Category: infrastructure software

SonicWALL heads behind closed doors

Brenon Daly

Contact: Brenon Daly

After more than a decade as a public company, SonicWALL is set to go private in a $717m leveraged buyout (LBO) led by Thoma Bravo. Terms call for the private equity (PE) firm to pay $11.50 for each of the roughly 62 million shares outstanding for the unified threat management (UTM) vendor. That marks the highest price for SonicWALL shares since early 2002. (However, that didn’t stop several law firms from investigating a possible breach of fiduciary responsibility by SonicWALL’s board, as the ambulance chasers have done in so many other recent transactions.)

As we look at the proposed LBO, the valuation strikes us as pretty fair. Our math: while the deal carries an equity value of $717m, the net cost is much lower thanks to the profitable company’s fat treasury. SonicWALL holds $213m of cash and short-term investments, lowering the enterprise value (EV) of the planned take-private to $504m. That works out to 2.5 times the company’s sales of $200m in 2009 and 2.2x projected revenue of about $230m this year.

That valuation sits about midway between SonicWALL’s two closest rivals. Four years ago, WatchGuard Technologies went private in an LBO by Francisco Partners that valued the UTM vendor at basically 1x trailing sales, on an EV basis. Meanwhile, fellow UTM provider Fortinet, which went public last November, currently trades at slightly more than 3x trailing sales. (Again, that’s calculated on an EV basis, and without any acquisition premium for Fortinet.) SonicWALL shareholders stand to get a 28% premium on their stock, assuming the LBO closes as expected in the third quarter.

Imagining ‘what if’ on Tripwire

Brenon Daly

Contact: Brenon Daly

As we were skimming through Tripwire’s recently filed IPO paperwork, we couldn’t help but wonder ‘what if….’ Specifically, we were wondering what the company would be like if it had gone for the other exit and taken the rumored offer from BMC more than three years ago. At the time, Tripwire was only about half the size it is now and nowhere near as profitable. But with the benefit of hindsight, it’s almost certain that Tripwire would have been valued at a much richer multiple in a trade sale during a time when M&A dollars were flowing freely (late 2006-07) than by going public in the current bearish environment.

To be clear, that’s not a knock on Tripwire. As we highlight in our report on the proposed offering, the company has a solid growth story to tell Wall Street: six consecutive years of revenue growth, while generating cash in each of those years. Instead, it’s just a reflection of the dramatic change in the valuation environment over the past three years. Consider this: In March 2008, BMC paid roughly 11 times trailing sales and 9x projected sales for BladeLogic, a valuation that wasn’t at all out of whack for the fast-growing datacenter automation vendor. (It was actually lower than what Hewlett-Packard spent on Opsware, a BladeLogic rival.)

While we have no idea what kind of valuation BMC was kicking around for Tripwire at the time, we have to believe it’s above the multiple we have penciled out for the IT security and compliance vendor in its market debut. Because of the bear market, we figure Tripwire will probably come public at about $300m. If that initial valuation holds more or less accurate, it will value Tripwire at basically 4x trailing sales and 3x projected sales – just one-third the valuation that BladeLogic got in its sale.

What’s new at Novell?

Brenon Daly2 Comments

Contact: Brenon Daly

Even though its shareholders aren’t overwhelmingly concerned with Novell’s financial numbers right now, the company will nonetheless be releasing results for its fiscal second quarter later Thursday afternoon. For what it’s worth, Wall Street expects earnings of about $0.07 per share on sales of $205m, representing year-over-year declines on both the top and bottom lines. (We should add that if Novell does manage to hit expectations, it will snap two straight quarters of earnings whiffs.)

But then Novell hasn’t traded on fundamentals for the past three months, ever since hedge fund Elliott Associates launched an unsolicited offer for the company. Novell, which is being advised by JP Morgan Securities, stiffed the bid, but did leave the door open to other ‘alternatives to enhance shareholder value.’ Since Elliott floated the offer, shares of Novell have basically changed hands at or above the $5.75-per-share bid.

As a decidedly mixed bag of businesses, Novell isn’t the cleanest match for any other company that might want to take it home. For that reason, most speculation around a possible buyer for Novell has centered on private equity firms. (The buyout shops are undoubtedly licking their chops at the prospect of picking up Novell’s $600m of maintenance and subscription revenue, not to mention the $1bn that sits in the company’s treasury.) However, we understand from a person familiar with the process that there are a handful of strategic buyers still interested in Novell.

