Category: infrastructure software

Juniper back in the market — and how

Brenon Daly

Contact: Brenon Daly

Just nine months after Juniper Networks picked up a small stake in Altor Networks through the startup’s second round of funding, the networking giant decided Monday to take home the whole thing. Juniper will hand over $95m in cash for the rest of the virtual firewall vendor. (Altor had raised around $16m in backing, including the undisclosed investment from Juniper.) At the time of the investment, Juniper said it planned to develop an ‘even closer’ relationship with Altor, its primary virtualization security partner. See our full report on the deal.

The purchase of Altor stands as Juniper’s fifth acquisition this year, and brings its M&A spending to almost $400m so far in 2010. That’s fairly remarkable activity, considering that Juniper had been out of the market for a half-decade. And with the exception of its recent pickup of Trapeze Networks, Juniper’s buys have been big bets on small companies. The networking giant has paid $70m-100m each for Ankeena Networks, SMobile Systems and Altor – and we gather that all three of the target companies were running in the single digits of millions of dollars.

Recent Juniper acquisitions

Date Target Deal value Rationale
December 6, 2010 Altor Networks $95m Virtualization security
November 18, 2010 Blackwave (assets) Not disclosed Internet video content delivery
November 16, 2010 Trapeze Networks $152m Wireless LAN infrastructure
July 27, 2010 SMobile Systems $70m Mobile device security
April 8, 2010 Ankeena Networks $69m Online media content delivery

Source: The 451 M&A KnowledgeBase

BMC adds to automation capabilities

Brenon Daly

by Brenon Daly

BMC Software hopes its latest purchase will make life easier for database administrators (DBAs) and systems operations. The management giant on Friday picked up longtime partner GridApp Systems, adding the startup’s database automation offering to its broader automation and management portfolio. GridApp automates tasks such as database provisioning and patching – mundane and time-consuming chores for DBAs, but ones that are critical for security and compliance reasons. Additionally, it enhances BMC’s full-stack automation capabilities.

The importance of this technology was highlighted (in part, at least) by another acquisition earlier this year. In late August, Hewlett-Packard reached for Stratavia, a startup that had begun life as a database management vendor but expanded into application-layer automation as well. (Pacific Crest Securities advised Stratavia, while GrowthPoint Technology Partners banked GridApp.) Even if the technology in the two deals doesn’t line up exactly, we understand that the valuations are nearly identical. Both GridApp and Stratavia, which were small, nonetheless garnered a 10 times multiple.

3Leaf ends up at Huawei – but will it be staying there?

Brenon Daly

Contact: John Abbott

Six months ago, I/O virtualization startup 3Leaf Systems disappeared from our radar screens. A little digging around more recently revealed that key staff members had scattered. VP of marketing Shahin Kahn was now at ORION Marketing Group, a consulting firm, with other ex-Sun Microsystems colleagues. CEO B.V. Jagadeesh had turned up as CEO of Virtela Technology Services, a managed network, security and technology services company. In his company biography he revealed that 3Leaf had been sold in a ‘private transaction.’ The trail of clues led on to Bob Quinn, founder and CTO of 3Leaf, who could be traced (via his LinkedIn profile) to Chinese telecom equipment maker Huawei Technologies, where he was now acting as a consultant. We surmised, and later received confirmation, that Huawei was the new owner of 3Leaf’s technology.

Two weeks ago, Huawei submitted an application to CFIUS – the US government’s Committee on Foreign Investment in the United States – including its first public statement that it had acquired 3Leaf in May. No details emerged other than that only the intellectual property and 15 of the 50 employees had been obtained in a transaction worth around $2m. According to CFIUS, Huawei should have requested permission from the committee. Huawei said it regarded the deal as a patent sale and hiring exercise and so believed it didn’t need to clear it with CFIUS. In 2008, the company abandoned its bid for 3Com due to US security terms. Hewlett-Packard stepped in to acquire 3Com a year later. More recently, Huawei has faced opposition to a proposed equipment-supply partnership in the US with Sprint Nextel over security concerns.

