Category: infrastructure software

Juniper returns to the M&A table

Brenon Daly

Contact: Brenon Daly

After almost a half-decade out of the market, Juniper Networks is back buying. The communications equipment vendor announced plans last week to hand over ‘less than $100m’ for Ankeena Networks, its first purchase since picking up Funk Software in November 2005. The company declined to be more specific on the deal value, but at least one source indicated that the price for Ankeena was indeed less than $100m, but not by much.

Whatever its final price, Ankeena undoubtedly got a rich valuation, as it essentially launched a year ago. Sales of the company’s software for serving and managing content delivery were fairly small. Ankeena also undoubtedly delivered a rich return for its three backers: Mayfield Fund, Clearstone Venture Partners and Trinity Ventures. The trio put just $16m into Ankeena.

In the four-and-a-half years that Juniper has been sidelined, its rivals have been busy. Ericsson has inked some 17 deals in that period, including the $2.1bn acquisition of Redback Networks. Meanwhile, Cisco has sealed 39 deals in that time, spending more than $40bn. Most observers would chalk up Juniper’s M&A hiatus, at least in part, to the fact that it came up way short on its biggest gamble, the $4bn all-equity purchase of NetScreen Technologies. (On a smaller scale, Juniper also has precious little to show for its $337m cash-and-stock pickup of Peribit Networks, a WAN traffic optimization vendor that we understand was running at less than $15m in sales.)

Realizing a return on NetScreen was going to be difficult from the outset because Juniper overpaid for the security provider. In a transaction that had more than a few echoes of the Internet Bubble era, Juniper paid 14 times trailing sales and more than 50 times trailing EBITDA for NetScreen. And when it tried to make the deal work, Juniper found itself struggling to integrate NetScreen’s firewall product into its core networking line, and was unable to reconcile NetScreen’s indirect sales model with its own direct model. Maybe buying Ankeena is the clearest sign yet that Juniper, which replaced its longtime CEO in September 2008, has finally closed the NetScreen acquisition and moved on.

HP buys big

Brenon Daly

Contact: Brenon Daly

Earlier this week, Hewlett-Packard closed its $3.1bn acquisition of 3Com. It was a significant shot at the company’s new rival Cisco Systems, adding additional networking and security products to HP’s ProCurve portfolio while also dramatically increasing its business in Asia (3Com generates roughly half its sales in China). The deal was announced on November 11, and closed on Monday.

What’s interesting is that HP, which was once a fairly steady dealmaker, has been out of the market since that purchase. Its rivals, however, haven’t been on the sidelines. In the five months since HP announced the 3Com buy, IBM has inked five deals, Dell has announced two transactions and Cisco has picked up one company. Of course, some of HP’s inactivity could be chalked up to its efforts to digest 3Com, which stands as the company’s fourth-largest acquisition. (On the other side, Cisco knocked out a pair of $3bn purchases in just two weeks in the month before HP reached for 3Com.)

But we understand from a couple of different sources that although HP is looking to do fewer deals, they will be larger. The shift has actually been taking place for some time at the company. In 2007, like a number of cash-rich tech giants, HP was basically knocking out a purchase each month. That pace slowed to just five deals in 2008, including the landmark acquisition of services giant EDS. Last year, HP bought just two other companies besides 3Com. It looks like the company, which is tracking to more than $120bn in sales this year, has realized that the big get bigger by buying big.

A Double-Take takeout?

Brenon Daly

Contact: Brenon Daly

Never mind the business, somebody has their eye on Double-Take Software. The file-replication software vendor said Monday that it came up short in its first-quarter performance, continuing the struggles that it saw throughout 2009. Last year, maintenance revenue flat-lined, while license sales dropped by one-quarter. And although the first quarter is starting off a bit underwhelming, Double-Take is still projecting that it will grow this year. However, even if the company hits the high end of its estimate of $95m, sales for 2010 will still fall just short of 2008’s level of $96m.

Apparently, that lackluster performance hasn’t dimmed the company’s appeal. As Double-Take was announcing its Q1 miss, it also said – in an ‘Oh, by the way…’ manner – that it had received an ‘unsolicited, non-binding’ expression of interest from an unnamed suitor. No terms were revealed so it’s hard to know, specifically, what’s on offer to Double-Take shareholders. The company says only that the bid is ‘above recent trading prices.’ Does ‘recent’ mean a bit under $9, where shares have been since early February? Or does ‘recent’ also include the period in January when shares changed hands above $10, before the company warned (for the first time) that the quarter was coming in a bit light? On the report, Double-Take stock jumped 15% to $10.05 in Monday afternoon trading.

