Category: Europe

Shopping with St. Patrick

Brenon Daly

Contact: Brenon Daly

Starting in the mid-1990s, Ireland joined the New Economy. The island shifted its economy from a centuries-old farming and manufacturing base into a services-oriented and technology-savvy industry. The historic economic isolation of the island gave way to brisk trade with its fellow European Union countries and beyond. Ireland prospered, with some dubbing the country ‘the Celtic tiger’ – a nod to the nickname for the fast-growing countries in Asia during that same period.

Recently, though, Ireland’s boom time has been slowed by the global recession. However, we would point out that the economic decline in the Emerald Isle has been nowhere near as sharp as in another European island nation that dramatically reinvented itself, Iceland. Of course, it helps to think of Iceland not as a country but as a hedge fund, as financial journalist Michael Lewis wrote recently.

What’s interesting to note on this St. Patrick’s Day is how Ireland’s flourishing tech sector has turned into a shopping center for other companies. Since St. Patrick’s Day last year, there has been more than twice the number of Irish tech companies sold than the number of acquisitions made by Irish tech companies. The gulf in spending by Irish companies compared to spending for Irish companies is even more pronounced. Just something to chew over today, in between bites of corned beef and cabbage.

Emerald Isle M&A

Period Acquisitions by Irish companies, $ total Acquisitions of Irish companies, $ total
March 17, 2008-March 17, 2009 11, $225m 25, $720m

Source: The 451 M&A KnowledgeBase

Xing the Atlantic

-Contact Thomas Rasmussen

In 2008, online social networking was the buzzword of choice. But as is the case with most tech bubbles, it imploded nearly as quickly as it ballooned. The year that started with a bang (Bebo’s record $850m sale to AOL in March and Plaxo’s sale to Comcast for an estimated $150m in May) ended with a whimper. Several smaller social-networking companies sold in fire sales, resulting in severe VC write-downs. And we expect this to carry on well into 2009.

Consider the case of business-focused Xing, which finished last year with a $4.1m tuck-in of New York City-based socialmedian. When we checked in with Xing before the holiday break, M&A and attractive valuations were the dominant themes. We fully expect the company to follow up on this with more acquisitions in 2009, particularly as social-networking competition goes global. Based in Germany, Xing has used M&A to expand geographically. In addition to its US deal last month, in 2007 Xing picked up Spanish competitors eConozco and Neurona. Furthermore, we understand that Xing was one of the active bidders for Plaxo, which would have represented a significant drive into the US market. On the flip side, US social-networking giants Facebook and LinkedIn are actively trying to expand across the Atlantic.

For Xing, there are literally dozens of US business-focused vertical social networks that would fit in with its expansion strategy. And the company has the resources to do deals. (It’s the only significant publicly traded social-networking company, plus it holds $61m in cash, no debt and is cash-flow positive on roughly $50m in trailing 12-month revenue.) Companies that we think might make a good match for Xing include Fast Pitch, APSense, Zerodegrees, and, dare we say, even Twitter.

Social networking M&A fizzles

Period Total deals Total deal value
January-June 2008 29 $1.28bn
July-December 2008 28 $15m

Source: The 451 M&A KnowledgeBase

US online job companies shop abroad

The large online recruitment companies in the US, having found that their business models don’t always translate in other countries, are increasingly buying their way into foreign markets. In recent weeks, both Monster Worldwide and CareerBuilder.com have gone on shopping trips overseas.

In October, Monster acquired the remaining 55% stake it did not already own in ChinaHR.com for $174m in cash. ChinaHR is a key player in the Chinese online recruiting sector and represents a sizeable gamble by Monster to gain market share in the world’s most-populous country. Monster’s move into Asia came just three months after CareerBuilder picked up Paris-based Lesjeudis.com for an undisclosed amount.

Both Monster and CareerBuilder have said they will continue to look at international expansion. Monster currently gets some 42% of its revenue from outside the US. That’s up from just 23% in 2005. While CareerBuilder, which was recently acquired by Gannett, does not disclose its international segment revenue, it has emphasized that division with its acquisitions. The company’s past four deals, along with its partnership with MSN, show the company is looking abroad.