Aside from all this, the deal is a sorry – and somewhat worrying – end for 3Leaf, which raised roughly $67m from VCs Alloy Ventures, Enterprise Partners Venture Capital and Storm Ventures, as well as money from strategic investors Intel and LSI. 3Leaf was working on what should be a hot sector, I/O virtualization, but perhaps it entered the market too early. Its first product, the V-8000, first shipped in May 2007, but used a somewhat proprietary approach due to the lack of standards at the time. The company effectively started all over again in 2009 with plans to build new technology for virtualizing CPU and memory resources across x86 server clusters. It was looking for deals from OEMs, although there were also plans to sell prepackaged versions based on SuperMicro servers. However, 3Leaf needed more money to fund the ongoing research, and those efforts appear to have been unsuccessful.

3Leaf looked promising when it was founded, but early technology decisions led it down a blind alley. There may be some value in its patents and certainly more in the experience of its engineers, but it seems unlikely that, if CFIUS forces Huawei to sell the assets it’s bought, there will be many takers. If one is found, it’s likely to be a major server vendor with networking pretensions such as HP or IBM, or an I/O and networking adapter specialist such as Emulex or QLogic. Meanwhile, other startups in closely related areas – including ScaleMP, NextIO, Numascale, RNA Networks, VirtenSys and Xsigo Systems – soldier on.

Not pretty, but it’s done at Novell

Brenon Daly

Contact: Brenon Daly

After holding out for more than eight months, Novell finally accepted on Monday a $2.2bn buyout offer from private equity-backed Attachmate. From the outside, it looks like a case where the buyer – or maybe more accurately, the hedge fund that put the company in play – simply wore down Novell. Under terms, Attachmate will hand over $6.10 in cash per share, or roughly $2.2bn, for Novell.

Yet if we step back and look at the offer, we can’t help but notice that the company is now embracing a bid that only values it slightly more than the original offer that put it in play. For the record, Novell’s board said three weeks after receiving the unsolicited bid from gadfly investor Elliott Associates that the offer of $5.75 for each share ‘undervalues’ the company and its prospects.

Apparently, Elliott’s opening bid wasn’t all that lowball because the company is selling for just 6% more than the offer that ‘undervalued’ it. We would also mention that Novell traded above the $6.10 bid several times over the summer, albeit on pure speculation. (JP Morgan Securities advised Novell, while Credit Suisse Securities and RBC Capital Markets worked for Attachmate.) The deal is expected to close in the first quarter of 2011, pending shareholder approval.

To be fair, the fact that Novell’s board got shareholders even a slight bump above the original offer should be viewed as a sell-side accomplishment. After all, Novell is a hoary, mixed-bag of businesses, with each unit attracting specific suitors. All of that made for an undoubtedly complicated process, with multiple permutations on bidders and bidding teams, as we understand it. (Companies we heard that may have taken a serious look at some point at Novell – or at least some of its businesses – include VMware and Oracle, among others.) Indeed, as part of the transaction, Microsoft will be acquiring a sprawling portfolio of 882 patents from Novell for $450m.

And beyond all of the complications around matchmaking is the fundamental fact that Novell just isn’t that attractive, regardless of whatever business we look at inside the company. Each component of its revenue (license, maintenance/subscription, services) has dropped so far this year, which is part of the reason why Novell has come up short of Wall Street expectations every quarter this year. Overall, sales have dropped 6% in 2010, and current projections call for Novell’s revenue to decline next year, too. So as we look at it, the board probably did a fair job to get Novell valued at $1.2bn (net of cash), which works out to basically 1.5 times sales. Novell shareholders will now have their say on the outcome of the more than eight-month process.

Blue-sky thinking on a bidding war for Isilon

Brenon Daly

Contact: Brenon Daly

Based on the two previous multibillion-dollar deals in the storage industry, we should be bracing for a bidding war around Isilon Systems. Recall that Data Domain last year and 3PAR this summer each attracted after-the-fact suitors that drove up the price on both by more than a few dollars. But in the case of Isilon, we don’t actually see the process going to a public auction.

For starters, there’s the not-insignificant matter of the buy-in bid, which currently values Isilon more richly (on a price-to-sales ratio) than either Data Domain or 3PAR. (As we note in our full report on EMC’s planned purchase, Isilon is being taken off the market at its highest-ever price, roughly five times the level where the company started the year and roughly twice where it traded just three months ago.)