As to who might have floated the bid, it strikes us that this looks like a private equity (PE) play. If a strategic buyer wanted Double-Take, we don’t see it approaching the company in such a fast-and-loose way. Besides, there are basically only two companies that would make obvious bidders: Dell and Hewlett-Packard. The two tech giants are Double-Take’s main channel partners, with Dell accounting for a full 17% of the company’s revenue on its own. Also, both vendors could presumably benefit from Double-Take’s large customer base of SMBs, which numbers more than 22,000. Of course, an auction could draw out any interested strategic player, so the potential bidders aren’t necessarily limited to HP and Dell.

But as we say, we think this offer came from a buyout shop. And we can certainly understand Double-Take’s attractiveness to a financial buyer. In short, it’s cheap. Even with the stock’s pop on Monday, the company still only garners a market cap of about $220m. And the net cost is even cheaper, because the debt-free, profitable vendor carries almost $100m in cash on its balance sheet. At an enterprise value of just $120m, Double-Take is valued at less than three times its maintenance stream. That’s a valuation that any number of PE firms probably figure they could make money on.

Phoenix sheds FailSafe

Brenon Daly

Contact: John Abbott

Phoenix Technologies announced at the start of the year that it was putting its plans to expand beyond the core BIOS software business on hold, and hired GrowthPoint Technology Partners to find a buyer for its non-strategic technology assets. A short time later, CEO Woodson Hobbs was out the door, followed soon after by CFO Richard Arnold. Ironically, Hobbs was originally hired in September 2006 to turn the company around, and his first task back then was to rebuild the BIOS business after Phoenix had lost its way through diversification. It appears that Hobbs fell into the same trap by putting too much effort into HyperSpace, a hypervisor that was being positioned as the basis for an OS for netbooks. Tom Lacey, who previously worked at Applied Materials Inc and before that Flextronics, took over as CEO in February.

Now a buyer has been announced for the first of Phoenix’s unwanted assets: FailSafe, a theft-loss protection and prevention system for laptops, and the associated Freeze computer locking system. The acquirer is security tools provider Absolute Software and the price tag is $6.9m. (This is Absolute’s second acquisition in five months: last December it spent $9.6m on the assets of Pole Position Software, primarily for the target’s LANrev asset management package). Phoenix is still trying to offload HyperSpace itself as well as the eSupport.com line of online PC diagnostics tools.

Since the need for a new OS to run on netbooks now appears to be fading away, HyperSpace could conceivably be utilized by vendors addressing the desktop virtualization market. However, the largest players here – VMware, Citrix and Microsoft – are working with their own hypervisors and are unlikely to want another. Interestingly, Phoenix has filed a patent-infringement lawsuit against startup DeviceVM, the developer of the SplashTop lightweight Linux OS. DeviceVM has licensing deals in place with netbook and laptop makers Asus, Hewlett-Packard, Lenovo, LG Electronics, Acer and Sony.

New CEO Lacey claims that excellent progress is being made on refocusing Phoenix back onto its BIOS business. At the end of fiscal 2009 (ending September 30), the noncore products made up less than 10% of Phoenix’s $67.7m in revenue, an overall decline of 8% over 2008. That means core BIOS sales are back down to the same level as they were in fiscal 2006, despite the acquisition of direct rival General Software Inc in July 2008. In its most recent first quarter, the company posted revenue of $15.6m (down from $17.4m in Q1 2009) and a profit of $1.1m (including a one-off $7.1m income tax refund). Phoenix has cash on hand of $27.9m.

A nope from Novell

Brenon Daly

Contact: Brenon Daly

The only surprise about Novell turning down the unsolicited $2bn offer from Elliott Associates was the timing. In an unorthodox move, the software vendor said ‘thanks, but no thanks’ to the hedge fund on Saturday morning, when most thoughts were turning to a full day of March Madness. (And what a maddening day it turned out to be, at least for people who filled out their brackets with top seeds: On Saturday, teams seeded No. 1, No. 2 and No. 3 all got sent packing.)