Number of overseas Monster Worldwide and CareerBuilder deals

Acquirer Number of acquisitions Value Target countries
Monster Worldwide 6 $380m France (2), Germany, Norway, People’s Republic of China, South Korea
CareerBuilder 4 Not disclosed France, Greece, the Netherlands, Sweden

Source: The 451 M&A KnowledgeBase

Inconsistent currencies

Brenon Daly

Throughout much of the year, the US dollar looked like lightweight paper. A buck basically bought you a loonie (as our northern neighbors call their dollar), and foreign exchange traders were heard shouting jokes about ‘the American peso.’ We noted the weak US dollar as one of the key reasons that total M&A spending by US acquirers dropped by about two-thirds from mid-2007 to mid-2008, while European shopping jumped by one-third (see report).

In the wake of the global financial crisis, however, the dollar has strengthened. To get a sense of that, consider the relative value of the US dollar when two Silicon Valley-based multinational tech giants went on shopping trips to Australia this year. Back when Hewlett-Packard made its play for records management vendor Tower Software in late March, the US dollar bought about A$1.10. A few days ago, when Oracle reached for Haley Limited, $1 bought A$1.60. That’s a lot more buying power for the once-humbled US dollar.

Indian acquirers on the go

Announcing its largest deal ever, Indian systems integrator Infosys offered $753m in cash on Monday for SAP consultancy Axon Group. The deal is seen as a way for Infosys to build up its consulting business as well as its sales in Europe, where the UK’s Axon gets roughly 60% of its revenue. Pending shareholder and regulatory approval, the acquisition is slated to close in November. Some Axon shareholders, however, are holding out for more. Shares of the company on the London Stock Exchange have traded above Infosys’ offer price since the deal was announced.

Infosys’ acquisition of Axon would be the second-largest purchase by an Indian services shop, trailing only Covansys India’s $3.2bn purchase of business process outsourcing firm Fortune Infotech in 2005. In addition, the deal would bring to more than 60 the number of deals by Indian acquirers so far this year. That’s up from less than 20 per year in the first part of this decade. Meanwhile, M&A spending by Indian companies is likely to hit its highest level since 2005. Already this year, shoppers have spent $1.8bn on deals, which is within striking distance of the $2.1bn spent in all of 2007. This year’s M&A total will inch even closer to that tally if Axon shareholders succeed in pressing Infosys to up its offer.

Deals by Indian acquirers

Period Deal volume Deal value
Jan.-Aug. 2008 57 $1.8bn
Jan.-Dec. 2007 86 $2.1bn
Jan.-Dec. 2006 78 $672m
Jan.-Dec. 2005 38 $3.7bn
Jan.-Dec. 2004 7 $104m
Jan.-Dec. 2003 8 $132m
Jan.-Dec. 2002 16 $228m

Source: The 451 M&A KnowledgeBase

Red-zone M&A

So-called ‘New Europe’ is emerging as an important Web 2.0 market. Revenue growth is steady in the mid- to high-double digits compared to low-double digits for the established US web portals. That hasn’t gone unnoticed by global companies scrambling to tap into these faster-growing markets. The latest example is the rumored sale of leading Czech Republic search engine and web portal Seznam. Goldman Sachs has reportedly been tapped to head the sale. Google, Microsoft and private equity shop Warburg Pincus are said to all be serious contenders, according to the Czech media.

Seznam is closely held. Founder Ivo Lukacovic owns just over two-thirds of the company, with the rest held by investment firms Tiger Holding Four and Miura International. The 450-employee portal says it took in about $55m last year, up from about $30m the year before. Revenue is expected to reach $80m for the year. Seznam is reportedly being shopped around at a valuation of $900m. At a multiple of 11 times sales, that is a premium compared to a similar deal inked by Warburg Pincus last year. The buyout firm acquired Seznam competitor NetCentrum for $150m at a multiple of 6.5 times revenue. Nonetheless, compared to recent US Web 2.0 deals, the rumored valuation of Seznam is in line with, or at a discount to, market prices.