Setting aside Isilon’s acrophobia-inducing valuation, which company could we imagine putting in a topping bid? Admittedly, that requires a rather vivid imagination, but one name we could come up with is Dell. (My colleague, Henry Baltazar, looked at Isilon and other potential targets for Dell in a recent report.) The company has already demonstrated a willingness to spend big to build out its storage portfolio, taking home EqualLogic three years ago and making an unsuccessful run at 3PAR this summer. (If nothing else, Dell’s effort to land 3PAR signaled that the tech giant doesn’t appear content to simply continue its long-term reliance on EMC for storage business. We suspect that marriage of convenience may well be on the rocks.)

Not that we necessarily expect it to happen, but Isilon would nonetheless bring Dell a fast-growing storage vendor (roughly 60% revenue growth for 2010) and a solid roster of more than 1,500 customers, which is roughly twice the number it would have picked up with 3PAR.

Granted, there would be some overlap with the NAS technology Dell obtained with Exanet earlier this year. But Isilon would significantly enhance that, as well as fit well with Dell’s more recent storage purchase, Ocarina Networks. (Isilon and Ocarina actually had a partnership, putting Ocarina’s digital image de-duplication technology in front of Isilon. That’s particularly useful for storage requirements for media and entertainment companies, which account for one-third of revenue at Isilon.) Again, we highly doubt that Dell plans to start a bidding war for Isilon. But it’s enough to get us thinking.

Isilon and 3PAR: strikingly similar storage sales

Brenon Daly

Contact: Brenon Daly

EMC’s planned purchase of Isilon Systems comes as the second storage acquisition valued at more than $2bn in just three months. In fact, it lines up rather closely on a number of fronts with the other recent big-ticket storage deal, Hewlett-Packard’s pickup of 3PAR. For starters, the adviser. Qatalyst Partners got sole print for helping to sell 3PAR, and also had a hand in the process for Isilon. (Morgan Stanley and Qatalyst teamed up on the sell side.)

In terms of financial results, both Isilon and 3PAR are very similar. The two vendors were both generating about $200m in trailing revenue and only modest amounts of cash flow at the time of their acquisitions. (Both also had slightly more than $100m in cash on hand, thanks primarily to their recent IPOs.) That means both Isilon and 3PAR secured a valuation of more than 10 times trailing revenue in their sales to EMC and HP, respectively. If anything, Isilon is garnering an even richer valuation at 12.8x trailing 12-month sales and 8.7x projected 2011 sales.

And finally, both Isilon and 3PAR are being taken off the market at their highest-ever valuations, with acquisition offers of about $33 for each share. (That was the exact clearing bid for 3PAR, which came after two rounds of bumped bids, while Isilon shareholders are set to pocket $33.85 for each of their shares.) Given that Isilon and 3PAR were trading in the single digits just a few months before their acquisitions, shareholders in both storage vendors have reason to smile.

Reading Cisco’s signals

Brenon Daly

Contact: Brenon Daly

As a bellwether for the tech industry, Cisco Systems laid out a fairly bearish outlook for Wall Street in its report on fiscal first-quarter results. The projections of lower-than-expected revenue at the networking giant trimmed some $20bn from its market value Thursday, and helped dragged down the Nasdaq, which has tacked on 6% over the past month. But from our perspective, Cisco is not just a key indicator for the equity market – it’s also a key indicator for the M&A market.

Looking more closely at the company’s fiscal Q1 report, we can’t help but be struck by Cisco’s paltry M&A spending. During the August-October period, the company handed over a total of just $69m (net of cash at acquired companies) for its purchases of ExtendMedia and Arch Rock. (Specific terms on both deals weren’t disclosed.)

While that may sound like a lot of money, it’s pocket change to Cisco, which generated $1.7bn in cash flow from operations in the quarter. Or more dramatically, consider this: during Q1, Cisco spent $2.5bn on share repurchases. That means it spent more than 35 times more on its own equity than on the equity of other companies.

Not that Cisco has been alone in staying out of the big-ticket M&A market recently. We noted that October (the final month of Cisco’s fiscal first quarter) was the first month of 2010 that a tech company didn’t announce a single transaction valued at more than $1bn. Obviously, that streak was broken last week, when Oracle said it was spending $1bn for Art Technology Group. Still, it was only Oracle’s second significant acquisition of the past 18 months.

