Category: Europe

Wayfinder finds its way to a decent exit

Brenon Daly

Contact: Brenon Daly

Even in write-offs, it’s not impossible for companies to come out ahead. That’s what we were thinking when we saw the news that Vodafone pulled the shutter down on the Wayfinder Systems business that it acquired a little more than a year ago. Of course, in the year since the second-largest wireless operator picked up the turn-by-turn navigation vendor, a lot has changed in that market. Most notable, it’s gone from a paid service to a free offering, thanks to Google and, more recently, Nokia.

That development has erased hundreds of millions in market cap from the two main suppliers of traditional navigation devices, Garmin and TomTom, and turned them into laggards on Wall Street. (Since Google announced in late October that it was adding free turn-by-turn navigation to a small number of Android devices, Garmin stock has shed 5% and TomTom has flat-lined, while the Nasdaq has posted a 12% gain.) Given the pressure that’s been felt by those two giants – both of which garner more than $1bn in annual revenue – we have to wonder if Wayfinder isn’t pretty content with selling the business back in December 2008.

It isn’t hard to see a scenario in which a tiny company ($14m in trailing revenue) that traded on an obscure stock exchange (the Nordic Growth Market) would have been deeply wounded – even fatally so – by the commoditization of its business. (That’s what happened to Nav4All, for instance.) Instead, Wayfinder managed to sell the business for about $30m, representing a 200% premium and a decent valuation of two times trailing sales. The alternative strikes us as pretty bleak. Had it not done the deal, Wayfinder could very well have been in the process of winding itself down. As it was, Vodafone wound it down, but at least Wayfinder and its backers pocketed a bit of money before that.

After dropping into pothole, Segway gets sold

Brenon Daly

Contact: Brenon Daly

As a rule, we love novelty. And we love it even more when there’s a ridiculous amount of hype – and money – directed toward that novelty, which somehow gets portrayed as something other than a novelty. So imagine our delight when we saw recently that Segway had been sold in what smacks of a scrap sale. The scooter maker, which raked in some $176m in venture backing, announced in mid-January that a UK-based holding company had picked up the firm. No terms were revealed.

Schadenfreude aside, we have to marvel at the craziness that consumed millions of dollars and probably even more engineering hours to solve a problem that never existed. A two-wheeled mode of transportation? Well, it’s pretty hard to top the bicycle, which is arguably the most efficient transportation machine ever created in terms of energy required for motion. That’s certainly not lost on the market. Each year, some 18 million bikes are sold in the US alone, while the Segway counts the total units shipped since its rollout in 2002 at less than 50,000.

Cadbury gets sweet deal; Yahoo sours

Brenon Daly

Contact: Brenon Daly

When Kraft Foods first launched its bid for Cadbury four months ago, we termed the offer ‘an Old Economy rendition’ of Microsoft’s reach for Yahoo in early 2008. And while it wasn’t a direct parallel, there were a number of similarities: A diversified, dividend-paying company makes an unsolicited play for a target that’s only just into a restructuring program, with a goal of bolstering a business where it’s currently an also-ran.

The parallels diverged even wider on Tuesday, as the British confectioner agreed to a raised bid from Kraft. Cadbury shareholders will pocket $19.5bn in cash and Kraft stock for their company, about 11% higher than Kraft initially offered. It represents the highest-ever price for Cadbury stock on the London Stock Exchange.

So that’s the reward to shareholders from a selling company. What about on the other side? What’s happened to the owners of Yahoo since the Internet giant spurned the advances of Microsoft (as Cadbury once dismissed the interest of Kraft)? Shares of Yahoo currently trade at just half the level that Microsoft bid for them. And it isn’t just the fact that shares got hit by the biggest economic upheaval since the Great Depression since Yahoo turned down Microsoft’s interest. In the nearly two years since that decision, the Nasdaq has basically flat-lined while Yahoo stock has dropped by one-third.

freenet: getting paid to sell

Brenon Daly

Contact: Brenon Daly

In a time when nearly all divestitures are done on the cheap, freenet’s recent sale of its mass-market hosting business Strato generated an unexpectedly rich return for the German telco. In fact, freenet more than doubled its money in the five years that it owned Strato. Back in December 2004, freenet handed over $177m ($107m in cash, $70m in equity) to German network equipment provider Teles for Strato. When freenet shed Strato to Deutsche Telekom (DT) two weeks ago, it pocketed $410m. (Arma Partners advised freenet on the divestiture.)