If a deal for Seznam gets done, the purchase will stand as one of the largest Internet deals ever inked in the former Soviet block. And as the Eastern European Internet market continues to grow, we believe so will the M&A activity from anxious companies trying to make an early land grab. Meanwhile, other search engines may look to go it alone. Yandex, a leading Russian portal, has reportedly been preparing for a US public offering for some time now, but an almost nonexistent IPO market may lead it to consider a sale, instead. We’re fairly certain that Google and Microsoft stand ready to provide the liquidity for either (or both) of these companies if the public markets can not.

Recent transatlantic search M&A

Date Acquirer Target Deal value TTM Revenues
July 18, 2008 Google ZAO Begun (Russia) $140m Not disclosed
May 26, 2008 Google 265.com (China) Not disclosed Not disclosed
January 8, 2008 Microsoft Fast Search & Transfer (Norway) $1.24bn $167.75m
December 4, 2007 Warburg Pincus NetCentrum (Czech Republic) $155m (reported) $24m (reported)

Source: The 451 M&A KnowledgeBase

eBay places bid

EBay officially acknowledged rumors this week that it is in talks with Interpark to acquire its roughly 37% stake in Korean auction competitor Gmarket. Gmarket shares rallied 15% on the news. Should this transaction go through, we believe eBay would quickly hit the ‘buy it now’ button for Gmarket to establish control of the Korean auction market.

Amid a slowing U.S. auction business, eBay has been relying on its international operations for growth. For its recent second quarter ended June 30, eBay’s international revenue accounted for about 54% of total revenue. International revenue grew close to 30% year over year, while US revenue was up just 12%. Most of the international success, however, stemmed from eBay’s European operations, with German and UK operations accounting for more than half of international revenue.

Interpark announced that it was shopping its shares earlier this year, putting a $1.4bn price tag on Gmarket. This is a 15% premium over Gmarket’s current market cap of $1.23bn, and means eBay would have to shell out slightly more than $500m for the shares. That works out to 5.5x Gmarket’s trailing twelve-month (TTM) revenue of $254.34m and 31.4x TTM EBITDA of $44.56m. That’s a premium compared to eBay’s own valuation of 4x TTM revenue and 24x TTM EBITDA.

By acquiring Gmarket, eBay would get a company that understands the local market. Its failure to adapt to economic and cultural realities burned eBay with its first attempt to crack the Korean market. Former CEO Meg Whitman simply applied a template that had worked in the West and put the operation on cruise control. It seems that new CEO John Donahoe has learned from that mistake. Rather than continue the failed strategy of going it alone, we expect Donahoe to try to succeed in Asia through joint ventures and acquisitions of local competitors. Given the huge potential upside for further international growth by capturing that elusive Asian market share, this deal is likely the first of many.

Significant eBay acquisitions, 2005 – present

Date Target Deal value
January 28, 2008 Fraud Sciences $169m
May 30, 2007 StumbleUpon $75m
January 10, 2007 StubHub $310m
April 24, 2006 Tradera AB $48m
October 10, 2005 Verisign (payment gateway business) $370m
September 12, 2005 Skype $2.57bn
June 1, 2005 Shopping.com $678m

Source: The 451 M&A KnowledgeBase

UBS: You buy us?

Brenon Daly

As it reported an ‘unsatisfactory’ loss of hundreds of millions of dollars, UBS AG also said Tuesday that it will carve off its investment banking business. The move represents a retreat from the ‘universal bank’ model the Swiss giant has pursued. And despite management’s statements, it makes a sale of the banking unit more likely. (Just as Time Warner splitting AOL’s legacy Internet access division from its online advertising business clears the way for a sale of the dial-up unit. That is, if there are any AOL subscribers left to sell.)

Washed away by the gallons of red ink spilling from the investment banking department is that UBS actually has a fairly robust advisory business, particularly for transatlantic tech deals. In terms of deal value, it ranked fifth in our recent league tables covering transactions between North America and the EU from mid-2007 to mid-2008. The previous year, UBS placed fourth. (An executive summary of the report is available here; download the full report here.)

Far and away, UBS was the busiest bank, advising on 13 transatlantic transactions over the past year. Both Lehman Brothers and Deutsche Bank advised on eight transactions. And UBS has kept its momentum, already claiming another tombstone since we closed our survey period on June 30. (UBS served as sole adviser for IBM in its purchase of Paris-based ILOG for $340m.) But given how things stand now, the next big deal UBS advises on could be the sale of its own banking business.

