybe it’s time for one last sale at VeriSign?

VeriSign saves best for last

Brenon Daly

Contact: Brenon Daly

When we look back at VeriSign’s two-year period of jettisoning unwanted businesses, we can only marvel at how it saved the best for last. The divestiture of its identity and authentication division to Symantec for $1.28bn caps a massive process of unwinding the previously misguided acquisitions of former CEO Stratton Sclavos. The longtime chief executive had used the money that gushed from VeriSign’s core registry business to buy his way into markets that were pretty far afield, such as mobile messaging and telecom billing.

Indeed, the scale of VeriSign’s divestitures is unprecedented among technology vendors, with the company dumping seven businesses in 2009 alone. (It’s interesting to note that while Morgan Stanley handled at least three of the divestitures last year, JP Morgan Securities banked VeriSign on the big sale of its security unit.) The company had seemingly wrapped up the grueling process last fall, telegraphing to Wall Street that it liked its two remaining businesses: registry and security. For that reason, the sale of the security division came as a bit of a surprise, the rumors of the divestiture earlier this week notwithstanding.

The sale also came at a substantial premium to virtually all of the other divestitures that VeriSign has closed. While the other divisions were lucky if they went for 1 times sales, the security business is going to Big Yellow for 3.5x sales. (More representative of the divestiture process is the 1x sales that VeriSign received when it sold its managed security services business to SecureWorks a year ago.) On a cash-flow basis, we understand that Symantec is paying about 10x EBITDA, which is roughly twice the valuation of most corporate castoffs.

As we see it, there are two basic reasons for the security division to fetch such a premium. For starters, it hummed along at a mid-20% operating margin. (Granted, that’s lower than VeriSign’s core registry business, but it’s still a level that most companies would envy.) But more importantly, we understand that Symantec actively sought out the VeriSign business, and indicated that it was a serious suitor right from the outset. Certainly, the pairing makes sense. As my colleague Paul Roberts points out, Symantec significantly bolstered its offering around cloud identity, broadening the reach of its policies around data protection, threat monitoring and compliance with enhanced authentication.

LANDesk on the block

Brenon Daly

Contact: Brenon Daly

When Emerson Electric picked up Avocent for $1.2bn last fall, we noted that the acquisition made a great deal of sense as a way for Emerson to get deeper into the datacenter. We also noted that the systems management business that Emerson was inheriting because of Avocent’s earlier purchase of LANDesk looked ‘increasingly out of place.’

No surprise, then, that Emerson has formally begun a process to sell off the LANDesk unit. What is kind of a surprise, however, is the fact that LANDesk is shaping up as a comparatively pricey divestiture. We’ve heard talk of 2 or even 3 times sales for the $150m business. That could get the price back to roughly the $416m that Avocent originally paid for LANDesk back in 2006.

The reason LANDesk is going for a richer multiple than the conventional 2x sales for a divestiture is that there appears to be a number of interested parties for the business. As my colleague Dennis Callaghan outlines in a new report, LANDesk could appeal to virtualization vendors (notably existing partner VMware), hardware providers (notably existing partner Lenovo) and security firms, which might be looking to match Symantec’s pickup of Altiris. (Incidentally, Big Yellow paid about 3.5x trailing sales in its big systems management buy.)

Additionally, the size and stability of LANDesk is also expected to draw interest from buyout shops. We understand that Greenhill & Co, which advised Emerson on the purchase of Avocent, is also handling the planned unwind of LANDesk. Emerson already classifies LANDesk as a ‘discontinued operation’ and plans to have the divestiture done this year.