In dismissing the bid, Novell’s board of directors said the offer from Elliott of $5.75 for each share ‘undervalues’ the company and its growth prospects. As an aside, we’re not exactly sure what growth Novell is referring to. The vendor has come up short of Wall Street revenue estimates for both quarters of its current fiscal year so far, and sales this fiscal year, which ends in October, will almost certainly come in below the $862m it recorded last fiscal year. Revenue in the following fiscal year is also likely to come in below last fiscal year, at least according to Wall Street projections.

Even without much top-line excitement, Novell does nonetheless have some valuable assets: A bankable $600m maintenance revenue stream, a decent Linux business and probably the fourth-largest portfolio of identity and access management technology. Of course, its most attractive property is its treasury, which is stuffed with a cool $1bn in cash and short-term investments.

And finally, we would note that Novell does have an experienced adviser in JP Morgan Securities as it explores options to enhance shareholder value. In just the past 10 months, JP Morgan has worked with two other long-in-the-tooth software companies that have been targeted in publicly contested M&A processes. Both Borland Software and MSC Software ended up getting sold, with Borland going for a whopping 50% higher than the initial bid.

Chordiant hits the bid

Brenon Daly

Contact: Brenon Daly

When Chordiant Software received an unsolicited offer from CDC Software in early January, we were pretty certain that deal had roughly 0% chance of getting done. We noted that Chordiant had a poison pill in place that would make it extremely difficult – and time-consuming – for CDC to finalize the deal. Since a quick close was one of the key concerns for CDC in its bid for Chordiant, we weren’t at all surprised to see the serial buyer pull its cash-and-stock offer just a week after floating it.

In addition to the timing, there was also the consideration that Chordiant shares traded above CDC’s offer the entire time it was out there. (In this case, investors agreed with Chordiant’s contention that the bid ‘undervalued’ the company.) That meant CDC would most likely have to reach a little deeper into its pocket to get the deal done. Although CDC indicated that it may well bump its bid, most observers expected the company to walk. (That’s just how the process played out three years ago, when CDC launched an unsolicited offer for another CRM vendor, Onyx Software, only to come away empty-handed.)

Flip the calendar ahead two months, and Chordiant (advised by Morgan Stanley) has pulled off a pretty rare trick: stiff-arming that unwelcome bid and then securing a richer payday for shareholders. (Most cases tend to look more like Yahoo, which is trading at half the level that Microsoft offered for the company two years ago. Yahoo shares have lost 20% of their value since Microsoft floated its bid, while the Nasdaq has flat-lined in that period.) And Chordiant didn’t just hold out for a nickel or a dime more for its shareholders. It got the highest price for its shares in a year and a half.

Under terms announced Monday, Pegasystems will pay $5 in cash for each share of Chordiant, for a total equity value of $161.5m. That’s 54% more than CDC thought the company was worth, and enough to get Chordiant’s board to (wisely) hit the bid from Pegasystems. Speaking of Chordiant’s board, we would note that chairman Steven Springsteel, who also serves as CEO, is now four for four in terms of helping to sell the companies where he held executive roles. As we noted three and a half years ago, when we first opined that Chordiant probably wasn’t a stand-alone vendor, Springsteel had seen a trio of his previous companies get gobbled up.

Bids for Chordiant

Date Suitor Offer Equity value EV/TTM sales multiple Status
January 8, 2010 CDC Software $3.46 per share $105m 0.7x Aborted
March 15, 2010 Pegasystems $5 per share $161.5 1.4x Closing in Q2

Source: The 451 M&A KnowledgeBase

A (belated) Oscar for IBM

Brenon Daly

Contact: Brenon Daly

We hand out our version of the Oscar every year in late December. (Like the movie industry award, our Golden Tombstone is voted on by folks in the industry, which, in this case, are fellow corporate development executives.) Last year, Oracle’s drawn-out acquisition of Sun Microsystems took the top spot, while the year before, Hewlett-Packard’s multibillion-dollar purchase of services giant EDS caught the voters’ favor. But watching Christopher Waltz and Mo’Nique last night pick up best supporting actor and actress, respectively, reminded us that we neglected to award our Golden Tombstone for best supporting strategic player last year.

The winner, of course, is IBM. It did a heap of due diligence on Sun and had the acquisition nearly done before it ‘failed’ to close it (to use the words of eventual acquirer Oracle). It’s actually the second time that Big Blue has done a lot of work on a multibillion-dollar transaction only to see a rival swoop in and carry off the target. IBM had an acquisition of WebEx all but inked before Cisco wrapped up a deal for the online conferencing vendor in less than two weeks, according to our understanding.