On top of that return, of course, freenet will hold on to the cash that Strato generated while owned by freenet. That’s not an insubstantial consideration, given that Strato ran at an Ebitda margin in the mid-30% range. We understand that Strato was tracking to about $50m in Ebitda for 2009, up slightly from about $46m last year. Revenue at Strato was also expected to show a mid-single-digit percentage increase in 2009, despite the tough economic conditions in freenet’s home market of Germany. DT’s bid values Strato at roughly 3x trailing sales and nearly 9x trailing Ebitda. That’s a solid valuation for corporate castoffs, which typically garner about 1x trailing sales and maybe 4-5x Ebitda.

Freenet’s divestiture of the Strato hosting business to DT comes a half-year after it sold its DSL business to United Internet, a sale that was also banked by Arma. The company has been looking to shed businesses as a way to pay down the debt that it took on for its $2.57bn acquisition of debitel in April 2008. Since that landmark deal, freenet has focused its operations on mobile communications, and had been reporting the DSL and Strato businesses separately. We understand that there may be additional divestitures by freenet, but they will be smaller transactions for more ‘ancillary’ businesses.

A thaw in the market

Brenon Daly

Contact: Brenon Daly

In recent weeks, there’s been a lot of talk about a thaw in the once-frozen M&A market. While that’s true for overall activity, it’s also turning out to be true for specific deals that for one reason or another found themselves on ice at some point. Whether the transaction originally froze because of financing, regulation or pricing, a few of the notable deals are now looking like they’ll get done. That warming trend in dealmaking stands in sharp contrast to the climate at the beginning of the year. The Ice Age that spanned the first few months of 2009 is the main reason why total M&A spending for this year is likely to come in at just half the level it was in 2008.

Among the transactions that have been reheated in recent weeks: JDA Software’s consolidation play for i2, the sale of once-hot-but-now-cold 3Com and Cisco Systems warming up to the shareholders of Tandberg, who had given the networking giant a Nordic brush-off in its first bid for the videoconferencing company. (Incidentally, the additional $400m that Cisco will kick in for Tandberg will deplete its overseas cash stash by a whopping 1.3%.) What’s interesting in this trio of deals is that all of them involve the target company pocketing more money than was offered in an earlier proposed transaction. That’s certainly a change in the climate from this time last year, when we were writing about bidders ‘recalibrating’ their offers lower.

Amid consolidation, Ixia opens its wallet

-Contact authors: Thomas Rasmussen, Steve Steinke

Historically, networking test and measurement vendor Ixia has never been much of a shopper. However, that has started to change this year as the Calabasas, California-based company reached for Catapult Communications in June for $105m as well as wrapped up its $44m acquisition of rival Agilent Technologies’ N2X product line earlier this month. For those keeping track, Ixia’s recent deals represent some 85% of all M&A spending at the company since 2002. (We would note that the pickup in dealmaking, coincidentally or not, has come since a European private equity investor joined the firm’s board and its strategic planning committee in October 2008.) Having recently assumed the role of consolidator, the small-cap vendor ($425m market capitalization) says it still has about $85m in cash after its recent purchases and is still pursuing deals. Who might be next?

One of the growing fields in the space is wireless network testing. Given Ixia’s desire for a larger presence in the segment, we think it could look to snap up a company here. Two interesting targets are privately held Metuchen, New Jersey-based Berkeley Varitronics Systems and Bandspeed of Austin, Texas. As for more traditional targets, we would point to competitors ClearSight Networks of Fremont, California, and Canada’s publically traded EXFO. EXFO currently sports an enterprise valuation of approximately $150m and would almost double Ixia’s revenue. Doubling down on EXFO might not be such a bad idea given that, despite its aggressiveness, Ixia is still relatively small compared to larger players such as JDSU and Spirent, which could look to do some consolidation in the space of their own.

