Category: Europe

Transatlantic cold front in M&A

Brenon Daly

In terms of North American tech companies shopping in Europe, the past year has been a case of overlooking deals rather than being over there looking for deals. Eastbound M&A (or North American acquirers of EU-based companies) totaled just $12.5bn from July 2007 through June 2008. That’s down two-thirds from the $45.2bn worth of deals inked from mid-2006 to mid-2007. The primary reason: a 15% decline in the Nasdaq and the US dollar (relative to the euro) over the past year that has sapped buying power.

Of course, the slumping greenback offered European acquirers a bit of a ‘rebate’ on their purchases. And they took advantage of that, pushing westbound M&A (or EU-based acquirers of North American companies) to a new record. From July 2007 through June 2008, European acquirers spent $30.2bn picking up North American-based companies, a 38% increase from $21.9bn in the same period in the previous year.

But even that record amount of eastbound spending wasn’t nearly enough to offset the utter disappearance of their North American counterparts. Overall spending on transatlantic tech M&A fell by more than one-third, dropping to $42.7bn from $67.1bn in the same period of the previous year. We look at the numbers and the trends in a full report that’s available here.

Transatlantic deals

Period EU to North America North America to EU Total
July 2005-June 2006 $14.5bn $19.4bn $33.9bn
July 2006-June 2007 $21.9bn $45.2bn $67.1bn
July 2007-June 2008 $30.2bn $12.5bn $42.7bn

Source: The 451 M&A KnowledgeBase

M&A cycles in France

Brenon Daly

 Our colleague Matt Aslett recently hit on an incredibly creative and entertaining series of posting on our sister blog CAOS Theory pegged to Euro 2008. He profiled the open source projects and policies in the 16 countries that took part in that soccer (errr, football) tournament. (A Brit, Aslett found himself with a fair amount of free time last month since his country didn’t qualify for the European championships.) Not only did Aslett review all the open source goings-on in the respective countries, he even had them square off against one another, as if they were on the soccer field (errr, football pitch). Eventually, he crowned France this year’s Open Source Champion.

We here at Inorganic Growth are decidedly less creative and industrious than our colleagues over at CAOS Theory. So, with that as back-drop, we try our own entry pegged to a major three-week sporting event in Europe: The Tour de France. The 2170-mile counter-clockwise trip around the country starts on Saturday in wind-swept Brittany. For the first time in 40 years, the Tour opens with a normal road stage rather than a ceremonial prologue. (It’s also the first time in about a decade that the defending champion will not be at the start, as cycling continues its lopsided fight against dopers and other cheats.)

When we punched up the numbers for French M&A in recent years, we have to say we were a bit shocked by how thin the peloton of deals has become recently. In the first half of 2008, we saw just 47 deals involving either French buyers or sellers, with total spending of just $1.2bn. That compares to 62 deals worth $7.8bn in the same period last year and 68 deals worth $18.4bn in the first half of 2006.

With that in mind, we decided not to award a yellow jersey, signifying a clear leader. Instead, we’ll got to the other end of the results and hand out an award for the ‘lanterne rouge’ – the designation for the last-place Tour de France rider. The winner of the ‘anti Yellow Jersey’: Alcatel’s $13.4bn purchase of Lucent. We put this deal, inked in April 2006, on top of the podium because the combination has destroyed more than $22bn of shareholder value in just two years. Felicitations, Alcatel-Lucent.

French deal flow

Period

Deal volume

Deal value

Jan.-June 2006

68

$18.4bn

Jan.-June 2007

62

$7.8bn

Jan.-June 2008

47

$1.2bn

 

Source: The 451 M&A KnowledgeBase

National (in)security

Brenon Daly

With Sourcefire likely to get gobbled up shortly by a hungry Barracuda Networks, we couldn’t help but flashback to the earlier attempt by Check Point Software Technologies to acquire the Snort vendor. (For those of you keeping score at home: Yes, Check Point’s offer more than two years ago valued Sourcefire higher than Barracuda’s current bid.) We mention the stillborn deal because there are echoes of Check Point-Sourcefire in a current proposed pairing.