If we were to put forward one potential suitor that could probably benefit more than any other company in picking up Novell’s broad portfolio of businesses, we might single out SAP. OK, we know it’ll never happen. (Never, ever.) But a hypothetical pairing certainly does go a long way toward filling a few notable gaps in SAP’s offering, while also making the German giant far more competitive with Oracle.

Consider this fact: some 70% of SAP apps that run on Linux run on Novell’s SUSE Linux Enterprise. Add in Novell’s additional technology around identity and access management, systems management, virtualization and other areas, and SAP’s stack suddenly looks a lot more competitive with Oracle’s stack. Again, an SAP-Novell deal will never happen, but the combination certainly does lend itself to some intriguing speculation.

Timeline: Novell in the crosshairs

Date Event Comment
March 2, 2010 Elliott Associates launches unsolicited bid of $5.75 per share for Novell The offer values Novell at a $2bn equity value but only a $1bn enterprise value
March 20, 2010 Novell rejects Elliott’s bid as ‘inadequate’ By our calculation, Elliott is valuing Novell at just 1.6 times its maintenance/subscription revenue

Source: The 451 Group

VeriSign saves best for last

Brenon Daly

Contact: Brenon Daly

When we look back at VeriSign’s two-year period of jettisoning unwanted businesses, we can only marvel at how it saved the best for last. The divestiture of its identity and authentication division to Symantec for $1.28bn caps a massive process of unwinding the previously misguided acquisitions of former CEO Stratton Sclavos. The longtime chief executive had used the money that gushed from VeriSign’s core registry business to buy his way into markets that were pretty far afield, such as mobile messaging and telecom billing.

Indeed, the scale of VeriSign’s divestitures is unprecedented among technology vendors, with the company dumping seven businesses in 2009 alone. (It’s interesting to note that while Morgan Stanley handled at least three of the divestitures last year, JP Morgan Securities banked VeriSign on the big sale of its security unit.) The company had seemingly wrapped up the grueling process last fall, telegraphing to Wall Street that it liked its two remaining businesses: registry and security. For that reason, the sale of the security division came as a bit of a surprise, the rumors of the divestiture earlier this week notwithstanding.

The sale also came at a substantial premium to virtually all of the other divestitures that VeriSign has closed. While the other divisions were lucky if they went for 1 times sales, the security business is going to Big Yellow for 3.5x sales. (More representative of the divestiture process is the 1x sales that VeriSign received when it sold its managed security services business to SecureWorks a year ago.) On a cash-flow basis, we understand that Symantec is paying about 10x EBITDA, which is roughly twice the valuation of most corporate castoffs.

As we see it, there are two basic reasons for the security division to fetch such a premium. For starters, it hummed along at a mid-20% operating margin. (Granted, that’s lower than VeriSign’s core registry business, but it’s still a level that most companies would envy.) But more importantly, we understand that Symantec actively sought out the VeriSign business, and indicated that it was a serious suitor right from the outset. Certainly, the pairing makes sense. As my colleague Paul Roberts points out, Symantec significantly bolstered its offering around cloud identity, broadening the reach of its policies around data protection, threat monitoring and compliance with enhanced authentication.

Thoma Bravo doubles down on Double-Take

Brenon Daly

Contact: Brenon Daly

Just a week after we noted that the bidding for Double-Take Software had hit the final stretch, with a trio of buyout shops still in the running, one of the private equity firms announced plans Monday to pick up the file-replication software vendor. Thoma Bravo, through its Vision Solutions portfolio company, will pay $242m for Double-Take in a take-private that’s expected to close in the third quarter. Assuming it goes through, the deal will end Double-Take’s three and a half years as a public company.

Frankly, Double-Take’s run as a public company was one that we didn’t really understand. It never cracked $100m in sales, and has basically been trapped at the same revenue level it hit in 2007. In that year, the vendor recorded sales of $83m. Although sales jumped 16% to $96m in 2008, they ticked back down to $83m in 2009 and Double-Take recently guided to expect about $86m in revenue this year. And the small company was competing against the replication offerings from some of the largest storage providers on the planet: EMC with RepliStor, Symantec with Replication Exec and the replication products CA Inc obtained in its XOsoft purchase.

Perhaps it’s not surprising, then, that the $10.50-per-share bid is actually slightly below the price Double-Take fetched when it came public. In its December 2006 IPO, Double-Take priced its shares at $11 each. And although the stock did trade at twice that price in late 2007, it has been below the IPO price since September 2008. In its time as a public company, Double-Take basically matched the performance of the Nasdaq.

At an equity value of $242m, the actual cost of Double-Take is much lower. The profitable, debt-free vendor held $89m in its treasury at the end of the first quarter, meaning Thoma Bravo/Vision Solutions will only have to hand over $153m in cash. That’s just 1.8 times this year’s projected revenue, and about 4 times maintenance revenue.