Ixia’s historical acquisitions

Date announced Target Deal value
October 21, 2009 Agilent Technologies (N2X product line assets) $44m
May 11, 2009 Catapult Communications $105m
January 24, 2006 Dilithium Networks (test tool business assets) $5.1m
July 18, 2005 Communication Machinery $4m
July 14, 2003 NetIQ (Chariot product assets) $17.5m
February 15, 2002 Empirix (ANVL product assets) $5m

Source: The 451 M&A KnowledgeBase

Dassault Systemes bulks up through an old friend

Brenon Daly

Contact: John Abbott

Dassault Systèmes’ $600m purchase of IBM’s CATIA product lifecycle management (PLM) sales and client support operations on Tuesday is the latest twist in a complex, 30-year relationship between the two companies. Dassault, founded in 1981, inherited the rights to CATIA, one of the first 3-D computer-aided design (CAD) packages, from its aerospace parent Avions Marcel Dassault (now Dassault Aviation). Then in 1992, Dassault bought the rights to the other pioneering CAD package, CADAM, from IBM. It set about combining the two, and continued to jointly market the product set with Big Blue.

Now it seems that Dassault wants more control over its business. Through the deal, which is expected to close during the first half of next year, it gains access to 1,000 more clients and around $700m in annual sales. The transaction is expected to boost earnings in the first year. (Dassault plans to speak more about the financial impact of the deal during its third-quarter earnings call on Thursday.)

The partnership will continue with IBM in the services role, but should enable Dassault to simplify its contracts with very large customers such as Ford Motor and Boeing, which until now had to negotiate with both vendors. The scope of CAD software has evolved over the years from core engineering and complex product design into collaborative PLM focused on business processes, workflows and the supply chain. However, Big Blue didn’t have the agreements in place to sell the full set of Dassault tools. The result was that more big firms were dealing directly with Dassault. A side effect is that both companies will be more able to work with other partners: Dassault with Hewlett-Packard, for instance, and IBM with other PLM providers such as Siemens PLM Software and PTC.

The deal is the biggest in Dassault’s history, though it has spent heavily in the past on industry consolidation, most notably through the acquisitions of MatrixOne (March 2006, $408m), ABAQUS (May 2005, $413m) and SolidWorks (June 1997, $310m). Other vendors have also been buying up big chunks of the PLM market. Siemens inked the sector’s largest deal in January 2007, spending $3.5bn on UGS, while Oracle handed over $495m for Agile Software in May 2007. The PLM shop that appears to be left behind is PTC, which despite spending more than $600m on 11 purchases of its own since 2004 is now much smaller than either Siemens or Dassault and is under pressure from moves into PLM by mainstream enterprise software houses such as Oracle and SAP. Several market sources indicated that PTC has retained Goldman Sachs to advise it on a possible sale.

Patient Smith Micro is big on M&A

-Contact: Thomas Rasmussen, Chris Hazelton

Up until the credit crisis knocked the economy into a recession, mobile software company Smith Micro Software had been a fairly active acquirer. The Aliso Viejo, California-based firm closed five deals worth $93m in 2007 alone. However, as the economy slid into a tailspin, Smith Micro pretty much stepped out of the market. Last year, it announced only a pair of tuck-in acquisitions, which we estimate cost just $3m total.

We suspect Smith Micro may be looking to return to a quicker M&A pace. Last month, it announced its second-largest deal, picking up Mountain View, California-based Core Mobility for $18.5m. (We understand the two sides discussed a deal back in 2007, but couldn’t get together on price.) Smith Micro will hand over $10m in cash and cover the rest of the Core Mobility purchase in stock, which will hardly limit its ability to do future deals. The debt-free company, with a market cap of $340m, claimed $44m in cash and short-term investments (at least before announcing the Core Mobility purchase). Moreover, it recently filed a shelf offering intended to fatten its treasury toward additional deals. At current prices, the four million-share offering will effectively double Smith Micro’s cash on hand. So where might it be looking to shop?