Recall that the deal got snagged because of US regulators’ concern about ‘sensitive’ technology (Sourcefire’s Snort intrusion prevention technology) falling into the hands of foreign companies (Check Point’s Israeli ownership). That concern – an overblown bit of nutty protectionism that doesn’t exist anywhere outside of Washington DC – is back at issue in the proposed pairing of Oregon-based identification card maker Digimarc and a French defense firm called Safran.

Earlier this week, Safran offered $300m in cash for Digimarc, hoping to trump a three-month-old agreement Digimarc had with US company L-1 Identity Solutions. (We looked at the deal, which represented a five-bagger for Digimarc, back in March.) L-1’s offer, which is half in stock and half in cash, is roughly worth $260m.

On word that Safran is now in the running, L-1 played the national security card, warning about the sinister threat posed by a French firm owning Digimarc’s ID card business. Safran’s bid would face scrutiny from the same regulatory agency that spiked Check Point’s planned purchase of Sourcefire, the Committee on Foreign Investment in the US. We think such regulatory meddling is misguided. But we certainly understand L-1’s move to wrap themselves in the flag to secure this deal. It’s a lot cheaper for them to hire a few well-connected lobbyists than actually raise their bid.

Emerald Isle M&A

Brenon Daly

Given that today is Bloomsday, we’ve given ourselves literary license to take a look at deal flow between the US and Ireland. (Don’t worry, if you’re like us and have never actually managed to get through James Joyce’s ‘Ulysses’ – despite taking more than a few cracks at the tome – this Insight will still make sense. Quick show of hands: Who’s actually read all the way to “…and yes I said yes I will Yes”?)

In any case, deal-flow between the two countries has been remarkably stable during the past four years, clipping along at about 30 deals each year. M&A spending in the most-recent year, however, has fallen to its lowest level, just half the previous year and one-quarter the level in the year before that. (Note: In three weeks, we’ll publish our annual Trans-Atlantic Tech M&A Banking Review. Obviously, the steady decline of the US dollar has had a big influence in deal-making. So far, we’ve seen European acquirers be even more active than the previous year, while US buyers have only spent about half as much as the same period last year. You can request a copy of last year’s report here.)

One company that may very well figure into the US-Ireland M&A tally very shortly is Iona Technologies. We noted in February that the Dublin-based company had attracted an unsolicited bid from an unknown company, which turned out to be Germany’s Software AG. Iona has retained Lehman Brothers, which led its IPO in the late-1990s, to advise it. At the time, we tapped SAP and Sun Microsystems as the most-logical buyers of Iona. More recently, an Irish newspaper reported that Progress Software or Red Hat is Iona’s ‘preferred’ buyer. Meantime, Software AG now says it’s out of the running. So it looks like we could very well be seeing an American company pick up another piece of the Old Sod. 

Irish-US M&A (year ending each Bloomsday)

Period Deal volume Deal value
June 16 2004-05 28 $1.2bn
June 16 2005-06 29 $3.8bn
June 16 2006-07 36 $1bn
June 16 2007-08 33 $860m

Source: The 451 M&A KnowledgeBase

How do you say ‘Tumbleweed’ in French?

Brenon Daly

About a year and a half ago, we heard Tumbleweed Communications was being shopped hard by private equity firms. The intervening credit crises – which bumped up the price of debt and trimmed the returns on LBOs – quite likely tabled any buyout. The email security vendor has struggled since then. It came up short of Wall Street estimates in every quarter in 2007. Shares that changed hands above $3 each in early 2007 dropped in a straight line to just above $1 this March.

Rather than a PE shop, however, it turns out Tumbleweed’s buyer will be the Sopra Group, a French IT consulting firm. Sopra will make the acquisition through its Axway subsidiary, paying $2.70 in cash for each share. With about 51 million shares outstanding, Tumbleweed gets a an equity value of about $138m, only slightly more than twice the sales it is expected to record this year. Sopra also got a discount from its currency: the Euro has climbed about 18% in value since we reported on Tumbleweed in February 2007. See full report.