Next to nothing for Novell

Brenon Daly

Contact: Brenon Daly

As bargains go, Novell’s valuation in the recently floated bid from a hedge fund is a bit like a ‘crazy Eddie’ discount. Earlier this week, Elliott Associates offered $5.75 for each of the roughly 350,000 shares for Novell. Altogether, the equity value totals about $2bn.

But the true cost of Novell is actually about half that amount because the company carries about $1bn in cash and short-term investments. (Don’t forget that some of that cash flowed from Novell’s good friends at Microsoft, which handed over some $350m in cash several years ago and is still buying more licenses.) So, at the current valuation, what does the $1bn buy?

Perhaps the most revealing way to look at it is that Elliott (or any other buyer, for that matter) would get more than $600m in rock-steady maintenance and subscription revenue, meaning the bid values Novell at a paltry 1.6 times maintenance/subscription revenue. And let’s be honest, that’s the most attractive asset at Novell. The business actually grew in the just-completed fiscal year, while revenue from both licenses and services declined. (License revenue plummeted 38% in the previous fiscal year, and continued to slide in the most-recent quarter, which ended January 31.)

Novell has said only that it is reviewing the bid. (It is being advised by JP Morgan Securities, which also worked with Novell on its purchase of PlateSpin two years ago. At $205m in cash, that was the largest acquisition Novell had done in a half-decade.) Meanwhile, the market has indicated that it expects Novell to go for a bit more than Elliott’s ‘crazy Eddie’ discount price. Shares have traded above $6 each since Elliott revealed its $5.75-per-share bid, changing hands at $6.07 each in mid-afternoon trading on Thursday.

Blue-light special on Brocade

Brenon Daly

by Brenon Daly

For all of the would-be suitors of Brocade Communications, now is seemingly the time to move on the enterprise networking vendor. The value of the company has been trimmed by about one-quarter this week, meaning that a buyer paying a typical premium would be getting Brocade for the price that it fetched on its own last week. (We understand that valuations aren’t quite that simple – and it probably shortchanges Brocade – but it’s directionally accurate.) The recent problems at Brocade stem largely from the Foundry Networks business that it acquired a little more than a year ago.

With investors lopping off the gains that Brocade had run up over the past 10 months, the company has clearly been marked down. Yet, on the other side of any theoretical deal for Brocade, the demand has probably dipped since M&A speculation was swirling around Brocade last October. The reason? One company that had been mentioned as a possible buyer for Brocade is probably now out of the market.

Hewlett-Packard made a major networking move of its own shortly after most people put it at the top of the list of potential suitors for Brocade. Last November, HP handed over some $3.1bn for 3Com, which means that it doesn’t need Brocade (or more specifically, Foundry) quite as much. Of course, IBM is still a big OEM partner for Brocade, as is Dell. Both of those vendors could still be interested in a major networking acquisition, particularly at a discounted price. Brocade currently sports an enterprise value of $3.1bn.

A Mimosa-colored Iron Mountain

Brenon Daly

Contact: Brenon Daly

Adding a major piece to its information management portfolio, Iron Mountain said Monday that it will hand over $112m in cash for Mimosa Systems. (We noted two weeks ago that the market was buzzing on this possible pairing.) The purchase is the largest by Iron Mountain since its October 2007 acquisition of Stratify, a deal that serves as the basis for the company’s Iron Mountain Digital. (Stratify’s founder now heads up Iron Mountain’s digital business. Incidentally, Mimosa chief executive T.M. Ravi will join Iron Mountain Digital as head of marketing.)

The purchase of Mimosa adds on-premises content archiving to Iron Mountain Digital, and brings it more directly into competition with some of the largest suppliers of information management technology, including two companies that bought their way into the market. In mid-2007, Autonomy Corp paid a whopping $375m for Zantaz, and two years ago Dell shelled out $155m for MessageOne. We understand that Dell valued its archiving startup at slightly more than 6x trailing sales, while Autonomy paid about 3.3x trailing sales for Zantaz. According to two sources, Iron Mountain is paying roughly the same multiple that Autonomy paid, valuing Mimosa at about 3.2x its estimated trailing sales of about $32m.