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.

LANDesk on the block

Brenon Daly

Contact: Brenon Daly

When Emerson Electric picked up Avocent for $1.2bn last fall, we noted that the acquisition made a great deal of sense as a way for Emerson to get deeper into the datacenter. We also noted that the systems management business that Emerson was inheriting because of Avocent’s earlier purchase of LANDesk looked ‘increasingly out of place.’

No surprise, then, that Emerson has formally begun a process to sell off the LANDesk unit. What is kind of a surprise, however, is the fact that LANDesk is shaping up as a comparatively pricey divestiture. We’ve heard talk of 2 or even 3 times sales for the $150m business. That could get the price back to roughly the $416m that Avocent originally paid for LANDesk back in 2006.

The reason LANDesk is going for a richer multiple than the conventional 2x sales for a divestiture is that there appears to be a number of interested parties for the business. As my colleague Dennis Callaghan outlines in a new report, LANDesk could appeal to virtualization vendors (notably existing partner VMware), hardware providers (notably existing partner Lenovo) and security firms, which might be looking to match Symantec’s pickup of Altiris. (Incidentally, Big Yellow paid about 3.5x trailing sales in its big systems management buy.)

Additionally, the size and stability of LANDesk is also expected to draw interest from buyout shops. We understand that Greenhill & Co, which advised Emerson on the purchase of Avocent, is also handling the planned unwind of LANDesk. Emerson already classifies LANDesk as a ‘discontinued operation’ and plans to have the divestiture done this year.

Sources: a take-private for Double-Take

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Contact: Brenon Daly

The final bidders for Double-Take Software have narrowed to three buyout shops, and a purchase of the file-replication software vendor could be announced within the next two weeks, we have learned. The company said a month ago that an undisclosed bidder had approached it about a possible transaction.

A number of sources have pointed to Vector Capital as the unidentified suitor, adding that the firm is one of the three bidders still in the running. Although we speculated early on that Double-Take’s two main channel partners (Dell and Hewlett-Packard) might be interested, we understand now that there aren’t any strategic bidders currently at the table.

The price couldn’t immediately be learned, but we suspect there won’t be a huge premium for the company, which was trading at $9.36 on Monday afternoon. The reason? Double-Take recently trimmed its sales outlook for 2010, essentially saying it doesn’t expect to grow this year. It recently guided to about $86m in sales for 2010, about 10% lower than it had expected earlier this year. It finished the recession-wracked 2009 with revenue of $83m, down from $96m in 2008.

Even without growth, Double-Take undoubtedly holds some appeal to a private equity (PE) firm. For starters, the company is cheap. It currently sports a market capitalization of just $200m, but nearly half that amount is made of its cash and short-term investments. (The company held $89m in its treasury at the end of the first quarter.)

With an enterprise value of only $111m, Double-Take now garners just 1.3x projected sales. Another way to look at it: even with a decent premium to the company’s current valuation, a buyer could still pick up Double-Take for about 4x maintenance revenue. Small wonder that a few PE shops are still considering a Double-Take takeout.

Where might Symantec shop?

Brenon Daly

Contact: Brenon Daly

After its double-header encryption deals last week, Symantec appears set to return to M&A. Like a number of tech giants, Big Yellow largely shunned dealmaking last year. But the drop-off was particularly notable at Symantec: It spent more than $1bn on acquisitions in both 2007 and 2008, but less than $100m in 2009. We would hasten to add that in the fiscal year that just ended on April 2, Symantec generated $1.7bn in cash flow from operations. That brought its cash stash to more than $3bn.

As to where the company might be shopping, my colleague Paul Roberts in our Enterprise Security Program outlines five areas that make sense for Symantec to buy its way into – as well as who might be of interest in those markets. In a new report, Roberts looks for M&A activity from Symantec in the following areas: threat detection and reputation monitoring, SIEM and vulnerability management, enterprise rights management, database security and endpoint control. All of those areas are a long way from Symantec’s original market of antivirus software.

A final thought on Big Yellow and its possible shopping is that the company actually enjoys a fair amount of goodwill on Wall Street right now. Symantec’s fiscal fourth quarter, which it reported Wednesday, was surprisingly strong for many investors, particularly after rival McAfee had a less-than-stellar first quarter. In fact, on many trading screens Symantec was the only green stock Thursday on an otherwise blood-red day. Symantec shares closed up less than 2%, but that was on a day that saw the Dow Jones Industrial Average plummet almost 1,000 points, or 9%, in afternoon trading.

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.