Wire buys wireless

Brenon Daly

Two weeks ago, we noted Trapeze Networks had been sold without indicating what company had been sitting across the table from the wireless LAN (WLAN) infrastructure vendor. The buyer can now be named: Belden. The St. Louis-based company is more known for its wiring and cable products. (Indeed, before inking the Trapeze deal, Belden’s previous deal had been the $195m purchase of a Hong Kong cable company.) We’ll have a full report on this transaction – and the implications for the sector – in tonight’s Daily 451.

While the pairing of a wireless company with a company known for its wires may seem odd, there are actually a fair number of points that make sense for Belden-Trapeze. For starters, Belden is viewed in the WLAN market as a neutral vendor, which means that Trapeze’s sales arrangements shouldn’t be threatened by the acquisition. We would contrast that with the fallout from Cisco’s early 2005 purchase of Airespace, which forced Airespace partners Alcatel and Nortel Networks to scramble to find a replacement supplier of WLAN technology after the deal. Also, Trapeze had decent sales in Europe and Asia, markets that Belden has targeted.

In the end, however, it all comes back to money. In that sense, the Trapeze deal shows how steeply the valuations of the WLAN infrastructure vendors have come down. The multiple in this deal was two-thirds lower than the level that Cisco paid three years ago in its purchase to get into this market. (Granted, Cisco has a reputation of skewing the market with top-dollar bids.) Still, Trapeze exited for $133m after raising about $100m in venture funding. We understand that rival Meru Networks is currently out raising another round. The company already counts Lehman Brothers, Clearstone Venture Partners, Sierra Ventures and DE Shaw among its investors. While Meru may well land an up round, we’re guessing Trapeze’s valuation – combined with Aruba Networks’ rough ride on the Nasdaq – certainly haven’t helped those conversations. 

WLAN vendor valuations

Company Acquirer Price Price-to-TTM sales ratio
Airespace Cisco $450m 7.5x*  
Trapeze Belden $133m 2.3x  
Aruba NA $467m market cap 2.7x  

*estimated, Source: The 451 M&A KnowledgeBase

Creative destruction and its discontents

Brenon Daly

In a February 2007 report, we asked an egghead question about valuations in a sector that had been ‘creatively destroyed,’ to borrow Joseph Schumpeter’s oft-used phrase. At the time, we weren’t asking for purely academic reasons. Rather, we were trying to put a price on Tumbleweed Communications following Cisco’s purchase of rival anti-spam appliance vendor IronPort Systems. (Rumors had private equity firms looking at Tumbleweed.)

It turns out we weren’t far off in our valuation. We slapped a $150m price tag on Tumbleweed; last Friday, French IT consulting firm Sopra Group said it would pay $138m in cash for the company. The deal is expected to close in the third quarter. While the companies see a bright future for the combination, we have some reservations. Specifically, we wonder how Sopra, which is making the acquisition through its Axway subsidiary, will hit its target of 12-15% operating margins for the combined company next year. (Tumbleweed has run at negative operating margins for years, piling up an accumulated deficit of $300m in its history.)

Whatever the performance of Tumbleweed under its new owners, we have to say that Sopra certainly didn’t overpay for the company, which should double its sales here in North America. At just two times trailing sales, Tumbleweed was valued at less than half the price-to-sales multiple found in comparable transactions.

Anti-spam shopping

Acquirer Target Date Price Target TTM sales
Sopra/Axway Tumbleweed June 2008 $138m $58m
Google Postini July 2007 $625m $70m*
Cisco IronPort Jan. 2007 $830m $100m
Secure Computing CipherTrust July 2006 $264m $48m
Symantec Brightmail May 2004 $370m $26m

*estimated, Source: The 451 M&A KnowledgeBase