An acquisition breaks the back of Bakbone

Brenon Daly1 Comment

Contact: Brenon Daly

In some ways, it was a misguided purchase last year by BakBone Software that led to yesterday’s distressed sale to Quest Software. The backup and recovery vendor made its largest-ever acquisition in May 2009, paying some $16m in cash and stock for ColdSpark. The rationale of the combination seemed sound at the time: broaden BakBone’s data-protection platform by adding ColdSpark’s messaging management. What could go wrong with that?

Unfortunately, plenty went wrong, as the two businesses never meshed. BackBone relies heavily on its indirect sales channel, while ColdSpark sold directly into enterprises. The average sales price for the messaging software was significantly higher than BakBone’s core storage products, which made for a highly unpredictable sales cycle at the acquired business. In the roughly one year that it owned ColdSpark, BakBone recorded only $1m in revenue from the business, according to SEC filings. It shuttered ColdSpark last May.

The integration struggles, however, came at a steep cost to BakBone, a Bulletin Board-traded company where cash has always been tight. Consider this: to generate the roughly $1m in sales at ColdSpark required spending of more than $3m in just R&D and sales/marketing efforts, to say nothing of the additional costs at the business. The spending drained BakBone’s treasury to just $5m, as of the company’s latest quarterly report.

Obscured by the smoke from the flameout around the acquisition is the fact that BakBone’s core storage management business actually puts up pretty decent numbers. In the latest fiscal year, it has run at a respectable 91% gross margin and 13% operating margin, while sales increased 9%. It boasts more than 17,000 customers. And Quest is getting all that for a relative bargain, paying just 1x sales for BakBone. As a final note on the deal, which is expected to close early next year, we would add that BakBone stands as the only public company we’re aware of that Quest has ever acquired

The rich valuation of integration

Brenon Daly

Contact: Brenon Daly

A lot of attention (and the accompanying financial rewards) around data management has tended to pile up in security, storage, analytics and other well-known market segments. Rather quietly but consistently, data integration has joined the list of richly valued markets as customers use these offering to get at the massive stores of information that run their businesses. The premium valuation is showing up both on Wall Street and, just recently, in M&A, too.

Take the case of Informatica. Shares of the data-integration provider have nearly doubled over the past year, and currently fetch their highest price in a decade. Informatica currently trades at a $3.8bn market capitalization, a rather rich six times its projected 2010 sales of $640m. The company has always stressed that part of its value has been in its independence among the software giants, but Informatica has nonetheless attracted M&A speculation in the past.

Those highly valued (and highly visible) public market vendors have helped drive up the valuation of smaller data-integration startups. For instance, we estimate that IBM paid about $200m for Cast Iron Systems, which we understand was running at about $30m in sales. And just last week, Dell reached for Boomi in a deal that valued the company at more than twice that multiple. (Subscribers can see our full report, which includes our estimates on the revenue as well as the price of Boomi.)

Bidding war keeps Phoenix Technologies rising

Brenon Daly

Contact: Brenon Daly

Shareholders in Phoenix Technologies were originally supposed to have their say today on the planned take-private of their company. Instead, they’ll be sitting tight, waiting to see if the maker of core systems software can fetch yet another round of topping bids. The vote is currently scheduled in two weeks, and we wouldn’t at all be surprised if the price put to shareholders then is higher than the one on the table now.

Original bidder Marlin Equity Partners is currently offering $4.20 for each share of Phoenix Technologies, valuing the company altogether at $152m. That’s roughly 9% higher than the $139m that Marlin initially offered in mid-August before getting jumped by The Gores Group. (RBC Capital Markets is advising Phoenix Technologies in the process.) To our mind, there’s more than a little irony in a bidding war around Phoenix Technologies, a company that has been unknown and unloved for much of its two decades on the Nasdaq.

In any case, the tug-of-war over Phoenix Technologies is a far cry from the wildly lucrative bidding war around 3PAR earlier this summer. A comparable escalation would push the offer for Phoenix Technologies a bit above $7 per share, or more than $250m. That’s not likely to happen. But we could certainly imagine a few more dollars tacked on to the final price. Investors expect that as well. Shares of Phoenix Technologies have traded above the official bid all week.