Category: Europe

Software AG does a bit of MDM shopping of its own

Brenon Daly

Contact: Brenon Daly, Dennis Callaghan, Krishna Roy

A little more than a year after scrapping its OEM agreement with master data management (MDM) vendor Orchestra Networks, Software AG has picked up its own MDM and data-governance technology. The German company recently reached across the Atlantic for Data Foundations, which we gather was a small purchase of a startup generating less than $10m in sales. Nevertheless, the deal continues the recent consolidation in the MDM market, which has seen fellow big-name buyers such as IBM, Informatica and TIBCO Software make acquisitions here.

A bit of a wonky area of information management, MDM has increasingly become a complementary tool for application integration and business process management software as it helps to make sense of the many different data types that underpin these applications. Further, other rival players have taken a platform-based approach to MDM, combining data-integration and data-quality capabilities into the MDM mix.

We wonder if Software AG will follow suit and enter the MDM platform fray by pairing the Data Foundations buy with another MDM-related purchase. If it looks to do that, we wouldn’t at all be surprised to see Software AG add a data-quality provider to its portfolio. A few names that might be worth a look for the acquisitive German company are Datanomic, DataLever, DataMentors, Datactics, Clavis Technology and Human Inference.

Valuations separated by more than the Atlantic

Brenon Daly

Contact: Brenon Daly

Comparing the valuations of US tech companies with their European counterparts, we can’t help but notice the fact that the recovery hasn’t been enjoyed equally on both sides of the Atlantic. We noted a few months ago that the strong US dollar had opened the way for some opportunistic shopping on the continent. Although most European currencies have inched back up since then, there are still discounts available because the valuations of the companies are still lagging their US peers and rivals.

Earlier this summer, we pointed out that discrepancy in Deltek Systems’ purchase of Maconomy, which valued the Danish ERP vendor at twice the level it started the year – but still below Deltek’s current valuation on the Nasdaq. Similarly, Adobe acquired Day Software at a price that was four times higher than the Swiss company’s own valuation last summer. However, Adobe’s own valuation is higher than the take-out valuation for Day, which included a 60% premium. (Adobe is still valued higher, even though it lost 20% of its value Wednesday after forecasting weaker-than-expected results.)

But those deals pale in comparison to the arbitrage that OpenTable did in its reach across the Atlantic for toptable.com. OpenTable values the British restaurant reservation service at basically 6 times trailing sales, while the San Francisco-based company trades at 19x trailing sales. (For those of you who haven’t looked lately, OpenTable trades in the mid-$60 range, commanding a market cap of some $1.5bn. Incidentally, various measures of OpenTable’s valuation – specifically, both trailing and forward price to earnings ratio – line up almost exactly with those of salesforce.com.)

Google picks on the pipeline

Brenon Daly

Contact: Brenon Daly

As if the IPO process wasn’t already hard enough, candidates looking to go public have found a new obstacle: Google. For the second time in less than a year, the search giant has swung its considerable market heft against a would-be public company – likely trimming hundreds of millions of dollars in market cap from the IPO aspirants. That from a company with the informal motto of ‘Don’t be evil.’

Most recently, Google introduced Google Voice, an add-on to its Gmail offering that allows for free calls to anywhere in North America. If that sounds vaguely familiar, it’s because Skype has been in that business for about seven years now. On the back of that product, Skype filed its paperwork with the SEC earlier this month to go public, less than a year after being carved out of eBay. In the first half of 2010, Skype reported $406m in revenue, according to its S-1 filing.

And it isn’t like Google just stumbled on the idea of Google Voice as a ‘Skype killer,’ or however it thinks of the offering. From our vantage point, Google has set a deliberate course of M&A to acquire bits of useful technology and engineers for a VoIP offering. The company reached for Global IP Solutions in May after picking up On2 Technologies last year, a deal that required Google to top its initial bid. So Google clearly wanted to be in this market, and was willing to buy its way into it.

This bit of sharp-elbowed competition comes after Google made an even more drastic entrance last November into the turn-by-turn navigation market. Just two days before TeleNav, one of the largest mobile navigation vendors, put in its IPO paperwork, Google announced that it would be offering turn-by-turn directions. Although the service would be available on only a very limited number of devices, Google’s price was hard to beat. (It was free.) Granted, TeleNav has run into trouble (no pun intended) of a different sort since it listed on the Nasdaq. But the company seemed almost destined for difficulties after being born under a bad moon, thanks to Google.

Shopping hard in the City of Light

Brenon Daly

Contact:  Brenon Daly

On its visit to Paris, Francisco Partners brought home more than just a miniature souvenir Eiffel Tower. In the past week, the buyout shop has announced not one but two $100m deals struck in the French capital. Francisco’s unusual double dip comes at a time when the dollar, which had been at multiyear highs against the euro earlier in 2010, has slumped in recent weeks. (We recently looked at the trade winds blowing across the Atlantic.)