The Core Mobility acquisition reached into a new market segment. But we believe any significant future deal would see the company aiming to bolster its core mobile enterprise VPN offerings. That is where it shopped before putting the breaks on its M&A program in late 2007, when it picked up PCTEL’s mobility assets and Ecutel Systems. Potential targets include Norwegian Birdstep Technology, Swedish Columbitech, Seattle-based NetMotion Wireless and Canadian vendor ipUnplugged.

Although all four would make excellent tuck-in acquisitions, we view publicly traded Birdstep as a particularly good fit for Smith Micro. The Norwegian company has trailing revenue of about $18m, which would be a not-insignificant boost to Smith Micro’s revenue. But more importantly, acquiring cash-burning Birdstep would provide a much-needed foot in the door to the Nordic/European markets to help Smith Micro expand beyond the Americas, which currently accounts for more than 90% of revenue. Birdstep can likely be had at a discount too, as the company currently sports a market cap of about $30m, a mere one-fifth of its 2007 levels. Patience might be the operative word for Smith Micro’s M&A strategy, and it looks like it’s paying off.

Smith Micro’s historical M&A

Period Number of acquisitions Total deal value
2009 YTD 1 $18.5m
2008 2 $2-3m*
2007 5 $93m

Source: The 451 M&A KnowledgeBase * official 451 Group estimate

Equinix continues datacenter consolidation

Brenon Daly

Contact: Brenon Daly, Dan Golding

Two years ago, Equinix went shopping to expand its business across the Atlantic, paying $555m in cash for London-based IXEurope. The deal, which required a topping bid from Equinix to get closed, created the first truly global carrier-neutral colocation player. Now, Equinix is looking to consolidate its home US market. The company said on Wednesday it is planning to pay $689m (80% in stock, 20% in cash) for Switch & Data Facilities Company.

The acquisition, which is expected to close in the first quarter of 2010, would bolster Equinix’s presence in several key markets, as noted by my colleagues at Tier 1 Research. Among the most valuable additions would be Switch & Data facilities serving financial institutions in Manhattan and North Bergen, New Jersey, as well as Switch & Data’s facility in Palo Alto, California, which is a major point of West Coast Internet interconnection.

Combining Equinix and Switch & Data produces a datacenter provider with revenue of just about $1bn, putting it ahead of rivals Savvis and Terremark. From our perspective, we would add that Equinix also garners a premium valuation compared to those remaining providers. In fact, its valuation lines up only slightly lower than the multiple it is paying for Switch & Data, even with the 34% premium on top of the previous closing price of Switch & Data shares. Equinix’s bid values Switch & Data at 17 times trailing EBITDA, compared to 14 times trailing EBITDA at Equinix. In terms of 2010 estimates, both the current valuation of Equinix and the takeout valuation of Switch & Data come in at about 9.5 times projected EBITDA.

A unanimous quartet

Brenon Daly

Contact: Brenon Daly, Dennis Callaghan

With BMC Software reaching across the Atlantic this week for Tideway Systems, the Big Four systems management vendors are now four for four in terms of buying startups that do datacenter asset discovery and dependency mapping. The deal, which is the second acquisition by BMC in as many months, should help the company round out its datacenter management lineup. Although terms weren’t disclosed, we understand that BMC paid $30m for Tideway, which was running at about $15m in revenue. Tideway, which is based in London, had raised some $37.5m in backing, including a whopping $27m series C in April 2008.

Most of BMC’s other rivals had already inked deals in this market. In addition to the Big Four, other tech giants also picked up startups that had discovery and mapping technology. The deals started in mid-2004, when Mercury Interactive (now part of Hewlett-Packard) reached for Appilog. After that, a yearlong flurry of transactions starting in late 2005 saw pretty much all the big names make their play. IBM acquired Collation, Symantec reached for Relicore, EMC grabbed nLayers and CA Inc bought Cendura. Based on disclosed or estimated deal values, all the buyers during that period paid in the neighborhood of $50m for their respective discovery and mapping startups, roughly 40% more than we hear BMC handed over for Tideway. Look for a full report on the transaction in tonight’s MIS sendout.