Selected UBS-advised transatlantic deals

Date Acquirer Target Price
July 2008 IBM (sole UBS mandate) ILOG $340m
April 2008 Apax Partners TriZetto Group (sole UBS mandate) $1.4bn
Feb. 2008 Reed Elsevier (co-adviser UBS) ChoicePoint $4bn
April 2008 Diodes (sole UBS mandate) Zetex Semiconductors $176m

Source: The 451 M&A KnowledgeBase

Big Blue shops across the pond

Brenon Daly

Despite a lingering cold front in transatlantic M&A, IBM recently announced plan to shell out $340m for ILOG. We noted in a mid-year report that spending by North American acquirers of EU-based targets has declined by roughly two-thirds from mid-2007 to mid-2008 compared to mid-2006 to mid-2007. The reason: the slumping dollar and grinding bear market that has cut the value of acquisition currencies for U.S. companies. (Both the greenback and the Nasdaq have lost about 15% of their value over the past year.)

Big Blue’s purchase of the Paris-based vendor of business rules engine technology isn’t likely to signal a rebound in ‘eastbound’ M&A, at least not a significant one. My colleague Adam Phipps notes the IBM-ILOG deal isn’t even among the Top 10 transactions, when ranked by deal size. The proposed combination comes in twelfth place in terms of purchases made by North American companies of EU-based companies over the past year.

Post-acquisition decapitation

Brenon Daly

The write-offs from wrong-headed acquisitions just keep coming. And we don’t mean just financial write-offs. Instead, we’re referring to the practice of a company’s board ‘writing off’ the executives who crafted a deal. This week’s high-profile example came when Alcatel-Lucent finally tossed overboard the two architects of ‘la grande fusion.’ Since that deal was announced in April 2006, the combination has incinerated some $20bn over shareholder value, leaving the telco equipment vendor with a market capitalization of just $13.6bn. (That’s less than the sales the company posted in 2007.) That two-year performance finally got Serge Tchuruk, the company’s chairman who represents the Alcatel side of the combination, and Patricia Russo, the Lucent legacy, shown the door.

This house-cleaning at Acaltel-Lucent comes just two weeks after AMD kicked Hector Ruiz upstairs. In virtually the same breath that AMD announced Ruiz would be relieved of his CEO post but continue as chairman, the company said it will divest much of the business it picked up with its $5.4bn purchase of graphics chip maker ATI Technologies. Announcing the deal two years ago, Ruiz said his combination offered ‘limitless’ possibilities for innovation. Instead, the future of AMD looks rather limited, in large part because of the $2.5bn it borrowed to cover its disastrous purchase of ATI. AMD’s total debt stands at $5bn, compared with just $1.6bn in cash.

Meanwhile, a chief executive who we’ve always thought must be on the hot-seat for a misguided acquisition appears to have gotten a bit of a reprieve this week. Symantec CEO John Thompson said Wednesday that fiscal first-quarter sales of its backup products outpaced overall revenue growth. That reverses the recent weakness in the company’s storage offering, which Symantec acquired with its $13.5bn purchase of Veritas in December 2004. Wall Street applauded the company’s report, with shares up about 10% since Wednesday. Still, Thompson has yet to recognize much value from the three-and-half-year-old purchase of Veritas. Symantec shares, which changed hands at $21.74 midday on Friday, are still about $6 below where they were when the company picked up Veritas. Perhaps that goes some distance to explaining the loose rumors this week that something big – possibly the much-discussed divestiture of the storage business or even an outright sale of the company – was brewing at Symantec.

Leading the acquisition

Deal Stock performance since deal Status of acquiring company CEO since deal
Symantec-Veritas, Dec. 2004 Down 35% John Thompson, CEO since April 1999, continues to serve
Alcatel-Lucent, April 2006 Down 61% CEO Russo and chairman Tchuruk ousted this week
AMD-ATI, July 2006 Down 77% Long-time CEO Hector Ruiz replaced in mid-July
Secure Computing-CipherTrust, July 2006 Down 51% Chairman and CEO John McNulty replaced in April

Source: Company reports, The 451 M&A KnowledgeBase