For Francisco, the transactions would help restock its European holdings. The buyout shop sold Swiss chip company Numonyx to Micron Technology for $1.3bn in May. In its first deal, Francisco put forward a $100m offer for the Grass Valley Broadcast business, which is being divested by Paris-based Technicolor. (The actual Grass Valley Broadcast business operates in central California, an ocean away from The City of Light.) In probably the more interesting move, Francisco picked up a majority stake in on-demand email marketing company Emailvision. The purchase gave Emailvision, which was advised by Pacific Crest Securities, a fully diluted equity value of about $109m.

NTT makes $3.2bn IT services play

Brenon Daly

Contact: John Abbott

Japanese telecommunications giant Nippon Telegraph and Telephone (NTT) has made a surprise offer for one of its existing partners, Dimension Data Holdings, an LSE- and Johannesburg Securities Exchange-listed IT services firm with roots in South Africa. This is an unusually large acquisition for a Japanese company, worth 120 pence per share, approximately £2.12bn ($3.2bn) in cash. That’s just over a 15 times EV/EBITDA multiple and 18x the closing share price before the announcement. (NTT has plenty of cash, with about $10bn on hand).

The Dimension Data board has recommended the offer and NTT has assurances from the directors and major shareholders Venfin DD Holdings and Allan Gray covering 52% of Dimension Data’s issued shares. The deal is expected to close by the end of October.

NTT cited the cloud computing opportunity as the main motivation behind the transaction. It brings to NTT specialist managed IT infrastructure and services capabilities that can now be rolled out on a global scale. NTT has its own managed network services, datacenters, system integration and mobile services, but Dimension Data adds to the development, operations and maintenance side of IT infrastructure, including network devices and servers running in customer sites. Geographically, NTT’s main strengths are in Asia, followed by Europe and the US; Dimension Data is strongest in Africa, the Middle East and Australia. NTT rival China Mobile has been making noises recently about investments in South Africa.

Dimension Data was founded in 1983 and listed on the JSE four years later. A series of acquisitions, including that of Plessey South Africa in 1998 and the European networking business of Comparex Holdings in 1999, helped it grow to over $2bn in revenue by 2003. (The deals have continued, with eight listed in The 451 M&A KnowledgeBase since 2004). At the end of fiscal 2009, revenue hit nearly $4bn and net profit was $135m. The company has 11,500 employees and more than 6,000 clients. JPMorgan Cazenove advised on the transaction for Dimension Data and Morgan Stanley for NTT.

The German giant’s gamble

Brenon Daly

Contact: Brenon Daly

In the largest software transaction in more than two years, SAP plans to pick up mobility software and database vendor Sybase for a net cost of $5.8bn. SAP’s all-cash bid of $65 per share represents a 44% premium over the three-month average closing price for Sybase. More dramatically, SAP’s offer represents the highest price for Sybase stock in the target’s two decades as a public company.

The purchase, which is expected to close in July, represents a big bet by the German giant on the future of mobile applications. The two companies have partnered for more than a year, with SAP offering mobile CRM and Business Suite applications on Sybase’s Unwired Platform. Currently, mobile products account for one-third of revenue at Sybase, which started life as a database vendor. Within the database segment, Sybase also has an analytic database (Sybase IQ) that has been generating most of the growth in recent years.

At an enterprise value of $5.8bn, SAP is valuing Sybase at basically 5 times sales. (Sybase generated revenue of $1.1bn in 2009 and recently guided Wall Street to expect about 6% sales growth this year.) That’s roughly in line with the multiple SAP paid in its other large deal, the $6.8bn acquisition of Business Objects in October 2007. It’s not out of whack with SAP’s own valuation. The company trades at about 4 times sales, and that’s before any acquisition premium is figured in. Viewed another way, SAP trades at roughly 14 times cash flow, while it is paying 15 times cash flow for Sybase.

One sale leads to another at Sophos?

Brenon Daly

Contact: Brenon Daly

As leading indicators go, the recent decisions around Sophos paint a rather bearish picture for the current IPO market. The anti-malware vendor had briefly filed to go public back in late 2007 but then pulled the paperwork as the markets tumbled. We understand that Sophos had lined up banks earlier this year for another run at an IPO, but it ended up selling a majority chunk to buyout shop Apax Partners earlier this week. (Two of the three bookrunners on the most recent lineup were the same as the 2007 prospectus, according to a source.)

A dual-track process typically adds at least a few dollars to the price of a company, since it at least introduces the idea of another buyer (the public market). However, Sophos’ sale to Apax, in our view, comes at a discount to the valuation we would have penciled out for the company. The deal values Sophos at $830m, about 3.2 times trailing sales and 2.7 times projected revenue. Sophos’ stillborn IPO comes at time when other would-be debutants are having to cut terms or shelve their offerings altogether.

Yet somewhat paradoxically, we think the move by Apax actually makes an offering by the security company more likely, at least down the road. For starters, it replaces Sophos’ somewhat cumbersome ownership structure, which didn’t always share the same alignment, with a single owner to call the shots. (For instance, we heard there was a fair amount of dissention inside Sophos over its mid-2007 purchase of Utimaco, which stands as the largest acquisition of a public security company by a private one.)

Also, Apax probably got in at a low enough price that it could make a decent return by taking Sophos public in a year or two, provided the equity markets stay receptive. (We would argue that’s a much more likely exit than a flip to yet another buyout shop.) And finally, there are plenty of banks ready to (at long last) get Sophos on the market. Many of the underwriters have been working with Sophos for more than a half-decade, so it would be just a matter of updating numbers in what has to be a well-worn pitch book.

Sophos is a seller

Brenon Daly

Contact: Brenon Daly

Former IPO hopeful Sophos will stay private (at least for the time being), but will have a new owner, the anti-malware company said. The new majority holder is Apax Partners, having picked up a 70% stake from both TA Associates, which had been a minority shareholder since 2002, and Sophos’ two founders. The purchase put an overall price tag of $830m on Sophos.

The sale comes after much speculation that Sophos, which had filed to go public in November 2007, was once again looking for an IPO. In fall 2009, British media reports indicated Sophos was planning an offering in 2010 that would have valued the company at about $1bn. Instead, Sophos is taking what we would consider a multiple at the low end of the range, even though the company’s size and recent growth rate might imply an above-market valuation.

Sophos indicated it recorded billings of $330m and revenue of $260m for its fiscal year, which ended March 31. On a trailing basis, that works out to just 2.5 times bookings and 3.2 times sales. Assuming Sophos continued growing at a 19% rate for the current fiscal year, it would have finished this year with about $310m in sales. That means Apax is valuing Sophos at just 2.7 times projected revenue.

Other security companies that have danced on and around the public stage have recently fetched much richer valuations, at least in one key measure. Encryption vendor PGP garnered four times trailing revenue in last week’s sale to Symantec. While PGP may or may not have been planning to go public, the most recent security IPO does trade at a notable premium to the valuation Sophos just got in its sale. Unified threat management vendor Fortinet currently commands a $1.25bn market capitalization, which works out to 4.9 times trailing sales.

Oracle: two deals, but more than a year apart

Brenon Daly

Contact: Brenon Daly

Exactly a year ago today, Oracle announced its unexpected $7.4bn acquisition of Sun Microsystems. If it doesn’t seem like it was that long ago, that’s because it really wasn’t. Final approval for the deal dragged on for nine full months, largely because of scrutiny by the European Commission of Oracle owning Sun’s open source database, MySQL. Eventually, Brussels agreed with our initial assessment that MySQL and Oracle rarely competed (MySQL was focused mostly on the low end of the market and on Web applications), so they cleared the transaction.

The purchase of Sun is a singular deal for Oracle. (It brings the company into the hardware game for the first time, for instance.) And it stands out even more when compared with Oracle’s pickup on Friday of Phase Forward, which is the only public company that Oracle has snagged since Sun.

For starters, the price of Phase Forward is about one-tenth the price of Sun. But more significantly, Sun was a broad, horizontal acquisition, while Phase Forward is a vertical market play. The target serves life sciences companies offering a subscription-based way to keep track of clinical trials. (It has more than 335 customers.) And perhaps most notably, parts of Sun’s technology (Sparc and Solaris, among others) will be integrated into many offerings from Oracle, which is following the strategy of other systems vendors. On the other hand, Phase Forward will be slotted into the narrowly defined Oracle Health Sciences unit.

An exclusive ‘club’

Brenon Daly

Contact: Brenon Daly

The price of admission for a ‘club deal’ just got a bit more expensive. The trio of private equity (PE) firms bidding for Irish e-learning firm SkillSoft recently bumped their offer to $1.2bn, up from the original $1.1bn bid in mid-February. The buyout firms teaming up to take SkillSoft private are Berkshire Partners, Bain Capital and Advent International. According to terms, the trio will be using equity to cover slightly more than half of the purchase price ($680m, or 57% of the $1.2bn transaction).

The planned leveraged buyout (LBO) of SkillSoft is one of only three take-privates by a PE club since January 1, 2008 valued at more than $1bn. (That doesn’t include syndicate purchases of divestitures or other parts of companies, such as the carve-out of Skype from eBay by a quartet of firms.) When credit was flowing freely in 2006-07, multibillion-dollar LBOs were plentiful, which was a primary reason that overall spending on tech M&A in each of those years topped $400bn. In both 2006 and 2007, PE shops accounted for more than 20% of all money spent on tech deals.

The topping bid for SkillSoft comes at a time when overall PE spending is dropping to some of the lowest levels since it began to recover last year. After averaging about $9bn in both of the quarters since the US recession officially ended, the value of deals by PE firms fell to just $6bn in the recently completed first quarter. Incidentally, the decline of PE deal value matched almost exactly the drop-off in overall first-quarter tech M&A spending, which came in at the low end of the range that we’ve tallied in recent quarters. Click here to see our full report on first-quarter M&A.

PE activity

Period Deal volume Deal value
Q1 2010 63 $6bn
Q4 2009 92 $9.9bn
Q3 2009 83 $8bn
Q2 2009 76 $2.8bn
Q1 2009 46 $250m

Source: The 451 M&A KnowledgeBase